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Thinking about Germany

Giancarlo Elia Valori

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What is Germany’s current role within the EU and in the global economic system? Which game is it playing? These are questions which cannot be answered in an unambiguous and simplistic way, as often happens today.

First and foremost, we shall wonder whether Germany is the cause or the solution of the European political and financial crisis.

Certainly, the current negative economic situation in the EU comes at a time when global financial markets are losing confidence in Greece’s ability to repay its debts.

The contagion of mistrust forces also other peripheral nations, but certainly not Germany, to seek bailouts of their sovereign debt in the framework of the international community, namely the EU itself and the International Monetary Fund (IMF).

It is the time when – as was the case in the Toronto G20 Summit of June 2010 – the absolute priority of fiscal consolidation, and hence of the squeeze on public spending, is set.

However, if we make an in-depth analysis, we realize that financial deregulation and the lowering of interest rates have been the primary causes of the Eurozone crisis.

It was precisely the new availability of funding from banks – as also happened in the United States – to excessively stimulate consumption and generate a series of financial “bubbles”, especially real estate ones, which apparently increased tax revenues and hence public spending. Those bubbles, however, quickly deflated and burst out, thus creating a structural imbalance which today makes the difference between Germany and the EU “peripheral” countries.

It is also worth recalling that the Euro introduction made the intra-European banking exchanges increase by 40%, with a relative increase in real estate and commodity prices.

Too much credit and at low interest rates “doped” both South European consumers and their governments.

Nevertheless, in the current crisis situation, the EU central countries and Germany, in particular, have maintained a greater competitive margin, mainly resulting from the relatively low wage growth.

Hence, also in the recent crisis, Germany could increase its exports to the EU peripheral countries, while its banks lent money to the EU marginal countries for them to buy German goods and services.

Therefore Germany must be seen both as the cause and the solution of the economic depression of the Euro zone peripheral countries.

However is Germany currently suffering from an invisible crisis, as some analysts note?

Even in this case, the issue is more complex than it may seem.

It is worth noting that Germany is the fourth world economy and the G20 third largest exporter. It depends on its export economy as Saudi Arabia depends on oil sales.

Currently German exports account for 45.7% of the country’s GDP. Therefore Germany is forced to face the imbalances and liquidity crisis of the countries buying German goods and services.

However, are the strategies adopted so far by Germany to support and stabilize its growth through exports still sustainable?

This raises some doubts in my mind.

Furthermore, all the traditional exporting countries, such as China, Russia, Saudi Arabia and South Korea, are in crisis.

Hence Germany could press ever more with its exporting model, thus preserving the EU as a free trade area, but fiercely competing with the European peripheral countries, which also live on exports and would see the German economy burn up the land under their feet, as currently already happens in many sectors.

We experienced so also with the 2008 crisis: the recession made the sovereign debt of many EU peripheral countries unmanageable and Germany, as net creditor, has always required public spending cuts and a quick repayment of the loans granted.

However, while Germany holds most of European debt securities, and particularly of the countries under crisis, if the South European economies collapse (and this possibility cannot be still ruled out) Germany will no longer have a sufficiently large market for its exports, because it cannot offset the losses in Europe with the corresponding increase in exports to China, the rest of Asia or the Arab countries – all nations which, at different levels, are recording an economic downturn.

Hence if Germany stimulates the growth of the Euro zone which owes money to it, the debt of the EU peripheral countries will increase. However, if the debt owed to Germany by the countries already in crisis rises, the latter will experience a very severe banking crisis and a possible default on their sovereign debt.

This adds to an unemployment rate which, in various ways, amounts to 20% in Southern Europe – a rate similar to the one recorded during the Great Depression in the United States.

Hence, against this background, the German economy cannot shrink up to making impossible to preserve the German export economy model also in the EU “economic locomotive”.

Furthermore, in this situation, the South European countries in financial crisis could not even replace Germany as to exports.

A productive and financial trap of which it is extremely hard to get out.

Moreover Germany has no interest in changing its development model.

It is the model which has produced all German comparative advantages since the introduction of the single currency.

Today the signs of the German crisis, which Germany will project onto the whole EU, are already evident.

The foreign market share for the “made in Germany” products is falling and the return on investment has declined. Many German companies are lowering prices to preserve their traditional market share.

If Germany shifts from an export economy to a productive system linked to the internal market growth, the German high savings rate, which allowed the companies’ technological upgrading, will no longer be possible.

France, for example, is no longer the first EU market for the goods produced in Germany.

In 2015 German exports to China fell by 4%.

Some German exports to the United States are increasing (19%), but the US market share cannot be a substitute for a long period of time.

Currently also the United States are a low-growth country and the US savings are increasing.

On average, the US economic crisis cycle is approximately seven years – hence we shall expect that, in a year or two, the North American market will tend to shrink again.

Therefore the bubble-boost cycle is now embedded in the US economy.

Incidentally, this should make us rethink – in a new way – about Marx’s theory of the inevitability of capitalist crises.

Furthermore, as already mentioned, the return of capital on investment in Germany is ever lower.

Over the last two years, the large German groups have seen a drop in the profitability of the capital employed from 13% to 3%.

Moreover the prices throughout the Euro zone are declining.

Last January prices decreased by an average 3% and the downward trend of average prices is increasingly evident and stable.

Hence, if Germany were to fall into recession, the German solution will likely be to quickly recover the Southern Euro zone’s debt, even with some discounts, and then fiercely eradicate competition from other EU exporting countries, also with unfair or dangerous business practices.

It is worth recalling that the German exposure to Italian banks amounts to 120 billion euro and our credit institutions have a share of non-performing loans (NPL) exceeding 17%.

In absolute terms, the German exposure to Italian banks alone is worth 3% of its GDP.

Hence how long will the German patience last in a phase of economic crisis?

It is also worth considering that this year the Commerzbank profit has fallen by 52%, while Deutsche Bank has recorded a fall in profit by 58%, with a German banking system which has as many as 41.9 trillion derivatives entered in the budget.

It is worth recalling that if Deutsche Bank collapses, the Euro will follow suit.

Moreover, if Germany “bails out” Deutsche Bank, everybody will note the different treatment reserved for the German credit institutions compared to the Greek banks.

It would be a sort of “anything-goes attitude” inside the Euro and the EU proclamations would turn into all talk and no action, as well as window dressing which serves no purpose.

If the German banks (and not just Deutsche Bank) are bailed out by the government, the German debt/GDP ratio will rise from 71% to 110%.

There would be no more room for preaching on austerity by Germany, which could not but accept the Italian, Spanish, Greek and Portuguese debt “overshooting”.

It is worth noting that Deutsche Bank funds most of German exports – hence, if it collapses, the German economy will soon fall into a severe crisis.

Therefore, the following can be predicted: if Germany falls into recession, the first reaction will probably be to quickly recover credits from the Euro zone and then follow a scorched-earth approach as to exports in the rest of Europe.

On the contrary, if Germany succeeds in “standing fast”, it will have every interest in refinancing the Southern Euro zone for it to buy its goods.

In any case, however, the EU situation is neither good nor stable and, in the future, we shall see to what extent the single currency will hold firm or whether Germany, or even Italy, will try to exit from the Euro in one way or the other.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Modi’s India a flawed partner for post-Brexit Britain

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With just two weeks to go until Britain is scheduled to exit the European Union, Boris Johnson and his ministers are understandably focused on the last-minute dash to formulate a workable Brexit deal with the EU. Once this moment has passed, however, either Johnson or whoever replaces him as PM will come under intense pressure to deliver the trade deals Brexit side supporters have so talked up since 2016.

One such envisaged deal is with India. Seven decades after securing independence from Britain’s colonial empire, New Delhi has the world’s seventh-largest economy and one of its fastest growth rates. The prospect of deeper trade ties with Asia’s third-largest economy has been a major feature of the pitch for a “Global Britain” that extends the UK’s reach beyond the continent, and Johnson himself made a big thing of expanding economic ties with India while campaigning to become PM.

Unfortunately, any plans to kickstart trade agreements with India will run into problems, and not just over immigration and visa issues. India is on the verge of a serious economic downturn, hit by job losses and decreasing levels of foreign investment. With growth slowing down, Indian PM Narendra Modi has fallen back on his aggressive brand of Hindu nationalism to galvanise public support, a gambit that has most recently resulted in his government’s controversial move to strip automony from Kashmir.

Bad time for a UK-India trade deal

Whereas only a few years ago India was held up as one of the world’s fastest growing economies and an enticing prospect for global trade and investment, Moody’s new projection of a 5.8% growth rate represents a danger to Narendra Modi’s promise of a $5 trillion economy. Recently released figures show India’s GDP growth falling for the fifth successive quarter, to a six-year low of 5.2%.

India’s economic woes are reflected in patterns of foreign investment. Around $45 billion has been invested in India from abroad over the last 6 years. The downturn in the country’s economic fortunes has seen a record $4.5 billion of shares sold by foreign investors since June this year. These economic problems are linked to Modi’s failure to carry through on economic reforms promised when he came to power in 2014, when a number of structural problems were seen as inhibiting external trade relationships.

India currently has over 1,000 business regulations and more than 3,000 filing requirements, as well as differing standards for social, environmental and human rights. These have been sticking points in the moribund trade deal negotiations between India and the EU, and Brexit advocates have not explained how they plan to overcome these hurdles.

Hostility to foreign companies

Structural issues are only part of the problem. Another key concern is the Indian government’s adversarial attitude towards foreign investors. Despite Modi’s promises to make India an attractive place to do business, his government has continued protectionist policies that throttle the country’s ability to attract outside capital.

One issue is retrospective taxation. Under Modi’s predecessor, Manmohan Singh, several British and international firms were hit with sizeable, legally dubious tax bills by the Indian government. Modi came to power on a promise of ending retrospective tax bills being imposed on overseas companies, and yet British firms such as Vodafone and Cairn Energy still find themselves pursued through the courts for back-dated tax bills, despite the protections they should enjoy under the bilateral investment treaty between India and the UK.

Vodafone’s case involved its 2007 acquisition of a stake in cellular carrier Hutchinson Essar. While the deal did not take place in India, New Delhi determined Vodafone still owed $5 billion in taxes on the overseas transaction. After the Indian Supreme Court dismissed the claim in 2012, India’s previous government introduced a new law to tax transactions of this nature that retroactively applied to cases going back to 1962. Modi attacked this “tax terrorism” at the time, but his government has continued its dogged pursuit of Vodafone in the courts.

Cairn Energy has faced an equally arduous struggle with the Indian Ministry of Finance, which in 2014 blocked the British firm from selling its 10% stake in Cairn India and subsequently demanded $1.6 billion in taxes. Indian officials used the 2012 law to justify their actions, violating the bilateral investment treaty and breaking one of Modi’s own campaign promises in the process.

Immigration laws a further sticking point

This recent history should already give British businesses pause, but the most obvious obstacle in any trade negotiations between UK and India will be the issue of immigration. The Centre For European Reform has argued post-Brexit trade will be closely linked to opening up UK borders to workers from partner countries, but a UK Commons Foreign Affairs Select Committee report in June highlighted how Britain’s immigration restrictions on Indian workers, students and tourists has already impacted bilateral trade relations. The report noted how the UK has slipped from being India’s 2nd largest trade partner in 1999 to 17th in 2019, adding that skilled workers, students and tourists are deterred from coming to the UK by the complicated, expensive and unwelcoming British migration system.

It is unlikely the Modi government will agree to any UK-India trade deal that doesn’t guarantee a relaxing of immigration rules that will allow a free flow of people as well as goods and capital between the two countries. The question is whether the British government, which has veered ever more closely towards a Brexit-fuelled populism at odds with relaxed border controls, will be flexible enough to sign up to this.

Given these issues, are Britain’s hopes for a post-Brexit dividend in Indian trade dead on arrival? Unless Modi’s government starts living up to international standards and honouring his country’s investment agreements with British companies, “Global Britain” may not get much further with India than it has with the US.

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A more effective labour market approach to fighting poverty

Cynthia Samuel-Olonjuwon

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Gainful employment is still the most reliable way of escaping poverty. However, access to both jobs and decent working conditions remains a challenge. Sixty-six per cent of employed people in developing economies and 22 per cent in emerging economies are in either extreme or moderate working poverty, and the problem becomes even more striking when the dependents of these “working poor” are considered.

Thus, it is not just unemployment or inactivity that traps people in poverty, they are also held back by a lack of decent work opportunities, including underemployment or informal employment.

Appropriate labour market policies can play an important role in the fight to eradicate poverty, by increasing access to job opportunities and improving the quality of working conditions. In particular, labour market policies that combine income support for jobless people with active labour market policies (ALMPs).

The new ILO report What works: Promoting pathways to decent work  shows that combining income support with active labour market support allows countries to tackle multiple barriers to decent work. These barriers can be structural, (e.g. lack of education and skills, presence of inequalities) or temporary (e.g. climate-related shocks, economic crises). This policy combination is particularly relevant today, at a time when the world of work is being reshaped by global forces such as international trade, technological progress, demographic shifts and environmental transformations.

Policies that combine income support with ALMPs can help people to adjust to the changes these forces create in the labour market. Income support ensures that people do not fall into poverty during joblessness and that they are not forced to accept any work, irrespective of its quality. At the same time, ALMPs endow people with the skills they need to find quality employment, improving their employability over the medium- to long-term.

New evidence gathered for this report shows that this combination of income support and active support is indeed effective in improving labour market conditions: impact evaluations of selected policies indicate how people who have benefited from this type of integrated approach have higher employment chances and better working conditions.

One example of how this combined approach can produce results is the innovative unemployment benefit scheme unrolled in Mauritius, the “Workfare Programme”. This provides workers with access to income support and three different types of activation measures; training (discontinued in 2016), job placement and start-up support. The programme was also open to those unemployed people who were previously working in an informal job. By extending coverage to the most vulnerable workers, the scheme has helped reduce inequalities and unlock the informality trap.

Another success came through a public works scheme implemented in Uruguay as part of a larger conditional cash transfer programme, the National Social Emergency Plan (PANES). The programme was implemented during a deep economic recession and carefully targeted the poorest and most vulnerable.

Beneficiaries of PANES were given the opportunity to take part in public works. In exchange for full-time work for up to five months, they received a higher level of income support as well as additional job placement help. This approach reached a large share of the population at risk of extreme poverty and who lacked social protection. The report indicates that providing both measures together was critical to the project’s success.

The effects of these policies on poverty eradication cannot be overestimated. By tackling unemployment, underemployment and informality, policies combining income support with ALMPs can directly affect some of the roots of poverty, while enhancing the working conditions and labour market opportunities for millions of women and men in emerging and developing countries.

ILO

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Economy

CPEC vs IMF in Pakistan

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International Monetary Fund (IMF) was created just after World War II (WWII) in 1945. The IMF is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Pakistan has been knocking doors of IMF since 1958, and it has been 21 agreements with IMF. Generally, the IMF provides loans at very low-interest rates and provides programs of better governance and monitoring too. But for the last 6 decades, Pakistan has suffered a lot, in terms of good governance. Especially last 2 decades, corruption, nepotism, poor planning, bribery, weakening of institution, de-moralization of society, etc were witnessed. We may not blame the IMF for all such evils but must complain that the IMF failed to deliver, what was expected. Of course, it is our country, we are responsible for all evils, and wrongdoings happened to us. We have to act smartly and should have made the right decision and at right times.

IMF also dictates its terms and condition or programs like: devaluation of local currencies, which causes inflation and hike in prices, cut or draw-back of subsidies on basic utilities like fuel, gas, electricity, food, agriculture etc, which causes cost of life rather higher for local people, cut on development expenditures like education, health, infrastructure, and social development etc, which pushes the country even more backward. IMF focusses only on reducing expenditures and collection of taxes to make a country to meet the deadlines of payments. IMF does not care about the development of a country, but emphasizes tax collections and payment of installments on time, to rescue a country from being a default.

While CPEC is an initiative where projects are launched in Power Generation, Infrastructure development under the early harvest program. Pakistan was an energy trust country and facing a severe shortage of Electricity. But after completion of several power projects under CPEC, the shortfall of electricity has been reduced to a great extent. One can witness no load shedding today, while, just a few years back the load shedding was visible throughout the country for several hours a day. Several motorways and highways have been completed. Gwadar port has been operational partially. Infrastructure developments are basic of economic activities.

Projects under CPEC has generated jobs up to 80,000. CPEC was the catalyst to improve GDP by around two percent during 2015-2018. CPEC has lifted the standard and quality of life of the common man in Pakistan. CPEC was instrumental to move the economic activities and circulation of wealth in society. Under CPEC, early harvest projects, 22 projects have been completed at the cost of approximately 19 billion US dollars.

It is understood that early harvest projects were heavy investment and rather slow on returns. But, these projects have provided a strong foundation for the second phase, where Agriculture, Industrialization and Social Sector will be focused. Return on Agriculture and Industrial produce is quick and also generates more jobs. The second phase will contribute toward the social development of Pakistan as well as generate wealth for the nation.  Pakistan’s agriculture sector has huge potential as cultivatable land is huge, workforce is strong and climate is favorable.  Regarding Industrialization, Pakistan is blessed with an abundance of mines and minerals. The raw material is cheap and the labor cost is competitive. Pakistan has 70% of its population under the age of 40 years, which means an abundance of the work force. Pakistan’s domestic market is 220 million and the traditional export market is the whole of the middle-east and the Muslim world.

The major difference between the CPEC and IMF is that CPEC generates wealth, while IMF focuses on tax collection and reducing the developments and growth. China is the latest model of developments in the modern days, China is willing to replicate its experience with Pakistan for its rapid development.

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