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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 "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. 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 of "Honorable" of the Académie des Sciences de l'Institut de France

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Economy

3 trends that can stimulate small business growth

MD Staff

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Small businesses are far more influential than most people may realize.

That influence is felt well beyond Main Street. Small businesses make up 99.7 percent of all businesses in the U.S., and these firms employ nearly half (48 percent) the workforce, according to the 2018 Small Business Profile compiled by the U.S. Small Business Administration.

In addition, take a look at recent trends and developments in technology. It’s clear that these changes can give entrepreneurs that extra leverage to scale up. Here are three to consider.

Big companies have big opportunities for small firms

Back in the 20th century, a large company would get things done in this very straightforward way. Wherever there was a need, they hired someone directly to perform that task, whether it was a driver or an accountant.

Under today’s leaner models, these big companies are finding it’s much more efficient to partner with other firms to fulfill certain needs. According to Deloitte, 31 percent of IT services have been outsourced, as well as 32 percent of human resources. This increasing acceptance of outsourcing is a huge growth opportunity for small businesses owners.

For example, Amazon recently announced it is actively seeking and helping entrepreneurs who are willing to deliver packages as their contractors. The mega retailer will even go as far as helping with startup costs so long as these smaller firms deliver their packages. Landing a contract with a big corporation is a significant milestone for any company, but starting out with that lucrative contract is sure to let these startups hit the ground running.

Better connections for greater flexibility

When today’s entrepreneur has a new role to fill, they’re not confined to the talent pool in their immediate community. Because we now have the tools and connectivity to work from anywhere, a business owner can expand the search across multiple states!

What’s more, these flexible, work from anywhere options can give business owners the inspiration to do things differently. Having greater collaboration means having access to more options to fit specific needs.

For example, what is the very nature of being a small business owner? It’s dealing with a fluctuating volume of work. Tapping into the talent pool of freelancers to work on these specific, short-term tasks and projects is easier than ever, because for a segment of workers, freelancing is increasingly becoming a way of life. Freelancers currently make up 36 percent of the workforce, according to a study from Upwork. And, if trends maintain, most Americans will be freelancers by 2027.

Thanks to remote options with easy access to talent, small businesses can easily set up temporary or ongoing as-needed work arrangements. When you partner with Dell for your computing needs, you’ll get the expert help and support so you can set up the perfect flexible workspace system.

More automation brings better efficiencies

Without a doubt, new technology works in favor of small businesses and entrepreneurs because they have many tools at their disposal to automate labor intensive processes, be more productive and cut costs. For example, entrepreneurs can use software to process client payments and even set up automated payments, saving hours and costs associated with collecting, processing and reconciling under the traditional paper check payment system. That translates into a more efficient billing department that can spend more time focused on complex issues.

Let Dell equip your small business with the right tech tools, tailor made for your venture and backed with support, so you can focus on running your business.

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Transitioning from least developed country status: Are countries better off?

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The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled.  One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.

However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.

Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI).  Many of the forthcoming LDC graduates will transition based only on their GNI.  This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.

So what’s the issue?  A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI).  This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.

Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.

How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability?  Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced.  The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita.  The analysis was repeated just for Commonwealth countries and similar results were obtained.

Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability.  This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.

So what’s the take away?

The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity.  It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.

One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.

What are your thoughts?

Commonwealth

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Economy

U.S. policy and the Turkish Economic Crisis: Lessons for Pakistan

M Waqas Jan

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Over the last week, the Turkish Lira has been dominating headlines the world over as the currency continues to plunge against the US dollar. Currently at the dead center of a series of verbal ripostes between Presidents Donald Trump and Recep Tayyip Erdogan, the rapidly depreciating Lira has taken center stage amidst deteriorating US-Turkey relations that are wreaking havoc across international financial markets. Considering Pakistan’s current economic predicament, the events unfolding in Turkey offer important lessons to the dangers of unsustainable and unrealistic economic policies, within a dramatically changing international scenario. This holds particular importance for Pak-US relations within the context of the impending IMF bailout.

In his most recent statements, Mr. Erdogan has attributed his economy’s dire state of affairs as an ‘Economic War’ being waged against it by the United States. President Trump too has made it evident that the latest rounds of US sanctions that have been placed on Turkey are directly linked to its dissatisfaction with Ankara for detaining American Pastor Andrew Brunson. Mr Bruson along with dozens of others has been charged with terrorism and espionage for his purported links to the 2016 attempted coup against President Erdogan and his government.  There is thus a modicum of truth to Mr. Erdogan’s claims that the US sanctions are in fact, being used as leverage against the weakening Lira and the Turkish economy as part of a broader US policy.

However, to say that the latest US sanctions alone are the sole cause of Turkey’s economic woes is a gross understatement. The Lira has for some time remained the worst performing currency in the world; losing half of its value in a year, and dropping by another 20% in just the last week. Just to put the scale of this loss in to perspective, the embattled currency was trading at about 2 Liras to the dollar in mid-2014. The day before yesterday, it was trading at about 7 Liras to the dollar.

While the Pakistani Rupee has also depreciated quite considerably over the last few months, its recent drop (-17% against the dollar over the past 12 months) pales in comparison to the sustained and exponential downfall of the Lira. Yet, both the Turkish and Pakistani economies are at a point where they are experiencing an alarming dearth of foreign exchange reserves that have in turn dramatically increased their international debt obligations.

The ongoing financial crises in both Turkey and Pakistan are similar to the extent that both countries have pursued unsustainable economic policies for the last few years. These have been centered on increased borrowing on the back of overvalued currencies. While this approach had allowed both governments to finance a series of government investments in various projects, the long term implications of this accumulating debt has now caught up with them dramatically. As a result, both countries may soon desperately require IMF assistance; assistance, that in recent times, has become even more overtly conditional on meeting certain US foreign policy requirements.

In the case of Pakistan, these objectives may coincide with recent US pressures to ‘do more’ regarding the Haqqani network; or a deeper examination of the scale and viability of the China- Pakistan Economic Corridor. With regards to the latter, US Secretary of State Mike Pompeo has clearly stated that American Dollars, in the form of IMF funds, to Pakistan should not be used to bailout Chinese investors. The rationale being that a cash-strapped Pakistan is more likely to adversely affect Chinese interests as opposed to US interests in the region at the present. The politics behind the ongoing US-China trade war add even further relevance to this argument.

In the case of Turkey however, which is a major NATO ally, an important emerging market, and a deeply integrated part of the European financial system, there is a lot more at stake in terms of US interests. Turkey’s main lenders comprise largely of Spanish, French and Italian banks whose exposure to the Lira has caused a drastic knock on effect on the Euro. The ensuing uncertainty and volatility that has arisen is likely to prove detrimental to the US’s allies in the EU as well as in key emerging markets across South America, Africa and Asia. This marks the latest example of the US’s departure from maintaining and ensuring the health of the global financial system, as a leading economic power.

Yet, what’s even more unsettling is the fact that while the US is wholly cognizant of these wide-ranging impacts, it remains unfazed in pursuing its unilateral objectives. This is perhaps most evident in the diminishing sanctity of the NATO alliance as a direct outcome of these actions.  After the US, Turkey is the second biggest contributor of troops within the NATO framework. As relations between both members continue to deteriorate, Turkey has been more inclined to gravitate towards expanding Russian influence. In effect, contributing to the very anti-thesis of the NATO alliance. The recent dialogues between Presidents Erdogan and Putin, in the wake of US sanctions point markedly towards this dramatic shift.

Based on the above, it has become increasingly evident that US actions have come to stand in direct contrast to the Post-Cold War status quo, which it had itself help set up and maintain over the last three decades. It is rather, the US’s unilateral interests that have now taken increasing precedence over its commitments and leadership of major multilateral frameworks such as the NATO, and the Bretton Woods institutions. This approach while allowing greater flexibility to the US has however come at the cost of ceding space to a fast rising China and an increasingly assertive Russia. The acceleration of both Pak-China and Russo-Turkish cooperation present poignant examples of these developments.

However, while it remains unclear as to how much international influence US policy-makers are willing to cede to the likes of China and Russia over the long-term, their actions have made it clear that US policy and the pursuit of its unilateral objectives would no longer be made hostage to the Geo-Politics of key regions. These include key states at the cross-roads of the world’s potential flash-points such as Turkey and Pakistan.

Therefore, both Turkey and Pakistan would be well advised to factor in these reasons behind the US’s disinterest in their economic and financial predicaments. Especially since both Russia and China are still quite a way from being able to completely supplant the US’s financial and military influence across the world; perhaps a greater modicum of self-sufficiency and sustainability is in order to weather through these shifting dynamics.

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