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The ongoing debt crisis in the European Union

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Public debt is a relatively complex concept that most current approaches agree to refer to the sum of debt whose obligation to repay falls on the government of a country[1]. According to the World Bank (WB)’s approach, public debt is understood as the liability of four main groups of institutions:

(i) Central government liability, (ii) Local government liability, (iii) Central banking institution liability, and (iv) Liabilities of independent organizations, state-owned enterprises of whose capital the state owns more than 50%, or other organizations whose debt the government has the responsibility to settle should they fails to do this[2].

Owing to the widespread nature of public debt and the fact that countries can easily fall into public debt crisis – especially since the 80s of the 20th century – the global community had created a number of criteria to supervise and warn countries about to, or in the middle of a public debt crisis[3]. However, the criteria most commonly used to estimate a country’s public debt situation is public debt as a percentage of Gross Domestic Product (GDP). This figure reflects the size of a country’s public debt as a fraction of the economy’s income and is calculated as of the 31st December each year.

               According to a 2010 research of the American National Bureau of Economic Research (NBER), a survey of more than 44 countries showed that when the public debt/GDP ration exceeds 90%, it will negatively impact on economic growth and reduce the economic growth rate of the country in question by around four percent on average. In particular, for newly emerging economies like that of Vietnam, the healthy public debt/GDP ratio threshold is 60%, and exceeding this threshold will stall annual economic growth by around 2%. However, the ratio between public debt and GDP alone is not a comprehensive estimate of the safety or riskiness of a country’s public debt – we need to examine public debt in a more comprehensive manner, in its relation with the system of macroeconomic criteria of a national economy[4].

                Public debt crisis refers to an escalated public debt situation – or worse, public insolvency – that damages the economy resulting from a imbalance between national budget revenue and expenditure. The typical scenario arises from an excess of governmental expenditure over revenue, forcing the state to borrow money in many ways such as government bonds, debentures or credit agreements. This results in the state’s inability to repay its debt obligations. Persisting budget deficit will increase public debt. Should the state be unable to settle these debts in a timely manner will lead to an accumulation of interest, further exacerbating the problem.

                Hyman Minsky (1986)[5] gave an explanation to what would cause the serious crisis starting in 2007, a flaw of the financial-credit system. According to him, the financial-credit system plays a key role in a financial crisis: It led to a large amount of risky and speculative borrowing by firms and the public alike (borrowing far more than their existing assets, for instance) to seek profit from appreciating assets. However, if and when assets depreciates instead (the credit bubble pops), these speculators will lose much – if not all – of their solvency, resulting in the insolvency of the entire financial and credit system, leading to a financial crisis[6]. This happened because there was not yet the necessary systems to control and reduce these speculative and highly risky activities..

b. Cause of the EU public debt crisis

                The current public debt crisis in the EU began in Greece when the Greece Prime Minister announced in November 2009 that the country’s budget deficit for the year would be 12.7% of GDP, twice as high as a previously announced figure (Lane, 2012), and that he would try to save Greece from insolvency. In reality, the country’s public debt had peaked at €300 billion (around US$440 billion), equal to 124% of the country’s GDP, twice as high as the level permitted by the Maastricht Treaty. Immediately, on December 22nd 2009, Moody’s Investors Service had reduced Greece’s public debt credit ranking from A1 to A2 because of its rising budget deficit. Previously, Fitch Group an Standard & Poor had reduced Greece’s credit rating below investment grade. In April 2010, Greece’s budget deficit had risen to 13.6%, followed by a spike in government bond interest rate; Standard & Poor reduced Greece’s credit rating to “junk status” – the lowest possible rank[7]. Ireland followed Greece with a budget deficit of 32% GDP (September 2010), Portugal (January 2012), Spain (June 2012), Italy (November 2012) and presently Cyprus (March 2013), all fell into debt crisis[8]. Why did this debt crisis happen? There were several causes as follows:

i. Root causes:

First, the problem arises from inefficiencies of an economic model based heavily on banking and financial services[9] as well as shortfalls in the EU and Eurozone’s management system. Every time an economic recession occurs or an election takes place, public debt would spike as governments have not brought forward long-term solutions to the public debt problem and instead focusing on short-term solutions. The accumulation of this problematic management and failure to solve the problem at its root results in an eventual loss of control of the public debt burden.

Second, the problem also owes to the rapid development of the financial and banking services based on exploiting market inefficiencies and based heavily on speculation and speculative investment of the early 90s, leading to a “fake prosperity”. This caused many instabilities in the labor structure, big gap of wealth and increasing unemployment and welfare dependencies. This development of the financial system also, paradoxically, stabilized the supply of credit, making it easier and promoting borrowing and rapid growth of credit. These contributed greatly to increasing public debt.

Third, the global financial crisis in 2008 was greeted with old policies – borrowing to sponsor credit funds, firms and unemployment support, while government bonds had come to maturity. This caused an overload as several decades’ worth of debt obligation fell on these governments at the worst possible timing. While governments have realized the unsustainability of an economy geavily stilted towards financial services, they have been unwilling to give up the old habit of a “false” economy, instead they were opting for a short-term solution of borrowing new funds to repay old debts and keep insolvent banks afloat.

Fourth, owing to structural problems, the European Union is heavily restricted in managing its economy as a whole, lacking mechanisms that would enable the governments of member countries to reduce budget deficit (Guillen, 2012). This leads to monetary policies not being consistent with fiscal policies, expecially tax reform and labor policies. While the EU has a limit on member countries’ budget deficit and public debts, the managing and supervisory institutions remain lax, making it easier for countries to borrow and much harder for the group to control said borrowing. The EU and the European Central Bank had responded too slowly when the crisis struck. When the politics of opposing national interests is taken into the equation, the mechanism becomes even more complicated and self-defeating (Bastasin, 2012).

Fifth, this wasthe emergence of the Euro (€). This allowed smaller countries to attract a huge amount of foreign investment owing to the common currency[10]. However, this also caused a major challenge: When the capital flow exceeds the economy’s capability to sustainably absorb it, the excess capital would easily be wasted on activities that do not efficiently benefit the economy, leading to an increase in bad debts among banks, causing an even faster outbreak of a debt crisis. This is one of the ways the sovereign debt crisis is linked to the banking crisis in Europe (Shambaugh, 2012)

Sixth, the monetary flows into smaller economies in the EU were too great, resulting in a huge monetary supply and an increase in price level, causing a far higher rate of inflation in smaller economies compared to larger ones, sometimes even greater than the rate of interest (causing, among others, the value of debts to decrease with time, causing borrowers to gain rather than lose). The consequence of taking advantage of external monetary flows was a long-term current account balance deficit, yet countries were unable to control this by their own monetary policies because of the common currency. Additionally, the use of an external monetary flows would further increase budget deficit (for want of stimulating domestic production), exceeding the 3% of GDP as allowed by the EU. This long-term budget deficit plays a contributing role to exacerbating public debt.

 

ii. Direct causes

First and foremost, causes pertaining to interior characteristics of countries undergoing crisis:

First, all of the countries currently undergoing public debt crisis have lax fiscal discipline. End-of-year spending realization of budget would always exceed the expenditure decision of their respective Parliaments as announced at the beginning of the year. In addition, these countries had undergone a missed opportunity to tighten fiscal policies throughout the earlier part of the last decade, owing in no small part to their poor analytical framework (Lane, 2012).

Second, the distribution of capital, in many cases, is influenced more by political rather than economic goals. (for examples: defense and security expenditure, social welfare, retirement wages, interest subsidy of banks for social welfare projects, governmental protocols or celebrations and so on)

Third, state projects generally are not completed in a timely manner. This causes an increase in interest payable over the borrowed funds.

Fourth, low capital utilization efficiency (often lower than that of private projects with commercial loans), since the borrower in the state sector are not directly held responsible for its repayment. This is to say borrower responsibility is not high as those in charge of borrowing are not necessarily those who have to settle the debt, especially if they have a slim chance of being reelected into office.

Fifth, these governments have the capability to hide problematic issues of the country’s public debt situation over an extended period (up to ten years), making it impossible to make readjustment in a timely manner. In fact, the severity of the crisis can be attributed to the governments’ lack of initiative in the years leading up to, as well as during the ‘lulls’ in between the crises (Lane, 2012). Coupled with the complex and overlapping nature of this crisis (Shambaugh, 2012), this inactivity has proven to be extremely damaging.

Second, causes pertaining to external factors:

First, credit rating and risk analysis firms like Standard & Poor, Moody’s and Filch Group is a contributing factor to the instability of the market and the crisis itself, owing to their announcement of lowering the credit rating of these government bonds, thereby decreasing investors’ confidence in these markets[11].

Second, political pressure from speculators, major financial organizations and economic powerhouses managed to persuade governments to adjust rather than reform their financial institutions. Governments had to spend many billions of Euros to bail out banks and on stimulus packages to save banks and the economies from collapse. This would invariably lead to an increase in public debt. At the same time, private banks received funds from central banks at a low interest rate (around one percent) to finance enterprises for production, but instead, they used these funds to repurchase government debts and debentures at a higher interest rate (4 to 5 percent).

Third, arbitrage activities with an aim to raise government bond interest to the highest possible level for maximum arbitrage profit. In practice, public debt is usually negotiated through private banks and priced by these private institutions. Such financial institutions like Alpha Bank, Bank of America, Merrill Lynch, ING Group and so on have ample opportunities to artificially raise government bond interest[12].

  1. The Vietnamese economy under the impact of the EU public debt crisis.

                The public debt crisis in the EU in addition to the current problems of the Vietnamese economy may have a number of negative impacts on it:

First, an increased difficulty in exporting to the EU market. According to the General Office of Statistics of Vietnam, EU has been Vietnam’s largest export market (the EU alone consumed around 17.5% of all products produced in Vietnam in 2012, worth US$20 billion)[13]. In 2012, difficulties in the Eurozone economies (high inflation, lowered income, increase in unemployment) resulted in a general tendency to reduce spending among EU consumers, giving rise to the demand of goods and services – including those from Vietnam – not rising. Additionally, EU countries have been increasing protectionistic measures to protect domestic industries, resulting in greater dificulties for Vietnamese exports, in addition to competition from other exporters. While the major relatively inexpensive export products such as agricultural and forestry products, seafood and foodstuff experienced a low drop in demand, the other products like furniture, handicraft, textile and footwear suffered a major demand hit.

Second, there was an increase in domestic market competition. In the backdrop of the ongoing public debt crisis and the difficulties challenging the entire global economy, Vietnamese firms are under pressure from foreign investors looking to diversify their market and hedge risks. These foreign firms are additionally granted advantageous borrowing rates (in many foreign countries, interest rates of commercial loans for their own firms are very low), and have greater competence and stronger trademarks than Vietnamese products, making Vietnamese firms being severely disadvantaged all but inevitable.

Third, foreign investment and investors’ confidence in Vietnam decreased. The crisis had forced European firms to constrict production and lay off employers owing to a decrease in consumption in both the EU and the world. The most obvious countermeasure is decreasing inefficient foreign investment. As a result, foreign direct investment flow from both Europe and the world into Vietnam has decreased. In 2009, Europe’s FDI into Vietnam took up 18% of total FDI. This figure was reduced to 11% in 2011, continued to decrease in 2012 and seems to continue on this downward trend in 2013.[14]

Fourth, according to the evaluation of WB, Vietnam’s business environment index is on the decrease (in 2011, Vietnam’s business environment ranked 98th out of the 183 ranked economies, falling eight ranks compared to 2010), showing the faltering confidence of foreign investors on the Vietnamese business environment. The main reason behind this is that the public debt crisis in Europe had caused investors and credit ratings services firms pay greater attention to the public debt issue. The three groups of main criteria used as early warning are: (i) excessive debts, reflected in a high public debt over GDP ratio; (ii) excessive spending, reflected in a high budget deficit over GDP ratio; and (iii) a continually decreasing GDP growth rate. In 2011, Vietnam’s public debt was 106% of GDP (see Table 1), state budget deficit was 4.9% of GDP (see Table 3), the GDP growth rates continually decreased[15] (see Table 2), making it the riskiest economy in the ASEAN region, with a S&P credit rating of BB- (a deterioration from the BB rating at the beginning of the year). This not only negatively impacted on the ability to attract foreign investment and borrowings, but also increased the cost of borrowing from international financial organizations owing to a higher interest.

Table 1: Vietnam’s public debt, 2011

Figure

Billion VND

Billion USD

Percentage of GDP

Public debt according to Vietnam’s definition

1,391,478

66.8

55%

    State debt

1,085,353

52.1

43%

   State guaranteed debt

292,210

14

12%

   Local government debt

13,915

0.7

1%

Public debt according to the international definition

2,683,878

128.9

106%

   Public debt according to the Vietnam

   definition

1,391,478

66.8

55%

   State-owned enterprise debts

1,292,400

62.1

51%

Source: Vũ Quang Vit, “Public and banking debts of Vietnam at a glance”, Forum Magazine, Hanoi, 25/11/2011.

Fifth, there was an increase in exchange rate risk. In the short term, the appreciation of the US$ relative to the € will decrease Vietnam’s export goods into the Eurozone owing to Vietnam’s export goods being valued in USD. In addition, recently the USD are also appreciating relative to the VND (Vietnamese currency) owing to high inflation in Vietnam from 2008 to 2011 (see Table 3), creating a pressure to adjust exchange rate, yet Vietnam has maintained the same rate. This causes a risk of existing two interest rates and the potential risk of smuggled import owing to cheaper import. This will put a greater pressure on Vietnam’s national foreign exchange reserve.

3. Lessons for Vietnam in public debt crisis prevention

a. Current difficulties of the Vietnamese economy.

               

                The main reason causing Vietnam’s current difficulties began to emerge in 2006 and was rooted before that. To promote high growth, Vietnam had promoted investment very strongly and over an extended period had had an investment-to-GDP ratio, rating second only behind China (see Table 2). The rate of increase in money and credit supply was also among the world’s highest and consequently the rate of inflation was record high in the world. This can be clearly seen when comparing Vietnam’s exceedingly high investment-to-saving ratio from 2005 to 2011.

Table 2: GDP growth rate and the rate of investment and saving of Vietnam (2000-2011)

Figure

   Year

2000

-2004

2005

2006

2007

2008

2009

2010

2011

Investment/GDP (%)

33

38

41

43

40

38

39

33

Saving/GDP (%)

 

28

28

26

23

23

23

24

Difference between investment and saving (%)

 

10

13

17

17

15

16

9

GDP growth rate (%)

7.1

8.4

8.2

8.5

6.3

5.5

6.8

5.9

Source: Vu Quang Viet, Crisis and the financial-credit system: Practical analysis in regard to the American and Vietnamese economy, Washington D.C., February 2013; Nguyen Anh Tuan; Vietnamese External Economic Syllabus, National Political Publisher, Hanoi 2005.

The rate of investment was much higher than saving, some years up to 16-17% of GDP (see Table 2). To achieve this there were only two ways: (i) borrowing from foreign sources, or (ii) extensive (excessive) issuing of credit lines, resulting in bad debts and very high inflation as of the last few years (see Table 3). As a result of high inflation while the government did not adjust the exchange rate between the VND and the USD, import was highly stimulated, resulting in an unprecedented trade balance deficit, some years as high as US$18 billion (See table 3). This excessive investment while efficiency was low resulted in an excessive public debt. As shown in Table 1, Vietnam’s public debt could have reached US$129 billion, equal to 106% of GDP in 2011, in which state-owned enterprises’ were US$62.1 billion (see Table 1).

Table 3: Increase in money supply, credit, CPI, trade balance deficit and state revenue-expenditure of budget in Vietnam (2006-2011)

Figure

   Year

2006

2007

2008

2009

2010

2011

Increase in money supply (%)

34.0

46.0

20.0

29.0

33.0

12.0

Increase in credit (%)

25.0

50.0

28.0

46.0

32.0

14.0

Inflation (CPI) (%)

7.1

8.3

23.1

5.9

10.0

18.6

Change in exchange rate (%)

0.9

0.7

1.2

4.7

9.1

10.1

Balance of trade (billion USD)

-5,1

-14,2

-18,0

-12,9

-12,6

-9,8

State revenue (Trillion VND)

na

na

357.4

390.6

456.0

590.5

State expenditure (Trillion VND)

na

na

398.9

441.2

581.0

725.6

Source: ADB, Annual Report 2011, Manila 2012; General Office of Statistics of Vietnam, Annual Report 2012, Hanoi 2013.

b. Lessons and suggestions for public debt crisis prevention in Vietnam

i. Basic Guidelines

                In order for the Vietnamese economy to avoid negative impacts from the public debt crisis, we need to examine intrinsic factors within the Vietnamese economy as well as the causes of the public debt crisis in the EU and its existing impact on Vietnam as previously analyzed. There are a number of suggestions:

First, in order to manage and prevent public debt crisis, the most pressing requirement is an effective governmental regulatory mechanism in order to control financial activities and the flows of financial sources. This includes transparency of information, the effective maintenance of macro-level supervisory mechanism, while guaranteeing the needs for social welfare and mobilizing and combining resources to develop the country in a sustainable manner.

Second, it is necessary to properly manage and improve efficiency of state investment. In the long term, state investment needs to be actively reduced while investment from non-budget sources needs to increase relative to total social investment; shift the focus of state investment outside of economic activities so as to concentrate on social and infrastructural investment. In the same time, there is also a need to reform and standardize the state investment process in an appropriate manner so as to serve as a selection and standardization criteria for public projects[16].

Third, state-owned corporations and enterprises diversifying investment outside of their main business and production must cease. State-owned enterprises should be concentrated on key industries of the national economy, mainly those related to and dealing with socio-economic infrastructure, public services and those pertaining to macroeconomic stability.

Fourth, systemic stability, prevention of side effects and debt “traps” and practical efficiency in both SOE and financial-banking sector restructuring should be ensured. At the same time, proper care should be taken to effectively handle such matters as firm acquisitions and mergers, unemployment insurance and social welfare.

                ii. In-depth suggestions and areas for attention

                On the basis of the guidelines above, we can draw a number of in-depth lessons and suggestions for public debt crisis prevention in Vietnam.

First, there are a number of issues pertaining to state-owned enterprises (SOEs), as followed: (i) cease excessive investment into SOEs and only maintain a minimal, manageable number of SOEs (between one to two dozen)[17]; (ii) put an end to diversification outside of expertise (especially letting a SOE own a bank, or vice versa)[18]; (iii) every decision to found new SOEs must be carefully discussed and approved by the National Assembly. The government needs to stop spending more than the budget previously approved by the National Assembly (notably, in a number of countries this is considered illegal)[19].

Second, the government should not continue to have the State Bank issue money for spending and credit distribution, especially for SOEs as a spearhead for development owing to its lack of efficiency and also owing to the very large existing budget deficit (from 5% to 7% of GDP, while in these times a 3% of GDP deficit is already seen as a warning threshold in some countries). Stimulation of demand through budget deficit is only a temporary solution and should only be used when there are no other options when the economy – for any reason – falls into a crisis owing to plummeting demand. It should never be used as a method for stimulating economic growth because it will lead to high inflation and loss of stability, since budget deficit would invariably be remedied by printing money. The reason for Vietnam’s current economic situation is the stimulation of demand via credit growth (which increased from 35% to 125% of GDP between 2007 and 2011), but without good control of the utilization of credit flow.

Third, it is necessary to raise the ratio of equity (paid-up or owner’s capital) in both private firms and SOEs to ensure stable development. Currently, in Vietnam the debt-to-equity ratio is 1.77, much higher than in the United States or Europe (around 0.7). This high ratio of debt can very quickly lead to financial distress and insolvency should the interest rate rise.

Fourth, there is a need to focus the power for development investment into seven regions of Vietnam instead of on a provincial basis in order to avoid waste owing to overlapping construction investment, as well as to reduce the influence of the locality on the central organs located in provinces[20]. In addition, management of territory, forests, rivers and seas needs to be stratified between central, regional and local government so as to concentrate power for infrastructural development. Local governments should not be permitted to issue their own bonds to foreign markets. Furthermore, local government bonds should be tightly regulated so as to avoid uncontrollable layering of debts.

Fifth, it is worth noting that the excessive expansion of credit in Vietnam (See Table 3) is because the State Bank lacks the independence according to the standard of a market economy and of a central bank. Because of this, it had acted not on the ultimate goal of maintaining market price stability, but according to the government’s directive to print money for SOEs to become as spearheads for the economy (that, in reality, was quite inefficient), but consequence of that was the detriment of the economy. The difficulties facing the Vietnamese economy occurred when the government began to execute stimulus packages but did not closely supervise them. Hence most of those funds were not invested on production but on stocks and real estate. When the bubble pops, this caused great difficulties for the financial-banking system with an increasing ratio of bad debts.[21]

Sixth, according to the Credit Organizations Law (2010), many banks that had been given permission for establishment but whose sole purpose was to help local governments and clienteles to carry out rent seeking activities because the Law does not distinguish between commercial and investment bank. According to the experience from the EU and the US, commercial banks use deposits from clients to lend, while investment banks mainly implement portfolio investment using their own money, or serve clients to invest in portfolio for the service fees. Hence, in order to avoid risks for the financial-banking system and crisis, there is an urgent need to amend this law to emphasize on the difference between the role and function of these two categories of banks, as well as stopping allowing a bank to own a non-financial enterprises, or conversely, a non-financial enterprises founding a bank to serve itself.

Seventh, the state bank should establish a standard for minimum capital for each category of banks, as well as set up and announce basic statistics of each bank in particular and the financial-monetary system in general to serve both policy-makers and users of financial services. The Vietnamese financial-banking system has (i) 101 banks and foreign bank branches including (a) 5 national commercial banks, each of which having more than US$1 billion in chartered capital and total assets of between US$15 to US$25 billion, (b) 39 private commercial banks, of which only a few banks are large like Eximbank with chatered capital of US$630 million, Sacombank – US$550 million, ACB – US$470 million[22]; (c) 53 foreign bank branches and banks with 100% foreign capital; (d) 5 foreign joint banks; (ii) 18 financial firms, 12 financial-lease firms and 1,202 public credit funds, (iii) 105 stock companies, 47 investment funds, 43 non-life insurance and 10 life insurance firms[23]. This financial system is a very complicated, overlapping that was not properly supervised and controlled[24].

4. Conclusion

                As the public debt crisis in Europe continues, casting further doubt on the already tumultuous and shaky macroeconomic and financial system worldwide, two questions demand a satisfactory answer. The first, what should be done to save those economies already engulfed in it and bring them back to financial healthiness. The second, what should be done for economies not yet in the crisis to avoid its ripple effect, or worse, being involved in its own crisis. This paper seeks to find an appropriate answer for the second question in a manner that is relevant to the Vietnamese economy.

                As has been discussed, the macro-economy of Vietnam is currently displaying a number of worrying issues and symptoms. The crisis has struck in the wake of Vietnam’s rapidly changing economy and exposed a number of key weaknesses in the country’s macro-economy such as inflation, state budget deficit and the inefficient use of SOEs as spearhead for the economy, to name a few. This article has named a number of suggestions to restructure the economy so as to alleviate these deficiencies at the root, while avoiding a potential public debt crisis.

                While a number of issues underlying the European crisis – one may even say key issues – are inapplicable to Vietnam, namely the dependence on a shared currency and fiscal policies and the political costs thereof, the situation in Europe has proven that weaknesses in government budget, in the banking system and low growth are inseparable and one cannot be examined or solved without the other. Considering the present state of the Vietnamese banking and financial sector and its many issues, how these three problems interact and how to tackle them is an important area that policymakers and future researches should pay attention to.

 

References:

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  3. Bastasin, C (2012), Saving Europe: How National Politics Nearly Destroyed the Euro, Brookings Institution Press.
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              The public sector as defined by the United Nations System of National Accounting (SNA) includes public service (government) and state-owned enterprises. Hence, the term “public debt” is also taken to mean the same as such terms as “governmental debt” (United Nations, System of National Accounts 2008, para. 22.15, http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf: “the public sector includes general government and public corporations”). However, public debt differs from national debts in that the latter refers to a country’s debt obligation in its entirety, including both governmental debt and private debts. In other words, public debt is only a component of national debt.

               This definition is similar to that of the Debt Management and Financial Analysis System (DMFAS) of the United Nations Conference on Trade and Development (UNCTAD)

               Supervisory criteria for a country’s public debt and foreign debt includes: (i) Public debt as a percentage of GDP, (ii) Foreign debt as a percentage of GDP, (iii) National debt as a percentage of GDP, (iv) Foreign debt as a percentage of gross export value, (v) Public debt as a percentage of state budget revenue and so on.

               These criteria are: (i) rate and quality of economic growth; (ii) total factor productivity; (iii) capital utilization efficiency (via the Incremental capital-output ratio – ICOR); (iv) budget deficit ratio; (v) domestic saving rate and gross domestic investment; and (vi) a number of other criteria. Additionally, such criteria as public debt structure, weight of different debt classes, interest structure and payment period also require in-depth analysis when addressing the sustainability of public debt. For instance, a public debt worth 100% of Greece’s GDP caused its bankruptcy, while Japan’s public debt is worth around 200% of its GDP and is still considered sustainable. Another example, Argentina, has a public debt ratio to GDP less than 60% yet is still undergoing public debt crisis. According to the Maastricht Treaty in 1992, the European Union countries are not allowed to have their public debt exceed 60% of their GDP.

               Hyman Minsky, 1986, Stabilizing an Unstable Economy, Yale University Press, Yale.

               Minsky classified borrowers into three categories: (i) hedge borrowers, who can repay their both principal and interest from their investment flows; (ii) speculative borrowers, who can repay interest but has to regularly roll over principal to stay afloat; and (iii) Ponzi borrowers, who operates on the basis of borrowing money from one creditor to repay another. His view was that a crisis would happen if the last two categories outnumbers the first.

               On the 2nd May 2010, the Prime Minister of Greece had accepted the aid package worth 110 billion (US$143 billion) from Eurozone and IMF, which would come into effect over the following three years.

               At the end of 2009, typical countries of the EU had the high public debt-GDP ratios such as Greece – 124%; Portugal – 84,6%; Italy – 120,1%; Germany – 84,5%; Ireland – 82,9%; France – 82,6%.

               Two energetical crises in 1973-1974 and in 1979-1980 pushed countries in Europe and America into recession. That was the time when Europe and America restructured and transformed their economies from industrial production into banking and financial services with the boom of portfolio investment.

             For instance, the small countries of EU like Greece, Ireland were allowed to borrow money with interest rates equal to that of Germany, France. In other words, the small countries took advantage of the whole EU for their benefit.

             At the beginning of 2009, the long-term interest of EU countries’ government bonds reached an all-time low by the time the governments issued new bonds, but within a few weeks the bond market had undergone significant changes. As S&P’sRatings Services and Fitch Group began to examine Greece’s debt and ranked her bonds as junk, their bond interest statred to increase dramatically while the stock market index went down quite as dramatically.

             For example, IMF’s report on the 22nd of April 2010, stating that the economy of Portugal that was deteriorating, would grow less than forecasted and would not be able to reduce her deficit. This caused the interest on Portugal’s 10-year bond to increase significantly, and as at present Portugal, Spain, Greece, Ireland and Italy are countries that are almost certain to meet with extreme difficulties reducing their public debt.

             Nguyễn Sinh Cúc, “An overview on the economy of Vietnam in 2012 and a forecast for 2013”, Communist Magazine, Hanoi, Jan 2013, pp 69-73. The impact of the European public debt crisis on Vietnam’s export goods arenot very large owing to Vietnam’s exports mainly being necessaries. In 2012, the amount of goods exported did not decrease, yet did not increase as much as expected.

             In addition, accoding to general analysis, global FDI in general and of the EU in particular into Vietnam, aside from the present crisis, are subject to a number of limiting factors: (i) low general effectiveness of FDI, still mainly being assembly and processing projects with little value added and low capability to participate in the global value chain; (ii) low ratio ofdisbursed to registered capital, small project scale, many projects slow on the execution; (iii) the majority of technologies attracted via FDI is not modern and is only average compared to the world, very few firms bringing high technology; (iv) the number of employment created by FDI isnot high, as is the living quality of FDI firm employees, as well as an increasing number of labor disputes, (v) there appear many cases of price transfering and tax evading in FDI firms with an increasing level of sophistication (falsely raising the capital value, input costs, overheads, education and so on) to create “real profit, false losses”, (vi) low diffusion value to ofther economic sectors, and (vii) a number of projects cause environmental pollution and waste of resources.

             In 2012, GDP growth rate of Vietnam economy that was only 5.03% compared with that of 2011, was lowest growth rate since 2000 (Nguyễn Sinh Cúc, 2013, Ibid). In 2010, although GDP growth rate was 6.8%, but this rate attributed to estate bubble and consequence of economic stimulus packages of 2009 whose utilization was not stricly controlled and supervised , therefore was not used in proper manner.  

             In particular, there is a need to distinguish between two classes of goals and criteria for assessing the efficiency of public investment (for- and non-profit investment), alleviate the confusion between tcapital for forprofit and for nonprofit activities as well as the social responsibility of state-owned enterprises.

             This can be achieved by promoting equitization of SOEs, reduce the weight and number of SOEs of which the state owns controlling shares, only maintaining SOEs with 100% state capital in industries and fields that the state needs to maintain a monopoly, or hold a key role in the economy, or that the private sector cannot or is unwilling to takepart in. Additionally, this can also be done by promoting a multi-owner corportations where SOEs play a key role that can take on the role as the economy’s lead, while operating according to economic laws, on the basis of voluntary agreement and cooperation between independent legal entities.

             At present, the Credit Law of Vietnam permits this.

             Since 2007 the government of Vietnam has been spending more than the amount approved by the National Assembly on a yearly basis: In 2007, exceeding 31%; 2008 29%; 2009 46% and 2010 11%. (calculation based on the statistics on budget estimates approved by the National Assembly and the budget liquidation at the end of each year).

             In other words, all branches of central organs like the State Bank, the Ministry of Finance, the Ministry of Planning and Investment, the General Office of Statistics and so on would be stationed on a region rather than provincial basis, as they are at the moment.

             Until the 31st of May 2012, the total outstanding debts of the banking system of Vietnamare around VND2,500 trillion. If we assume 10% of this figure is bad debt, it would have an absolute value of 250 trillion. According to senior banking expert, Mr Nguyen Tri Hieu, bad debts in Vietnam are around 15% (VND370 trillion) of which 50% (VND190 trillion) is irretrievable (according to international precedences), which is very large compared to the banking system’s provident fund (VND70 trillion). At the same time, State Bank Governor of Vietnam Nguyen Van Binh insinuated that the rate of bad debt is only 4.47% (around VND117 trillion) and 84% of all debts have collaterals worth 135% total outstanding debts. On the other hand, according to the banking inspectional body, the rate of bad debts is closer to 8.6% of outstanding debts (VND202 trillion).

             According to the 141-ND-CP decree dated the 22th November 2006, up to 31st December 2010, each private commercial bank has to have a minimum chartered capital of VND3 trillion (more than US$150 million). However, at that time there were 21 banks with a chatered capital less than VND2 trillion, 9 banks having a chartered capital between VND2 to VND3 trillion, and only 9 banks with a chartered capital of above VND3 trillion. At the meantime, the average global commercial bank has a typical chartered capital of US$1 to US$2 billion.

             Vũ Quang Việt, Crisis and the financial-credit system: Practical analysis in regard to the American and Vietnamese economy, Washington D.C., February 2013 .

             Labor (Người lao động), Market-dominating financial group, 23/1/2013, (http://nld.com.vn/20130123104917462p0c1002/tap doan tai chinh lung doan thi truong.htm)

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The European Green Deal: Risks and Opportunities for the EU and Russia

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The European Green Deal approved by the EU in 2019 is an economic development strategy for decoupling and for carbon neutrality by 2050 [1]. The plan is to reduce greenhouse gas emissions by at least 55% by 2030. In pursuit of this policy, the EU is setting the goals of increasing resource use efficiency and of advancing toward a circular economy, restoring biodiversity and curbing pollution.

While obviously having an impact on the EU economy, the implementation of the Deal will also concern the economies and foreign commerce of its trading partners through the anticipated re-structuring of energy markets and reduced carbon-intensive imports. In the next decade, the European Green Deal will mostly affect coal imports, possibly followed by oil and gas imports after 2030. By 2030, coal imports are expected to reduce by 71–77% of the 2015 level, coupled with a 23–25% decrease for oil imports and a 13–19% decrease for imports natural gas. Post-2030 plans envision a virtually complete abandonment of coal and significant reductions in the EU’s oil and gas imports—by 78–79% and 58–67% of the 2015 level, respectively.

The border carbon tax (BCT) is one of the mechanisms envisioned by the European Green Deal with a view to covering the expenses of European manufacturers in their commitment to reduce emissions. The tax will be based on the carbon-intensity of a particular product and its foreign trade share in EU market sales.

Why does the EU want The European Green Deal?

The EU and Russia offer quite different reasoning for the European Green Deal and the ВСT.

European regulators believe the European Green Deal and the ВСТ will help “force” the nations (primarily the EU’s partners) trying not hard enough to reduce their emissions and to mount a stronger climate policy. The EU has declared its historical responsibility for the accumulation of greenhouse gases in the atmosphere, while believing that it will not be able to resolve the issue of global climate changes on its own.

Along with enhancing supply security by making the EU less dependent on imports of a vast number of raw materials from one single country, other arguments suggest boosting the efficiency of resource use and curbing pollution. The EU is largely dependent on the deliveries of several natural resources, since it imports 87% of the oil it consumes and 74% of the natural gas. Proponents also note greater dependence on deliveries from a limited number of countries, including Russia. In 2019 and the first half of 2020, Russia’s share in the value of natural gas supplies to the EU was 44.7% and 39.3%, respectively. Norway, the second biggest supplier, had a share of some 20%, or about half of Russia’s. In reality, the degree of dependence is even greater, since long-term contracts are commonplace in this field and no allowances for delivery route flexibility are made as shipments are transported by pipeline. In 2019 and the first half of 2020, dependence on oil imports from Russia was less pronounced and amounted to 28% and 26.4%, while still being way higher than the share of the second biggest supplier, the U.S. (9.2%).

COVID-19 and the subsequent 6.2% contraction of the EU’s economy were additional factors weighing with the European Green Deal. Economic recovery has come to be considered in connection with achieving carbon neutrality. The 2020 global economic meltdown has become a driver for stepping up the environmental—and climate, in particular—ingredient in the aid packages offered by many developed and a number of developing countries.

From Russia’s perspective, the new deal is intended primarily for preemptively boosting competitiveness on global markets through advancing new technological sectors, which is mainly justified as a solution to the climate problem. Moreover, Russia believes that the deal is driven by political considerations that, among other things, have to do with reducing the EU’s dependence on imported raw materials. The environmental sector in the EU economy is already a global leader. According to Eurostat, the environmental goods and services sector grew by 2.3% already in 2017, while its gross added value amounted to $287bn, or 2.2% of the EU-27’s GDP.

Another proof that the task of making Europe-made goods more competitive is high on the agenda lies in the fact that the ВСТ will be based on the foreign trade share of carbon-intensive products, which will help stimulate sales of Europe-made goods. At the same time, European officials acknowledge that no significant carbon leakages have so far occurred; however, they cannot be ruled out in the future. Russia believes that exporters from other countries will hardly be able to compete once the tax is introduced.

Like the EU, Russia presumes that the BCT is an additional source of revenue for the European treasury amid the crisis brought about by the pandemic as well as a way to cover the significant expenses involved in implementing the new deal.

From Russia’s standpoint, one of the “unfair” aspects of levying such a tax is the fact that the EU’s policy-makers are playing up the advantage of the Union’s higher level of economic and technological development, making particular use of the historically broad resource base and the accumulated volume of greenhouse gas emissions. The EU-28’s Accumulated Emissions for 1751–2017 were estimated at 22% of global emissions, which makes the EU the next to largest emitter after the US (25%), while Russia accounts for only 6%.

Both parties concur that the main goal of the European Green Deal is to maintain the EU’s competitiveness amid the radical restructuring of the global economy. It is claimed that the ВСТ could prompt a shift of manufacturing into the countries with less stringent carbon emission standards (“carbon leakage”) due to the fact that outlays on de-carbonizing businesses in several carbon-intensive sectors will significantly increase.

For the EU and Russia, the European Green Deal carries both risks and rewards

The main risks for the EU lie in the high costs of making the European Green Deal a reality as well as in the fact that some manufacturers being tipped into unfavorable conditions, all of which is coupled with a price hike for consumers, retaliatory measures to be undertaken by other countries and energy security risks. Apart from some technological difficulties in introducing the BCT, other challenges include the tax’s ineffectiveness in resolving the climate change problem, since the BCT is non-existent in other countries.

The European Commission estimates the additional annual investment required to achieve these goals by 2030 at €260bn. Yet the unprecedented funding envisioned by the new deal for the purpose is not enough to achieve these goals. The roadmap entails allocating at least €1 trillion for “sustainable” investment. Besides, the Next Generation EU fund, established to boost the recovery of the European economy after COVID-19, earmarks another €750bn for this purpose. A staggering €600bn shall be provided for climate action funding alone, as stipulated by the Green Deal and the pertinent part of the recovery plan. Additional investment is expected to come from companies, households and national governments.

Ultimately, the ВСТ will have a negative impact on the competitive edge of all European manufacturers, concerning, above all, those sectors where imported raw materials with a high carbon footprint account for a significant chunk of the costs.

Transitioning to new power sources will require higher carbon prices, which might ultimately result in a hike in consumer prices and a drop in the quality of life across the EU.

The European Green Deal might result in new threats to the EU’s energy security, since a significant import expansion of metals and minerals—used in manufacturing solar panels, wind turbines, ion-lithium batteries, fuel cells and electric cars—is needed for a large-scale de-carbonization of the economy. As of now, no substitutes for these raw materials are to be found.

Should the ВСТ be introduced, the EU’s trade partners may well, contingent on specific policies, initiate trade disputes. The European Commission has to ensure that the BCT is compliant with the WTO’s rules, which, however, does not eliminate the risk of retaliation on the part of other countries, which may take the shape of their mounting resistance to the adoption of the tax. In 2012, the plans to introduce the ВСТ for foreign air transport companies encountered particular pushback from other states, such as the US, China, India, Japan or Russia, which forced the EU to abandon the idea.

Several experts point out that this tax is ineffective in resolving the global climate change issue, since it does not exist in other countries.

There are also technical difficulties in introducing the tax. These have to do, in particular, with calculating the carbon component in imported goods in consideration of greenhouse gas emissions along the entire value chain of the product.

At the same time, the European Green Deal could benefit the European companies that bear the high costs in de-carbonizing their manufacturing. The tax will allow production to be expanded in energy-intensive sectors as well as in sectors with high-intensity trade, as about 20% of the drop in manufacturing will be offset by payments for CO2 emissions.

Russia, in turn, may face the dire prospect of losing its energy and carbon-intensive markets as well as encounter challenged posed by the BCT. Most of the profound consequences will stem from a gradual loss of oil and gas markets following a drop in demand and prices, which may additionally be exacerbated by the carbon tax. Oil and gas revenues play a key role in the Russian budget, with their share being in the ballpark of a third and a half of it. In 2018 and 2019, the figures stood at 46% and 39% respectively. In 2020, they fell to 28% owing to the slumping demand and prices amid the pandemic and OPEC agreements.

No significant drop in oil and gas imports is expected before 2030. However, in the longer run, the EU aspires to significantly reduce its supplies from Russia. In the meantime, 45% of Russia’s fossil fuel exports go to the EU. Russia might lose a significant chunk of the EU market to European manufacturers or foreign competitors whose oil production has a smaller carbon footprint: take Saudi Arabia, for instance.

The ВСТ will be conducive to the EU’s demand for Russia’s finished products falling as well, primarily when it comes to a number of steels manufactured with carbon-intensive technologies. The BCG company estimates Russian exporters’ losses, once the tax is introduced, to be some $3–5 bn annually; KPMG’s estimates are somewhat higher.

De-carbonization practices in other countries will also inform the demand for Russian fuels and carbons. Many countries have set the goal of radically reducing greenhouse gas emissions. Some countries plan to introduce a ВСТ, while the US, China and the EU are now discussing possible cooperation in this field. It is worth noting that the global pace of de-carbonization and ВСТ introduction is hard to predict, but this should not justify a setback in Russia pursuing a more active climate policy.

At the same time, Russia could stand to benefit from the European Green Deal. Before 2030, a significant reduction of emissions will demand that the use of coal be rapidly phased out, which will result in an increased demand for natural gas, as the latter is seen as a “transition fuel” on the way to a low-carbon economy. This will allow Russia to expand its short-term and medium-term gas exports.

Technological restructuring of the economy and export diversification might emerge as the main potentially positive outcomes for Russia. The point at issue has ultimately to do with transforming the energy industry towards greater use of renewable energy sources (RES), whose cost tends to gradually decrease, as well as towards enhanced reliance on the new types of energy, such as hydrogen, which may, at the very least, partially replace fossil fuels and be exported to foreign markets.

Timely introduction of climate regulations will allow Russia to avoid having the ВСТ applied to its products. It remains unclear what kind of regulations could help resolve this matter, though.

Russian companies, now transitioning to low- and zero-carbon technologies, will be able to benefit from the price to be put on carbon and avoid paying the special tax, much as able to engage in trading quotas, depending on the instrument to be potentially used at the state level. They will likely be required to monitor greenhouse gas emissions along the entire product value chain.

The European Green Deal and the pertinent part of the EU’s economic post-pandemic recovery plan earmark about 10% of the climate action funding for “internationalizing” the Deal, which effectively means providing aid to trade partners in the form of grants, loans and guarantees for transitioning to “sustainable” energy industries and restructuring their economies and exports. Therefore, there is a theoretical possibility that some of the investment will be channeled into joint “green” projects.

The ‘green’ avenues for fostering EU–Russia bilateral relations

The European Green Deal affords opportunities for the parties to cooperate. This should not be limited to climate issues alone, although restructuring the energy sector remains a priority. Such cooperation should also include addressing the whole set of measures needed to transition to a “green economy”, with circular economy being one of its ingredients. The latter’s share in the global economy is estimated at some 9%.

Investment cooperation might become a key area, primarily encompassing investment in research, manufacturing and infrastructure, since restructuring the economy means taking it to a new technological level. Amid falling oil and gas revenues, Russia needs to explore new areas. Legally, there are no sanctions-related restrictions in climate matters.

The world already possesses a large number of the technologies to facilitate transitioning to a zero-carbon development track. Above all, these are the RES, “green” hydrogen and state-of-the-art bioenergy. Combining these sources will help implement this development track. Additional academic assessments are required to identify the efficiency and environmental acceptability of specific technologies to be used in joint projects, while taking the entire value chain into account.

Investment in hydrogen energy might become an important cooperation avenue, since its global market share is pegged at $2.28 trillion already by 2027. The International Renewable Energy Agency (IRENA) predicts that hydrogen will account for 12% of global energy consumption by 2050. Other experts put hydrogen’s share in global final energy consumption at 18%.

Hydrogen energy is seen as an important element in achieving the EU’s carbon neutrality, as the hydrogen’s share in Europe’s energy balance might reach 14% by 2050. Gazprom estimates Europe’s hydrogen market at $153bn as of 2050, while the Ministry of Energy suggests it will amount to $32–164bn. The Hydrogen Strategy approved by the European Commission in 2020 as part of the European Green Deal encourages the development of hydrogen energy. In Russia, it may be driven by the Strategy for Hydrogen Energy Development, which is currently being drafted. This strategy provides for collaboration with other states, including the EU. Plans for 2021 include presenting incentive measures for hydrogen exporters and consumers.

Supplies of “blue” and “turquoise” hydrogen could be a promising cooperation area. This hydrogen is produced from natural gas and it might be a particularly viable option, since this is generally perceived as being profitable economically and having the smallest negative environmental impact. Another prospective area is to encourage “green” hydrogen projects [2]. Hydrogen cooperation is of interest to both Russian and European companies, including Gazprom, Rosatom and NOVATEK. Rosnano and Enel Russia plan to jointly produce “green” hydrogen at the Enel Russia wind power plant, which is currently under construction in the Murmansk Region, and subsequently export the hydrogen of some $55m worth to the EU. Besides, NOVATEK signals its intentions to commence production of “blue” and “green” hydrogen together with Germany’s Uniper.

Another potentially conducive to cooperation factor is that, as far as the EU is concerned, Russia has a competitive edge in its geographical proximity, large gas deposits, production facilities and robust infrastructure. Small-scale pilot projects may become the first step to determine their benefits and costs for both parties. Building business partnerships may be another prospective path.

Cooperation is also promising in the areas of increasing energy efficiency, reducing methane leaks, supplying electricity, adapting to climate change, preserving biodiversity as well as in the fields of waste management, sustainable agriculture and forestry, electric car manufacturing, introduction of trading quotas, etc. The big take-off of digital technologies makes it possible to create databases in order to transparently select the most promising projects, boost their efficiency and achieve positive outcomes, and improve management systems.

Predicted development of EU-Russia economic and political relations amid Europe’s increasingly stringent environmental standards

The BCT tax will clearly have a negative impact on the bilateral relations and, most importantly, serve to breed deeper distrust between the parties, triggering a further re-orientation toward enhancing economic links with Asian nations, primarily China, for whom Russia, along with Saudi Arabia, is one of the biggest suppliers of oil and where Russia is stepping up its natural gas exports.

To avoid a deterioration in relations, it would be preferable for the parties to engage in constructive cooperation in their mutual interests, especially since the framework for this is already in place. In 2021, Russia intends to adopt its own Climate Strategy as well as a number of environmental laws in other areas. In order to facilitate Sakhalin’s path to carbon neutrality, there has been proposed a bill introducing a mechanism for selling greenhouse gases emission quotas on the island. Russia’s leading energy companies have already embarked on climate-related plans, with some companies devising climate strategies of their own.

In fact, the European Green Deal is an issue where Russia and the EU have common approaches as much as differences of opinion. At the same time, divergent opinions are no crucial obstacle to environmental cooperation between the parties.

The implementation of the European Green Deal is fraught with major risks for both parties, the principal ones for the EU being the high costs of the strategy and retaliatory steps to be undertaken by other countries. Russia faces the dire prospect of losing markets and lagging behind in re-structuring the energy industry, its key economic sector. At the same time, new opportunities are opening up, such as bolstering the parties’ global competitiveness by entering new markets.

Environmental cooperation between the two parties could be mutually beneficial to become one of the principal areas for negotiation and implementation. In order to fulfil this potential, dialogue—based on an open and balanced approach to assessing areas for collaboration and possible rapprochement—is needed. As a first step, the EU and Russia could develop a roadmap outlining every step of such cooperation and the parties’ commitments as well as specifying the market segments where projects could be carried out.

  1. Breaking down the proportionate relations between development and resource consumption.
  2. Produced by using RES to power water electrolysis.

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Eastern Balkans Economic update: Romania’s and North Macedonia’s new data for 2020

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When governments around the world started reacting to the pandemic, they induced a vast and unpredictable crisis. The ensuing recession struck in decidedly variegated ways both we looking at different countries and multiple social strata. Many economies fell in a downturn that has compromised access to income in certain States, although elsewhere these effects were risible. Such inequalities stand out in worldwide comparison, but they happen to be huge in structurally-alike, bordering States as well.

Recently, a varied pack of heavyweights and some smaller countries has rebounded strongly in relation to both GDP and employment. China and the US are at the forefront of this recovery for diverse whys and wherefores and in dissimilar manners. Like trucks on a difficult mountain road, the two are accelerating as they overcome the crisis helping the world economy.

Still, something is absent in this rubicund montage of rebounds and development: the European Union. Being the wealthiest market in human history, the EU may support other countries’ recovery tremendously. Yet, inner imbalances, organisational feebleness, and lack of resolve are restraining the Union. There have been serious consequences for some unconsolidated EU economies and on the many other States bound to the block. Following up a previous article, new data reveal how two very different country on the EU’s periphery fared in 2020.

Romania — The worst seems over

Over 20 million inhabitants and yearly exports worth about $80 billion make Romania a little giant in the Eastern Balkans. It joined the EU In 2007 in tandem with Bulgaria, and since analysts then to bundle the two countries together. However, this article’s approach is different as it compares Romania with the least populous country in the region: North Macedonia. The latter is not an EU member either, making them possibly the most dissimilar cases in the Eastern Balkans.

Romania’s economy suffered badly in the beginning of 2020, with its GDP collapsing 33% in the first quarter. These figures could be considered the worst since the onset of the post-socialist transition in the 1990s.The trend only got partially more positive in the following three months (April–June), when the economy started recovering somewhat. Yet, by the end of 2020 only 128,800 people had lost their job, or 1.49% on the previous year. The fact that the economy seems to be performing well has kept swaths of them in look for a new job. This explains rather discomforting unemployment statistics.

Gross Domestic Product

Romania’s economy only managed to get out of a steep slump in the summer quarter (July–September) of 2020. The figures reveal a strong V-shaped rebound, with GDP recovering almost 20 percentage points on its 2019 levels (Chart1). In the last three months of 2020, Romania’s GDP rose by a further 13%, reaching slightly above last years’ estimates. At the end of 2020, total production was 100.39% of its 2019 levels, whereas the Euro Area stopped at 96.86%.

Un/Employment

Curiously, unemployment data for most of 2020 diverge from Romanian economy’s overall impressive performance — and significantly so (Chart 2). Unemployment rose in the first three months of 2020, and started growing even faster in the ensuing nine months. In spite of a positive GDP dynamic, employment decreased by almost 130,000 units in 2020Q4due to the pandemic-induced crisis.

True, unemployment statistics do not say much about the structure of the Romanian labour market, a key factor in these processes. Unlike most of their Eurozone peers, Romanian enterprises deal with a greatly flexible manpower with fewer rights and protections. Thus, they can lay off and hire staff much faster than competitors and partners in the richest EU economies. Yet, one should not interpret unemployment’s as a consequence of new people entering the job market during 2020Q2–Q3. After all, in those six months the number of employed people fell by 2.4% compared to 2019Q3 or 207,500 units. Meanwhile, unemployment ‘only’ grew by 1.3 percentage points indicating that some laid-off workers became inactive. In a word, ordinary Romanians did not get a fair share of the recovery’s gains.

RNM — It couldn’t get much worse, so it got better

As anticipated, the Republic of North Macedonia (RNM) is very different from Romania in many respects. First, its population is a fraction of the latter’s, only about two million people according to questionable official data. Furthermore, the RNM is not a member of the EU despite the fact a markedly asymmetric dependence from the Union. In effect, its economy is mostly reliant on trade with and tourism from three EU member States: Bulgaria, Germany and Greece. The country averted a civil war in 2001 by appeasing its Albanian minority, but its economy has struggled ever since.

One could argue that the situation before the pandemic hit was so dire that worse performances were rather unlikely. When the economies of Bulgaria and Greece slowed down and tourism came to a halt, the RNM’s suffered as well. In the first quarter of 2020 the RNM’s GDP fell by 14%, and shrunk further in the following three months. New figures show that about 17,000 people lost their job in April–June 2020, which became 21,000 in December. This means a 2.66% decrease in employment for a country where unemployment was 17.3% in 2019.

Gross domestic product

The RNM’s economy took the biggest hit in the second quarter of 2020, after having already suffered somewhat in January-March. In 2020Q2, North Macedonian GDP was about 23% lower than in 2019 (Chart 3), against the Eurozone’s 17%.Yet, the slid is nothing like the recession the RNM experienced during the Yugoslav Wars and the 2001 civil war. With the summer, both Bulgaria and Greece as well as the entire EU reopened their borders and started growing again. There were positive ripple effects on the RNM’s economy in the third quarter, with GDP growing by 448 million euros. The 20% increase of the summer became the base for further growth in the October-December 2020. By the end of the fourth quarter, the RNM’s GDP increased by another 10%— converging on its 2019 levels.

Un/employment

Unlike in Romania’s case, inconstant performances did not affect unemployment statistics visibly in the RNM (Chart 4). Actually, and counter intuitively, in comparison to 2019 unemployment decreased by 0.6% to 16.7% in the first two quarters of 2020. In total, during the first half of 2020, the RNM’s economy lost4,200 jobs or 0.5% in comparison to 2019 levels. The National Statistical Agency recorded similarly inconclusive fluctuations all year round, suggesting a deep disconnect between GDP and unemployment. All in all, one could justify these findings with the ignominious state in which the RNM’s labour market is. The population is not very active, yet unemployment has never fallen below 15%in the past 20 years.  Therefore, ordinary people fail to reap sensible benefits even if the economy overall is growing.

Conclusion: Pandemic management matters

There are two lessons that one can draw from these figures and by comparing the cases of Romania and the RNM. One, regards the pandemic and the ways its management interact with key economic indicators. While the other speaks volume on the differences between these two countries on the EU’s periphery.

Arguably, the data may comfort the thesis that not only lockdown fuel recessions, but less lockdowns spur economic growth. In fact, Romania performing better than most EU and Eurozone economies in terms of GPD growth suggests that less lockdowns favour growth. After all, authorities in Bucharest have been and remain remarkably consistent in their refusal to shut down the economy. Conversely, the rather trendless fluctuation in the RNM’s data and performance results at least partly from the government’s inconsistency. Actually, Skopje went from minimal anti-contagion restrictions to declaring a full-scale, countrywide lockdown virtually overnight— a behaviour that fuels uncertainty.

Additionally, these figures dispel some of the cloud surrounding the EU’s and its peripheries’ path out of the crisis. On the one hand, the EU is trying to dig its escape route by investing billions of euros over the coming years for countrywide Recovery plans. True, Romania’s share of grants is not as bis as Bulgaria’s, Greece’s or Italy’s, but the government is thinking big. On the other hand, the RNM is amongst the “poorest countries in Europe” never to be part of the USSR. Unemployment figures could cause vertigos even before the pandemic hit and the population is shrinking at impressive rhythms. Not being a member of the EU, Skopje will get only a fraction of the money Brussels has earmarked. Paradoxically, dependence on the EU was the transmission belt of the crisis, but lack of integration will hinder the recovery.

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Biden should abolish corporate tax for small business, and make Big Tech pay what they owe instead

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If Biden wants to increase tax revenue, create jobs and protect the American Dream, he should abolish corporate income tax for startups and small businesses.

In America, mom and pop businesses pay the same tax rate as multinationals. Individual income tax has seven tax rates, depending on how much an individual has made. We need the same system for corporate income tax, instead of a flat rate that strangles small businesses. Small businesses that are essential for our post-pandemic recovery.

For companies to pay their fair share of tax, corporate tax rates need to be fair. Individuals have a progressive tax system – the more you earn, the higher rate you pay – but for companies it is a flat rate. That’s not fair, especially when the US, like many countries, is committed to the idea of corporate personhood: that a corporation is a legal person.

For small businesses – which are the majority of American businesses – there is really no difference between corporate and individual income. If the mom and pop store does well, so do Mama and Papa. This is what makes the current system even more unfair.

The inherently fair idea of progressive taxes (where the more you earn, the higher rate you pay) has deep roots in Western civilization. The famous economist Adam Smith wrote about this concept centuries ago. Even John Locke, a man who famously hated taxes, was in favour of progressive taxation. The idea originates in Ancient Greece and in the arguments of Aristotle and is intimately linked with democracy itself. 

We can all agree that this makes sense for individuals. So why does this same principle not apply to business? I think it should, especially because I believe every individual has an entrepreneur within them. Anyone can – and should – be a CEO, a builder of opportunity and wealth. But government policies have to encourage that, and protect capitalism from the threat of increased social divides.

Two individuals, Elon Musk and Jeff Bezos now have more wealth than the bottom 40% of Americans. The share of total wealth of the upper class in the US has increased from 60% to 79% in the last 40 years, while the lower class share has decreased from 7% to 4%, and the middle class’s share has dropped from 32% to 17%. 

This doesn’t mean that we shouldn’t aim to raise more corporate taxes – we should. Out of $3.46 trillion revenue income realized by the US government only about $230 billion or close to 6.6% was contributed by corporates.

Some corporates can afford to pay more – especially Big Tech, because they don’t even pay the low flat rate they should be paying. In the UK, for example, Amazon paid £293 million in tax, even though it made £13.73 billion in sales in 2019 or about 2%. This is in stark contrast to the 21% corporation tax it is supposed to pay. 

We need more fairness, to protect true capitalism. Fairness isn’t just a socialist value, it is about providing equal opportunity for all citizens to prosper through wealth creation.

It’s unfair that those small businesses and start-ups end up paying proportionally more than their multi-national counterparts. But this is also economically stifling: Instead of allowing founders the space to breathe, grow and make new hires, they are faced with big, strong competitors who pay effectively lower taxes (because they can afford the best tax attorneys).

The American Dream is predicated on the idea that one can start a new business, work hard and be the master of his or her own destiny. A regressive corporate tax policy, which we have now, flies in the face of this ideal. 

In 2020, 804,398 new businesses were started in the US. We have to give these businesses a fair opportunity to grow. By taxing them at the first hurdle, we stifle the chance of the next Facebook and Google being born, which could equally lead to much less tax revenue down the line. 

Lowering, or abolishing, start-up business tax can counter-intuitively increase tax revenue for the federal government in the long-term.

More importantly, it can remind us what America is really about, and bring our communities and generations together at a time when we need unity, growth and innovation more than ever before.

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