[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.
Turkey and Trump’s sanctions-based “political economy”
By the end of last year, the Turkish economy had slipped into a technical recession, boosting in 12 months by only 2.6%, despite the fact that a year ago the government expected GDP to grow by 3.8%. The slowdown is particularly striking against the background of sustainable development over the past seven years: in 2010, the country’s GDP grew by 8.5%, in 2011 – by 11.1%, in 2012 – by 4.8%, in 2013 – by 8.5%, in 2014 – by 5.2%, in 2015 – by 6.1%, in 2016 – by 3.2% and in 2017 – by 7.4% This trend has turned Turkey into one of the fastest developing economies, earning it 17th position worldwide in nominal GDP and 13th in the GDP value regarding purchasing power parity.
The situation changed by the middle of 2018, when relations with Washington deteriorated to the point of a trade war. The Trump administration resorted to the much-practiced method of targeting the “dissenters”: it raised drastically customs duties on steel and aluminum imported from Turkey (which, however, did not prevent the United States from becoming the second buyer of Turkish metallurgical produce by the end of the year). On August 1 the US introduced sanctions against Turkish Interior and Justice Ministers. At that time, the main stumbling block (at least on the surface of it) was Turkey’s refusal to release American priest Andrew Brunson who was detained in 2016 on charges of espionage and links to Fethullah Gulen’s movement along with the Kurdistan Workers ’Party. For some time Donald Trump’s propaganda slogans were dominated by the maxim “to save rank-and-file pastor Brunson”.
Turkey responded by slapping import duties on American goods: cars, alcohol, tobacco, cosmetics. And, of course, it put two US ministers on its sanctions list.
But the forces were clearly far from equal. As a result, the Turkish lira collapsed. At the beginning of 2018 one dollar traded for 3.8 liras, whereas by the end of the year it sold for 5.3 liras. Moreover, at the peak of the weakening of the national currency, the dollar cost almost 7 liras. The Central Bank of Turkey was forced to raise the interest rate, even despite opposition from the country’s omnipotent president. Today, the rate has climbed up to the red level of 24%. Consequently, there has been a drop in the sales of real estate, cars, and a number of other industrial goods. Prospects for inflation have materialized too – in October, inflation hit a fifteen-year high, exceeding 25 percent.
Recep Tayyip Erdogan put the blame for the crisis on Turkey’s foreign ill-wishers. This time – with a lion’s share of truth.
In October, the court sentenced Branson to imprisonment for exactly the time he had already served. The pastor returned home, mutual sanctions were lifted, which partly calmed the markets. But only partly.
According to the Turkish Statistical Institute (TSI), the country’s GDP increased by 2.6% by the end of the year. At the same time, the service sector grew by 5.6%, agrarian – by 1.3%, industrial – by only 1.1%. Exports, compared to the previous year, increased by 7% – to 168 billion dollars (a record figure in the entire history of the Turkish Republic). Foreign trade deficit, amid a boost of imports prices, decreased by 28.4% to $ 55 billion, while imports proper dropped by 4.6% to 223 billion dollars. Tourism revenues increased by 12.3% to 29.5 billion
At first glance, the situation is far from critical, but, according to the TSI, over the year, per capita GDP dropped from $10,597 to $ 9,632; household expenditures, although going up by 1.1% on the year, went down by 8.9% in the fourth quarter. In December unemployment rate among the able-bodied population reached 13.5% – more than 4.3 million people.
Nevertheless, Berat Albayrak, Minister of Treasury and Finance of Turkey, sounded optimistic: “The worst days for the economy are over. The government is confident that the growth of the Turkish economy in 2019 will match the forecasts laid down in the New Economic Program. ”
In general, the above-mentioned program envisages the implementation of reforms that will protect export-oriented small and medium-sized enterprises, strengthen their competitiveness, stimulate the economy to secure a high level of added value. An important part of the document is a clause that stipulates cutting government spending on expensive infrastructure projects, often designed to foster the image rather than the economy.
Specialists differ in assessing the prospects for the Turkish economy: forecasts vary from a slight increase to a further decline. In particular, according to the Frankfurter Allgemeine Zeitung, “Economists expect the cooling to continue. The OECD forecasts a further reduction in the economic growth of (Turkey-author) for 2019 to minus 1.8 percent.” So far, the trend is as follows: industrial production, for example, in January 2019 fell by 7.3% against January last year.
Among the chronic illnesses of the Turkish economy is a deficit of the balance of payments, which the government traditionally tries to compensate with foreign loans and foreign investment – these primarily provided economic growth in previous years. Now this source seems nearly exhausted as investors worldwide are growing increasingly wary of developing markets. The position of Turkey is aggravated by the uncertainty of foreign capital about the independence of the Central Bank, its concerns about the unpredictability of the country’s policy and the adequacy of its economic course (first of all, its adherence to ambitious projects with questionable economic efficiency).
Also, potential investors are deterred by the strained relations between Ankara and Washington. For many, President Trump’s recent treat to “ruin” Turkey for its policy on Syrian Kurds and his recent decision to abolish customs preferences for a number of Turkish goods came as signaling the continuation of a trade war. Significantly, these statements were made after the Turkish leadership confirmed its determination to acquire Russian air defense systems, thereby making it clear that pursued a course towards independence in strategic decision-making.
For Turkey, the United States is a fairly important trading partner, which in 2018 accounted for almost five percent of Turkish exports ($ 8.3 billion) and more than five percent of imports ($ 12.3 billion).
The recession in the Turkish economy has a certain negative impact on Russian-Turkish economic results. Last year, Turkey became Russia’s sixth largest trading partner. In particular, it accounts for a considerable share of Russian exports of metals, grain and, most importantly, energy carriers (the second, after Germany, importer of oil in the world). In February, according to Gazprom, the export of Russian gas to non-CIS countries decreased by 13% in annual terms. The company said the main reasons behind the decrease were the warm weather in Europe and the crisis in Turkey.
The Russian economy has succeeded in adapting to the extensive sanction pressure from Washington and, it looks like the Trump administration has now chosen to “attack from the flank”, targeting one of Moscow’s major foreign economic partners. It would not be a mistake to assume that the ability of the Turkish leadership to resist pressure from its “strategic ally” and NATO partner in the near future will largely determine not only economic, but also political relations between Moscow and Ankara.
First published in our partner International Affairs
Ambiguity in European economic leadership
Europe’s economic situation remains uncertain! The European economic crisis and austerity policies remain in place. On the other hand, there is no sign that the EU is passing through the current situation. Two conservative /Social Democrats in Europe have not been able to effectively counteract the economic crisis over the last few years.
This same issue has led to anger by European citizens from traditional European parties. Subsequently, the trend of European citizens to nationalist and extremist parties has increased in recent years.
The events that have taken place in France in recent months have led to disappointment with the eurozone leaders over the current deadlock.The most important point is that Macron was planned to assume the title of the Europe’s economic leader in the short term, and that was to be after succeeding in creating and sustaining economic reforms in France and the Eurozone.
Meanwhile, European citizens expressed their satisfaction with the election of Macron as French President in 2017. They thought that the French president, while challenging austerity policies, would strengthen the components of economic growth in the European Union. Moreover, EU leaders also hoped that Macron’s success in pursuing economic reforms in France would be a solid step in pushing the entire Eurozone out of the economic crisis.
In other words, in the midst of anti-Euro and extremist and far-right movements in Europe, Macron was the last hope of European authorities to “manage the economic crisis” which was raising inside the Eurozone: the hope that has soon faded away!
The main dilemma in France is quite clear!”Failing to persuade French citizens” on his economic reforms, and Macron’s miscalculations about the support of French citizens for himself, were among the important factors in shaping this process. Macron had to give concessions to protesters to prevent further tensions in France.
After the country’s month-long demonstrations, Macron was forced to retreat from his decision on raising the fuel price. Besides, he had no way but to make promises to the French citizens on issues such as raising the minimum wages and reducing the income tax. This had but one meaning: Macron’s economic reforms came to an end. Right now, European authorities know well that Macron is incapable of regaining his initial power in France and the Eurozone by 2022 (the time for the France general elections).
Therefore, Macron has to forget the dream of EU’s economic leadership until the last moments of his presence at the Elysees Palace. Of course, this is if the young French president isn’t forced to resign before 2022! The European authorities and the Eurozone leaders have no alternative for Macron and his economic reforms in Europe. That’s why they’re so worried about the emergence of anti-EU movements in countries such as France and Germany.
For example, they are well aware that if Marin Le Pen can defeat Macron and come to power in France during the upcoming elections, then the whispers of the collapse of the Eurozone, and even the European Union, will be clearly heard, this time with a loud voice, all over the Europe.
First published in our partner Tehran Times
Economic integration: Asia and the Pacific’s best response to protectionism
Deepening economic integration in Asia and the Pacific is a longstanding regional objective. Not an end in itself but a means of supporting the trade, investment and growth necessary to achieve the 2030 Agenda for Sustainable Development. It is a priority for all member states of the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP). China has a valuable contribution to make so I am beginning 2019 with a visit to Beijing. One to discuss with Chinese leaders how we can strengthen our collaboration and accelerate progress.
The case for deeper integration in Asia and the Pacific is becoming increasingly apparent. Recent trade tensions highlight Asia and the Pacific’s vulnerability to protectionism from major export markets. UN ESCAP analysis shows how regional supply chains are being disrupted and investor confidence shaken. Export growth is expected to slow and foreign direct investment to continue its downward trend. Millions of jobs are forecast to be lost, others will be displaced. Unskilled workers, particularly women, are likely to suffer most. Increasing seamless regional connectivity – expanding the infrastructure which underpins cross border commercial exchanges and intraregional trade – must be part of our response.
We should build on the existing Asian transport infrastructure agreements UN ESCAP maintains to further reduce regulatory constraints, costs and delays. For instance, UN ESCAP members are working to improve the efficiency of railway border crossings along the Trans-Asian Railway network. There is great potential to improve electronic information exchange between railways, harmonise customs formalities and improve freight trains’ reliability. The recent international road transport agreement between the governments of China, Mongolia and the Russian Federation grants traffic rights for international road transport operations on the sections of the Asia Highway which connect their borders. We should expand it to other countries. There is also huge opportunity to develop our region’s dry ports, the terminals pivotal to the efficient shipment of sea cargo to inland destinations by road or rail. A regional strategy is in place to build a network of dry ports of major international significance. UN ESCAP is looking forward to working with China to implement it.
Sustainable energy, particularly cross-border power trade, is another key plank UN ESCAP member States’ connectivity agenda. Connecting electricity grids is not only important to meet demand, ensure energy access and security. It is also necessary to support the development of large-scale renewable energy power plants and the transition to cleaner energy across Asia and the Pacific. The fight against climate change in part depends on our ability to better link up our networks. ASEAN’s achievements in strengthening power grids across borders is a leading example of what political commitment and technical cooperation can deliver. At the regional level UN ESCAP has brought together our region’s experts to develop a regional roadmap on sustainable energy connectivity. China is currently chairing this group.
For maximum impact, transport and energy initiatives need to come in tandem with the soft infrastructure which facilitates the expansion of trade. UN ESCAP analysis ranks China among the top trade facilitation and logistics performers in our region. This expertise contributed to a major breakthrough in cross-border e-commerce development and ultimately led to a UN treaty on trade digitalisation. This has been adopted by UN ESCAP members to support the exchange of electronic trade data and documents and signed by China in 2017. Now, UN ESCAP is working to support the accession and ratification of twenty-five more countries who recognise the opportunity to minimise documentary requirements, promote transparency and increase the security of trade operations. Full implementation of cross-border paperless trade in Asia and the Pacific could reduce export costs by up to 30 percent. Regional export gains could be as has high as $250 billion.
As we look to the future and work to accelerate progress towards the
2030 Agenda’s Sustainable Development Goals, economic integration must remain a
priority. A strong UN-China sustainable development partnership is essential to
take this agenda forward and strengthen our resilience to international trade
tensions and economic uncertainty. Working with all the countries in our
region, we have a unique opportunity to place sustainability considerations at
the heart of our efforts and build seamless regional connectivity. That is an
opportunity, which in 2019, UN ESCAP is determined to seize.UNESCAP
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