It used to be that politicians in power understood the economic constraints under which they operated. James Carville, an advisor to President Bill Clinton in the 1990s, summed up this unavoidable relationship when noting that “I would like to come back as the bond market. You can intimidate everybody”.
The context for Carville’s comments – 1994 financial market worries about US public spending and debt accumulation – spurred the Clinton administration’s embrace of fiscal rectitude. It also resulted in the last period of US federal budget surplus’, between 1998 and 2001.
The decades since have fundamentally altered how politicians (and increasingly whole societies) approach economic policy. This is a change driven primarily by a decade of monetary easing on a stupendous scale, negative interest rates, corporate debt bingeing, and ever-expanding mortgage credit.
The natural corollary to this dawn was the emergence of a supportive economic theory – Modern Monetary Theory (MMT). Under this model, deficits aren’t necessarily bad and only old-fashioned fiscal conservatism is preventing the birth of what MMT proponents call a true, deficit-backed “people’s economy”.
From a politician’s perspective, the emergence of free money (from their own central banks) and MMT complemented what many elected officials realised to be the biggest lesson of the 2008 economic crash.
Namely, that voters don’t tend to reward governments that preach fiscal rectitude and austerity. In fact, regardless of the scale of the crisis or the terrible alternatives (banking sector failure, mass unemployment, even sovereign default) it is those governments that make the hard decisions that are usually looking for new jobs after the following election.
In this context, cheap money was an easy way out.
So while the Great Recession starting in 2007 required a monetary stimulus to maintain and then restart economic activity, elected governments consistently failed in the subsequent years to live up to their side of the bargain.
They failed because monetary support was supposed to be the prelude to economic reform. Real structural reforms that would drive long-term growth.
Alas, Mario Draghi’s commitment to saving the Eurozone insulated member states (and the European Union itself) from market pressures. As a result, critical reforms were abandoned, ignored, or went unfinished.
From Italy’s unsustainable pensions to Ireland’s sky-high legal fees, from the failure to complete the last pillar of the EU’s banking union (a common deposit insurance scheme) to its still unfinished capital markets union – cheap liquidity overrode the political will required to attain difficult objectives.
It allowed politicians to keep riding the supposedly “free” monetary train.
But this engine was never built on sustainable tracks.
In reality, the pandemic has only worsened the dependence of the political class on central bank largesse. And while the need for fiscal support was obvious in March 2020, the de facto response – borrow cheap and worry about the consequences later – has now become embedded as a desired political response to every crisis or unforeseen shock.
What is probably most worrying is that this political reflex to spend, spend, spend has become embedded at both ends of the political spectrum. Where once these policies were centred primarily on the left, recent years have also seen them embraced by those on the right.
Rassemblement National in France, Fratelli d’Italia and Lega in Italy have all embraced huge increases in public spending as a means of increasing their potential pool of voters. By slamming the orthodoxy and constraints of the “financial markets” they position themselves as “outsiders” determined to “fix” the system.
On the right, Britain is the most extreme case of how basic economic principles have been laid waste. An entire growth strategy based on “trickle-down economics” requiring hundreds of billions of pounds of additional public borrowing is simply macroeconomics gone loco. Particularly in a state already reeling from almost a decade of political stability and a debt to GDP ratio approaching 100%.
It’s also completely incompatible with an independent Bank of England attempting to control runaway rising prices. Britain is showing, just as predicted by Mario Draghi in 2018, that “When inflation is rising, short-term political considerations still create a certain set of incentives to pressure central banks into prioritising economic growth”.
Ironically, the markets are already reminding Westminster what real financial constraints actually look like. The Bank of England will likely do the same. A falling sterling and rising bond yields point not to Britain’s national bankruptcy (as correctly noted by the economist Tyler Cowen), but to a serious loss of credibility in Britain’s ability to effectively manage the economic challenges ahead.
Even high inflation (to which MMT offers no real solution) is no impediment to those who prefer to keep shaking the magic money tree rather than face hard economic realities. Paul Johnson (from the Institute of Fiscal Studies) recently stated the obvious when tweeting that “economic and fiscal constraints are real. It’s not just “Treasury orthodoxy” or a failure of imagination”.
In this context, the forthcoming global recession should be viewed as only a starting point. The commencement of a likely bloody battle to reacquaint policymakers today with some basic economic realities.
Unfortunately for us, the past decade of easy money hasn’t (in general) been invested well, or accompanied by the required structural reforms. Instead, politicians choose the easy way out. Borrowing simply covered rising current costs. As a result, debt levels in major global economies – US, Britain, France, Italy and China have never been higher.
Easy money has changed how politicians view the economics of being in power. The exceedingly painful readjustment has only just begun.Eoin Drea Crisis Economy Macroeconomics
Easy Money has Warped the Economics of Power
28 Sep 2022
Much has been written on the economic impacts of Russia’s invasion of Ukraine. For the European Union, the already visible impacts of rising energy and food prices presage more fundamental economic challenges in the longer term. Coupled with the lingering side effects of the COVID-19 pandemic the global economy is facing unprecedented turmoil.
Unfortunately, the ongoing humanitarian crisis in Ukraine is also being followed by economic consequences which are already impacting both European and global economies. The uncertainty of this war is eroding confidence and will pose a threat to economic stability should it continue in the long term. As European Commissioner for the Economy, Paolo Gentiloni noted, ‘the duration of the war will determine its cost, both humanitarian and economic’.
This In Brief provides a broad overview of the principal macroeconomic impacts of the Ukraine war on the EU. It also provides a set of recommendations designed to guide the EU’s policy actions in the future. Further publications in this series will deal with specific issues related to the impacts on agriculture, energy prices, European security/defence policy and the longer-term effects on the wider European integration process.Crisis Economy EU-Russia Macroeconomics Ukraine
The Long View: A Centre Right Response to the Economic Fallout of War in Ukraine
14 Sep 2022
Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide short-term relief to highly indebted EU member states, it is based on the expectation that bond yields will remain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term anchor for the EU fiscal framework than the bond rate.Economy European Union Macroeconomics
GDP, not the Bond Yield, should Remain the Anchor of the EU Fiscal Framework
21 Jul 2022
As the European Central Bank (ECB) begins to tighten monetary policy, Ireland, as the famous band U2 once wrote, really is “stuck in a moment it can’t get out off”. With inflation at multi-decade highs (9.6% and rising), a worsening housing crisis, escalating public spending and full employment, the Irish economy is remarkably unbalanced.
However, unlike in the 2007 crisis, these characteristics are not unique to the Emerald Isle and the Mediterranean fringe. Rather, they are now shared by an increasing number of other EU member states. In Estonia, prices are rising at an annual rate of 22%. Eight other Eurozone states are now experiencing double-digit inflation. All the while, unemployment across the EU remains at historic lows.
A common narrative is that COVID, followed by war in Ukraine, has turbo-charged price levels. Spikes in energy and food prices are exacerbating the mix of excess savings and supply-side shortages deriving from pandemic shutdowns. The contribution of these events to current economic conditions is undoubtedly true. However, such an overwhelming focus on these risks ignores the longer-term underpinnings of Europe’s destabilising economies.
Namely, the Eurozone’s addiction to cheap money as the principal driver of its growth and investment.
Even before the February 24th invasion of Ukraine, inflation was becoming embedded across the Eurozone. In January 2022 – much to the increasing consternation of the “transitionary” inflationary brigade – price rises were already above 5% in the Eurozone. And these are inflation readings which continue to take no account of most households’ biggest cost of living expense – housing!
Even in that pre-Ukraine context, the politicisation of the ECB was clearly evident. President Lagarde’s view at the time that raising interest rates too soon risked “putting the brakes on growth” highlighted how political concerns have superseded the ECB’s core objective of maintaining price stability.
The scale of global monetary imbalances cannot be understated. The ECB and the Bank of England now account for nearly 40% of their own government bonds. In this world of puny yields “fund managers were effectively pushed into taking ever greater risks to deliver the returns that their end investors expected”. The ongoing shake-out in the broader crypto-assets markets highlights just how skewed the risk-return trade-off has become.
And this rebalancing dance has only just begun.
Worse still has been the invocation of central banks – most notably the ECB – as agents of social change. The development of Frankfurt as a key facilitator in the battle against climate change has further diluted its focus on controlling inflation and further increased uncertainties in the financial markets. The argument is not that central banks should be detached from helping to tackle climate change, but that they are not the most effective, or appropriate, mechanism for doing so.
The cumulative result of these trends – greater politicisation and a widening scope – is the erosion of the ECB’s credibility in controlling inflation. As noted by Jürgen Stark and others, the ECB has “jeopardised its political independence and compromised its primary objective. Actions that are clearly intended to anticipate political pressure leave no doubt that it has exceeded its mandate”.
For the Eurozone, the implications will be profound.
Because, just like Ireland, the ECB now finds itself facing an intractable policy bind. In allowing inflation far above its 2% mandate, Frankfurt is seeking to soothe the political implications by deliberately lagging on raising interest rates in the hope of maintaining economic growth. But, just as Ireland discovered in 2007, the belief in a “soft landing” for the economy is more wishful thinking than sound economics.
There simply is no easy way out.
The result is an ECB that is now a prisoner of fiscal policy. A captive of its own member states with high debt, low growth and a tradition of unfinished reform programmes. And while this reality is the implicit rationale for the ECB’s current strategy, it belies a much wider structural problem. Namely, that the Eurozone continues to be characterised by weak potential growth, a Germany over-reliant on exports to China (and energy imports from Russia) and an unresolved “doom loop” between indebted governments and banks holding that debt.
Ultimately, the most far-reaching results of the ECB’s policy failures will be political. As evidenced in recent French elections, a prolonged cost of living crisis will sap strength from centrist parties, feed the political extremes on both the left and right and destabilise wider society. National elections in Italy in 2023 may well mark the beginning of the political fragmentation amplified by over a decade of easy money and limited reforms.
Back in 2012 former ECB President Mario Draghi calmed markets when he proclaimed he would do “whatever it takes” to protect the Euro. Unfortunately, the ECB seems to have lost any such commitment to controlling inflation.Eoin Drea Banking Crisis Economy
After the Easy Money Comes the Hard Political Reality
12 Jul 2022
The recent price crash of Bitcoin and Ethereum has caught many investors off guard and re-opened the debate about the inherent risks of crypto assets. Interestingly, their current volatility is not just about the whims of increasingly risk-averse investors. Rather, it is the inherent design flaws of stablecoins which are also hastening this era of crypto uncertainty.
Unlike conventional crypto assets, digital stablecoins promise a ‘less risky’ investment by pegging their value to traditional currencies like the US dollar, the euro or certain commodities. Stablecoin design can become more intricate with certain types guaranteed by a basket of government-backed (fiat) currencies or specific financial instruments.
Essentially, stablecoins offer assurances that they are backed by real-world assets, not just by computational wizardry. Think an updated, decentralised savings fund backed by boring old government bonds and real world currencies.
Alas, the past weeks have shown that stablecoins can have feet of clay. In a matter of days, TerraUSD – a stablecoin supposedly pegged to the US dollar – imploded and lost more than 80 % of its value. Its over-elaborate algorithmic blueprint and extremely questionable balance sheet cost its investors billions in losses. Before the crash, TerraUSD comprised more than 10 % of the overall €170 billion stablecoin market.
One might say that this was a one-off blunder of a relatively small and reckless digital asset. However, the biggest stablecoin Tether – with a market cap of more than €70 billion – also tumbled the same week and fell below its $1 peg before recovering.
Unfortunately, the damage was done and this negative signal caused selling panic, which ricocheted to many other crypto assets. Tether has been on the radar of regulators for a long time, as a US investigation in 2021 revealed that its creators have falsely advertised its stablecoin as being fully backed by actual dollars.
This is not a recipe for building confidence in a global market beset by rising inflation and political uncertainty.
Superficially, the current stablecoin industry is far too small to endanger global financial stability. Nevertheless, it remains an important cog in the bigger crypto market, which is currently close to a €2 trillion valuation. Should stablecoins continue to grow in prominence internationally, a sudden liquidation of assets to cover redemptions could have negative contagion effects on the traditional financial system.
Just think of 2007 when a little known, but highly risky, financial ‘innovation’ called mortgage-backed securities triggered a global financial crisis. And the parallels between what happened in 2007 and the current crypto markets are rising.
Global policymakers thus face a momentous task in crafting a regulatory response that sets up clear and binding rules for the stablecoin industry, as part of a wider legislative effort on crypto assets.
The best approach is to safeguard societal interests and financial stability while allowing individuals to continue to have access to these tools. In Europe, policymakers should anticipate that there will be growing demand for these novel type of applications and ensure legal predictability for both users and industry. The European Commission’s proposed ‘Markets in Crypto-Assets’ (MiCA) regulation is a necessary, but far from complete, first step.
Although still in draft form, MiCA has suggested a wide array of rules on traditional crypto, stablecoins, as well as on their service providers. Explicitly on stablecoins, the draft places on issuers strict obligations for authorisation and certification. National competent authorities, specialised European agencies, and even the European Central Bank (ECB) would be involved in the implementation and monitoring of all technical requirements for stablecoins.
Politically, as recent economic history has shown, innovation can never be regarded as risk-free.
The international aspect is also key. The EU should seek to coordinate its novel approach with global partners and avoid competing regulatory regimes fighting for stablecoin domiciliation. Mairead McGuiness, the EU Commissioner for Financial Services, has rightfully issued an open call for a global approach to regulating cryptocurrencies; global challenges require a global response.
But it is not just about regulating the many risks of stablecoins. Global central banks must act faster to develop their own digital currencies as a means of underpinning the credibility of digital finance. In Europe, the EU and the ECB should also accelerate their efforts in setting up a digital euro, as a complement to traditional euro notes. Unlike crypto assets, central bank digital currencies are centralised digital equivalents of cash, which offer new avenues for payment operations and financial inclusion.
The ECB has the resources and technical capacity to develop a privacy-proof digital euro equivalent, which will be a natural next step in the digitalisation of the European economy.
The strategic political importance of the digital euro cannot be underestimated. Unregulated payment solutions or third-country financial applications (especially from China) are already mushrooming, which creates specific long-term vulnerabilities across Europe’s economies. Like it or not, fundamental change is coming within retail, e-commerce, and finance across Europe, and EU policymakers must be prepared to provide trustworthy alternatives.
Crypto assets are now part of the financial mainstream. But the wider risks posed by still unregulated stablecoins remains a potential credibility shredder for the wider digital finance industry. It’s time for public policymakers to step up.Eoin Drea Dimitar Lilkov Economy Innovation
Stablecoins are Crypto’s Feet of Clay
09 Jun 2022
In the spring of 2012, the European People’s Party controlled 17 of the 28 governments in the EU. Ten years on, they control 7. The reasons behind this dramatic drop are manifold, and nobody in particular is to be blamed for it.
Nevertheless, the reality is that the centre-right family has been removed from the governments of every large member state and, moreover, from every capital west of Vienna. By the end of this year, Ireland will have an EPP prime minister once again, becoming the exception to that rule, and will revert the European Council to the status quo before the Slovene election: 8 seats for the EPP, 7 for the socialists, and 6 for the liberals (7-7-7 as of now). There is the possibility that Swedish elections may also be won by a conservative-liberal coalition in September, making the balance in the Council 9-6-6 in favour of the EPP.
This would enable the EPP to speak about renewed Conservative leadership of all 3 major institutions: biggest group and presidency of the Parliament, presidency and largest number of commissioners at the Commission, and plurality of seats in the Council. This might sound irrelevant, but it will be an important message to send when Europe enters ‘campaign mode’ by next spring.
But let us be frank; for the moment, the three biggest EU countries in terms of population (Germany, France, and Italy) are in the hands of other political families, so the hope of truly beginning to come back to strength again rests on Spain and Poland. And, in the eyes of many, without a major Western European, Eurozone country, the political map will remain far too red, yellow, and grey. Psychologically, you need EPP blue covering some parts of the pre-2004 members. That is why ‘bringing home’ Sweden, Finland or Ireland is so important, and why winning back Spain is absolutely crucial.
Spaniards will be called to the polling stations by November 2023, but it may very well be sooner than that. Current polls predict a fairly robust victory of Alberto Núñez-Feijóo’s Partido Popular, and socialist prime minister Pedro Sánchez might want to advance the general election to May, when the country will have local and regional elections in most of the territories.
The country is suffering another severe crisis, with energy prices spiralling out of control since last summer already, inflation levels not seen in decades, stagnating salaries, systemic unemployment affecting 20% of the population, while some productive sectors can’t find workers; the list goes on. At the same time, the government coalition is more divided by the day, and increasingly fewer proposals come to life. It is highly possible that they will not be able or even willing to approve a budget for next year, and the country is starting to show that change is desperately needed.
There is still plenty of time for the Spanish left to recover, and we should never underestimate their capacity to mobilise voters, control the media narrative, and suffer very little electoral punishment for their mistakes and negligence. That being said, like in many other countries, Spanish citizens tend to come back to the centre-right when they are in crisis; we might not be their hearts’ preferred option, but when times get tough, their brains trust us to resolve the situation. Today, Partido Popular offers once again the certitude and proven experience of a great manager, surrounded by a dream team of soon-to-be minsters. Núñez-Feijóo’s brand new leadership has taken the party back to a dominant role in record time, and he is by far the most trusted leader, even among moderate left-wing voters.
To most outsiders, Núñez-Feijóo is quite unknown and, if you just started listening to his speeches, you might think he’s not that special. However, he does matter a fair bit, especially to the many Spaniards who have had enough of the pretty, camera-friendly, superficial and inexperienced youngsters that ‘new politics’ have yielded in recent years. This man, 60 years old, was until a few weeks ago the only regional president holding an absolute majority and having kept the far-right completely out of the autonomous parliament. He’s serious, efficient, moderate, speaks plainly, and knows how to connect with regular people. But most of all, and this is his brightest quality to many, including myself: he despises polarisation and confrontation, knows how to reach agreements with the left, and doesn’t treat them like the enemy; and that is quite refreshing these days!
I recently heard someone call him the ‘Sheriff of Galicia’ (the region he comes from, the westernmost region of continental Spain and, alongside Portugal, of Europe). I couldn’t help but to think to myself that he is indeed not unlike one of these Hollywood Western characters that every boy loved in their childhood; the taciturn, serious, charming town Marshall that everybody respects and feels safe around. The man who brings back law and order and finally enables the poor townspeople to go about their lives fearlessly.
It is time to come back to old-fashioned politicians, those who can talk to each other in a calm way, even be friends with their opponents. It is time to give more importance to ideas and proposals than to tweets and TV shows. It is time to be united, to find compromises and middle ground that benefit a majority of citizens. It is time to put an end to polarisation in Western Europe.
Can you think of anyone better fit to begin reconquering the West for the centre-right and put a stop to the populist and extremist forces than the most popular sheriff of the most western town in Europe? I can’t.Álvaro de la Cruz Economy EU Member States European People's Party
Álvaro de la Cruz
Reconquering the West
24 May 2022
Tomi Huhtanen Dimitar Lilkov Eoin Drea Digital Economy
Regulating the Digital Future: Can Europe lead the Crypto and Digital Currencies Revolution?
Live-streams - Multimedia
10 May 2022
Digital finance is now part of the financial mainstream. This paper provides recommendations aimed at making the EU a stronger global player in digital finance and digital currencies. It also seeks to place the centre–right as the key driver of this change within the European political framework. First, we argue that a carefully deliberated EU legal framework for crypto assets is both welcome and required. This framework should be based on protecting financial stability while encouraging innovation. Ensuring the ability of European citizens to have access to these digital tools and to invest based on their personal preferences is an important principle of open democracies.
Second, Europe must be at the heart of the digital currency revolution, and the European Central Bank should expedite the development of a ‘digital euro’ as a complement to traditional euro notes. This is the optimum solution to providing a secure and universally accepted digital currency. Public money must remain the linchpin of digital finance. Moreover, the framework for crypto assets should be based on key principles of the centre–right: it must be regulated, secure and credible. The centre–right should actively support the proposed Markets in Crypto-Assets (MiCA) regulation and work, across the EU institutions, towards its speedy finalisation and adoption. The principle of ‘same activity, same risk, same rules’ should remain the bedrock of the regulatory approach to crypto and digital asset classes, and to stablecoins in particular.
Lastly, the regulation of crypto assets should be part of the wider effort to reduce the fragmentation of the policy landscape within the EU. Financial technology (FinTech) products and services are rising in prominence globally, and this has direct bearing on issues related to competitiveness, digital services and cybersecurity. European policymakers should act more decisively so that the EU does not fall behind in the global FinTech race.Digital Economy Technology
Regulating the Digital Future: A Centre–Right Approach to Crypto Assets and Digital Currencies
27 Apr 2022
The recent downgrades of the Russian economy have increased the prospect of the Kremlin defaulting on its foreign debts. Tied to international sanctions and the retreat of foreign investment from Russia, there is much speculation about the prospects of a reeling Russian economy.
But although President Putin is a self-proclaimed scholar of economics, the economic implications of invading Ukraine for the Kremlin will have little in common with the chaos of the 1990s (or Russia’s last default in 1998). In fact, prolonged conflict in Ukraine resulting in a continuation of sanctions against Russia by key global economies makes 1918 a more relevant comparator.
Then, as now, Russia was experiencing soaring interest rates, a collapsing currency, foreign exchange controls, roaring inflation, military conflict and increasing international isolation. The overall economic consequences for the Russian population at large was uniformly devastating, a factor exacerbated dramatically by the domestic policies undertaken by the newly established Communist authorities (who had seized power in November 1917).
It is sometimes incorrectly assumed that Russia’s participation in the First World War (fighting alongside Britain and France) directly contributed to its economic collapse beginning in 1918. But this is only partially true. In fact, up to 1917, Russia had financed its enormous war efforts without radically compromising the living standards of its population. The decline of average incomes in Russia between 1914 and 1917 (about 20%) was less than that evident in the German and Habsburg Empires.
The decades up to 1918 also witnessed Russia becoming a viable investment location for capital from Western Europe, particularly France. By the time Russia exited the war (through the Treaty of Brest-Litovsk in March 1918) the Kremlin’s debt to its war allies totalled over $3.5 billion, or well in excess of 125% of its GDP. By 1917, Russia was very much part of the global trading economy.
Yet, it wasn’t even the Communist seizure of power in November 1917 that ultimately ensured Russia’s isolation from the international financial community. Rather, it was the Communist decision in February 1918 to repudiate all international debts contracted by both the previous Tsarist regime (up to March 1917) and the Provisional Government of March-October 1917. Not only were debts defaulted on, but all assets of foreign investors in Russia were also seized by the state.
For Russian leaders like Lenin and Trotsky, the 1918 repudiation was the long held realisation of their 1905 Financial Manifesto which declared that:
“Foreign capital is going back home. ‘Purely Russian’ capital is also seeping away into foreign banks. The rich are selling their property and going abroad in search of safety. The birds of prey are fleeing the country and taking the people’s property with them”.
The economic impact arising from the debt default of 1918 cannot be underestimated. It convinced western economies of the unreliability of Communism as an economic model (notwithstanding French disbelief at the loss of their investments), encouraged Western support for anti-Kremlin “White” forces in the Russian Civil War, led to a blockage of the Russian economy, and resulted in the isolation of Russia from the world’s markets for much of the following decade.
For the Russian population, the debt default contributed to a downward economic spiral of almost unimaginable proportions. From 1917 to 1919, output per head in Russia halved. The Kremlin’s attempts to centralise industrial and agricultural assets resulted in famine-like conditions appearing in some regions in 1920, and again during the early 1930s. All the while, the Russian government was still engaged in expensive, large-scale military campaigns against its many foes, including in Ukraine.
The events of over a century ago provide important lessons for the prospects of the Russian economy in 2022.
Firstly, Russia defaulting on its foreign debt will only serve to increase its international isolation. It will presage a wider move towards nationalising all foreign-held assets in Russia, as the Kremlin will seek to centralise many more key sectors of the Russian economy to sustain the war effort.
Second, living standards in Russia will decline as long as Russia remains internationally isolated. Although not approaching the levels of decline evident in 1919–20, it is likely that 2022 will bring a double digit contraction of the Russian economy. However, it must be noted that even with only limited support from states like China, the Kremlin will likely be able to continue to operate on a more enclosed, war-like footing for the medium term. A footing which prioritises the “war effort” over the production and availability of many consumer goods.
Third, a Russian debt default in 2022, as in 1918, will not have any direct systemic impact upon the global financial system, due to the relatively limited size of Russia’s foreign debt. With a debt to GDP level of less than 30% in 2021, and a limited exposure to foreign currencies (a policy implemented by Russia after its invasion of Crimea in 2014), the Russian economy can continue to operate in greater autarkic conditions for a considerable period; albeit with a continuous decline in its population’s living standards.
The danger is not in the direct impact of a Russian default, but rather in its potential contagion to exposed sectors, like banking and aviation. The exposure of French and Italian banks to Russian default is estimated at $50 billion. Irish aviation companies’ exposure to Russian airlines exceeds $4 billion alone. Like in 1918, international investors in Russia face a very uncertain future, allied to huge disconnection from existing business models.
In 1905, the Communist Financial Manifesto began with the words “the government is on the brink of bankruptcy. It has reduced the country to ruins and scattered it with corpses”. More than a century later, President Putin seems intent on bringing those terrible words to life.Eoin Drea Crisis Economy EU-Russia
The Future of the Russian Economy – Echoes of 1918?
15 Mar 2022
The current European Central Bank (ECB) inflation strategy is predicated on the belief that current inflation levels (5% in the Eurozone) are a temporary occurrence. A transitionary phase underpinned by what ECB Chief Economist Phillip Lane recently called a “pandemic cycle of inflation”. This narrative assumes that supply side shortages and energy price fluctuations will moderate in 2022, returning the Eurozone to the optimum land of 2% price stability.
But there is another important factor driving ECB policy. A reasoning that has nothing to do with debatable economic forecasts. That’s because the ECB is determined to atone for past monetary policy mistakes; namely, its ill-timed and growth killing interest rate rises of 2011.
The legacy of its 2011 actions are now a central underpinning of its current strategy. ECB President Christine Lagarde acknowledged as much in July 2021 when she pledged that Frankfurt had “learned from history” and would facilitate ongoing monetary policy support, regardless of elevated short-term price levels. Now facilitated by a revised strategic framework, the ECB is deliberately running the economy hot in an effort to permanently raise price levels across the single currency area.
Unfortunately for Eurozone consumers, Frankfurt seems oblivious to the difference of being informed by history rather than being held prisoner by it. In a sense, the overly restrictive actions of the ECB in 2011 have their mirror image in 2022. Today, the determination to avoid past mistakes has given rise to an overly accommodative monetary policy stance, which is willing to forsake its basic obligation to maintain price stability. The results are starting to look no less catastrophic than the aftermath of the 2011 interest rate rises.
In seeking to atone for past mistakes, the ECB may unwittingly usher in a new period of permanently higher prices. Prices that look increasingly likely to become embedded in the daily costs facing hundreds of millions of Europeans. The constant refrain from Frankfurt is that the easing of energy prices and supply chain blockages will result in moderating prices in 2022. This may be the case, but such a model also fails to acknowledge two key factors which will contribute significantly to elevated prices levels in the longer term.
The first are the inflationary impacts of Europe’s investments in its Green Deal. One third of the 1.8 trillion euro in the EU’s Recovery Plan, and the EU’s current seven-year budget will finance the transition to a carbon-neutral economy. Many trillions more of further investment will be required in the coming years. These are trillions of euro of investment that will exacerbate the skills and capacity constraints already existing in many of these areas.
Yet, the impact of these huge ongoing investments upon inflation are not adequately reflected in the ECB’s current forecasts. This was a point highlighted in January 2022 by ECB Executive Board member Isabel Schnabel, who explicitly noted that the energy transition “poses measurable upside risks to our baseline projection of inflation over the medium-term”.
So while energy prices may decline as projected over the next 12 months, the ECB remains behind the curve in factoring in the true inflationary effects of the EU’s climate ambitions.
The second factor undermining the ECB’s strategy is that its inflation estimates, quite remarkably, continue to ignore housing as a driver of rising living costs. This is a Eurozone economy where housing costs remain a critical component of real expenditure patterns. According to Eurostat, an average of 20% of a household’s disposable income is dedicated to housing costs across the EU. Yet, housing costs, as admitted by the ECB itself, are not yet adequately accounted for in its inflation estimates.
The reality is that the longer term-inflationary impacts of the EU’s Green Deal and housing costs will more than offset any temporary slowdown in price pressures evident in 2022. By pursuing an agenda driven by history, the ECB is underplaying the longer-term risks.
One other point should also be considered in addressing the ECB’s current positioning; and that is the importance of personal experience in framing future strategic actions. Here, President Lagarde’s tenure as Economy Minister of France between 2007 and 2011 is relevant. Because “learning from history” can be read as seeking to avoid making the same mistakes twice.
But repeating past mistakes is exactly what the ECB has sleepwalked into. In 2011, its orthodox zeal was driven by an instinctive Northern European monetary memory; experiences based on the hyperinflations of the 1920s across much of Central Europe. In 2022, its accommodative enthusiasm is driven by a desire to avoid the mistakes of 2011 at all costs.
Neither strategy took (or is taking) account of broader macroeconomic realities or of the day-to-day experience of millions of Eurozone citizens. Price stability is, at its core, all about maintaining balance.
Unfortunately, the ECB continues to wobble from one extreme to the other.Eoin Drea Economy Eurozone Macroeconomics
Atoning for Past Mistakes is not a Monetary Policy Strategy
18 Jan 2022
France Fitzgerald Theo Larue Economy Macroeconomics
The Week in 7 Questions with Frances Fitzgerald
Multimedia - The Week in 7 Questions
10 Dec 2021
Eoin Drea Economy Macroeconomics
Too hot to handle: Will Inflation kill Europe’s Recovery?
Live-streams - Multimedia
08 Dec 2021
Over the course of the COVID-19 pandemic, tourism has been one of the most affected sectors at both the European and the global level. According to the recent annual Economic Trends Report conducted by the World Travel and Tourism Council (WTTC), tourism is the sector that saw the biggest economic collapse last year. In Europe, travel and tourism GDP declined by 51.4% in 2020, while domestic spending declined by 48.4%, and international spending fell at a sharper rate of 63.8%. Travel and tourism employment fell by 9.3%, equating to a loss of 3.6 million jobs. Vaccines offered the prospect of a sunrise, but recent restrictions to curb rising cases and Omicron variant concerns are once again provoking losses for the tourism industry.
However, the pandemic has also offered a unique opportunity for change, providing a chance for tourism industry stakeholders and popular destinations to reassess their priorities and create a transformative and regenerative vision for the sector.
The climate emergency accelerated the need for the implementation of sustainable tourism practices. As part of the road to recovery for the tourism industry, it is fundamental to foster green investments for protected areas, enabling the development of a more sustainable and inclusive tourism sector. However, there is still a long way to go. Many tourism destinations continue to struggle, particularly those that rely on long-haul tourism or business travel.
Tourism is the economic sector with the most significant potential to generate future growth and employment in the EU. It is important to recognise the industry’s crucial role for Europe’s economy; the EU should take the lead in this regard. The tourism industry needs to be appropriately included in the implementation of Member States’ recovery plans with long-term strategies in order to make the tourism ecosystem more green, digital, and resilient.
People’s willingness to embrace more responsible and sustainable practices when travelling is a critical factor. The European Travel Commission published a handbook on encouraging sustainable tourism practices. It shows that it is necessary to look at demand-and supply-side trends, and determine what people demand to incentivise changes. For example, a preference for more sustainable transport choices can be noticed. One of the handbook’s studies shows that 73% of European travellers agree it is essential for them to support local SMEs. Younger age groups tend to privilege greener practices when they travel.
In this regard, sustainability-driven tourism policymaking at European level is essential to help decision-makers. At national level, examples of good practices are the “Copenhagen’s ‘Tourism for Good’ Strategy”, a long-term ambition for Greater Copenhagen, and the “Astypalea project” in Greece, a pilot project in collaboration between the Greek government and the Volkswagen Group for sustainable mobility and energy supply on the island of Astypalea.
These projects demonstrate that tourism is a driver of positive change, but that tourism is not the goal in and of itself. It contributes positively to society, building better destinations for locals and visitors. However, it is crucial to adopt a holistic and integrated approach, ensuring that national tourism policy creates the necessary fiscal and legislative framework to implement truly sustainable tourism practices. Transport and infrastructure are areas in which the pressure exerted by visitors can have a significant impact on the destination, and where tourism reform can positively impact the quality of life of locals.
Many European cities, such as Zurich, Oslo, Stockholm, and Frankfurt, are already widely investing in improving public transport, electric and low-emission vehicles, and cycling routes. Nevertheless, additional practical solutions such as educating travellers about their behaviour as tourists could be useful. This would help make people more aware about the impact of their actions on their destinations, for example underlining the fact that it is fundamental to prioritise small, local businesses while travelling. With regard to leisure activities, it is relevant to promote outdoor experiences in nature, eco-friendly accommodation, and “remote escapes” in rural destinations, thus preventing the phenomenon of “overtourism” from taking over again.
Moreover, frameworks such as the European Commission’s European Tourism Indicators System for sustainable destination management can help to monitor these actions and report progress in tourism sustainability.
Profits from the recovery of tourism will definitively contribute to shape a type of European economic growth better adapted to climate change. A new year is coming, but the path towards the sustainable recovery of European tourism has only just begun.Irene Paolinelli Economy European Union Sustainability
The Future of European Tourism
07 Dec 2021
Economic cooperation between Russia and China is widely seen as the backbone of an emerging global alliance between Moscow and Beijing. Since 2014 and the emergence of the current rift with the West over Russia’s aggression against Ukraine, the Kremlin has been eager to promote the idea of strengthening economic ties with China as a viable alternative to strained relations with the West, and as a sign that a new, less West-centred global economic order is emerging. Concerns about this growing Sino-Russian economic activity have scared many Western politicians, who have rushed to appease Moscow to prevent its further integration with China. However, a cross-check of the implementation of the ambitious economic agenda set out in 2014 by Russian President Vladimir Putin and Chinese President Xi Jinping shows that no real integration is happening and that fundamental problems lie behind this failure. This paper explains why Russia and China’s economic cooperation plans have failed since 2014 and are not likely to succeed in the future.China Economy EU-Russia
Ambitions Dashed: Why Sino-Russian Economic Cooperation Is Not Working
26 Nov 2021
For the European Central Bank (ECB), the inflation outlook seems quite clear. The factors underpinning current price rises – energy, supply bottlenecks and the temporary cut in German VAT rates – will all moderate, or end, in 2022.
No further action is needed. Although prices are currently rising at a 4.1% annualised rate in the Eurozone, the view from Frankfurt is unequivocal – inflation will decline and interest rates will not rise over the course of the next twelve months. As the ECB recently noted, “We continue to foresee inflation in the medium term remaining below our two per cent target”.
Worried? Who’s worried?
What is clear, however, is that the ECB’s current strategy of tolerating relatively high inflation will not have uniformly positive impacts across all Eurozone members. It will also, if continued in the medium term, result in catastrophic effects for Europe’s centrist political parties.
Dressed up in the language of its recently completed “Strategy Review”, the ECB is essentially running the economy hot, regardless of all shorter-term implications. This approach will result in many Eurozone economies experiencing an unsustainable economic reality in 2022 – relatively high economic growth, ultra-low interest rates, and a rapidly rising cost of living (underpinned by dramatically rising property prices).
The latest data highlights that a wide variety of Eurozone states, including Ireland, Germany, Estonia, Lithuania, Slovakia, and Spain are already experiencing annualised inflation levels close to double the EU’s 2% target. Easy and cheap financing is flowing into many European residential property markets as investors seek a broader hedge against uncertain equity market movements. House prices continue to surge across both the Eurozone (6.8%) and the EU27 (7.3%). As in the United States, these are price rises far in excess of wage growth.
What is also concerning about the ECB’s approach is that while President Lagarde admitted that the ECB Governing Council “talked about inflation, inflation, inflation” at their last meeting in October, their remains no real consideration of how booming property prices are not yet fully accounted for in ECB inflation readings. But, as economists have pointed out, this oversight is already contributing to a significant underestimation of the cost of living.
The reality is that the ECB’s current policy will cause significant collateral damage to many members of the Eurozone. And that damage won’t be limited to their economies.
The political implications are potentially catastrophic. As one commentator noted, “if I were a populist politician, inflation would be my best friend”.
Because a “cost of living” debate will feed into the narrative of EU and ECB policymakers being completely out of touch with the day-to-day experience of ordinary European citizens, this is manna from heaven for the classical populist political playbook.
The likely response of more mainstream European governments – as already seen in the additional energy taxes and subsidies proposed in Spain and France – will do little to alter the trajectory of this debate. Rather, it will just reinforce the impression of clueless policymaking washed down with a good dose of financial unsustainability.
This is the reality President Biden is already facing in the United States. There, the rising cost of living (6.2% annualised and rising) was a key factor in Glenn Youngkin’s surprise victory in claiming the Governorship of Virginia. It will also form a key plank of the Republican economic strategy for the 2022 midterm elections. Far from being the crowning achievement of his time of office, his (still under discussion) 1.75 trillion dollar social spending plan will soon become the focus of a great inflation debate. It’s a debate President Biden is not sure to win.
For Europe’s centre right, the political implications of the ECB’s current strategy are particularly acute. The cornerstone of all the EU’s grand strategic plans – including the Recovery Fund and the Green Deal – are based on the assumption of price stability. Prolonged higher rates of inflation will render those plans quickly obsolete as more and more investment will be needed to offset declining real values. From there, EU objectives become a hamster wheel from which it’s impossible to escape.
And while much comment is being made about the ECB learning from its missteps during the Great Recession (notably the precipitous interest rate rise of 2011), this misses a key point. Because being informed by history is fundamentally different than being trapped by it. And in overextending its tolerance of significant price rises, the ECB risks destabilising the entire European political debate.
In effect, the ECB is repeating the exact same mistakes as a decade ago, only this time in the opposite direction. But the political result will be the same – a populist surge with a very uncertain outcome.Eoin Drea Economy Macroeconomics Populism
Europe’s Monetary Policy Will Lead to a Populist Surge
23 Nov 2021
Eoin Drea Sandra Pasarić Economy Macroeconomics
#ComeTogether Ep 2 with Sofia Zacharaki and Eoin Drea
Multimedia - Other videos
01 Oct 2021
European economies are rebounding, annual inflation across the Eurozone is running at 3%. In Europe’s largest economy, Germany, consumer prices are running at multi-year highs of 3.4%. Continued rises in production and import prices point to a broad-based inflationary landscape.
But while economists bicker about whether price rises are “transitionary” or “permanent” a key element of the economy remains totally ignored. Namely, roaring house price inflation across Europe is outstripping wage growth, reducing affordability for many working families and beginning to threaten longer term political consequences.
Even worse, housing costs aren’t even adequately addressed in the European Central Bank’s (ECB) current inflation readings. And while much attention has been lavished on the ECB’s new monetary policy strategy, the glaring omission of relevant housing data from its index continues.
As identified by Angeloni and Gros, the ECB strategy review contains the recognition that “the inclusion of the costs related to owner-occupied housing in the HICP (harmonised index of consumer prices) would better represent the inflation rate that is relevant for households”. But, and this is the important point, such an inclusion is fobbed off into an unspecified future timeframe.
All the while housing costs remain a critical component of real expenditure patterns. On average, 20% of a household’s disposable income is dedicated to housing costs across the EU. Nearly 12% of the EU’s population lives in households where over 40% of disposable income is required just to meet housing needs.
The reality is that current ECB inflation readings seriously (and continuously) underestimate the level of price rises being experienced by households across the EU. Research suggests that the inclusion of proper housing data in the HICP would increase inflation readings by 0.4%.
Even this estimate likely undercounts the situation being experienced by millions of European families. The ECB’s commitment relates only to including data for “owner-occupied housing” which fails to account for price rises in the rental sector. This is important given that the average home ownership rate in the EU is below 70%. Thus, a significant element of property-related inflation will remain unaccounted for.
Recent work from the Dallas Fed shows clearly that surging house price growth has, historically, been a useful predictor of further rise of rent and of owners equivalent rent (i.e., the amount of rent equivalent to the cost of ownership), thereby driving inflation rates even higher as property prices and rent inflation will drive increased wage demands; a situation exacerbated by the labour shortages being experienced in many sectors in this (hopefully nearly) post-pandemic environment.
The real danger is that the ECB (and other central banks) are already behind the curve when it comes to evaluating the price rises being experienced by ordinary citizens. Such a lag increases the risk that inflation expectations will shift rapidly from the transitionary consensus to that of a more permanent nature.
This is a risk magnified by the new strategies of the ECB and the US Federal Reserve. Strategies which allow both economies to experience inflation levels above their 2% targets for longer periods of time.
This change may already be happening. In the US, the Conference Board now sees US consumers expecting inflation of 6.8% in 12 months’ time. And this in an economic landscape where the S&P Case-Shiller national home price index is witnessing double digit price increases across all nine US census divisions.
The American housing market will probably get more bubble-like in the months ahead. Even Dallas Fed President Eric Rosengren has been directly highlighting the role of housing market instability in driving wider financial market and economic woes.
Exuberant housing markets spell all kinds of trouble for European policymakers. Belated action to curb inflation levels (the real kind that includes proper data for housing) leaves the EU vulnerable to losing control of inflation expectations and allowing a wage-price inflationary spiral to embed itself across economies. From that point, a wild price ride, like that which began in the late 1960s when the Fed chair, McChesney Martin, infamously lost control of inflation expectations, will no longer be inconceivable.
For the EU, that would spell disaster beyond the obvious effects of prolonged, elevated inflation levels. While more indebted member states – such as Greece and Italy – might instinctively welcome higher inflation rates, an out-of-control inflation spiral would have more than national impacts.
The very stability of the Eurozone would, once again, be called into question, as would the credibility of its entire economic governance system. For the centre-right, this would pose fundamental questions about the viability of the European Commission’s wider strategic agenda including, but not limited to, reaching the investment levels required to meet agreed climate change and digitalisation targets.
Stable inflation is the bedrock of the EU’s vision for itself as a sea of relative stability in a rapidly changing world. But, as the former German Finance Minister Karl Schiller understood, “Stability is not everything, but without stability, everything is nothing”.Eoin Drea Economy Macroeconomics
Housing Inflation is the Biggest Threat of all
09 Sep 2021
On 27 January 2021 the member governments of the European Stability Mechanism (ESM) signed the Agreement Amending the ESM Treaty, instituting long-awaited reforms to the EU’s crisis management and financial-aid mechanism. The ESM was never perfect. Set up outside the EU treaty framework, it suffered from acute accountability and legitimacy issues and, being directly controlled by eurozone governments, its procedures were subject to cumbersome voting arrangements and conflicts of interest. Finally, with its inception in the throes of the eurozone crisis, it was committed to a single rigid approach based on conditionality.
The European Commission’s attempt to address these shortcomings in December 2017 was categorically rejected by the member states, who instead embarked on a separate reform initiative resulting in the current ESM Reform Treaty. This turn of events has been in part motivated by troubling levels of distrust between EU institutions and member states, and—as a result—between EU institutions and the ESM. The other driving force has been the political refusal to let go of the Maastricht promise of national fiscal sovereignty without shared liabilities. Thus, the ESM Reform Treaty is the culmination of a political campaign to redeem the economic compromise at the core of the Economic and Monetary Union and create an alternative arrangement for member states to avoid surrendering further competences to the EU.
This paper finds that the ESM Reform Treaty not only fails to address the outstanding issues in the original ESM framework, but exacerbates the status quo by further empowering the Mechanism outside the legal framework of the EU treaties. The ESM’s ‘peacetime powers’ represent a consequential novelty in this regard. These ‘powers’ are in fact the ESM’s own analytical capabilities, which have been extended beyond its financial-aid function and are now applicable within the bounds of the European Semester for economic governance. Perhaps worst of all, the ESM remains an extremely limited instrument, legally designed to imagine the single scenario of a sovereign debt crisis which requires disciplinary conditionality in exchange for financial aid. It would be careless to insist on this approach for resolving the multitude of difficulties which might befall the eurozone in the future.
Future reforms are not just advisable, they are a functional necessity. It will become increasingly difficult for the ESM to exercise its new powers or provide suitable crisis management without the efficiency and legitimacy which these adjustments could confer.
A compromise solution could see the ESM become its own independent technocratic institution, equally removed from the political influence of governments and the reach of the Commission. Introducing flexibility in its strict conditionality could be a matter of reinterpreting the meaning of ‘sound budgetary policy’ from the Court of Justice of the European Union’s ruling in Pringle. Lastly, in matters of justiciability and the protection of fundamental rights, nothing prevents ESM governments from committing the activities of the Mechanism to the European Charter on Fundamental Rights or the authority of the European courts, should they wish to do so.
Whatever decisions may be taken on the future of the ESM, they cannot ignore the unfolding of the EU’s fiscal response to the pandemic with Next Generation EU. Should the facility remain an exception, there would be even more pressure on the ESM to undergo another round of far-reaching reforms. However, should Next Generation EU prove a positive exercise, the EU should look to capitalise on the newfound trust by consolidating its economic and crisis governance capacities under a single flag—a certain blue one with 12 gold stars.Crisis Economy Eurozone
Reforming the European Stability Mechanism: Too Much but Never Enough
19 Jul 2021
Eoin Drea Economy Eurozone Macroeconomics
EIF 21 Interview – Paschal Donohoe
Live-streams - Multimedia
29 Jun 2021
Dimitar Lilkov Economy Green Deal Sustainability
EIF 21 Panel 1 – European Sustainable Economic Recovery: This Time It’s Different?
Live-streams - Multimedia
29 Jun 2021
Suddenly Brussels has a shiny new eco-system. Europe’s Recovery Fund (ERF) has given rise to a new posse of member states and companies setting out their commitments to greater sustainability and digitalisation. With the European Commission as the ultimate arbiter of where the money flows, Brussels is agog with how the ERF is going to lead Europe’s economic renaissance.
However, this endless focus on the procedures and timescales of the ERF risks distracting EU decision makers from the more immediate economic challenges. Namely, how to translate the gradual lifting of pandemic restrictions into creating new jobs and building a lasting economic revival.
Although initially conceived as a fast-track response to the initial wave of COVID-19, both the ERF (and its considerable administrative machine) will take time to filter down to national level. It will take longer still to make a meaningful impact in domestic economies. Even the most productive proposals for physical infrastructure, digitalisation projects, and increased sustainability initiatives may take years to fully design, tender, and implement.
The ERF is a long-term game, not a short-term answer.
In addition, packaging the attempt to rectify Europe’s core long-term challenges (climate change, lack of digital skills) as part of the wider pandemic response brings with it three further considerable risks.
The first is the increasing likelihood of conflict between member states and the Commission over National Recovery Plans, structural reforms, and the wider economic integration of the EU. As the panic of the pandemic recedes (a lot quicker than originally forecast), national capitals will realise that ERF spending brings with it a lot more than just another layer of oversight from Brussels.
For those states in the Eurozone, the resumption of the application of Europe’s fiscal rules from 2023 will also restrict the ability of states to respond to unforeseen economic shocks (such as a pandemic!). The moves towards harmonising corporate tax rates will further reduce the ability of member states to compete against each other to attract investment and promote innovation.
The broader point here is that the ERF is a centralising funding tool, deliberately designed to move the EU towards a more integrated economic unit. The conflicts over the future level of economic integration required for the EU are far from resolved. These disagreements will likely resurface as Europe’s economies recover in the short to medium term.
The second big risk emanating from the ERF is the fact that it is a debt instrument, not a programme funded directly by the existing EU budget. It’s not that the overall size of the Recovery Fund (750 billion euros) poses a significant financial risk or that future repayments will be a significant burden, rather it is the fact that Brussels is now required to raise new EU level taxes to pay for the ERF’s expenditures over the coming decades.
The risk here is that while ERF spending may last a couple of years at best, the new taxes will likely last a lifetime. Here, the challenge will be to gain public support for the new taxes and to sustain that support long after the ERF is a distant memory. It is naïve to think that the introduction of new EU level taxes may not impact negatively on broader public support for the wider integration process.
The problem here is that new taxes – the current menu includes a plastics charge, a carbon border adjustment mechanism, a digital tax, revenues from emissions trading, and a financial transactions tax – will result in a long litany of disagreements between member states, even before they are finally agreed and introduced. Eventually, some national capitals may feel forced to accept these new taxes, regardless of the spending that has gone before. The potential for such member states to then stoke anti-Brussels sentiment over the perceived financial burden of EU membership (such as Thatcher did in 1980s Britain) should not be overlooked.
The third risk (which also encompasses both preceding ones) is that the disbursement of ERF funds is marred by significant corruption, a lack of transparency, and misuse of capital. This risk has the potential to undermine public support for further EU integration and dramatically reduce the public acceptance of further EU taxes in the future.
For the ERF to really succeed, it must be transparent down to the last Euro. Anything other than this will simply drain away public support. It’s important to remember that the repayment of ERF funds will persist for many decades into the future. How the ERF funds are spent now will determine if a deepened European integration really has a chance to succeed in the future.Eoin Drea COVID-19 Economy Eurozone
Beware the Unintended Consequences of Europe’s Recovery Fund
11 Jun 2021
Europe and the centre right simply can’t afford to get this recovery wrong. The challenge is to develop a policy approach which balances the unprecedented economic circumstances arising from the pandemic with the societal demand for more inclusive growth. Only in blending these challenges into a “Middle Way’ can the centre right hope to lead the economy recovery.
This Policy Brief proposes four steps. (1) The unlocking of consumer spending and business investment to drive an initial economic expansion aided by tapering pandemic supports. Growth must become the immediate tool for tackling (and capping) pandemic related debt. (2) A back to basics set of priorities facilitating employment creation, affordable housing and the provision of essential public services. A ‘back to basics’ approach is necessary as it is the only way to deliver the payoffs needed to maintain support across a broad swathe of the middle classes. (3) A renewed commitment to reducing public debt and controlling inflation. Prolonged high inflation erodes purchasing power, particularly for those on fixed incomes or with savings. The optimal strategy for debt reduction is to keep debt levels steady initially, but then focus on slowly reducing it over time. Repairing public finances remains a marathon, not a sprint. (4) The centre right must play the long-term game because institutional reform (at both EU and national level) is about generational change, not soundbites. The European Recovery Fund is a long-term investment tool for achieving structural change, not a short-term mechanism for fiscal expansion. Europe’s fiscal rules also require a more easily understood framework. The ownership of these redesigned rules should rest with member states through a more decentralised Eurozone.Centre-Right Economy Macroeconomics Middle Class
Getting Back to Basics: Four Centre Right Steps to Economic Recovery
20 May 2021
Throughout Europe the Covid-19 pandemic has led to lower economic growth and higher unemployment. This has resulted in a surge in public debt and an increase in gender inequalities in the labour markets of many advanced countries. This situation has stimulated interest in policies that can simultaneously boost employment, increase tax revenues and reduce labour market inequalities.
This report investigates whether a move from family-based (i.e. joint) taxation to individual taxation would increase the labour supply of the lower-earning spouse (often the woman). It has often been argued that joint taxation decreases the employment of women because it increases the tax rate for the second earner.
This report focuses on the situation in Germany because work disincentives for women are particularly strong in the country’s tax system. However, it is likely that the conclusions will apply to other EU countries with joint income taxation, for example, France, Poland and Portugal.
According to our simulations, moving to individual taxation would substantially increase the labour supply in Germany and therefore also spur economic growth. Moving to individual taxation and returning the higher tax revenues to married couples (to ensure that there are no additional budgetary costs) would increase the labour supply by more than a half million full-time equivalents. This reform would lead to a measurable increase in GDP, that is, an increase of up to 1.5%.
Such a tax reform might be a way to reduce debt levels and stimulate the economy in the face of the current massive rise in public debt and decline in GDP. It could also help reverse labour market gender inequalities, which have been exacerbated by the pandemic.
However, since the simulated reforms produce results that are not distributed equally, ultimately a political value judgement is needed to decide whether the sizeable efficiency gains would outweigh the losses for those who would lose from the reform. Politically, the negative impact on more financially vulnerable groups may need to be addressed through further targeted tax reforms.Economy Gender Equality Taxation
Me, Myself and I: Could Tax Individualisation Create Jobs and Reduce Inequality?
06 May 2021
For those who view the pandemic as an event that will change societies and economies permanently, the post-COVID horizon seems limitless. From working patterns to the digital transformation, from increased public spending to greater European integration, Coronavirus is being used as a cypher for sweeping visions of the future.
And while fundamental issues (such as operating the Single Market or tackling climate change) are absolutely vital to the long-term sustainability of European prosperity, the EU risks having its future successes circumscribed by its scattergun approach in seeking “more Europe” as the answer to every conceivable policy area.
This cannot be the centre-right approach. Because it will end in failure.
Europe’s economies and societies are uniquely vulnerable. This is not just attributable to the impacts of the pandemic, as dislocating as many of its side effects are. The reality is that these vulnerabilities have been built up over the preceding decades, particularly in the period since 2008. Europe’s responses to the combined crises of the past decade have veered from the barely sufficient (economic and banking) to the scarcely credible (migration).
The pandemic has significantly worsened these existing economic and societal weaknesses. In this context, the centre-right simply can’t afford to get this recovery wrong. If it does, the reality will be felt through a significantly smaller parliamentary representation in Brussels post-2024; and an electorate increasingly alienated from the wider integration process.
It’s fine for the centre-right to have grander ambitions, but its immediate post-COVID delivery must be focused on the day-to-day realities facing Europeans today.
In some ways, the current set of economic conditions are viewed with trepidation by many centre-right decision makers. Concerns about rising public and private debts, asset bubbles underpinned by loose monetary policy, and the looming threat of inflation are already evident in calls favouring more restrictive policies.
Politically, the economic options facing the centre-right are often viewed as a binary choice between continued monetary/fiscal stimulus, or a return to more restrictive pre-pandemic norms.
But this is incorrect.
The real challenge for the centre-right is to develop a more nuanced, or mixed, policy approach which takes specific account of the vulnerabilities of Europe’s economies and societies. Vulnerabilities which, it should be pointed out, almost all existed in a pre-pandemic landscape.
But this “Middle Way” approach can only be successful if it delivers the necessary payoffs to maintain support across the broad swathe of the middle classes. And as the recovery begins in 2021, it is essential that the centre-right focuses on the key issues which are driving voters to political parties outside of the traditionally centrist, pro-European tent.
Three key issues must be afforded the highest priority.
The first is employment. But not simply the standard social media rhetoric about creating “Jobs, Jobs, Jobs”; what is needed is an integrated approach which actively promotes employment creation, especially for younger people. No new EU projects or funding streams are required. Simply the flexibility to allow member states to invest in technical/digital skills, hi-tech manufacturing, and in facilitating new ventures and businesses. Not every young person needs to learn to code, but every young person deserves an opportunity to work and to be covered by social security, regardless of their position. The centre right must make meaningful employment its top priority.
Second, the centre-right remains worried about the wrong type of inflation. Housing affordability – be it rents or real estate prices – are a key concern for many young people today all across the EU. If young families continue to be priced out of the housing market, the drift of voters to the fringes will continue. To hold the centre ground, the centre-right has to win the battle for housing. Affordable, good quality, and accessible housing is a key ingredient of the European middle-class lifestyle. This issue cannot be seriously addressed without tackling inter-generational wealth issues and the concentration of such capital in older generations. On this, the centre-right must be brave.
Thirdly, the under-provision of basic public services generates a large portion of societal unease. For families, issues like childcare, schools, and leisure facilities represent a fundamental part of their ability to enjoy a sustainable work-life balance. Again, this is a common issue across most member states, increasingly also in Central and Eastern Europe. The centre-right must double down on giving the middle classes a stake in a society that they feel is working for them.
It’s fine for the centre-right to have grander ambitions, but its immediate post-COVID delivery must be focused on the day-to-day realities facing Europeans today.
The moon can wait, it’s time to fix Europe first.Eoin Drea Centre-Right Economy Society
It’s Recovery or Bust for Europe’s Centre Right
14 Apr 2021
Don’t miss the President of the Eurogroup answer Roland Freudenstein’s questions on the priorities for 2021 & 2022, the EU’s recovery, fiscal rules, a potential increase in inflation, or the taxation of digital companies, among other economic issues.Roland Freudenstein COVID-19 Economy Eurozone Macroeconomics
The Week in 7 Questions with Paschal Donohoe
Multimedia - The Week in 7 Questions
02 Apr 2021
This week, Dr Drea answered Roland’s questions on the immediate economic future of the EU, including Covid-19 vaccines, tourism, the coming Eurogroup meeting, the Recovery Fund, and even Saint Patrick’s Day.Roland Freudenstein Eoin Drea Economy Macroeconomics
The Week in 7 Questions with Eoin Drea
Multimedia - The Week in 7 Questions
19 Mar 2021
In the 1990s Bill Gates said: ‘As we look ahead into the next century, leaders will be those who empower others.’ He has been proven right. Over the last two decades intermediaries have emerged that empower, among others, writers and other content creators, innovators, traders, programmers, businesses and start-ups. These intermediaries are private businesses technologically enabled by digital platforms. They are the cyberspace counterparts of, for example, newsletters, pinboards, bazaars, public squares, roads and toolboxes. A new kind of digital economic ecosystem has emerged and needs to be addressed by regulation. The relevant laws are about to be changed in the US and in the EU.
The regulation of this ecosystem needs to preserve and possibly enhance the dynamism of innovation and remain open and competitive. On private platforms existing national laws and human rights must be observed. The enforcement of the law should in principle be carried out by the government and in principle the responsibility to comply with the law lies with each of the actors involved. Platforms may voluntarily assist in law enforcement on their platforms. Moreover, platforms are free to set their own rules on who may use them and what can be done on them.
However, some of these platforms play a pivotal and sometimes unique role which, naturally, gives rise to calls for them to be subject to regulatory oversight that would place constraints on their ability to set their own rules. Such oversight is needed to ensure that platforms are open to all users who would make lawful use of their services. It is also needed to help ensure that any rules set by the platform operators are fair and are applied in a manner that ensures free and fair competition. Regulations that attempted to stifle innovation or limit freedom of expression would be harmful. The same holds for regulations that simply tried to prevent the shift towards the platform economy for the sake of protecting the old ways of connecting customers and providers.Digital Economy Regulation
Digital Economy: Regulating Digital Platforms and Intermediaries
24 Feb 2021
Who knew that the negative impacts of Brexit could be so easily mitigated by Ireland? After years of conjuring up vistas of hard borders and economic wastelands, Dublin now seems ready, willing, and able to embark on a beautiful European dream.
But such views bely a worrying naivety about Ireland’s real economic and cultural dependencies.
Because Brexit won’t make Ireland more European. It won’t usher in a new dawn of Irish diversification across Europe.
Rather, it will simply reinforce Ireland’s dependence on an Anglo-American economic model. A model which has become the backbone of Ireland’s entire approach to job creation, taxation, and education.
What Brexit actually means is that Ireland is about to get a whole lot more British.
In reality, the recent Brexit trade agreement condemns the British to a process of constant negotiation with the EU. Talks about market access (for the vast majority of the British economy, like financial services) will be a process of perpetual motion. This will be topped off with annual bust-ups over fish quotas and accusations of bullying behaviour from both sides.
Like the Swiss before them, Downing Street will discover the technocratic underbelly of the EU’s Single Market rules-making machine.
But in Ireland’s case, such a degree of uncertainty for British businesses has clear implications. Namely, that Dublin will – slowly, but discernibly – become the focus of British activity in attempting to influence, lobby, cajole, and circumvent barriers to providing services in the EU.
Take Dublin’s Irish Financial Services Centre (IFSC). The success of Ireland’s entire financial services industry was originally based on operating as a satellite location for the City of London. Even today, for all the talk about global diversification, 65% of funds domiciled in Dublin originate from fund managers in Britain or the US. This will likely increase in the years ahead as both New York and London seek the certainty of an operational base in the EU.
Nor will this trend be limited to financial services. Legal advisory services and entertainment/audio-visual services (due to French insistence on excluding British-based providers) are among several sectors where Britain’s presence in Ireland will further increase. Britain is home to about 30% of all TV channels in the EU. Ireland is ideally suited to allow them to continue to operate on a pan-European basis.
In some ways, it’s like the 1930s all over again. Back then, the Irish government sought to use legislation to ensure that new manufacturing industries would be Irish-owned. The dreams were of self-sufficiency and lessening dependence on Britain. The reality turned out to be the establishment of a plethora of British-controlled subsidiaries in Ireland.
British influence on the Irish economy simply continued on in an altered form.
Only by balancing Ireland’s embedded position in the Anglo-American economy with our membership of the EU can Dublin ever hope to build a sustainable, successful, and truly European Irish state.
One other characteristic of the Irish economy will serve to magnify Britain’s role in Ireland in the coming years. Namely, Dublin’s support of US policy priorities on a Brussels stage. Hardly surprising, given that well over 10% of all jobs in Ireland are tied to US multinationals.
But the US also remains a key element of Britain’s more globalist strategy. So Ireland will become the perfect location for an Anglo-US rapprochement, even under an openly pro-Irish President Biden. Shared economic interests – lower business taxes, softer data protection laws, more languid financial regulation – will drive further investments in Ireland as a conduit to influence EU decision-making and restore London’s relations with Washington.
Ireland has proved a reliable cypher for US goals in the past. Brexit will simply enlarge this role to act as a combined Anglo-American advocate on a European stage. Make no mistake, the structure of Ireland’s economy is not continental, it is a distinctly Anglosphere construct, significantly different from the more statist model prevalent in most of Europe.
In Brussels, these trends (and Ireland’s past behaviours) will ultimately reveal a more peripheral and more distrusted Ireland. This view, despite the grandiose protestations of solidarity from the continent, will drive the EU’s engagement with Ireland in the coming years as it seeks to capitalise on the current momentum for deeper integration.
In reality, Ireland’s European future will not be determined by how many continental languages are introduced into the Irish education system, what proportion of Irish exports go to the EU27, or by how many student exchanges Dublin liberally funds (such as students from Northern Ireland).
Rather, it is only by balancing Ireland’s embedded position in the Anglo-American economy with our membership of the EU that Dublin can ever hope to build a sustainable, successful, and truly European Irish state. Ireland should take the lead in developing and leading proposals on issues like data protection and corporate taxes; issues which currently limit the ability of the EU, the UK, and the US to successfully shape global norms.
It’s time Ireland stopped being afraid of Europe. And started believing in the globalist, fair trading model, upon which its prosperity largely lies.
However, the quest to become more European cannot ignore the much longer-term economic relationships that link Ireland to Washington and London. Ironically, far from setting Ireland free from Britain, Brexit will do much to remind Dublin of the older economic ties that bind.Eoin Drea Brexit Economy EU-US
Ireland is About to Get a Whole Lot More British
20 Jan 2021
You’ve got to hand it to the Chinese authorities – there`s never a dull moment. In late 2020, a lottery was organised in the city of Suzhou for the allocation of thousands of online wallets, each containing 200 digital yuan (25 euro). The lottery was one of the many pilot experiments organised by the People’s Bank of China (PBOC) to test how China’s central bank digital currency would perform both online and offline.
On the face of it, this is a noble pursuit by a government providing essential services to its citizens. The World Bank estimates that China has one of the highest number of people who lack access to a bank account. The PBOC wants to provide a state-backed digital equivalent of the yuan which will be fully operational in late 2021 or early 2022. However, the government isn’t actually opening new opportunities – it’s desperately trying to catch up with the private sector.
In the last decade, the Asian country made a silent transition to a near cashless society. Payment systems designed by digital giants Alibaba and Tencent essentially leapfrogged the card-based services and started a revolution in financial transfers and retail. China currently tops the global ranking of financial technology (FinTech) adoption globally, with 87 % of its mobile users having access to innovative services. FinTech refers to all kinds of technology-enabled innovation in the financial sector. Plastic cards are not in vogue anymore – QR codes and FinTech apps make the money go round in China.
Widespread mobile applications Alipay and WeChat Pay dominate the mobile payments market in the country, with trillions of euro worth in annual transactions. When it comes to personal data, the reputation of these private apps is murky. In early 2021, the US President signed an executive order banning transactions with eight Chinese software applications (Alipay and We Chat Pay included) due to potential snooping of sensitive data.
The Chinese Communist Party isn’t too happy with the fact that private companies operate the bulk of transactions within the country and that so much money is transferred from traditional banking accounts to electronic wallets. The PBOC is also eager to cut the costs of maintaining traditional banknotes, and also being able to efficiently track money flows within China.
An additional aim for Beijing is increasing the international appeal of its currency. The yuan’s annual share of global payments cleared on SWIFT hovers around 2%, which is meagre compared to the sway of the dollar, euro, and pound sterling. If China is the first country to launch a digital currency, it will make the headlines, but that doesn’t mean the yuan’s inherent problems will go away. Foreign investors are subject to specific financial restrictions, while Chinese authorities have often intervened in capital markets and been criticised for currency manipulation. Global investors are not going to judge a currency only by its shiny new cover. Still, Chinese leadership hopes that in the long run, a digital yuan might pressure the dominance of the US dollar and become the currency of choice for partner countries in Asia.
Fig. 2 Source: SWIFT
USD = US dollar, EUR = Euro, GBP = British pound, JPY = Japanese yen, CNY = Chinese yuan
Interestingly, the biggest prize here may not be the currency’s strength. Recent investigations report that Chinese regulators have persistently bullied Ant Group (parent to the Alipay app) to share their valuable troves of consumer-credit data they have been accumulating from their customers. The recent public disappearance of Jack Ma, founder of Alibaba, certainly raises additional eyebrows. A few months ago, Ma publicly stated that traditional Chinese banks operate with a ‘pawn shop’ mentality.
Obviously, Chinese pawnbrokers and their political overlords are in a hurry. The state wants to reduce the dominance of private actors in the digital payment space. Policymakers in Beijing are also concerned that cryptocurrencies like Bitcoin or Ethereum will grow in appeal for Chinese users, who may migrate funds towards decentralised and anonymous digital tokens. In essence, with its digital yuan, the Chinese state aims to develop the perfect anti-thesis to cryptocurrencies – highly centralised and completely prone to state surveillance.
It seems that China’s digital currency would tick all the right boxes – reining in private companies, tracing financial flows, and boosting the international appeal of its national currency.
The mass adoption of the digital yuan will make every transaction in the country potentially transparent and traceable. This would be an additional step in Xi Jinping’s blueprint for societal management through state-backed digital tools. Monitoring of digital financial flows can also be bundled with China’s nascent social credit system as a mechanism for rewarding and penalising individual behaviour. It seems that China’s digital currency would tick all the right boxes – reining in private companies, tracing financial flows, and boosting the international appeal of its national currency. Indeed, Chairman Mao would have been proud.
European policymakers shouldn’t underestimate these developments. Within the EU, Sweden is one of the few experimenting with the creation of a digital currency, while this topic isn’t even on the agenda in many European capitals. The European Central Bank (ECB) has launched a public consultation on the idea of creating a digital euro, but Frankfurt is years behind on an actual project. Europe doesn’t need to race ahead to beat China in creating a digital currency, but we should be wary of yet another domain in which the Chinese are taking the lead.
An in-depth Martens Centre research study shows that the EU is currently lagging behind when it comes to FinTech services and innovative financial products – all the hot developments are happening in Asia or the US. Add in AI research, telecommunications patents, or development of various technological standards internationally, and you’ll see the EU being dwarfed by China in many of these domains.
The EU is best positioned to pioneer a global standard for a secure digital currency, which will be complementary to euro banknotes. The ECB has the resources and technical capacity to develop a privacy-proof digital euro equivalent, which will be a natural next step in the digitalisation of the European economy. An ECB-designed digital euro should not be launched overnight, and should go through rigorous tests for its durability and state of the art privacy design. It could serve as a tool for financial inclusion of citizens who are operating outside conventional banking services and also increase personal convenience when dealing with financial transactions. Moreover, unregulated payment solutions or third-country financial applications are already mushrooming, which creates specific long-term risks and vulnerabilities. Like it or not, fundamental change is coming within retail, e-commerce and finance across Europe, and EU policymakers must be prepared to provide trustworthy alternatives.
In the coming years, we will witness increasing cyber warfare globally and a relentless race for technological leadership. The European Union simply cannot let digital authoritarians from the East dominate technological standards, or become unrivalled to pioneer new tools for monetary policy which carry the stamp of the Chinese Communist Party.Dimitar Lilkov China Digital Economy
China’s Digital Currency: Mao Would be Proud
14 Jan 2021
The recent agreement on the EU budget and Recovery Fund is the latest example of the difficulties in forging pan-European agreements. Even in the midst of a global pandemic and the urgent need for a secure budgetary framework, the EU’s decision-making process continues to frustrate faster, majority led decision making.
These disagreements between member states directly risk the ability of the EU to proceed with key policy initiatives such as the Recovery Fund, the Green Deal and working towards a fuller recovery from the ongoing Corona crisis. This, in turn, has the potential to compromise the wider geo-political role of the EU as a global actor. It also injects uncertainty into how the financial markets view existing commitments made by Brussels regarding Europe’s flagship Recovery Fund. This event will consider if the recent disagreements over the Rule of Law mechanism should provide the catalyst for a wider reform of how important decisions are made at EU level. What other mechanisms, if any, exist for ensuring a more streamlined and efficient decision-making process at EU level? Could agreement on fundamental issues be reached outside the standard approach of achieving unanimity across all member states?Roland Freudenstein Economy European Union Macroeconomics
The Budget, Recovery Fund and Implications for the Future of EU Decision Making
Live-streams - Multimedia
17 Dec 2020
The Week in 7 Questions brings you today MEP Siegfried Muresan to discuss the EU Recovery Fund and the Polish & Hungarian potential blocking.Siegfried Mureşan Roland Freudenstein Economy EU Member States
The Week in 7 Questions with Siegfried Mureșan
Multimedia - The Week in 7 Questions
27 Nov 2020
Tomi Huhtanen Economy Macroeconomics Trade
EIF 2020 – Panel 2: Global Trade
Live-streams - Multimedia
27 Oct 2020
Dimitar Lilkov Jyrki Katainen Maria Spyraki Economy Macroeconomics
EIF 2020 – Panel 1: Europe’s Green Deal
Live-streams - Multimedia
27 Oct 2020
Coronavirus has fundamentally altered the economic and social environment for billions of people around the world. The tragedy of this immense human loss has been compounded by significant economic dislocation and severe social strains, arising from the required public health restrictions. As a result, the broader economic response of the EU to the pandemic (with the exception of direct healthcare priorities) must now focus on a considerably longer time horizon.Economy Eurozone Growth Macroeconomics
A Marathon, not a Sprint: A Six Point Plan to Build Confidence, Create Jobs and Repair Public Finances
22 Oct 2020
The publication examines the various aspects of these turbulent times and their impact on the Czech and European societies, with a special emphasis on the middle class. It was the (often) painful experience of the ‘quarantined’ middle class that exposed what it needs to flourish and not perish in the future. The authors uncover the threats and the opportunities related to the current situation, and provide recommendations for centre-right parties, who have most often represented the interests of the middle class, currently most endangered class by the effects of the pandemic. The centre-right parties (together with the centre-left) will be in danger, too, if they do not present straightforward programmatic goals for the future of the middle class and honest leadership skills capable of cooperation and solidarity. Otherwise, we face the danger of further destabilisation of the political scene and the dismantling of liberal democracy.Crisis Economy Middle Class Society
The (Post)Covid Era: The Middle Class in Focus
29 Sep 2020
China is no longer only a partner, but increasingly also a systemic competitor, due to the continued enforcement of state capitalism under Xi Jinping. The hope for change through trade has not been fulfilled, as the growing influence of the Chinese Communist Party shows. Trust in the Chinese leadership has been eroded in recent years due to an aggressive global raw materials strategy, expansive moves in Southeast Asia, the Belt and Road Initiative, the 17+1 initiative, and the interference with Hong Kong most recently.China Economy Foreign Policy Trade
For a More Robust Approach Towards China in European Trade and Investment Policy
28 Sep 2020
For policymakers and politicians, it’s easy to discount the millennial generation as lazy, footloose and obsessed with social media. In Italy, a whole generation are now derided as bamboccioni (big babies) who prefer to lounge at home with their aged parents, rather than embrace a more financially independent lifestyle. But such easy stereotypes belie a much harsher economic reality. And nowhere is this despondent realism more evident than in an Italy seemingly on the verge of perpetual economic and societal collapse.
Italian millennials (those born between 1981 and 1996) have confronted the 2008 financial crisis and the ongoing Corona crisis. But even these crises are mere bookmarks in the longer story of Italian economic fragmentation which began with the recession of the early 1990s. This is a stagnation which has already resulted in a whole generation of young Italians being without steady employment, bereft of economic independence and increasingly without hope for the future.
This millennial disenfranchisement has caused frustration, distrust of government and a tendency to vote for populist parties. This is a society where young women are still exposed to the ridiculously discriminatory and illegal ‘dimissioni in bianco’ (blank resignation) letter which allows employers to dismiss workers on account of any future pregnancy or marriage. An economy where the richest 1% of Italian adults increased their share of total personal wealth from 17% to 24% in the two decades up to 2016 notwithstanding a stagnating economy.
Although Italian millennials are more educated and skilled than their parents, two out three workers with a short-term contract are under forty. As a result, young Italian adults are poorer than the previous generation. A 2018 study showed that Italians in their thirties earn 17% less than their parents did at the same age. This had led to reluctance to start a family (Italy has one of Europe’s lowest birth rates) and a gradual decline in the size of the traditional middle class.
Closing this dichotomy – between the struggling younger generations and their often affluent parents and grandparents – is the biggest obstacle to fundamentally rebooting Italy’s economy.
But to give millennials a fighting chance at success means confronting two bedrocks of Italian society: an antiquated education system and a reorientation of political power away from well-heeled middle-aged and retired Italians.
The Italian education system is exacerbating millennial struggles. Highly theoretical and based on the acquisition of general background knowledge but few practical skills, the Italian teaching system at the post-primary level is not attuned to the realities of the 21st-century labour market. The results are either abstract or controversial. Italy (the third largest economy in the EU) has no university in the top 100 globally. This compares to eight from Germany and seven from the Netherlands.
Closing this dichotomy – between the struggling younger generations and their often affluent parents and grandparents – is the biggest obstacle to fundamentally rebooting Italy’s economy.
Perhaps even more importantly, giving young Italians a fair opportunity at economic independence requires challenging the stranglehold on policymaking held by older Italians. Italy has become the Florida of Europe with the conservative (and often regressive) economic policies to match. The oldest population in the EU (22% of Italians are aged over 65) benefit disproportionally from a welfare system designed to protect their interests over all else.
Over 77% of public social spending in Italy goes to retired people while only 3% of total expenditure is targeted on working families and children. Remarkably, Italian retirees enjoy the highest net pension replacement rates in the EU (nearly 92%) notwithstanding Italy having the largest public debt in Europe.
It’s a retirement heaven for older Italians. But it’s deliberating sabotaging the prospects of millennials. It is also – very obviously – totally economically unsustainable.
A country famous for putting family at the heart of society is in fact dressing up this wealth grab as a continuation of traditional norms. Witness the mass hysteria when former Prime Minister Mario Monti attempted to reform the unaffordable public pension system in 2011. The reforms were subsequently rolled back and the Italian retirement gravy train (just like Snowpiercer) is still speeding around and around the tracks.
So what can Italian millennials do?
The first thing is to realise that neither a naive EU nor its much-heralded Economic Recovery Plan will save Italy. Such initiatives will only facilitate existing Italian policymakers clinging to power while the money flows from Brussels. Tens of billions of euros of investment in combatting climate change and digitalisation, while very welcome, will change nothing if more deep-seated structural reforms are ignored.
Second, Italian millennials should refuse to accept the current status quo as the only available path for Italy. This will mean confronting the older generations (including parents and grandparents) about the illogicality of such generational inequality. It means the young need to inject a sense of urgency and positive disruption into their approach to mainstream politics. It’s time for a productive movement of change that is not just the same old negative messaging stuck on repeat. For all the noise they generate groupings like the Movimento delle Sardine (Sardines Movement) are devoid of tangible reform proposals.
Italy needs a generational awakening dedicated solely to pursuing the interests (and rights) of young Italians. Unburdened by history and unfettered by the conservatism of wealth preservation, this movement should work towards fundamental economic and social reform by working for young Italians across the political spectrum. Only then will Italian millennials have a fighting chance.
Existing politicians are incapable of reforming Italy because that would mean compromising their own tightly held privileges. That’s why only its ‘big babies” can save Italy now.
Only its ‘big babies’ can save Italy now
20 Jul 2020
This policy brief analyses the competences and potential of the EU in the field of cultural heritage protection. Despite numerous references to culture and heritage in the EU treaties, the analysis suggests that the Union’s focus on cultural heritage remains limited and does not adequately reflect the magnitude of recent challenges.
In the last decade of financial and economic difficulties, Europe’s cultural heritage has suffered from major funding cuts. This is now being compounded by the devastating consequences of the COVID-19 pandemic on the culture and heritage sectors. Climate change also represents a growing threat to cultural sites across the EU, and the successes of right-wing Eurosceptic populism have changed the politics of cultural heritage. The EU is routinely portrayed as a remote post-national technocracy bent on overcoming separate national identities and lacking a commitment to the continent’s common historical heritage.
This paper argues that all these developments have created the conditions for considerable ‘European added value’—economic, social and political—to be realised by stepping up EU action for the protection of the continent’s cultural heritage. Currently ongoing negotiations for the next EU Multiannual Financial Framework (MFF 2021–7) and for the post-COVID-19 recovery fund that is tied to it (the ‘Next Generation EU’ initiative) offer a unique opportunity to advance this important agenda.Economy EU Member States European Union Values
A Europe That Protects Its Heritage
15 Jul 2020
The corona crisis apparently reinforces the role of the nation-state, of the government and the hard struggle between the United States and China, which put their own interests above the multilateral world order. Yet a different agenda is needed now, says former Prime Minister Prof. Dr. Jan Peter Balkenende: “Collaboration, connection, and sustainability are now more essential than hammering on the nation-state. Europe and Christian democracy can play an important role in this. Christian Democracy has always had the courage to row against the current.”
The interview conducted by Marc Janssens, editor-in-chief, has been published in Christen Democratische Verkenningen, Summer edition 2020 (Dutch). The World Leadership Alliance – Club de Madrid published the interview in English. Below you can find a summary of the key elements and an excerpt from the interview.
– Precisely at a time when nation-state and autocracy are leading the way, we must strengthen the social undercurrent of connectedness, values, and sustainability.
– The global agenda of the Sustainable Development Goals (SDGs), climate change and the circular economy give hope and perspective to everyone. This agenda is essential to overcome nationalism, populism, and attacks on multilateral organisations.
– High trust societies are performing better than low trust societies.
– Europe must develop a new narrative, in which commonness, diversity, solidarity, and competitiveness are leading, which discusses the importance of values and shows geopolitical leadership.
– A new orientation and organisation of our economies are required: a moral, responsible, and stakeholder capitalism.
Jan Peter Balkenende has been out of active politics for ten years, after his time as Prime Minister (2002-2010). But sitting still is by no means the same as uninvolved. He works as an external senior advisor to EY, a professor at Erasmus University Rotterdam, a supervisory board member at ING, and is involved in various organisations. The common thread is sustainability, social connection, global cooperation, and tackling inequality. The guiding principle in all this is the Sustainable Development Goals: “We now see a world where it seems to be about the right of the fittest and about capitalism driven by a mere pursuit of profit. China and the US compete for world power, but are mainly focused on their own interests. Their leaders Trump and Xi Jinping have little interest in multilateral institutions such as the World Trade Organisation or the World Health Organisation. On the other hand, I would like to draw attention to another, hopeful agenda: that of sustainability, the common interest – the so-called Common Good -, a circular economy and working together.
Europe but also Christian Democracy can play an important role in this, because they have a long tradition of connection and attention to the moral side of all kinds of issues. If Europe seeks strength in its uniqueness and in the interest of global institutions, it may prevent being played apart by China and America. Global thinking is not only about countries and their governments, but also about NGOs, companies, universities, civil society, religious groups. The SDGs – requiring actions and measurement – and Pope Francis’s encyclical ‘Laudato Si’ provide hope and perspective. Christian Democracy can be important in this because it is not only a political but also a social movement. We as Christian Democrats have always had the courage to focus on connection and row against the current.”
What does the new story of Europe look like?
“We have to redesign the EU to motivate people and organisations. Europe must start from its own strength, which connects countries that are also different. Of course, there are concerns in Europe and there is a lack of unity, but the current crisis requires the commitment and qualities that Europe has always drawn strength from: bridging differences and thinking together. In addition, Europe must also show results, for example in the areas of climate, environment, sustainability, and a circular economy. Showing results will strengthen trust in Europe among citizens, organisations, and businesses; but Europe must want to reform. Equally crucial is the awareness and debate about values in Europe: peace, democracy, liberty, solidarity, equality, justice, respect for human rights, and the rule of law. If you break EU rules and see Europe only as an institution from which subsidies can be obtained, sanctions must follow, after dialogue of course. Europe is too important at its core and relies too much on its own values to be undermined from within.”
How do you assess the situation in the US?
“The US fascinates by its dynamism. This has enormous appeal in the fields of science and innovation, but politically it is a completely split country. The connection is gone; there is a certain harshness surrounding discussions about fake news that is not good for the country. There is a need for truth-seeking institutions. We live in previously unthinkable times. In the late 1980s, Francis Fukuyama wrote his essay “The End of History” about the liberal democratic world order. Now we can see book titles such as “The End of Democracy” and “How Democracies Die”. The world order, as it was built up after the Second World War, has proved extremely fragile, so it is therefore important now to draw attention to values such as connection and communality.”
Doesn’t the corona crisis show that many companies in their prime have let their profits flow to shareholders, and now have to hold hands with the government because they have too few buffers? Shouldn’t we get rid of shareholder capitalism?
“It cannot be the case that shareholders only focus on the short-term financial gain and neglect the long-term consequences for the company and society. In this respect, I strongly support values-driven capitalism, in which not only financial growth, but also the social involvement of companies is the main aspect. This is really about creating shared value: economic and societal value. It must be about inclusive thinking and acting. That stakeholder thinking – the World Economic Forum recently argued for stakeholder capitalism – is essential in this day and age, when we meet the limits of money-driven capitalism. We are entering the era of responsible capitalism.”
What contribution can Christian democracy make in the debate about the organisation of society?
“That we recognise that all issues have a moral component. We are now faced with the choice: do we only determine what the role of the state, the market, and social institutions are through an economic prism, or do we examine, from a moral framework, what justice is and what the common good is, the so-called Bonum Commune. Then it’s not only about the question “who does what”? No, then we first determine what we want, what public justice means, and then the question arises why the market, government, or society can best do this. This is called differentiated responsibility in Christian Democratic thinking, but it is always a spread responsibility normalised by solidarity and stewardship. Something similar is needed now, because all kinds of things will shift due to the corona crisis. It is my firm belief that the strength of Christian democracy lies in our vision of tomorrow’s society: common good and Bonum Commune, community thinking, moral capitalism, long-term value creation, climate and stewardship, the SDGs, collaboration, and connection. We need to develop this further and, therefore, we must be inspired. That inspiration remains the most important thing a Christian Democratic politician needs. “Christian Democracy Economy European Union Values
Against the Current for the Common Good
14 Jul 2020
The travel industry is one of the economic sectors most harshly affected by the Coronavirus epidemic. Airline companies are facing the worst challenge in decades by cutting costs and laying off employees, fighting to survive another day.
National airline companies have now become a significant challenge for EU member states. Airline companies do not only employ large amounts of people; they are part of the core transport system of each EU member state, and often potent national symbols. Should national airline companies collapse, national governments would have to foot the bill.
Therefore, the European Commission’s announcement on 2 July, launching an infringement procedure against ten EU member states in breach of the bloc’s passenger rights rule was met with discontent in some EU capitals.
In many EU member states, the view is that passenger rights should be temporarily suspended. Lobbied by airline companies, twelve EU countries have demanded the suspension of passenger rights. In practice, this would mean if a flight is cancelled, instead of immediate reimbursement (for which the delay is currently one week), passengers would be offered a voucher instead. The member states’ letter proposes ‘a clear right of reimbursement immediately at the end of validity’. The short-term implications of this are unclear, but if the voucher’s validity is 2 years, the consumer could wait for their money a long time.
The problem is that as the airlines are fighting for survival, and enjoy the moral backing of the member states, questionable tactics are already being used. After the EU has already helped airline companies by waiving the obligation to use 80% of their take-off and landing slots, airline companies across the board have begun cancelling flights last minute. This has obviously caused a big headache or two for airline customers.
For airlines, the logic seems to be to ensure that flights are full and profitable. Unfortunately, some airlines are currently selling tickets for routes which they know full well the flight will probably be cancelled.
The business logic is that through these unfair tactics, companies can improve their immediate cash situation by reimbursing customers with several months’ delay. Additionally, certain clients will end up returning the money to airline companies through vouchers, because airlines do not inform travellers about reimbursement options, or often make the reimbursement process so complicated that customers give up and accept the voucher right away.
Fool me once, fool me twice…
Of course, one can argue that it is in the customers’ interest for airline companies to survive, and the current climate is very tough for airlines. But misled customers should not be the ones paying the industry’s bill.
As things stand today, the situation for us, as airline customers, is radically different. When buying a flight ticket, one has to take into account that the risk of flight’s cancellation has increased substantially. Secondly, one is better off buying a ticket from a company which you plan to fly with in the near future so the voucher is of some use, in case the flight is cancelled. Finally, remember that obtaining reimbursement for your ticket might be a lot of work, and you would be waiting a long time for compensation.
By using deceptive tactics with customers, airlines are adding rapidly declining consumer trust to their long list of problems, the most obvious of which is a drop in demand for flights as a result of the Coronavirus epidemic.
Once this trust is damaged, it will take a long time to regain it. The EU’s infringement procedure is not only protecting European customers, it is also protecting the flight industry by maintaining consumer trust. After all, the airline industry can only thrive with happy and confident travellers.
Travelling in times of Corona: how the EU is preventing a long-term aviation’s crisis and saving our summer holidays
10 Jul 2020
People across Europe are suffering. They are scared of becoming ill, uncertain about their economic future and still worried about the well-being of their parents and grandparents.
But men and women are feeling this crisis differently. For example, while more men than women are tragically dying from COVID-19, more women are on the frontlines providing care, with women accounting for almost 80% of healthcare workers, 76% of the 49 million care workers, and 82% of cashiers within the EU. The impact of this virus is different for men and women, and to build a recovery that works for all people, we must acknowledge this core difference and tailor our response to it.Crisis Economy European Union Society
Putting Women at the Heart of Europe’s Recovery
10 Jun 2020
The Portuguese and Italian governments have decided to grant large-scale regularisation to undocumented non-EU migrants. This includes work permits and access to health care for temporary periods. An expert panel has recommended similar measures for Germany. In principle, are temporary regularisations of undocumented workers a good idea or not?
Wido Geis-Thöne, Senior Economist Qualifications, Migration and Innovation, Cologne Institute for Economic Research:
“Regularisations for undocumented non-EU migrants are a good idea if they have been living in the country for a long time and two other conditions are met. First, the host country should not be able or willing to enforce their removal, and, second, they should not have access to regular residence with the corresponding rights and obligations by other means. The latter is not the case in Germany. Thus, the legal status of Duldung (toleration) exists here for third-country nationals who cannot be deported or who are not to be deported for various reasons, such as illness or completion of training. Although this is not a residence title and does not release them from the obligation to leave the country, it does give them access to the health, education and social system: Geduldete (tolerated persons) receive largely the same benefits as asylum seekers–and are allowed to take up gainful employment. If the Geduldete integrate successfully into the labour market and society, after a certain period of time, they can also obtain a regular residence permit, which secures their long-term stay in Germany. If it should turn out that a larger group of non-EU migrants who would actually be eligible for regularisation do not have access to toleration – which in my opinion is not the case – the access criteria for Duldung should be adjusted. Germany’s Duldung approach is clearly better than regularisation programmes, as it works continuously and not just at infrequent points in time. A combination of the two makes no sense, as it would in all probability only lead to confusion and uncertainty on the part of the competent authorities and would hardly help those affected. Both the Duldung and regularisation programmes always run the risk of motivating other people to set off for Europe without valid papers, which can plunge them into misery. Policymakers should therefore be very careful in applying them, although they are often necessary for humanitarian reasons and with a view towards integration.”
Olivia Sundberg-Diez, Policy Analyst European Migration and Diversity, European Policy Centre, Brussels:
“These measures are, in principle, very useful to address labour shortages, exploitative working conditions, and social marginalisation during the COVID-19 pandemic. In Italy, they can undo some of the damage caused by the country’s recent Security Decree, which substantially increased the number of people living irregularly and without basic services in the country. Now that returns from Europe have essentially (not completely) halted and will be difficult to implement for the months to come, other policy responses for these migrant groups need to be seriously considered, such as regularisation. The details of these proposals merit attention, however. If states do not provide paths for longer-term regularisation, they may simply be kicking the can down the road and sending people back to precarity in some months’ time. Incentives need to be in place to ensure employers, and migrants themselves, do in fact come forward and apply to regularise their status. Finally, the policies proposed so far by Italy and Portugal (and to a smaller degree by other countries) apply only to a small portion of undocumented migrants in these countries. Italy’s measures exclude migrants working in certain key sectors, such as tourism, construction, or transport, or people who are unable to work and may be especially vulnerable. Portugal excludes those who have been employed without formal contracts or for less than a year at a time. From a public health perspective, excluding these groups from access to basic services during the pandemic is bound to be counterproductive.”
Monica Andriescu, Senior Policy Analyst, Migration Policy Institute Europe, Brussels:
“Governments in Europe and beyond have repeatedly used regularisations to address pressing labour shortages, manage migration, and slow down the growth of informal economies. However, this policy tool has the potential to be more than a quick fix, if it is well designed, effectively implemented, and accompanied by other relevant measures. Two questions are critical in this context. 1) Who is eligible? Regularisation measures often select specific groups of migrants, depending on their occupational profile or length of residence. This selection inevitably excludes other categories of migrants. And 2) What is the impact? Temporary regularisation programmes might reinforce irregularity in the long-term, if the outcome for migrants is the return to the undocumented status once provisional work or residence permits expire. Well-conceived programmes can positively impact migrants’ livelihoods and upward mobility prospects if they balance labour market needs with rights protection requirements, provide a path to permanent residency, and are accompanied by other policies that support migrants to remain in regular employment.”
Rainer Münz, migration and demography expert, formerly working at the in-house think tank of the European Commission (2015-2020):
“Europe has, so far, experienced two types of mass regularisations: (a) During the 1990s and early 2000s, several European countries – including Belgium, France, Greece, Italy, Luxemburg, Portugal, Spain, Switzerland, and the UK – offered large-scale regularisation on one or more occasions. Depending on the country, tens or even hundreds of thousands of irregular migrants profited from such opportunities. However, some regularised migrants quickly lost their jobs, if employers were no longer willing to keep them under minimum wage, tax, and social security regulations that applied under regular work contracts. (b) EU enlargements of the years 2004, 2007, and 2013 implicitly regularised hundreds of thousands of people who had already moved in earlier years from Central and South-Eastern Europe to Western and Southern Europe. EU accession of their home countries immediately gave them a legal status. After a transitional period, they also obtained legal access to formal labour markets. In 2004, only Ireland, Sweden, and the UK did not apply a waiting period.
In response to the COVID-19 epidemic, Portugal and Italy have now offered irregular migrants residing on their territory temporary regularisation of their status. From an epidemiological point of view, such an offer makes perfect sense. Many recent and future measures, including testing, isolating, or tracing people and identifying their social contacts in case of infection, can hardly be applied to irregular migrants avoiding any contact with authorities and using pre-paid cell phones. Pull effects are not to be expected as long as borders are closed, and irregular arrivals are at an all-time low.”Crisis Economy Migration
Should EU countries regularise undocumented migrants due to the COVID-19 pandemic?
04 Jun 2020
The COVID-19 pandemic has exposed some exploitative employer practices for both EU and non-EU seasonal workers, especially in agriculture in some EU member states. Can the conditions for these labourers be improved without damaging the viability and competitiveness of national agriculture sectors?
Wido Geis-Thöne, Senior Economist Qualifications, Migration and Innovation, Cologne Institute for Economic Research:
“If the exploitative employer practices violate existing legislation, better controls are needed. The problem is then that there can be such a strong distortion of competition that is detrimental to law-abiding companies that, if they do not also resort to these illegal practices, they can be forced out of the market. If companies are forced to violate the law, the regulatory framework must be adapted as a matter of urgency. Otherwise, the economic order itself will be called into question. In this case, either law enforcement has to be improved, or the legal framework must be adapted. If practices move within the range of what is legally permissible, the situation is different. In this case, it should be noted that there can be very different perceptions of when individual work processes are exploitative and when they arise from operational necessities, e.g. with regard to optimal harvesting times. In this case, policymakers are called upon to listen to all sides and to assess the arguments carefully. If the regulations are carried out within a reasonable framework, there is no reason to fear that the vitality and competitiveness of the European agricultural sector will be impaired, since imports from third countries play a rather subordinate role in this area and the Common Agricultural Policy (CAP) provides very strong support and protection mechanisms for domestic farms. Within the EU, agriculture, and hence seasonal workers should, in any case, be subject to largely the same rules in order to ensure that the CAP functions properly. At the same time, however, local conditions, for example with regard to wage levels, must also be considered in shaping employment relationships.”
Monica Andriescu, Senior Policy Analyst, Migration Policy Institute Europe, Brussels:
“Guaranteeing fair working conditions can never be at odds with growth and competitiveness. The pandemic has exposed the fault lines of our economies and its pervasive inequalities. In these times more than ever, safeguarding workplace safety, health, and decent working conditions are critical to increasing productivity and building economic resilience. Policies cannot afford to go amiss in harnessing and protecting the human capital needed to weather the storm ahead. Exploitative working practices are regrettably still part of European labour markets, with migrants particularly vulnerable to unfair employers and temporary work agency practices. While there is political commitment at EU level to improve employment conditions for all workers, there is a need for decisive action to be channelled towards alleviating inequalities at times when they are likely to be exacerbated if left unchecked (e.g. increasing workplace inspections and encouraging the reporting of abusive practices). This is particularly relevant for sectors where workers’ vulnerabilities are heightened by the physically draining nature of their work, e.g. in agriculture. Despite the gloomy prospects this crisis brings at macro and micro levels, it does harbour opportunities to rethink connections between economic growth and good work, and how to go beyond artificial perceptions that there is an inverse relationship between them.”
Rainer Münz, migration and demography expert, formerly working at the in-house think tank of the European Commission (2015-2020):
“Following initial travel restrictions and border controls, many Western European farmers and slaughterhouse operators resumed recruiting labour in Central and Eastern Europe. Austria, Germany, and the Netherlands organised airlifts from Poland, Romania, and Ukraine. Employers mainly argued that domestic job seekers lacked the required experience and endurance. Another reason was that foreign seasonal and contractual workers are less expensive. They are exempt from certain social security contributions. Minimal wage arrangements do not apply if workers are hired via subcontractors or categorised as self-employed.
The background to this wage dumping is competition within the EU. The Common Agricultural Policy does not shield Western and Southern European producers and processers from having to compete with their Central and South-Eastern European counterparts, operating in a distinctively lower wage environment. The flip side of this is retailers being able to offer lower food prices, for example, tomatoes at €1.29 per kg, apples at € 1.50 per kg or chicken nuggets at € 2.99 per kg.
The COVID-19 crisis has exposed not only the extent to which certain businesses are dependent on readily available short-term migrant workers, but also their wages and their living and working conditions. In Austria, two dozen foreign temporary agricultural workers were confined in quarantine as some of them tested positive for the virus. In Germany and the Netherlands, hundreds of slaughterhouse workers were infected at their workplaces or at boarding houses. After the death of a few Romanian workers, the Romanian Minister of Labour, Violeta Alexandru (PNL), travelled to Germany to conduct on-sight inspection. Later in May, the German Minister of Labour, Hubertus Heil (SPD) announced that from 2021, it would become illegal for slaughterhouse operators to hire non-employed foreign contractual workers. It remains to be seen if this will lead to more automation, higher retail prices for meat or in a shift of production towards EU countries with lower wage levels or less regulated labour markets.”
Several EU countries, including Germany, have been recruiting migrant and refugee health and social care workers although many of these people lack the professional certificates that they would require under normal conditions. Do you foresee a relaxation of national qualification standards as a result of the Corona crisis?
Wido Geis-Thöne: “I consider it very unlikely that the Corona crisis will lead to a relaxation of national qualification requirements for health and social care professions. As far as I can see, the Corona pandemic is not expected to lead to a sharp increase in the number of people in need of care and assistance in the longer term. If this is not the case, there will be no sharp increase in the number of staff needed in the health and social services sector. The peak of the (first) pandemic wave represents an exceptional situation in this respect. However, in the context of demographic change, we will observer a gradual increase in the need for care and assistance, and this will pose major challenges for the health and social services in the medium term. It will also raise the question of whether it is possible to achieve a different mix of qualifications in these areas with a higher proportion of assisted personnel without the relevant specialist training.”
Monica Andriescu: “National education and training systems are not prone to swift changes, such as the sudden relaxation of qualification standards. The key question is rather how to enable quicker procedures of recognition of foreign qualifications, which under normal conditions are often lengthy and complex. As evidenced by the stringent need for health and care workers to support the frontline fight against the Coronavirus throughout Europe, fast and effective procedures of recognising foreign qualifications are more relevant now than at any time in the past, to ensure a steady stream of relevant workforce. These will ensure that professional certificates are recognised in a timely manner and that occupational standards are maintained in destination countries. The pandemic provides an opportunity for relevant authorities and employers to join forces in identifying innovative routes to reform or expedite the recognition of skills, and to pilot these. The key challenge will be to balance speed and quality of processes and outcomes, without lowering standards.”
Rainer Münz: “The relaxation of standards in order to hire migrants with professional health and care background during the COVID-19 epidemic is of temporary nature, caused by exceptional circumstances. It will not remain in place after the crisis ends. It can, however, be expected that many of those who have now found a job, will remain in the health and care sector. And we can assume that labour market authorities financing retraining and job integration of unemployed migrants will encourage more people to specialise as care givers or to have their medical degrees recognised.”Crisis Economy European Union Migration
How does the Corona crisis affect the conditions for migrant workers in the EU?
29 May 2020
Rules-based trade is under attack, and the World Trade Organisation (WTO) is at risk of marginalisation. The COVID-19 pandemic and its detrimental effects on public health, value chains, and industrial production have brought back national export restrictions and stopped the free flow of goods and people. Buzz words such as ‘decoupling’, ‘sovereignty’ and ‘autarky’ have quickly returned to the global stage. However, COVID-19 is not the first shock to global trade. The WTO is already facing an existential crisis due to a deadlock in negotiations, blockage of institutional reforms, and paralysis of the dispute settlement mechanism (DSM). Nevertheless, there is hope that countries experiencing the effects of disrupted trade means the EU can take the lead in global reform efforts.COVID-19 Crisis Economy Globalisation Trade
EU Trade Policy as an Economic Recovery Tool
27 May 2020
The view of the chair of the Federal Reserve in the United States – Jay Powell – that “for the economy to fully recover, people will have to be fully confident. And that may have to await the arrival of a vaccine” belies the stark economic realities facing the US economy over the next 12 to 18 months.
For the United States – an economy where consumer spending accounts for over 70% of its activity – the risks of a long, slow, grinding economic recovery are immense. Multi-trillion dollar Federal support programmes for workers and businesses will never fully replace the absence of comprehensive social supports at state level, nor full-time employment income.
With unemployment at rates not seen since the Great Depression, an uncoordinated public health response at federal level and increasing political polarisation it is clear that American companies and workers will require more trillion dollar support packages in the future. The immediate economic consequence is obvious. By the end of 2021, the US will have a federal debt to GDP ratio much closer to Greece than to Germany.
The enthusiasm of many US Governors to reopen their states as quickly as possible (regardless of public health advice) will not supply the economic adrenaline shot so desperately desired by many policymakers in Washington. Even the most minimal of social distancing requirements will reduce consumption across almost all sectors of the US economy. In many sectors, such as hospitality, it will continue to have a disastrous impact for the foreseeable future.
Two further factors will further undermine the ability of the US to recover in the short term, regardless of states restarting economic activity. First, is the impact of the pandemic in reducing consumer confidence, particularly for those who are retired and most at risk from the Coronavirus.
These “baby boomers” are an important driver of consumption in the US. They are also heavily dependent on US federal payments (such as Medicare) and are hugely overexposed to US equities (37% of the US stock market is owned by retirement funds). This combination of health risk, federal transfers and stock market uncertainty will likely exacerbate, not alleviate, declining consumer confidence in the months and (possibly) years ahead.
Second, is the false hope that restarting the export economy will help restore jobs and confidence to huge swathes of the US economy. As we are already seeing across the US (and indeed globally) the restarting of production in industries such as automotive and aeronautical will be largely dependent on international demand. Boeing – a key US industrial champion – has already cut its employee numbers by 10% as it seeks to deal with the dramatic fall in demand for air travel. These cutbacks will be repeated across most other economic sectors. There will be no quick return to a 2019 “normal”.
But perhaps the biggest danger to prospects of a robust US economic recovery has been the dramatic politicisation of the federal support system.
In an unprecedented health crisis such as the Coronavirus, Europeans have long assumed that the US federal model of government would act as a stabilising force for the states hit worst by the pandemic. It was this “transfer union” which European economists believed signalled the superiority of the US model of currency union when compared to the disjointed and overly complicated Eurozone model.
And indeed the US federal government has provided trillions of dollars of relief to businesses and workers. But the political cost has been significant. And the long term economic damage may be incalculable.
Mitch McConnell’s stated aversion to “blue state bailouts” highlights just how politically tinged the U.S. federal system has become. “Well run states should not bail out poorly run states” has become the new mantra of President Trump. Solidarity is fast becoming another American rarity, just like balanced budgets and social mobility
But the very real danger for the US is that a politicised federal support system further deepens mistrust of central government and reduces the effectiveness of federal spending in limiting the damage to, and then restarting, the US economy.
During the Great Depression, the Detroit riots of unemployed Ford workers in 1932 so startled policymakers that it resulted in the swift development of a property-owning working class (facilitated by cheap federal mortgages). It is the societal model which still dominates in the US and in much of the world today. The point is that economic upheaval of the scale we are now experiencing will have far-reaching, and often unintended, economic and societal consequences.
Perils abound for the US in a slow, faltering and overly politicised economy recovery. Europe should take note.Eoin Drea Crisis Economy EU-US Society
Perils for the US in a slow and faltering economic recovery
19 May 2020
We should not be worried about the emergence of China as a superpower, wielding influence and power at a comparable level to the United States. China’s geography will not allow it. Instead, we should be worried about China as a globally influential superpower, less powerful than the US, but still dominating East Asia, building a global bloc of like-minded, authoritarian countries, rivalling the rules-based international order and undermining democratic standards around the world.
In recent years, China has visibly increased its economic and political power. In some circles, the idea is emerging that China may become a superpower and regional hegemon comparable to the US. These fears are being highlighted by the seemingly ruthlessly effective way China is dealing with the COVID-19 crisis and how, allegedly, our Western democracies are a comparative failure.
China is now the second-largest economy in the world, it has begun to dominate numerous high-tech industrial sectors, and it is rapidly developing its military. Globally, it is the most important trade partner for countless countries. Its coordinated diplomatic efforts, inter alia through sharp power, make China able to leverage its stance better and become an increasingly influential player in global affairs. However, geography puts clear external and internal limits on China’s power.
China is a landlocked country, surrounded by rivals. The Korean Peninsula is inhabited by two countries with a history of hostility towards China. Japan is an island nation, with a strong blue-water navy, able to block China’s access to the Pacific and maybe even to the Indian Ocean. Taiwan is effectively a mountain stronghold, with a capable military. Without controlling Taiwan, it is effectively impossible to control the South China Sea, a strategic area for China’s security through which most of its trade passes. Over the Himalayas, there is India, a distinct civilisation with its own ambitions and nuclear arsenal. With Russia, China is competing for the post-Soviet space, which is hardly helping relations, even if their rapport has become friendlier recently. China also has numerous internal issues. For instance, people in Hong Kong do not want to be a part of Mainland China, and there is separatism in Xinjiang. China is also poor in natural resources and barely able to feed itself without being reliant on imports.
The Chinese momentum and the challenges for the EU
Still, even with its constraints, China’s rise is a challenge for the EU. America’s shrinking global presence changes a lot in the global balance of power. The US Navy may soon cease ensuring the freedom of the seas, a global public good that is essential for international trade. Due to the American retrenchment, the multipolar, unstable global system, with emerging great power rivalries, may unfold soon. China will be a very strong pole of power, that will have to be taken into every equation, especially the European one.
China is assertively and persistently fighting for global influence and, despite impediments, behaving like it wants to replace the US as the most powerful state in the international system. It is developing both its ‘Made in China 2025’ project and the Belt and Road Initiative, aimed at distorting world trade, by flooding it with price-dumped products. China is slowly becoming dominant in certain high-tech, high-value technology industries, like 5G and face-recognition. China is also spending more on defence and rapidly developing its military capabilities.
This coalesces with its diplomatic efforts, consisting of actions aimed at building an alternative global order, based on an alliance of countries, like Russia, Iran, Saudi Arabia, uniting against liberal democracies. China aims to undermine the legitimacy of the international, liberal, rules-based order, in order to gain more power. This should be vigorously countered. The EU needs to become more active, then reactive, and begin taking strong action against this threat.
Developing a European narrative and response
First of all, the EU needs to build a narrative to tackle China and other autocracies, that are aiming to delegitimise the current global order. It needs to be able to point out the numerous failures of autocracies, which are covered up by shiny construction projects, and point out the fact that there does not exist any viable and fair alternative to the international, rules-based global order. It also must be able to better illustrate the benefits that the current order yields, and the risks any alternatives may bring.
The EU also needs to engage in an economic action plan. This means introducing legal measures that would prohibit buy-outs of our economy’s crown jewels and innovative companies, by China’s state-backed entities. It also means stopping the development of 5G infrastructure by Huawei in Europe, and investing in alternatives like Nokia and Ericsson, even if it is more costly in the short term. There is also a need for an expansion of funding to be able to support the development of states in need of cash, especially those in Africa, but also in Europe. Challenging Chinese influence also means paying more attention to Asia and what is happening there, as Asia is home to a major share of global economic growth. Trade deals with Japan, Singapore, and ratifying the one with Vietnam should be just the beginning of enhanced cooperation with the region.
Moreover, if the EU will not take its security and defence seriously, that would mean engaging in an ambitious process to boost the member states military capabilities, as the efforts mentioned before, even if they are all undertaken, will not suffice. No one will be impressed, and especially not China, by empty talks about multilateralism, rules-based order and fair trade, if it is not backed up by hard power and if the is EU unable to take care of its own security.
China, as a strategic competitor of the EU, should not be appeased. It should be engaged with confidence and wit, as the future wellbeing of all Europeans depends on it.Jan Czarnocki Economy European Union Foreign Policy Security
Watch out and act fast: shaping the EU’s strategic response to China
14 May 2020
Tsvetelina Kuzmanova Dimitar Lilkov Economy Technology
Fintech – disrupting the world of finance, with Tsvetelina Kuzmanova
Brussels Bytes - Multimedia
07 May 2020
The pandemic has created an unprecedented level of uncertainty, mainly because we do not know how long it will last. This affects the economic implications. Two facts are clear: there will be a recession and budget deficits will have to soar. This note draws some implications beyond the immediate health concerns. In many ways, they challenge the architecture of the Eurozone. Either the architecture will change or the Eurozone as we know it will cease to exist. During the sovereign debt crisis from 2010 to 2015, the architecture was changed just as the Eurozone was on the verge of losing one or more members, with unmeasurable consequences. Will history repeat itself?COVID-19 Crisis Economy EU Institutions Eurozone
Looking Beyond Coronabonds: What COVID-19 Means for the Future of the Eurozone
30 Apr 2020
We are happy to present our new weekly video series, each week with a different guest. Today, we’re honoured to have Daniel Schwammenthal answering the 7 Questions of the Week.Roland Freudenstein COVID-19 Economy Middle East
The Week In 7 Questions with Daniel Schwammenthal
Multimedia - The Week in 7 Questions
10 Apr 2020
The COVID-19 outbreak, and its deep financial aftermath, will put the European Union under unprecedented stress over the next five years or more. Brexit will add to these tensions for some members, notably Ireland. It is a matter of vital national interest for Ireland, that the EU gets its response to the crisis right, and does not allow it to create dangerous social distancing between the states of the EU.
The existing structure of the EU is unfitted to a crisis like this. The public expects the EU to act, but has not been given the EU the powers it needs to do so. Unlike the states of the EU, the EU itself has no capacity to borrow money, and no capacity to raise taxation. So it often lacks the financial clout to take decisive action. The amount it is allowed to spend is a mere 1% of GDP, whereas EU member states can and do spend around 40% of their GDP.
The countries and regions that gain most from the EU Single Market, are either unaware of the gains, or mistakenly think it is all due to their own efforts. A recent study by the Bertelsmann Foundation showed that the big objectors to Eurobonds (Germany, Austria and the Netherlands) gain almost three times as much per capita from the EU Single Market as do the assumed beneficiaries of the Eurobonds, Spain and Italy!
If the Single Market were to fail, the objectors would lose the most. But their national politicians fail to tell them this. Incidentally, the study showed Ireland to be a big gainer from the Single Market.
Meanwhile, the countries and regions that gain comparatively less from the Single Market resent this, and fail to acknowledge that they too are gaining from being in the EU Single Market, albeit a bit less than the others are gaining. Envy blinds some to reality.
Of course, these contradictory feelings are rarely expressed publicly, but they are there under the surface, ready to emerge when a crisis happens and decisions have to be made quickly.
COVID-19 has been such a crisis.
The restrictions on economic activity, as well as the direct health and income support costs, arising from COVID-19 will dramatically increase the debts of all states in the EU. At the same time, the initial reactions in some member states – from Germany blocking sales of vital equipment to Austria closing its border – have left bitter feelings in Southern member states, especially Italy.
Assuming a 20% drop in GDP as a result of COVID-19, an economist in the Bruegel Institute in Brussels has estimated that the Debt/GDP ratio of Italy could rise from 136% of GDP to 189%, that of France from 99% to 147%, that of Spain from 97% to 139%, and that of Germany from 59% to 94%.
As all these countries can expect their workforces to decrease in the next 20 years, because of past low birth rates, this is a very troubling prospect. A way needs to be found to spread the debt as widely as possible and as far as possible into the future.
The EU faces an unprecedented situation which justifies unprecedented actions.
One of the proposals made to do this is Eurobonds/Coronabonds which would enable countries to borrow with a guarantee from all eurozone states. The interest rate might be lower but it is still just another form of borrowing. If Italy issued a Eurobond, it would still be increasing its overall debt, and might face a higher interest rate on its ordinary bond issues. Another objection is that it might take 18 months or more to get these Eurobonds up and running, and the markets need something quicker.
Another proposal, favoured by some Northern member states, is that distressed countries borrow from the European Stability Mechanism (ESM). Some believe that the ESM is too small for all that needs to be done. Others worry about the conditions that might be imposed.
Meanwhile, the European Central Bank (ECB) continues to buy the bonds of member states. For example, it owns 26% of all German government bonds and 22% of all Spain’s bonds. This bond buying by the ECB enables governments to continue borrowing, but its support is confined to members who are in the euro. It is using monetary policy to achieve the goals of fiscal policy, which is controversial.
I suggest that a better solution would be to allow the European Union itself to borrow, up to a limit of (say) 0.5% of the EU GDP, to spend exclusively on COVID-19 related expenditures.
Article 122 of the Treaty already makes provision for the EU to give aid to help states suffering from “natural disasters and exceptional occurrences” beyond the control of a member state or states. COVID-19 meets this criterion.
But the EU is not using this power, because its budget is fully committed to other things. It has no room to respond to sudden emergencies. It would have such room if it was allowed to borrow. This power could then be activated to allow direct transfers of funds to a state in acute distress because of COVID-19 or the like, without adding to the recipient state’s debt.
Doing this would require an amendment to Article 310 (1) of the Treaty. This article presently requires the EU always to run a balanced budget. This could be amended to allow borrowing that was confined to spending on matters, like COVID-19, that had arisen suddenly and were beyond the control of the state looking for help. Such a limited borrowing authority would command a lot of support from the electorate.
It would also be borrowing under the democratic control by the Council of Ministers and European Parliament, something that does not apply to bond buying by the ECB.
The EU faces an unprecedented situation which justifies unprecedented actions.John Bruton Brexit COVID-19 Crisis Economy EU Institutions EU Member States
Increasing our firepower: Where can the EU find the ammunition to fight a Coronavirus induced economic slump?
07 Apr 2020
At its core, the Coronavirus (COVID19) pandemic is a human tragedy. However, it has also become clear that the negative economic and social impacts are deeper and broader than were first anticipated. The continuing spread of this virus and the required measures to contain it have resulted in a concurrent slowdown in all major global economies. This represents an unprecedented challenge to the economic integrity of the EU, its constituent member states, and the global trading framework.COVID-19 Crisis Economy EU Institutions Eurozone
Whatever it takes, for as long as is needed: Mapping a new European Recovery Programme
01 Apr 2020
Empty supermarkets, sold out face masks, and the prices of hand sanitiser reaching absurd heights; this is the picture that has been portrayed of Italy in the past weeks. As of 10th March, 9,175 people in Italy have contracted COVID-19 (a.k.a. the Coronavirus) with the majority of cases concentrated in the North of the country.
After closing schools, universities, museums and cancelling public events (even sacred Serie A football games), the government took even stricter measures by issuing a decree during the night of the 7th of March. This measure ordered the isolation of the region of Lombardy and 14 provinces in Emilia-Romagna, Veneto and Piedmont. The decree prohibited all circulation in and out of the “red zones” with only partial exemptions granted for emergencies or work. It also involved closing all schools and universities. These measures are in place until 3rd April. During a press conference on the evening of 9th March, the Italian government extended the restrictive measures to all regions. In effect, placing Italy on total lockdown.
The reason behind such a drastic decision of the government, besides obviously containing the spread of the virus, is to prevent contagion to the southern regions of Italy. The Italian healthcare system, based on universal access, has been put under immense pressure with more and more patients contracting the disease. The mortality rate among infected people is not extremely high and the average age of the deceased is 81, however, a continuously increasing number of people require intensive care. Having a huge wave of contagion in regions like Apulia, Campania or Sicily, may actually lead to the collapse of already weak southern healthcare facilities should the virus continue to spread.
But the impact on the population’s health, or on normal social interactions, are not the only impacts of COVID-19 on Italy. The repercussions on the already fragile economy of the country will be massive. The shutdown of Lombardy, accounting alone for 46% of foreign investments into Italy, will have significant economic repercussions for the Italian economy. Repercussions that are now impacting on every region in Italy.
Although the Italian government has already announced stimulus measure totalling approximately 4 billion euros these measures will not be enough to counter the longer-term economic impacts.
Even before the arrival of COVID-19, the Italian economy experienced a significant slowdown in late 2019. In February 2020, the European Commission lowered its forecasts for Italian growth to just 0.3% for the coming year and a budget deficit of approximately 2.2% of GDP. Events since then – now escalated to an unlimited shutdown of the vast majority of the Italian economy – will result in Italy entering recession in the coming months. It will also result in a significant deterioration in public finances (both in terms of lower tax incomes and higher health and social security expenditures).
Although the Italian government has already announced stimulus measure totalling approximately 4 billion euros (or a 0.2% increase in the government deficit) these measures will not be enough to counter the longer-term economic impacts. This is due to three main factors.
First, the Italian economy – particularly Northern Italy – is embedded in both European and global supply chains. Thus it is doubly exposed both to the ongoing containment situation in China and the coming restriction of Europe’s economy due to the spread of the virus. Second, tourism in Italy accounts for approximately 15% of total employment. As we enter the start of the tourist season it is likely that there will be a dramatic reduction in tourist visits to Italy, at the very least for the next 3-6 months, but possibly longer. The Italian body representing tourism provides estimates that 22 million fewer visitors to Italy will result in an economic cost of 2.7 billion euros. Third, the Italian economy was already stagnating before COVID-19 arrived. Thus, the depth of the recession will be deeper (and possibly longer) than many now predict.
COVID-19 should be the starting point for Eurozone 2.0.
In this context, it is likely that Italy will require additional spending of at least 1 to 1.5% of GDP to effectively counter the recession currently underway. This will not be a situation unique to Italy. For example, the recent mitigation measures announced in Ireland will likely account for at least 0.7% of Irish GDP in the short term.
Unfortunately, a severe economic slowdown – with severe societal implications – is now underway across Europe. This also implies a significant level of risk for the future stability of the Eurozone. What is clear is that a European approach which prioritises adherence to existing budgetary rules over mitigating the worst impacts of the coming recession will lead to a further deterioration of economic and social conditions.
What is required now – for Italy, and shortly for the rest of the Eurozone – is an understanding of the exceptional nature of the current circumstances. This should be reflected in the application of highly flexible Eurozone budgetary rules for as long as the crisis lasts. It should also stimulate a renewed push for much more fundamental changes in how the Eurozone is constructed and managed. No more tinkering around the edges, real reform can no longer be subject to political inaction. Completing Banking Union and severing the “doom loop” between governments and banks should now be the top priority. Work should also begin immediately on placing the national capitals back at the centre of the Eurozone family. And that must include greater fiscal flexibility.
It would be easy now – in a state of societal unease – to resort to classical Brussels based thinking about how the economic impacts of the Coronavirus should lead to more centralisation, more common functions in the Eurozone. That would be a mistake. Italy’s largely unreformed and unbalanced economy is an example of all the imbalances the Eurozone was designed to protect against. COVID-19 should be the starting point for Eurozone 2.0. The only alternative is fragmentation and ultimate collapse.Anna Nalyvayko Eoin Drea COVID-19 Crisis Economy EU Member States Society
Could Coronavirus save Italy and the Eurozone?
20 Mar 2020
The coronavirus has affected all of us and, equally, scared all of us. We are forced to change our daily lives and habits, along with the way we work and interact with others. It has reminded us how fragile and vulnerable we are, but also how we take many things for granted. It would be wise to use this time for self-reflection ahead of new challenges.
Our European community has stagnated for years, if not decades. We established the Single Market, introduced the Schengen area, and got stuck with adopting more red tape, which is constantly growing. However, we are afraid to move forward with European Common Defense. We argue that neither a German nor a Slovak soldier will deploy his life for a European interest. We have created a separate institution for European Foreign Policy, yet foreign policy continues to be decided at the national level. Every seven years, we fight the same endless battles: whether the Multiannual Financial Framework (MFF) should subsidise farmers, infrastructure, or support Research and Development (R&D). This time, we are also discussing the future of the Spitzenkandidaten process and the introduction of transnational lists.
COVID-19 represents a great threat, but also a unique opportunity. Let’s use the lockdown and teleworking period to reassess our priorities.
We cannot expect the European Commission to find solutions to all of our problems. The European Financial Stabilisation Mechanism was the response to the global financial crisis, a solution that can withstand other similar challenges. Our answer to the migration crisis is to strengthen the control of our external borders. Many propose to declare war on globalisation and multilateralism. But where do we set the bar to tackle the coronavirus?
We need to review our priorities, but also the methods and tools of our policy. We must move forward towards a real, functional, determined federation of European nations. Our Union should be based on the principle of subsidiarity where the EU institutions and Member States are respected. This model would lead to more effective decision-making procedures and will put the common European interest above national egoism. It will also require respect for the values we share, as well as our traditions and our “way of life”. This formation will represent our European Common House.
I am glad that the Wilfried Martens Centre for European Studies is ready to contribute towards building this house. Since 2016, we have been developing the vision ‘For a New Europeanism’. This project is our recommendation in finding a response to the global challenges we face: from the aggressiveness of China, protectionism of the US, Brexit, to migration and the current pandemic. When the time comes, and our lives are back to normal, we would like to present this project within the framework of the conference on the Future of Europe. In the meantime, we will continue to work tirelessly to come up with solutions to mitigate the impact of this pandemic. We struggle, we overcome.
President of the Wilfried Martens Centre for European StudiesBrexit Crisis Economy European Union Society
Thinking Europe, Our Common House
19 Mar 2020
The fact that Slavoj Žižek sees the end of global capitalism coming, should probably be read more as a sign of normality than a reason for undue alarm. After all, he’s done it many times over the last 20 years. But looking at global developments over the last couple of weeks, the Sars-CoV-2 pandemic is not only changing our daily lives on a global scale. It also has a political fallout with at least three main dimensions: the relations between China and the West, the authoritarian temptation in the West itself, and the renewed calls by the Left for Big Government. They are strongly interlinked because ultimately, they are all about the different forms of organising our societies and the relation between the individual and the collective. While it’s early days to outline political implications, some things can already be said.
The systemic rivalry between China and the West
From the very beginning, when the spread of the virus had barely exceeded Hubei Province, Chinese soft power was at stake, first referring to time-honoured Chinese practices of selling wild animals in unhygienic markets. This likely produced the outbreak, and the cult of cowardice and secrecy in the Chinese Communist Party (CCP) allowed the virus to spread initially. Then came the first pushback by CCP spin doctors, with a nationwide war declared on the coronavirus, the shutdown in Hubei Province and beyond, pictures of marching doctors but also a brutal suppression of criticism, epitomised by the fate of the early whistleblower Dr Li Wenliang.
Externally, CCP propagandists quickly began to send two messages to the rest of the world: First, that the Party is not only firmly in control, but also that Chinese authoritarianism is better suited to combat the virus – the famous time-lapse video of the ‘hospital built in 10 days’ comes to mind. Secondly, on social media, Chinese trolls began accusing the West of racism because of travel bans and quarantine for travellers from China –knowing full well that in most Western countries, the racism card plays well, at least with liberal audiences. Of course, these accusations were highly hypocritical in themselves. Imagine for a moment that the virus had truly had its origins in a Western or African country. Anyone who has ever been to China knows how the CCP would have exploited racist tropes in such a situation.
Since the beginning of March, in parallel to the first signs of an easing of the virus spread in China itself, a more ominous phase in CCP propaganda began. Travel bans and quarantine were now pronounced on non-Chinese, the blame for the virus was increasingly openly shifted to the West, and more or less open threats were made by Chinese commentators that for pharmaceuticals, the rest of the world depends on China, and China’s ‘goodwill’ might end. The generous delivery of masks and equipment to Italy in early March won’t make up for the big hit that China’s soft power has taken, together with its image as the selfless force for the good of humankind as it has been impressively cultivated in the Netflix Sci-Fi drama ‘Wandering Earth’.
Accordingly, even when we move back to global economic growth, the West as a whole, not just the US, will want to reduce economic and technological dependency on China. Some soft decoupling will become inevitable. But the mother of all systemic questions is indeed whether the future belongs to societies that are technologically best capable to harness the forces of nature, irrespective of political ideas (i.e. to China, as Bruno Maçães subtly suggests); this stance is highly questionable because it disregards cases such as Taiwan or South Korea.
The authoritarian temptation and the end of European solidarity?
As a general rule, authoritarians love emergencies, in the West as well. Of course, some could not withstand the temptation to conflate the migration crisis with the virus threat. What is more ominous is the quick breakdown of the initial determination of governments in the Schengen zone to keep internal borders open. Within two weeks, this was overtaken by an escalating wave of border closings. Certainly, any return to more national or even regional self-sufficiency as a result of the corona crisis will only reinforce already existing conservative and populist trends criticizing globalisation as such. What may eventually emerge is a new equilibrium between self-reliance and a global division of labour, but the costs of truly reversing globalisation are unlikely to be tolerated by Western societies even after this emergency.
It remains to be seen to what extent this crisis will really be a boon to the West’s new authoritarians, not only because their US idol, President Trump, has performed so dismally in the unfolding crisis in the US, but mainly because Central Europe’s autocrats may show some of the CCP’s dishonesty in dealing with the public while lacking the technology and efficiency to come to grips with the crisis. This is bound to backfire.
To draw a direct correlation between authoritarianism and effectively fighting a pandemic is surely simplistic. Of the two best performing Asian countries in dealing with the pandemic, one is mildly authoritarian – Singapore – and one is a vibrant liberal democracy – Taiwan. Iran, however, one of the worst-performing countries so far, is highly authoritarian.
Return to Big Government?
The Corona pandemic also reinforces authoritarian tendencies on the left. First, there is the classical infatuation of Socialists and Social Democrats with big government and a strong state that are not only able to set tough rules to private behaviour, but also provide high-quality universal health care. Secondly, there are the Greens, asking why tough measures strongly impacting individual behaviour are possible at such short notice in the pandemic, while they are so hard to bring about in the climate crisis – which is, according to the Greens, much more lethal than Coronavirus.
Both trains of thought make the same mistake: They confuse an obvious exception with the rule. People are willing to accept quarantines and lockdowns because they know these are temporary. Big state socialism has failed in the 20th century – catastrophically in the East, and slightly less catastrophically in Western Europe, but failed it has there, too.
We will get over this. In the upcoming weeks and months, some of our ugliest and some of our best behaviour as humans will come to light. Some of our daily routines may well change for good. But the big exception will not become the new normal. Authoritarianism – Chinese or ‘Western’ – will not be the automatic winner. The West will seek new ways of reducing dependence on China. But globalisation is not coming to a grinding halt. And Open Society is far from finished.Roland Freudenstein COVID-19 Democracy Economy Globalisation Society
Brave New Coronaworld? COVID-19 and the Future of Open Society
17 Mar 2020
The Coronavirus (COVID-19) is continuing to spread quickly around the world. It is a highly transmissible virus which impacts disproportionally on older age cohorts. Large gaps in our understanding remain, particularly with regard to the possible extent of undiagnosed cases and whether the virus will naturally reduce in Europe as the spring develops. However, as of March 16 th, over 170,000 global cases have been confirmed with over 6,500 deaths. All European countries are now preparing for large increases in the number of affected people requiring treatment and hospital care. On March 11th , COVID-19 was declared a global pandemic by the World Health Organisaton.
Understandably, much of the current commentary on the virus still focusses on the fluid situation regarding the number of infections, the mortality rate and the differing containment measures enacted by varying states. The level of societal unease at the implications of the virus – restricted activities span all aspects of daily life from cinemas to cafes, from schools to universities and businesses – is currently dominating the media discourse. Such a focus reflects the overwhelming priority of all societies to protect human health where possible.COVID-19 Crisis Economy European Union Society
“Flexibility without Limits”. The Political Economy Implications of the Coronavirus
16 Mar 2020
Perhaps, when the history of European integration in the early 21st century is written, 5G will be viewed as the beginning of Europe’s geopolitical renaissance. Although, that currently seems very unlikely. Because it’s hard to escape the overwhelming feeling in Brussels that a greying, slowing Europe is now stuck in a technological blindspot behind the two global superpowers of the United States and China.
5G sums up the EU’s ability to constantly punch below its weight on a geopolitical level. It also symbolises how Brussels has totally failed to leverage its significant (and often underestimated) economic strength to project its wider political priorities.
Honesty is clearly needed in Brussels because advocating for greater subsidiarity within the EU while simultaneously calling for a more geopolitical Europe is resulting in a clear dilemma. You simply can’t be a global power if there are 27 (or more) potential veto’s sitting around the table. What is required is not a universal abandonment of the EU’s competition or industrial legislation, but rather a more agile, more nuanced understanding that in select, geopolitically important areas, Europe must work together if it is to protect its interests on the global stage.Economy European Union Industry Innovation
A Geopolitical, 5G Europe? Brussels needs to go big, or go home
13 Mar 2020
The executive board of the Wilfried Martens Centre for European Studies at its last board meeting approved the nomination of Professor Lars Jonung as the centre’s newest Senior Research Associate.
Professor Lars Jonung is a Swedish economist, and Professor at Knut Wicksell Centre for Financial Studies, Department of Economics, Lund University, Sweden. He was Chairman of the Swedish Fiscal Policy Council from 2012 to 2013, and Research Adviser from 2000 to 2010 at DG ECFIN with the European Commission, where he focused on macroeconomic and financial issues related to the euro. He was previously Professor of Economics at the Stockholm School of Economics, and served as Chief Economic Advisor to Prime Minister Carl Bildt, from 1992 to 1994.
“We are excited to have Professor Emeritus Lars Jonung of the Knut Wicksell Centre for Financial Studies joining us as a Senior Research Associate. Professor Jonung’s acknowledged expertise in the areas of monetary and fiscal policy, financial crises, the euro, European integration, and the history of economic thought will be invaluable to us as we continue to develop the case for a reformed, more decentralised Eurozone” said Dr Eoin Drea, senior research officer at the Martens Centre.Economy Eurozone Integration
Martens Centre welcomes Lars Jonung as Senior Research Associate
06 Mar 2020
Digital authoritarianism is no future prospect. It is already here. The People’s Republic of China has institutionalised draconian measures for citizen surveillance and censorship, as well as gaining almost full control of online political discourse. The Chinese Social Credit System is an intricate extension of this tactic. A coordinated administrative system which feeds on data from different governmental sources and has the ability to sanction and publicly shame individuals would be a powerful tool in the hands of the Chinese Politburo. In parallel, China is pursuing an aggressive agenda of techno-nationalism which aims to move the country closer to technological self-sufficiency and to maximise the penetration of its technological giants on the global stage. The majority of these digital champions have been nurtured by generous public subsidies and successfully shielded from international competition.
This research paper analyses the unique features of the Chinese model of digital authoritarianism and its international spill-overs. China’s oppressive model is no longer just applied domestically but is successfully being exported to other countries across different continents. As a new decade begins, the EU must make sure that its citizens have the necessary institutional and legal protection from abuses of modern technology such as facial-recognition software and the advanced application of AI. Europe must remain a global influence when it comes to ensuring a coherent regulatory approach to technology and stand ready to oppose the spread of digital authoritarianism.China Democracy Economy European Union Innovation Technology
Made in China: Tackling Digital Authoritarianism
11 Feb 2020
During the last decade of perma-crisis in Europe, we started to believe in our own impending demise. Suddenly there was money for nothing, China was chomping at our heels and our demographics were catastrophic. All that was left was a long, slow inevitable decline into global insignificance. Fast forward to 2019 and a similar vista appears, this time with the added bonus of catastrophic climate change. Now Europe teeters on the brink of another economic downturn.
These challenges, while serious and real, can be addressed by a long-term policy reorientation. But to adequately respond to the issue of climate change and to effectively project European interests on a global stage Europe must combat the one issue which is its biggest impediment. Europe needs to remember that thinking big isn’t a crime. Europe needs to understand that investing for the long term is a vital part of economic planning.
Take the environment. The airline industry is one of the largest sources of global Co2 emissions. Yet, notwithstanding the relative proximity of many of Europe’s main urban centres, high-speed rail in Europe remains “an ineffective patchwork of lines without a realistic long-term plan”. EU funding of 23.7 billion euro in co-funding for high-speed lines since 2000 is minuscule when compared to support levels for other transport modes. At a European level, the overall picture remains one of isolated national systems and incomplete domestic programmes.
Yet, the environmental benefits of high-speed rail are obvious. The development of high-speed networks in France, and more recently in Italy and Spain, have significantly reduced domestic air travel and resulted in reliable transport links between many major cities. Cross-border services – most notably the Eurostar connecting London to Paris/Brussels and Thalys linking Paris to Amsterdam (via Brussels) have become important transport arteries.
So why then the implied reluctance – at both a national and European level – to place high-speed rail at the centre of the EU response to fighting climate change? One reason is the economics of high-speed rail. Such developments are, by their very nature, expensive to construct, the time taken for such lines to become operational can be substantial (often a decade or more) and during this time they are constantly being subjected to negative media and economic analyses.
China built a comprehensive high-speed rail network in little more than a decade.
Consider both the proposed Lyon-Turin and London-Birmingham (HS2) rail links. The considerable opprobrium heaped on these projects relates mostly to cost. Unrealistic initial budgets (often required to gain political support for commencement) are used by opponents as an economic basis for seeking to halt the project. But cost-benefit analyses are, by their very nature, only based on a set of quantitative assumptions regarding issues such as construction costs and passenger numbers.
The traditional economic analysis ignores wider societal and environmental benefits. In addition, both of these projects also seek to achieve important strategic economic objectives in terms of improving cross border mobility (Lyon-Turin) and tacking increasing regional inequalities (London-Birmingham).
Often expensive (and they are very expensive) high-speed rail projects find it difficult to attract consistent political support. Welded to an election cycle governments find it difficult to coherently develop plans for high-speed rail lines that may take decades to become fully operational. This equates, in many politicians eyes, to decades of considerable government spending without any discernible impact on their re-election prospects.
China built a comprehensive high-speed rail network in little more than a decade. In Europe, proposals for new, or even for upgraded lines, can languish for decades in planning hell.
To counter this reality, the EU should be the perfect mechanism for ensuring consistent financial support for these long term investment projects. The EU should significantly increase co-funding for an earmarked list of strategic priority projects. For example, the approximate 500km distance between Berlin and Munich still takes a minimum of 4 hours to complete by rail.
Likewise, the 400km trip between Brussels and Frankfurt requires a journey time in excess of 3 hours. These train journey times are not sufficient to alter many passengers travel habits regarding short-hop airline flights. Up to 8-10 flights still leave Brussels for Frankfurt (and vice versa) on a daily basis.
Given the current climate crisis, and Europe’s wish to lead the response, this situation is clearly unsustainable. Tackling climate change is a very expensive business. Europe needs to hop aboard this high-speed train before it leaves the station.Eoin Drea Economy Energy EU Member States Industry Sustainability
To tackle climate change Europe needs to embrace high-speed rail
02 Sep 2019
Federico Ottavio Reho Economy
Ambiguous by design: the concept of social market economy
Europe out Loud - Multimedia
31 Jul 2019
A restructuring of the global economy towards lower carbon goods and services is under way. The EU’s global competitiveness hinges on consistent investment in the accelerated transformation of its energy sector and industrial base. At the same time, reducing current differences between Eastern and Western Europe in terms of the economic risks and opportunities of the transition is crucial for the continued stability of the eurozone. This policy brief argues that the EU needs to fully align public and private financial flows behind this transformation and to support this by assessing and managing the macroeconomic, fiscal and monetary impacts of the transition.Economy Environment Macroeconomics
Financing a Sustainable and Competitive Economy: Next Steps for the EU
23 Jul 2019
Here we go again. With slowing growth, increasing debt and an uncertain global environment, Italy faces another budgetary crisis in 2019. Once again Rome will face Brussels in a battle for fiscal sovereignty. The result? Either another political fudge or the end of Europe’s current fiscal rules as a credible policy tool. This In Brief argues that there is an alternative to engaging in repeated political arguments about existing fiscal rules. Rather, the EU should recognise the fundamental weaknesses in the governance of the eurozone. A move towards a more decentralised monetary union based on the concepts of national fiscal autonomy and a credible no-bailout rule is now essential. Only then will the eurozone have a realistic chance of long-term survival.Economy EU Member States Eurozone Macroeconomics
Why Italy should spell the end of Europe’s fiscal rules
16 May 2019
With global politics in turmoil, Russia and China have found each other. In 2018, the President of Russia Vladimir Putin and Chinese President Xi Jinping met one another five times. In the same year, Russia and China held their biggest shared military exercises for decades.
Trade between the two nations increased by over 30% in 2018, and is expected to increase even more. They also seem to be finding synergies when it comes to dealing with the situations in Syria and Venezuela.
China and Russia both have features that unite them. Both are blatantly autocratic, show a callous disregard for human rights, and share an openness to using military force in their neighbourhoods. They also share a great interest in pushing back the West’s influence in the world.
Yet, despite these various areas of cooperation, the list of potential conflict points between the two powers is long. Despite the decade-long and successful efforts to ease the potential security conflicts between China and Russia, China’s increasing global ambitions are clashing with Russia’s interests.
To start with, Russia considers the Arctic region its front yard. In 2018, China – self-identifying as a ‘Near-Arctic State’ – announced its official Arctic policy, promoting Beijing’s ambitions for the region, and raising Russian fears of a potential Chinese takeover of the polar zone through the creation of a ‘Polar Silk Road’.
Despite efforts to ease the potential security conflicts between China and Russia, China’s increasing global ambitions are clashing with Russia’s interests.
China’s Belt and Road Initiative also penetrates post-Soviet states in Russia’s backyard. While on the surface level the project underlines economic cooperation, it is clear that China will not make billions worth of investments without making sure that those investments are protected.
As a consequence, China’s influence in Central Asia is increasing rapidly. In the long run, it is clear that the power balance will shift in China’s favour in Central Asia. This represents a major change for Russia.
China has been careful not to encroach upon Russia’s security concerns in Central Asia, but at the same time Beijing is strengthening its role in counterterrorism initiatives with Central Asian states, and beefing up its security presence in countries like Tajikistan.
As China’s Belt and Road Initiative becomes more established, it could easily come into conflict with Russia’s interests in the Russia-managed Eurasian Economic Union. Conflicts of interest may also arise in setting out the future direction of the Shanghai Cooperation Organization (SCO).
Over the past couple of years, European countries have become very concerned about the consequences of China’s increasing investments. The exact same thing is taking place in Russia’s far east.
For example, Chinese capital now accounts for 45 percent of total foreign investment in the second most important regional city in Russia’s far East, Khabarovsk. Meanwhile Vladivostok, Russia’s far east capital, is also being transformed by Chinese investments.
While this economic boost is being welcomed in this troubled Russian region, the daily deluge of tens of thousands of Chinese holidaymakers and investors has raised concerns among Russian nationalists, who suspect that this could be part of China’s strategic plot to reconquer its lost territories. Indeed, Vladivostok itself was once a part of China known as ‘Haishenwai’ in Chinese.
Why is Russia not reacting to China’s expansion?
Despite these numerous threats, why is Russia still choosing a close alliance with China in various areas? To start with, Russia believes it does not have much of a choice; Russia is a fraction of China’s size economically, and its population is just one tenth of China’s. In military terms, comparing active personnel and military equipment, Russia is not as far behind.
Nevertheless, Russia can ill afford a military confrontation with China along its long land border, given that its military budget is only one third that of China’s. Russia also knows that China could scale up its military rather quickly if needed both in term of men and equipment because of its economic resources.
Additionally, despite Russia’s nuclear advantage, it cannot employ the same scaremongering tactics with China as Putin does with the European population, due to the fact that in China the media is controlled.
But the central reason for Russia’s approach is that while the Putin administration is focused on surviving the next few years, China, by contrast, is playing the long game. Putin’s main goal is to secure his immediate future, and in that regard cooperation with China is beneficial.
While the Putin administration is focused on surviving the next few years, China, by contrast, is playing the long game.
The likelihood that Putin manages to maintain his grip on power in Russia is high. Nevertheless, the economic situation in Russia is worsening, and increasing popular dissatisfaction is being expressed more openly. The result is growing difficulties for the Kremlin in maintaining the status quo, and controlling different regions and their elections has become more difficult as Putin’s hold on the Russian public loosens.
Meanwhile, Putin has declared a de-facto war against the West and its set of values. The colour revolutions in Russia’s neighbourhood were interpreted by Putin as an advance of the West’s values, as well as an immediate personal threat. China might become a threat to Russia at some point, but not immediately, and not to Putin himself.
No doubt Putin understands the long-term risks of China’s growing influence for Russia, but for Putin events in twenty- or thirty-years’ time seem to have less value. China, by contrast knows that Russia is a quickly declining power and it has the patience to wait both for Russia’s power to decay and its own to rise. No doubt Russia will snap out of its sleepwalk with China at some point, but by then it will already be too late.Tomi Huhtanen Defence Economy Foreign Policy Macroeconomics
Is Russia sleepwalking into Chinese dominance?
15 Apr 2019
In the era of populism old ideas are being rolled out again. One of them is the concept of basic income, which has recently been circulating in many political debates in various member countries and international conferences, including Davos and the World Economic Forum’s annual meeting this year. Many variations of basic income are on the table, and some have even been translated into electoral promises, for example Five Star’s late proposal on Citizens’ income.
Finland’s former government actually ran a pilot project on basic income, whereby 2,000 people across Finland were paid a tax-exempt income of 560 euros for two years. Participants were unemployed, and no other conditions were required to receive the payment.
The pilot project received much more enthusiasm from outside Finland than within Finland itself. The main reason might be that while outside Finland the pilot project was taken as an indication of structural change to the whole social welfare system, in Finland the project was really seen as just a test, mainly launched to realise a long-standing objective of the Prime Minister’s Centre Party.
The first set of results came out more than a month ago. While more specific studies are yet to be published, these results indicate that while people receiving the income were happier, the income did not have an impact on the employment status of the test group.
In Finland, reactions have not been enthusiastic. Heikki Hiilamo, Professor of Social Policy at the University of Helsinki, has commented on the preliminary results of Finland’s basic income experiment, noting that effects on the labour market were minimal, and survey results demonstrating that basic income recipients had better subjective well-being are questionable.
These results indicate that while people receiving the income were happier, the income did not have an impact on the employment status of the test group.
Taking the results into account, it is not surprising that with the Finnish parliamentary elections taking place in just two weeks’ time (on 14 April), and with other reforms taking centre stage of discussions, the basic income topic has faded away totally from the electoral debate. Indeed, while many parties initially made proposals they called ‘basic income’, after it was pointed out that these proposals do not really respect the basic definition, the label was dropped.
Reflecting on the results of the basic income experiment, Finnish politicians Juhanna Vartiainen and Asmo Maaselkä pointed out that basic income is not suitable for a developed country like Finland, especially if it happens to be of large geographical size. Basic income is not able to equalise the cost of living in different parts of the country in the same way as income support can, nor does basic income adapt to the situations of different families.
Basic income would possibly suit countries with low levels of basic security and a low cost of living with a lot of low-skilled work not requiring higher education, i.e. developing countries, not countries in Europe.
Introducing real basic income would mean radical reform of labour market structures
In addition, basic income cannot be debated without speaking about compatibility with labour market structures, starting with incentives for the labour market to target specific groups, such as young people without qualifications.
In order to ensure that getting and applying for a job would remain attractive, the society-wide labour contracts would need to be rethought if basic income were introduced, as would the minimum wage and the prohibition of zero-hour contracts, for example. This was obviously not done in Finland due to the temporary nature of the experiment, and the results speak for themselves: there was no boost in the integration of people into the job market.
If the cost neutrality of introducing basic income is taken as a guideline, the problem of basic income to the political left becomes obvious. Already existing support, allowance and regulatory structures which have been dear to the left would need to be erased. As an example, the Finnish Social Democrats (SDP) oppose the basic income.
The entry of basic income into Finnish political discussions appears temporary based on what we can see from the current debate. However, the debate around basic income is useful; complex social support systems and overlapping unemployment benefit schemes need reform and simplification in most European countries.
The need for simplification most likely means that in many countries some variation of a universal credit system will be debated, but as UK’s experience with the universal credit system shows, simplification of multi-layer system takes a lot of effort.
In a similar way to Finland’s political debate, many proposed models will be called ‘basic income’, but in reality represent only some variation of it. Pure basic income will hardly be introduced in European countries, but simplification of our current social and unemployment allowance systems is absolutely needed.Tomi Huhtanen Economy Elections EU Member States Jobs Social Policy
Basic income is basically unworkable – so let’s drop it
02 Apr 2019
For those seeking to understand the debate in Britain about leaving the EU, it is important to understand that history—or rather a certain Eurosceptic Tory interpretation of British and Imperial history—played a key role in building and sustaining the momentum for Brexit, both during and after the 2016 referendum. In this context, the process of Britain leaving the EU can be seen as the triumph of a misrepresented and selective view of British Imperial history and an unbending view of the primacy of the nation state. This narrative was combined (quite quickly and unpredictably) with a rise in economic nationalism and populism stimulated by the global economic crisis that commenced in 2007. This combination, in turn, challenged long-established political norms such as Britain’s membership of the EU. These were challenges that were largely based on a mutated form of British declinism and a fatalist view of the EU.
Ultimately, this paper concludes that it is not in the interests of Brussels that Britain should either seek to remain (or gain re-admittance in the future) as a full member of the EU. Rather, Britain’s historical self-conception is more conducive to a looser, yet clearly defined relationship with Brussels, based on shared political, economic and security interests. Such an arrangement—a bespoke Anglo-Continental compact—is more consistent with Britain’s political realities and accepted historical narratives. It will also better preserve the integrity of the EU’s internal cohesiveness, which since 2016 has become unavoidably intertwined with Britain’s search for relevance in this post-colonial age.Brexit Economy EU Member States Euroscepticism Macroeconomics
The Empire Strikes Back: Brexit, History and the Decline of Global Britain
12 Mar 2019
For the first time in history, more than half of the world’s population belongs to the middle class. Global poverty has declined rapidly due to globalisation and technological development. But the same trends also lead to rapid change and the feeling that society is moving away from its moral core. In this book, the middle class in the Netherlands and Europe is highlighted by several authors and from several points of view. How is the middle class doing? What problems do families experience? What power lies in the civil society? And what does this mean for politics?Economy Macroeconomics Middle Class Social Policy Society
The Middle: The middle class as the moral core of society
19 Nov 2018
The rapid technological progress in automation, robotisation and artificial intelligence is raising fears, but also hopes, that in the future the nature of work will change significantly. There will be changes in what we do, how we form workplace relations, how we find work and the role of work in a society. Some believe that these changes will be for the better: we will need to work less and thus will have more free time. Others think that the changes will be for the worse: there will be fewer ways to earn a living.
The central question of this paper is this: will adages such as ‘By the sweat of your brow you will eat your food’ and ‘No bees, no honey, no work, no money’ become obsolete? Will work disappear and with it the societal relations and inequalities that result from differing success in work? If this is going to happen, what policy options do we have to address the issue?Economy Innovation Jobs Society Technology
The Future of Work: Robots Cooking Free Lunches?
11 Jul 2018
Compared to the 18 months preceding the 2014 elections, the mood music in Brussels could scarcely be more different. But while growth and employment are increasing, vast swathes of the established middle classes have lost faith in their ability to achieve a higher standard of living and to match the social mobility achieved by preceding generations. Increasingly topics such as globalisation, free trade, immigration and even stable political systems are viewed as tools of the “elite” designed to prevent progress for working and middle class families. Politically, this has manifested itself in a fracturing of the traditional party political system and the rise of a protectionist, combative populism.
To confront these challenges, this paper identifies five social and economic priorities that should form an important element of centre right policy formation. With the ultimate objective of rejuvenating an aspirational middle class in Europe, we argue that only by bridging the gap between the rhetoric of a digitally driven, flexible economy and the day to day realities confronting middle class families can the centre right hope to increase working and middle class support in the 2019 elections and beyond. Such an approach is based on the core social market economy principle of seeking to conciliate economic freedom with social security, while maintaining a high level of personal responsibility and subsidiarity.Centre-Right Economy Macroeconomics Middle Class Social Policy Society
The Middle Class: Priorities for the 2019 Elections and Beyond
02 Mar 2018
Federico Ottavio Reho Economy Social Policy
Is capitalism immoral? Four myths busted
Europe out Loud - Multimedia
19 Feb 2018
Successful systemic reforms – reforms that put an entire country on a higher trajectory of development – have become the Holy Grail of modern democratic politics. All politicians of some ambition claim to be pursuing them, but few manage to secure any during their time in office.
In recent decades, successful reforms have in fact been a rarity and a riddle in western democracies: they seldom happen and we do not exactly know why they succeed. For one country that made it – for example Thatcher’s Britain – one can find several that failed – from France to Italy and Greece.
Thanks to Nils Karlson’s book Statecraft and Liberal Reform in Advanced Democracies, published by Palgrave Macmillan this year, successful reforms will be less of a riddle and perhaps less of a rarity too.
Karlson, the Founding President and CEO of the Ratio Institute in Stockholm and an Associate Professor at Uppsala University in Sweden, had first-hand exposure to successful structural transformations in his own country when he served as a public sector manager under Prime Minister Carl Bildt.
Successful systemic reforms have become the Holy Grail of modern democratic politics.
This was the period when Sweden transformed from an economy plagued by low productivity, heavy regulation and exorbitant taxes into an open, competitive one with high productivity, deregulated markets and sound public finances.
From an in-depth comparison between the Swedish experience and the Australian one – another success story of reform – the author develops the best theory yet on how to understand – and pursue – reforms.
Modern statecraft – the art of governing a country well and of promoting reform – requires that there is an opening for action but most crucially that elites know what to do and how to do it. The opening is usually created by changing economic and social conditions that show the inadequacy of existing arrangements.
By the 1970s, for example, interventionist policies had created a state of economic sclerosis and social stalemate in Britain and Sweden. Something had to be done, but what exactly? At this juncture, ideas take center stage.
Jean Claude Juncker’s famous quip that ‘we all know what to do, but we don’t know how to get re-elected once we have done it’ shows way too much confidence in politicians’ skills.
Politicians are consumers, not producers, of ideas.
Building on an intuition that had already surfaced in the thinking of Friedrich Hayek – the great liberal economist and social theorist – Karlson explains that novel ideas for policy changes must have been developed and strategically promoted for policy-makers to know what to do when the occasion arises.
Politicians are consumers, not producers, of ideas. All available examples show that policy entrepreneurs in universities, think tanks and strategically placed institutions play a key role in developing ideas for policy changes and in finding political champions to promote them.
Without these people, beneficial change does not normally happen. In the British case, a policy entrepreneur such as Anthony Fisher and an organisation such as the Institute of Economic Affairs come to mind.
This process of elaborating and spreading new ideas can be decades-long – it was in the cases treated in the book. Besides, its success is no guarantee of welfare-enhancing reforms.
The author explains that policy-makers who have embraced ideas for change need to overcome powerful obstacles on the road to reform, from special interests and public goods traps to public opinion and cognitive biases.
To be successful, they need to know how to do what they deem necessary, which in practice means mastering and using three major reform strategies: Popperian, Kuhnian and Machiavellian.
The first are based on rational argumentation, the second on changing the frame of discussions, the third on shrewdness, divide-and-rule and scapegoating. All successful reformers seem to have used some combination of the three, depending on circumstances.
The book does a good job explaining why major policy changes succeed in advanced democratic welfare states. It also offers a promising framework to understand why they often fail. In France, Italy and Greece, for example, policy entrepreneurs are mostly absent, and think tanks relatively underdeveloped.
To be successful means mastering and using three major reform strategies: Popperian, Kuhnian and Machiavellian.
Elites are traditionally absorbed by the state bureaucracy, which acts as a bulwark of conservatism and discourages any reform. In order to prove the robustness of his theory, Karlson will have to test it with more countries, most interestingly those who tried and failed to reform. The theory may also benefit from placing higher emphasis on institutional obstacles to reform, which are somewhat neglected.
When a country has dysfunctional institutions, in addition to ineffective economic and social policies, reforms may be blocked even if all the conditions identified by Karlson are in place. The Italian case comes to mind again here, with successive reformers – most lately Renzi – worn out by failed attempts to modernise an ineffective constitution that makes special interests all-powerful.
All in all this is an excellent contribution that scholars, practitioners and politicians with reformist ambitions would do well to read carefully. At a time when the future of Europe and EU reform are the talks of the town, it is an essential read for us in the Brussels bubble too.
It should help think tanks and political foundations better understand how decisive our role in developing and spreading novel ideas for EU reform can be in the current context. And it should induce us to upgrade our ambitions from playing a mostly supporting role to becoming drivers of change that actively shape narratives and policies.Federico Ottavio Reho Economy EU Member States Macroeconomics
Federico Ottavio Reho
Even advanced democracies need reforming
15 Feb 2018
What a difference a year makes! Early in 2017, President Xi Jin Ping’s Davos speech about openness and sustainability seemed to herald a new China, globally responsible and therefore in many ways a potential strategic partner for Europe – especially when compared to Trump’s America which just seemed to have said goodbye to the West.
But come 2018, global media’s biggest China stories are about Australian universities being bullied into firing staff for ‘insulting the feelings of Chinese students’, European investors complaining about intrusive Communist Party cells in their Chinese factories, EU direct investment in China actually decreasing recently, German counterintelligence warning about a broad offensive of Chinese spy agencies and, most ominously, the impending nationwide introduction in China of a Social Credit System which would make Big Brother green with envy.
And this is not to mention the familiar stories about tightening controls of social media, crackdowns on Civil Society and foreign NGOs (aka ‘closing space’), and now perpetuating the authoritarian rule of one person (Xi) within the authoritarian rule of the Chinese Communist Party (CPC).
The Economist had three China cover stories in four months – all with a critical spin: One about China’s questionable trade practices, one about the dangers of Xi Jin Ping’s new authoritarianism, and the last one about how China is spreading its ‘sharp power’ across the globe.
There is no doubt that the rise (or re-emergence) of China is one of the great events of our time that will ‘echo down the ages’ as Mark Leonard said in his seminal ‘What Does China Think?’. But in the past year, the European debate about how advantageous the rapid power shift to Xi Jin Ping’s China is for us, has taken a healthy turn towards realism.
Above everything else, Europeans, and indeed Westerners in general, will have to perceive this as an ideological challenge. Xi’s ‘Chinese model’ (brutally simplified: market economy minus democracy) is not only in direct competition to the Western model of combining economic and political freedom (the takeaway from 1989 to the 21st century, if you will).
But 2017 was the year when it became abundantly clear that the Chinese model has mutated from a competing design to a threat in many ways, through a combination of military expansion, bullying neighbours, strategic investments (including ‘buying’ institutions and people) and political arm-twisting. Of course, such pearls of Western democracy as Trump or Brexit, or electoral successes of national populists across continental Europe are grist on the mills of the proponents of the one party state.
But then again, as long as the one party state produces psychopathic mass murderers such as Kim Jong Un, there is no reason for an overdose of Western contrition. Neither are we powerless, nor is head-on confrontation the only alternative to total acquiescence. Instead, here are eight steps to a more solid response by the EU:
- Putting things in perspective:
Of course, China is not – and will not be – the only show in town. Take a look at the much-hyped relevance of China to the EU’s foreign trade: In 2016, Germany, the EU’s no. 1 economy, traded with China goods worth 170 billion Euros. But Germany’s combined trade volume with the V-4 countries (together about 65 million inhabitants) was 255 Billion Euros. China’s phenomenal economic growth notwithstanding, it still faces enormous challenges in social stability, corruption, the environment and private debt.
- Maintaining unity in the EU:
Even if it’s hard, we should strive for a more coherent answer to China’s ‘Belt and Road Initiative’, coordinating among member states. A joint strategy, or at least, best practice, vis-à-vis Chinese direct investment, would be a good idea. And the governments inside as well as outside the EU participating in China’s 16+1 initiative addressing cash-strapped former communist countries should at least be offered some analysis and intelligence about Chinese investment strategies in connectivity, especially in the digital field.
- Working with our allies:
Even Trump and Brexit have not changed the laws of gravity, nor the relative community of values and interest between Europe and North America. Confronting China on its authoritarian trade model (forced technology transfers, large state-owned enterprises, WTO rules manipulation) will be an excellent field of strategic coordination with a post-Brexit Britain and a US with checks and balances still intact. NATO is also a good framework to do so.
- Compartmentalising relations:
Cooperating with China where useful and possible, but by all means pushing back where necessary. While trade, fighting climate change and, in future, even defending parts of the global liberal order such as copyright law (as Chinese inventors become more defensive) may be good areas of strategic cooperation, China’s sharp power needs to be resisted, by means of our open societies as well as the rule of law and counter-intelligence.
- Learning Mandarin (or Cantonese, for that matter):
The EU and its member states need to quickly and sustainably improve their expertise on China. That ranges from linguistic abilities to analytical capacities. It will be crucial that these efforts are financed from within Europe, and not by the Chinese government, universities or private investors.
- Institutional networking:
Think tanks and experts analysing China (and not on a Chinese payroll) must cooperate more closely, and build sustainable networks to exchange information and analysis. The EU, as well as national governments and civil society, all have crucial roles to play here.
- China mainstreaming:
China should be factored into all strategic policy areas in Europe. Our pushback against Putin is an excellent example: The Chinese leadership is watching very closely how Russia fares with its territorial annexation and military aggression. There is a Chinese factor even in our sanctions policy towards the Kremlin. Whether energy, foreign investments, technology cooperation, relations with Africa (not only in the migration context), even defence policy: there is a Chinese angle to many EU policy fields, hence China must become part of our strategy in all of them.
- Reaching out:
To Taiwan, which is the living proof that democracy and the rule of law are very much compatible with Chinese culture, contrary to what the CPC would make us believe; to Hong Kong and its courageous democracy activists; to the growing Chinese expat community, and within China to regional and local partners who often genuinely desire more independent relations to Europe. As to China’s neighbours: Countries such as Japan, South Korea and Vietnam should become part of an informal network of intelligence exchange and strategic coordination.
The West has seemed to be losing out already a couple of times in history. In the 1930s, communism and fascism looked like the wave of the future. In the late 1950s, with the Sputnik shock, the victory of the West in the Cold War looked less than sure, to put it mildly. The West has the ability – amazing to many and annoying to its detractors – of bouncing back when it’s least expected to. If 2017 was the year the Chinese dragon began to audibly growl, let 2018 become the year we developed a valid response!Roland Freudenstein Democracy Economy Foreign Policy Globalisation
Dancing with the Dragon: how the EU should respond to the Chinese challenge
10 Jan 2018
Media headlines seem to have given much larger attention to the bailout programme in Greece than to those of most other countries. But Greece’s experience with economic adjustment is in many ways an outlier, complicated by the election of the radical-left government of Tsipras.
Cyprus offers the interesting example of an economy saved with the help of economic adjustment and responsible reforms. Cyprus under centre-right leadership seems to be a rags-to-riches story after being shut out of financial markets only six years ago.
During the 2000s Cyprus registered strong growth driven by buoyant domestic demand according to a European Commission report. On average, Cyprus’ real GDP grew at a rate of 2.75% between 2000 and 2010 compared to the 1.4% of the euro area for the same timeframe.
The country enjoyed high employment rates, low inflation rates and rising real disposable income. This led to real convergence with the stronger economies in the European Union. Apart from domestic demand, Cyprus’ accession to the European Union in 2004 and its joining the euro area in 2008 contributed to this growth by boosting investor confidence.
While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.
However, this positive image was underpinned by economic vulnerabilities and imbalances due to the mismanagement of the public finances. Notably, Cyprus ran current account deficits averaging 6.9% of GDP for approximately one decade during EU accession and entry to the euro area. In order to finance its current account deficit, Cyprus relied on foreign direct investment, which provided little added value to the economy.
Furthermore, the public sector had grown extensively in the 2000s, taxpayer compliance was low, and total government expenditure as a share of GDP increased. Additionally, the banking sector was vulnerable because of inadequate prudential supervision and because of its openness toward Greece.
When the financial crisis and subsequent euro crisis hit, the Cypriot banking sector was severely impacted. Cyprus reached a 6.3% budget deficit and gross debt rose sharply to 85.8% of GDP and subsequently going over 100%. Cyprus was shut out of financial markets for 18 months starting in mid-2011.
In order to adjust its economy, Cyprus agreed a bailout programme and undertook comprehensive structural reforms under centre-right President Anastasiades. The implementation of the bailout programme of €10 billion (56% of Cypriot GDP) took place between 2013 and 2016.
It was one of the largest sovereign bailouts in history. The bailout programme targeted Cypriot banks and involved a severe austerity programme (cuts to public spending, tax increases, and privatisation of semi-government organisations).
The reform to the banking sector, which saw Cyprus’ second-largest bank shut down, was received negatively by the public as it involved losses to all stakeholders in the banking sector, especially bondholders and depositors.
The government in Cyprus was determined in its response to the crisis and Cypriots were stoic in their resolve to see the reforms through. Apart from minor unrest toward the beginning of 2013, there were little protests and no riots against the austerity programme.
While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.
The performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity.
The country exited the bailout programme on track in 2016 due to ambitious and consistent implementation of necessary reforms by the centre-right government led by President Anastasiades.
Statistical data from Eurostat supports the positive contribution government policy since 2013 has made to the country’s recovery. Cyprus ranks among the top ten countries in the European Union on key financial indicators.
Data for the third quarter of 2017 shows a 0.9% increase in GDP over the previous quarter and a 3.9% increase over 2016. Employment has increased by 0.7% in the third quarter when compared to the second and by 3.5% when compared to 2016.
Equally, Cyprus registered the fifth largest year-on-year decrease in unemployment in the European Union, from 13.1% in 2016 to 11.0% in the third quarter of 2017.
Cyprus had the largest year-on-year drop in government debt to GDP ratio (7.4%) in the EU in the third quarter of 2017. According to a European Commission forecast, growth is expected to remain strong in 2018 and 2019 coupled with a strong labour market and modest inflation.
The economy of Cyprus has outperformed the government’s budgetary targets, and government debt is likely to fall below 100% of GDP in 2019.
The academic literature on public administration reform often emphasises the difficulty of agreeing to and implementing reforms as well as of deciding whether or not the intended reforms had the intended outcome.
In this respect, the performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity. Notably, it is a victory for the centre-right, which has once more shown its ability to deliver results in highly challenging circumstances.
Even so, the Cypriot economy should not rest on its laurels even if it has registered a significant improvement. A forecast by Oxford Economics warns that reform is still necessary as the ‘legacy of the 2012-2013 crisis can still be seen in the banking sector’.
Further work on restructuring non-performing loans and improving public finances is required in order for the positive forecasts to become a reality. Rags-to-riches stories are popular, but so are riches-to-rags.Andrei Moraru Centre-Right Crisis Economy EU Member States Macroeconomics
Cyprus: from rags to riches?
01 Jan 2018
This book explores how the position of the middle class has changed in the past decade. No Robots expresses the perspective of households which are not floating as some kind of atomic particles in a macro economy, but consist of human beings who find meaning in relationship to others. Analysing their perspective on the economic situation, globalisation, migration and technology is key, we believe, to understanding political trends. In this context, No Robots also expresses the widely-felt anxiety about the replacement of jobs by robots. Households in every country are concerned about the future of work: whether it will be there, whether it will be well-paid and whether their children are receiving the right education to find a job. These are the type of concerns that we uncover for a diverse set of countries from the European Union.Economy EU Member States Macroeconomics Middle Class Social Policy Society
No Robots: The Position of Middle-Class Households in Nine European Countries
19 Nov 2017
Today being pro-trade and defending globalisation seem to be out of fashion. After Trump crushed the Trans-Pacific Partnership (TTP), and put the North American Free Trade Agreement (NAFTA) under his hammer, it does seem that the tide has turned against global trade and globalisation.
In Europe this is seen through the fall of the TTIP agreement, which in fact was already in trouble before the election of President Trump. Anti-trade sentiments are labelled as partly responsible for the rise of populism in Europe, and nationalist parties have adopted a soft-anti trade stand.
Setting the numbers straight
But the fact is that the mainstream held assumption that there is strong anti-trade sentiment in Europe is a fallacy. The majority of Europeans support free trade and want more of it, as the Eurobarometer study shows. 73% of EU citizens view free trade as positive. There is national differences of course, with 85% of Danish citizens seeing it as positive at the higher end of the spectrum and 58% of Greeks seeing it positively.
Furthermore, according to the Eurobarometer, respondents increasingly see globalisation as positive and important for economic growth. More than half of all respondents consider globalisation to be positive (54%), an increase of six percentage points since autumn 2016 and a 17-point increase since spring 2005. More than six in ten (62%) agree that globalisation is an opportunity for economic growth, and more than half (51%) agree that globalisation represents a good opportunity for companies in their country by opening-up new markets.
How do you explain these results, despite all of the negative spin in the media? The fact is that Europe and the EU are made up of mainly small and medium sized countries, which understand that political and economic isolation will not bring them strength and prosperity. Many of the countries have well known success stories of citizens’ companies being successful in global markets. Those companies could not have made it if they only had access to the market of their home country.
When the minority is loud and the majority remains silent
If trade is such a popular topic, what then explains the unpopularity of TTIP in Europe? Firstly, a loud minority together with anti-globalist networks, who managed to dominate the debate. Secondly, for the large majority of the political actors in EU capitals and Brussels, TTIP was important, but not important enough to fight and go public in defending. And thirdly, as Matthias Bauer of ECIPE points out, the anti-TTIP movement was not a bottom-up movement but clearly a top-down one:
“The widespread aversion to TTIP in Germany is the result of an orchestrated, top-down campaign initiative launched by a small number of long-established, well-connected and, thus, highly influential politicians of Germany’s Green and left-wing political parties and associated NGO campaign managers masquerading and operating under the guise of pro-democracy, pro-environment and pro-Christian civil society.”
In addition, we are only beginning to understand how Russian-related media played strongly against TTIP.
What should pro-trade forces do?
A major difficulty with debating trade agreements is that when anti-trade actors criticise trade agreements, they usually speak hypothetically about what the trade agreement could contain. The problem, for example, with TTIP was that there was no official text since the negotiations were still ongoing. It is difficult to refute obnoxious claims on the details of the agreements on a fact-basis, when the official agreement paper has not yet been drafted.
In this case, what should pro-trade forces do? Firstly, as the European Commission has already emphasised, as part of underlining the economic benefits and positive impact on growth, we need also need to make it clear that rule-based trade agreements can play a strong role in developing a rule-based framework for the global economy. Trade agreements aim to eliminate distortions and unfair practices on a global scale. They are a tool for promoting European values.
Secondly, we need to continue to find new partners for trade and work on respective trade agreements. The Commission’s intention to examine the possibilities with Mercosur is a good example of the direction we should be going in. Also, we should build on where we left off with TTIP, especially in our trade relationship with the United States.
Despite the political situation in the US, we must work on sectoral cooperation, as Vice-President of the European Commission Jyrki Katainen mentioned during a recent keynote. If an overall agreement with the United States is not possible, we should work on sectoral agreements. Despite the White House statements, there are still very important Republican and Democrat Congress members who are very much in favour of re-launching the trade agenda.
Lastly and perhaps most importantly: we must change our mindset and understand that trade is not an underdog topic, but it is a topic which the majority of voters (at least centre and centre-right ones) feel positive about. If trade is supported by more than 50% of European citizens, it must not become a “no-go area” for centre and centre-right politicians.
In conclusion, if the majority of European voters are in favour of both trade and globalisation, thus showing that the commonly held assumption about anti-trade sentiment in Europe is a fallacy, centre and centre-right politicians have an important mission to keep defending, pursuing and explaining the benefits that trade brings.Tomi Huhtanen Economy EU Member States EU-US Globalisation Trade
The European anti-trade sentiment: a fallacy, not a fact
15 Nov 2017
I say Europe, you say…?
In our last interview, Eva Maydell’s question to you was: what is your vision for Europe in 2040?
In 2040 the European Union will be more integrated in some areas, such as defence and security. Europe will be stronger as a trading block, and its role in the world political scene will also be strengthened because of increased unity. We have improved considerably our internal market, so that it generates more prosperity and jobs. There has been a significant convergence between the Member States in terms of social justice and fairness – mostly because of the measures the Member States have taken themselves, but also because of what the EU has done.
Do you think now is the time to push for an EU defence co-operation? Why?
Yes, it is the right time to further develop EU defence cooperation, because no country can on its own afford to invest sufficiently in security and defence. It makes sense to pool resources together. Also, more efficient use of existing resources can strengthen security in Europe. Furthermore, there is a whole range of new threats, such as terrorism and cyberattacks, which need more European cooperation.
Is there any Finish foods which you love but find it is impossible to get anywhere else?
The autumn season ahead is sure to be a busy one, what will you be mainly focused on?
I will be focused on 2 things: the EU defence policy and the trade agenda.
What was the last movie you saw?
It was a children’s movie, Inside Out.
What is your biggest Brexit worry?
That there is no solution.
You have now been 3 years as Vice-President of the Commission – what do you enjoy most about the job?
I enjoy the most the feeling that I can work for a more integrated and unified Europe. The feeling when I can see that concrete measures open up new opportunities for people and companies throughout Europe.
What do you think is the single greatest benefit of being a citizen of the EU?
The whole Europe, it’s all 28 Member States are as free and as achievable for everyone as one’s home country.
If you could share a meal with one celebrity you haven’t met yet, who would you pick?
How is the #investEU plan working? Can you give us a couple of examples?
The European Fund for Strategic Investments (EFSI) functions well. Already over 460 000 European SMEs can get financing through EFSI. The Investment Project Portal is up and running to match investors with project promoters, so that projects can find financers. We have lowered capital charges of insurance companies so that they can invest easier in infrastructure.
Are you keeping up with any TV series at the moment?
House of Cards.
Do you like to cook? Are there any signature Katainen dishes?
I love cooking. My signature dishes are wild game food and warm-smoked salmon.
What do you remember most fondly about your Erasmus experience and why would you recommend young students to go on an Erasmus today?
Erasmus changed my life completely. It gave me a view from living in a multicultural environment, surrounded by fellow students from various countries. It also strengthened my self-confidence and gave me a feeling that Europe is open for me.
Which EPP colleague would you suggest for our next interview? What would be your question for her or him?
I would like to suggest MEP Roberta Metsola. My question to her is: what are your 3 key themes for the future development of the EU?Centre-Right Economy European People's Party European Union Leadership
I say Europe, you say…? Interview with Jyrki Katainen
I Say Europe
18 Oct 2017
Looking back over time, we can see that the Information Age has made our economies and our society knowledge-driven; our main drivers of growth have become based on pushing bits up and down (digital services) and on connectivity improvements which have made delivering those bits quicker, and ubiquitous, all throughout the world. In sum, we are assembling the “space shuttle” for globalisation.
In today’s world, the biggest transport company doesn’t own a single car. The foremost house rental company doesn’t own a single house or apartment. The space race is being carried out not by state agencies but by energy, automotive and online payment companies (SpaceX founded by Elon Musk), by a company that started as a record shop (Virgin Galactic, founded by Sir Richard Branson) and even by the world’s biggest retail company (Blue Origin, founded by Amazon CEO Jeff Bezos).
The car industry is being challenged by Internet companies which have yet to produce a single car. Recently, an Internet/TV company went global, disrupting the TV industry’s decades-long reign. Trade is global, companies are going global; the workforce and talent pool are becoming more and more global as well.
In the time since we have unleashed the information society, our economies have undergone incredible transformation, causing me to wonder, “Are we taking this transformation seriously?” I don’t think so.
Our so-called modern societies, democracies, governments and institutions are still not organised with an agile mindset that will enable them to engage in decision-making and policy-making that is able to cope with such transformation and speed. The way we think and govern this transformation is still rooted in a sectoral approach, not focused or centred on the citizen.
Governments, politicians and institutions should give to digital policies the same weight, the same holistic approach which they do for those dealing with education, health, social issues, the economy and even foreign affairs and defence.
We fail to consider how the digital transformation is being disseminated horizontally, economically and across sectors (e.g. in education, health, manufacturing, farming, etc.) and how vertically it is impacting our society.
The Internet has become the veins of the modern economy and of modern society — and data the lifeblood within, rendering cyberspace analogous to The Good, the Bad and the Ugly for every middle-aged or older politician.
The Good, because it has brought about increases in productivity and therefore growth; the Bad, because it has increased inequality and has apparently led to lower incomes and to the erosion of low-skilled jobs; and the Ugly, because it has been regarded as an unruly space facilitating cyberattacks, fake news and terrorism.
We must then prepare our society and institutions for the radical change that is underway. Governments, politicians and institutions should give to digital policies the same weight, the same holistic approach which they do for those dealing with education, health, social issues, the economy and even foreign affairs and defence.
At EU level, this Commission (EC) has built a political structure to underpin the Digital Single Market (DSM) for concentrating efforts on the market dimension horizontally. Still lacking, however, is proper coordination or structure on cyber-diplomacy in order to address and promote a values-based and a rules-based global cyberspace — an EU Digital Ambassador is needed.
In the European Parliament (EP), digital affairs are done either in the Industry, Research and Energy (ITRE) Committee or in the Internal Market and Consumer Protection Committee (IMCO). But due to the cross-sector nature of the digital files, some files end up having five committees involved. This brings slowness and lack of agility on delivering pieces of legislation: a Digital Affairs Committee is badly needed!
In the Council of the EU (Council), whilst digital files are discussed in the Transport, Telecommunications and Energy Council configuration (TTE) and in the Competitiveness Council configuration (COMPET), most of these files end up being dealt with in more than just one Council configuration, within the framework of a particular sector, thus losing the horizontal vision needed in the digital transformation. Here, and again, it’s about time to devise a Digital Affairs Council.
A Digital Affairs Council would bring together a specially designated digital minister from every Member State, who would address the “digital present” but also devise a borderless and human-centred digital future. A digital minister would enable its Member State to no longer regard the digital realm merely as a sector, framed within his country’s own borders.
As a matter of fact, with digitalisation taking place in every sector, citizens will also be equally demanding toward their respective Member States, either in terms of “public” services or public policies: soon, domestic policies will have to deal with algorithms and the virtual world as well.
Concerns over privacy must be addressed, as do other recent phenomena, such as cyberbullying and online behaviour. We should be looking at how new digital technologies are re-shaping the family structure as we have traditionally conceived it, at how they are affecting our sense of time, our critical-thinking capacity to evaluate information and our standards of knowledge themselves — which are fundamentally changing our perceptions of the world. Before long, we should be questioning which values we want to preserve and nurture in a society that is turning digital.
New generations born in a hyper-connected world will hardly understand the concepts of borders or sovereignty — even the languages which are seen by today’s generations as barriers will be transformed by technology into enablers. We need to cope with their aim for flexibility — working from anywhere to reach everyone in the world.
It’s being said that globalisation and digitalisation are destroying jobs — or at least destroying more than they create. I’m not fully convinced of this; I believe there will be changes in jobs rather than losses: changes, for example, from low-skilled to high-skilled work.
Governments should thus be preparing society for a massive movement of workers from one profession to another, putting the right employment and social policies in place to incentivise workers, and encouraging the private sector to invest more in skilling, up-skilling and re-skilling human capital.
In the same way, discussions have started to appear regarding what some call “the negative effects of automation”. The ideas range from Universal Basic Income to taxing robots, although the point remains valid that “there is no single magic bullet for poverty” and inequality. But these tools can be valuable instruments when contextualised within a broader strategy — such as an education, fiscal and social reform — and targeted such as to maximise effectiveness.
We need to prepare future generations for jobs that don’t yet exist. For this, deep reform of our educational systems is of the utmost importance. Kids should master creativity, critical thinking, communications and adaptability. Throughout their lives, they will have to face a world in rapid and constant change, in which their ability to adapt to this change will be key to surviving. We must nurture a natural process of learning, unlearning and relearning.
Quick adaptability to change, therefore, is key to success, be it at EU level or Member State level, in the public or the private sector, or even at the level of the individual.Gonçalo Carriço Business Economy Innovation Internet Technology
Are we prepared for the digital transformation?
22 Jul 2017
This article argues that maintaining the status quo is not an option for the euro area. The euro has functional and existential weaknesses that force us to take drastic action if we want to become resilient enough to withstand the next banking crisis. The article argues that the existential weaknesses of the euro stem from the D/Y ratio (debt-to-GDP). Euro-area members have only limited scope for using traditional mechanisms to deal with D/Y problems.
What makes this especially worrying for the overall stability of the euro area is the ownership of the debt issued by the euro-area member states. It is absolutely vital to separate banks and sovereigns and to slash debt-to-GDP levels. The question is whether the political decision-making processes in the member states can deliver these structural changes.
Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.Juha-Pekka Nurvala Economy EU Member States Eurozone Macroeconomics
The status quo is not an option: functional and existential weaknesses of the EMU
04 Jul 2017
On the eve of the invocation of Article 50, this policy brief disentangles the main components of the Brexit imbroglio and lays out the legal framework and political constraints of the negotiations that are about to start. It assesses the reversibility of Brexit, the likely duration and possible outcomes of the negotiations, the legal options for the transition period, and the probable impact of Brexit on the EU27 in general and Central Europe in particular.
Because of the UK’s size, economic weight and political clout, as well as its peculiar historical background, it concludes that the new EU–UK relationship cannot be based on one of the existing ‘models’ of external arrangements. The new partnership between the UK and the EU27 will have to go beyond even the most comprehensive free-trade agreement and it should also include finance, energy and external economic policies, as well as covering foreign policy, security and defence.
The author emphasises that any weakening of the free movement of persons as a result of the negotiations would be a serious violation of the essential constitutional principles upon which the EU is built, and could damage the foundations of European integration. The brief considers managing internal differentiation without creating permanent divisions among groups of countries as the most important challenge ahead for the EU27.
It also argues that, with Brexit, Central Europeans will lose a powerful ally on many economic and constitutional issues, although their economic and geopolitical weight will be on the rise in the new EU27.Brexit Economy EU Member States European Union Trade
15 Mar 2017
What is the alternative to a hard Brexit?
I believe conditions can be created in which the UK voters could decide not to leave the EU at all. Ireland should work to create those conditions. The terms for Brexit set out by Mrs May will do incalculable damage to this island, politically, emotionally and economically. We cannot simply wait for this to happen. While seeking to mitigate the effects of Mrs May’s chosen hard Brexit, we must also do everything we can to ensure that there is no Brexit.
Apart from a few open questions, Theresa May has said what she wants. She wants out of the single market, out of the customs union, and “control” over immigration. The open questions she has avoided so far are about the financial terms of the divorce, the status of EU citizens living in the UK and vice versa, and two aspects of a future trade agreement (if there ever is one), namely arbitrating disputes, and third country imports getting into the EU via the UK.
It is unlikely that the Article 50 letter she will send to Donald Tusk next month will tell us much more about the UK negotiating position than the Lancaster House speech did. So it is time now to start thinking about how the EU will respond to Mrs May’s letter.
On the present schedule, the European Council would meet in April to agree the orientation it would give to the EU negotiators for the discussions with the UK that would start in June. These orientations would be agreed by consensus, so every EU head of government would have to be satisfied. For Ireland, this April European Council meeting is potentially the most important European meeting a Taoiseach will ever attend.
In working out the orientation to be given to the negotiators, the crucial thing is for the European Council to work out what would be its ”best alternative to a negotiated agreement” (BATNA). It is important to have an alternative ready because there is every possibility that no agreement will be reached within the two year time frame for negotiation, and ratification, of a withdrawal agreement. Mrs May has said that, for her, no deal at all preferable to a bad deal. Her BATNA, so to speak, is no deal at all.
“No deal” would mean the UK simply crashing out of the EU overnight, sometime before the end of March 2019. This “no deal” scenario would be an overnight halt to flights, to trade and to commerce. There would be immediate and massive currency instability.
From the point of view of pure negotiating tactics, maybe it is no surprising that Mrs May would threaten with a “no deal”. But to do so, in the absence of a well-crafted fall-back position, is something the UK cannot really afford. It vindicates Tony Blair’s description of the UK government as “not driving the (Brexit) bus”, but rather “being driven” by partisan and ideological forces it has not tried to control. In the absence of a real alternative to a hard Brexit, it is on auto pilot heading towards a cliff.
The EU country that would be worst affected by the UK crashing out of the EU with no deal is, of course, Ireland. So Ireland must use all its imagination and ingenuity to see if a creative way out for the UK and the EU can be found.
Should the EU offer UK voters another option?
If the UK government is unable or unwilling, because of domestic politics, to work out a responsible “best available alternative to a negotiated agreement” (BATNA), then the EU side should do so for it. It should adopt it alongside its line by line response the UK’s negotiating demands. Having a BATNA would also strengthen the EU’s negotiating position. It would provide something with which an emerging deal could be compared. It would also provide a basis on which the UK could reconsider its decision of 23 June 2016, if it wants to do that.
As Tony Blair said, UK voters have a ”right to change their minds”. After all, politicians are allowed to change their minds, so why not voters? If UK voters, in a referendum, sent their government on a mission towards Brexit, it would be reasonable that the same voters, rather than Parliament, should adjudicate on what will have been achieved (or not) by their delegates.
If UK voters ever do change their minds about Brexit, it will happen slowly and incrementally. Parts of the Brexit scenario, obscured during the Referendum, will become clearer during the negotiation. The unavoidable interconnections between EU freedoms and EU rules will emerge. For this to happen, it will be in the EU side’s interest to ensure that there is maximum public understanding of the unfolding negotiation. Transparency will work in the EU’s interest. A running commentary is exactly what is needed in the interest of public education!
If the alternative to EU rules is no rules at all, citizens in both the EU countries and the UK may come see EU membership in a different light. They may, for the first time in many cases, see the EU as something that simplifies their lives, rather than the reverse. In my view, the best BATNA that the EU side should adopt is an offer of continuing UK membership of the EU broadly on the basis that the UK was a member in 2015, before David Cameron’s ill fated “renegotiation”.
The 2015 terms were generous to the UK. They allowed it to opt out of the euro, of Schengen, of Justice and Policing cooperation, of the Stability and Growth Pact, and of the justiciability in the UK of the European Convention. Furthermore, the UK itself had also decided, without Brexit, that it would have a referendum of any new EU powers. In that sense the UK was already having its cake, while eating it, before it ever decided on Brexit. These 2015 terms should be left on the table by the EU side, but without the unjustifiable UK budget rebate.
Of course, at this stage, the UK would reject such an offer out of hand. But, as the inevitable consequences of Brexit become clearer, UK public opinion might begin to see merit in it, particularly when it is compared with the costs of simply crashing out of the EU, overnight, with no deal at all, which is Mrs May’s fall back negotiating scenario.
The resistance to keeping such an offer on the table is more likely to come from some existing EU member states. Some members will point to the UK’s insatiable demands, when it was a member, for opt outs, rebates, and exceptions. Arlene Foster’s analogy about feeding crocodiles may come to their minds. They will recall General de Gaulle’s original veto of UK membership, and his foresight that the UK would never settle in as a member. They might also argue that offering the UK a way back, after it has triggered Article 50, might encourage others to try it on too.
But if they sit back and think about it, they will, I believe, conclude that a UK that inside the EU is better for the EU than a UK that is outside. This will be so even if a trade deal is eventually concluded with the UK. Keeping the offer of resumed UK membership on the table would be good politics and good economics for the EU.
The terms of the Lisbon Treaty do create some difficulty for this approach. Article 50 (3) says a country that has sought to leave the EU under that article will be automatically excluded from the EU two years after it has triggered Article 50 unless the EU side “unanimously decides to extend the period”. Article 50 (5) says that, if a state, that has withdrawn for the EU, asks to rejoin, it has to do under article 49, where the application would have to be ratified by all existing members.
Others may argue that the UK cannot withdraw its Article 50 letter once it has sent it. This is a matter for the European Court of Justice to decide, but article 6.8 of the Vienna Convention on treaties explicitly allows revocation of a notice of intention to withdraw from a treaty.
These problems are real, but not insurmountable. A political declaration by the EU heads of Government in April in favour of facilitating an eventual UK resumption of EU membership, on its 2015 terms minus the budget rebate, would create a realistic basis for comparison in the debate about Brexit that, in a sense, is only now starting in the UK.John Bruton Brexit Economy Elections EU Member States European Union
Brexit out of the box
28 Feb 2017
This working paper looks at recent trends in the Russian economy after more than two years of recession. It analyses the fundamental reasons for the current economic crisis and argues against some of the mainstream views on ‘the end of the recession’ and the role of Western financial sanctions. The paper follows up the author’s publication on the same topic which was published by the Wilfried Martens Centre for European Studies in December 2015.Crisis Economy EU-Russia Growth Macroeconomics
The Russian Economy: Recovery Is Further Away than Some Might Think
12 Feb 2017
In December 2014 under the leadership of Mikuláš Dzurinda, president of the Martens Centre, former prime minister of Slovakia and successful country reformer, we launched the #UkraineReforms programme to bring together the expertise of senior EU decision-makers in support of the reform process in Ukraine. This transfer of experience is organised through public events, town-hall style meetings, TV debates, online articles and interviews held in Kyiv and other major Ukrainian cities. The initiative is supported by local partners including Ukrainian NGOs Reanimation Package for Reforms and Stronger Together, as well as the Kyiv School of Economics. By the end of 2016 the programme presented over 20 activities, 18 high-level visits in Ukraine in 7 different cities, around 70 meetings and lectures and over 40 media interviews. This brochure gives an overview of the project’s milestones and achievements following 2 successful years of expert visits and exchanges.Eastern Europe Economy Leadership Macroeconomics
Ukraine Reforms: milestones and achievements
01 Feb 2017
Technological change was never as fast as it is today. This is not a cliché, this is a fact: previous technological revolutions, such as the agricultural revolution or the industrial revolution provided humanity with abundant food, energy and industrial products.
ICT innovation is supporting the innovation process itself. Never before did so many people have such an easy access to so much knowledge and never before was it so easy to connect with other educated, empowered people.
The end of work?
There may be one downside to all this: the pace of innovation is killing jobs faster than new ones are being created. Indeed, if we were satisfied with the 1930s standard of living, we could have a 4 hour workweek and produce all the goods and services we need.
However, work is not just about satisfying material needs, it is about establishing a meaningful place of a person in society. Nobel Prize winner Wassily Leontief stated as early as 1983:
“the role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors.”
The fancy term for this is “machine induced human redundancy”. The usual answer to this problem is that creativity and education might prevent that. We hope that the answer to accelerating technological change is better education, more creativity, so that we can be the ones that are leading change, and so that our jobs and lives are not being destroyed in the process.
How to thrive in this new environment
I believe we have reasons for optimism rather than panic in this new environment. First, we are flexible: there are many different things that we can do and we can learn. This is why education, especially life-long education is so important. Machines too can do many different things, but machines can also help a not so perfectly skilled human to do work he/she alone would unable to do. Therefore, a key thing to learn in the future is man-machine teamwork!
Second, we are not only those who work, we are also the customer. As customers, we will always have new desires and demands. Humans will always be guided by the ambition to better their lives and new work will always be generated as a consequence.
Demands are shaped by values and culture and we need to educate these. Appreciating the local and the particular, as conservatives, creates more jobs than finding satisfaction in the global and the general. We need to preserve the innate feeling that humans like to deal with humans! And we need to reward the desire of people to feel useful. Being useful towards our fellows creates the interdependencies and the fabric of human society. The issue is not so much about jobs as it is about being of use to others, in one way or the other.
Education: learning what makes us human
Currently, school systems are ignoring or suppressing what makes us human. We learn how to be like machines: memorize facts, learn recipes and formulae. This is, as Andreas Schleicher from OECD likes to point out, easy to teach, easy to test, easy to replace by machines. Instead, learning should encourage us to preserve and develop what makes us human and what is uniquely human, things like curiosity, creativity, empathy and critical thinking. And, most importantly, social interaction and building communities.
Education will have to focus less on “just-in-case” topics, learning something in school in case we might need it later in life, and more on “just-in-time” learning, such as learning while working. It should be less about how to serve machines and computers, and more about how to control them; less about how to answer questions, and more about what questions to ask.
Currently, school systems are ignoring or suppressing what makes us human.
Education should focus less on how to solve problems, and more on how to define problems; less on how to obey decisions, and more on how to make decisions; less on how to make stuff, and more on how to sell stuff; less machine skills, more people skills; less how to be smart, more how to be good; less how to treat people like objects, more how to treat people like humans.
This calls for a major overhaul of school curricula and pedagogy, whose effects will only start to reap results in fifteen years at the earliest. Therefore, a major effort is required on all kinds of life-long learning approaches and on opportunities for experimenting with creative ideas.
More education is not a panacea
Education is not a panacea, though. Too often, when faced with a problem, politicians’ answer is “more education”. As if better educated people are a solution to everything. The “more education” mantra is politically un-controversial: who could be against more education? Who could be against better educated people? Who could argue with the fact that having better educated people in the right places would solve all of our problems?
Well, Hayek had already argued against that. More precisely, his argument is that we cannot expect to have perfect people everywhere; rather, we must create systems and institutions that work with imperfect people and yet produce optimal results.
Education is about perfecting people, but it is not the only tool that governments have. Rather than only focusing on (the non-controversial) education, governments should keep a 360 degrees view on other tools available in their toolbox.
The infrastructure of innovation
States should provide the right infrastructure for curiosity, creativity, empathy and community building. This would include technological infrastructure, human-human networking, modernized IPR legislation, flexible employment mechanisms, social safety nets, all in order to allow people to experiment with new ideas. Innovation should be permission-less. Legacy institutions and legislation should not stand in the way of inventing new ways of working.
And states should put in place a responsive market economy that will recognise and reward the winners of this permission-less innovation. It is not likely that politicians and civil servants will find a solution to the future of work, but people will, as providers and as customers. The role of the state is to provide an infrastructure for innovation, for the generation of ideas, and then recognise the winners.
By innovation I do not only mean technical innovation, but also innovation in business, institutional and social models. The role of the EU is not to enforce, from the top down, a new social model for the digital age, simply because the civil service in Brussels is unable to come up with such a model. Instead, Brussels should allow states to experiment with different solutions and then facilitate best practices to spread.
To sum up, humans will always survive and thrive by adapting, learning, and creating new demand and supply. If we were happy with our current standards of living, less and less work would be needed to achieve it; however, human nature will always aim for more and better and newer! Thus, we should never be afraid of running out of work, but of running out of being human, running out of ideas, running out of fertile ground for ideas to develop into businesses and running out of mechanisms that tie individuals into a community.
The text is an expanded version of the author’s introduction and closing remarks on the panel “Tomorrow, How Will We Learn and Be Creative” at the 2016 Economic Ideas Forum.Žiga Turk Economy Education Innovation Jobs
The end of work? It just isn’t in our human nature
25 Jan 2017
Technology is transforming the world around us at a growing pace. It affects the way we live, the way we study, the way we trade, the way we communicate. And it can be disruptive. It puts into question long cherished assumptions, it makes communities more fragmented and fluid and – crucially – it can destroy jobs in the industries it challenges. Are we to conclude that the world would have been better off if we had artificially restricted the development and commercialization of trains, cars and electric devises? Obviously not. This lesson is still valid for tomorrow’s technological developments.
It’s around these pressing issues that experts from all over Europe gathered for the 7th Economic Ideas Forum. Organized by the Wilfried Martens Centre for European Studies, the official think tank of the EPP, the EIF’s aim is to act as a laboratory for policy-oriented ideas. This year’s edition has six main takeaways to pick our brains:
1. Keep Calm and No Basic Income
Today, the majority of jobs in Europe are still full time, permanent positions. But labor markets are changing as technological advances and flexible working options increasingly dominate the discussion. Basic income, many people say, offers a potential solution to the emerging realities of tomorrow’s labor market. But according to one speaker, a universal basic income will simply let big business off the hook in terms of providing corporate and social responsibility. In Europe, we should distinguish between being more educated and being more skilled.
2. Creative Bravery: Celebrating Failure, Changing Europe
One participant quoted Nobel Prize winner economist Wassily Leontief: ‘The role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors’. We need to move towards a system in which individuals and firms can innovate ‘without permission’ as regulations often distort or prevent the creative process. In Europe, the risk reward balance needs to be reset. Failure is an option, because out of failure comes innovations which change the world.
3. To Be Digitalized or Marginalized: That is the Question!
The European Fund for Strategic Investments (EFSI) offers huge potential for the EU to close the digital infrastructure gap with other global economies. For this to happen, public money needs the support of private capital in order to tackle market failures. The right regulatory framework requires a light and flexible approach, allowing private enterprise to bring their strengths to the next-generation digital economy. In Europe, fierce competition is the best way to ensure lower prices and higher investments.
4. Conscious Uncoupling: Living Happily Even after Brexit
The success of EU integration has been constituted by the internal market and the free movement of goods, capitals, services, people. These principles constitute the basis of the market economy model. To build walls and limit freedom of movement now would be not just counterproductive but also impossible. Free movement of people and jurisdiction of the European Court of Justice are two key negotiation points. If the United Kingdom accepts these principles, an agreement may be possible. However, according to Alexander Stubb, former Prime Minister of Finland and speaker at the head-to-head session on Brexit, this seems to be an unlikely scenario.
5. ‘Nothing is lost, nothing is created, everything is transformed’
Fragmentation must be overcome. Only through combining the strengths of member states can the EU hope to add value at an industrial scale. European industry is going through a fourth industrial revolution: digital transformation is changing how companies do business on a daily basis. European industries still need to challenge fragmented markets, fragmented standards and fragmented national regulations. In Europe, we need to think globally.
6. Can Cows Save Europe?
Agricultural policy has been at the heart of EU policy since the Treaty of Rome. Research just doesn’t happen in factories and labs; it happens every day in millions of farms throughout the EU. In a time of huge global population change, land scarcity and increased environmental awareness, research and innovation in agriculture matters more than ever. For the EU, this means not just ensuring European farmers have the best knowledge transfer gained from private sector companies, but also helping farmers in emerging countries learn from our expertise. In Europe, agriculture must remain one of the most innovative and research intensive sectors in our economy.Agriculture Business Economy EU Member States Innovation
Tomorrow’s Europe in Six Steps
09 Dec 2016
For Russia, business and state are indistinguishable. This was just one of the main takeaways of the event “Understanding Kremlin’s influence in Central and Eastern Europe”, co-organised by the Wilfried Martens Centre for European Studies and the Center for the Study of Democracy (CSD) on Thursday, 1 December 2016 in Brussels.
The event started off by presenting the main findings of The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe, a CSD report in cooperation with the Center for Strategic and International Studies (CSIS), a Washington DC-based think tank. With ample qualitative and quantitative data, the study reveals the exact nature of Russia’s economic footprint in the domestic economies of Central and Eastern European countries, as well as its amplifiers.
“When think tanks produce publications like these, critical of Putin’s Russia, the Kremlin sees this as an existential threat”, mentioned Tomi Huhtanen, Executive Director of the Martens Centre, in his introductory remarks. Member of the European Parliament Paul Rübig, who sits with the centre-right EPP Group and is the longest-serving MEP from Austria acknowledged the importance of think tanks working together to counter Russian influence, as well as in the battle for facts in the media.
Ruslan Stefanov, CSD’s Economic Programme Director and The Kremlin’s Playbook project director underlined that no Russian oligarch is in a position to refuse Kremlin’s insistence and efforts to expand Russia’s economic influence, and that CEE countries are prime real estate for this influence.
Martin Vladimirov, another expert author of the Kremlin Playbook study emphasised that for Moscow the energy dependence of CEE is almost an issue of national strategic interest and gave the example of Gazprom which has been able to exploit economic governance deficiencies in the region to its advantage.
“No Russian oligarch will refuse Kremlin insistence to expand Russia’s economic influence.” Ruslan Stefanov, Kremlin Playbook author
But what makes the CEE countries so vulnerable to Russia’s attempts of political patronage? Is it capitalism, EU disillusionment or communism nostalgia? There was a deeply held assumption that, when they joined NATO and the EU in 2004, these countries would continue their positive democratic and economic transformation.
Yet more than a decade later, the region experiences a decline in democratic standards and governance practices at the same time that Russia’s economic grip of the region is strengthening. According to Vít Novotný, researcher with the Martens Centre, these countries have been more focused on the anti-communist rhetoric and dealing with their communist past, rather than improving governance and transparency.
With older generations slipping into old mind frames, Veronika Víchová, analyst of the Kremlin Watch Programme of European Values, a Prague-based think tank, highlighted the importance of counteracting the sophisticated disinformation strategy of the Kremlin. She maintained that cooperation among different states is key for countering Russian influence, and both NATO and the EU will need to diversify and cooperate more to address Russian soft power, including misinformation, disruption and even cyber-attacks.
Source: The Kremlin Playbook: Understanding Russian Influence in Central and Eastern EuropeEconomy Energy EU Member States
CEE and Russia: when economic dependence translates into political influence
02 Dec 2016
This article argues that political economy can explain how and why information distribution and opinion formation are changing. Even more importantly, political economy offers us ways to fight the negative effects of misinformation. It is argued that asymmetry of information can explain recent developments and why poor-quality information is capable of competing with good-quality information. Subsequently, the article explains how poor-quality information influences peoples’ decisions through internal decision-making processes.
Read the full article in the December 2016 issue of the European View, the Martens Centre policy journal.Juha-Pekka Nurvala Economy
Do not trust people: lessons from political economy on how to counter misinformation and lies
07 Nov 2016
‘It would have been easy if it had been a clean break’, stated Gunnar Hökmark MEP (Moderaterna, EPP), opening the discussion. ‘The problem is that we are going to live in the same house’, he added, referring to the global issues of climate change, the need for financial and economic stability and foreign policy with China and Russia, which require European collaboration.
It would have been easy if it had been a clean break
‘How to secure a friendly Brexit?’ was a question asked in an event organised by the Wilfried Martens Centre for European Studies and Open Europe on 13 October 2016. Centre-right Swedish MEP Gunnar Hökmark and industry representatives from both the UK and continental Europe were invited to discuss what is at stake in the negotiations and the UK’s relationship to the Union after the termination of the membership. In order to achieve common goals, establishing good EU-UK relations after Brexit is important, Mr. Hökmark stated.
According to German entrepreneur Kai Büntemeyer, director of a manufacturing company Kolbus with important interests in the UK, the results of the UK referendum can already be seen in the UK’s and EU’s economies. Many investment projects are on hold. In order to prevent further damage, ‘We must help the UK to get the best possible one foot in, one foot out – deal. Anything else would be a complete disaster’, he argued. Britain should not be punished by hard Brexit terms.
The British panellists Parisa Smith (Director of EU Affairs, BBA) and Stephen Booth (Director, Open Europe) agreed that there is a lot at stake when it comes to geopolitics and economic consequences. However, according to Mr. Booth, it is important to remember that ‘the public in the UK has decided to reject political integration, not engagement in wider challenges facing Europe’. The result of the vote should ultimately be respected. The next step is for both parties to establish what kind of relationship they wish to maintain before focusing on the details of the Brexit terms. After that, Ms. Smith noted, the negotiators must stay pragmatic and work together to find a beneficial deal for both sides.
In the Q & A part of the event, the potential model for the post-Brexit EU-UK relationship was discussed. The already existing examples of Iceland and Switzerland were not seen favourably among the panellists, as the UK specificities seem to require an innovative model.
An important conclusion was that Brexit should be understood as the sign of an anti-globalisation trend currently taking hold of Europe and the West. For Mr. Hökmark, the key issue from now on is to fight populism. The success of Britain’s leave campaign demonstrates that appealing to the emotions of the public is a powerful tool. In an effort to come to a friendly Brexit, we should not underestimate the role of emotions and the need for decisive leadership.Economy EU Member States European Union Euroscepticism
How to secure a friendly Brexit?
18 Oct 2016
With economic growth not expected to exceed 1.6% up to 2017, a debt to GDP ratio predicted to peak at 106% in 2016, coupled with established labour market challenges, the country remains extremely susceptible to further economic external shocks. This event on 12 October 2016, entitled ‘Belgium: Reforms for Growth?’, was part of a common project with the Wilfried Martens Centre for European Studies and CEDER, aimed at discussing the current state of Belgium’s economy.
Following attempts to adhere the Commission’s three overarching recommendations relating to fiscal reform, labour market reform and competitiveness, Javier Yaniz Igal of DG ECFIN noted that there is now a risk of significant deviation from the adjustment for 2016’s and 2017’s forecast. Belgium’s tax shift, which Javier emphasised is progressing in the right direction, does not appear to be neutral, further illustrating that there is still considerable scope for improving the designs of the overall tax system.
Although some improvements have been made in the overall functioning of Belgium’s labour market, said Javier, underutilisation of labour – especially among low-skilled, young and older works and people of migrant backgrounds – continues to undermine the economy. Further measures are therefore needed to ensure compliance; to meet the recommended targets and to get Belgium’s economy back on track.
Department of Economics Professor of the University of Ghent, Koen Schoors, suggested that in order to understand Belgium’s economy, we need to understand how exactly we ended up here. Globalisation has been mismanaged on a global scale, resulting in significant income disparity not only in Belgium, but across Europe and the rest of the world, including the UK, Spain and Germany.
Koen agreed with Javier that the tax shift being implemented in Belgium is indeed essential, particularly away from labour and instead on consumption, waste and sugar, etc. as well as capital – which is not being taxed enough, or in some cases at all.
Ultimately, what is needed for Belgium is a long-term plan, he proposed; a roadmap, with all stakeholders, in order to create incentives and improve competitiveness. Failure to do so will almost certainly result in the killing of investments and prolonged stagnation of the economy.
The political perspective offered by Belgian Member of European Parliament Tom Vandenkendelaere presented Belgium as an exceptional case, encompassed by the slogan ‘only in Belgium’. Regional disparities and a high level of government instability culminate in a very unique political landscape, he said, something which needs to be addressed in order to improve the confidence of Belgians, expats, investors and entrepreneurs.
According to Tom, economically Belgium is not doing explicitly bad, referring to the implementation of the Commission’s recommendations on fiscal reform, Belgium’s labour market and chronic stagnation. However, he acknowledged that Belgium frequently faces challenges which need to be addressed, including areas like retail liberalisation, as well as government communication and crisis response, with the latter two being highlighted by the 22 March 2016 attacks in Brussels.
What is needed for Belgium is a roadmap on how to improve coordination, competitiveness and encourage investment. MEP Tom Vandenkendelaere
Agreeing with Koen, Tom stressed that what is needed for Belgium is a roadmap on how to improve coordination, competitiveness and encourage investment, adding that investing in education is also essential in order to sow the seeds for future generations. Most of all, Tom advised, what we need in Belgium is to foster trust.
During the Q&A session several particularly pertinent issues were raised, most notably on how to better regulate/deregulate the various Belgian sectors, how to reduce the constraint of Belgian banks and finally, what can be done to improve the investment environment of Belgium and its and overall competitiveness.
The panellists were in agreement that a long-term roadmap which responded to such queries, capitalised on Belgium’s strengths while addressing its weaknesses, was indeed the best method moving forward. They concluded that government stability was also imperative for delivering and following through on that roadmap.Economy EU Member States Macroeconomics
Progress made on reforming Belgium’s economy, but long term road map required
14 Oct 2016
I don’t need to quote Bill Clinton to impress the importance of economic issues within the wider EU referendum debate. A recent YouGov poll that examined motivation for voting one way or the other showed the economy at the top of the tree in terms of broad policy (albeit behind the idea of the “right to act independently, and the appropriate level of cooperation with other countries”) a finding frankly unsurprising given the level of messaging on the subject by the mainstream media, both campaigns and an alphabet soup of official bodies over the last few weeks.
Twenty-three per cent of voters polled by YouGov cited the topic as more important than any other and the online conversation has long been dominated by finance and business- related opinions. The extent of this domination however, is on the wane, as social media users increasingly find the broad subject of immigration more discussion-worthy.
Immigration, and the distinctive yet linked by many in the debate, discussion of refugees and asylum has risen in prominence since the beginning of June, to become the second most discussed motivation category within the online debate, perhaps prompted by at least two events in the last week: one hugely controversial, one tragic. Figure 1 shows the movement across these motivation areas from May to June.
Figure 2 shows how these motivation areas have tracked since the beginning of May. Lines showing trends for discussion around the economy and immigration, in relation to the wider debate on the EU referendum, clearly converge. We have not reached a tipping point in terms of prominence and it might be interesting to speculate on how long the campaign we need to run before the lines would cross, but we are certainly approaching parity.
The reasons for this are varied. As noted, social media debate does not exist in a vacuum and mainstream media and offline events have certainly helped to nudge immigration to the fore, but this trend existed before last week’s UKIP “Breaking Point” billboard and the murder of MP Jo Cox. It may be that, as both campaigns have upped the ante in the last few weeks and the debate has grown more poisonous, issues that were once the preserve of political extremes have become normalised.
We could look further at the proportion of owned content posted by each official campaign account on the subject of the economy and immigration. To what extent has the nudge become a shove? Has the dog whistle become a foghorn?
We can understand a lot more about the nature of the debate by graphing the conversation. As outlined in my previous piece on Brexit, pro-Leave campaigners have consistently generated the majority of the noise on referendum-related subjects, with this changing little since the end of March when I first measured the subject.
The first blog on the referendum showed the networked conversation in March and at the beginning of May: a vociferous, messy exchange, largely controlled by Brexiteers.
Figures 3 and 4 outline the networks if we isolate economic discussion within the referendum (3) and that about immigration (4). The differences are far from obvious, but we can see a marginally different shape to the maps. Discussion on the economy (3) is more fractured: the bulb to the right predominantly consists of pro-Leave tweeters, while the strands to the left largely pro-Remain, and there are few links (conversations) between them.
When we look more closely at the immigration map (4) we see three areas: a Leave bulb to the right, a loose cluster of Remain campaigners to the left and the Stronger In (@strongerin) neighbourhood in the centre. This, along with the tightness of the Leave community to the right shows both that this is a more combative area of the debate, given the closer links, and that the Leave side is possibly more “unified’ (or perhaps more insular) given the concentration of the community to the right.
Further points of interest come in understanding who is is more conspicuous with each neighbourhood. For example, the former Director of Strategy to the Prime Minister, Steve Hilton (@stevehiltonx) is prominent and central to the debate on the economy, but peripheral amid discourse on immigration, and vice versa for UKIP MP Douglas Carswell (@DouglasCarswell). Louise Mensch is central within both: the most influential contributor to the debate on immigration, according to this methodology, and the fourth-most on economic issues.
Further top-level analysis shows where the graph of the debate deviates from what we might expect. Dan Hannan MEP (@DanHannanMEP) for example, is found on the ‘wrong’ side of the immigration map. Algorithmically, at least, Hannan is closer to Chuka Umunna (@ChukkaUmunna) and The Independent (@independent), despite being a high profile and long-standing Eurosceptic and prominent pro-Leaver, due to his conversational connections with other influential parties in the debate. Hannan is graphed centrally on economic issues; however, closer to grassroots campaigners, deeply inside the cluster with Vote Leave (@vote_leave) at its centre.
Whilst this light scrutiny barely scratches the surface of this online dialogue, we clearly see that there is not one debate, but many pieces, clusters and neighbourhoods, dictated by topics that provide motivation to vote, influential social media users or concentrations of grassroots campaigners. Beyond this blog, we might understand micro-discussions at a local level, around TV debates, political parties or other organisations. In short, there are ways to quickly unravel this mess and isolate the areas of the discussion that best match certain messaging or targeted campaign strategy.
The relative importance of the economy or immigration to the referendum result will quickly become apparent next week, after pollsters have picked through exit polls and dissected motivation. What’s sure at this stage is that control of these conversations will go a long way to determining the outcome and, whilst online conversation is clearly not representative of the sentiment of the electorate at large, it might persuade the many undecided voters that seek guidance on polling day.
On a more personal note, any optimism I once held that the referendum could precipitate a healthy debate on Britain’s relationship with the EU, its future as an outward-looking country and its role in the wider world has long disintegrated, and the hegemony of economic and immigration-related fear in this analysis goes a long way to explaining why.
* A full explanation of the network maps is available here.
This blogpost is the first from an Ogilvy London series analysing the online EU referendum debate from a variety of angles in the weeks before the vote on June 23. You can read the original blogpost here.Gareth Ham Economy Elections EU Member States Immigration
Economy or immigration: which one tops the EU referendum debate?
23 Jun 2016
“Pleased to make your acquaintance,” European Commission Vice President Jyrki Katainen meets 3D-printed life-sized robot InMoov at Makerstown.
Held on 24 May 2016 at the Square Meeting Centre, Makerstown was the first event of its kind in Brussels. It brought to the European capital 50 young and innovative Makers — a new generation of entrepreneurs and DIY experts empowered by Web 3.0 tools, technology and crowdfunding. From 3D printing to robotics, wearable technology to new ICT and food to fashion, the Makers selected from all over Europe might just be tomorrow’s Robert Bosch, Enzo Ferrari or Arthur Guinness.
Part fair, part conference, Makerstown was organised by the Wilfried Martens Centre for European Studies, the official think tank of the European People’s Party, and by Think Young, the first think tank to lobby for young people.
Speakers included Jyrki Katainen, vice president of the European Commission responsible for Jobs, Growth, Investment and Competitiveness; and Carlos Moedas, European Commissioner responsible for Research, Science and Innovation, as well as members of the European Parliament and business leaders. Industry 4.0, public and private finance for entrepreneurs, women’s entrepreneurship, start-ups and scale-ups were the order of the day.
1. Ideas are assets. Makers are leading the way
Twenty years ago, our biggest challenge was digitalising information. Now we are entering a new era in which the digital world is affecting and transforming the physical world in unpredictable ways. It is the age of the fourth industrial revolution and of the peer-to-peer economy. In this age, innovative Makers at the cutting-edge of the technological frontier are our best hope to revive our ailing economies.
Start-ups in Europe represent only 5 percent of firms, but they already account for a disproportionately high percentage of job creation. This is destined to rise due to the increasing interpenetration between digital and physical world. We must be ready to exploit this opportunity.
2. The three Fs of funding: Friends, family and fools
For innovative start-ups launched by visionary Makers, financing is often the main initial hurdle. In the early stages, often only friends, family and fools will be bold enough to believe in a new idea. In some contexts, public money can partly remedy this shortcoming, and innovative financial instruments have been developed by the European Commission and the European Investment Bank in the last few years.
Such versatile instruments are often not well known by makers and it is important to raise their awareness on this topic. However, public money should be used with great caution, as it can backfire and discourage the investment of private money.
Europe’s real problem today does not seem to be the availability of finance – markets are actually flooded with liquidity – but the lack of an adequate ecosystem. In the U.S., public money is much more limited than in Europe, and yet Silicon Valley is in California, not in Germany or France.
3. We can make it: Female entrepreneurship
Women are an under tapped source of economic growth and innovation. While more than half the European population is female, women represent only a third of the self-employed and 30 percent of start-uppers in the EU. This happens in spite of excellent educational achievements. The EU has traditionally been at the forefront of initiatives promoting gender equality and equal opportunities.
It could potentially do more in the field of education, which is essential in fostering a new mindset that would encourage women to live up to their potential. This needs not come at the expense of maternity and family life: intelligent policies can help women reach a balance between family and career engagements.
4. Creative bravery: Celebrating failure, changing the world
According to Organisation for Economic Co-operation and Development (OECD) figures, 60-70 percent of productivity growth stems from innovation. Taking initiative is therefore essential. Recent years have seen a few success stories of innovation in Europe, for example the Estonian policy of abolishing tax for new companies, arguably one reason why Skype was born in Estonia.
However, some countries are doing better than others and policymakers should be open to bolder initiatives. In the U.S. more universities are introducing commercialisation offices to help students develop their ideas and bring them to the market. The initiative can be valuable for Europe, too.
Other important policy initiatives include increasing personal security on the Internet, strengthening the presence of technology and science in schools and decreasing transportation costs. Why not even allow reformist zeal to carry us away? The introduction of a ‘failure day’ could celebrate entrepreneurial failure and help eliminate the stigma it carries.
5. Ecosystems are essential
Only the right ecosystem can allow entrepreneurial spirit to create start-ups. The first element of a successful ecosystem is a big continental market. Europe has in place all the institutional instruments to create such a market, but national tensions mean services, digital and energy remain closed to competitive pressure.
The second essential element is an environment with few regulations, little bureaucracy and a very high level of flexibility. The EU has not always been up to the task. The EU and its member states should minimise regulation and allow as much innovation as possible. The third element is a mindset open to failure as a stepping stone towards success, and not paralysed by it as a shame to avoid. Although it’s unlikely that a single European Silicon Valley will emerge, we can be optimistic that Europe’s innovative future is bright.
After a day of demos and discussions, everyone who attended the event could agree on at least two things: Europe’s manufacturing tradition IS getting an update, and Makerstown was THE place to experience it first-hand! Breaking free from the confines of a regular EU-bubble conference, it was anything but a talking shop. Instead, it was streets ahead, celebrating European innovation in a dynamic, engaging, and inspiring way. Missed the action this year? No worries, Makerstown 2.0 will be back in town in spring 2017.Business Economy Industry Innovation Technology
Europe, get ready for the Makers Revolution!
25 May 2016
The 2013–14 Euromaidan revolution in Ukraine created much admiration and hope among Ukrainians and the international audience. Both Ukrainian civil society and international partners have voiced their high expectations of the meaningful changes in the economy, the political system, and public institutions.
This paper argues that positive changes depend on a clear escape from the Soviet legacy, which provokes political populism and stalls reforms. Despite the immense challenges of the Russian military intervention and the declining economy, Ukraine has made progress with its ambitious reform agenda.
This paper discusses the achievements and setbacks in four policy areas: decentralisation, energy, the civil service and anti-corruption. It includes firm evidence that proves that the results of many of the reforms are already helping the Ukrainian economy to recover from the crisis.
In the long run, the success of a new prosperous and democratic Ukraine will depend on several components of the reform process: vision, leadership, communication, political consolidation and Ukrainian ownership.
The EU can and should help in this endeavour, but the national government must maintain the critical share of responsibility.Eastern Europe Economy Macroeconomics
No Illusions, No Regrets: The Current Struggle to Reform Ukraine
20 May 2016
When the Tiananmen demonstration took place in late spring 1989, the west and other democratic countries were expecting that developments similar to those that took place in Central and Eastern Europe in the same time period would equally ensue in China. Communist powers were losing their grip on society around the world and China was expected to follow suit.
“For many years, a big revolution in China
was predicted, but never materialised.”
The government initially took a conciliatory stance toward the protesters but as the demonstration spread over 400 cities by mid-May, China’s government decided to use force. Martial law was declared on May 20 and 300,000 soldiers were mobilised to Beijing. Demonstrations were cracked down upon and many protesters were arrested. In the end, Chinese political power did not change and the country moved forward to become the greatest economic miracle of the past decades.
Over the years many have predicted that eventually China will be forced to change, as it can go only so long with its huge growth leaning on industrial production and ultimately, when trying to ensure the growth through increase of innovation, it will lead to more open and democratic society.
But year after year, these predictions have fallen empty. China has remained tightly politically controlled by the communist party. The China’s communist party was able to hold power, due to the huge unquestionable economic success and the continuous growth of the past 40 years.
Nevertheless, China today is a capitalistic economy, even if it is state capitalist economy. A modern market-based economy, it has inherited a tendency for cyclical changes. This is linked to the fact that China’s competitive potential for productivity increases has declined and is bringing China to a totally new situation unseen in past decades.
Rapidly cumulating debt, falling exports and imports, and news of expectations to lay off 1.8 million workers in the coal and steel industries are not signals of slowing economy. They are signs of major economy heading towards severe economic depression – a totally new phenomenon in new modern China.
For many years a big revolution in China was predicted but never materialised. As a result, today very few are speculating about what might happen internally in China if an economic crisis accelerates. In 2011 when the Arab revolutions swept through the Middle East and North Africa, this came as surprise to many experts.
“People […] usually rebel when they have something and they are about to lose it.”
Political establishments which had ruled for decades were suddenly challenged and in many cases overthrown, without any substantial rapid change in societal or political conditions before. The lessons learned from Arab revolutions is that the question is not if societies under stress have a tipping point but rather when that point is reached – and what can trigger it.
People do not usually intend to rebel when they don’t get what they want. They usually rebel when they have something and they are about to lose it. Today in China a large amount of people feel that they are losing something they had or something that was promised to them.
The economic crisis has invited societal backlash in China for a number of reasons. First and foremost, there is a growing fear that jobs will be cut. It has already been announced that 5-6 million state workers will be dismissed over the next two to three years in order to curb industrial overcapacity.
Additionally, working conditions deteriorate in times of labour market uncertainty. Powerful employers have potential to abuse employees by failing to pay them on time or ensure safe working conditions. While enterprises still report growth, Chinese households are struggling. Personal debt frequently goes unrecorded but this climate of unrest and fear has led to increasing numbers of demonstrations. Already in 2010 over 180,000 protests, riots and other mass incidents took place across China and that number is steadily growing.
How is China’s political leadership prepared to manage the upcoming turmoil? China’s leaders Xi Jinping seems to be establishing tighter rule and control, and enforcing his own cult kind of image. These are not very ‘outside-the-box’ tools to deal with China’s population potential discontent.
China’s model has been portrayed by China as an example also for other countries. China’s political establishment is now facing the ultimate test. Whether this boils down to the continuation of dynamics started in Tiananmen Square remains to be seen.
But today’s China is so significant for global developments and the economy that the wishful scenario for rest of the world is that any internal tensions China might have will be relieved in a stable and non-destructive manner. Hopefully, at the end of the process, China’s leadership will have the insight that China today is strong enough to offer freedom and empowerment to its people in order to guarantee China’s future success.
 Wall Street Journal http://www.wsj.com/articles/SB10001424053111903703604576587070600504108Tomi Huhtanen Democracy Economy Globalisation
China and the return to Tiananmen Square
19 May 2016
Technology is, undoubtedly, disrupting the world as we know it at a faster pace than we’ve ever seen before. It is reinventing society in ways we could have hardly imagined just a few years ago.
Technologies such as cloud computing, mobile apps, ecommerce or wireless communication have helped democratize information and give access to knowledge at a larger scale than ever before. We now live in a ‘network society’ always connected, always changing and always redefining itself.
This digital revolution has taken by storm all aspects of our daily lives and the way we work is one of the areas where disruption will be the strongest. It is not only the ‘how we work’ that we need to rethink, but also the ‘when’ and ‘where from’.
Coping with such disruption is already proving to be very challenging across industries, for both employers and employees in the public and private sectors. But it is up to us to face the challenges and make sure that the workplace environment is keeping up with the technology surrounding it, instead of trying to ignore for as long as possible (which, on the long term, would have disastrous consequences).
First of all, I strongly believe that for the world of work to keep the pace with the technological revolution, our paradigm around what work is and how it should happen need to change. For the past 150 years, throughout the industrial revolution and until today, very little has changed in the way we design organisations and jobs.
Just like in Henry Ford’s time, today’s workplaces are following the factorymodel organisational design shaped around structured hierarchy, heavy bureaucracy, overwhelmed by control and rules, adverse to change. As much sense as this model might have made in the industrial era, today it is making less and less sense to apply these same principles to our working environments.
Given the opportunities that technology is providing, it is now the time for us to start rethinking the meaning of work so that we can start redesigning the workplace. Organisations need to become flexible and adaptive in order to survive and because of technology, we now have the opportunity to make it happen.
Less hierarchy, more autonomy, simplifying bureaucracy as much as possible and involving employees more in the decisional process should become the norm of the organisation leading the way forward in any kind of industry or sector.
New models of organisation design such as holocracy, wirerachy, freedom centered or distributed (remote) have challenged the status quo of the world of work. And though none of these models have proven to be perfect, they all have one thing in common: maximising the impact that technology has within the workplace, taking full advantage of how it can help an organisation thrive (and improve the flow of information, communication, learning and development of employees, productivity etc).
In addition, technology is also redefining the physical environment of the workplace. Remote work is becoming more and more the chosen solution, as for an organisation this means lower fixed costs, significantly decreasing commuting times and also being able to tap into a global talent pool without being limited by the physical space to look for the most talented employees living in the proximity of the workplace.
And even for companies for whom remote work is not the solution, the office space is being redefined. It is making its transition from the cubicle to becoming a hub for collaboration where employees can spend time connecting with each other rather than the place where they need to be between 9am and 5pm.
But for all of this, the shift of paradigm needs to happen also as organisations need to drop the idea that efficiency and performance is directly tied with the rules of the physical offices fixed working hours and long commutes. Instead, remote working working organisations and coworking offices rely heavily on collaborative technology and digital tools to help employees thrive in their work.
Secondly, another aspect of the world of work keeping up with technology is the fact that digital workplaces will need digital employees. In other words, emphasis needs also to be put on developing digital literacy both within current generation in the workplace as well as younger generations who will enter the workplace in the upcoming years.
At the moment, there is a high percentage of the workforce (mostly represented by Generation X) across the world with real difficulties in using digital tools within the workplace and this is impacting in a negative way both productivity and the workflow within the organisation.
Developing learning programs that help them gain digital skills will be critical in the next years, as the requirements of the modern workplaces and the transformation of many of today’s jobs could lead to a stron technological unemployment trend which might leave heavy marks on economies and the society.
And even if today’s younger generations have been heavily exposed to technology since very early in their lives and they are true digital natives, they still need training and education about using digital tools purposefully in the workplace. For this, attention needs to be brought to education systems across the world to integrate digital literacy within the curricula of schools as an essential part of the learning process.
At the moment, the gap between skills taught at school and skills required in the workplace is becoming higher and higher and most of it because of this lack of focus on digital literacy.
Last but not least, government policies need to be more open to regulating new ways of work supported by technology. On one hand, it is the rise of the digital nomads and of the remote workers (who are either working on a freelance basis or as part of remote or flexible working companies).
At the moment, it is legally quite difficult for such workers to deal with paying taxes or finding legal ways of justifying their work (since the are huge gaps in legislation related to such regulations of remote or freelance work).
On the other hand, technology offers the opportunity to help close the unemployment gap for vulnerable groups of people (the disabled, the elderly, ethnic discriminated minorities etc). With the help of digital tools, they can be much more easily integrated in the workplace (both on physical or in remote working environments, depending on the needs).
But in order for organisations to create employment opportunities for these vulnerable groups, government policies play an important role in advocating for such approaches, reducing the bureaucracy of these processes and maybe even incentivising organisations for adopting such policies.
To sum up, I believe the impact that technology will have on the workplace will have a massive impact on shaping tomorrow’s society and it is our duty right now to try to foresee the changes coming along in the workplace and the forces driving it so that we can adapt to them in the best possible way.
The Romanian version of this article has been previously published in the Romanian news portal Ziare.com.Ana Marica Economy Education Industry Innovation
The Digital Revolution Within the Workplace
10 May 2016
2016 has been marked by a return of uncertainty in the financial markets and increased doubts over growth prospects in key global economies such as China, Europe and the U.S. Nearly ten years after the U.S. sub-prime mortgage crisis first erupted, the global financial sector has returned as a key concern of economists and global investors.
This note identifies four key issues underpinning the current market turbulence. It argues that although these challenges are varied and serious, they are not insurmountable for Europe owing to the reforms undertaken since 2008.
However, in order to prevent regular cycles of market speculation further economic reforms are necessary which will challenge existing national preferences and change the governance of both the European and global economies.
Ultimately, for Europeans, the goal of these reforms is to lead to a more cohesive and robust European Union. However, the failure of the EU to act in a timely (and collaborative) manner will result in further periods of speculation.
Four policy priorities – increased investment, further global cooperation, the completion of Banking Union and the maintenance of sustainable public finances – are identified as being necessary for the EU to withstand future financial crises.Banking Crisis Economy Growth Macroeconomics
Financial Market Instability: A Four Point Plan to Avoid Economic Catastrophe in Europe
02 May 2016
Wikileaks, Cablegate, Offshore Leaks, Lux Leaks, Swiss Leaks, Panama Papers…the last few years have witnessed a spectacular surge in scandals sparked by journalistic leaks of confidential information. With the exception of the first, all others exposed elaborate systems of tax avoidance used by firms and prominent individuals to deflate their tax bills by taking advantage of low tax jurisdictions.
Invariably, revelations provoked outbursts of indignation on all sides of the political spectrum and increased popular anger against ‘privileged’ elites. The occasion was seized by law-makers, international organisations and regulators to vow once more to ‘do something’ about this, to assault the last fortresses of bank secrecy and to move to a world of total transparency in people’s wealth and income.
I confess that I would not like to live in such a world. And I suspect that it would be a far less free and ultimately less prosperous world than the one we know. I am no friend of tax evasion and not even a defender of tax elusion. But there are aspects of the mainstream opinion on tax avoidance and fiscal transparency that any person believing in the sanctity of individual and economic freedom should be deeply uncomfortable with. I would like to signal two of them.
First, there is the ideological option in favour of total transparency – and therefore potential total control – that is implicitly adopted in this debate. It is the red line connecting the more political revelations of Wikileaks with the tax-related leaks of the Panama papers. At the root of it there is a radical breed of ‘democratism’ that treats power and wealth with suspicion – as somewhat fraudulent and illegitimate – and struggles to tear apart the veil of secrecy often protecting their holders. The objective is exposing them nakedly in the limelight, where they will stand defenceless against the conforming attacks of people’s anger and indignation. They will be stigmatised as the morally corrupt and undeserving citizens they are.
This form of staged pressure with strong moral overtones is frankly scary to conservative and liberal eyes. Secrecy and freedom are historically intertwined in the most diverse realms. There is no voting freedom without secret ballot, and freedom of correspondence is a fiction unless one’s letters are inviolable. Can there be real economic freedom if not a cent of one’s wealth can elude the public eye?
There is a second unspoken assumption I detect in the common discourse on tax avoidance. It is the belief that all wealth ultimately belongs to ‘society’, not to those who created it. The implication is that the latter are left the enjoyment of part of it to the extent agreeable to society, as represented by its democratic authorities; but there is no upper limit to the proportion of private wealth society, i.e. the progressive State, can legitimately decide to confiscate to its owners for its own purposes. This is well illustrated by a declaration of Sergei Stanishev, President of the Party of European Socialists, with reference to the Panama papers: ‘The money that these people were hiding’, he said, ‘does not belong to them — it should have been redistributed for the benefit of all.’
How much of it should be redistributed? Perhaps all of it? Is there no limit beyond which society’s claim on its people’s wealth stops being a legitimate demand to promote the public good and becomes instead an odious act of oppression? For those of us who believe in economic freedom, such a limit should exist. This means that, when we discuss tax avoidance, we should, at the very least, be indignant of the exorbitant fiscal demands of modern states as much as we are of the creative tricks used to circumvent them. Such balance is hard to find in the commentaries I hear around, including many coming from the centre-right and the right wing of the political spectrum.
I am familiar with the socialist argument that the rich are getting richer, the poor are getting poorer and the middle class is disappearing. This, we are told, would intensify the urgency to close up all available opportunities for tax avoidance. However, from Marx to Piketty, socialists have been making this point for well over a century. Each time they were proven wrong in the long run. Do we really have solid evidence to argue that ‘this time is different’? I have my doubts.
Finally, there is a most important issue that casts the whole debate on tax avoidance in a completely different light. Historically, tax avoidance was one of the major drivers of Europe’s economic development in the modern era. In ‘The European Miracle’, his classic work on the subject, notable economic historian Eric Jones clearly showed that crucial to laying the foundations for Europe’s economic rise was the ‘curtailment of predatory government tax behaviour’. But what made it possible? The fact is that, at the beginning of the modern era, Europe was a hodgepodge of kingdoms, principalities, and city-states constantly eroding each other’s ‘tax base’ – as modern technocrats put it – through remorseless tax competition. In other words, early modern and modern Europe was a paradise of tax avoidance in which the confiscatory fiscal instincts of rulers were held in check by numberless ‘exit options’ for merchants and bankers. In all likelihood, we owe the rise of a modern competitive economy in Europe – and ultimately our very prosperity – to this fact.
It is no surprise that the leftist ideal should not be the decentralised and competitive Europe of the early modern era, but early modern China, a formidable centralised empire whose bureaucracy of mandarins always managed to squeeze the most out of rich and poor Chinese alike. It was enough to ensure that the country missed out on modern economic growth until the 1980s. But the urge of many centre-right politicians and commentators to embrace the crusade against tax avoidance and for tax harmonisation – instead of focusing on reducing taxes for everyone, rich and poor, so as to make tax avoidance unnecessary – will forever puzzle me.Federico Ottavio Reho Economy Ethics Globalisation Values
Federico Ottavio Reho
Panama papers: on tax avoidance we take too much for granted!
25 Apr 2016
The discussion about strengthening the European economy is very timely. Although the EU is facing urgent challenges now, we have to learn to tackle more than one crisis at a time. We still need to make efforts to improve the competitiveness and thus resilience of our economy when facing shocks, I have asserted today in the debate “Do or Die: Political and Economic Reforms for a Stronger EU”, organized within NET@WORK Forum of the Martens Centre. The completion and strengthening of the Economic and Monetary Union is essential to ensure the stability of our common currency. In order to strengthen our economies, we have to tackle the root causes of the current crisis: Too much debt and too little competitiveness. It is necessary that the banking system returns to its mission of supporting the real economy, like financing entrepreneurship and SMEs. Progress has been made regarding the governance of the Eurozone, where the ECB monetary policy has been constructive. However, this help is limited and can only function as a bridge. There is no way around improving competitiveness through economic and political reforms, and I believe an appropriate tool for this can be a fiscal capacity of the Eurozone. The capacity should incentivize reforms especially in good economic times, when it makes sense to implement them, such as reforms already laid down in the Country Specific Recommendations (CSRs). An evaluation of the CSRs implementation rate could steer us towards reforms whose transposition require financial incentives through the fiscal capacity. What kind of reforms do we need to make our economies more competitive? On the one hand, we have to reduce deficits and limit public debt, return banks to their initial function, allocate more financing to research and innovation, further invest in roads and railway infrastructure as well as improving energy and digital markets. On the other hand, we need to reform labour markets to be more flexible in order to offer more opportunities to young people. We have to support entrepreneurship, start-ups and SMEs, further develop the single market, provide predictable and reliable tax and legal systems as well as insuring the functionality of the rule of law. In addition, there is need to reform the budgets. The limited financial resources we have at public level should be allocated to those areas which strengthen our economies. The budget should be a reflection of our political priorities. Moreover, we must invest in education. Schools and universities have to prepare the students with the necessary skills to be successful in the labour markets of the future. Many jobs of the future will require new skills, such as digital and e-skills. Furthermore, the development of the governance of the Eurozone is necessary, but more important is the impact on the real lives of the citizens. We have to show how our actions in Brussels really help the economy, and more specifically, how they benefit entrepreneurs and SMEs. European citizens are rightly interested in the final results. As pro-Europeans we have to talk about the achievements of European integration and present the EU as something which is still responding to the present and future needs of the citizens. In the past, the most urgent need was peace. Today, the challenges of the future are manifold, including the refugee crisis, increasing Euro scepticism and international conflicts. If the European idea is challenged and questioned by populists, it is our obligation, besides defending the European idea, to improve and further develop it. [originally published in Siegfried Muresan’s blog]Siegfried Mureşan Economy Education EU Institutions European People's Party Innovation
Do or Die: Political and Economic Reforms for a Stronger EU
20 Apr 2016
Following the financial meltdown of 2007–8 and during the ensuing ‘Great Recession’, a chorus of recriminations against the evils of capitalism was heard. To many who had always distrusted the liberal shift in economic policy initiated in the 1980s, the turmoil on the financial markets was the long-awaited confirmation of their fears. Unbridled capitalism, they concluded, was unstable and unfair. The deregulation in recent decades had put the finances of whole nations at the mercy of financiers’ greed and bankers’ profits.
Unethical behaviour was rampant in the banking industry. Therefore, tighter regulations were urgently needed to protect the public interest and rein in the forces of globalised capitalism. These convictions provided the moral high ground from which to advocate re-regulation, stimulus packages and ultra-loose monetary policy on both sides of the Atlantic.
This paper considers the case for ‘moralising capitalism’ from a centre–right perspective. After defining capitalism and briefly explaining how it works, it illustrates some of its moral achievements and casts some doubts on the responsibility of the capitalist system for the 2008 financial crisis. It then tries to sketch the contours of a specifically centre–right approach to moralising capitalism, also drawing on the rich insights offered by Wilhelm Röpke, one of the fathers of the Social Market Economy.Centre-Right Economy Ethics
Humane Capitalism: Towards a Centre-Right Approach
14 Apr 2016
What have we learned and what are the implications for Putin and for relations between Russia and the West from the ‘Panama Papers’ scandal? Here’s what we know so far.
Substantial evidence of Putin’s involvement
The owner of two Russia-linked offshore companies with an alleged turnover around $2 billion, cellist Sergey Roldugin, has no record of major involvement in business and nothing in Roldugin’s experience or career suggests that he is worth this much. In a 2014 interview with The New York Times , he said ‘I’m not a businessman, I don’t have millions’, a claim which is supported by the lack of evidence of meaningful business activity on his behalf.
Is there any reason major Russian businesses would pay billions through highly controversial deals to a cellist with no practical business experience and no value as a business partner?
Oh, wait, let’s not forget one important thing: the cellist is the closest personal friend of the Russian President. The money transfer schemes involved are mostly obscene in terms of full lack of commercial sense: unreasonably huge penalties for wittingly breached deals, generous buy-offs of publicly traded shares just days after they were sold to Roldugin’s firms at but a fraction of the future buy-off price, etc. All these deals will be subject to thorough money-laundering investigation because this is what bribes normally look like in the modern world.
What implications for Russia?
Most commentators agree that the publication of the ‘Panama Papers’ will have little public effect on the Russian society. There are a number of reasons for this: Russia’s state media almost completely silenced the revelation about the papers, Russians are used to it and, to a large extent, tolerate large-scale corruption. Some people would buy arguments that ‘it’s the Western plot to discredit Putin’ and that ‘Putin’s personal signature is not in the register = no proof’.
However, among the Russian elites, this publication will undoubtedly have a great psychological effect. Alongside Roldugin, many Russian officials and businessmen have been exposed in the papers as owners of offshore companies. And many of them have already had too much to deal with in previous years – Western sanctions, the international credit blockade, difficulties moving money back and forth across the borders, dealing with Western authorities and financial institutions. They thought that Putin’s system would offer them protection once they’ve been loyal to the Czar—but now it seems that the Czar is mostly busy covering his own deals, and the protection has vanished. On top of this, the additional sanctions and growing difficulty in cross-border business as a result of the Czar’s policies likely make them question if it is worth it supporting Putin and his system any longer?
I do not believe that an ‘elite revolt’ against Putin will occur in Russia any time soon—Putin has effectively managed to suppress the quality of the Russian elites, expel the most outstanding persons from power, and breed only loyal depoliticised technocrats around him, who are also under 24/7 surveillance by the security services. But the ‘Panama Papers’ are an important milestone in creating a situation where, there will be few who would stand to defend him, as, unlike previous years, a lot of influential people have had enough.
As for Russia’s relations with the West, clearly the issue of the alleged link between President Putin and the Panama offshore money will be investigated much more in-depth. There is enough evidence that a link possibly exists, so it is not enough to rely just on independent investigative journalists—it is time for governments to step in if they are serious in their rhetoric about combating corruption and money laundering.Vladimir Milov Economy EU-Russia Foreign Policy
The Panama Papers and the Russian Connection
11 Apr 2016
What have we learned and what are the implications for Putin and for relations between Russia and the West from the ‘Panama Papers’ scandal? Here’s what we know so far.
Substantial evidence of Putin’s involvement
The owner of two Russia-linked offshore companies with an alleged turnover around $2 billion, cellist Sergey Roldugin, has no record of major involvement in business and nothing in Roldugin’s experience or career suggests that he is worth this much. In a 2014 interview with The New York Times , he said ‘I’m not a businessman, I don’t have millions’, a claim which is supported by the lack of evidence of meaningful business activity on his behalf.
Is there any reason major Russian businesses would pay billions through highly controversial deals to a cellist with no practical business experience and no value as a business partner?
Oh, wait, let’s not forget one important thing: the cellist is the closest personal friend of the Russian President. The money transfer schemes involved are mostly obscene in terms of full lack of commercial sense: unreasonably huge penalties for wittingly breached deals, generous buy-offs of publicly traded shares just days after they were sold to Roldugin’s firms at but a fraction of the future buy-off price, etc. All these deals will be subject to thorough money-laundering investigation because this is what bribes normally look like in the modern world.
What implications for Russia?
Most commentators agree that the publication of the ‘Panama Papers’ will have little public effect on the Russian society. There are a number of reasons for this: Russia’s state media almost completely silenced the revelation about the papers, Russians are used to it and, to a large extent, tolerate large-scale corruption. Some people would buy arguments that ‘it’s the Western plot to discredit Putin’ and that ‘Putin’s personal signature is not in the register = no proof’.
However, among the Russian elites, this publication will undoubtedly have a great psychological effect. Alongside Roldugin, many Russian officials and businessmen have been exposed in the papers as owners of offshore companies. And many of them have already had too much to deal with in previous years – Western sanctions, the international credit blockade, difficulties moving money back and forth across the borders, dealing with Western authorities and financial institutions. They thought that Putin’s system would offer them protection once they’ve been loyal to the Czar—but now it seems that the Czar is mostly busy covering his own deals, and the protection has vanished. On top of this, the additional sanctions and growing difficulty in cross-border business as a result of the Czar’s policies likely make them question if it is worth it supporting Putin and his system any longer?
I do not believe that an ‘elite revolt’ against Putin will occur in Russia any time soon—Putin has effectively managed to suppress the quality of the Russian elites, expel the most outstanding persons from power, and breed only loyal depoliticised technocrats around him, who are also under 24/7 surveillance by the security services. But the ‘Panama Papers’ are an important milestone in creating a situation where, there will be few who would stand to defend him, as, unlike previous years, a lot of influential people have had enough.
As for Russia’s relations with the West, clearly the issue of the alleged link between President Putin and the Panama offshore money will be investigated much more in-depth. There is enough evidence that a link possibly exists, so it is not enough to rely just on independent investigative journalists—it is time for governments to step in if they are serious in their rhetoric about combating corruption and money laundering.Vladimir Milov Economy EU-Russia Foreign Policy
The Panama Papers and the Russian Connection
11 Apr 2016
Last week at the Munich Security Conference, the Russian Prime Minister Dmitri Medvedev once again threatened the West with a “new Cold War” and repeated the old blame-game approach to relations with the West. There’s one problem: a growing call from ordinary Russians to reconcile with the West, and normalize relations.
According to recent polls as conducted by FOM, a polling agency which is traditionally loyal to the Kremlin, 60% and 62% of Russians say that Russian leaders “must aim to improve relations” with the United States and Europe respectively. These numbers match those of an independent polling centre, Levada, which claims that 54% of Russians believe that Russia should “strengthen its ties with the West” (up from 40% a year ago).
This is not to say that the viewpoint of Russian citizens to the West has changed for the better. All pollsters show that more than two-thirds of Russians view the U.S. and the E.U. in a negative light (which is no surprise, given the tireless 24-hour brainwashing by propaganda machines, which claim that Russia is “under attack” by the West and that they “aim to overthrow the legitimate government” and “exploit Russian resources”). However, given all that negativity, it’s also quite clear that this is not backed by some kind of deep-rooted aggression within Russian society.
Russian people have visibly grown tired over the past several years of confrontation, and are not truly interested in the Kremlin’s foreign policy-related mobilization efforts. For instance, according to Levada, only 18% of Russians follow Russian military campaign in Syria attentively (half a year ago, the maximum number of people interested was only 25%), whereas over 80% show limited interest in the subject. The same thing has happened in relation to events around Ukraine: Levada has shown a recent surge in public indifference to those, with the number of people who do not truly follow these events or not follow them at all reaching almost 70%.
All these developments are hardly surprising, given the severity of the developing economic situation in Russia. I have described the nature of this crisis, hitting the consumer purchasing power of Russians the hardest since 1990s, in more detail in December; since then, retail sales in Russia have fallen further by 15.3% year on year in December and by another 7.3% in January, and real wages – by 10% and 6.1% respectively. Notably, in January 2016 sharp declines continued contrary to the “low base effect” that optimists hoped for (in January 2015, the decline had already commenced, and optimistic outlooks were based on the assumption that the population’s purchasing power will level off compared to last year’s weak numbers).
It’s quite clear that Russians are unhappy with these developments, and demand that the Russian Government devote more effort to domestic economic policies so as to solve these problems and to reconcile with the West.
Given Medvedev’s Munich speech, Russian leaders seem to be totally ignorant of that demand from the Russian society by simply continuing with the old confrontational style. This is worth remembering for any Western politician talking to them further: The Kremlin’s international tough talk is not really backed by solid public support anymore.Vladimir Milov Crisis Economy EU-Russia
Medvedev’s tough talk does not match Russian public opinion
22 Feb 2016
Unsurprisingly even within the “Brussels bubble” economists cannot agree on the ultimate result of President Juncker’s European Fund for Strategic Investments (Juncker Plan). The mobilisation of additional funding mechanisms – over and above agreed national and EU frameworks – has caused unease with those who have prioritised budgetary consolidation as an immediate policy imperative.
In this debate Germany holds the most important role as Europe’s strongest large economy in 2016. However, this note highlights that fiscal balance and increased investment are not mutually exclusive political actions, but rather form important elements of a sustainable economic policy framework. This is vitally important for all member states, but particularly for Germany, in light of its challenging long term economic outlook.Economy EU Member States Eurozone Growth
Germany and the Juncker Plan: 3 Steps to Reconcile Fiscal Consolidation and Investment
16 Feb 2016
This working paper looks at the recent trends in the Russian economy and argues against the official view of the Russian authorities that the worst phase of the Russian economic crisis is over.
The paper highlights the main driving factor behind the current crisis, the sharp decline of domestic consumption, unprecedented in the past twenty years, and argues that Western sanctions have had a great role to play in these developments.Crisis Economy EU-Russia
Russia’s Downfall: The Worst Economic Crisis Since the Collapse of the USSR
17 Dec 2015
“We have stabilized the Euro and carried out reforms. Now we need to focus on innovation for growth and the digital economy.”
These are the words used by Manfred Weber, leader of the European People’s Party (EPP) Group in the European Parliament during his opening of the Economic Ideas Forum that was held in Brussels on December 2nd 2015.
The Economic Ideas Forum (EIF) is an annual high-level conference that brings together economic experts, decision makers and business leaders to discuss and consider innovative ideas and solutions to the economic challenges facing the EU today. The Forum has so far been a roadshow affair, with previous editions successfully held in Bratislava, Helsinki, Dublin, London and Madrid. Organized by the Wilfried Martens Centre for European Studies, the official think tank of the EPP, the EIF’s aim is to act as a laboratory for policy-oriented ideas.
Here are the seven key takeaways from the one day discussions:
- Digital Single Market (DSM): You snooze, you lose
The Commission’s plans for a Digital Single Market featured prominently in the discussion and all speakers agreed that their successful implementation could be agame-changer for the future of the digital economy in Europe. According to one speaker, some EU member states still need to wake up from their “digital snooze”, otherwise the EU will continue to lag behind in digital innovation, most notably in comparison with the US. One big market, rather than 28 different ones will make Europe an investment and digital-friendly continent.
- Industry 4.0: Embrace, don’t erase
As the birthplace of the industrial revolution, Europe has long relied on its industrial eco-system as a core economic strength. But the relative contribution of industry to the EU economy is declining. In response, we need to activate a new industrial revolution: we need to transform industrial production through the merging of digital technology, the internet and conventional industry.
In an era where users take the driving seat, and the economy becomes an “on demand” one, including the personalization and digitalization of products, the EU needs to provide a co-ordinated response on how to embed innovation at the core of Europe’s industrial sector.
- Collaborative economy: Disrupt yourself
Revolutionising our economies and work habits, that’s no modest ambition set out by the new, dynamic players that are part of the so-called collaborative economy. How about the more traditional players that are challenged in the process? They can use this as an opportunity to disrupt their own business models by adapting and borrowing practices from the newer players. This will lead to growth, lower prices for the consumer and increased efficiency in the utilization of resources.
- It’s the (data-driven) economy, stupid!
All the digital innovations discussed raised complex issues of data treatment, storage and protection. There was a general agreement that a balanced deal on data protection is a necessary prerequisite for the digital economy to fully accelerate in Europe. On the issues of data flows and “safe harbor” the temptation to build walls around Europe should be avoided.
- Energy Union: Don’t rush to Russia
In the energy field, speakers agreed that the objectives are security of supply, climate protection and the reduction of energy costs. The EU has gone a long way towards having a common policy to achieve these goals, but further steps will still be needed. Tackling the overreliance of some EU countries on external supply (i.e. Russian gas) can be achieved through a better connected European energy market, a stronger energy union and intelligent diversification.
As for the latter, agreement on the importance and role of renewable energy sources was mixed with an acknowledgement that other complementary solutions should also be considered, including nuclear power.
- COP21: Leader, not lonely front-runner
With the EIF taking place just before the Climate Change Summit, the timing was right to underline that what was at stake in Paris was the future of Europe as a leader in clean energy. If an agreement was not reached, Europe could turn into a “lonely front-runner”, shouldering a disproportionate part of the burden in fighting climate change and losing its competitiveness to countries with laxer standards.
- Ukraine: Remain Calm – now reform and support
The need for diverse and comprehensive reforms in Ukraine was best summarized by a speaker that urged for a “Maidan in government structures”, as well as de-regulation, privatization and an independent judiciary. In this, Ukraine should value the experiences of centre-right reformers from Central and Eastern Europe during the 1990s. In turn, Europe needs to avoid that Ukraine falls off the EU agenda and offer concrete rewards to encourage the reform process in the country, such as the concrete prospect of visa liberalization.
Closing the event, Martens Centre Executive Director Tomi Huhtanen told the audience how, in previous years, “financial crisis” and “economic recovery” were the topics dominating the EIF discussions. This time around, new buzzwords such as “collaborative economy”, “industry 4.0” and “data-driven economy” took over the conversation.
In a world where change seems to happen at an exponentially growing pace, 2016 is no doubt going to bring new, disruptive trends for the European economy. The Martens Centre will be there to discuss them as they happen, with a continued appetite for new ideas and concrete policy recommendations.Economy Energy Growth Innovation Trade
Economic Ideas Forum, inspiring ideas into policy action: 7 key takeaways
10 Dec 2015
Europe and the US are witnessing a trend towards a more diffused production of services. This can be seen in the entry of a new kind of platform-based company into services markets. The driving economic factor behind this development is collapsing transaction costs enabled by new applications of the Internet.
It is a move towards what can be called a ‘People-to-People Economy’ (P2PE), in which self-employed individuals offer services in areas such as transportation, accommodation, cleaning and dining through platforms that connect demand and supply. This article explains, first, the concept of the P2PE and, second, how it has the potential to make the European economy more flexible.
It argues that the centre–right should not oppose, but support this development. The P2PE has the potential to transform European culture and entrepreneurship. Nonetheless, there are plenty of challenges ahead, which require policy responses such as modernising labour legislation, revising outdated regulations, tackling vested interests and providing social security for the growing number of self-employed people.
This article will take an unwaveringly positive approach to the P2PE since this new economy will likely increase the efficiency of service production and lead to gains for the economy as a whole.
Read the full FREE article published in the December 2015 issue of the European View, the Martens Centre policy journal.Juha-Pekka Nurvala Business Economy Innovation Resources
‘Uberisation’ is the future of the digitalised labour market
08 Dec 2015
The recent financial and economic crisis has exacerbated the funding shortfalls of Europe’s public pension systems. However, although the ageing of Europe’s population is a general trend observable in all member states, its scale and timing will impact differently on a national level. By analysing demographic trends and utilising a case study approach, this research highlights the challenges facing national pension systems in the years ahead.
Politically, it will be on the basis of national preferences that further pension system reform will occur in the future. With this in mind, it is too narrow-minded to take a solely fisc al perspective from which to develop European reform strategies which meet the requirements for both fiscal balance and sustainable public pension systems. Therefore, the EU should support national reform strategies by monitoring public pension reforms as well as improving the single market.
However, public pension policy should remain a national competence. In addition, the examples of the Italian and British case studies highlight that long term pension reform should be innovative and involve public, occupational and private elements.Economy Macroeconomics Social Policy Sustainability
Live Long and Prosper? Demographic Change and Europe’s Pensions Crisis
10 Nov 2015
Socialists of all colours would have us believe that government interventions and regulations are the only way to tame the animal spirits of capitalism and give it a human face. As so often with socialist mantras, the very opposite is true: only a ‘conservative economy’ can be truly humane. But what exactly is a conservative economy? First, I define as conservative an economy with minimal government intervention, organised according to the principles of competition and individual freedom and responsibility. Second, I define as conservative an economy that is embedded in a society with solid conservative morals and a wealth of spontaneously developed and organically grown institutions.
The first element was crucial in unleashing the forces of human ambition and creativity that produced what economic historian Deirdre McCloskey called the ‘Great Enrichment’ of the last two centuries. The second element is crucial in order to maintain a sense of moral restraint and community belonging, which channel these wild creative forces to the pursuit of high and worthy purposes, something the rigorous enforcement of free market principles alone cannot ensure. In the inspired words of Edmund Burke, the father of modern conservatism: ‘society cannot exist, unless a controlling power upon will and appetite be placed somewhere; and the less of it there is within, the more there must be without.’
Precisely: the progressive agenda has always been about weakening ‘the controlling power within’ (the strict moral discipline of the classical and Christian tradition) in order to strengthen ‘the controlling power without’ (government controls and regulations), with a clear loss of human freedom, diversity and spontaneity; the conservative agenda has been – and should still be – about reviving ‘the controlling power within’ in order to minimise ‘the controlling power without’, thus protecting a societal model that is both more free, more humane and better connected to the great history of Europe’s civilisation.
In my understanding, this is one of the central themes in the thinking of German economist Wilhelm Röpke, a man who certainly deserves an honourable place in the intellectual pantheon of the European centre-right. Now fallen into almost complete oblivion, except in some ordoliberal circles of his native country, Röpke was once a respected and influential personality. He is rightly regarded as one of the intellectual fathers of the ‘Social Market economy’ and considered as the intellectual mentor of Ludwig Erhard, the man who, as Minister of Economics and then federal Chancellor, engineered the extraordinary rebirth of West Germany’s economy in the 1950s and 60s, and to whom Röpke was a trusted advisor.
Precisely fifty-five years ago, Röpke published a book entitled A Humane Economy, in which he set out to reflect upon ‘the social framework of the free market’ (a free PDF version of the book is available here). The book never became a bestseller and was too focused on the ills of its author’s age to be considered a classic. However, to the extent that the ills of its author’s age are also the ills of our age, there is a great deal we can learn from it. Here are some of the lessons I retained, although I do not claim that Röpke would have necessarily illustrated them the way I do:
- In spite of its amazing power of innovation, the market is a conservative institution with precise limits. It is ‘conservative’ because it is, to borrow the expression of Adam Ferguson and Friedrich Hayek, ‘the product of human action but not of human design’. In other words, it is an organically grown institution resulting from the free and spontaneous interaction of human beings. Nobody has either planned it or can control it, and yet its results are infinitely better than anything the smartest planners could engineer because it gives free course to human cooperation and ingenuity. At the same time, Röpke explains, what makes life worthy is ‘the whole unpurchaseable world beyond the market and turnover figures, the world of dignity, beauty, poetry, grace, chivalry, love, and friendship, the world of community, variety of life, freedom, and fullness of personality’. There is no guarantee that free markets will promote the pursuit of these values, in fact they may even discourage it unless they are underpinned by healthy moral foundations.
- The European welfare state is one of the major instruments of the progressive plan to weaken ‘the controlling power within’ and strengthen ‘the controlling power without’. As Röpke explains in details, ‘a whole world divides a state which occasionally rescues some unfortunate individual from destitution from another state where a sizable part of private income is constantly sucked into the pumping engine of the welfare state and diverted by it, with considerable friction losses’. In the second scenario (our scenario), the welfare state becomes a bureaucratic machine that weakens individual and family responsibilities, distorts economic incentives, increases economic dependency and tends towards self-aggrandizement and the self-preservation of people who have a stake in it.
- An integrated European order that is both free and humane must be built on federalism and on what Röpke calls ‘decentrism’, not on centralisation and progressive planning. Calling himself a ‘European patriot’, this German intellectual who was in love with Switzerland – where he lived and taught for a long time – seems to have had in mind the Swiss model of the immediate post-WWII period when he spoke about Europe. According to him, the continent had to consolidate, recover its self-confidence, revive its political and military power and regain its due place in world politics, but it could only do so by strictly adhering to decentralisation, revitalising local communities and embracing competitive federalism: ‘decentrism is of the essence of the spirit of Europe. To try to organize Europe centrally, to subject the Continent to a bureaucracy of economic planning, and to weld it into a block would be nothing less than a betrayal of Europe and the European patrimony’. We are not very far from the European federalism I recently defended as the best vision for the pro-European right of the 21st century.
Wilhelm Röpke was all at once a Christian humanist imbued with the social doctrine of the Catholic Church, a conservative in the best central and Northern European tradition and a free market economist. He harmoniously combined in his own thinking different intellectual traditions which are now politically represented within the European People’s Party. His work deserves to be rediscovered and pondered.Federico Ottavio Reho Centre-Right Christian Democracy Economy Values
Federico Ottavio Reho
Economy with a human face: some thoughts on Wilhelm Röpke’s ‘A Humane Economy’
10 Nov 2015
A crucial negotiating session will take place in Miami, Florida from 19 to 23 October on the terms of a possible US-EU trade and investment pact. An independent study by Copenhagen Economics has calculated that a Transatlantic Trade and Investment Pact (TTIP) would add 1.1% to Ireland’s GDP. This is twice the rate of gain that would be experienced by the European Union as a whole.
I spoke recently at a seminar organised by the European Ideas Network (EIN) which is a think tank associated with the parliamentary group of the European Peoples Party, the biggest party in the European Parliament. I said that TTIP would be good for Europe because:
- It would reduce the cost of regulation by eliminating the necessity for duplicate standard setting and inspection regimes, the cost of which has to me met by the consumer without any compensating benefit
- The reductions in the cost of regulation would disproportionately help small and medium sized businesses to break into the transatlantic market. The present duplicative system acts as a barrier to entry and helps bigger well established companies keep markets to themselves
- It would open the US Federal, State and local government market to European tenders, who are now discriminated against by “buy America” rules, which deliver poor value to US taxpayers
- It would help high tech start up businesses on both sides of the Atlantic by creating a single market of almost 1 billion consumers
- It would help to keep Britain in the EU, in order for it to access this market. A failure to conclude TTIP could, on the other hand, push the UK towards the exit, on the supposition that it might be able to negotiate better on its own
- It would give a confidence boost to the global economy at a time when the burden of debt precludes other forms of stimulus
There is, unfortunately, quite a bit of opposition, in Germany and Austria in particular, to the conclusion of TTIP. This seems to be linked to a general suspicion of globalisation and a perception that it adds to inequality. Austrians are 53% to 35% against, Germans 41% to 39% and Luxembourgers 43% to 40% against. The rest of the EU is pretty overwhelmingly in favour with the biggest favourable votes in Ireland and Denmark, at 71%.
On the far side of the Atlantic, trade is not a big concern of Americans. Their big concerns, according the Pew Research Centre, remain international terrorism and building up their own economy. 69% of American under 28 believe trade deals are good, as against only 50% of over 65s.
Interestingly, 59% of Democrats favour concluding TTIP, whereas only 45% of Republican voters do so. This is opposite to the traditional position in the US Congress, where Republican Congress members generally favoured freer trade, and Democrats often did not. US public opinion will be less willing to accept European standards until the trust, damaged by the Volkswagen and LIBOR scandals, is repaired.
It is also important to recognise that differing standards sometimes reflect genuine differences in priorities among populations. For example, Europeans put a higher value on data privacy. Americans probably put a higher value on national security. So the negotiations will be intensely political..John Bruton Business Economy EU-US Trade
Why TTIP is good
12 Oct 2015
The period since the election of Syriza to power in January 2015 has been marked by increased political uncertainty, economic instability and a growing polarisation of public attitudes in both Greece and the EU. The reality of Syriza in power has worsened the underlying economic conditions of the Greek economy, reduced the ability of the Greek state to provide essential public services and led to a clear breakdown in trust with other EU members. The election of Syriza to power did not result in a fundamental restructuring of the Greek or European economies, rather their lack of a coherent strategy (beyond reneging on previously agreed support programmes) has set the reform process in Greece back by several years.
The coming to power of Syriza marked the culmination of pent-up public anger and discontent at prevailing economic/political conditions and the impact of such conditions across wider society. Notwithstanding several years of support programmes, the Greek economy requires further reform in order to ensure its long term sustainability. The shortcomings in the assumptions underpinning the initial programmes undertaken by the EU/ECB and IMF were complemented by implementation weaknesses which further eroded public support for the structural adjustments required. This resulted in a clear division arising between those in favour of the support programmes and those opposed.
The level of financial adjustment required in Greece – over 20% of GDP – imposed significant socio-economic challenges. In the public mind, ownership of the reform process then passed from national bodies to imposed, supra-national institutions, thus increasing resistance at both public and political levels in Greece. Resistance fuelled by populist political parties seeking short-term political gain.
Syriza in power has sought to deliberately widen the gulf between those who acknowledge the long term importance of the many difficult structural reforms required, and those who seek to blame “austerity” for Greece’s current woes. In reality, the experience of Syriza in power has highlighted its complete lack of a defensible economic and political strategy which safeguards Greece’s position in the EU, protects the well-being of its citizens and acknowledges the current standing of the Greek economy.
IN FOCUS is a new series of commentaries in which the Martens Centre looks closely at current policy topics, dissects the available evidence and challenges prevailing opinions.Crisis Economy EU Member States Eurozone Populism
Greece – Between farce and tragedy: Four realities of Syriza in power
16 Sep 2015
This is the title of an excellent book by Mark Mazower, first published in 1998, which I have just finished. Among the fascinating questions prompted by reading it are:
– Why did democracy, triumphant in the immediate aftermath of the First World War, become almost extinct across much of continental Europe in the following 20 years?
– Was the League of Nations policy to protect national minorities doomed to failure and was the alternative policy of ethnic cleansing, practised at the end of the Second World War, thus inevitable? Even to this day, European countries have not devised a good way of creating a sense of belonging among national and religious minorities? In some European countries, minorities now make up a disproportionate share of the prison population. Sport seems to be one of the few ways in which minorities are integrated.
– Why did the leaders of Britain and France assume that Hitler could be appeased with territorial concessions, when “Mein Kampf” had suggested his ambitions were much greater?
– Was there an alternative in the 1920’s to the return to the Gold Standard as a way of combating the rampant inflation that had been fuelled by the financing of the First World War? In a sense the euro, like the Gold Standard, is also a method adopted by many countries of breaking away from a previous vicious cycle of inflation and devaluation
– Why was the Soviet model so effective in the period from 1930 to 1950, in industrialising Russia and enabling it to defeat Nazi Germany, so ineffective afterwards in meeting the consumer aspirations of its citizens? Mazower says Stalinism was a “bad idea, implemented surprisingly well”. Communism collapsed later on, because Communist Party members had ceased to believe in it, and Russia itself had become tired of subsidizing its East European satellites to the extent of 2% of Russian GDP through artificially cheap energy.
– Why did Hitler make the mistake of killing so many people (including 3 million Soviet POWs) who could instead have been put to work in his labour starved armaments industries?
– What accounts for the surge in marriage and child births in the aftermath of the Second World War, and for the unsustainable decline in birth rates in more recent times? As the author puts it, “marriage has become a choice rather than a duty”.
– Why did European countries diverge so much in the way they developed their welfare systems after the Second World War? The UK opted for a minimum income guarantee financed by taxes, whereas most continental countries opted for pay related systems, whereby better off people paid bigger contributions to the state, but got bigger pensions on retirement. The result is that in many continental countries the biggest beneficiaries of “welfare” systems are the better off.
– What will become of nation states, when so many of the important decisions have, in practical terms, to be takes at a multinational or supranational level?
As the author puts it “nation states are becoming mere shells, with no real hold over policy, while alienation from government has increased”. Mazower says the real victor in 1989 at the fall of Communism was “not democracy but capitalism”.
But the problem we now face, as Europe tries to manage financial and banking issues, is that “capitalism does not create feelings of belonging capable of rivalling the sense of allegiance felt by most people to the state in which they live”. European Electorates continue to see all problems within a national framework, even though many modern problems cannot be solved in that framework.John Bruton Economy EU Institutions EU Member States
Dark continent – Europe’s twentieth century
30 Jul 2015
Paul Krugman, in the New York Times, urges the Greeks to vote “No” in the referendum next Sunday. So does Joe Stiglitz in another article in the Guardian. Is this serious advice, or an unhelpful extension to Europe of an ongoing American polemic?
Paul Krugman says the Euro was a “terrible mistake” because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent, and, unlike the EU, it has no general bailout fund for states.
If I recall things correctly, our present collapse in confidence originated in the United States, in a housing bubble in a small number of US states, that eventually engulfed the whole world! The US system did not prevent that.
Puerto Rico, a US dependency which is in the dollar zone, has got itself into a Greek style debt trap, without the US monetary union, which is much older and stronger than the EU one, being able to prevent it.
Krugman says that “most of what you hear about Greek profligacy is false”.
He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection and the debt accumulation that went on for decades before that, when Greece erected a completely unsustainable pension regime, on the strength of borrowed money.
He says that since 2010, the Greek economy has collapsed because of “austerity”.
He fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money? Just because a country is in the eurozone it does not mean it can have an unlimited call on the taxes or loans of other euro members.
While there is more to do, like euro area wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Paul Krugman does not acknowledge .
He says that “even harsher austerity is a dead end”, as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.
Product and labour market reforms, opening up the professions, better tax collection, and privatisations, have been an important part of the recipe urged on Greece by the EU, and these would greatly improve the allocative efficiency of the Greek economy, and promote growth. Greece needs to move its human resources out of unproductive activities, into areas that will earn money from abroad and the EU reforms will assist that.
Another Nobel Prize winning economist, Joe Stiglitz, in his article in the Guardian also calls for a “No” vote, but is more extreme.
He claims the eurozone was ”never a democratic project”. He seems to have completely forgotten that the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state that is currently a member. It was approved in referenda in several countries, including France and Ireland.
Furthermore, each of the Eurogroup of Finance Ministers, who make all the key decisions, represent democratically elected governments.
Greece was not forced to join the euro in the conditions and at the time that it did. This was a free choice of the Greek government. Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded it would destroy the basis for credit and inter state relations.
He makes a more substantial point when he says that a good deal of the money lent to Greece by the taxpayers of other EU countries and the IMF has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.
It is true that the money from the EU has been used in part to repay banks money they had put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the euro zone altogether, including from Professor Stiglitz’s own country and from the UK, in one of whose newspapers he is writing.
Back in the 2010/2012 period, thanks the crisis which started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on ANY of these banks.
There remains a justifiable argument, however, that it was unfair that the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed.
Yes, the taxpayers of the rest of the euro zone should, in moral terms, bear more of the burden.
But if that is so, so also should the taxpayers of non euro zone countries like the US and the UK, whose banks were also saved when Ireland, Greece and Portugal got help .
Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe, and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?
But then neither Professor Krugman, nor Professor Stiglitz are writing for German, Slovak, Latvian public opinion.
They are writing in journals, published in countries, whose governments are not being asked to write more and more cheques for a Greek Government, that seems to blame everyone else for home grown problems.
There is, I believe, an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse, have been fairly distributed between the governments of the world.
But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now, and be conditional on growth promoting reforms, and budget balancing, already having been fully implemented by governments seeking debt relief from it. Perhaps a Third Party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.John Bruton Crisis Economy European Union Eurozone
Krugman and Stiglitz: dispatches from a far far away land
02 Jul 2015
The debate surrounding a potential BREXIT has largely focused on the costs and disadvantages for Britain of making such a move. However, Britain leaving the EU would also alter the strengths and profile of the European Union. Britain is the EU’s second largest economy, a significant net contributor to the EU budget, hosts Europe’s only global financial centre and is an important driver of single market reform on the European stage.
In her absence, the EU will lose a key proponent of the market economy and free trade as drivers of economic growth and prosperity. In this context, while BREXIT would be a catastrophe for Britain, it would also, as this INFOCUS identifies, fundamentally change the profile and focus of the EU.
The ongoing debate over BREXIT symbolises Britain’s detachment from Brussels based European affairs, a process hastened by the economic crisis of recent years. From a London perspective, long term doubts over the viability of the Euro have been reinforced by the depth of Britain’s economic recovery (relative to the Euro zone) and by the EU’s rule based approach to furthering economic governance.
This detachment is physically apparent across the EU’s institutions. Although currently accounting for over 12% of the EU’s total population the proportion of British nationals employed in policy influencing roles in the European Commission has declined to just 5.3% in 2014. Less than 3% of all applicants taking the EU civil service exam (the concours) were British in recent years.2 In a wider context, Britain leaving the EU (and the uncertainty over the exact nature of the future relationship) poses a number of significant challenges for Brussels based policymakers.
IN FOCUS is a new series of commentaries in which the Martens Centre looks closely at current policy topics, dissects the available evidence and challenges prevailing opinions.Brexit Economy EU Member States Macroeconomics
BREXIT: Six ways it will fundamentally change the EU
26 Jun 2015
The gurus of the economic left are at it again: in ‘a plea for economic sanity and humanity’, a group of progressive economists led by Joseph Stiglitz and Thomas Piketty published yet another letter to condemn the austerity allegedly practiced on Greece. The initiative follows an earlier plea published in January against ‘the dogmatic insistence on debt repayment in full regardless of the social and political consequences’.
The distinguished signatories insist that ‘to condemn austerity does not entail being anti-reform’, and that ‘austerity’ actually undermines Syriza’s key reforms, namely its efforts to overcome tax evasion and corruption: ‘Austerity’, they explain, ‘restricts the space for change to make public administration accountable and socially efficient’. This is surely a scientifically and politically respectable perspective. But let me make some points from a different one.
First of all, let me contest the appropriateness of the term ‘austerity’ for what we have witnessed in the last years in the periphery of Europe. One would think that a person is austere when she is thrifty and saves part of her income, namely she spends less than she earns. Under this common sense definition, austerity is a virtue (yes, a virtue!) virtually unknown to all European governments. They all spend way more than they receive in revenues, and most of them have been consistently doing so for decades!
The fact that public opinions can seriously regard the attempt to curb overblown fiscal deficits and to slow down an accumulation of public debt unprecedented in the history of modern economics as ‘austerity’ is a clear sign of the dismal progressive spell which we’ve all been living under since WWII.
Second of all, the claims of the anti-austerity crowd are even more dubious when we move from Europe in general to Greece in particular. The idea that EU-inspired adjustment programmes forced Greece to adopt an otherwise unnecessary ‘austerity’ policy is a gross misrepresentation of what actually happened. Nobody said it better than CEPS Director Daniel Gros in a commentary last February:
‘it is disingenuous to claim that the troika forced Greece into excessive austerity. Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity’.
Exactly, from more than 10% of GDP to zero IMMEDIATELY. As explained in this post by IMF Chief Economist Olivier Blanchard, what is being consistently rejected by the Syriza government now is a primary budget surplus target of 1% in 2015, not exactly the ‘fiscal waterboarding’ one may expect when reading the recurrent progressive pleas for forbearance and debt relief.
Third of all, I would argue – together with many conservative economists – that the much decried austerity is nothing less than an instrument of economic liberation. Contrary to the fallacy constantly spread by progressives, austerity is not primarily about cutting, but about transferring. Specifically, it is about transferring control over productive resources from bureaucrats to individuals and companies.
Austerity does not simply mean balancing the budget by doing ‘whatever it takes’. It means balancing the budget as part of an overall reduction of public expenditure that allows people to keep more of their income and to freely decide how to spend it, instead of having government bureaucrats decide on their behalf.In other words, true austerity returns to people what rightly belongs to them and was unduly appropriated by the state in the last century of progressive drunkenness. It enlarges the scope of individual freedom and choice in our society.
Furthermore, far from restricting ‘the space for change to make public administration accountable and socially efficient’, austerity forces public administrations to limit their notorious wastes, to optimise their utilisation of scarce resources and to become more efficient.
In conclusion, the most legitimate criticism against austerity in Europe is probably that it has not really happened. Although the emphasis of ‘the institutions’, as they are now amusingly called, on balanced budgets was sound, the need for a radical restructuring of the social model that has generated Europe’s over-indebtedness was never recognised.
As we know, spending on education and health consumes 10-15% of the national income of developed countries, while replacement incomes and other transfer payments account for another 15-20%. Compared to the resources that could be freed by reorganising the provision of these services along more competitive lines, the savings imposed by the most draconian European programmes of adjustment are just cosmetics.
As long as the need for a profound paradigm change is not understood in Europe, progressives will keep attacking conservatives for imaginary misdeeds, conservatives will take the blame for policies they have never dreamt of, and common citizens will continue to suffer under the oppressive weight of a wasteful and bureaucratic social model.Federico Ottavio Reho Centre-Right Economy Growth Macroeconomics Political Parties
Federico Ottavio Reho
Austerity never happened
17 Jun 2015
The creation of jobs across Europe remains a key economic and social challenge for the EU. Given the negative impact of the financial crisis on European citizens, the EU’s ability to promote effective job creation policies will be viewed as a major success of the wider integration process.
In this context, a new approach is required to provide a growth-based strategy for creating employment across Europe. What is required is an achievable strategy based on the realities of modern EU labour markets. This research, based on an analysis of six member states, provides a set of recommendations designed to reflect the current characteristics of the EU labour markets. This research concludes that:
- EU employment policies should be simplified and better coordinated;
- Clearly defined action s should be introduced to further improve labour mobility;
- The focus of policymaking should be switched from combating unemployment to creating jobs;
- It is possible to finance the recovery by bridging the gap between investment and reform.
It’s Our Job: Reforming Europe’s Labour Markets
04 May 2015
On 26 April 2015, former prime minister of Slovakia Mikuláš Dzurinda will be taking part in the Kyiv Half Marathon. He will be leading a team of runners including members of the European Parliament Dita Charanzova (Czech Republic), Ivan Štefanec (Slovakia) and Roman Babjak, European Commission Programme Manager. Under the slogan ‘Run for Ukraine’, the team led by Mikuláš Dzurinda wants to send a clear signal that responsible European leaders have a moral obligation to show solidarity with Ukraine during the comprehensive reform process the country has embarked on.
‘This is a deeply symbolic act to show our support and solidarity with the Ukrainian people. I see many similarities between running a marathon and implementing reforms: both require long-term commitment, they can be painful at times, but nothing compares to the rewarding feeling of crossing the finish line. And they both require team effort’, said Mikuláš Dzurinda, who is currently President of think tank and political foundation Wilfried Martens Centre for European Studies, based in Brussels.
‘Run for Ukraine’ is part of the ‘Ukraine Reforms’ campaign, an initiative of the Martens Centre led by its President Mikuláš Dzurinda to bring together the expertise of senior EU decision makers in support of the reform process in Ukraine. The initiative is supported by local partners including Ukrainian NGOs Reanimation Package for Reforms and Center UA, as well as the Kiev School of Economics.
The Kyiv Half Marathon is an annual international sports event which aims to promote a healthy lifestyle and to consolidate Ukraine’s position on the international marathon circuit. For the 2015 edition, organisers are expecting more than 6,000 participants to tackle the 20km run.
Mikuláš Dzurinda is the former prime minister of Slovakia (1998-2006) and current President of the Wilfried Martens Centre for European Studies. Previously, he has held various positions in government since first entering politics in 1990. Dzurinda introduced far-reaching reforms which have enabled Slovakia to successfully join the EU and NATO. In his free time, he is also a committed marathon runner with notable achievements. In November 2001 he took part in the famous New York Marathon to show solidarity with the American people following the 9/11 terrorist attacks.Democracy Development Eastern Europe Economy
Mikuláš Dzurinda runs Kyiv half marathon in show of support for Ukraine
20 Apr 2015
If Greece defaults on its debts, and leaves the euro, the effects will be very hard to calculate. Nobody really knows what will happen. Nobody even wants to talk about it. But a very serious precedent will have been established. That precedent, that of a euro zone country defaulting on its debts and leaving the euro, will eventually place upward pressure on the interest rates charged to small euro zone countries with substantial debts. Financial markets are emotional and erratic and often fail to make distinctions that should be made.
The effect of a Greek default may not, of course, be felt immediately, thanks to quantitative easing, but the underlying precedent will tend to corrode of confidence in government bonds generally and confidence in the irreversibility of the euro, and confidence is the basis for all money. Maintaining confidence, and doing what is just and rational in an abstract sense, are not always the same thing. Just as in the private sector, a risk of not being repaid in full usually leads to a higher interest rate…a risk premium. For example, if , for legal political or cultural reasons, banks have difficulty getting hold of properties, given as security for loans that are no longer being serviced by borrowers, they will tend to charge a higher interest rate on such loans. The gap between the rate of interest banks charge, and the rate they pay for funds, will be wider than it would be if they knew they could easily realise their security, if a borrower defaults.
The rules for capital adequacy of banks, set by global banking regulators, have treated government bonds held by banks as risk free, and this has meant that banks buy a lot of government debt. If, thanks to a Greek default, government bonds are no longer risk free, this will call these rules into question. That , in turn, would make government borrowing more difficult.
The present Greek crisis was not inevitable. It is the result of a decision by Greek voters.
A few months back, it looked as if the Greek economy was about to start growing again, admittedly from a low base. For example, as recently as August 2014, Deutsche Bank forecast that the Greek GDP would grow by 2.2% this year. This was to be almost twice the forecast growth for the euro zone as a whole, and second only to the forecast growth for Ireland of 2.3%, which has proved to be a big underestimate in the Irish case. Greece had put in place a lot of structural reforms, under the previous Greek government, more than almost any EU country by some measures. The labour market reforms improved the competitiveness of the Greek economy, but the full benefit of these reforms was not achieved because of cartels protecting some professions and services. The reform programme of the previous government was not a “failure”, but it was delivering results too slowly for an impatient electorate in Greece. 40% of loans in the Greek banking system were non performing, but the banks were not dealing with this. Greece was suffering a brain drain.
That prospect of 2.2% growth in the Greek economy was blown away by the uncertainty caused by the Syriza election victory, and the nationalistic rhetoric and grandstanding that surrounded it. This led to a flight of confidence, and money, from the Greek banking system and an unwillingness of foreigners to invest in Greece as long as the political uncertainty persisted. It did nothing to slow the brain drain.
The new government threatened to undo the labour market reforms and to make it more difficult for Greek banks to deal with non performing loans.
The structural reforms, put in place by the previous Greek government, had begun to work, when they were derailed by politics.
Syriza won office on a false platform which asserted that the previous structural reform programme had been a “failure”. It had not been a failure, it had brought Greece to the point where its forecast growth rates for this year were second best in the euro zone. It had simply taken longer to work than it , if international conditions were more favourable, and if it had been extended as vigorously to the professions, and to tax evasion, as it had been to employees.
Syriza convinced Greek voters the “austerity” was a “failure”, without saying what those terms meant in practice, but implying instead that others should pay Greece’s debts for it, as part of some sort of moral obligation the rest of the world had to Greece. This was naive. Greeks forgot that other EU nations have electorates too!
If one is spending more than one is earning, “austerity” is inevitable, sooner or later, unless you can achieve a rate of economic growth that is faster than the growth in your state’s obligations. That was always going to be difficult for an ageing society like Greece, with an under funded pension system, and a disproportionate amount of early retirement.
The tragedy is that modern election campaigns have become shouting matches, that do not lend themselves to the sort of informed discussion that would have led voters to see, in time, the fallacy of policies that imply that one can persistently consume more than one is earning, without eventually facing “austerity”.
There is some ground for hope. A deal can be reached. Because of the nature of its support base, Syriza may have more freedom to tackle tax evasion and cartels in the professions, than the previous government. This could get Greece back on a growth path, so long as Syriza does not attempt to reverse the reforms the previous government HAD put in place.John Bruton Crisis Economy
What happens if Greece defaults?
20 Apr 2015
The Transatlantic Trade and Investment Partnership (TTIP) aims to remove trade barriers between the world’s two largest economies – the EU and the US. The goal is to create growth and jobs on both sides of the Atlantic. There are three pillars upon which any future agreement will be based:
1. Market access for businesses
2. Enhancing regulatory cooperation; and
3. Setting international rules
However, the opposition to TTIP in Europe has increased significantly. This opposition reflects broader discontent at existing political structures, the continuing fall-out of the economic crises evident in Europe since 2008 and the concerns many Europeans feel about the revelations concerning the National Security Agency (NSA). Empirical data, however positive, will not be sufficient to successfully counter anti-TTIP arguments. For many, the benefits are intangible and too long-term.
As noted by the British Parliament, “the traditional political hurdle for trade agreements is that potential benefits are diffuse while potential costs are concentrated”. In this context it is important not to rely disproportionately on headline quantitative data, but rather develop real narratives to counter anti-TTIP arguments, which are often not based on the realities underpinning the TTIP process.
IN FOCUS is a new series of commentaries in which the Martens Centre looks closely at current policy topics, dissects the available evidence and challenges prevailing opinions.Economy EU-US Trade Transatlantic
TTIP: 11 Myths Exposed
02 Apr 2015
For the Wilfried Martens Centre for European Studies, 2014 was a year of significant changes that reflect the organisation’s maturity and its established position on the European think tank scene.Democracy Economy Elections Foreign Policy Transatlantic
Activity Report 2014
19 Mar 2015
Acemoglu and Robinson have produced a book that has attracted a lot of interest and discussion amongst the ranks of political scientists, institutional theorists and development economists. They attempt to answer a fundamental question that has occupied some of the greatest minds of our age and that has produced a number of illustrative theories.
It is no mistake that the writers choose to address all these theories in the second chapter of the book (titled under the provocative label “Theories that don’t work”). First, they criticise Jeffry Sachs’s approach of economic geography and move on to tackle the vast bibliography that attempts to associate cultural characteristics with economic prosperity (here they point to Max Weber and his monumental work on the Protestant ethic and the spirit of Capitalism).
They try to deconstruct what they call the ‘ignorance hypothesis’: the theory that political leaders simply do not know the way to lead nations towards prosperity and sustainability. The two authors point out that all these theories fail to explain long-term trends of inequality. They also fail to account for the contributions and the effects of cultural exchanges; of political horse-trading and of the numerous financial aid programmes that have been offered in order to tackle global inequality.
The two renowned professors articulate at length their main argument which is easy to understand and supported by strong historical and modern empirical evidence.
For Acemoglu and Robinson, the main reason that nations prosper or collapse has to do with the structure and the functioning of their central institutions. Concretely they go further than other theorists (see North, Wallis and Weingast in ‘Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History’, 2012) saying that having the effective monopoly of violence or even the ability to form ruling dominant coalitions is not enough. They argue that it is necessary for the majority of the population to be included inside the governing structures. Inclusiveness here is not strictly limited to the input side of the political process. It also refers to the equal (or at least to the fair) apportioning of economic benefits.
In fact, the notion of inclusiveness, as used in ‘Why Nations Fail”, implies that having people participating at the input phase of policymaking, would inevitably lead to the creation of rules, norms and conventions that will also promote fairer output sharing. Thus the book argues that the fate of nations is closely correlated to whether they are ruled by extractive (that disseminate benefits to limited privileged groups) or inclusive institutions.
A quite significant part of the book is dedicated on listing and explaining cases that are meant to confirm the original hypothesis. The most telling and characteristic example supporting this hypothesis regards the city of Nogales- which lies right on the border between the US and Mexico. The city is administrationally split in half- the southern part is governed by the Mexican national and regional authorities, while the north forms part of the US. Unsurprisingly, despite their common geographical location and their regular cultural exchanges, the US part is far more prosperous rather than the Mexican one.
For the writers it is obvious that this is because of the different respective national and regional institutions that are operating in the two parts of the city. US institutions are far more inclusive and prosperous as opposed to the Mexican extractive state. ‘Why nations fail’ is a compelling book that attempts to explain and interpret the mechanics of history by adopting a macroscopic method to it. The approach used in the book was heavily influenced both by institutional theory (as developed by Douglas North) and by Lipset’s theses on democracy and economic development.
However, the book is not bereft of imbalance.
The argumentation about inclusiveness as the central factor in whether nations fail or prosper does not acknowledge other important exogenous factors that shape the status of nations. For example, the book fails to point out that violence between states is also a major variable that can decide the emergence or the destruction of nations. Carthage was raised to the ground not because its institutions were not inclusive enough but because it faced a powerful enemy (Rome) that, at a certain point, had focused all its efforts and resources on destroying the city. Similarly, global economic imbalances can lead nations with inclusive democratic institutions into chaos and disorder. For example it is undeniable that the global economic turmoil that erupted in the 1920acontributed to the fall of numerous European democracies and thto the rise of fascism.
Further, the causality between inclusiveness and success is not sufficiently demonstrated. There are several examples of nations that had inclusive and functional institutions but still failed. Inclusive democratic institutions do not guarantee the establishment of governments that are responsible and prudent. It is even possible that the electorate will give power to a government that will fgovern destructively. Such governments may lead nations into druin and the margins of history. Collective rationality does not necessarily lead nations to the best decisions.
In today’s globalised world exogenous variables such as technological trends; international dynamics; security and economic risks can prove to be as decisive for the fate of a nation as its institutions. Acemoglu’s and Robinson’s argument is far from wrong but it is not the whole story of modern governance and nation-building. “Why Nations Fail” is without a doubt an insightful book but it is also clear that its authors would prefer it to be a magnum opus regarding the study of institutions and statecraft. Me thinks this is not the case.Development Economy Leadership Macroeconomics Society
Why nations fail: A book review
18 Mar 2015
Book review: European Spring: Why Our Economies and Politics are in a Mess and How to Put Them Right, by Philippe Legrain
The efficiency of Europe’s reaction to the post-2008 economic crisis continues to fuel a vibrant debate. Was austerity the best solution to the problem or did it make things worse by creating a vicious circle of underdevelopment? Did European leaders respond effectively to the challenge or did they get carried away by developments which they just couldn’t control? And what about the European Union itself? Was the crisis a positive test for its coherence or did it prove that it was ill-equipped and badly prepared to deal with extraordinary conditions?
This debate lays the background of Michael Legrain’s analysis which can be found in his much discussed book, European Spring. Legrain argues that Europe has made a series of mistakes, the most important of which is the obsession with fiscal austerity. For Legrain austerity measures not only did not cure the illness of public debts, but on the contrary plunged the members of the European Union into a much deeper recession. The ‘medicine’ had exactly the opposite results than the ones expected. It drained economies of valuable resources without dealing with the deeper underlying causes of the problem: Europe’s low productivity and low competitiveness in comparison with the United States, China, India, Brazil, as well as other emerging economies. He even suggests that the German example, which is presented as the model that other European countries should follow, is nothing more than an illusion.
Apart from describing the grim picture, Legrain makes suggestions on how to build a brighter future for Europe. He seeks the answer in a combination of economic and political renewal. European economies should try to become more adaptable to rapidly changing conditions: openness and flexibility seem to be the key words here. From a political point of view, he argues that Europe should not hesitate to experiment with new forms of democracy (including direct democracy) which will make citizens more actively involved. Economy and politics are seen as the two sides of the same coin. Despite the great obstacles, the author remains optimistic. On condition that European countries make the necessary reforms, he believes that they still stand a good chance of overcoming these obstacles and that the European Union will continue to remain a focus for development in the long term.
Legrain’s book is crisply and obviously benefits from its firsthand knowledge of EU decision making at the highest level based on his period as an Economic advisor to then Commission President Barroso. His arguments are very well articulated and can be easily understood by the average reader. He appears to have an answer to every question. However, one cannot refrain from thinking that many of the things he proposes are easier said than done. Innovative ideas often seem too good to become reality. But that’s exactly what makes them ever more appealing!Antonis Klapsis Crisis Development Economy European Union Macroeconomics
Easier said than done
16 Dec 2014
There is an ongoing debate about budget cutting in the world today, because revenue coming in is not matching the promise Governments made to their people of availability of pensions, unemployment support and health services.
This problem is particularly acute in countries whose populations are getting older faster, like Finland and Germany. Who would suffer most if crude, across the board cuts in Government social spending were made? The table below, which appeared in a recent OECD report, shows some surprising results.
In some countries the top fifth of income earners are the biggest beneficiaries of social supports in the form of cash payments from Government! In fact, France, Italy, Austria, Portugal, Ireland and Spain give a higher share of their cash social supports (pensions, unemployment and disability supports) to the top fifth of their population than to the bottom fifth.
In contrast, Sweden, the UK, Finland, Belgium and the US give more to the bottom fifth. The share of cash benefits paid to households in the lowest income fifth of the population is highest in Norway and Australia at 40%, compared to around 10% in Mediterranean countries and 5% in Turkey. In these latter countries, social transfers often go to richer households, because these benefit payments are often related to a work-history in the formal sector and often concern pension payments to retired workers. Earnings-related social insurance payments also underlie substantial cash transfers to the top income fifth in Austria, France and Luxembourg.
Perhaps the most striking thing about this chart is that the average OECD country distributes almost exactly 20 per cent of cash benefits to both the top and bottom fifth of the income distribution. Some governments do less “social spending” in places where the private sector fills in the gap, particularly when it comes to pensions and health insurance. In the Netherlands, Denmark, the US and the UK for example, private pension payments are worth about 5% of GDP each year, while American spending on private health insurance is worth nearly 6% of GDP.
Some countries spend more on those of pension age, others spend more on those of working age
There are interesting contrasts in where the money goes. Pensions paid by government are 5.3% of GDP in Ireland and 5.6% of GDP in the UK, but they are 13.8% of GDP in France, 14.8% in Greece and 10.6% in Germany.
In contrast, income support by Government for those of working age are 8.3% of GDP in Ireland, as against just 4.7% in France, 5.1% in the UK, 3.8% in Germany and a mere 3% in Greece (notwithstanding the country’s high unemployment).
In Ireland’s case, it is worth noting that 40% of the unemployed who receive income support from government are long term unemployed (i.e. more than a year out of work). The OECD has said that their skill levels are inadequate to the modern economy, which is a big long term concern. The longer people are out of work, the harder it is for them to get a job. I heard one person describe the experience of long term unemployment as worse than losing a spouse.
Meanwhile, the number claiming various forms of illness benefit has increased by 47% in the last 14 years from 150,000 to 220,000. This is surprising in light of the improvements in spending on health services in Ireland in recent years. Health spending as a percentage of GDP is 8.6% in France and 8% in Germany as against 5.8% of GDP in Ireland, which is below the OECD average of 6.2%. But health spending is rising in Ireland and the National Competitiveness Council says that since 2001 Ireland has had the fastest rate of inflation in health insurance costs of 17 Euro area countries.
These contrasts make it harder to devise a common policy for the Euro area
These contrasts between countries make it harder to devise a common economic policy, even for the countries who share the euro as their currency. They lie behind some of the arguments about immigration in the European Union and the accusations of “welfare tourism”. These accusations are mostly wrong
For example, a recent study in Germany showed that the average immigrant to that country pays 3,300 Euros more in taxes and social contributions than he/she takes out in benefits. In fact immigration yields a 22 billion euro surplus to the German taxpayer. Yet 66% of Germans believe immigrants are a burden! The same applies to the UK.
In countries where government spending goes to the well off, one can expect well placed interest groups to be particularly effective in resisting changes or reductions in expenditure.
Another conflict of interest will be between households with high debts, who are finding it hard to meet their obligations, and households who have made significant savings over the years and who wish to protect the value of those savings. Household debt, as a percentage of household disposable income, is 326% in Denmark, 288% in the Netherlands and 230% in Ireland as against 58% in Poland, 90% in Austria and 94% in Germany.
For example, a policy that favoured low interest rates and inflation would benefit the debtors, but hurt the savers. The savers would also have an interest in protecting the value of the bonds issued by banks, companies and governments in which their pension and insurance funds are invested. Debtors, on the other hand, would be more relaxed about “burning “ these bondholders.
These genuine differences of interest need to be brought out into the open because there are reasonable concerns on both sides of the argument.John Bruton Economy EU Member States Social Policy
Who benefits from government social spending?
08 Dec 2014
Banking Economy Energy Innovation Jobs
Economic Ideas Forum 2014, Bratislava – Conference Report
01 Dec 2014
Marcin Piatkowski is a Senior Economist at the World Bank in Warsaw specializing in central Europe. He speaks about the historically unprecedented success of Central Europe in the last 25 years, especially that of Poland, argues for the need to adopt a new growth model called “The Warsaw Consensus” and offers insights on introducing the Euro in Poland and the surrounding region.
What are the prospects for central European economies?
In general, the new EU member states in central Europe have performed extremely well during the last 20 years. They have grown much faster than their western European counterparts. Poland, Slovakia and Estonia have developed much faster than most emerging markets. Poland, the most successful economy in Europe over the last quarter of a century, has grown even faster than the so-called Asian Tigers such as Singapore or Korea.
As a result of this historically unprecedented growth—central Europe has never grown so fast in the past—the average income across the region increased from about forty per cent of the average western European level twenty years ago to around sixty per cent now. Countries like Poland, Slovakia and Estonia have shortened the distance to the West to an extent never experienced before.
Quality of life is even higher than suggested by the level of income, as reflected in the relatively high life expectancy, easy access to modern technology and low levels of crime. In terms of technology, the region has even leapfrogged the West. For instance, in Poland there are more touchless credit cards users than in Germany. In most of Central Europe, citizens have never had life so good. Poland, Estonia and Slovakia have entered their new golden ages.
However, while prospects for continued growth and catching up are generally positive (according to the IMF, Poland, for instance, is projected to grow more than twice as fast as Germany at least until 2019) past performance cannot guarantee future success.
What reforms and policies are required in central Europe?
Central Europe will have to continually readjust its growth model to continue to catch up. Given the inherent economic potential, most of central Europe should be growing at four per cent or more a year rather than the current two or three per cent. The speed of growth will decide whether central Europe will catch up with western Europe within a single generation or if it will take much longer. In the worst case scenario, the convergence process could stop altogether.
Central Europe needs to base its growth on a re-adjusted economic model which I call ‘The Warsaw Consensus’. It is based on ten policy pillars including inter alia domestic savings; high employment; labour markets open to immigration; strict supervision of the banking sector and a new focus on well-being rather than only GDP. Among other policies, central Europe has to continue to focus on employment, education, and innovation.
First, central Europe needs to substantially raise the employment rate: today only two out of three people work, while in the West it is three out of four. Raising the employment rate to the western European level would help accelerate growth; reduce inequality and improve the long term fiscal situation. Labour markets have to offer jobs to every one capable of working.
Second, the quality of education needs to increase further. While many countries in the region have achieved a remarkable improvement in primary and secondary education, the quality of tertiary education still leaves scope for improvement. There are no central European universities that belong to the global elite. This needs to change if the region wants to start to compete with the best global minds.
Finally, central Europe needs to enhance innovation. This is a significant challenge, as technological innovation has never been a strong part of the region’s DNA. There are only few examples of global innovations developed by central Europeans, however, most of them have not been commercialised, as in the case of Copernicus or Marie Curie-Sklodowska. Central Europe, now, has possibly the last chance to use another fifteen billion euro of EU funds available to support innovation until 2020 to adjust its economic DNA to move from imitation to innovation. From quantity to quality. From importing to exporting ideas.
How will the ageing population affect future economic development?
The challenge is that we may grow old before we grow rich. That being said, increasing life expectancy is the best outcome we could desire because the ultimate goal of economic growth is to allow us to live longer and healthier lives not the other way around. However, when talking about demographic changes we are missing one very important variable which tends to be pushed aside: immigration. The fertility rate across the whole region is low, below 1.5 children per woman. We would need a fertility rate of 2.1 for the generations to simply replicate themselves. We thus need to enhance our pro-family policies to make sure that the fertility rate increases.
However, due to cultural changes and a new family model, I am convinced that pro-family policies alone will not be sufficient to achieve the replacement fertility rate. Germany, which spends over ten times more on pro-family policies than Poland, has a similarly low fertility rate. More money will not solve the problem. It will thus be inevitable to fill the demographic gap by opening up to immigration. Central Europe should invite young people from all around the world to fill the increasing gaps in labor supply.
This could start from eastern Europe, whose citizens could integrate into our labor markets and societies with relative ease. The same passion with which we attract foreign direct investment, FDI, we should also deploy to attract foreign human investment: FHI. Highly-educated, young, entrepreneurial and energetic people should be our targets. An optimal way to attract young immigrants would be to open central European universities to foreign students.
Why Poland seems to be now more successful than other countries in the region?
It is likely due to a couple of factors. Poland, unlike all the other countries in the region, is a large economy, representing 40 per cent of the region’s GDP. It’s more than twice as big as the Czech Republic and three times as big as Hungary. Such a large economy has allowed Poland to base its growth largely on domestic rather than external demand, insulating the economy from external shocks.
Second, Poland started from a much lower income level. Back in 1989, it was one of the poorest countries in the region, behind Hungary or the then Czechoslovakia. It’s easier to grow when you start low, as in seen also with China.
Third, Poland witnessed a truly historical expansion of tertiary education. In 1989, Poland had 400,000 students. Today it has 1,600,000 students. Almost sixty per cent of young Poles are now taught at a university level. The quality of education is close to the European average. Poland has also done a lot to improve primary and secondary education.
When you look at the OECD Pisa study that looks at the quality of education of 15 year olds around the world, Poland is doing extremely well: Polish 15 year olds are better educated that most of western Europe and the US even though Poland spends less than half on a student than in the West. If I were to exaggerate a little bit, I would say that Poland is producing geniuses on the cheap.
Finally, from the very beginning Poland was lucky with the quality of its economic policy makers, who were competent, committed and honest. They also knew where they were going: towards Europe and joining the EU. They knew that Poland needed to become more open, more liberal, more entrepreneurial and more Western. Throughout the last 25 years there was an implicit consensus among all the parties both in power and in the opposition that Poland needed to become “European” again. And it has worked well.
Were you never challenged by Euroscepticism as seen in Hungary or the Czech Republic?
Poles are quite supportive of the EU. 80 percent of Poles support the EU. They have seen the benefits of EU accession and how the European convergence machine continues to work, taking in poor countries and making them rich. They have become the most European among all the Europeans. Had it not been for the institutions, values, norms and funds that Poland has received from the EU in the last twenty five years, it would have never achieved such remarkable success and never entered its new Golden Age. Poles are supportive of the EU also for geopolitical reasons.
Do you still believe in the big bang introduction of Euro as you wrote in an article for the Financial Times in 2008?
What I meant in this article was that at that time there was an opportunity to introduce the Euro to more countries on the condition of strengthened fiscal rules. I also argued that the exchange rate criterion for euro zone entry, i.e. the ERM II mechanism that requires countries to keep their currencies within a +/-15% band relative to the Euro, could be a challenge, especially for countries with floating exchange rates such as Poland. This is because entering ERM II would expose them to potentially destabilizing currency attacks.
The vast fluctuations of the Euro itself against the dollar show how hard it is to keep the exchange rate stable in the context of globalized currency markets driven by portfolio flows. The risks are particularly high for the Polish Zloty, which is the most liquid currency in Central Europe and a currency of choice for global speculators. Successful passage through ERM II would then require very careful planning and strong support of the ECB.
But do you still think that the best way is: “Euro as soon as possible”?
The introduction of the Euro cannot take place overnight but it is still the way to go. The euro would help to further enhance macroeconomic stability in the region, expand trade and increase private investment. It would thus help accelerate growth and allow Poland to catch up with the West faster, the current situation in the Eurozone notwithstanding. Central European countries that have already adopted the euro are on the whole doing well.
However, before entering the euro zone, countries like Poland first need to do their homework. This includes sustainably reducing budgets deficits to below 3 per cent, keeping public and private debts in check and reforming the economy so that its competitiveness is increasingly based on quality rather than quantity. Fewer potato chips, more micro-chips.
Interview by Vladka Vojtiskova. The interview presents personal views only.
Dr. Marcin Piatkowski was a speaker during the fifth annual Economic Ideas Forum that took place in Bratislava on 16-17 october 2014. He is a Senior Economist at the World Bank in Warsaw, former Chief Economist of PKO BP, the largest bank in Poland, economist in the European Department and Advisor to Executive Director at the International Monetary Fund in Washington D.C. He is an Assistant Professor of Economics at Kozminski University in Warsaw. He also served as Advisor to Poland’s Deputy Premier and Minister of Finance. He has recently published papers on “Poland’s New Golden Age: Shifting from Europe’s Periphery to Its Centre” and on “The Warsaw Consensus: The New European Growth Model” He tweets using @mmpiatkowski and can be reached at firstname.lastname@example.orgEconomy EU Member States Eurozone Growth Macroeconomics
Central Europe: move from imitating the West to innovating!
19 Nov 2014
The European Union is a union of sovereign states, who are sovereign in that they are entirely free to leave the EU. This freedom to leave means that the EU is not a “super state”. There is no coercive force, no EU army, to force Britain or any other country to remain in the EU. Britain enjoys a freedom, within the EU, that colonies did not enjoy within the British or other European Empires.
Britain is thus entirely within its rights in considering the option of leaving the EU, although that does not mean that such a course would be wise.
The EU does not exist on the basis of coercion. It exists on the basis of common rules, or Treaties, applicable to all, interpreted independently by the European Commission and the European Court of Justice, that EU countries have so far freely abided by, even when particular decisions were not to their liking. If countries started systematically ignoring EU decisions, the EU would soon disappear.
One set of particularly important set of EU rules are the ones that apply to budget deficits and debts of EU countries within the euro zone. These rules have been incorporated in EU Treaties and in Treaties between Euro area states. One of the provisions is that if a country has an excessive deficit, it must reduce that deficit by an amount equivalent to 0.5% of GDP each year until it gets its deficit below 3%.
France and Italy, big states that were founder members of the EU, have both produced budgets for 2015 that do not comply with the rules. Previous commitment they gave to get their budget in line have not been kept. Initially the European Commission objected to their 2015 budgets, and both countries have adjusted their budgets a little. But, even after these revisions, the budgets are still in breach of the EU rules.
Some will argue that it is the rules that are at fault, not France and Italy. If inflation is negative, debts increase in value, while prices are falling. Countries are then caught in a debt deflation trap of a kind that was not envisaged when the rules were drawn up. But that is an argument for changing the rules, not an argument for ignoring them, or pretending they have been complied with when they have not been.
Neither France nor Italy have taken the sort of steps that Ireland, Greece, Spain and Portugal have taken to bring their fiscal situation into line. Nor have they implemented structural reforms that would release growth potential , as Spain and Greece have done. Thanks to reforms it undertook under pressure, Greece is set to have one of the fastest growth rates in the EU in 2015 and 2016, along with Ireland. French and Italian laws have rigid protections for insiders in the job market, but leave a choice of temporary low paid contracts, or unemployment, for the rest of their people. Their administrative, legal, and tax systems need urgent reform.
Obviously, the European Commission will try to be politically realistic with both countries, but a single currency cannot work for several countries unless there is either a single government, which we do not and will not have in the euro zone, or rules that are transparently and uniformly applied to all countries, big and small.
Some would argue that the rules should be changed to take account of the problem of the debt trap caused by deflation, which is Italy’s problem (but not that of France). There is a good case for this. But changing the rules would require EU Treaty change, and nobody wants to change the Treaties, because a Treaty change would have to be unanimously agreed among all 28 EU states.
Other states fear that proposing any Treaty change now would be an opportunity for Britain to use the lever of blocking a Treaty change unless British demands for
– a restriction of free movement of people within the EU,
– vetoes for a minority of national parliaments on EU legislation and
– the scrapping the goal of “ever closer union” within the EU,
This is a form of blackmail, but it has happened before in EU affairs. But British domestic politics should not be allowed to prevent Treaty reform for the euro zone, of which Britain is not even a member!
If the EU is unable to change its Treaties, because of blockages like this, the EU will eventually die. A state would cease to work if it cannot change its constitution. It is the same with the EU. Necessary EU Treaty change cannot be dodged indefinitely.
In a recent commentary, Daniel Gros of the Centre for European Policy Studies has criticised the European Commission of Jean Claude Juncker for failing so far to either
a. Insist that France and Italy stick by the existing fiscal rules or, if not
b. Call for a revision of the rules to take account of the exceptional deflationary conditions that exist
He is right .John Bruton Economy EU Member States Macroeconomics
The EU is a union of rules, not a union of force
08 Nov 2014
According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels. Italy has given an indication that it will meet the European Commission half way and make some further adjustment, but France is taking a harder line.
If France, as a big country making up 20% of the Euro area’s GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller euro area countries, this would do great damage to the credibility of the euro, and could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to all EU states that France overcomes it’s problems.
In recent years, France has lost competitiveness, and is running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.
The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.
The loss of competitiveness of France is due to several factors
+ Fewer people are working fewer hours for fewer years. For example, of people between 55 and 64 years of age, only 44% are still working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and 58% in the UK.
+ There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones. Last year 80% of all new jobs created in France were on temporary contracts.
+ The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire. So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has. 90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.
+ Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to extra costs and loss of exports by French companies.
The current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, may be slow in coming, perhaps not in time for the 2017 elections.
There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success. Meanwhile business leaders are afraid to speak up about the global realities France must face.
Faster growth is crucial, and the margin between success and disaster is very narrow. If the French economy grows at only 1% per annum over coming years, France could be on the road to ultimate default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties.
The stimulus for French growth will have to come to come both from inside and outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.
The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf. German economists may accept the Keynesian idea that one should spend extra in a down turn but they doubt if the other, essential, side of Keynes’s theory-running surpluses during the good times is politically realistic, and the historic evidence supports them.
Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.
France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other EU countries’ energy industries do.
Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.John Bruton Crisis Economy EU Member States Eurozone
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth. France needs a new politics, even more than it needs a new economic model.
France…solving the problems of the Eurozone’s second biggest economy
28 Oct 2014
Germany runs a current account (trade) surplus which is almost twice that of China. (The actual figures are USD 278.7 bln USD for Germany and 164.8 bln USD for China according to latest official data). Although this may be viewed as a sign of growth and competitiveness of the German economy, one should go beyond the headline reading and look at both the causes of this performance and its long term implications.
In very simple terms, a trade surplus is defined as the difference between a country’s exports and imports – in other words, it is the difference between consumption of the country’s goods and services by citizens of other countries less the consumption by citizens of the country of imported goods and services.
A beautiful summary of this phenomenon had been provided by Martin Wolf in the Financial Times who wrote that “Export surpluses do not reflect merely competitiveness but also an excess of output over spending”. (Martin Wolf, “Germany is a weight on the world”, Financial Times, November 5th, 2013). At the same time, there is significant room for expanding investment in Germany. At the moment, German government spending as a % of GDP is well below the European average. This is accompanied by limited real earnings growth (salaries and wages) combined with relatively high levels of taxation. This mix leads to a decline in spending – thus harming consumption – including consumption of imported goods – and increasing further the trade surplus. The latest set of macroeconomic statistics which showed a decline in German industrial production by 4% in August and a decline in GDP by 0.2% in Q22014 are definitely a cause of concern.
Trade surpluses can be viewed as an example of “beggar thy neighbour” policy. Surplus countries hide their weak domestic demand via strong demand for their products elsewhere in the world, i.e. exports.
It is common sense that this is not a situation that can be sustainable in the long term. Competitiveness is a relative term. A competitive economy comes hand in hand with a non-competitive economy on the international level.
As the situation stands, over-reliance in export driven growth renders the German economy vulnerable to external shocks – primarily a decline in global demand. For long term equilibrium, domestic demand has to pick up. Increased domestic demand will insulate the German economy from the risk of external shocks, but will also benefit the Eurozone as part of the increased spending will be spread to goods and services in the rest of the EU.
Should the picture painted by the last set of macro figures prove to be permanent rather than seasonal, Germany runs the risk of running into a difficult to escape recession spiral. Germany’s “Wirtschaftwunder” of the past decade was based on high investment and productivity growth. A continuing low level of investment in Germany could become a counter factor for the long term competitiveness of the German economy. Most importantly, it could become a counter-factor for the revival of the Eurozone economy.
Increased government spending combined with incentives for investments is the right policy mix to minimise the risk of running into a recession spiral in the medium-long term.Maria Spyraki Economy EU Member States Macroeconomics Trade
Is it time to talk about the surplus?
23 Oct 2014
I have been in Hangzhou in the past week attending a Global Investment Conference organised by Euromoney. Hangzhou was for a time the capital of China and the biggest city in the world. It is about 200 km from Shanghai, or an hour’s journey on the high speed train, a trip that I was told costs only 10 euros. Hangzhou was a centre of the silk business and was visited by Marco Polo. Silk from Hangzhou went along the ancient Silk Road all the way to Europe, thereby making Hangzhou one of world’s first globalised economies.
I spoke in Hangzhou just as the Asia Europe Economic Meeting (ASEM) of heads of Government was taking place in Milan. As the President of the European Council, I attended the first ever ASEM meeting in Bangkok in 1996. I met the Mayor of Hangzhou and key commercial and political figures.
Since 2010 there has been a huge surge in outward investment from China in the rest of the world, jumping from 6.1 billion euros to 27 billion euros in just three years. This investment is going into buying high tech companies, companies with globally known brands, and tourist resorts (like Fota in Cork). Just as China’s export drive enabled it, not only to gain income but also to gain market knowledge, this wave of investment is also designed to strengthen China’s global competitiveness and sophistication.
Children in the Shanghai are getting the highest test results in Maths, Science and Reading comprehension in the global PISA tests, which shows that they will provide strong competition for European and Irish children in the global economy. Irish Universities are accepting Chinese students and also investing in developing University facilities in China. This will help China to become a high income economy, its people enjoying lifestyles that will make similarly exorbitant demands on global resources, to the ones already being made by European and American lifestyles consumers.
Wage levels are rising fast in China, as demand for workers is beginning to exceed supply, partly thanks to the one child policy. China is losing low cost jobs to Vietnam and Mexico, so it has no choice but move higher up the value chain.
There is a shift in the allocation of credit away from big, relatively inefficient, state owned heavy(and often polluting) industries, towards privately owned businesses in the consumer goods sector. While the raw GDP growth rates in China may decline as a result, the life style enhancing quality of future GDP will improve.
China is becoming a middle class country, with middle class tastes and material aspirations. With wealth has come anxiety, with many Chinese wanting to invest some of their savings overseas. This provides opportunities for the Irish international financial services industry.
While I was in Hangzhou, the protests in Hong Kong were still under way. The protesters wanted anybody to be eligible for election, not just candidates approved by a single nomination committee. I read an article on this controversy in the “China Daily”, by an Indian Professor, M D Nalapat, entitled “Hong Kong must avoid the democracy trap”, which challenged the notion that, at every level of economic development, democracy is a guarantor of economic success.
He also said: “ Political chaos can act as a speed breaker for rising Asian economies, dampening the challenge they pose to western counties. Iraq, Egypt, Libya and Ukraine are examples of countries where hundreds of thousands of youths believed that replacing of existing structures through street protest would result in a better life. Instead what they have got are deteriorating living standards and increasing insecurity.”
This is unfortunately a fair comment, and demonstrates the danger of making exaggerated claims of automatic economic advantages from any change of governmental system. Democracy requires patience and self restraint, sometimes absent in recently liberated societies.
Professor Nalapat went on: “Hong Kong is still moving upward, when the present generation in the US and the EU are worse off than the generations preceding it”
This is a superficial comment. Mature economies will never have, or need to have, the same rates of economic growth as economies, like China, which are in the “catch up” phase. Indeed, there is a case to be made that, beyond a certain level of economic development, diminishing returns in human wellbeing and environmental quality set in. 5% plus annual growth rates cannot continue to infinity…..anywhere in the world.
It is not surprising that an article like Professor Nalapats’ should appear in the “China Daily”, but is troubling that it should be written by an Indian, an inhabitant of the world’s largest democracy, a country in which there are 3 million freely elected legislators at differing levels of government, with real competition between parties unlike the tightly controlled system obtaining in China.
But Professor Nalapat is showing that people in the developing world are watching European and North American democracies, as we squabble about how to restore dynamism and optimism in the wake of the 2008 economic crisis, and are drawing conclusions about our systems of government, and the capacity of those systems to enable us to get our economic act together, and democratically to reconcile citizens expectations with economic realities.John Bruton Democracy Development Economy Education Trade
Reflections from the Silk Road
20 Oct 2014
Bond markets are notoriously fickle. They often seem to be driven by sentiment rather than deep analysis. The experience of 2006-2008 shows that they are not infallible. They are not a good guide to long term economic prospects. Rating agencies seem to follow sentiment rather than lead it. They are like a bus driver who is looking out the back window of the bus rather that at the road in front.
This is the context in which France and Italy should be assessing the wisdom of submitting draft budgets this month to the European Commission, in accordance with the Stability and Growth Pact, that go back on commitments they had previously given to reduce their budget deficits to below 3% of GDP.
The low rate of interest at which most European governments can borrow at the moment can be explained by two factors, which are not necessarily permanent:
1. Sovereign bonds, that is bonds issued to allow governments to borrow, are treated as entirely risk free assets in the balance sheets of banks under the rules the EU has set for calculating the solvency and adequacy of capital of banks. This is a somewhat artificial assumption, in that it implies that there is a ZERO risk that a European Government will ever default on its bonds i.e. fail to pay all the interest due and repay the bond in full and on time. The scale of debt relative to income of some European countries might lead some to question this assumption, unless of course there is a big surge in either inflation or economic growth
2. Prevailing interest rates are now so low, the amount of money seeking a home is so great, and high yielding investments are so scarce, that it is not surprising that investors are turning to government bonds, and thus driving down their interest rate. But if the flow of funds slowed, or if the availability alternative better yielding investments were to increase, the demand for government bonds would immediately slow. Then the interest on government bonds would have to increase, if governments were to sustain their borrowing levels.
It is against this background that the budget plans to be submitted by member governments of the euro on 15 October will have to be assessed. The European Commission, in assessing the draft budgets of member states, would be unwise to assume that present low interest rates on government bonds are a permanent condition.
Ironically, while governments may defy the European Commission, they would not be able to defy the bond markets, if, for any reason, bond markets were to change their minds about sovereign bonds, and look for a higher interest rate. Bond markets can be less forgiving and less attentive to rhetoric or political argument
than the European Commission or Ministerial colleagues in the European Council of Ministers.
That could happen quickly, leaving little time for adjustment.
It is less likely to happen if the EU’s system for coordinating the budget policies of the 18 euro area states (the Two Pack and the Six Pack) are seen to be respected, especially by the big countries like France and Italy. This is backed up in a very specific way by Article 126 of the European Treaties.
If the system is defied, or reinterpreted in a way that removes its meaning, the fickle bond markets could get nervous again.
Ireland knows, better than most, how difficult that can be for a state that needs to borrow to fund services, or repay maturing debts.John Bruton Economy EU Member States Macroeconomics
Keep calm and keep the budgets on track
12 Oct 2014
On September 1st, the Italian Premier Matteo Renzi announced an ambitious plan of reforms known as the “1000-day plan” which is to be implemented by May 2017. The government’s reforms are aimed at addressing numerous problems in a plethora of different fields: job market, public service, civil justice, agriculture, energy, and infrastructure, tax schemes, education, and so on.
During the press conference in Rome, Renzi also praised Germany, stating that German reforms of the early 2000s represent a “model” that Italy should follow in order to increase flexibility in the job market and to relaunch the economy.
However, the Premier will have to deal with serious obstacles along the way and for this reason the success of the government’s plan is far from guaranteed.
So far Premier Renzi has had a couple of significant victories: the approval of a significant constitutional reform (ddl Boschi) on the first reading in the Senate, on August 8 and the 80-euro tax bonus on individual income tax (IRPEF) for salaries between €8.000 and €26.000.
The constitutional reforms are fundamentally intended to bring to an end the power parity between the Chamber of Deputies and the Senate by transforming the Senate into a non-elected chamber and by depriving it of significant powers in order to simplify the legislative process and increase the government’s power. From the government’s point of view, this is a fundamental step which is needed to speed up the reform process. Moreover, the constitutional reform aims at redesigning the institutional architecture so as to strip the regions of some competencies and to return them to the central state – a move that should help to ease the financial burden of regional administrations.
The battle is far from over: in order to be confirmed, the reform still needs the approval of the Chamber of Deputies and a second round of backing in both chambers. Moreover, there are signs of mounting opposition inside the Premier’s Democratic Party. Only the votes of the opposition party Forza Italia, still headed by Silvio Berlusconi, can guarantee the success of the reform. Furthermore, before being adopted, the constitutional reforms must be confirmed by referendum.
There are still some doubts as to the effectiveness of the 80-euro tax bonus: the reform, which costs 10 billion euro, had negligible effects on the total aggregate demand because households’ concerns about the future continue to act as a brake on consumer buying.
Given that the economic decline is mainly due to the country’s loss of competitiveness, more and more economists argue that the entire amount should have been channeled into a consistent reduction of the IRAP tax – Regional Tax on Productive Activities – in order to benefit enterprises (SMEs in particular) and professionals. The IRAP is a real burden on the enterprises as it is levied on the net value of production prior to paying salaries – therefore it penalizes enterprises with a greater number of employees and exacerbates the unemployment problem. The recent IRAP reduction from 3.9% to 3.5% approved in April is considered insufficient to have any real effect on the economy.
Recent macroeconomic indicators show that Italy has fallen into recession for the third time in six years. Total unemployment is still high at 12.6% (July 2014) while youth unemployment is around 42.9% – industrial production is declining and according to the Bank of Italy public debt rose by about 100 billion in the first six months of 2014 while tax revenues are falling due to the recession.
There’s still a desperate need for further cuts in public spending in order to free resources that could be used to further reduce taxes and the crippling public debt. It’s still questionable whether the government’s measures to reduce subsidies and to privatize inefficient state-owned enterprises will succeed.
Carlo Cottarelli, former director of the Fiscal Affairs Department at the IMF and currently in charge of the Italian spending review, is tentatively pushing through a plan to reduce public expenditure by about 34 billion in three years with the aim of further reducing taxation on the real economy. However, he recently accused the government and the parliament of sabotaging his efforts by approving new unauthorized expenses without previous consultation. As a result, he announced his intention to resign from his position in mid-October.
The episode shows that the battle for reform is far from over. Despite the promising announcements of the current government, there is still a long way to go on the road to economic recovery – as confirmed by the recent ECB’s warnings on budget deficit.
Now the responsibility of the reform falls on Renzi’s shoulders. He has to choose whether to appease the leftists inside his party or to confront the numerous entrenched lobbies that resist change so as to protect their own interests.Davide Meinero Economy EU Member States Macroeconomics
Italy and the illusion of reform
19 Sep 2014
The EU’s uneven recovery from the economic turbulence of recent years has highlighted a fundamental shift in Europe’s growth dynamics. A new briefing by the Wilfried Martens Centre for European Studies argues that as much of ‘old Europe’ struggles to regain economic growth, several of the ‘new Europe’ member states of Central and Eastern Europe (such as Romania) seem poised to drive economic activity forward in the coming decade. This shift, allied to the significantly improved medium term growth prospects of ‘programme’ countries (Ireland, Greece, Cyprus, Spain and Portugal), illustrates the positioning of more peripheral EU member states as reform leaders who may act as the catalyst for longer term growth in the EU.
IN FOCUS is a new series of commentaries, in which the Martens Centre looks closely at current policy topics, dissects the available evidence and challenges prevailing opinions.Eastern Europe Economy EU Member States Growth
The EU’s Reform Cycle: Out with the old and in with the new? Romania and EU Growth dynamics
10 Jul 2014
A spectre is haunting us – the spectre of ‘pikettyism’. Originated in France, it draws its strength from a book by economist Thomas Piketty whose work on the historic trends of capital inequality has bridged the gap between academic research and a mainstream audience. His central finding – that inequality will continue to rise underpinned by a disproportionate concentration of wealth in relatively few capital owners – has particularly delighted the progressive establishment in the US, with Paul Krugman and Joseph Stiglitz throwing all their weight behind Piketty and making his study into the economic sensation it became. The risk now is that socialist governments in Europe will embrace this seemingly new rationale for supporting increased taxation and government intervention in the economy.
Piketty is convinced that, if left unchecked, the dynamics of capital accumulation will produce a level of inequality incompatible with our democratic societies. His diagnosis borrows a great deal from the ‘iron laws’ that periodically appeared in nineteenth century economics to predict the catastrophic outcomes of capitalism’s contradictions. His therapy seems little more than a nostalgic update of the confiscatory fashions embraced by most governments until the late 1970s, when top marginal tax rates and inheritance taxes were often above 80%. A century-old theory combined with policies of the 1960s seems hardly a new frontier of progressive economic thinking. In fact, the only policy innovation of the author is a proposal that he himself does not hesitate to define utopian: a progressive global tax on capital enforced through a high level of international coordination. My impression is that such proposal is worse than utopian: it is mistaken. And so are most policy prescriptions in Piketty’s book.
To begin with, Piketty has a very unrealistic view of capital. He identifies capital as all ‘nonhuman assets that can be owned or exchanged on some market’ and treats any income from capital, be it interest, dividends, profits, royalties or other, as a form of parasitic rent. This makes him blind to the fundamental entrepreneurial dimension of capital investment and accumulation in a free society. In a market economy, capital is not just stockpiled so as to produce certain returns automatically: it must be employed productively in activities that are successful and add value to the economy. Piketty’s theory has no place for market competition and entrepreneurial profit, possibly the two most important factors in a market economy. Furthermore, the optimal degree of government control of national income comes out of Piketty’s book as a purely technical problem, so that the author sees ‘no reason why a country cannot decide to devote two-thirds or three-quarters of its national income to taxes’.
Unfortunately, there are excellent reasons why even a far lower threshold has proved to be unsustainable in the past. Incidentally, these happen to be the reasons why a wide consensus in favor of a dramatic reduction in the size and scope of government emerged since the late 1970s. The simple truth is that government is too often inefficient in its regulatory, economic and welfare interventions. It invariably operates by establishing bureaucracies based on centralized control which grant all sorts of privileges and special protections. In fact, ‘rent-seeking’ by special groups has been long recognized as one of the main drivers of the growth in government spending. Piketty’s view of government officials is as idealized as his view of capitalists is demonized. The mundane truth is that both tend to be self-interested individuals acting in accordance with the incentive structure they face. While competition in the free market acts as a balancing force that tends to align individual incentives with social welfare, no such mechanism exist in government.
The moral implications of Piketty’s argument are even more questionable. The obsession of some economists with fighting income inequality is highly misguided. We accept market freedom because it creates a ‘society of incentives’ where everybody can make the most of his talents and innovative abilities and reap the full benefits of them. The rules of this game imply that some of us may get much richer than others and should have the right to freely employ their wealth and bequeath it to whomever they like. Income inequality is the price we pay in order to make our societies more dynamic and innovative, ultimately to the benefit of everyone. Extensive taxation and redistribution may make our incomes more equal, but it will not make any durable contribution to reducing overall levels of poverty.
Instead, the virtues of market freedom are unfolding before our eyes and they have been lifting millions of people out of poverty and deprivation in the last decades. Today’s China is characterized by striking and extreme inequalities. Are we really to conclude that the miserable equality of pre-capitalist China was preferable because it did not offend the social sensitivity of progressive economists? It is no chance that Piketty is completely silent about the economic miracle that has reawakened entire continents after centuries of stagnation and decline. He is too obsessed with widening income inequality in the West to care about poverty reduction in the East and the South. However, it seems to me that the most meaningful moral issue is not by how much my neighbor grew richer than me in the last years, but how many fewer people are starving in the world. To my knowledge, there is no government program of income redistribution that ever contributed to this objective anywhere in the developing world.
Like it or not, it has been economic policies traditionally labelled as conservative that were the most progressive in their effects. In the past generation, the most ambitious leaders of the centre-left (Clinton, Blair, Schröder) were courageous enough to recognize this simple lesson of history and turn their back on the old-fashioned policies of the past. Is it pure chance that their more traditional successors were never capable of repeating their landslide victories in recent years? Piketty’s theories may well be able to win over the nostalgic leaders of the European left, but I have the impression that we can still count on the electorate to look past his simplistic solutions and focus on real policies that will make our societies more productive and prosperous in the long run.Federico Ottavio Reho Development Economy Social Policy Society Values
Federico Ottavio Reho
Confronting Piketty and his mistaken concept of inequality
26 Jun 2014
Arx tarpeia Capitoli proxima: the Tarpeian Rock is close to the Capitol. In politics, triumph and annihilation are never far apart. Following its stunning success in local elections this March, the right-wing UMP had good reason to believe it was the strongest opposition party, even the largest party altogether of French politics. That the FN won eleven town halls, and performed well in those towns where it had candidates was worrying, but meaningless compared to the ‘vague bleue’ (blue wave). Two months later, the FN cruised to victory while François Hollande’s popularity ratings had sunk so low he could be drilling for shale gas and the UMP held back by an invoices scandal and divisions over Europe. We have to add ‘marine’ to the ‘vague bleue’ this time around, a darker shade of blue has triumphed.
We seem to be heading down an unprecedented track, with a President who may be forced by his own party to give up hope for a second term. Ultimately, even if the unemployment curve did decide to switch course; even if growth somehow returned; even if the deficit stopped increasing, it is doubtful anyone would give Hollande or his government credit for it. The president is now embarking on a rearrangement of local boundaries, merging regions together, probably to show he can actually do something. This is not unlike Louis XVI abolishing serfdom in 1779 although it had been virtually extinct for five centuries, when radical economic reforms were desperately needed.
Why such an outcome? The country is feeling ill. For some part, it might still be a Malade Imaginaire, but the country believes it needs protection, from globalisation, from Europe, from its neighbours, from imports, from immigration, perhaps from the state, maybe even from itself. Part of the country seeks refuge in an impossible isolation. Fear and lack of initiative at all levels paralyse it. What happened to the ‘impossible n’est pas Français’, to the nation who has given to the world the word ‘entrepreneur’, which even the Americans and British have no translation for?
The situation of Hollande should bring joy to the heart of the French right. However, a disappointing second place in the elections washed that away. This came not by surprise since opinion polls consistently showed that the FN would come out on top, with the UMP second and struggling to remain above the waterline. It was as if the electorate had made up its mind a long time ago and had decided to stick to its choice. Although the media and the politicians have talked in the recent weeks as if it had been a huge surprise, the final result ought not to have been such a surprise.
Whether this was a protest vote or a conviction vote is not the point; what does it matter whether 25% of us actually mean ‘we’re sick of the other lot and therefore we’ll try the alternative’ rather than ‘we believe in Marine Le Pen’? After all, François Hollande was elected President largely because of an anti-Sarkozy protest vote. Since 1978, with one exception, France has never returned a parliamentary majority. We don’t vote in favour, we vote against.
On this basis, let us put forward a 2017 presidential election scenario: the Socialists are wiped out, leaving the UMP candidate facing Marine Le Pen in a standoff echoing another standoff, on 21 April 2002, when Jacques Chirac faced Jean-Marie Le Pen. But this time, on 23 April 2017, the FN is ahead and there are no demonstrations, or rather, there is a gathering in Paris, on the Place de l’Opéra: the FN team and some of its voters are celebrating. There is little chance that their candidate will triumph in the standoff, but what do they care? They believe the wave of history is on their side, as most of the country braces itself and gasps for breath before the genuine, yet improbable tsunami.
The classic left vs. right standoff is a less likely scenario. The Socialists, under the leadership of Prime Minister Manuel Valls, could undertake the economic reforms the country requires. It seems that many in his party have already understood that this is the only way to hold on to power in three years’ time.
As for the right, the UMP will hold a Congress this autumn to elect a new leader and a new team, hopefully leaving behind the leadership election of November 2012 after which the party almost split. Whoever becomes the new leader, it will be a new starting point from which to build on.
However, both parties also need a clearly-defined vision, they need to put to the fore what they believe in, we need to see enthusiasm for ideas and ideals, or else 2017 threatens to be a debate between grey-suited, tired men talking about figures and percentages, and a woman talking about France and patriotism.Gerald Gilmore Economy Elections EU Member States
European election results in France: a watershed?
23 Jun 2014
The period since the outbreak of the financial, economic and social crises in Europe has witnessed a renewed focus on the need to develop a more sustainable and qualitative growth model. A model where the traditional focus on economic growth (i.e. GDP growth) is complemented by an adherence to a wider range of qualitative indicators. Indicators which more broadly characterise the well-being of society as a whole. This paper defines a model for Sustainable and Qualitative Growth (SQG) in the EU and questions if existing EU economic and social governance arrangements are consistent with this wider approach to building a sustainable growth model. This paper identifies a number of key recommendations. First, a more encompassing, balanced and multi-dimensional EU strategy for growth should be adopted. This refined strategy should take into account the broader indicators underpinning the SQG model and should be addressed in key EU documents such as the Annual Growth Survey. Second, a symmetric and ‘time consistent’ macroeconomic strategy, allowing for investments in SQG related domains, should be pursued. These growth-enhancing investments should primarily target relevant policy areas such as education and training, technological innovation and lifelong learning strategies. Third, a common automatic stabiliser in the EU should be set up in order to provide a minimum level of EU investment across all member states.Crisis Economy Growth Sustainability
A Model for Implementing Sustainable and Qualitative Growth in the EU
02 Jun 2014
I was in the Far East recently doing some work in Singapore on behalf of IFSC Ireland.
It is a part of the world, like Europe, where a sudden bad political development could easily over turn good economic potential.
The approach China is taking to oil exploration in the South China Sea, claiming the whole of the sea for itself, is deeply troubling to its neighbours. We see this in the riots in Vietnam in the past few days. There is, unfortunately, no agreement to jointly exploit the resources under the South China Sea, and that is a continuing source of tension, and is leading to an expensive arms race. Internal economic problems can often lead to external aggressiveness, as a means of distraction, as we have seen in the case of Russia.
Many of the players in Asia, notably China, Japan and South Korea, despite their rapid recent growth, have internal problems arising from rising income expectations, indebtedness, and ageing .Wage inflation in China is running at 18%, which will have a long term effect on its competitiveness. Its banking system has many non performing loans.
Japanese corporations are heavily in debt. The Japanese Government has a debt/GDP ratio of over 200%. Japan is one of the most elderly societies in the world, but is reluctant to allow immigration.A rise in international interest rate would aggravate all these vulnerabilities. Such a rise will eventually happen.
Meanwhile North Korea, with its nuclear arsenal, remains an existential threat to all in the region.
Conflict in East Asia could have disastrous implications for the world economy, because it would disrupt the complex, interdependent, and fragile multinational supply chains on which global manufacturing is now based. Meanwhile, China and the United States are pursuing competing agendas. Each would like to incorporate East Asian countries into rival economic blocs.
The US sponsored proposed Trans Pacific Partnership does not include China, but China is offering an alternative, less demanding, trade deal to its Asian neighbours. The choice is important.
If Senate Democrats continue to deny President Obama the authority to negotiate trade deals, on which the Senate agrees to vote on as a single package rather than pick apart, there has to be a possibility than the Chinese approach will win out. This would bring about a significant shift in the global balance of power.John Bruton Economy Macroeconomics
Strategic rivalries in East Asia have implications for the whole world
30 May 2014
In 2004 ten new members from Central and Eastern Europe joined the EU. At the time member states were concerned about the potential of the free movement of people from these countries to seriously undermine their economies by increasing unemployment and reducing wages. How would labour markets support the millions of new workers expected to arrive from the new states? To protect workers against the arrival of cheap labour, the majority of member states restricted labour market access. Ireland, Sweden and the UK were the only member states to allow unrestricted access from 2004 on.
One decade later and it is clear that the free movement of workers to Ireland has had a hugely beneficial impact on the economy and Irish society generally. Census figures show that in 2002 there were just 4000 Poles in Ireland but by 2010 this number had jumped to 120,000. The Poles have officially become the largest non-Irish group in the country. The census shows a similar trend for non-Irish residents from other 2004 accession states such as Lithuania, Latvia and Estonia. In fact the Irish census figures record a steady increase in inward migration from both European and non-European countries in recent years. Surprisingly this trend does not appear to be changing in spite of the significant economic difficulties Ireland is experiencing.
To celebrate the tenth anniversary of Poland’s accession to the EU the Polish Embassy in Ireland released a video, entitled ‘Thank You Ireland’, in April 2014. The video thanks the Irish people for their ‘openness and kindness’ towards Poles in Ireland over the last decade. Many of the young Polish workers that came to Ireland immediately after accession have remained. They have become part of rural and urban communities across the island. Their children have been born in Ireland and attend local schools. They have joined local sport clubs and formed theatre groups. Increasing numbers of Polish people have opened businesses in Ireland; from the obligatory ‘polski sklep’ selling Polish groceries to hairdressers, garages, beauty salons, computer and software businesses. Ireland will have a local election later this month and there are many non-Irish candidates, standing as independents or as members of Irish political parties.
Ireland has always been a self-proclaimed emigration nation. In a recent address Taoiseach Enda Kenny told his audience that there are 70 million Irish abroad. In the last 20 years Ireland has had to transition from a predominantly emigration nation to one that welcomes immigrants. To counter populist and Eurosceptic arguments we must continue to support this societal transition. As we get closer to the European elections and are increasingly being bombarded with negative immigration messages from groups such as UKIP, it is important to highlight the positive integration message from Ireland. There are examples from across the EU that the free movement of people, a core tenet of our Union, is a success story and will continue to remain one in the years ahead.
[Photo source: flickr.com]Kathryn O’Donovan Eastern Europe Economy Enlargment EU Member States Immigration
‘Thank you Ireland’: A Success of Free Movement in the EU
13 May 2014
Italy is experiencing the first tepid signs of recovery after years of pain and crisis. According to the IMF, Italian GDP will increase by 0.6% in 2014 and will supposedly reach 1.1% in 2015. Nevertheless, all that glitters is not gold. Unemployment is still high (currently 12.4%) and public debt in January reached a frightening height of 2.089,5 million, more than 133% of GDP. According to Unioncamere, the organization that supervises the Italian Chambers of Commerce, in the first three months of 2014 about 3,600 businesses declared bankruptcy – which equates to an average of forty per day, two per hour.
The decline of the Italian economy started at the end of the 1970s, well before the launch of the monetary union in 1999. The single currency on the contrary gave Rome greater room to manoeuvre by giving Italy access to cheap credit. Instead of using the euro dividend to restructure the economy in the first year of the new millennium the parties in power resorted to an increase in government spending – about €141.7 billion between 2000 and 2010, an increase of 24% – this created a false sense of growth while Italian industry was losing competitiveness in the face of growing global competition. Currently, public spending in Italy accounts for almost €800 billion, which is equivalent to about 50% of the GDP.
In the summer of 2011 the ECB clearly identified the woes of the Italian economy and urged the Italian government to take “bold and immediate action” to balance the budget by reducing taxes, cutting government spending and liberalizing the job market by making it more flexible. However, more than two years later almost none of the abovementioned problems have been addressed.
On the contrary, the incredible tax rises (the fiscal pressure has increased from 41.9% in the early 2000 to 44.1% in 2013) coupled with almost non-existent spending cuts in recent years was a mortal blow to the real economy and plunged the country into recession. According to the World Bank Data, the Total Tax Rate (the amount of taxes and mandatory contributions payable by businesses) in Italy reached the frightening level of 65.6% in 2013 compared to 49.4% in Germany, 34% in the UK and 25.7% in Ireland. If we couple high taxation with slow justice and inefficient bureaucracy, it should come as no surprise that Italy falls behind other big economies, according to the Doing Business ranking – it is in 65th position compared to France 38th and Germany 21th.
After the failure of the previous governments, great hope has been invested in Matteo Renzi, former mayor of Florence and head of the current coalition government. It’s still questionable whether Renzi will be able to reign in the opposition inside his own party, the Democratic Party, and make the necessary reforms. Any action to unravel the current economic crisis will face strong resistance from bureaucrats inside the ministries, who may fear losing their jobs, and from the trade unions, who still enjoy a privileged relationship with some key figures of the ruling élite and who will almost certainly use their power to sabotage the reforms. One example of this is the recent measures aimed at liberalizing the job market, the so called Jobs Act, which faced strong opposition from the leftist side of the Democratic Party that is making every effort to stop or radically change the reform process. Therefore, the chances of success are low.
A failure by the current government would embolden the populist movements and political parties who blame the EU institutions, the common currency and the “eurocrats” for the economic decline. For instance the Five Star Movement, despite being able to uncover and denounce bad practices and corruption cases in politics, still lacks a strategic vision of the future and tends to be easily influenced by conspiracy theories which are of little use in interpreting, let alone solving, the current problems.
Every step to embrace change is going to be delicate and probably painful in the short term. Furthermore, it’s not going to succeed without a clear long-term plan and a new social contract between the citizens, the economic actors, the political élite and the EU institutions. Whoever is at the helm of the country during the current tempest needs to have exceptional leadership qualities and great courage to lead the country towards a better future without being afraid to challenge potential enemies along the way and of opposing populist tendencies for the sake of Italy’s future.
[Photo: European Parliament; Flickr]Davide Meinero Crisis Economy EU Member States Eurozone Leadership
Italy: is the crisis over?
06 May 2014
As the eurozone starts to emerge from the deep financial crisis of the last three years we should maintain a sense of economic urgency. The fact that Europe had a growth problem before the financial crisis was common knowledge. This is still the case. The growth trend, in total factor productivity, has been negative for quite some time and the performance of the European Union’s economy relative to the United States’ economy has been deteriorating for at least twenty years.
This is all the more striking in light of the fact that the EU has undertaken a number of growth initiatives and reforms since 1992, which promised to deliver a significant growth boost, as well as welfare gains. Does this mean that structural reform has not worked in Europe and that some other factor must explain why we still have a growth problem?
I was recently asked to answer this question. My answer was simple: structural reform must be supported and promoted, otherwise it will fail to deliver. It is this element — the political and institutional framework for reform — that we need to focus on as we return once more to Europe’s growth puzzle. The best example we have of structural reform in Europe, the reform agenda of the last ten new member states, was actively promoted by institutional arrangements whose main goal was to expand the policy range of governments during the reform process.
In brief, there is an obvious contradiction between affirming the crucial role of structural reform for economic prosperity while doing far from enough to create the right framework and the right instruments to support and encourage it.
Often structural reform is so difficult because it pits governments against organised interest groups that have a lot to lose from a more open and competitive economic environment. Other times, severe financial constraints force governments to undertake reforms in less than optimal conditions and may even render them entirely unfeasible. Clearly the best way to involve national stakeholders such as social partners and national parliaments is to smooth the rough edges around structural reform and make it much easier to carry out than it is at present.
The good news is that an increasing number of people in Europe have come to realise that there is a better way. Both the European Commission and Council have put forward proposals that aim to mobilise the public for reform, strengthening the hand of governments against organised interest groups and providing financial support where it is needed.
In its December meeting the European Council defended the need for a system of mutually agreed arrangements and associated financial support mechanisms designed to support a broad range of growth and job-enhancing policies and measures. This was a good start, but the conclusions did not sufficiently emphasise the structural reform element. This is above all a political issue. Structural reform partnerships are elements of what I would call a political union. They would help countries become politically closer, allowing them to overcome social and political standstill in order to learn from each other and from the policy dialogue going on between them. Political fragmentation (by which I mean complete path dependence, the inability countries have to break from their habitual way of doing things) is just as dangerous as financial fragmentation.
At the current moment we face a paradoxical situation. Either structural reform is implemented in an emergency, when the right conditions for it are mostly absent, or then it is simply postponed. These structural reform partnerships would introduce a much needed preventive logic into European economic policy making. It makes little sense to wait for structural economic problems to develop into a fully-fledged economic and fiscal crisis before putting together the instruments and political will to address them. At the same time, favourable conditions for reform cannot be wasted if we want to seriously tackle Europe’s growth problem.
[Note: a previous paper on how to create the right framework for structural reform can be found here: http://ces.tc/1fLa7nJ ]Bruno Maçães Crisis Economy European Union Eurozone Macroeconomics
The structural reform puzzle
05 May 2014
To many observers outside of Brussels the recent ratification of Banking Union by the European Parliament represents the final step in the EUs fractured response to the economic crisis. To some, the Banking Union, as is now being implemented, represents nothing more than a superfluous project which will make no practicable difference to weaker member states faced with collapsing banks in the future.
However, as noted by Geeroms and Karbownik (2014), the economic consequences of a euro zone without a Banking Union are significant. They illustrate that a Banking Union will help ensure the long term sustainability of the euro through a mechanism for dealing with asymmetric shocks. Citing the US experience they note that a Banking Union is a more important absorber of economic shocks than a fiscal union.
In this context, the development of the ECB as a single banking supervisor will play a key role in shaping the euro zones long term financial architecture. Although arguments continue as to the actual robustness of the forthcoming stress tests, the very existence of such a supervisory framework has already had an impact on banking operations. The raising of additional capital by many banks has been complemented by the raising of statutory capital requirements by national authorities. The ‘coco’ bond market (i.e bonds that either convert to equity or simply write down investors’ principal when a certain threshold is reached) has expanded dramatically as banks seek to absorb losses while simultaneously increasing their capital reserves.
Banking Union, specifically the creation of a meaningful European banking supervisor, has shown that financial regulation can have a direct impact on how major financial institutions operate. In this context, at least, it is clear that financial regulation can have a role in ensuring that the weak regulatory practices followed by Ireland and other member states in the past will not reoccur in the future.
However, an overlooked aspect of the European Parliament’s recent legislative package concerns the imposition of strict rules on high frequency traders (i.e. financial traders that use sophisticated technology to execute orders in fractions of a second). This practice has been the subject of recent controversy in the US where characterisations of these traders as ‘flash boys’ has been accompanied by serious accusations that such trading allows better access to information, thereby prejudicing traditional investors. These accusations are currently under investigation by relevant US authorities and follows the so called ‘flash crash’ in 2010 when a sudden drop in the value of the Dow Jones was at least partially attributable to high frequency trades.
The recently passed EU legislation also aims to prevent a repeat of these problems in Europe. Commissioner Barnier has noted that the recent regulations are among the strictest set of rules for high frequency trading anywhere in the world. Such rules will serve to protect the integrity of the European financial markets while maintaining the effective use of technology in financial market innovation. Combined with the coming into operation of the resolution mechanism of the Banking Union and the ‘bail-in’ concept regarding failing banks, the EU has significantly strengthened consumer (and national government) protections against collapsing financial institutions.
Financial regulation may be an overused term in the post-2008 political landscape, but the EU – through its recent regulatory package – has ensured that the mistakes of the past will stay consigned to history as Europe continues to build a stronger and more efficient regulatory environment.Eoin Drea Banking Economy EU Institutions Eurozone
Flash Boys and Celtic Tigers: Do Banking Union and Financial Regulation Actually Matter?
30 Apr 2014
Heavy soul-searching has been the trademark of the European Socialists for the past decade. Lost elections in country after country led to strong reflections about the future of Socialism and Social Democracy in Europe.
The victory of Hollande in France gave European Socialists a new hope. Finally Socialism would have a new flagship, President Hollande, who would turn the tide not only for France, but would also give a badly-needed boost for socialists across Europe. Or so they hoped.
From the beginning it was obvious that it would not work out for Hollande. Hiring 60000 teachers and 75% taxation on those earning more than €1 million a year were popular for some voters, but it could not return France to economic stability. No real reforms or fiscal balancing was on the shopping list.
Thus, from the beginning one could guess two possible outcomes for Hollande. The first scenario was that he would promote the policies he was proposing in his electoral programme, which would lead to an economic disaster for the country, to an electoral disaster for his party and ultimately, to a political disaster for himself. That is, if he would try to re-run as a President, of course. The second scenario was that he would very soon understand that the only way out for France is to push for reforms. This way he would be able to put France on the right track. However, the stark contrast between the things he said he would do and what he actually did ultimately disappointed his core voters and is costing him and the French socialists dear.
What we see now is that in fact both scenarios happened. French government was paralysed for almost two years and the economic indicators got worse for France every day. At some point he came to realise that he needed to totally change the fundamental philosophy of his economic policy. And so he did. One of the many witnesses of this fundamental change was Krugman’s article bashing Hollande for abandoning the “out from crisis by spending” strategy ( http://nyti.ms/1eSEZiA ). Nevertheless, by his initial inaction Hollande had burned the political capital he had, and so half-hearted attempts for reforms with a demotivated team were very unlikely to produce a success story. Unfortunate for France. And for Europe.
In addition, the understandable U-turn of Hollande in economic policy has led the socialist candidate for the position of Commission President, Martin Schulz, into a difficult position. Schulz’s vision of debt-driven growth matches badly with the current French Economic policy. Often the discrepancy creates odd situations both for the socialists and Schulz. For example, during the visit to Paris, Head of the Spanish socialist list Elena Valenciano was preaching against “the tyranny of austerity”, in a common political rally with the socialist candidate Martin Schulz, only a day after new Socialist French Prime Minister Manuel Valls announced an unprecedented and comprehensive package of austerity measures in France, heading to save over 50 billion euros in the next three years.
Thus, there is a substantial disparity between the programme of Schulz and the policies of Hollande’s administration. But then again, Hollande has to deal with economic reality – and Schulz does not.Tomi Huhtanen Crisis Economy European Union
Schulz’s vision meets Hollande’s reality
25 Apr 2014
The euro is one of the most important projects that the European partners have committed to since the foundation of the European Union. The common currency is a symbol for European integration. It gives Europe a unique opportunity to have a global voice. The global financial crisis and the European sovereign debt crisis gave us a clear lesson: structural problems in individual member states can cause severe economic repercussions across the EU.
However, the crisis in the eurozone is not a crisis of the euro itself. It is a sovereign debt crisis, a banking crisis and a competitiveness crisis combined. The roots of which lie in a series of inter-related issues starting with unsustainable fiscal policies all over Europe, lack of economic reforms and inadequate regulation of financial and labour markets. These were weaknesses which magnified the consequences of the global financial crisis that started in 2008.
This leaflet offers an overview of how the euro has transformed the European integration process and the lives of many Europeans since its introduction in 1999. The European member states share rights and duties, opportunities and risks. Each member state has to make its own contribution to the ongoing recovery process. If we succeed in this, the euro offers more opportunities than risks.Economy Eurozone Integration Macroeconomics
The Euro: Basics, Arguments, Perspectives
12 Mar 2014
The referendum against “mass immigration” in Switzerland has reminded us of the importance of the principle of freedom of movement at the heart of the Single Market. The principle is based on four pillars or freedoms – goods, people, capital and services. However, there is another pillar which has been overlooked but is intrinsic to the principle, one that we often use to justify the other four freedoms – the freedom of knowledge.
This fifth pillar is not a new concept. Janez Potočnik, the former European Commissioner for Science and Research, introduced the idea. Potočnik identified that lack of cooperation between member states on R&D rendered the European Research Area less dynamic. He argued that there should be greater synergy across national borders, reducing costs, promoting economic growth and job creation.
To me it always seemed that the idea went a bit beyond what Potočnik had in mind. Knowledge is not limited to R&D, technology and science. It includes culture and the arts. The fifth freedom offers us a way to think about knowledge which is free from many of its traditional limitations.
We cannot speak of a fifth freedom without taking into account the digital economy, which is of course key to innovation – making it faster and borderless. Telecommunications, high speed internet and services are integral to the economy. However, this sector is not getting the investment it needs, gravely increasing our competitiveness gap with other markets such as the US and Asia. A recent study [http://ces.tc/1nJnm5W ] estimates that by 2020, if the current year-on-year drop in investment in the telecoms market continues, Europe will not meet its EU Digital Agenda targets for broadband coverage and penetration. We will find ourselves having missed a huge opportunity for the broader EU economy.
A new approach to the digital economy and smarter EU funding will make Europe more competitive and unlock further investment.
Too much funding might be distributed to duplicate research or funding may be mismatched [http://ces.tc/1gyTKrH ]– i.e. it might go to a region that lacks know-how in one area, instead of going to a stronger region unaware of available funds. Creating meaningful consortiums by bridging universities, research institutions and businesses will help fill these unnecessary overlaps and gaps. You can do this by investing in facilities that enhance the transfer of knowledge between institutions. The exchange of cultural experiences and skills can unlock further funding, investment and ideas.
Member states, research bodies, universities and EU institutions can facilitate knowledge mobility:
• Member states could reform laws by making them innovation friendly. They could offer tax incentives to innovative enterprises similar to tax breaks for low emission vehicles [http://ces.tc/1nJnHWl ]. Member states should also agree to harmonise telecoms regulation at the EU level, unlocking wasted money for much needed investment in technology and increasing innovative capacity.
• As part of the new EU’s research programme Horizon 2020, designed to make Europe a more competitive economy, the EU could simplify bureaucracy for funding applicants and also help identify partners – the EUapp report [http://ces.tc/1m4sx1j ] is a good example of EU support aimed at finding opportunities in the digital economy.
• Universities and research institutions should raise the awareness of European organisations in these areas and work in collaboration with other universities on specific projects and look to partner with private enterprises. This in turn, will help them gain international recognition. Consortiums may be more appealing for investors, like multinationals looking for breakthrough ideas. Microsoft [http://ces.tc/1jN2OfC ] alone spends $10 billion per year just on R&D.
David Bohm famously conceived of knowledge as the stream of thought flowing among, through and between us. The freedom of knowledge is an ideal high enough and noble enough for all Europeans.Bruno Maçães Economy European Union Growth
The fifth freedom: transforming the single market
18 Feb 2014
Last week the European Commission tabled energy and climate objectives with a 2030 horizon [see http://ces.tc/1lyt9j6 ]. These proposals update the well-established 2020 goals [see http://ces.tc/1fKI8k6 ] and mark another step in the evolution of the European Union’s (EU) environment policy. They also provide an updated framework for EU climate change policy in the context of the banking and financial crises which have impacted upon the EU since 2008.
A narrative common in many discussions on Europe’s energy policy relates to the perception that the EU, through its constant support for renewable energies and carbon emission reduction, has prioritised longer term environmental objectives over economic performance. Proponents of this narrative argue that a revitalised United States (US) economy, fuelled by a relatively cheap and indigenous shale gas reserve, will alter global energy supply trends and further undermine Europe’s economic competitiveness. In this context, the key question is whether the EU’s commitment to environmental protection is impacting upon economic growth?
However, an analysis of Europe’s longer-term economic growth patterns provides a different narrative. According to the OECD, Europe’s annual rate of economic growth declined continuously from 5.4% in the 1960s, 3.8% in the 1970s to 3.1% in the 1980s. It further declined from 2.3% in the 1990s to just 1.4% in the decade to 2010. Thus, Europe’s slowing economic performance cannot be attributed to the emergence of more environmentally sensitive practices.
Of course, in the short run the EU would be financially stronger by not investing in green energy and longer term emission reduction projects. However, any short term benefit to economic performance would be more than offset by further environmental degradation in the future. The scientific community agrees that fossil fuels are running out and their extraction is at an ever increasing cost. Newly-discovered fuels, such as shale gas, do not provide a sustainable long term solution. For instance, burning of shale gas produces carbon dioxide (CO2) emissions and its extraction produces even more CO2 emissions.Eoin Drea Kalin Zahariev Economy Environment Renewable Energy
In the long-rung green energy will help contribute to achieving a sustainable energy supply path that balances economic considerations and environmental responsibilities. This will enable energy suppliers serve an ever increasing world population. Transition from our current resource intensive economic growth model to a resource efficient growth model is a must, if the EU, and Europe as a whole, to prosper in the twenty first century. Either we transform our energy production into a resource-efficient, low carbon sector, or the EU’s competitiveness will continue to decline.
Environment or economy? How about both?
04 Feb 2014
“Capitalism is not a form of spontaneous order or the embodiment of a basic structure of human rights, but one of the great constructions of the human mind”, so says David Sainsbury, former UK Minister in the Blair Government in his book “Progressive Capitalism, how to achieve economic growth, liberty and social justice” published last year by Biteback Publishing. Inevitably, the book does not fully live up to its unrealistically ambitious title, but it makes some really important points and goes beyond putting forward a critique of what wrong, but also some constructive solutions.
Capitalism will only work if politics works. Capitalism allows resources, human and material, to be constantly allocated and reallocated in a way that meets people’s needs, as they express those needs by way of the relative price they will pay for different goods and services. Without stable money in which to set those prices, the system would not work. Money is a promise. One must have a stable political system to underpin those promises if one is to have stable money. Without order and security and laws to prevent theft, fraud and unsafe products, capitalism would collapse. Again one has to have a stable political system if these requirements are to be met.
If capitalism leads to outcomes that are socially, financially or environmentally unstable, or are perceived as grossly unfair, the stable political order on which capitalism itself rests will fail.
These are some of the things that David Sainsbury tackles in this book. He points out that:
1. In 1965, the average US CEO earned 24 times as much as the average worker. But by 2007 he earned 300 times as much. That trend is not socially sustainable.
2. UK pension funds earned a 5% return on capital between 1963 and 1999. But between 2000 and 2009, they earned only 1.1% return. That’s not financially sustainable.
3. Between 1950 and 1973, the western economies grew at twice the rate they had grown during the period from 1800 to 1950. That was not economically or environmentally sustainable. But the West built welfare states during that period on the premise that the 1950-1973 growth rates were permanent.
These problems can only be tackled if the rules governing capitalism are updated. Sainsbury makes some useful suggestions.
Company law and taxation should be changed to require CEO’s to be paid on the basis of longer term goals and achievements, rather that short term share price movements. Remuneration of fund managers should be restructured to reflect a similar philosophy of long term returns and stable investment strategies. The threat of takeover, to the extent to which it incentivises pursuit of purely short term share price gains, may have to be mitigated. Firms should have incentives to use scare materials like energy, water, clean air, metals and chemicals extracted from the earth sustainably and renewably. These things cannot be done by one country acting on its own. They need to be tackled at international level, in the European Union and/or between the EU and the US.
This book may not have all the answers, but it asks all the right questions. They are questions that could usefully be tackled in the forthcoming European Elections which are, after all, the only multinational elections that take place anywhere in the world.John Bruton Crisis Economy Elections European Union
Saving capitalism from itself…a topic for the European elections?
27 Jan 2014
The upcoming year will be a very significant year. Important events will be remembered during the course of it; the huge enlargement of both the EU and NATO which occurred 10 years ago; the shot in Sarajevo 100 years ago which triggered the First World War and the fall of the Iron Curtain in Europe which occurred 25 years ago.
These anniversaries are undoubtedly a powerful incentive to ensure that not only political leaders but also people outside of politics contemplate the future of our continent and the world. For political leaders the aforementioned anniversaries are inspiration to responsibly shape the future architecture of the once again reunified Europe.
So it is home, a cosy abode for all countries, nationalities and ethnic groups — an inclusive home for all its inhabitants. The specified milestones in the history of our countries, of Europe and of the world, will be marked at the same time while the EU is working intensively on new rules for mutual coexistence in the common European house. The new rules have in part been forced to be implemented due to the economic and financial crisis, and also as an effort to succeed in intensifying global competition.
We need new rules and effective tools so we can overcome the consequences of the financial and economic crisis with minimal cost to our citizens. And also to help us avoid the repeating the same errors and mistakes that led to the crisis into the future.
It will not be easy to fine tune an orchestra of 28 players, of which many are convinced that they are the virtuoso. But many of us feel that change is necessary, that further development cannot be stopped. Personally, I believe there are still a number of areas suitable for deeper integration.
However, there are also areas in which power should be left in the hands of member states. I think we need more effective European cooperation, but also efficient internal competition that will stimulate the development of a united Europe. It is not just the issue of the consistent application of the principle of subsidiarity, but also artfully creating tools that could and should inspire leaders at national level to form effective economic and social models according to local, regional, historical, cultural, and geographical conditions. Obviously, in strict compliance with the agreed rules. In my experience and in my view: cooperation, competition and solidarity should dominate in the EU.
We all feel that these new rules at the European level are needed. For example, in the banking sector. The banking sector should be more durable, less vulnerable, but also sufficiently conducive for business development. It should be more effective, for example in helping small and medium-sized enterprises. We should not even prevent stricter scrutiny of compliance with the agreed rules.
Personally, I support the legal enforceability of compliance with these rules. Equally I consider structural reforms at the national level, in other words in the individual member states to be as important. The world is changing and changing fast. Previous sources of employment are no longer as strong as in the past, meaning Europe has to begin to look at new areas for growth and employment, like in renewable energies and in the science sector for example.
With innovation and creativity, new opportunities can be born for EU citizens. So I think, in Europe, it is not only more discipline and accountability that we need, but more creativity and the courage to make the required changes. Only then can we stop the threat of unemployment, particularly among the young. Only then can our economy create the conditions for the creation of new jobs, which I consider the largest challenge in the New Year to a common Europe.
I consider a great challenge in 2014 to be how to manage migration and its implications. The EU and its member states will continue to intensively apply itself to the areas and regions from which refugees come (it will continue to be Africa, particularly the north, but it will also be Syria and other Middle East countries, it will also be regions and countries and military conflicts).
To help solve problems in the regions where they arise is by far the best solution even though it is not an easy prevention migration. I think, however, that there is also an urgent need to adopt new rules in this area. So that, for example, the institutes of political asylum is not misused for economic objectives and that the accepted migrants integrate effectively with the citizens of the countries that accept them. At the same time, we must ensure a convergence of our asylum systems and a proper application of existing rules by the member states. Finally, Europe needs a much better system to regulate labour immigration, to ensure that it does not lose out in global competition for the bright minds that can bring dynamism and new ideas to our societies.
Today it often seems that the project of multiculturalism in Europe is failing. This is also true because instead of making use of individual opportunities, immigrants are sometimes promoting their interests collectively. Some groups of immigrants set themselves apart. Instead of contribution to the common good, we sometimes witness abuses to the social system of the country. Europe should continue to show migrants its kind face. However, it should also show the necessary courage and determination against those who would want to abuse this kindness. In order to prevent problems with integration, European political parties should make a strong effort to bring immigrants into the political and public life. Otherwise, we are risking even deeper problems with integration.
Undeniably great, maybe even the dominant challenge to the free world, and also for our European community, is the challenge of security and the duty to prevent attacks like the one of September 11.Likewise, atrocities such as the attack on marathon runners and spectators in Boston, and most recently the residents of Volgograd. I want to highlight just three essential key factors of our European security:
• First, is the transatlantic alliance. A steadfast alliance of the EU and the US; effective cooperation in the NATO environment is and must remain a fundamental element of our European security as well as global stability;
• The second major element I consider to be, is the creation and development of European defence capabilities which will strengthen the partnership element of the European transatlantic alliance and will be complementary to the existing capacities and capabilities of NATO;
• Finally I consider as necessary the modernisation of our armies at national level and the cooperation of national armies at a regional level, which should be dominated by the principle of sharing and pooling, as well as smart defence.
Prior to the fall of the Berlin Wall the then US President George Bush senior stated his dream, his vision, to make Europe whole and free. Much of that vision has come true. It is amazing how Europe has changed in 25 years. But the work is not yet completed, not in the Western Balkans, or in the countries of the Eastern Partnership.
I believe that this year will continue to see the success story of Serbia, as well as the normalisation of its relations with Pristhina. That Macedonia and Greece will manage to unravel the Gordian Knot and further progress will be recorded in Kosovo and Albania and that Bosnia and Herzegovina will also see improvements. Montenegro is already on the right track. 2014 is a year of opportunities for these countries and the challenge for the EU is to develop wise, active and responsible policies to contribute to the realisation of these opportunities.
The big challenge for us all is the movement that is taking place on our eastern borders, especially in Ukraine. The EU should take an interest in the positive and in particular the sustainable development of Ukraine. It should not however compromise on its principles and criteria. Only then can the citizens of this country properly orientate themselves. Because, ultimately, only Ukrainian citizens can decide on their future.
The same as we decided our future ourselves, we, Slovaks, but also Poles, Czechs, Hungarians and the other countries of the former communist bloc 25 years ago.
I believe that this year we will also collectively protect and promote human rights not only in our countries, in those countries that aspire to EU membership, but everywhere in the world. The EU will be consistent and principled with any country in the world. That we will develop strategic partnerships also with countries where human rights are t limited, but that we shall be courageous and consistent in the protection of human rights in these countries.
We enter the New Year as a rule always with hope, with optimism, with positive expectations. It is good and natural. However, one should admit that we live in troubled times. The previous levels of prosperity are over but yet some people are expecting someone to come along to sign a cheque to get ourselves out from these troubled times. For some time it seemed that the answer to the challenges of the 21st century would be globalisation.
Technological development and significant social movements in all corners of the world have indeed led to rapid globalisation. Of growing concern and anxiety for people in today’s world is the frequent feeling that there will be ever less space in it for them.
People feel that they are becoming ever more lost in the labyrinth of communication highways and gigantic corporations. That they are losing their identity, their roots, and their traditions. Young people especially nowadays find it hard to find a job and fell confident about their future.
The number of people who place the blame for their own problems on politics is dangerously increasing. Many blame the so-called standard political parties. In my country – and I think it is not an exception – it is fashionable to vote for extremism. Elections are becoming manifestations of revolt, not choice. Militants, extremists and populists are winning recognition. The challenge of the EU is to offer answers to such trends, to such developments. The answer to the current difficulties cannot be extremism or chaos, as suggested in some circles. The answer cannot be collectivism as suggested by many, even by reasonable people.
We are rich in experience of collectivism in Central Europe: we all had the same, but the same was very little. The answer is the protection and promotion of individual freedom, individual rights, but also of the individual responsibility of every person.
The answer is politics that allows for individual opportunity, individual assertion of oneself, individual dignity. In other words, politics that puts a focus on quality education, on science, research and innovation. Politics that prefers and honours a healthy lifestyle, but also a real solidarity for those who are able to aid those whose handicaps prevent or limit them from creating these values.
I think an important and serious test for all responsible European leaders ahead will be the forthcoming elections to the European Parliament. To join in the efforts of combating populism and shining a light on their rhetoric, regardless of whether it comes from the left or right. The ways to respond to the challenges of today are various but must be offered in the values of our Western world which are also universal values.
These values should be unconditionally returned to, and these values are to be held onto. As did Konrad Adenauer, Alcide de Gasperi, Robert Schuman, and Helmut Khol for example.
If we stick to these traditional universal values, we can find the right answers to the challenges of not only the present, but also to those we will face further down the road.
[Speech given at the Konrad Adenauer Stiftung Annual Reception ‘European Challenges 2014’, 22 January 2014]Mikuláš Dzurinda Centre-Right Economy Leadership Transatlantic Values
Challenges for 2014
24 Jan 2014
In 2001 the well-known American economist Rudi Dornbusch summed up the attitudes of U.S. economists to the euro with the phrase “It can’t happen, it’s a bad idea, it won’t last”. For Dornbusch, as for many economists at that time, the euro represented a misplaced political project without the required economic rationale. The outbreak of the global financial crisis in 2008 at first seemed to corroborate Dornbusch’s negative assessment of the euro’s prospects. It has added to populist arguments that the euro is reducing the competitiveness of national economies and is somehow contributing to the difficult economic conditions facing member states.
However, these arguments fail to recognise the real achievements of the euro since its introduction into public circulation in 2002. In 2014 the euro remains an enlarging global currency with an important role across the financial markets. In the period since the outbreak of the financial crisis in 2008, the euro and European Monetary Union (EMU) have provided a framework for supporting struggling economies while putting in place an institutional framework designed to strengthen the economic co-ordination of member states. Political parties advocating a euro breakup remain in a minority across euro zone members.
Overall, populist rhetoric against the euro are fuelled by frustration at the slow pace of institutional reform within the European Union (EU) rather than entrenched public opposition to a common currency. The debate on the euro in 2014 needs to be moved from a static, ahistorical analysis of the weaknesses of EMU to a forward looking debate on banking and currency structures in a post-crisis environment.
The actions of the European Central Bank since 2011 have been vital in convincing the financial markets that the EU will act to establish an institutional architecture capable of strengthening EMU. Although significant achievements have already been made in this context, particularly with regard to budgetary and economic surveillance processes, much more work remains to be completed.
In the short term it is vital that the first two pillars of a robust banking union – a single European banking supervisor and a single mechanism for dealing with failing banks – are both brought into operation as dual supports to the euro. Any delays beyond the end of 2014 in implementing a mechanism for dealing with failing banks will increase market uncertainty, reduce private sector investment and act as further drag on employment growth. Internal EU disagreements as to the exact structure of a bank resolution mechanism should not be allowed to distract from the imperative of acting speedily to introduce such a mechanism.
The history of monetary unions, particularly in the United States, highlights that institutional reform (and policy innovation) is a required element of responding to a banking crisis. In this context it is up to the EU itself to meet the challenges of monetary and banking reform. If this is successfully progressed in 2014 Dornbusch’s negative assessment of the euro’s prospects will be long forgotten.Eoin Drea Banking Economy Eurozone Macroeconomics
The Euro in 2014: A Strength not a Weakness
20 Jan 2014
Business Economy Youth
Overcoming the stigma of failure: Perceptions of the European youth
23 Dec 2013
On 16 December, a delegation from the Centre for European Studies (CES) met with officials from the Organisation for Economic Cooperation and Development (OECD) in Paris. In a meeting with Yves Leterme, Deputy Secretary General of the OECD, a range of areas including economic, social and industrial policies were discussed as priority fields for both organisations.
Tomi Huhtanen, CES Director elaborated on the activities and priority topics of the CES. He noted that both the CES and the OECD share the belief that implementing reforms will lead to growth and sustainability in the economy. During the day, further meetings took place with key OECD experts including Monika Queisser, Head of Social Policy Division and Eckhard Wurzel, Senior Economist where the topic of the European welfare state and the issue of competitiveness were discussed.
The role of education in economic growth was discussed with Simon Field, Senior Analyst, Directorate for Education and Skills while Andrew Wyckoff, Director of Science, Technology and Industry, alongside Alistair Nolan, Senior Economist provided their insight on innovation and industry as new sources of growth. Finally, the topic of entrepreneurship and small and medium-sized enterprises was discussed with Sergio Arzeni, Director of the Centre for Entrepreneurship at the OECD.Economy Education Growth Jobs
CES meets OECD experts
17 Dec 2013
What would your employment ad sound like, young man? The variety of crises (financial, economic and debt crises) that clouded over the EU triggered intense youth employment debates. At the Centre for European Studies we carried out in-house research that paves the way to solutions.
Figure 1: Employment rate, age 15-24 years, EU28 and Turkey, 2002-2012 Source: Eurostat, extracted Sep. 2013
Youth employment (age 15-24) in EU-28 shows a downward trend ever since 2002. There was an increase to 37.3% between 2004 and 2008 when the economic boom created higher youth employment rates. When the system plunged into crisis, youth employment rates decreased by a large margin. The crises aggravated a structural problem of youth employment. In 2012 youth employment rate in EU-28 (32.8%) come close to the rate in Turkey (31.5%).
Figure 2: Employment rate, EU-28, age 40-64 years, 2002-2012 Source: Eurostat, extracted Sep. 2013
Our analysis shows as well that elderly employment increased rather steadily since 2002 (from 62.6% to 67.6% in 2012). The pre-crises economic development boosted the employment rate to 67.5%. The 2012 numbers indicate a clear recovery path for the EU-28. This shows that young people took the burden of the crises. In addition to that, more and more elderly people remain active in the labour market. This is a key achievement of the active ageing policies.
Figure 3: NEET rate, EU-28, 2002-2012. Source: Eurostat, extracted Nov. 2013
EU-28 NEET rate (young people not in employment, not in formal/informal education and training) shows no improvement since 2002. Again, the pre-crises economy delivered some relief. In 2002 the NEET rate (age 15-29) was 15.6% and 15.9% in 2012. The number of young people that are not employed or do not participate in a training has remained unchanged. This indicates that more and more young people stay in education and training programmes to compensate for not finding a proper employment.
Figures 4, 5 & 6: NEET rates, selected countries, 2000-2012. Source: Eurostat, extracted Sep. 2013
When we zoom in at individual countries, growing divergence in the EU surfaces. We distinguish three groups.
The outperforming Denmark, Germany, Luxemburg, the Netherlands, Austria and Sweden where we see a clear recovery trend in terms of NEET rates.
The average Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia where NEET rates are high (especially in Bulgaria). The lagging Greece, Spain, Italy and Portugal where NEET rates increased sharply and are still increasing.
The negative youth employment trend and continuously high NEET rates is one thing but there is more to it. Our research points out few other burdensome trends – labour mobility, unpaid internships and temporary employment.
Labour mobility within the EU rests very low, according to OECD data. Important causes for this are bureaucratic procedures, the burdensome recognition of qualifications and language barriers. These issues lead to the bigger problem – the incompleteness of the European labour market.
Unpaid internships are the second chunk of the youth employment issue. A survey by the European Youth Forum reveals that approximately half of the internships in the EU are unpaid. Without remuneration, fewer young people will be able to afford a traineeship due to the cost of living. Thus fewer youngsters will stand a better chance of being employed. Another effect of unpaid internships is that there are no contributions to the social security and tax systems.
Temporary employment rates for young people in the EU are very high, soaring over 42% in 2012, according to Eurostat data. The main issue here is the lack of sustainability and high uncertainty among youth. This for instance prevents many young people from establishing families.
- The crises were a wakeup call. The EU youth employment rate is a long-term negative trend and a result of structural problems.
- NEET rates today will hit back on EU’s economy like a boomerang. Simply put, the economy will be held back by the growing size of the EU’s lost generation.
- Europe is like a car with wheels spinning at different speeds. There is a great country-to-country difference within the EU in terms of youth employment and NEET rates. Instead of convergence, we witness divergence.
- Labour mobility, unpaid internships and temporary employment are overlooked topics. However, these are crucial bits of the youth employment issue.
- Blame-it-on-Brussels attitude was and still is a popular excuse for many governments. However, social, labour and youth policies are foremost in the hands of the Member States.
- Implement reforms. Southern Europe and especially the former Socialist countries should address the low youth employment rates and high NEET rates. The 2014-2020 Programming Period offers funding tools for such reforms.
- Bridge business and universities. Start-up platforms and initiatives, spin-off companies and clusters should be prioritised by governments through public and private investment (risk capital).
- Update education and skills. Introduce: 1. Vocational training to the bachelor’s and master’s degrees; 2. Entrepreneurship education and training in secondary and tertiary education; 3. Digital literacy and transversal skills such as creativity, critical thinking, self-learning and communication.
- Support youth labour mobility. 1. Cut the labour mobility red tape through labour legislation. 2. Revision of national labour regulations should be encouraged more by the European Commission. 3. Full implementation of the European Qualifications Framework. 4. Improve the foreign language skills of the young Europeans.
- Restrain unpaid internships. There should be more tax relief for companies that employ interns but no unpaid internships.
- Limit temporary employment. There are two main priorities in this field – ensuring more, permanent but flexible work contracts and deepened social partnership.
- Proactive young people. Knowledge is widely and freely accessible nowadays – the internet. Accumulating skills and knowledge makes you more competitive with a better chance of being employed. This is not a front row ticket to employment but at least you are getting closer to it.
Young, never employed, under qualified, looking for a future. Hire me!
12 Dec 2013
The latest session of the Working Group Economic and Social Policies of the European People’s Party that took part on 4 December 2013 discussed the issues of reforms and economic growth. The book by the CES and its member foundations, “From Reform to Growth: Managing the Economic Crisis in Europe” served as a background to the discussion and provided arguments for the debate.
The book analyses government responses to the current economic crisis, covering nineteen European countries, and based on this, offers recommendations to policymakers at national, regional and European level. The book argues that lasting economic growth should be restarted by a combination of fiscal consolidation measures and structural reforms, which include creating flexible labour markets, functioning pension systems and efficient public institutions.
The discussion at the working group focused on the varying experiences that different European countries have had with managing their economies during the crisis. Countries from all corners of Europe have made significant attempts to reform and thus increase the competitiveness of their economies; others have a long journey ahead of them. There is a lot of scope to learn from one another and the participants mentioned inspiring examples. At the same time, it was stressed that economic formulas cannot replace a policy focus on people’s personal development and welfare.
The European People’s Party operates several working groups in which experts and representatives of member parties take part. The agenda of the Working Group Economic and Social Policies is to debate economic policy challenges and strategies.
The book has been officially launched earlier this year during the fourth annual Economic Ideas Forum, which was held in Helsinki during 6-7 June 2013 and gathered high level European and national policy-makers together with economy experts. Several other launching events took place in other EU capitals, including Brussels, Berlin (organised by the Konrad Adenauer Foundation) and Tallinn (in cooperation with the Pro Patria Institute).Centre-Right Economy EU Member States Growth Macroeconomics
CES study on economic crisis discussed at Working Group of the European People’s Party
05 Dec 2013
The cost of health service is going to rise a great deal in coming years.This is due to the ageing of the population and to the cost of medical treatments at the end of people’s lives. Rising incomes in society also lead to higher expectations of health services and higher pay costs within the health service. Advances in medical technology make better treatments available, but these treatments are often costlier than the (less effective) treatments they replace.
POLICY CHOICES MAKE A DIFFERENCE
But there are choices that can be made. For example, on certain assumptions, a McKinsey study suggested that the cost of the health service in Ireland in 2040 could range between 10% of GDP and 18%, depending on policy choices. In the UK the range is between 11% and 14% of its GDP, and the range in the US is between 24% and 26%.
SO DO OUR OWN DECISIONS ON USING THE SERVICE
What can be done to contain costs? I saw a report of a British NHS report on Accident and Emergency visits which suggested:
+ one million of the 5.2 million annual visits to A and E were avoidable
+40% of patients who visit A and E are discharged needing no treatment at all
+ 50% of Ambulance call outs could be managed at the scene without going to hospital
+ 20% of GP consultations could be dealt with by self care or a visit to a pharmacy
These statistics suggest that there is plenty of room to encourage people to learn more about looking after their own health. The challenge is to devise policies that incentivise this in a responsible way.John Bruton Economy Social Policy Sustainability
Must the cost of healthcare go on rising inexorably?
21 Nov 2013
Vít Novotný Crisis Economy Growth Sustainability
From Reform to Growth – Managing the Economic Crisis in Europe
05 Nov 2013
GLOBALISATION REFLECTS OUR CHOICES
Ireland’s new Minister for European Affairs, Paschal Donohoe TD, gave an interesting speech last week. He made the point that globalisation, of which many people complain, is not something “done to us, but is a consequence of the human desire to communicate, share, and exchange”. He is right.
He could have added that humans also want lots of variety and choice in their lives, sometimes to an excessive degree, and that this drives globalisation forward as people go to the ends of the earth to find elusive “highs” in their lives. He went on to say that the European Union gives us an opportunity to “positively mediate the consequences of globalisation”. He is right here too. A small country on its own, like Ireland, could have little impact on global trends, but the EU, as a block, can make a difference. Globalisation has been facilitated by the internet, Skype, containerisation, cheap air fares and plentiful energy sources.
All these took investment to generate and would not have happened if people did not want them or were unwilling to pay for them. These technologies cannot be “uninvented” now. So globalisation cannot be reversed. It is here to stay.
HOW SHOULD WE COPE WITH THE CONSEQUENCES OF GLOBALISATION?
But all this variety, all this communication and all this exchange does not necessarily make us happier.
In fact, the more choices we have to make, the more discontented we can often become. This is especially so if we feel we have to make these choices to keep up with neighbours or others with whom we feel we must compare ourselves. Choices are hard to make. They require an effort. They involve saying No, as well as Yes. And the more choices you have, the more are the things you have to say No to. The more options you have, the more regrets you may have about the choice you could not make. The more choices we have the more we expect of life and of ourselves.
“The Paradox of Choice”, by Barry Schwartz, had the subtitle “How the culture of Abundance robs us of satisfaction”. People are shopping more now, but enjoying it less. Increased choice may actually contribute to the recent epidemic of clinical depression. Depression has tripled in the last two generations, despite all the treatments now available, that were not there 60 years ago.
The culture of “more choice” undermines institutions like churches. Because choice is the priority, people do not want to regard religious teachings as commandments, about which they have no choice, but as suggestions about which they themselves are the ultimate arbiters.
The over estimation of the value of choice may also have something to do with the increased divorce rate, because, as Schwartz puts it, “establishing and maintaining meaningful social relations requires a willingness to be bound and constrained by them.” But constraints are exactly what the ideology of choice rejects!
EUROPE NEEDS A RENEWED VALUE SYSTEM, IF IT IS TO MEDIATE GLOBALISATION
“Studies have estimated that losses have twice the psychological impact as equivalent gains” says Schwartz. In other words, people hate losing 100 euro, a lot more than they like winning 100 euro. This may explain why people in modern well off societies are so anxious, and why, in the face of recent economic losses, many are regressing to old dead end ideas like nationalism, class warfare, and xenophobia.
Happiness is at last being measured by economists, as well as the gross domestic product. It seems that once a society’s per capita wealth crosses a threshold from poverty to adequate subsistence, further increases in national wealth have little effect on happiness. You may find as many happy people in Poland as in Japan, even though the average Japanese is much richer than the average Pole. This should make us stop and think.
Economic growth is a good thing, but it has physical limits, as we are discovering with climate change and pollution. Economic growth also has psychological limits, in the sense that some forms of growth increase anxiety by offering people a bewildering array of choices that they do not feel competent to make. Markets only work well if people are informed enough, and have the time and mental energy, to make wise choices.
Laws and government subsidies will never be enough. Societies need a strong value system if they are to be happy. These values must put human respect ahead of material things and human relations ahead of maximising choice. The science of economics is only beginning to recognise this.
If the European Union is to positively mediate the consequences of globalisation, it must ask itself whether the values of more choice and more material abundance, imported from economics, are sufficient to build a good society. I believe they are not, but I do not have the sense that a discussion of alternative and better European values is yet taking place.John Bruton Economy Globalisation Growth
Globalisation is not something that is done to us
04 Nov 2013
The EU Summit last week discussed the digital economy, a youth guarantee, apprenticeships, and the European Semester. During the Semester, each EU state will have an input to the policies of each of the other states. Hopefully, they will learn from each other.
But it would be a mistake to think that the main ingredients of a solution to the economic problems of the countries of the eurozone will be found at European level, because the problems did not, in the main, arise at European level. Although they had the same currency, some countries did much better than others did. Between 2008 and 2013, the growth in the euro zone ranged from plus 6% growth in Slovakia, to minus 6% in Greece. Some countries (Bulgaria, Sweden and Germany) grew faster than the United States between 2008 and 2013, while most of the other EU countries saw their economies contract.
It is good that, at EU level, we will now, through the European Semester, have detailed peer review of one another’s growth policies, including market liberalisation, taxation and public spending. But it would be a great pity if this encouraged national governments to delegate strategic thinking, about how to maximise the growth of their own economies, to the European Union.
Growth promoting reforms, whether these reforms be
+ of professional restrictions,
+ of slow and costly courts systems
+ of welfare systems that penalise work,
+ of educational systems that leave too many 15 year olds unable to read properly,
+ or of public sector wage and pension policies that are unaffordable,
will all differ from country to country, and can only be made on a country by country basis. The EU cannot do that job for national governments. They must do it themselves.
EUROPE MUST TAKE RESPONSIBILITY FOR THE EUROZONE BANKING SYSTEM
The EU has some things it must do. It must set up a single banking system for the euro zone. Given that most money takes the form of bank credit of some kind, it makes no sense to have a single currency without a single banking system. It makes no sense either that, at the moment, a badly run, and possibly insolvent bank in a well run country can borrow much more cheaply than can a well run and solvent bank in a country whose public finances are in a mess. These things can only be put right by EU action. Nor is it right that European arrangements to deal with banking and currency problems should be held hostage to the decision of the constitutional court of one country (Germany).
THE NEXT GENERATION WILL BE LESS ABLE TO REPAY THIS GENERATION’S DEBTS THAN THIS GENERATION IS TO MAKE SAVINGS
I find the arguments against “austerity”, in countries whose governments are spending more than they are collecting, to be lacking in rigorous thought. If a state is spending more than it is taking in by taxes, to borrow more today is simply to decide to pass the “austerity” on to a later generation, and to do so with interest! As a result of compound interest, a future generation will have to repay a lot MORE that the present generation will have borrowed. But the next generation will be far LESS able than we are to meet our bills that this one is.
This is because, 35 years from now, there will be two Europeans at work for every European who is retired, whereas today there are four Europeans of working age for every European who is retired. Thus the future burden of debts taken on today will have to borne out of the earnings of a smaller number of working people than are at work today. And those working people will also have to provide for a larger number of retired people than this generation has to cater for.
I wonder what the anti austerity protesters think of that!John Bruton Banking Crisis Economy Sustainability
EU can help, but states must take primary responsibility for reforms
30 Oct 2013
Are the US President, and the US Congress forgetting the rest of the world?John Bruton Economy EU-US
Are the US President, and the US Congress forgetting the rest of the world?
16 Oct 2013
Due to strong growth rates, BRICS countries are more confident than ever and seek contact with each other. The increase in BRICS to BRICS trade over the last ten years has been impressive: approximately a 1000%, from 29 Billion in 2000 to 319 Billion in 2010.
In a time when Europe is fighting a severe recession and growing economic divergence between its member states, China proposes a currency swap with Brazil to assure access to its raw materials and large consumer market and a BRICS Development Bank including a contingent Reserve Arrangement up to 100 Billion to support these countries is in the works. Will Europe become a victim of intra-BRICS closeness and miss out on trade opportunities? Will Europe have to step aside as a global leader in the near future?
In classic international relations ‘realism’ as opposed to ‘idealism’ is still the dominant theory to make sense of the international world order. In this view, each actor is only concerned with its individual and relative gain instead of absolute gain for multiple countries. Self-interest and survival are their only concern. Is there a danger of deriving to a Hobbesian state of a war of all against all for, for example, natural resources?
We would argue that the EU is still a very rich and competitive continent and all actors (EU, BRICS, etc) also have an interest in developing their so-called ‘Leviathan’. All actors should engage in concluding and creating bilateral or multilateral trade agreements and institutions to enforce a level playing field. At that levelled field, businesses can compete, innovate and generate welfare for an ever growing number of citizens.
Although it is a well-known fact that the Asian countries experience a much higher economic growth than Europe at the moment, the EU-economy is still three times the size of China, measured in GDP. Low growth rates in a large economy still generate more new market demand than high growth in a smaller economy. Other than that, the majority of the BRICS countries export-basket still consists of raw materials and the EU market remains one of the biggest destinations. Brazil for example is the single biggest exporter of agricultural products to the EU.
Furthermore, the EU is China’s biggest trading partner. It illustrates that these emerging economies for a large part still rely on the EU, so a strategy based on pure relative gain might not be the smartest move.
Despite recent trade liberalizations, the Brazilian market for example, is still relatively high protected with an applied customs averaging tariff of 12%. The EU therefore consistently encourages Brazil to reduce tariff barriers and to maintain a stable regulatory environment for European investors and traders. Russia and China on the other hand recently joined the WTO and the latter has made good progress in its membership commitments but industrial policies and non-tariff measures in China still discriminate against foreign companies. India has embarked on a process of economic reform and progressive integration with the global economy that aims to put it on a path of rapid and sustained growth. Negotiations on a free trade agreement with the EU started in 2007.
Considering the theory of ‘realism’, the EU does everything in their power to develop sustainable trade relations with the BRICS countries. So will the rise of the BRICS mark the end of the EU as a global leader? According to the Global Competitiveness Index 2013 from the World Economic Forum, the EU is still miles ahead of the BRICS when it comes to key factors like infrastructure, higher education and business sophistication. This lack of development in some of the most essential market characteristics will keep the BRICS from taking over EU’s top position in the world market in the short to medium term.
However, the EU is challenged and should keep up its focus on increasing its (cost) competitiveness In times of global challenges and economic crises, emerging and established economies should unite in bilateral FTA’s and WTO memberships in order to create a level playing field. Striving towards absolute gain for all the aforementioned continents might in fact be the best way to serve both EU and BRICS’ self-interest.
NOTE: This blog is based on a public presentation in the framework of a Konrad-Adenauer-Stiftung Conference in Berlin on 25th September 2013, “Twilight of the Gods in Europe, A Golden Age of the Emerging Countries? The EU and the BRICS States Facing New Global Challenges.”Stefaan De Corte Barend Tensen Economy European Union Foreign Policy
Stefaan De Corte
The rise of the BRICS countries: threat or opportunity for the EU?
14 Oct 2013
At a recent presentation by the Danish Center for Political Studies (CEPOS) on the highly praised Nordic Model of reform, I gained more insight into how this model really works. Along with a paper entitled “The Nordic Way”, a contribution to the World Economic Forum in Davos, this presentation by CEPOS President, Martin Agerup, was a real eye opener and discussed some of the myths behind one of the most successful economic models in the world.
From the beginning, it was made clear that the Nordic Model is more influenced by individualism rather than community. To quote the authors of the paper, the Nordic Model is ‘less tied down by legal, practical or moral obligations within families’ but is instead based on ‘individuals of both sexes’ becoming ‘more flexible and available for productive work in a market economy.’ This individualism, in combination with a positive view of the state, leads to a higher level of social trust, which in turn benefits economic performance through a subsequent decrease in transaction costs, corruption and a greater respect for the rule of law.
Much to my surprise, the presentation underlined that the Nordic Model does not exist and highlighted that we should instead speak about ‘continuous socio-economic reform’ as the ‘Model’. These continuous reforms were much more concentrated on strict budget rules, an independent central bank, liberalisation of markets, deregulation of labour legislation and decreasing the ‘security’ component in the flexicurity model. This, in reality, may not have been evident to the many advocates of the Nordic Model. Furthermore, the Danish experience has showed that unemployment figures started to decrease once the duration of the unemployment benefit scheme was reduced from 7 years to 4 years, the pension age was increased and early retirement schemes were lowered financially.
In the past, the World Economic Forum has released ranking indices on competitiveness, which are essentially productivity indicators, and has always seen the Nordic countries placed in the top 20. However, in this system, labour costs are not taken into account and if they were, it is argued that Nordic countries would appear much lower in the ranking order. This reality has already been acknowledged by a large majority of Nordic businesses and economists for a while already. In Denmark, out of a population of 5.5 million people, 1.2 million benefited from transfer payments or were public sector employees. By 2012, this number had risen to 2.9 million leading to an increase in numerous taxes, including labour, which have helped weaken the Danish economy through an increase in cost of production and by decreasing its competitiveness on the world market. As a consequence, the employment in the sector of industrial production has declined as well as foreign direct investments.
To summarise, the Nordic Model is a system that includes continuous reforms and is built on individualism and a strong state. The reforms have focused on introducing free market components into the economic model. However, in order to preserve the high standards of living, further reforms will be necessary with a reduction in the high taxation levels.
Link to the paper: http://www.slideshare.net/abcsjf/davos-the-nordic-way; CEPOS: www.cepos.dkStefaan De Corte Business Economy EU Member States Macroeconomics
Stefaan De Corte
The Nordic Model: three myths exposed
20 Sep 2013
Banking Economy Energy Growth Transatlantic
Economic Ideas Forum Helsinki 2013 – Conference Report
02 Sep 2013
The relationship between our two continents is not a new one. Our people are intertwined in a long and complex history, one which is steeped in mutual respect, assistance and friendship. Our history of course was not always idyllic, nor have we always seen eye to eye. But as is always the case with old friends, we have worked through our troubles, and have always been there for each other in times of need.
Today, all eyes are firmly locked on the economic and trading aspect of our relationship. This, of course, is in no small part due to the recent launch of negotiations of the Transatlantic Trade and Investment Partnership. The scope and potential of this agreement is immense, and I will return to it later. But first I would like to examine the essential nature of our special transatlantic friendship, from the perspective of stability, democracy and an enduring peace.
Two summers ago, I holidayed with my husband in France. We spent 10 days driving around Normandy, visiting the beaches, graveyards and landmarks associated with the World War 2 “Normandy landings” of 1944. These sites, where countless lives were lost, in defense of truth and democracy, reminded me of the special connection between our two great continents. Standing at Pointe du Hoc, I was particularly conscious of the words of Ronald Reagan, when he stood on that same headland on the 40th anniversary of the DDay Landings. The very spot where the allied troops had stormed to liberate Europe from the tyranny of Nazism. He said:
“Today, in their memory, and for all who fought here, we celebrate the triumph of democracy. We reaffirm the unity of democratic peoples who fought a war and then joined with the vanquished in a firm resolve to keep the peace. From a terrible war we learned that unity made us invincible; now, in peace, that same unity makes us secure. We sought to bring all freedom-loving nations together in a community dedicated to the defense and preservation of our sacred values. Our alliance, forged in the crucible of war, tempered and shaped by the realities of the postwar world, has succeeded. In Europe, the threat has been contained, the peace has been kept.”
Whatever about conjuring up the savagery of that war today, it must have been chilling, yet exhilarating for President Reagan to stand there, just 40 years after tens of thousands of men had lost their lives in that very place, realizing the scale of the tragedy which occurred, but also knowing that out of that tragedy, had grown a real and enduring common purpose.
That purpose, on both sides of the Atlantic, was to leave behind a redundant skepticism and nationalism borne out of suspicion and fear. It was to understand that by building trust, and forging close and intense relationships, both within Europe and between Europe and the United States, we could ensure a much brighter future for our people. And this we have done.
My family lost two members fighting Flanders Fields during World War 1, they would be great grand uncles of mine. In the first half of the last century, countless families the continent of Europe were touched by war, as they were all over the United States of America. We resolved to end the bloodshed and pool our might to create something much stronger, much more satisfying. And we have succeeded, with democracy and peace flourishing on both sides of the Atlantic. This is no mean feat.
But of course, we must do more. I firmly believe that if we are not moving forward, we always risk slipping backwards. Europe and America must now explore new and dynamic ways of moving forward together. We must, of course, always defend and promote our values. These are the shared values which we believe integral to the protection and respect of mankind. Values, based on essential freedoms – freedom of expression, freedom of association, freedom of religious practice, freedom of conscience. These are the values which underpin our shared respect for human rights, and which bind our democracy together.
These values are the threads that weave together the magnificent transatlantic tapestry of Europe and America. They are strong and durable, yet need careful attention, lest any of the carefully woven threads come loose. Building on these shared values, we see the immense potential that exists to do more – to weave Europe and America ever closer together. This is where the trading partnership presents such a vital opportunity.
We know our citizens are hurting. We know that since the shock of Lehman Brothers crossed the Atlantic like a tsunami, things have been difficult for both of us. In Europe we have a banking crisis that is not over, we have a significant debt crisis, and most worryingly of all we have a major unemployment crisis. We know that things are difficult Stateside too. You share many of these problems. To solve these enormous economic challenges, we must work together. There is no alternative.
In Europe we know we need to grow our economy, and we recognize that in the years ahead as much as 90% of future growth across the globe will be generated outside of Europe. Enhancing trade is one of the few ways to bolster much needed economic growth without drawing on severely constrained public finances. Advancing the external trade agenda therefore featured prominently on the Irish Presidency programme for the first 6 months of 2013, and it is no secret that Ireland has prioritised the EU-US trade relationship. This relationship simply makes sense for Europe and for the US
I don’t need to bore you with statistics, but it is a fact that the EU and the US enjoy the most integrated economic relationship in the world. Our economies account for about half the entire world GDP and for nearly a third of world trade flows. EU investment in the US is around eight times the amount of EU investment in India and China put together. Total US investment in the EU is three times higher than that in all of Asia. In other words: The transatlantic relationship defines the shape of the global economy as a whole. Either the EU or the US is the largest trade and investment partner for almost all other countries in the global economy. So we have already achieved much in terms of deepening our economic ties, but there is still much more to do.
It logically follows, that releasing the further untapped potential of the EU-US trade relationship, would provide significant benefit in terms of growth and jobs, on both sides of the Atlantic. Such deepening of our ties is both timely and very necessary. Our trade relationship has an enormous potential, which is far from being fully exploited. Currently 15 million jobs depend on EU-US trade. That is 15 million people either employed by European companies in the US or by American companies in the EU. Last year an OECD study demonstrated that the elimination of non tariff barriers to transatlantic trade and investment would boost US GDP by 2.5% and EU GDP by 3% annually.
There are also long-term benefits to unleashing the full potential of transatlantic trade: our mutual competitiveness in the global economy. As more and more production flows from the US and the EU to emerging economies we must face facts. In order to remain competitive in the global economy Europe and the US must innovate. Long-term evidence shows that the flow of trade and investment help spread new ideas and innovation, new technologies and the best research, leading to improvements in products and services. By investing in the EU-US trade potential, we are not only releasing short to medium-term economic and jobs growth, we are also ensuring the long-term sustainability of our economies’ competitiveness.
Given these enormous benefits, both in the medium and the long-term, I am delighted that a real momentum to advance transatlantic trade is emerging. So now the negotiations for the Transatlantic Trade and Investment Partnership are underway. And it only took 20 years for this breakthrough! I am keenly aware of the fact that there will be difficult choices for both sides to make now that the talks are underway in earnest. Given the low average tariffs, the key to unlocking the potential of our trade relationship lies in the tackling of non-tariff barriers, as highlighted by the OECD. These consist mainly of customs procedures and of diverging regulatory systems, but also other non-tariff measures, such as those related to certain aspects of security or consumer protection.
There will be difficult bridges to cross in the area of health and safety standards, public procurement and agriculture but I am convinced that if both sides take an open and flexible approach, we will be able to agree on regulatory issues – effectively setting the standard for world trade. An ambitious, comprehensive and far-reaching agreement on trade and investment between the EU and the US will not only trigger economic growth in our respective economies. It will also send a strong signal of leadership to other economic powers.
This is the least of our responsibilities to our citizens on both sides of the Atlantic. The challenges we face, arising from recession, depression, and the sovereign debt crisis, requires us to be brave, and to go where we haven’t ventured before. We have the formula to a accelerate towards a transatlantic market, which will create jobs, stimulate recovery and contribute to global growth. This formula can ensure much needed benefits for our businesses and our citizens. We must pursue a common vision, with a mutual sense of purpose, for this vision to become reality.
As Reagan said in Pointe du Hoc in 1984 “We were with you then; we are with you now. Your hopes are our hopes, and your destiny is our destiny.” Let us never forget how much more we can achieve together.
[Keynote speech given during the 4th Transatlantic Think Tank Conference, Washington, July 2013]Lucinda Creighton Economy EU-US Trade Transatlantic
A Union of Values, Respect, Democracy and Common Economic Interest
23 Jul 2013
Due to high government debt levels and the dangers of self-defeating austerity, smart fiscal consolidation measures are needed that foster economic growth. A thorough review of the relevant literature provides many useful insights. To regain credibility, a clearly communicated broad reform program (including structural reforms) is required. Targeting mainly public expenditures, rather than revenues, raises the chances of expansionary effects. The timing of consolidation should focus on adjustment in structural terms to leave room for automatic stabilisers. The main part of the study evaluates the impact of individual consolidation and fiscal reform measures on consolidation success, on economic growth (in the long and short term), and on social fairness.Economy Growth Macroeconomics Sustainability
Smart Fiscal Consolidation: A Strategy for Achieving Sustainable Public Finances and Growth
09 Jul 2013
The topic of this year’s Economic Ideas Forum (EIF), organized by the CES in Helsinki, was “From Reform to Growth: a Roadmap for Europe”. We chose this title because we are convinced that it is the combination of budgetary AND structural reform that will create the conditions in which lasting growth is possible. And only lasting growth will lead to more and better jobs for Europeans. It is difficult to image a better place than Finland to organize a conference with this in mind. The country successfully reformed itself after an economic crisis 20 years ago and today it is a prime example of good economic governance.
“Both more Europe and more national responsibility”, these are the words spoken by Prime Minister Katainen when addressing the European Parliament’s plenary session in April, and I could not agree more. To the populist voices claiming that Europe cannot find common solutions: I say that’s simply not true. To the populist voices saying that European institutions are a threat to their countries I say, quoting Prime Minister Katainen, that strong rules and strong European institutions are the protectors of the member states, especially the smaller ones.
The EIF was a great opportunity to emphasize the idea of cooperation between different Member States. At the European People’s Party (EPP), we have always felt that the EU is much more than a partnership. The EU is a community, and it brings together countries of different size, economic power and wealth, and different cultures. However, the aim is to find, and strengthen, the things we have in common and to value the richness and opportunities of our diversity.
At the EPP we believe in the power of individuals and the importance of union and solidarity. We believe that a European community exists an adds value to people’s lives. It is an antidote to both egoism and populism. This is why, when citizens and states show initiative to cope with difficult times, this European community should show its solidarity. The strong have to help those who are weakened and the weakened have to make the effort to get back to economic growth. This means reaching a careful balance. We must give our members the freedom to follow their own paths to success, while maintaining a common goal and vision.
We do not believe in the artificial growth defended by other parties. We profoundly disagree with their proposals to create unsustainable, short-term growth by increasing public spending and refusing to present credible measures for fiscal consolidation. This is an irresponsible and populist approach, which will lead us deeper into the crisis.
I should make a small mention of my own country: Spain. It has been a tough few years: reforms were unpopular and often misunderstood, but we have been patient. We held the course and the economic fundamentals are starting to paint a better picture. Unemployment has decreased for three months in a row, inflation has been kept under control and the competitiveness of our exporting companies has increased non-stop. I believe that we can feel prudently encouraged, and all my colleagues in the EPP, Prime Ministers, Finance Ministers, have shown their admiration and encouragement for our reforms and efforts.
Maintaining social cohesion is a priority, but we must achieve this in a responsible, sustainable way, with emphasis on the “sustainable” part because this is where we differ most from the Socialists. We know that growth is not something that a government, or the EU, can decree. Growth is created by people: by entrepreneurs and consumers who act within a stable and predictable framework. In order to create this framework, market confidence in politics has to be restored, and that means fiscal consolidation and economic reform. In the long run, it means a stronger economic and political Union.
There is no silver bullet for resolving the current crisis. Its causes are complex and the solutions cannot be simple, which is why conferences like the EIF are necessary.Antonio López-Istúriz White Economy European People's Party Eurozone Growth
Antonio López-Istúriz White
The Economic Ideas Forum: a roadmap to sustainable growth
26 Jun 2013
This report surveys recent works in political economy showing that trust—and civic capital more generally—matter for various aspects of economic well-being and presents new evidence from European countries showing that trust has deteriorated considerably in those European countries that have been affected the most by the ongoing economic downturn. We also discuss policy recommendations. The key message is that because trust and social capital matter crucially for economic and institutional development, countries must both monitor developments closely and pursue policies that cultivate civic social capital. Given strong inertia, changing people’s beliefs and promoting civic engagement will not occur overnight. Targeted policies can increase civicness and promote social capital considerably. First, promoting education seems crucial as, a higher level of education cultivates social capital. Second, countries where primary and secondary education are based on lecturing and memorising, should alter the curriculum towards more group activities, team projects, and critical thinking based on a dialectic method. Third, policymakers should continue promoting the outward orientation of the economy and the removal of administrative barriers to entry that fuel corruption and impede competition.Crisis Economy Education Ethics Values
Trust(ing) in Europe? How increased social capital can contribute to economic development
10 Jun 2013
With respect for common rules and values, solidarity but also strong national responsibility, and the EU functioning in a way the citizens can support it and feel it as their own, Prime Minister Jyrki Katainen highlighted.
PRESS RELEASE, 6th June 2013 Helsinki
Today in Helsinki, the Prime Minister of Finland, Jyrki Katainen, opened the 4th Economic Ideas Forum (EIF) organised by the Centre for European Studies (CES) with the title “From Reform to Growth: A Roadmap for Europe”, by emphasising the need to keep Europe united. “Europe cannot afford divisions between Member States. Leadership is about unity, not about divisions.” PM Katainen stressed that leaders have to be responsible. In his speech he pointed out the need for a profound debate about Europe’s future, “we should not allow dogmatic voices to dominate it”. He reminded the audience of both populists, who attempt to blame the EU without offering solutions, and of those who demand the immediate creation of a United States of Europe. Instead, he advocated a modern, pro-European pragmatism that includes both ‘more Europe’ and more national responsibility. “We need more Europe, but fair Europe”, with respect for common rules and values, solidarity but also strong national responsibility, and the EU functioning in a way the citizens can support it and feel it as their own. PM Katainen said it’s time Europe regained its self-confidence: we need to highlight what has worked, reminding the international audience of that the euro has been successfully stabilised and the eurozone kept intact. “In Greece, the talk is now of “Greekovery“ instead of Grexit”. He also mentioned the importance of strengthening the Economic and Monetary Union, for instance by establishing the banking union, reminding, however, that more needs to be done. According to the Prime Minister, unemployment remains the biggest challenge, especially with the youth. Measures are also needed to improve financing for small and medium-sized companies and to make Europe strong enough to meet global competition. “We have to also protect our continent from protectionism”, he added. Prime Minister Katainen lauded the Economic Ideas Forum for providing a good opportunity for leaders to exchange views without time constraints. On Friday 7th June the EIF will welcome discussants such as Enda Kenny, Taoiseach of Ireland, Antonis Samaras, Prime Minister of Greece,Valdis Dombrovskis, Prime Minister of Latvia, Olli Rehn, Vice-President of the European Commission, and Michel Barnier, European Commissioner for Internal Market and Services, among others.Business Centre-Right Crisis Economy Jobs
We need a united and fair Europe
06 Jun 2013
The global economic crisis that began in 2007 has posed huge challenges for European citizens and governments. The crisis has shown that the ﬁnancial sector has not been adequately regulated and supervised, that governments and individuals have overspent, and that European economies are suffering from structural problems. This book, a collaboration between the Centre for European Studies and its member foundations, assesses government responses to the crisis at the national, EU and regional levels, and also offers policy recommendations. Governments should work with one another and with EU institutions to improve bank supervision and regulatory mechanisms. They should undertake ﬁscal consolidation measures, bearing in mind that government deﬁcits and debt incur costs that burden future generations. Finally, they should undertake structural reforms such as creating ﬂexible labour markets, increasing the retirement age and shaping efﬁcient public institutions. Implementing such measures would bring about lasting economic growth, contribute to job creation and set Europe on the path to prosperity.
You can buy the book, including e-book versions, at:Centre-Right Crisis Economy EU Member States Growth
ibookstore.com (http://ces.tc/1eFKvDP) and
From Reform to Growth: Managing the Economic Crisis in Europe
31 May 2013
Current demographic changes are a major factor in the increasing societal interest in the contributions older generations can make to the development and cohesion of society. This Centre for European Studies study argues that the traditional view of ageing is gradually being replaced by a new perspective, one with increased focus on older people’s capabilities, resources and potentials. It suggests that population ageing does not imply inevitable declines in a society’s competitiveness or reduced intergenerational solidarity. Amongst other policy recommendations, the study proposes flexibility in age limits, to prevent exclusion of older people from areas of societal responsibility. The study encourages a stronger focus on the productive participation of older people in political and public discourse, and support for civil engagement of older people through mechanisms such as incentive systems.Economy Ethics Social Policy Society Values
Active Ageing: Solidarity and Responsibility in an Ageing Society
08 Apr 2013
It has been five years since the banking crisis erupted in the United States. If, instead of boasting of having the most robust financial system in the world, the Spanish Government had immediately begun the process of restructuring its financial system, Spain would not have needed European aid to complete this arduous task. However, we should not cry over spilt milk. The important thing right now is to ensure that this type of crisis will never be repeated.
One year ago the Spanish savings banks finally acknowledged that they had serious problems after making excessive loans to the construction sector. Months later, problems with the saving banks turned into a government crisis: after injecting money into the financial system in order to save the banks, they continued to experience problems with financing because of the lack of trust of investors. This problem in countries like Spain and Ireland spread to the rest of the European Union. What started as a banking crisis ended up being a threat to the euro. It created a vicious circle between the banks, the trust in the Member States and the euro.
If we have learned anything from this crisis is that the architecture of the euro was flawed, since we created a monetary union with different economic policies and banking regulations. The result was that the citizens ended up paying for the banking disaster. Now we have the opportunity to change the structures supporting the euro which we were not able to be put in place at the time of its introduction..We are entirely committed to this task.
In order to do this, the European Parliament has been proposing to create a banking union for more than a year. The primary goal of this proposal is to protect taxpayers being forced to pay for the banking crises. Firstly, we need a single supervisor to ensure that all EU banks are supervised and they do not pose a risk to the rest of the banking system. This would guarantee that, for instance, a badly supervised saving banks in Spain or poorly supervised banks in Ireland would not pose a risk to the rest of the countries. This joint monitoring system, along with a Deposit Guarantee Fund and a common crisis resolution mechanism should be the three axes of a reform that will protect the citizens of all euro countries from another banking crisis.
The truth is that progress in the last year has been substantial. However, there is some cause for concern in relation to the speed at which European institutions are responding to the problems posed by the banking crisis. Sometimes it seems that we fail to react until we are on the brink of another crisis. Progress was made last year because Europe felt the pressure of rising bond spreads. With lower spreads, we probably would have not reacted. Therefore, this year we risk failing to take decisive action and creating the banking union that is so urgently needed as bond markets appear more stable.
These days there is a heated debate on a bailout for Cyprus which seems to be breaking the taboo of the deposit insurance fund and its consequences for the fledgling banking Union. It is important to contextualize the measure. A high percentage of deposits in Cypriot banks are foreigners, mostly Russians. This is not the case in other euro zone states. Also, whether we like it or not, we must not forget that Germany faces an election in two months. I tend to be positive and believe that the Cyprus bailout may be the price we have to pay so that the Banking Union becomes a reality.Pablo Zalba Banking Crisis Economy EU-Russia Eurozone
Cyprus bailout and the banking union
20 Mar 2013
The European Council reached a political agreement on key elements of the European Union’s budget for the period 2014-2020 (multi-annual financial framework) at its meeting on 7th -8th February 2013. However, the formal, legally binding agreement has to be jointly reached by the European Parliament and the Council of the European Union, for which the General Affairs Council has the lead. The Lisbon Treaty requires that the position of the Parliament is to be taken into account in this process.
From an EPP perspective, it is important that the budget of the European Union is more than the sum of diverging national interests. It shall serve the wider European interest. The budget shall give the Union the financial means to fulfill its tasks and obligations, and finance its main policies in a future oriented manner.
The European Parliament adopts its formal position for the start of the negotiations in a Resolution on 13th March. The Council will adopt its position at the next meeting of the General Affairs Council on 23rd April 2013.
The European Parliament has made it very clear that the outcome of the European Council is not to be seen as the final agreement on the Union’s budget for the next 7 years and it cannot be imposed upon the Parliament. The political agreement of the European Council is, therefore, the starting point, not the ending point of this inter-institutional process. Due to the fact that it is the first time that the Lisbon Treaty applies to the seven-year EU budget, the role played by the Parliament in this process will serve as a precedent for all future EU budget talks. It is because of this that the Parliament is expected to have a particularly firm position.
The main demands of the Parliament towards the Council are: flexibility in the implementation of the budget; a compulsory and comprehensive revision of the budget during its implementation; and an agreement on own resources, as a source of revenue for the EU budget. A wide majority of the Parliament supports these claims. Several Member States have also indicated sympathy for these demands and the Council’s negotiation mandate might contain some space of maneuver to meet these Parliament’s requirements. These points proposed by the Parliament are valuable points, and are worth including into the final agreement, so that the final budget assures that the Union meets its tasks, while the sensitivities of individual Member States are also taken into account.
For the future, in order to avoid the escalation of conflicts on the EU budget, which also go against the wider European interest, a particular attention needs to be given to an EU budget built on own resources. This is also the spirit of the EU Treaties, which foresee EU own resources as the source of financing for the European budget. At this stage, each opposition leader in the Union’s 27 Member States tries to politically exploit at national level the negotiations on the EU budget. This puts extreme pressure on each EU Head of State or Government to secure national interests as a matter of priority. Any compromise reached by the European Council is subsequently exploited by opposition parties, often in a populist way, and presented as against the interest of the respective Member State. This leads to 27 divided national debates on a European topic. This is not in the interest of the Union. Pro-European forces should unite to explore opportunities for an EU budget built on own resources.Siegfried Mureşan Economy EU Institutions EU Member States Integration
The future negotiations on the EU budget: what to expect?
12 Mar 2013
The Schuman Report on the State of the Union is a work of reference which everyone now looks forward to reading every year. For decision makers and observers of European policy it is a source of original thought and ideas, underpinned by a strong requirement for quality. It is a tool for those who are looking for reliable sources in terms of European statistics and macro-economic data. Some eminent people have chosen to contribute their ideas also. In 2013, Josef Ackermann, former CEO of Deutsche Bank, Chairman of the Board of Directors of Zurich Insurance Group , offers his analysis of the banking Union, Lord Dykes, Foreign Affairs Spokesperson for the LibDems in the House of Lords, provides readers with his view of the future for the UK in the European Union and Alain Lamassoure, MEP, Chairman of the Budget Committee in the European Parliament, suggests a budgetary federation.The very best specialists help to throw light on the major trends ongoing in the economy and also in international and European politics. This book includes around 35 maps that are often unique, in explanation of the major issues the Union is facing. It also includes a summary of political Europe which analyses the 2012 electoral year (among France, Greece, The Netherlands, Romania), looks into the political and economic representation of women in Europe and draws up an overview of normative output in the Union in 2012. A unique series of commented statistics and maps covers all of the main topical issues (growth, buying power, economy, demography, immigration, energy, environment) and enables the Schuman Report 2013 to present a full view of the European Union and its policies.Crisis Economy European Union Eurozone Values
Schuman Report on Europe: State of the Union 2013
25 Feb 2013
President Obama’s state of the union address contained a big success for transatlantic relations: “And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.”
A comprehensive Partnership agreement, covering investments, regulatory convergence and other non-tariff barriers would be a game changer in world trade relations. And this, for different reasons:
– It would enable the European Union and the United States to lead instead of follow when it comes to standard setting. This might seem as a technical argument but it is not. It would enable the EU and the US to set world standards for electrical cars, mobile devices, etc. giving our industries a competitive advantage.
– Indirectly, this Partnership agreement will increase the appetite for other economies to open up as well. When barriers to invest between the EU and the US are lowered, it will increase the interest of emerging economies to engage in similar negotiations. As they will want to avoid that EU or US investments are diverted from their economies to the transatlantic economic area. As such, a EU-US agreement will revive multilateral free trade negotiations.
Overall, a EU-US Partnership will make both economies more competitive and stronger. Such an agreement will not be a zero-sum game but a gain for both parties. However, some EU and US industries will face more competition and might lose or, to the contrary, become more globally competitive. Moreover, it might make the US a bit more European and the Europeans more American, an evolution that should benefit both societies.Stefaan De Corte Economy Growth Jobs Trade Transatlantic
Stefaan De Corte
Transatlantic Free Trade – An Agenda for Jobs, Growth & Global Trade Leadership
14 Feb 2013
A recent study conducted by Deutsche Bank concluded: “Based on this approach the authors could identify improvements in competitiveness in the GIPS countries (Greece, Ireland, Portugal and Spain), but not in Italy and France. This suggests that the reduction in Italy’s current account deficit has been cyclical. The persistence of the French deficit is consistent with the lack of competitiveness and more robust domestic demand growth.”
In short, while some European countries such as Spain are improving the competitiveness of their economies, others are making no such progress. Should this trend continue, economic imbalances in Europe could emerge. In order to emerge from the crisis we need to improve productivity. The only alternative would be to lower wages. All European countries should strive towards creating innovative economies that can sustain relatively high wages and good working conditions. Europe cannot compete on the basis of labour costs. Rather, Europe must compete in terms of innovation and talent.
The second issue on which we should reflect is the lack of competitiveness of the French and Italian economies, as found by Deutsche Bank. Economic experts are concerned about both economies. France has become less and less competitive because of a failure to introduce necessary structural reforms. In Italy, the forthcoming elections make it unclear whether or not an agenda of structural reforms, of the sort which benefited countries such as Spain, will actually be introduced.
Hopefully in the coming months, Italy and France will resume a reform agenda and begin to experience economic growth once again. Not only for the good of their respective citizens, but for the good of all Europeans.
Restoring Europe’s competitiveness
14 Feb 2013
The European Council has agreed upon a proposal for the next Multi-Annual Financial Framework 2014-2020. The next step will be to seek consent of the European Parliament.
As it goes with political decisions where 28 negotiators have to agree, the result of the discussions has been a compromise. This is how the European works and this is how democracies work in general. The more relevant question is whether the prosperity and wellbeing of the European Union’s citizens will benefit from the result.
Some general comments can be made:
– The overall envelope of EU spending will decrease. We could consider it as a missed opportunity to see the EU budget as an investment budget, to be used in counter cyclical spending.
– The relative weight of expenditure on competitiveness for growth and jobs and economic, social and territorial cohesion will increase from 44.8% today to 49% in 2020, whilst direct payments in the framework of the common agricultural policy, although important, will decrease from 30.9% to 26.8% in 2020. This change is irreversible and strengthens the EU budget’s role as a multiplier of Member States’ efforts to increase social cohesion and competitiveness.
– If the Parliament agrees, the Commission will have the authority, upon agreement of the Council, to ask for a review of funding programmes to maximise the growth impact. The Commission may as well propose suspension of commitments and payments. All these measures will increase the effectiveness and efficiency of public service delivery and with this, the positive impact of the projects on the Member States’ economies.
Therefore, although one should regret the overall decrease in funding, the budget contains a clear choice for growth, social cohesion and better spending. Legislators should now focus on translating this philosophy into the sectoral legislation of each relevant funding instrument.Stefaan De Corte Economy EU Institutions European Union
Stefaan De Corte
A budget for the wellbeing of EU citizens?
13 Feb 2013
CES is proud to host the fourth Economic Ideas Forum, which will be held in Helsinki during the 6th and 7th of June 2013 under the Patronage of Prime Minister Jyrki Katainen. The annual conference brings together high level economic experts, Ministers of Economy, EU Commissioners, EU Prime Minister, as well as business leaders from around the world. The Forums provide an opportunity to consider innovative ideas and propose solutions to the economic challenges facing the EU economy.
This year’s Forum will once again contemplate the pressing issues on the economic agenda: the role and continued relevance of the EU in the global economy, new sources of growth, how to tackle unemployment, banking and financial regulation, green economy and sustainability. Every year, over 250 participants attend this high level, interactive conference. Confirmed speakers include Prime Minister of Latvia Valdis Dombrovskis; EU Commissioner Olli Rehn; Alexander Stubb, Minister for European Affairs and Foreign Trade of Finland; Irish Minister of European Affairs Lucinda Creighton; Erkki Liikanen, Governor of the Bank of Finland; Portuguese Minister of Finance Vitor Gaspar; and Jari Koskinen, Minister of Agriculture of Finland.
Previous Forums have been successfully held in Madrid (2010), London (2011) and Dublin (2012) and have received wide international media coverage. Please keep checking our website for more information regarding the programme, speakers and online registration.Banking Economy Energy Eurozone Growth
CES proud to host fourth Economic Ideas Forum in Helsinki under the patronage of PM Katainen
07 Feb 2013
The Greek economic crisis has imperilled the stability of the eurozone, generating much global anxiety. Policymakers, analysts, and the media have daily debated the course of the Greek economy, prescribing ways to move forward. This collection of essays progressively moves from an analysis of the causes of the crisis and the policy responses so far to a debate on some of the country’s advantages and capabilities that should underpin its new development model and propel the return to growth. The book seeks to provide motivation and inspiration for change by indicating some of the economic sectors where Greece maintains a comparative advantage. Therefore, it challenges the emerging picture of Greece as a country doomed to failure, where everything falls apart.Crisis Economy EU Member States Eurozone
Greece’s Horizons: Reflecting on the Country’s Assets and Capabilities
31 Dec 2012
Like elsewhere in Europe, the crisis has affected economic developments in the Western Balkans, from Croatia in the north to Albania in the south. The countries in the region face difficulties such as high unemployment, decreased availability of bank credit and reduced trade. Furthermore, the inability of their political institutions to deal immediately with these economic challenges has reinforced the negative effects of the crisis. What does this mean for the Western Balkans’ accession to and integration within the EU? This paper by Rumiana Jeleva shows that improving the economic situation is an essential precondition for public support for EU integration. At the same time it argues that the pro-European orientation of the Western Balkans ensures that they will continue to look towards the EU, rather than to the US or Russia. This is demonstrated by the fact that they are not merely taking measures to recover from the crisis: they are taking measures that are aligned with European regulations. The Western Balkan countries may have a long way to go to become EU members, but they have proven their commitment to a future within the EU by their pro-European solutions to the crisis. This makes it all the more important for the EU, even in this time of crisis, to continue to support the accession process and bring the Western Balkans closer to the EU.Balkans Crisis Economy
The Impact of the Crisis on the EU Perspective of the Western Balkans
28 Nov 2012
This publication summarises the proceedings of a conference organised during April 2012 in Lisbon by the think tank Platform for Sustainable Growth (Plataforma para o Crescimento Sustentável) on the topic “How can we foster green growth?” Speakers included António Costa e Silva (CEO of Partex), Joy Kim (Advisor at United Nations Environmental Programme), Peter Vis (Chief of Cabinet of the EU Commissioner on Climate Action) and Carlos Pimenta (Coordinator of Sustainability at PCS). The aim of the event and the follow-up publication was to identify the role green economy can play to achieve sustainable growth in Europe in general and Portugal in particular.Economy EU Member States Growth Renewable Energy Sustainability
How Can We Foster Green Growth?
05 Nov 2012
The sovereign debt crisis in some EU Member States has shown that greater economic convergence, the long-term sustainability of public finan ces and a European approach to banking regulation and resolution is necessary in order for the eurozone to become a sustainable currency area. This requires further economic, budgetary, financial, and thus political, integration of the European Union . However, when EU governance mechanisms are implemented or strengthened there is a need to reinforce the democratic legitimacy of institutions and procedures. In the short term, work should be continued to introduce transnational lists of candidates for the European Parliament and the standard use of roll call voting; the biggest political families should declare their candidate for Commission president before the upcoming elections; and more regular high-level consultation and dialogue between members of national parliaments and European policymakers on economic, financial and budgetary policies should take place. When it comes to long-term reforms, this policy brief puts these proposals up for debate: attributing the right of initiative to the European Parliament and the Council, in addition to the Commission; the direct election of the president of the executive, the European Commission; and having the president of the executive also taking up the role of president of the European Council. Moreover, the European Parliament should be more involved in decision-making, particularly on economic policy.Democracy Economy EU Institutions
Democracy and Legitimacy in an Economic Union
01 Nov 2012
The financial transaction tax (FTT) has been in the limelight ever since the European Commission President, José Manuel Barroso, presented his proposal to the MEPs in Strasbourg in his ‘state of the Union’ speech (28/09/2011). In the current economic turmoil, this proposal revives an old debate and adds more food for thought to the general discussion on European economic governance.
The proposal will have to be approved unanimously by the 27 Member States at the Council of Ministers, following the opinion of the European Parliament. The FTT raison d’être is twofold: on the one hand, it is meant as a fair contribution from the financial sector to the cost of the economic crisis or, in other words, a way to make banks and similar institutions pay their share of the burden of adjustment; on the other hand, the proposal is expected to reinforce EU’s internal market by preventing financial speculative activities and competitive distortions from happening.
By introducing a FTT first at EU level, the measure is also projected to set up the appropriate grounds to eventually work on a similar tax at global level. The proposal has wide support from European citizens (65% according to the latest Eurobarometer) and has been fostered by the French-German axis. For this reason, critical voices speak about a ‘political’ proposal, while questioning its viability from an economic standpoint. Most of the criticism has come so far from Sweden and the UK. One of the main arguments put forward by the detractors of the proposal is its potential negative side-effects on the economy, namely the relocation of the financial institutions, the resulting loss of competitiveness and, eventually, the possibility of clients bearing the burden of the tax. Swedish economist Anders Aaslund has recently criticised the proposal recalling Sweden’s experience with the so-called Tobin Tax back in the 1980s. According to Aaslund, the revenue of the tax amounted at the time SEK80 million, while SEK1.5 billion was foreseen.
Furthermore, most of the securities market left the country as a reaction to the tax. A similar situation is foreseeable, in his opinion, with the security trade abandoning the EU. For that reason, the Swedish government is expected to reject the proposal and, always according to Aaslund, the Nordic and Baltic governments in general would reject it too. The UK’s opposition to the FTT is perhaps more difficult to explain, particularly if we take into account that there is already a sort of financial transaction tax in place in this country. However, according to some studies, the so-called Stamp Duty Reserve Tax actually exempts more than 70% of the total UK stock market volume from the tax. This situation would change with the introduction of a FTT at European level. Besides this economic argument, internal politics are likely to be an influential factor for the rejection of the proposal, mainly because the introduction of the FTT would mean a step towards more of the EU’s own resources. Other voices, such as the one from the European Central Bank President, Jean-Claude Trichet, do not criticize the idea of having a FTT per se, but emphasize the fact that it should be applied everywhere in the world. If not implemented at global level, the proposal would have disrupting effects on the economy, he asserts. In spite of the above mentioned criticism, the Commission proposal has the strong support of the European Parliament, as well as with the backing of French and German leaders.
When defending the FTT, there are many arguments to point out. Firstly, the proposal has the support of the majority of the European citizenry. Secondly, it is regarded by the Commission as a first step to a global transaction tax, this being the ultimate goal, which will probably be introduced in the next G20 meeting as a subject for discussion. Thirdly, the proposal addresses the financial services, which have benefited so far from preferential treatment when it comes to taxation compared to other sectors (financial services are, in general, exempted from paying VAT). Fourthly, it will only affect transactions on financial instruments between financial institutions, in other words, it will not be detrimental to private households or SMEs. Fifthly, the tax rates will vary from 0.1% and 0.001% depending on the product – this would be the minimum for Member States to implement – therefore not representing a threat for financial institutions and therefore an incentive to relocate. Sixthly, the tax is expected to raise revenue of approximately €57 billion per year, a part of which is meant to go directly to the EU Budget, thus reducing the Member State’s GNI-based contributions. What can be the expected outcome of the FTT proposal? As already mentioned, it is highly improbable that it will make its way through a Council deciding unanimously. It is more probable, however, that the FTT would begin its journey within the eurozone, as suggested already by some, like the Belgium Finance Minister Didier Reynders. Nevertheless, the approval of every country from the eurozone cannot be taken for granted either, since there is speculation that The Netherlands and Spain – two countries with powerful banking sectors – would be reluctant to approve the proposal. Another option would be a selected team of countries willing to participate under enhanced cooperation procedure but, in such a scenario, the ambition of having a universal FTT would be far from realized.Rodrigo Castro Nacarino Banking Business Economy Social Policy
Rodrigo Castro Nacarino
Financial Transaction Tax – a controversial proposal
19 Oct 2012
The third annual Economic Ideas Forum, EIF12 took place in Dublin on the 19th and 20th of April and brought together experts and policymakers from across Europe and beyond. Participants included EU officials, parliamentarians and senior Irish politicians, as well as high-level representatives of major corporations. As Europe continues to struggle, fresh ideas are urgently needed for revitalising the economy, generating growth and creating jobs. This unique gathering of speakers and participants provided an ideal opportunity to discuss current economic issues and challenges while offering innovative policy ideas and solutions.Over the course of five panel discussions, as well as keynote addresses by EU officials, ministers and heads of government, significant and timely topics were tackled including greater integration in the European Single Market, greater fiscal responsibility in all Member States, closer economic coordination with Europe’s partners, especially the United States and creating a stronger European identity and sense of solidarity among citizens.Business Crisis Economy Eurozone Growth
Economic Ideas Forum Dublin 2012 – Conference Report
02 Jul 2012
European electorates are squeezed between austerity they don’t like and stimulus they can’t afford. Economic growth would provide the easy way out. But how can growth be achieved if economic activities are restricted and success is not appreciated? The Bourgeoisie founded the modern world and made it grow out of pre-capitalist poverty. As bourgeois virtues, such as prudence in the daily business of life and courage in investing were digniﬁed, entrepreneurs were granted freedom to innovate. However, the bourgeois virtues, values and freedom have always been resisted and despised by powerful counterforces. The question of growth or stagnation can be described as a struggle between political mentalities: the bourgeois against the aristocrat, ascetic and peasant mentalities.Economy Society Values
Bourgeois Virtues: the Aristocrat, the Ascetic, the Peasant, and the Bourgeoisie
18 May 2012
This paper presents the case for deepened trade and investment policy cooperation between the European Union and the United States. A trade deal between the two economic powers has become an increasingly popular notion, particularly given increased competition from China. Old arguments against a transatlantic deal have become weaker as the balance of the world’s economies has changed. Such an agreement would generate significant gains if designed properly and would encourage global trade liberalisation. It is time for the EU and US to press ahead with a free trade agreement. The EU and US also need to find a way outside of the WTO system to use their economic power as leverage in their dealings with emerging economies. An ambitious free trade agreement can, therefore, achieve more than the benefits of reducing barriers.Economy EU-US Trade
Transatlantic Free Trade: An Agenda for Jobs, Growth and Global Trade Leadership
01 May 2012
The Multiannual Financial Framework (MFF) is the budget of the European Union and the most important tool to finance common policy areas, actions and strategies. Upon a proposal from the European Commission, it has to be approved by the majority of the members of the European Parliament, before it can be unanimously adopted by the Council. This procedure, as well as the views of the different institutions and two representative Member States are examined in this research paper. All parties agree that the current MFF needs to be changed to respond to new EU priorities. However, reaching an agreement between the three negotiating institutions will not be straightforward, as views on the development of the financial resources of the European Union diverge considerably. Transparency of the decision-making procedure needs be increased to facilitate negotiation. The long-term strategic objectives and interests of European citizens need to be kept in mind when reflecting on an adequate level of funding for policies. However, there are differing views as to whether the budget should be increased or not.Economy Social Policy
The Next Multiannual Financial Framework: From National Interest to Building a Common Future
01 May 2012
The Schuman Report on Europe, the State of the Union 2012 edition is a unique, unequaled reference work on Europe. The Report is a source of information, analysis and proposals in which the most eminent thinkers express their ideas on governance, federalism, the euro, regulation, European industry, European budget, energy, international policy, social model, in other words a complete review of the European Union and its policies. This publication is also a practical tool with 34 unique maps, a summary of political and legal Europe and a complete range of statistics on the European economy. The third edition is devoted to the means to implement to overcome the crisis, with an exclusive interview with Jean-Claude Trichet, former President of the European Central Bank. All 26 contributions in the Schuman Report converge to one message: “the reasons calling on Europeans to stand together have never been as numerous as today”. Basing themselves on 67 commented tables and graphs and 34 colour maps, most of which are unique, the authors invite you to understand all of the challenges that the European Union faces today.Crisis Economy European Union Mediterranean Values
Schuman Report on Europe: State of the Union 2012
05 Mar 2012
In all probability 2011 is going to be one of the most critical years in recent decades. The problems created by the global economic crisis continue to affect the lives of ordinary people and could become a source of social instability. At the same time, developments at international level are creating a sense of uncertainty since long-established balances are facing profound challenges. With contributions by distinguished scholars and policymakers from Greece and abroad, the Konstantinos Karamanlis Institute for Democracy Yearbook 2011 addresses various issues of public debate both in Europe and internationally. Special attention is given to the global economic crisis and, more specifically, to its impact on Greece, which has recently found itself at the epicenter of international attention. Certain of the essays highlight the importance of leadership as an instrument for political reform, while a special section provides an update on the major global issue of climate change.Crisis Economy Environment EU Member States Globalisation
The Konstantinos Karamanlis Institute for Democracy Yearbook 2011: The Global Economic Crisis and the Case of Greece
05 Dec 2011
At present there is deep concern about the Union’s ability to deal with the sovereign debt crises currently being faced by certain Member States. The authors believe that it is time to use the crisis as an opportunity to take some bold decisions.Banking Crisis Economy
The EU at a Crossroads: An Action Plan
01 Oct 2011
The worldwide economic crisis and the citizen’s crisis of lack of confidence in institutions, politics and the economy means that it has become necessary to scrutinize fundamental political values and economic practices (e.g. quantitative easing), as well as their suitability for the future, much more critically if western democracies intend to maintain their legitimacy and not give way to post-democratic conditions in the medium-to-long term provoked by angry citizens and bureaucracies. The collection of essays in this book discusses weak points and fractures in the political system and shows how reverting to conservative virtues can make democracies and the economy prosper once again. These conservative corrections are a signal that a political life exists outside of utilitarian-materialistic intellectual uniformity.Christian Democracy Democracy Economy
02 Sep 2011
One could view the current crisis as an opportunity to make up for past mistakes or past reluctance to do what was necessary. This was the approach adopted by the European institutions when they came up with their proposals on economic governance. This paper aims to provide an insight into the thinking of French and German policymakers when it comes to the issue of how the economic governance of the European Union should be organised, as well as assessing what has been done so far and providing new ideas for future steps.Crisis Economy Eurozone
EU Economic Governance: The French and German Views
01 Sep 2011
The second annual Economic Ideas Forum, EIF11 took place in London on the 25th and 26th of May and brought together high-level government officials, business leaders and other influential stakeholders from across Europe and the United States. Participants included EU officials, parliamentarians and senior British politicians, as well as high-level representatives of major corporations. This unique gathering of speakers and participants provided an ideal opportunity to discuss current economic issues and challenges while offering innovative policy ideas and solutions. Over 200 participants took part in EIF11, which counted on the support of our partners the Stockholm Network and Business for New Europe.Business Crisis Economy Growth Macroeconomics
Economic Ideas Forum London 2011 – Conference Report
25 Jul 2011
World trade is recovering from its sharpest decline since the Great Depression. Europe remains the world’s leading trading entity, despite the crisis. The authors of this paper assert that the EU should not retreat to protectionism, but should rise to the post-crisis challenge. The paper assesses how Europe can do this through strengthening the single market, proposes various objectives for external trade policy and examines the need for greater political advocacy regarding the benefits of open markets.Crisis Economy Trade
The Future of World Trade: EU Priorities for the Global Trading System after the Crisis
01 Mar 2011
This book is the long-awaited abridged English translation of Lumedemokratia (Quasi-Democracy, 2009), which sparked a vivid debate about the nature of Finnish society, from recent history to the present day. It condemns the economic policy pursued during the great depression of the 1990’s and Finland’s continued failure to revamp its suffocatingly rigid labour market structures. The authors, Katja Boxberg and Taneli Heikka, claim that Finland still lacks essential elements that earmark a genuine Western democracy and true market economy; for this, they argue, we have to thank the ubiquotous Finnish consensus and the disgraceful era of “Finlandisation”. This is a book for anyone wondering why Finns “eat rubbery cheese, dull plastic-wrapped bread, and meat drowned in marinade”. Professor and historian Martti Häikiö provides a concluding commentary.Democracy Economy Society
Quasi-Democracy: Finland’s Fall from the Cradle of Innovation to the Abyss of Stagnation
06 Dec 2010
This publication is a collection of ideas and thoughts, which according to the authors in no way pretend to be “the truth”. Rather than formulate an easy answer, in this document, the attempt was to search for the right questions. The direct impetus for this kind of book was the outcome of the evaluation of the CD&V’s electoral defeat in June 2010. It became clear that one of the weak points was the lack of a clear long-term vision. This text is aligned with the principles of Christian Democracy in the determination of socio-economic policy. These actualized principles should be the leitmotif in the decision-making processes, that is to say, the daily application of the principles. Christian Democracy is present all over the Europe, and many of the challenges that CD&V is facing are similar to those that other Christian Democratic parties are facing. Therefore, this book is a space for discussion, it is not the end of a series of debates but rather the beginning.Christian Democracy Economy Society
Applied Christian Democracy: the Rhineland Model
02 Dec 2010
After the entry into force of the Lisbon Treaty and in the wake of the financial crisis which has challenged a number of certitudes and just as a new world order is emerging, it is now more important than ever to understand the issues affecting Europe today. The 2010 Schuman Report is a reference work to understand the European Union’s progress, its needs and the opportunities open to it. Once more the authors offer you original analyses which are supported by unique data and maps so that you can understand everything about Europe in 2010. The Report includes 22 articles written under the guidance of Thierry Chopin and Michel Foucher with a preface by Jean-Dominique Giuliani. The leading European experts address the following themes: the European Union after the Lisbon Treaty – opportunities and challenges; the European economic model after the financial crisis; the European Union an its neighbours : how are they progressing? What can Europe offer them?; the European Union in the world : how should it position itself in relation to the new powers? What kind of a relation can be established with the USA? What can be done for the Middle East?Economy EU Institutions European Union Globalisation Leadership
Schuman Report on Europe: State of the Union 2010
04 Oct 2010
The financial crisis and global warming have led to a crisis of confidence in our traditional ways of measuring wealth because they do not take speculative risk and environmental costs into consideration. A number of alternative indexes have been proposed that would measure people’s well-being and the environmental sustainability of the planet.
Even though the gross domestic product (GDP) measure has its problems, a look at the alternatives reveals that they are constructed with a specific political agenda in mind and are easily manipulated by governments.
In fact, a strong argument for sticking with GDP is that it is narrow in scope and value free. It tells us what we can do, but not what we should do, and does not even try to define well-being. It fits a liberal, pluralistic society where people have different interests, preferences and attitudes to well-being. Our present environmental and financial problems can and should be solved within the intellectual framework of economic growth.Crisis Economy Growth
GDP and its Enemies: the Questionable Search for a Happiness Index
01 Sep 2010
This paper advocates the introduction of a flat rate income tax in the Netherlands. It also gives some recommendations for lowering the flat tax rate by shifting away from income taxes, increasing value-added taxes and broadening the tax base. It concludes by showing that a marginal tax rate plus social security contributions of 33.25% is possible. The focus of this proposal is the Netherlands, but several aspects of it may be relevant to other EU Member States.Economy Jobs Social Policy
Flat but Fair: A Proposal for a Socially Conscious Flat Rate Tax
01 Jun 2010
The first annual Economic Ideas Forum brought together high-level economic experts, Ministers of Economy, EU Commissioners, former Prime Ministers and Ministers of EU Member States and business representatives from around the world in an effort to set in motion a synergetic chain by involving EU leaders with the business community and inspiring them with strategic insights. The Forum took place in Madrid, 15 April 2010 during the ECOFIN Meeting of Ministers of Economy and Finance and was a perfect opportunity to present new ideas and offer solutions for overcoming the current global financial and economic crisis. The Forum tackled the hottest topics in the economic agenda: international cooperation; coordination of strategies; economic dynamism; the promotion of a value-driven economy; building a competitive and sustainable economy that promotes green investments, innovation, the promotion of small and medium-sized enterprises, and the activation of sustainable recovery actions. Over 250 participants joined in the Forum, which counted on the support of the two of the Centre’s member foundations, FAES (Fundación para el análisis y los estudios sociales) from Spain and KAS (Konrad-Adenauer-Stiftung) from Germany.Business Crisis Economy Globalisation Growth
Economic Ideas Forum Madrid 2010 – Conference Report
01 Jun 2010
Small and medium sized are the backbone of Europe’s economies and represent the future, driving innovation and change. Therefore, SMEs are important to economic recovery. This paper examines the issues facing SMEs, including the role of SMEs in Europe’s economy in times of recovery and growth and the effects of bureaucracy and punitive taxes on enterprise.Crisis Economy Industry
Powerhouses of Recovery: Small and Medium Enterprises during and after the Financial and Economic Crisis
01 Oct 2009
The goal of this paper is to make available to European policymakers a general and consistent framework to design the competition policy of the future, as well as to reform existing competition policy in the EUEconomy EU Institutions European Union
European Competition Policy: Design, Implementation and Political Support
01 Sep 2009
Politicians and academics have warned against a surge of protectionist measures in light of the economic and financial crisis. Although the World Trade Organisation has extensive rules regarding tariffs, it offers few options for contesting protectionist subsidies and procurement conditions that favour domestic suppliers. This paper examines stimulus packages in both the US and EU, international rules governing protectionism and advocates a policy of greater market access.Economy EU-US European Union Trade
Good for the Economy – Bad for Trade: The Effects of EU and US Economic Stimulation International Trade and Competition
01 Jul 2009
As a consequence of the most severe economic crisis in post-war European history, public debt is bound to reach record highs in many EU Member States. Obviously, such scenarios pose an imminent but also ongoing challenge to European policy-makers both at national and at EU levels. Thus paper assesses the extent, consequences and possible solutions to the current public debt crisis in Europe.Economy Eurozone Growth
Avoiding the Debt Trap: Public Finances in Crisis and Recovery
01 Feb 2009
This paper examines the extent of competitive challenge faced by European enterprises in the knowledge economy from the emergence of Asian technology powerhouses. Key sectors such as those of software development, IT services and pharmaceuticals are explored and the paper demonstrates that European politicians and business leaders should become more aware of the current and future innovative capacity that industries such as these are beginning to gain momentum in Asia today.Economy Innovation Technology
Maintaining Europe’s Innovative Advantage: EU Policy Responses to the Asian Challenge in Pharmaceutics and Software
01 Feb 2009
It took only several months for Russia and a number of other developing markets that had been experiencing miraculous economic growth to deteriorate to the point of near economic collapse.The financial crisis has been a central issue in Russia’s monetary and credit sphere since September 2008. This paper presents trends and prospects for the development of Russia’s economy in 2009 and beyond.Crisis Economy EU-Russia
The Russian Economy in the Crisis: Trends and Perspectives
01 Jan 2009
József Antall’s generation witnessed the painful conclusions of the partially democratic or outright totalitarian regimes which were in place between the World Wars. They recognised that the time had come for a humanistic political era which would exclude all kinds of inhumanities, injustices and features of dictatorship which differed so widely from democracy. This can be imagined principally as a conservative social policy concept based on Christian Democracy which is able to recognize its own faults and the frailties of human nature, promoting organic development of the world and calling for change without radical turns. Prime Minister Antall considered it essential to return to Christian traditions at a fundamental level which he believed to be the basis of Western Europe: “It is simply about that in Europe even the atheists are Christians. Europe’s Christianity means culture, ethics and approach.” He often referred to the fact that after the Second World War it was the Christian Democrat politicians who began to build a unified Europe and the founding fathers belonged to that circle. József Antall overcame much adversity during his sadly shortened time in government; his political accomplishments were outstanding in the development of Hungary and the neighbouring area. He recognized the challenges of his time and he was able to find substantive answers to promote the integration of Central Europe. That is why his thoughts are contemporary and exemplary even today and should be widely known in Europe and around the world. Speeches selected for this publication were delivered before the General Assembly of the United Nations, at the Conference on Security and Cooperation in Europe summits, Central European Initiative Heads of the States meetings, or moving, visionary ones, such as those about the concept of Europe, Hungarian foreign policy and challenges of presence, or even pre-electoral ones still are inspiration for many and serve as a tribute not only to a great leader and statesman but also as a monument to the way of approaching political and social affairs.Democracy Eastern Europe Economy
Jozsef Antall: Selected Speeches and Interviews (1989-1993)
01 Dec 2008