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Deutsche Bank Crisis and German Exceptionalism



During the last two weeks, Deutsche Bank (DB) the largest German Bank (identical to our State Bank of India) making headlines in financial press because of the downward slide of its share value to the record low. A fall by 65 % in share price that has not only erased more than half of its market value but is likely to lead to a closure of 25% of its branches and loss of job for over 2,000 staff. Financial circles are afraid that DB once a triple-A-rated bank is likely to be the next Lehman Brothers which caused the famous US financial crisis.

This is not a speculation but a likely event pregnant distinct certainty because rating agency Standard & Poor, has already lowered DB’s rating even lower than what was that of Lehman Brother three months prior to the historical debacle in 2008. It was then the US Government had to bail out the US financial sector by burning tax payers 13 Trillion Dollars. The DB crisis is more serious because this time the context is radically different. Unlike Lehman Brothers in the United States, it is DB in Germany. And the primary difference is the core German economic philosophy called the Ordo-liberalism which does not permit any state intervention in the market once having laid the rules.

As the Nobel Prize winner economist Paul Krugman has said in one of his articles in Fortune magazine, “Germans are sticklers for principles, while Americans are philosophical and personally “sloppy”. Today, it looks like the German self-righteousness which is holding a hanging sword on the “project unified Europe” is also likely to lead to some kind of self-harm if not self-destruction for the Germany itself.

German Chancellor Angela Merkel has a hard choice to make between devil and deep sea. On one hand, she has gone to the town with Ordo-liberalism as the panacea for ailing European member states of south and taken hard line against state aid in other European nations (remember Greek crisis) and on the other side is the likely domino effect the DB failure will have on the European financial markets besides her domestic political compulsions.

In a way, it may not be too much of a bad throw at the dartboard if we say that chickens have started coming home to roost for Angela Markel which may see her eventual exit from the political center stage of European Union.

The Iron lady of European Union has for last five years been riding roughshod over democratically elected European Union member states of south; the PIGS (Portugal, Italy, Greece and Spain) in pursuit of austerity measures and fiscal discipline. Her consistent message to these member states has been to bring about a policy convergence of their economies around the best practice policy template, used by Germany which has made it the most successful economy in the EU. This German bullying is interpreted by some as pursuit of its narrow nationalistic interest above collective interest of the EU on account of its strong economy and capital surplus but more serious minded intellectuals treat this as the typical German approach to economic policy making traditionally called as the Ordo-liberalism.

It may be useful to do bit of theoretical heavy lifting out of the way by understanding what Ordo-liberalism broadly means. It is the German intellectual tradition of liberal economy originally developed by the famous Freiburg school. It evolved in the context of the bitter experience of rising inflation and mass unemployment in Weimar German during the interim period of two world wars. Ordo-liberalism expects that the role of the state is to create an economic and legal framework to enable the market to work efficiently. Ordo-liberalism opposes intervention into the normal course of the economy and staunchly opposes expansionary fiscal and monetary policy during an economic downturn and to stabilize the business cycle in a recession.

Ordo-liberalism forged the template of German growth in post war period where state maintained framework of austerity, balance budgets and price stability and encouraged firms to grow through exports and country gained positive current account surplus. Experts feel that Ordo-liberalism normally succeeds in a more stable economic environment with growing economies something that world witnessed following second world war period up to Eighties. During this period this approach helped Germans build formidable competitive manufacturing sector and enviable current account surplus.

However, Germany is a part of European Monetary Union ( EMU) and the German current account surplus reflected in current account deficit of Southern European members of Union. Close to third of Germany’s current account surpluses are on account of its intra-EU trade. Hence, while Germany has run current account surpluses of more than 7 percent of its GDP, Greece, Portugal and Spain have experienced current account deficits of 10 percent of GDP. And large current account deficits thus lead to quickly rising external debt. This has been partly the genesis of Euro problem.

On this background the DB crisis acquires special ideological connotation. Americans as pragmatic they are, were quick to accept fallibility of their system and resorted to a bail out, no matter the American tax payer had to pick the tab. This was in a way better than letting the economy fail and entire society collectively suffering endless miseries by of unemployment hunger and deprivation. So the Americans swallowed the bitter pill reminding themselves the famous argument of “Too big to Fail”.

On the contrary, Germans have taken all along a “Holier than though” stance and deprived crisis ridden nations of south any state sponsored economic initiative. Mostly it was done because of their sincere belief in their economic philosophy of Ordo-liberalism. The philosophy which not only built the might of Post war German State but as EU leader and chief protagonist of the Union, gave it the moral right to force down the throat its Economic approach to member states across the community. Now when the financial crisis is knocking on its own door, it will be interesting to see if Germany finds some creative solution from its Ordo-liberal tool box retrieving once again the high moral ground or does the famous American flip flop. In a way, it will not be only a defining moment for Angela Merkel but the entire German state and its economic policy based on Ordo-liberalism.

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231,000 New Jobs Added in Western Balkans amid Ongoing Economic Challenges, Emigration

MD Staff



A 3.9 percent increase in employment over the last year has led to the creation of 231,000 new jobs throughout the six countries of the Western Balkans, according to the “Western Balkans Labor Market Trends 2018” report, launched today by the World Bank and the Vienna Institute for International Economic Studies (wiiw). Unemployment also fell from 18.6 percent to 16.2 percent, reaching historic lows in some countries.

Leading the way for employment in the region was Kosovo, which saw an increase of 9.2 percent, followed by Serbia (4.3 percent), Montenegro (3.5 percent), Albania (3.4 percent), FYR Macedonia (2.7 percent), and Bosnia and Herzegovina (1.9 percent). Despite this progress, however, low activity rates – particularly among women and young people – along with high rates of long-term unemployment and a prevalence of informal work, continue to pose challenges for sustained economic growth in the region.

“The region has made great strides in improving labor market outcomes over the last year – meaning more people are finding jobs,” says Linda Van Gelder, World Bank Country Director for the Western Balkans. “However, we continue to see high rates of people who are not in employment, education or in training programs and we need to find ways to link them to future opportunities.”

Youth unemployment of 37.6 percent is a key challenge for the region. However, this rate is down from last year and nearly every country in the region is experiencing the lowest levels of youth unemployment since 2010. Country rates range from 29 percent in Montenegro and Serbia, to more than 50 percent in Kosovo. According to the report, it may be difficult for young people who become detached from jobs or education for long periods to reintegrate into the labor market. They also face a wage gap, earning up to 20 percent less than those who find employment sooner.

The report also notes that female employment rates are on the rise but they still remain low by European standards. The employment rate for women across the region stands at 43.2 percent, varying from a low of 13.1 percent in Kosovo to a high of 52.3 percent in Serbia. The gender gap in employment has also narrowed since 2010, ranging from 28.9 percentage points in Kosovo to 9.8 percentage points in Montenegro.

“Economic trends in the region look to be headed in the right direction,” says Robert Stehrer, Scientific Director of the Vienna Institute for International Economic Studies. “Getting more people, particularly young and women into employment remains one of the key challenges in the region to sustain economic and social convergence.”

A number of obstacles to employment need to be addressed to reduce ongoing emigration from the region, especially common among young, educated people. In order to address this, further knowledge is needed. Countries in the region should synchronize their data on emigration and improve the registration and publication of migration statistics. By utilizing high-quality data that is in-line with international standards on workforce composition – both domestically and internationally – will produce accurate analysis of labor market dynamics in the region and allow for the design of policies that can simultaneously address the challenges of emigration and reap the benefits of migration.

Better linkages between secondary graduates and the labor market, as well as earlier interventions to retain students, can improve opportunities for employment. Policies, such as child care, care facilities for the elderly, flexible work arrangements and more part-time jobs would also promote labor market integration among women.

The report was produced with financial support from the Austrian Ministry of Finance.

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Economic Growth in Gulf Region Set to Improve following a Weak Performance in 2017

MD Staff



The Gulf Cooperation Council (GCC) region witnessed another year of disappointing economic performance in 2017 but growth should improve in 2018 and 2019, according to the World Bank’s biannual Gulf Economic Monitor released today in Kuwait.

The region eked out growth of just 0.5% in 2017 – the weakest since 2009 and down from 2.5% the previous year. The GCC region’s economies experienced flat or declining growth as lower oil production and tighter fiscal policy took a toll on activity in the non-oil sector. External debt issuance continued to rise to help finance large fiscal deficits.

Economic growth is expected to strengthen gradually, helped by the recent partial recovery in energy prices, the expiration of oil production cuts after 2018, and an easing of fiscal austerity. The World Bank expects growth to firm to 2.1% in 2018 and rise further to 2.7% in 2019. Growth in Saudi Arabia is expected to rebound close to 2% in 2018-19 and to strengthen similarly elsewhere in the region.

“Policy attention is shifting towards deeper structural reforms needed to sever the region’s longer-term fortunes from those of the energy sector,” said Nadir Mohammed, World Bank Country Director for the GCC. “While the recent increase in oil prices provides some breathing space, policy makers should guard against complacency and instead double down on reforms needed to breathe new life into sluggish domestic economies, to create jobs for young people and to diversify the economic base. Any slippage could negatively impact the credibility of the policy framework and dampen investor sentiment.

Looking forward, there are several downside risks that may weigh on activity. Lower than expected oil prices could exert pressure on the OPEC producers to extend or deepen their production reduction agreement and dampen medium-term growth in the GCC countries.

Although fiscal and current account balances are improving, the region continues to face large financing needs and remains vulnerable to shifts in global risk sentiment and the cost of funding. Geopolitical developments and relations within the region could slow growth prospects. Slippage in the implementation of country reform plans arising from weak institutional capacity will rob the GCC of the benefits of fiscal adjustment and of deeper structural reforms that aim to diversify their economies.

Over the longer term, the enduring dominance of the hydrocarbon sector in the GCC economies argues for the vigorous implementation of structural reforms.  The terms of trade shocks in 2008-09 and in 2014-16 barely dented the dominance of the hydrocarbon sector in the GCC, with the bulk of the adjustment so far driven by spending cuts rather than the emergence of other traded sectors.

Structural reforms should focus on economic diversification, private sector development, and labor market and fiscal reforms. The GCC states’ long-term ambitions are articulated in various country vision statements and investment plans, and aspire to build competitive economies that utilize the talents of their people.

Implementing these structural transformation programs requires continuing political commitment from the GCC governments.

Saudi Arabia has shown considerable leadership in this regard: the 12 “vision realization plans” associated with its Vision 2030 aspirations aim to significantly transform the economy over the next 15 years by lifting the private sector share of the economy from 40 to 65% and the small and medium enterprise contribution to GDP from 20 to 35%.

Transforming from an oil-dependent economy to a self-propelled, human capital-oriented one requires some fundamental changes in the mindset; some also call this a new social contract,” said Kevin Carey, Practice Manager at the World Bank.  “GCC countries do not need to discard their existing social contracts but rather to upgrade them to reflect new realities of low for long oil prices, increasing global competition and the long-term threats from technological and climate change.”

As with other Arab countries, the GCC states also face sustainability, equity and welfare challenges related to their pension systems. These issues need to be addressed urgently to prevent any negative impact on economic growth, fiscal sustainability, and labor market stability.

Among the potential solutions that could help improve pension outcomes, the Gulf Economic Monitor underscores the importance of improving efficiency by reducing the prevailing fragmentation in many of the GCC pension systems; making access and contributions as simple and systematic as possible through the strengthening of ID and IT systems and the capabilities of pension administration bodies; and strengthening the governance of pension institutions. If GCC countries wish to attract global talent, they will also need to consider potential solutions for expatriates that help to meet their long-term pension and financial security needs.

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Poland: Build on current economic strength to innovate and invest in skills and infrastructure

MD Staff



Poland’s economic growth remains strong. Rising family benefits and a booming jobs market are lifting household income while poverty rates and inequality are falling, says a new OECD report.

In its latest Economic Survey of Poland, the OECD encourages policy-makers to build on the country’s current economic strength and social progress in order to tackle major remaining challenges. To sustain rising living standards Poland has to develop its capacity to innovate and invest in skills and infrastructure, as is acknowledged in the government’s Strategy for Responsible Development. The report says that the level of expenditure on research and development, despite recent welcome rises and tax incentives, remains weak. Vocational training suffers from limited business engagement which is hindering many of the country’s plentiful small enterprises from modernising and improving productivity.

Poland is also ageing rapidly. The working age population is projected to decline markedly over the coming decades. The lowering of the retirement age risks increasing poverty among the elderly, particularly women, says the OECD. Women often have patchy career paths and their retirement age is now set to remain unusually low. Workers should be made aware of the benefits of working longer for their future pension income, the report says.

Despite efforts to improve childcare, it remains insufficient and expensive, especially in rural areas. More investment in childcare is required as part of a range of measures to help combine work and family life and strengthen the number of women in employment.

Presenting the Survey in Warsaw, OECD Deputy Secretary-General Mari Kiviniemi said, “Poland is in a strong position. A dynamic job market together with the Family 500 + programme has helped make economic development more inclusive. Many people now benefit from new opportunities and rising incomes.”

“The time is ripe to ensure that living standards continue to rise. Strengthening innovation, improving infrastructure and investing in skills will be crucial. With rising labour and skills shortages, many employers now realise how important it is to invest in training. The government must seize this opportunity to engage with them.”

Measures to improve tax compliance have succeeded in shrinking the public deficit despite higher spending on social benefits. But more resources – or shift in how they are used – will be needed to raise  spending in priority areas such as public infrastructure, healthcare and higher education and research.

Limiting reduced VAT rates, increasing environmental taxes and giving a stronger role to the progressive personal income tax would raise additional revenue while contributing to more equity and a greener environment.

Plans to reform higher education and improve research excellence and industry-science co-operation are welcome, the report says. The general health status of Poles and access to healthcare are very unequal, while environmental quality is below the average of OECD countries. Tax rates on air and water pollution and on CO2 emissions are low and many environmentally harmful fuel uses are exempt from taxation. Raising environmental taxes would provide stronger incentives to replace ageing coal-intensive equipment with greener alternatives.

A clear immigration policy strategy is also needed to better monitor integration of foreigners in line with labour market needs, the protection of their rights and their access to education and training.

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