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Eurozone Crisis

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World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it.

This was the idea behind the formation of the European Union which was initially formed by the ‘Inner Six’ countries like France, West Germany, Italy, Netherlands, Belgium, and Luxembourg. The origins of the European Union sees its history of  70 years of war and unrest between France and Germany which led to the formation of ECSC(European Coal and Steel Community) under the SchumanPlan of pooling the coal and the steel of France and Germany. The European Union grew out of the aim to build a common political entity to undo the adverse effects of wars and to build up for an ‘internal single market’ with common laws and systems. It was culminated on 7th February 1992 under the Maastricht Treaty.

The Eurozone Crisis began in the year 2008 with a rise in debt of countries like Greece and Ireland.  In 2009, Greece had a budgetdeficit of 12.9% of the GDP. That was more than 4 times of the limit suggested by the European Union which is 3%. The investors were discouraged. As a result, the investors sold the bonds of these countries to purchase the bonds of more credible countries like Germany and France. The uncertainty of the European Central Bank to act in such a situation led to a liquidity crisis and an erosion of the credibility of the European Union. Eurozone Crisis also demonstrated that it was the delayed collective action by the European Union that strengthened the ulterior motives of the Financial markets to make profits out of the difference in the bond prices of the different member states. The economic conditions in the year 2010 exposed the loopholes in the European Union’s foundation. There can be numerous reasons for this. They are as follows: –

Lack of a single currency – A single currency means a union or a political union but that is a distant dream as member states think that it would jeopardize their sovereignty.

No Federal European Government– Because of a no common governing body, there is no mechanism to set a central tax or budget policy. All member states under it are sovereign having their own political complexities in their respective countries.

No common Euro Bonds– Due to the lack of a common budgetary policies, well to do countries like Germany have rejected to subscribe to a common euro bond. They withdrew to underwrite Europe wide bond issues.

The United States Link-What happens in a country doesn’t stay in a country in the interconnected financial system of the world. The European Debt crisis was not just limited to Greece, but it had connection with the spending of the US government budget. US contributes approximately forty percent to the International Monetary Fund’s Capital. Waiving off the debts of Greece means adding additional burden to the Taxpayers in US.

Not just economic, Even Political Issues involved in emerging the Crisis. They are as follows: –

Austerity led to Protests: – The countries who were adversely affected by the Eurozone crisis switched to austerity. (Austerity is a set of political and economic policies which intends to reduce the government deficits either by increasing taxes or cuttingdown expenditure). Austerity leads to decline in the consumption and  the employment rate of a country. A lot of protests occurred in Spain and Greece against the government because of the increased unemployment. Austerity measures even led to the removal of party in power in countries like Italy and Portugal.

Financially sound countries vs High Debt countries: – European Union saw a strain in the relationship between fiscally sound nations like Germany and the nations under high debt like Greece. Germany was not ready to ratify to a region wide solution rather pushed such countries to make changes in their budget policy. These situations might have led any of the member state to leave the Euro. There was a high possibility of the weakening of Euro against the other currencies in the global market. This crisis, indeed,witnessed the periodic weakness of the Euro.Slovakia andLithuania refused to bear the burden of Greece’s debt. Even these two countries resorted to austerity measures but without any aid from the EU.

Greece had manipulated its balance sheet to conceal its debts and it was also the result of long years of tax evasion, fiscal mismanagement and authorities misleading the reports.

The European Financial Stability Facility paid a bailout of 190 billion euros in the year 2011. It was only in the year 2014, that Greek economy was able to recover a bit and grew by 0.7% and successfully balanced the budget by selling its bonds. The crisis was not just limited to Greece.

Even Ireland’s banks borrowed loans from the housing market in the year 2008 which led to a huge debt crisis by 2010. $112 billion EU- IMF package was given to Ireland in exchange of following Austerity measures. This was again a severe Eurozone crisis with the Irish economy’s decline in output by 10% and Unemployment rising to 13% in the year 2010.

Portugal also received an aid of $116 billion in the year 2011 from the EU as it fell into recession as the deficit grew for about more than 10% of the GDP in the year 2009.  Not just this, the deficit shifted to large countries like Italy and Spain too leading to an overall Eurozone crisis.

WHY DID GERMANY REFUSE TO ADJUST IN THE EUROZONE CRISIS?

Germany had the world’s largest current account surplus of almost 8% in the year 2017 (IMF 2018). And Regional Imbalances have led to the Balance of Payment crises (Schularick and Taylor 2012). Consequently, there had been a resentment against Germany in the international arena. But the following reasons can be the attributed why Germany didn’t behave accordingly: –

  • Current account Surplus may not be always interpreted as beneficial to the economy. It indicates that investments in public and private sector has not been enough. (Bach et al. 2013, Sudekaum and Felbmayr 2017).
  • With an intention to balance against Germany by reducing its current account surplus may not work. It may lead to their improved infrastructure, higher wages, higher inflation and also a higher consumption.
  • With the rise in inflation, the debt burdendeclined, and the wages of the workers in the Non- Tradable Section rose. The High Export dependence of Germany on the foreign nations tarnished its image. Also, the current account surpluses are also related with net capital outflow.

The solution here was not to punish Germany but coming to terms with the fact that Internal Adjustment too, may not have positive consequences all the time. Moreover, A current account surplus was needed for an ageing country like Germany.

GREECE- LEARNING FROM THE MISTAKES OF THE EUROZONE CRISIS

Greece, which were the odd ones out in the Eurozone crisis and had its credibility crippled in the past ten years seemed to have learnt lessons. At present, it is one of the best performing countries in Europe with respect to flattening the Covid curve according to an analysis by the Bridge Tank. Not all perish in a crisis, few turn it into an opportunity.Kyriakos Mitsotakis, The Prime Minister of Greece along with the Sydney born Harvard immunologist Sotiris Tsiodras received praises for handling the Covid crisis. The deaths due to Covid was controlled unlike Italy which turned out to be a disaster.

According to Dr.Ladi, an expert whose field of study includes the Eurozone crisis and role of experts in the public policy said that “ Because of the previous crisis the people were better prepared to react and the country’s leadership worked very quickly compared to others who reacted late’’.

IS BULGARIA JOINING THE EUROZONE ANSWER TO IT’S PROBLEMS?

Bulgaria and Croatia are the latest Eastern European countries who are ready to adopt the Euro currency after meeting certain economic and regulatory criteria. This enlargement has come after a decade long of crisis which deterred the countries from joining. However, the inclusion of these two relatively poor countries may bring risks along with it. The Eurozone has already suffered much because of Greece’s rising debt which destabilized the entire currency in the former decade. Analysts have warned before hand only that the two countries in question may have a hard time in fulfilling criteria like Low Public Debt and the Rule of Law. Croatia is expected to increase its debt to 86% of the GDP by this year which is yet again above the 60% level that the European authorities accept.

Bulgaria joined the EU in the year 2007 and has expressed its intentions of joining the euro area since the year 2009 until the debacle in the form of Eurozone crisis occurred which hindered its entrance at the prevailing circumstances then. With the economic recovery in the year 2018, It again wanted to join the Euro Club. To join the club, it needs to fulfil two conditions: –

  • It must join the Exchange Rate Mechanism (ERM ii) – a waiting room where a country introducing the euro is required to stay for a minimum period of two years at least.
  • The Public Debt levels must not exceed 25% of the GDP (Bulgaria’s GDP here)

Few officials of the Eurozone have expressed their concerns and are quite apprehensive about Bulgaria in the zone. According to them, Bulgaria’s entry will do no good or rather repeat the ‘Greek scenario’. Besides this, Bulgaria also must fulfil the ‘additional’ requirements of joining the Banking Union which was not a requirement before but would be implemented from now onwards. Joining the Banking Union means the scrutiny of the Big Banks of Bulgaria. This is quite obvious with news of the collapse of the Biggest bank in Bulgaria in the year 2014. The European Central Bank is being a watchdog here and Banks in Bulgaria have been given time to create additional capital buffers till April 2020. It must be noted that the FI Bank has still not fulfilled the criteria.

There are other factors as well which act as an instrument to demotivate Bulgaria to the Eurozone. Those are as follows:-

  • No adequate support from the public for the introduction of Euro in Bulgaria.
  • The EU area crisis is also a factor.
  • Depiction of EU as a fading power.
  • Bulgaria is also seen as an under- performing state and the common currency works in the interest of the third parties.
  • Gaining domestic support and Anti – EU voices is much easier than in favour of it.

The Bulgarian government doesn’t want to escape this opportunity of joining the EU zone in the Corona crisis. It would be interesting to see whether it gets successful or not.

Today, in the times of Corona, The European Central Bank seems to have learnt from its past mistakes unlike the Eurozone Crisis. It has acted quickly and has kept the borrowing costs low for all countries in the Euro Zone because as per the forecasts done by IMF, the public debt will reach almost 100% of the GDP by the year end. To cope up with this, the head of the ECB, Ms. Christine Lagardesaid that economic implications of Covid- 19 would result in decrease in the supply chain by approximately 35%  and would also expose us to a rise in the inequalities in the Euro- Zone.  Factors such as Climate Risk and bio-diversity will be taken into account while drafting plans.  The ECB also created a Pandemic Emergency Purchase Programme worth of € 750 billion involving both government and private debt. A decision regarding the same is to be made in the upcoming EU Summit which will be held on the 17 and 18th July 2020.

Economy

Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Economy

Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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Economy

Iran’s Economic Diplomacy through CPEC

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U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth.  Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.

Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.

Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.

Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.

Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.

In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.

The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.

Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.

China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.

Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might.  On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.

USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.

Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.

Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.

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