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Euro – 20 years on: Who won and who lost?

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The common European currency – the euro – came into being 20 years ago. Since January 1, 1999, the euro has been widely used in cashless money transfers. On January 1, 2002, banknotes and coins were introduced into circulation. How did the European countries benefit from the single currency? How many profited from its introduction?

In the early 1990s, the European Community entered a new stage of development which was characterized by a transition to a higher level of integration within it and expansion to include more members. This was provided by the Treaty on European Union, which was signed on February 7, 1992 in the Dutch city of Maastricht and entered into force on November 1, 1993. The Maastricht agreements and the subsequent decisions of the EU’s governing bodies – the European Council and the Council of the EU –formed a groundwork for a gradual, stage-by-stage creation of a monetary union and the introduction of a single currency, the euro.

At the time the decision on the introduction of the euro came into effect it was believed that the main objectives of the transition to a single monetary policy and the replacement of national banknotes with a single European one were the following. First of all, a monetary union was supposed to put the finishing touches to the formation of a common market and was to transform the EU territory into an economic space with equal opportunities for all players. A single currency was expected to facilitate the transition of the EU to a common economic policy, which, in turn, was seen as indispensable for moving to a new level of political integration. Many also viewed a single currency as vital for cementing European integration and a symbol of the economic and political integrity of the region. It was assumed that the euro would keep European countries “in the same harness” even in times of crisis and would help them to overcome differences and even resist outbursts of nationalism.

The second goal was to prevent losses caused by continuous fluctuations in the rates of Western European currencies. Once the euro was established, risk payments for possible losses in different-currency transactions became a thing of the past. It was assumed that stable and low interest rates would bring down inflation and stimulate economic growth. Thirdly, it was thought that fixed exchange rates within the euro zone with no more fluctuations would boost investment activity and, as a result, would improve the situation on the labor market. In addition, a better economic performance was to make it easier for countries to enter the EU and adapt to the new reality. A better economic performance was supposed to make European products more competitive in world markets.

Fourth, a single currency was supposed to significantly cut circulation costs. At the end of the 1990s, the existence of various national currencies cost the EU countries 20-25 billion ECU (26-33 billion dollars) annually, including the cost of keeping records of currency transactions, insuring currency risks, conducting exchange operations, drawing up the price lists in various currencies, etc. Finally, fifthly, the initiators of the single currency hoped that the euro would become one of the international reserve currencies. The introduction of the euro was supposed to change the balance of strength between the United States and united Europe in favor of the latter. In the long run, it boiled down to ensuring more independence of the EU economic policy since interest rates on long-term loans would be less dependent on American ones.

What is happening at present? Not surprisingly, the greatest difficulties emerged  while grappling with the most pressing and large-scale agenda involving the ambitious plans of the political and economic transformation of the EU and the strengthening of its global geo-economic role. Indeed, since the late 1990s, the economic and financial spheres of the EU have undergone dramatic changes. In 2004 and 2007, the majority of Central and Eastern European countries joined the Union (an increase in social dumping). The current EU “bears little resemblance” to that of 20 years ago. “Not only the currency has become different, but the entire European economy has changed.”

Nevertheless, as predicted by those who criticized the approved version of transition to a single European currency, chances for meeting the criteria of eurozone membership in case the global economy followed an unfavorable scenario are pretty slim for most countries of the eurozone. As economic and financial crises sweep Europe one after another, the presence of the euro and the unprecedentedly high level of the European Central Bank’s autonomy and its extensive powers are restricted by the “possibility of influencing the economy” of separate states. Since inflation rates vary from country to country, the interest rate suggested by the ECB (about 2%) turns out to be too low for countries with high inflation (which leads to financial bubbles) and too high for countries with low inflation (which has a negative impact on investments).

As a result, the economic slowdown in European economies in the 2000s through 2010s led to increases in budget deficits. According to the requirements of the eurozone, governments have to raise taxes or cut spending, even if it damages national economy. Formally, there exists a procedure to tackle economic upheavals in this or that country of the eurozone to minimize their consequences for other members. From the point of view of abstract macroeconomic indicators this procedure is functioning well. But, judging by what happened in Spain, and then in Greece and Italy, its social, economic and subsequently, political costs are too high. In the first place, we talk about social upheavals, which became one the main reasons for the rise of “right-wing populists” across Europe.

The euro is running into problems mainly because it hinges on politics, rather than economics. On the one hand, it is this that largely keeps it from the collapse. The EU leadership is ready to sustain any financial or economic losses to preserve the single currency.  However, from the economic viewpoint, the ECB’s readiness for currency interventions has ruined market discipline. In March this year the German Wirtschafts Woche stated that the euro had failed to become either an effective currency or an EU stability enhancing tool. What proves it is the fact that without “billions and billions in financial injections on the part of the European Central Bank and European governments to save the euro the single currency would have long sunk dead”. The 2008 financial crunch quickly triggered the crisis of the eurozone which culminated in the Greek debt crisis of 2010. As a result, “the dispute over how to save the single currency laid bare purely political differences across Europe”.

As skeptics forecast, membership in the eurozone, sought by countries with different levels of economic development regardless of the tough requirements and selection criteria, resulted in a situation in which a setback in the global economic performance hit weaker members the hardest. Citing the IMF, Le Figaro points out that “the euro exchange rate is too high for France and Italy (which deals a blow on their competitiveness), and is too low for Germany (by about 20%)”.  This provided the German economy with a clear edge over other EU members and secured a “huge foreign trade proficit”. Moreover, in the course of the eurozone crisis in 2009 there emerged a vicious circle: Germany’s domineering position in the EU enabled Berlin to dictate its policy of austere budgetary measures to the greater part of the rest of Europe, which, in turn, gave rise to an outburst of anti-German sentiment in a whole range of countries, including Greece and Italy.

Therefore, in 20 years of its existence the euro has made Germany yet more powerful economically than it used to be. Simultaneously, it has become a major factor that contributed to Germany’s isolation in Europe. Critics say that while drafting the euro project its authors meant to weaken Germany. Instead, the single currency “strengthened it, providing it with competitive advantages through a “weak” euro”. Central Europe has become a supplier of spare parts for German businesses thereby putting into practice the Mitteleuropa Doctrine in the 21st century. The rest of the EU countries have become a market for German goods. Meanwhile, Germany has to pay for economic failures of an ever greater number of its EU partners. In such a way, Germany’s economic might has all but become a major threat to European integration. Pessimists fear the current economic and geopolitical trends will sooner or later push the Germans into pursuing a more “egoistic” and “aggressive” policy, in every sense of the word. Everyone remembers what this kind of policy ended with in a period from the mid19th to the mid20th century.

As for the second and third points of the objectives of a single currency, the results are contradictory. Inflation in the eurozone is indeed at an all-time low. There has occurred a unification of the common market of goods, capitals and workforce. At the same time, measures which are being taken by the European Central Bank to fight low inflation have more than once driven a number of EU countries into recession and sovereign debt crises. Living standards in EU countries have not been growing steadily over the past few years. A rise in wages has turned out to be much smaller than predicted in the late 1990s.  Most European banks still prefer holding debt obligations of their countries only, which, in case of financial crisis, is fraught with banking problems and could ruin national economy. As for competitiveness, the appearance of a single market “in the first place, aggravated competition between  EU countries”. Simultaneously, the introduction of the same standards and requirements for all countries of the eurozone “cemented their differences, rather than brought them together”.

The fourth point can be considered fully implemented. Economic transactions have been simplified, cost less and have got rid of exchange-related risks. According to the British The Economist, three out of five residents of eurozone countries consider the euro useful for their country. And 75% of Europeans are sure that the single currency benefits the EU. Meanwhile, the removal of barriers to capital movements has led to a significant imbalance in investments, especially in the industrial sector. The main benefits went to countries located in the center of the EU while the geographical “periphery” of the eurozone has lost some of its former investment attractiveness. But the presence of the euro makes it impossible for the less fortunate countries to stimulate the economy by bringing down the currency value.

As for the fifth point, some of the ambitious plans have been implemented. The euro has already made a significant contribution to the weakening of the position of the US dollar in the global economy. According to the European Commission, one-fifth of the world’s currency reserves are denominated in the single European currency. “340 million citizens use it daily, 60 countries and territories link their currency to it”. On the other hand, 10 years of 20 years of its history the eurozone has devoted to the struggle against an “unprecedented crisis”. By now, experts say there has been a “fragile recovery.” Nevertheless, unlike its main competitors, the dollar and the yuan, the euro has no solid foundation. The EU budget is used mainly for paying subsidies to member countries, while the years-long disputes over prospects for creating a common EU ministry of finance all but fuel differences between 19 eurozone governments.

Thus, according to optimists, criticism of the euro is first of all the result of profound differences on the fundamental issues of European economic policy. The single currency consolidated the leaders of Europe, provided them with the common goal of creating a more integrated, a more attractive for trade and business, and a globally competitive, economy. However, a further stable existence of a single currency mechanism in Europe calls for urgent reforms, which European politicians are either not ready for or are not capable of. According to critics, the single currency has driven the different economies of the EU countries into the Procrustean bed of all-fitting standard format. The single currency mechanism completely ignores, if not completely denies, the geographical, historical and cultural specifics of the member states. Overall, the current model of economic and monetary integration in the EU mindlessly forces countries whose national economies do not match the general format “to carry out endless reforms,” which all but aggravate their long-standing inherent problems.

 First published in our partner International Affairs

Economy

China Development Bank could be a climate bank

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China Development Bank (CDB) has an opportunity to become the world’s most important climate bank, driving the transition to the low-carbon economy.

CDB supports Chinese investments globally, often in heavily emitting sectors. Some 70% of global CO2 emissions come from the buildings, transport and energy sectors, which are all strongly linked to infrastructure investment. The rules applied by development finance institutions like CBD when making funding decisions on infrastructure projects can therefore set the framework for cutting carbon emissions.

CDB is a major financer of China’s Belt and Road Initiative, the world’s most ambitious infrastructure scheme. It is the biggest policy bank in the world with approximately US$2.3 trillion in assets – more than the $1.5 trillion of all the other development banks combined.

Partly as a consequence of its size, CDB is also the biggest green project financer of the major development banks, deploying US$137.2 billion in climate finance in 2017; almost ten times more than the World Bank.

This huge investment in climate-friendly projects is overshadowed by the bank’s continued investment in coal. In 2016 and 2017, it invested about three times more in coal projects than in clean energy.

The bank’s scale makes its promotion of green projects particularly significant. Moreover, it has committed to align with the Paris Agreement as part of the International Development Finance Club. It is also part of the initiative developing Green Investment Principles along the BRI.

This progress is laudable but CDB must act quickly if it is to meet the Chinese government’s official vision of a sustainable BRI and align itself with the Paris target of limiting global average temperature rise to 2C.

What does best practice look like?

In its latest report, the climate change think-tank E3G has identified several areas where CDB could improve, with transparency high on the list.

The report assesses the alignment of six Asian development finance institutions with the Paris Agreement. Some are shifting away from fossil fuels. The ADB (Asian Development Bank) has excluded development finance for oil exploration and has not financed a coal project since 2013, while the AIIB (Asian Infrastructure Investment Bank) has stated it has no coal projects in its direct finance pipeline. The World Bank has excluded all upstream oil and gas financing.

In contrast, CDB’s policies on financing fossil fuel projects remain opaque. A commitment to end all coal finance would signal the bank is taking steps to align its financing activities with President Xi Jinping’s high-profile pledge that the BRI would be “open, green and clean”, made at the second Belt and Road Forum in Beijing in April 2019.

CDB should also detail how its “green growth” vision will translate into operational decisions. Producing a climate-change strategy would set out how the bank’s sectoral strategies will align with its core value of green growth.

CDB already accounts for emissions from projects financed by green bonds. It should extend this practice to all financing activities. The major development banks have already developed a harmonised approach to account for greenhouse gas emissions, which could be a starting point for CDB.

Lastly, CDB should integrate climate risks into lending activities and country risk analysis.

One of the key functions of development finance institutions is to mobilise private finance. CDB has been successful in this respect, for example providing long-term capital to develop the domestic solar industry. This was one of the main drivers lowering solar costs by 80% between 2009-2015.

However, the extent to which CDB has been successful in mobilising capital outside China has been more limited; in 2017, almost 98% of net loans were on the Chinese mainland. If CDB can repeat its success in mobilising capital into green industries in BRI countries, it will play a key role in driving the zero-carbon and resilient transition.

From our partner chinadialogue.net

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Economy

Oil-Rich Azerbaijan Takes Lead in Green Economy

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Now that the heat and dust of Azerbaijan’s parliamentary election on February 9thhas settled, a new generation of administrators are focusing on accelerating the pace of reforms under President Ilham Aliyev, who has ambitious plans to further modernise its economy and diversify its energy sources.

Oil and gas account for about 95 percent of Azerbaijan’s exports and 75 percent of government revenue, with the hydrocarbon sector alone generating about 40 percent of the country’s economic activity. Apart from providing oil to Europe, Azerbaijan successfully completed the Trans-Anatolian Natural Gas Pipeline (TANAP) with Turkey in November 2019 to transfer Azerbaijani gas to Europe.

Yet, with an eye on the future, the country has also begun to take huge strides in renewable energy. Solar and wind power projects have been installed, with their share in total electricity generation already reaching 17 percent. By 2030, this figure is expected to hit 30 percent.

Solar power plants currently operate in Gobustan and Samukh, as well as in the Pirallahi, Surahani and Sahil settlements in Baku.

The potential of renewable energy sources in Azerbaijan is over 25,300 megawatts, which allows generating 62.8 billion kilowatt-hours of electricity per year. Most of this potential comes from solar energy, which is estimated at 5,000 megawatts. Wind energy accounts for 4,500 megawatts, biomass is estimated at 1,500 megawatts, and geothermal energy at 800 megawatts.

President Aliyev has supported the drive for renewable energy. He signed a decree in 2019 to establish a commission for implementing and coordinating test projects for the construction of solar and wind power plants.

Azerbaijan’s focus on renewable energy has drawn interest from its European partners, with leading French companies seeking to invest in the country’s solar and wind electricity generation.

Azerbaijan is France’s main economic and trade partner in the South Caucasus. According to French ambassador Zacharie Gross, “the French Development Agency is ready to invest in Azerbaijan’s green projects, such as solid waste management. This would allow using new cleaner technologies to reduce solid waste. This is beneficial for the environment and the local population.”

“I believe that one of the areas that have greatest development potential is urban services sector. An improved water distribution system can reduce the amount of water consumed, improve its quality, and also solve the problem of flood waters in winter,” the French ambassador added.

Azerbaijan is currently a low emitter of greenhouse gases that contribute to climate change. According to the European Commission, the country released 34.7 million tons of CO2 into the atmosphere in 2018, i.e. just 3.5 tons per capita. This is lower than the norm adopted by the world: 4.9 tons.

In contrast, in 2018 Kazakhstan generated 309.2 million tons of CO2, Ukraine generated 196.8 million tons,Uzbekistan101.8 million tons, and Belarus 64.2 million tons.

And the amount of carbon dioxide emitted by Azerbaijan has been consistently falling. In 1990, Azerbaijan emitted 73.3 million tons, but in 2018 this had dropped to 34.7 million tons. By 2030 the country plans to reduce its annual greenhouse gases emissions by a further 35 percent.

Measures taken by the government include the early introduction of Euro-4 fuel standards in Azerbaijan, with A-5 standards to be introduced from 2021. An increasing number of electric buses and taxis are now transporting passengers in the main cities.

Another key step is the clean-up of the environmental degradation caused by over 150 years of oil production. Azerbaijan’s state oil company SOCAR is helping to recover oil-contaminated lands in Absheron Peninsula, particularly in the once critically contaminated area around Boyukshor Lake. This involves the removal of millions of cubic metres of soil contaminated with oil.

Azerbaijan is also reducing the amount of gas it wastes in flaring. In a study funded by the European Commission, Azerbaijan ranks first among 10 countries exporting oil to the EU in the effective utilisation of associated petroleum gas.The emission of associated gases decreased by 282.5 million cubic meters from 2009 through till 2015. This is expected to fall further to 95 million cubic meters by 2022.

The government is also encouraging large-scale greening of the land. In December 2019, a mass tree-planting campaign was initiated by First Vice President Mehriban Aliyeva to celebrate the 650thanniversary of famous Azerbaijani poet Imadeddin Nasimi. 650,000 trees were planted nationwide, including 12,000 seedlings that were delivered by ship to Chilov Island.

A 2018 survey, carried out in cooperation with Turkish specialists, found that forest area is 1.2 million square meters in Azerbaijan, i.e. 11.4 percent of the total area of ​​the country.A new requirement was introduced last year to halt deforestation and to reduce the negative impact of business projects on the environment.

For a country with the 20th largest oil reserves in the world, Azerbaijan could well have chosen to stick to a hydrocarbon future. But it has instead dared to think beyond oil and gas in its energy, transportation, economy and environment. The country is setting a template that should inspire other large oil producers to emulate.

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Economy

China-US: How Long Will the Phase One Agreement Hold?

Osama Rizvi

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Although the recently signed Phase One agreement between the US and China has put a halt to the ongoing trade war between the two global economic superpowers, it cannot be viewed as a long-term solution. At its best, it is a temporary truce. The language of the eighty-six page document, including its ambiguities and the unrealistic promises upon which the entire agreement is based, suggests that it is based on two unreconcilable compromises between the two parties.

Some of the main highlights of the deal include: China must give an action plan on “strengthening intellectual property protection” and it must reduce the  pressure on international companies for “technology transfer.” China has promised to increase the purchase of goods and services from US by $200 Billion over two years. Other key points include easy access to Chinese markets. The 15th December tariffs of $160 Billion have been delayed in December 2019. Tariff rates on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 to 7 percent although tariffs of $250 Billion at a rate of 25 percent will remain.

The 86 page document, when analyzed, displays an ambiguity in its language, as well as the absence of any enforcement plan and dispute settlement process. Therefore, whenever an issue might arise (and it will) there is a likelihood the deal may implode. For instance, whilst mentioning enforcement of payment of penalties and other fines, the word “expeditious” remains unclear. What is the time period and how will enforcement be accomplished? At another point, while referring to China to send a case for criminal enforcement the word “reasonable suspicion” which can be based on “articulable facts” makes it very abstract. Chad Brown, a trade expert in an article for Business Insider, says that there is no specific way mentioned in the document to penalize the party who violates any provision. Moreover, there is no body (like WTO) that will take decisions but is rather left to the USTR and discussions with Chinese counterparts – a recipe for confusion.

Then there are the promises. But we have to consider different variables. But if it turns out that China carries out its promise to buy crude oil, LNG and coal, the global commodity markets will feel the heat – in a negative way. Under the agreement China will buy an additional $52 bn of energy products in the span of coming two years- 418.5 Billion in 2018 and $33.9 in 2021. This year China will have to buy about $27 Billion energy purchases from U.S. To put this in context, China imported 14 million barrels of oil in November 2018 which is its highest ever. Assuming that China buys the same amount for 12 months it would yield only $9 to $10 billion in revenue! In a similar calculation for coal and LNG, Clyde Russell, in an article for Reuters, concludes that in order to fulfill the above target (of $27 Billion) China would have to double the amount of these imports from US!

Moreover, the Phase One agreement has a snapback clause which implies that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.

Even if China fulfills its promise, the purpose wouldn’t be served:  the US. deficit won’t reduce significantly.  The US trade deficit with China for the first 10 months of 2019 was $294 Billion – in other words, roughly 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times that amount (or about $382 bn). China will need to half its exports to the U.S. for a “meaningful” drop in the deficit – something that seems highly unlikely.

Also, the US might even end up more dependent on China. Increased demand for US oil will spike its prices and might trigger other suppliers of China to increase their output in order to fight for the market share. The global energy and commodity markets could face disruption. Similarly, Brazil and other countries, beneficiaries of this trade war, can decrease soy bean prices in order to retain their market share, giving farmers in the US a tough time.

As the U.S. Treasury Secretary, Steven Mnuchin, said that tariffs can remain in place even after a Phase Two agreement, we, therefore, have to be patient and observe the trajectory of Phase One trade agreement carefully.  Chinese promise of $200 bn purchases, the lack of a proper dispute resolution mechanism and technical loopholes in language puts the future of the agreement in doubt.

Both sides are keeping some cards in their deck; we have yet to witness the end of this trade-war saga.

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