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What to do about the Euro

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] A [/yt_dropcap]fter the North American subprime crisis, European countries suffered two simultaneous shocks: the customers of those “toxic” assets – mainly European assets – discovered that most of their assets were completely presumed, while the US economic crisis made the substantial EU exports to that market decrease significantly.

As usual, recession leads to an increase in public deficit, because tax revenue decreases while, in time of crisis, public expenditure for subsidies and welfare cannot but increase.

Hence the global recession of 2007, caused by the United States, led to the first real crisis of the Euro.

When adjustments of exchange rates are no longer possible, in the Eurozone the mitigation of imbalances is entrusted to the EU structural funds for low-income regions – funds scarcely suitable for specific needs and too complex to be used by local governments.

Hence the Euro was born as an intrinsically deflationary currency and the only nation winning the single currency battle was Germany which, shortly before the start of the European single currency phase, had depressed wages severely and had created the well-known “mini-jobs”.

With an inflation rate and a labor cost already lower than those of the other future Euro members, it immediately created an optimal and stable differential as against the ”South’s Euro”.

Currently the Euro conceals, but not solves this asymmetry.

Hence very low inflation in Germany and a related very low interest rate, which have further increased German competitiveness compared to the South’s Euro area.

Therefore the EU Member States which had not prepared themselves for the single currency recorded inflation rates much higher than the German ones but, thanks to the single currency, recorded lower interest rates, thus financing the cost of crisis with debt.

The Euro was a good currency for incurring debt, but a bad currency for exporting.

Furthermore, this was the reason why the public debt increased also in Italy but, unlike the lira time, the Italian debt securities were held in the Eurozone surplus countries and not by the Italian customers of public debt securities.

At that juncture, the crisis broke out in Greece which, with the then Prime Minister Papandreou, had overtly and naively “cooked the books”.

Instead of funding Greece immediately at a low cost, so that it could overcome the crisis, and then allowing it to redress its accounts, the Sarkozy-Merkel axis imposed very harsh “austerity measures” on Greece which had to pay very high rates on the market. Hence, for international markets, the Greek default became a very concrete possibility.

If Strauss-Kahn had not been unfairly defamed by a special relationship between Sarkozy and Obama – who was afraid of a brave EU showing guts – the low-interest loan to Greece would have been a reality and there would not have been the first “Euro-branded” default. A default which paves the way for others.

It will be the project in progress for other “weak” economies, the rush towards bankruptcy and default.

International markets have got so accustomed to gain money quickly and easily from a national default of the Eurozone that they are rubbing their hands in view of the next country falling into that spiral.

Hence the Euro is a currency which amplifies internal crises between high rates and rising national deficits. It also signals to financial markets that there exists a great chance of short-term high profits – almost usurious ones, if usury were not a criminal offense also on international financial markets.

Hence while the Euro, as conceived today, is a sign of the end for the weakest countries of the single currency area, it is not true that over-spending by the countries already weakened by the Euro has worsened the crisis, as the current economic theories make us believe.

Data shows that, after 2007, the countries called PIIGS (Portugal, Italy, Ireland, Greece and Spain) had a debt/GDP ratio fully comparable with the one preceding the Euro introduction. Hence we do not accept explanations on “immoral” countries which “spend beyond their means.”

The crisis broke out and expanded because a currency created for the monetarily strongest countries, with remarkable trade surpluses, was not suitable for nations having different productive configurations and very little surpluses.

Therefore the crisis of the single currency and its economies does not result from the “non-restrictive” and profligate policies of some PIIGS governments.

A that juncture, the quite unusual idea emerged among European bureaucracies that deficit spending of the public sector – the only known driver to stimulate the economies under crisis – had the immediate effect of increasing taxes, thus leading to an increase in savings and a reduction in consumption.

This is the expansionary austerity school of thought, which is currently the best known one in contemporary economic analysis.

It is generally based on subjective (and psychologically questionable) assessments which are transposed into the macroeconomic environment, where everything is very different from the people’s spending or saving attitudes.

You cannot infer the behavior of an entire organism from one single cell, as it is well-known that all organisms are not simply clusters of similar cells.

Again according to the expansionary austerity school of thought, it is believed that deficit reduction will be interpreted by taxpayers as a reduction in taxes to pay.

It is a shaman-style reasoning – however, without avoiding media influencing citizens or without thinking they save or not for reasons other than the irrational bet on the reduction in State deficit, which anyway depends on a political choice.

Hence as long as the governments’ interest rates to refinance their debt are set by unspecified “markets,” which are interested in increasing interest rates to enhance their gains, there is no way out.

So, what can be done? If the Euro countries were funded directly by the ECB, at rates similar to those used by the private banking system, financial resources equal to 5% of GDP would be released.

Even a uniform tax system among the Euro countries would be essential for this purpose.

However, neither the first nor the second option is possible in the current Euro regulatory framework. Hence what can be done?

This is the reason why the exit of some countries from the Eurozone and their return to national currencies must be considered without making an issue of it and overdramatizing.

By calculating the loss of competitiveness of a post-Euro lira or peseta, we record a comparative loss of approximately 14% – hence nothing very severe.

Provided, however, that the Bank of Italy has well-designed plans already available for the possible exit from the Euro – something in which we do not believe at all.

Unfortunately Guido Carli passed away.

Hence, it is worth reiterating that Euro crisis was generated by excessive private and public debt held by non-European hands.

Therefore, as from 2010, all the countries hit by the Euro crisis had accumulated current account deficits while, coincidentally,   those which had current account surpluses did not record financial crises.

In fact, the crisis materialized with a sudden stop of capital flows between the Eurozone countries.

A stop which took the form of a generalized increase in risk premiums.

The end of flows immediately raised doubts on the solvency of banks and governments which depended on foreign loans from abroad, for example those who were accumulating current account deficits.

Inevitably the crisis also increased the debt/GDP ratio.

The monetary union enabled global imbalances to expand rapidly without anyone noticing it, because the Euro “conceals” the differences between the countries using it.

Hence, also as a result of the inefficient European bureaucracy, the loss of trust vis-à-vis the countries recording deficits increased.

Hence, without a “lender of last resort”, each monetary shock tends to be amplified and the Euro is precisely a currency without a lender of last resort.

A currency in which no international investor believes, unless it represents the individual economies and the single public debt of the Eurozone countries.

Therefore the crisis is bound to get worse, considering that the increase in risk premiums and interest rates produces a budget deficit which, in turn, increases the risk premium and interest rates.

It is worth adding that the countries’ typical and natural response to this situation would be devaluation which, obviously, is not possible with the Euro.

Has a currency which cannot be devalued ever existed?

It is still the “Napoleonic myth” of the single currency for the whole Europe which, however, the French Emperor supported with bayonets, just as the US dollar is currently backed with the North American Armed Forces’ global rayonnement.

Therefore, the debt denominated in Euros is increasingly similar to a foreign currency debt, as in those sudden stop crises which often occurred in Third World countries.

Hence the link between banks and governments in the Eurozone has amplified the crisis.

The cost of financing the deficit increased and this made the deficit rise.

Only Mario Draghi’s “whatever it takes” at the end of July 2012 made the Euro a “safe haven currency”, because he made it clear that the “lender of last resort” existed and was the ECB Governor. In the meantime, however, the other major international currencies had been depreciated by 30%.

Furthermore, the proposals to solve the single currency crisis are often paradoxical.

They range from Joseph Stiglitz, who wants Germany to leave the Euro so as to enable the old remaining single currency to devalue.

With the same current rules? It is impossible.

Hence shall we wait for a courtesy by Germany, which would have no interest in leaving the single currency, which deprives it of European competition?

Naivety of the New World. Germany will never leave the Euro, which enables it to bring dangerous competitors for exports into line (such as Italy).

While President Ciampi – an extraordinary man who has recently passed away and whom I still regret – was visiting the Great Wall, the German Prime Minister, Schroeder, arrived in China to sign the agreements for the expansion of the German car-making industry in China.

Better and more autonomous intelligence would be needed to defend ourselves from competitors-allies.

According to Paolo Savona and Luigi Zingales, two Euros should be created, one for the “rich” North and the other for us poor countries of the South.

Furthermore, sometimes Zingales speaks of various Euros. Would they all have the same value?

Possibly becoming quasi-national currencies? Nevertheless also the countries in the South have significant budget and debt differences, as well as different production logics.

Certainly better than before, with the Euro, but not much better.

Conversely Basevi thinks of a European Debt Agency (EDA) purchasing – on the secondary market (where raiders have already made good profit) – up to 60% of debt in relation to each EU country’s GDP.

On the basis of these securities, it issues its own bonds, the blue bonds, while for the part exceeding their debt over the 60% acquired by EDA, the countries issue their red bonds autonomously.

The blue bonds would be “liquid” and safe (Why? Where is the EDA underlying fund?), while the red bonds would have a higher risk profile and thus would pay a higher interest rate.

However, the global market of financial securities is not made up of fools.

And it is not clear from where the premium for the blue bonds would come.

And where the red bonds would be sold, with such an interest as to rapidly recreate the old huge public debt.

Hence if we leave the Euro and a new lira is recreated, devaluation would be approximately 27% as against the European currency.

The price of raw materials could rise by the same rate, but we should consider the length of contracts and the specific role played by ENI for oil and energy.

Bank deposits could still be denominated in euros – the law permits to have bank deposits in foreign currencies – and the new lira could have legal tender as the old currency designed by Silvio Gesell which the more stood “still”, the greater value lost.

The drive towards exports would be important, but there would be enough euros available to buy technologies or other items abroad.

In short, we need to think rationally to an upcoming withdrawal from the Euro, without pro-European myths and with an accurate analysis of our national interest in the short and medium term.

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

Is Myanmar an ethical minefield for multinational corporations?

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Business at a crossroads

Political reforms in Myanmar started in November 2010 followed by the release of the opposition leader, Aung San Suu Kyi, and ended by the coup d’état in February 2021. Business empire run by the military generals thanks to the fruitful benefits of democratic transition during the last decade will come to an end with the return of trade and diplomatic sanctions from the western countries – United States (US) and members of European Union (EU).  US and EU align with other major international partners quickly responded and imposed sanctions over the military’s takeover and subsequent repression in Myanmar. These measures targeted not only the conglomerates of the military generals  but also the individuals who have been appointed in the authority positions and supporting the military regime.

However, the generals and their cronies own the majority of economic power both in strategic sectors ranging from telecommunication to oil & gas and in non-strategic commodity sectors such as food and beverages, construction materials, and the list goes on. It is a tall order for the investors to do business by avoiding this lucrative network of the military across the country. After the coup, it raises the most puzzling issue to investors and corporate giants in this natural resource-rich country, “Should I stay or Should I go?”

Crimes against humanity

For most of the people in the country, war crimes and atrocities committed by the military are nothing new. For instances, in 1988, student activists led a political movement and tried to bring an end to the military regime of the general Ne Win. This movement sparked a fire and grew into a nationwide uprising in a very short period but the military used lethal force and slaughtered thousands of civilian protestors including medical doctors, religious figures, student leaders, etc. A few months later, the public had no better options than being silenced under barbaric torture and lawless killings of the regime.

In 2007, there was another major protest called ‘Saffron Uprising’ against the military regime led by the Buddhist monks. It was actually the biggest pro-democracy movement since 1988 and the atmosphere of the demonstration was rather peaceful and non-violent before the military opened live ammunitions towards the crowd full of monks. Everything was in chaos for a couple of months but it ended as usual.

In 2017, the entire world witnessed one of the most tragic events in Myanmar – Again!. The reports published by the UN stated that hundreds of civilians were killed, dozens of villages were burnt down, and over 700,000 people including the majority of Rohingya were displaced to neighboring countries because of the atrocities committed by the military in the western border of the country. After four years passed, the repatriation process and the safety return of these refugees to their places of origin are yet unknown. Most importantly, there is no legal punishment for those who committed and there is no transitional justice for those who suffered in the aforementioned examples of brutalities.

The vicious circle repeated in 2021. With the economy in free fall and the deadliest virus at doorsteps, the people are still unbowed by the oppression of the junta and continue demanding the restoration of democracy and justice. To date, Assistant Association for Political Prisoner (AAPP) reported that due to practicing the rights to expression, 1178 civilians were killed and 7355 were arrested, charged or sentenced by the military junta. Unfortunately, the numbers are still increasing.

Call for economic disengagement

In 2019, the economic interests of the military were disclosed by the report of UN Fact-Finding Mission in which Myanmar Economic Corporation (MEC) and Myanmar Economic Holding Limited (MEHL) were described as the prominent entities controlled by the military profitable through the almost-monopoly market in real estate, insurance, health care, manufacturing, extractive industry and telecommunication. It also mentioned the list of foreign businesses in partnership with the military-linked activities which includes Adani (India), Kirin Holdings (Japan), Posco Steel (South Korea), Infosys (India) and Universal Apparel (Hong Kong).

Moreover, Justice for Myanmar, a non-profit watchdog organization, revealed the specific facts and figures on how the billions of revenues has been pouring into the pockets of the high-ranked officers in the military in 2021. Myanmar Oil & Gas Enterprise (MOGE), an another military-controlled authority body, is the key player handling the financial transactions, profit sharing, and contractual agreements with the international counterparts including Total (France), Chevron (US), PTTEP (Thailand), Petronas (Malaysia), and Posco (South Korea) in natural gas projects. It is also estimated that the military will enjoy 1.5 billion USD from these energy giants in 2022.

Additionally, data shows that the corporate businesses currently operating in Myanmar has been enriching the conglomerates of the generals and their cronies as a proof to the ongoing debate among the public and scholars, “Do sanctions actually work?” Some critics stressed that sanctions alone might be difficult to pressure the junta without any collaborative actions from Moscow and Beijing, the longstanding allies of the military. Recent bilateral visits and arm deals between Nay Pyi Taw and Moscow dimmed the hope of the people in Myanmar. It is now crystal clear that the Burmese military never had an intention to use the money from multinational corporations for benefits of its citizens, but instead for buying weapons, building up military academies, and sending scholars to Russia to learn about military technology. In March 2021, the International Fact Finding Mission to Myanmar reiterated its recommendation for the complete economic disengagement as a response to the coup, “No business enterprise active in Myanmar or trading with or investing in businesses in Myanmar should enter into an economic or financial relationship with the security forces of Myanmar, in particular the Tatmadaw [the military], or any enterprise owned or controlled by them or their individual members…”

Blood money and ethical dilemma

In the previous military regime until 2009, the US, UK and other democratic champion countries imposed strict economic and diplomatic sanctions on Myanmar while maintaining ‘carrot and stick’ approach against the geopolitical dominance of China. Even so, energy giants such as Total (France) and Chevron (US), and other ‘low-profile’ companies from ASEAN succeeded in running their operations in Myanmar, let alone the nakedly abuses of its natural resources by China. Doing business in this country at the time of injustice is an ethical question to corporate businesses but most of them seems to prefer maximizing the wealth of their shareholders to the freedom of its bottom millions in poverty.

But there are also companies not hesitating to do something right by showing their willingness not to be a part of human right violations of the regime. For example, Australian mining company, Woodside, decided not to proceed further operations, and ‘get off the fence’ on Myanmar by mentioning that the possibility of complete economical disengagement has been under review. A breaking news in July, 2021  that surprised everyone was the exit of Telenor Myanmar – one of four current telecom operators in the country. The CEO of the Norwegian company announced that the business had been sold to M1 Group, a Lebanese investment firm, due to the declining sales and ongoing political situations compromising its basic principles of human rights and workplace safety.

In fact, cutting off the economic ties with the junta and introducing a unified, complete economic disengagement become a matter of necessity to end the consistent suffering of the people of Myanmar. Otherwise, no one can blame the people for presuming that international community is just taking a moral high ground without any genuine desire to support the fight for freedom and pro-democracy movement.

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Economy

The Covid After-Effects and the Looming Skills Shortage

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coronavirus people

The shock of the pandemic is changing the ways in which we think about the world and in which we analyze the future trajectories of development. The persistence of the Covid pandemic will likely accentuate this transformation and the prominence of the “green agenda” this year is just one of the facets of these changes. Market research as well as the numerous think-tanks will be accordingly re-calibrating the time horizons and the main themes of analysis. Greater attention to longer risks and fragilities is likely to take on greater prominence, with particular scrutiny being accorded to high-impact risk factors that have a non-negligible probability of materializing in the medium- to long-term. Apart from the risks of global warming other key risk factors involve the rising labour shortages, most notably in areas pertaining to human capital development.

The impact of the Covid pandemic on the labour market will have long-term implications, with “hysteresis effects” observed in both highly skilled and low-income tiers of the labour market. One of the most significant factors affecting the global labour market was the reduction in migration flows, which resulted in the exacerbation of labour shortages across the major migrant recipient countries, such as Russia. There was also a notable blow delivered by the pandemic to the spheres of human capital development such as education and healthcare, which in turn exacerbated the imbalances and shortages in these areas. In particular, according to the estimates of the World Health Organization (WHO) shortages can mount up to 9.9 million physicians, nurses and midwives globally by 2030.

In Europe, although the number of physicians and nurses has increased in general in the region by approximately 10% over the past 10 years, this increase appears to be insufficient to cover the needs of ageing populations. At the same time the WHO points to sizeable inequalities in the availability of physicians and nurses between countries, whereby there are 5 times more doctors in some countries than in others. The situation with regard to nurses is even more acute, as data show that some countries have 9 times fewer nurses than others.

In the US substantial labour shortages in the healthcare sector are also expected, with anti-crisis measures falling short of substantially reversing the ailments in the national healthcare system. In particular, data published by the AAMC (Association of American Medical Colleges), suggests that the United States could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, including shortfalls in both primary and specialty care.

The blows sustained by global education from the pandemic were no less formidable. These affected first and foremost the youngest generation of the globe – according to UNESCO, “more than 1.5 billion students and youth across the planet are or have been affected by school and university closures due to the COVID-19 pandemic”. On top of the adverse effects on the younger generation (see Box 1), there is also the widening “teachers gap”, namely a worldwide shortage of well-trained teachers. According to the UNESCO Institute for Statistics (UIS), “69 million teachers must be recruited to achieve universal primary and secondary education by 2030”.

From our partner RIAC

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Economy

Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery

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Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

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