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A Euro theory

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] I [/yt_dropcap]f it were not for the euro, Germany’s trade balance would have caused a revaluation of the Mark, which would automatically have reduced the exchange rates of the other “European currencies”, thus favouring them on international markets. The single currency was not created to stimulate exports and improve productivity.

In fact, for the first time, the then President of the European Economic Community, Roy Jenkins, proposed a common currency which, however, was also based on a common budget, equal to 10% of the sum of all Member States’ GDPs.

Initially the Euro was based on the “optimum currency area” theory developed by the Canadian economist, Robert Mundell, in 1961. It also rested on the fact that an economy open to international trade always tends to a low exchange rate.

Furthermore, as assumed by Mundell’s group of economists, in a highly diversified national economy the exogenous shock is always very limited.

This would lead a country open to trade and with a diversified economy to accept, in principle, a currency common to other countries.

Provided, however, that there is flexibility on the capital and labour markets and that its economy is very diversified and open to international trade.

However, to what extent can an economy be “diversified”? Does excess of diversification not lead – as natural – to a different and sometimes negative gain margin between products?

In Mundell’s model, the national currencies were described by the economic theory as simple barriers to international trade, as well as limits to productivity and finally obstacles blocking commercial transactions.

At that time, Jacques Delors and Romano Prodi theorized that – rebus sic stantibus – with the mere introduction of the Euro, the European economy would grow 1-1.5% per year.

Later Perrson and Nitsch proved that the econometric model used for those predictions was wrong, while other academics and experts studied the influence of the European monetary union on international trade.

Once again the analyses carried out on macroeconomic data demonstrated that the assessment of the benefits resulting from the single currency had been greatly exaggerated.

Obviously, for political purposes, economics is not so much a “sad science”, but rather rhetoric used to convey political and social messages and choices.

According to these more realistic models, the monetary union was responsible only for a 4.7-6.3% increase in foreign trade, while the most pessimistic forecasts of the first analyses on the Euro-induced growth pointed to a 20% or even a 200-300% increase in international trade.

We have always known that economics is ideology in disguise.

In other words, the Euro does not change international trade transactions, but rather tends to change competitive pricing.

Furthermore, there is no factual evidence of a stable structural difference between foreign trade and exchange rate.

Moreover, according to the International Monetary Fund, a 10% decline of the exchange rate leads to a 1.5% average increase of GDP.

Yet another demonstration of how a healthy and sound devaluation is good for international trade.

The persistently “high” single currency has also hampered recovery in the Eurozone countries, while other European countries, such as Sweden, could quickly rebuild their economy.

This implies that the Euro could do nothing to avoid the crisis, except in Germany, where the per capita GDP has been growing incessantly since 1999.

As to investment in fixed assets, only France, Belgium and Finland have been successful.

Portugal and Greece have fallen to the levels of fixed capital investment of the 1980s, while per capita fixed capital investment (housing, infrastructure, roads, railways, airports, machinery, etc.) has levelled off since 1999.

With the Euro introduction, investment in infrastructure was put to an end.

Furthermore, as repeatedly noted, the crisis of the single currency and of the Eurozone began with Greece’s tragic situation.

Greece is worth almost 3% of the Eurozone GDP and the banking crisis following tension in Greece, at first, and later in Spain, Germany and Italy, cannot be solved with the EU banking union, but only with the action of individual governments.

The signal to international markets is clear: if the Euro is hit with a speculative action, the Eurozone individual countries shall try to solve it, with their limited resources.

With its crisis Greece has later demonstrated that monetary and credit tensions in each country of the single monetary area are never supported by the rest of the Eurozone – as would happen in any real monetary union – but the country in trouble is blamed for being “spendthrift”. The result is that the other Eurozone countries buy the assets of the nation in crisis below cost.

In fact, the single currency works only in really federal States, such as India or the United States, where the internal market and financial networks are wide and can manage the income gap between the various regions of the country.

If we were to support the economies of Italy, Greece, Spain and Portugal, the cost of recovery for these four countries would be 260 billion euro per year for ten years.

Hence the issue does not lie in Germany being wicked, but in the fact that the Euro has been conceived and designed badly and leads to crisis the countries which do not adjust their domestic economy to a structurally and unreasonably overvalued currency.

And in these cases, monetary expansion combined with economic “austerity” does not solve the problems.

Public spending and discretionary spending, as well as wages and salaries and, in some respects, even profits are now regulated by the Solidarity Pacts of 2011, in addition to the Treaty on Stability, Coordination and Governance signed in 2012.

They are inter-European agreements prohibiting the redistribution of funds within the EU. They were signed upon German pressure and it is worth recalling that Germany cannot objectively take upon itself the cost for restructuring Southern countries’ debt.

Indeed, we could devalue the Euro.

Nevertheless the relations between the Eurozone members would not change and Germany would gain even more from a devalued Euro.

Therefore the only way then to change the exchange rate between the various countries of the single currency is not to devalue the Euro, which is based on fixed exchange rates established ne varietur in 1999, but just leave the Euro area.

Furthermore, considering the differences of economic integration in the Eurozone, if the single currency were devalued, the least integrated country, namely France, would gain much more than the others.

It is worth making clear that it would be a gain at the expense of the Euro Mediterranean countries.

It would be tantamount to go back with the Euro to the old gold standard of the 1930s, with the Euro: either it is fully dissolved or you decide to leave.

In this sense, the single currency is a severe loss of economic flexibility in the relationship between inflation, productivity and public debt.

Relations between macroeconomic values which can be manipulated for the better only in a national context, given that the EU still records very significant micro and macroeconomic differences.

It should be noted that the impasse resulting from the gold standard led to the Great Depression after the 1929 crisis.

At the beginning of the Great Depression, Germany and Great Britain tried an internal devaluation, but in these cases, if there is a fixed monetary standard, devaluation only means domestic deflation.

Considering price rigidity, unchanged financial costs and the money supply restriction, any policy of this kind finally makes both politics and society unmanageable.

What about leaving the single currency?

Meanwhile, it is worth recalling that, in international financial law, what matters is not the lender’s nationality, but rather the law applicable to the contract.

If, for example, the debt were regulated by French law, regardless of the parties’ nationality, the payment should be made in the French national currency.

Moreover, statistics throughout the single currency EU tells us that the private debt would not be affected by the transition to the new Franc, Lira, Peseta, etc.

According to the studies of the Bank for International Settlements, which has already analysed these issues, the cost to be borne by EU countries for leaving the single currency would be approximately 5 billion euros – a figure that can be easily managed by everybody.

Hence, after the end of the Euro, the EU countries could appreciate or devalue their currencies, by offering competitive prices and thus recreating precisely those competitive advantages which had been basically removed by the single currency.

In this way the German Mark would surely appreciate as against the Lira and the Peseta, thus favouring the Southern countries’ currencies and making the huge German trade surplus disappear, as if by magic.

Probably this is the best prospect and the best way forward.

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. “

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The Covid After-Effects and the Looming Skills Shortage

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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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An Airplane Dilemma: Convenience Versus Environment

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Mr. President:  There are many consequences of COVID-19 that have changed the existing landscape due to the cumulative effects of personal behavior.  For example, the decline in the use of automobiles has been to the benefit of the environment.  A landmark study published by Nature in May 2020 confirmed a 17 percent drop in daily CO2 emissions but with the expectation that the number will bounce back as human activity returns to normal.

Yet there is hope.  We are all creatures of habit and having tried teleconferences, we are less likely to take the trouble to hop on a plane for a personal meeting, wasting time and effort.  Such is also the belief of aircraft operators.  Add to this the convenience of shopping from home and having the stuff delivered to your door and one can guess what is happening.

In short, the need for passenger planes has diminished while cargo operators face increased demand.  Fewer passenger planes also means a reduction in belly cargo capacity worsening the situation.  All of which has led to a new business with new jobs — converting passenger aircraft for cargo use.  It is not as simple as it might seem, and not just a matter of removing seats, for all unnecessary items must be removed for cargo use. They take up cargo weight and if not removed waste fuel.

After the seats and interior fittings have been removed, the cabin floor has to be strengthened.  The side windows are plugged and smoothed out.  A cargo door is cut out and the existing emergency doors are deactivated and sealed.  Also a new crew entry door has to be cut-out and installed. 

A new in-cabin cargo barrier with a sliding access door is put in, allowing best use of cargo and cockpit space and a merged carrier and crew space.  A new crew lavatory together with replacement water and waste systems replace the old, which supplied the original passenger area and are no longer needed.

The cockpit gets upgrades which include a simplified air distribution system and revised hydraulics.  At the end of it all, we have a cargo jet.  If the airlines are converting their planes, then they must believe not all the travelers will be returning after the covid crisis recedes.

Airline losses have been extraordinary.  Figures sourced from the World Bank and the International Civil Aviation Organization reveal air carriers lost $370 billion in revenues.  This includes $120 billion in the Asia-Pacific region, $100 billion in Europe and $88 billion in North America.

For many of the airlines, it is now a new business model transforming its fleet for cargo demand and launching new cargo routes.  The latter also requires obtaining regulatory approvals.

A promising development for the future is sustainable aviation fuel (SAP).  Developed by the Air France KLM Martinair consortium it reduces CO2 emissions, and cleaner air transport contributes to lessening global warming.

It is a good start since airplanes are major transportation culprits increasing air pollution and radiative forcing.  The latter being the heat reflected back to earth when it is greater than the heat radiated from the earth.  All of which should incline the environmentally conscious to avoid airplane travel — buses and trains pollute less and might be a preferred alternative for domestic travel.

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