Allgemein, Economics, European integration

BREXIT: Strong Pros and Cons in a Fool’s Debate?

 

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

(www.eiiw.eu) welfens@eiiw.uni-wuppertal.de    BrexitWelfensEIIW2016, January 24, 2016

BREXIT: Strong Pros and Cons in a Fool’s Debate?

In the UK there is a long-standing debate about the option of leaving the European Union – as announced by Prime Minister Cameron there will be a referendum on BREXIT in 2016. In sections of the British press there is a debate which would seem to suggest that the BREXIT topic is a kind of rational political question (see, for example, the Economist: interview with the pro-BREXIT activist Dominic Cummings on January 21, 2016). The truth, however, is that the BREXIT question has become part of the agenda of the British government – and of that of the Labour Party – as a direct consequence of UKIP’s election victory in the European elections of 2014: only due to UKIP did the BREXIT emerge as a topic for discussion. UKIP’s No. 1 position in that election was as remarkable as that of the Front National in France and the strong showing of the populist right-wing party AfD (Alternative für Deutschland) and all three are reflecting nonsense results related to a European vertical political architecture which stimulates voters to vote for small radical parties at European elections. In Germany the Forschungsgruppe Wahlen – a leading voting analysis think-tank – has analyzed voters’ behavior and finds the following result (axplained by a representative of Forschungsgruppe Wahlen in Düsseldorf at an higl-level meeting of experts from academia):

  • when asked about relevant topics at a local, regional or national government level voters have a clear view about the respective issues. However, when it comes to European elections voters have no clear idea about the relevant topics at EU level – since the EU expenditure-GDP ratio is so ridicously low (1%; 1/9 of that of the US at the federal level). As a consequence voters are inclined to vote on an emotional basis and to actually prefer small radical parties which normally do not enjoy high voters’ shares at the national level. With the financial rewards obtained for every vote received at the European level these radical populist (often right-wing) parties can then invest in national political campaigns. Thus the strange vertical political architecture with the mini-role of supranational government – defended by many German and British politicians under the headline of “subsidiarity” – has contributed to an ever-declining voter turnout at European elections (with a minor exception in 2015) and an ever-increasing share of anti-EU radical populist parties. This is not to say that one cannot find crucial points of inefficiencies and political contradictions in the EU, but the anti-EU sentiments that have grown over decades are largely the artificial result of a contradictory and inefficient political vertical architecture in Europe. Had the supranational EU level – in line with the economic theory of Fiscal Federalism – control over part of infrastructure expenditures, military expenditures and the unemployment insurance, the voter turnout for the European Parliament would be much higher, fiscal policy much more effective, the political competition in Brussels more intensive and the role of UKIP, Front National and AfD effectively negated. Mr. Cameron would never have considered the issue of a referundum on BREXIT the debate over which will largely emphasize the allegedly too large a role played by the EU and that immigration into the UK is a major problem. This is the paradox of the insufficient EU budget and could lead to a truly European political tragedy from which only China, Russia and some other countries will benefit. Is this what people – rational British voters – are really interested in?
  • BREXIT will destabilize the EU, weakening the role of traditional liberal economic countries such as Germany, Denmark and the Netherlands. With Germany increasingly destabilized over time – and struggling to come to terms with the refugee wave that is bound to further reinforce right-wing populist parties in Germany – it will not take many years until there is full EU disintegration plus economic stagnation; and Germany, France, the UK and other countries will return to a stark agressive political rivalry that leads Europe back to the period before 1914. This includes defense-GDP ratios which will increase from below or close to 2% to about 4%, just like in the decade before World War I. Is this what is in the interest of the UK? The artificially strong UKIP has imposed on the British political system an artificial referendum that under normal rational circumstances – in a US-type European Union – would never play any role on the political agenda.

Does it therefore make sense to consider the elegant pros and cons of an artificial, irrational referendum on BREXIT? Not really. There is a lack of political and economic enlightenment in Europe and the potentially rather powerful European Union might face a sad long-term decline and disintegration from which primarily the autocratic and anti-democratic countries worldwide will benefit – with Russia and China to be the leaders in this regard. Disintegration of the EU will clearly undermine the integration prospects of ASEAN and MERCOSUR and the whole concept of regional integration and peaceful economic cooperation. The British people has made the UK a pioneer in democracy, liberal markets and free trade plus the rule of law. An unreflected UK debate on a BREXIT referendum would endanger half a millenium of political progress and rational decision-making. Beyond the UK referendum there are several questions to be analyzed:

  • How can the EU successfully cope with the humanitarian challenge of the refugee crisis? The rather silent role of the UK in this field is strange.
  • How can a more effective and efficient vertical integration generate more benefits for the EU member countries and help to bring about a more intensive political competition process?
  • How can the liberal forces of the EU be reinforced and inconsistent minimum wage policies – as in France and Belgium – be avoided in the future?
  • How EU integration become remain a role model for integration around the world?
  • What is an adequate role for the principle of subsidiarity in the EU?
  • Why are key facts on the success side of immigration – for example the more than 7 million new jobs created by immigrant entrepreneurship – so poorly known in the British public?
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Allgemein

An Unprofessional Immigration Policy plus a Dangerous European Election Setup Undermine Germany and the EU

Prof. Dr. Paul J.J. Welfens

President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

 

immigrationGermanyRisk2016

 

Jan. 21, 2016

 

An Unprofessional Immigration Policy plus a Dangerous European Election Setup Undermine Germany and the EU

There are many good arguments which support the view that in the summer of 2015 Germany’s government should react and behave generously when the EU faced an unprecedented wave of refugees arriving from Syria, Iraq and several other countries. During 2015, circa 1.1 million refugees/asylum seekers came to Germany (Germany’s own population in 2014 was about 82 million). This number is about 1/3rd higher than the maximum number who sought asylum in Germany during the Balkan wars in the 1990s, when the Federal Republic of Germany joined allied forces in its first military intervention since 1945: As Bodo Hombach – then the Balkans High Commissioner for the European Commission (before he was head of the chancellor’s office) – once explained in Washington D.C., during a seminar sponsored by the German Marshall Fund, that it was a fear of more asylum seekers and refugees from the Balkans which tipped the political balance in Berlin in favor of joining the US and other countries in the Kosovo War. Absorbing a large number of refugees is a challenge to every society and the problems encountered in Germany in 2015 were considerable for many reasons. If there would be an EU consensus for allocating refugees within an integrated concept it would also become clear that the 1.4 million refugees are not really a big number – relative to 520 million people in the EU (0.3%).

Germany’s government – obviously poorly organized in terms of intelligence services and an anticipation of refugee problems – was largely overwhelmed by the refugee wave which arrived in 2015 with most refugees coming via Turkey and entering the EU in Greece; a smaller part entered the EU via Italy. With the Greek economy in the seventh year of a record-breaking (in terms of duration) recession and the country in political turmoil, respectively, it was clear that the Greek government would be neither able nor willing to follow the Dublin framework which would have required Greece to handle more than half a million asylum seekers coming across the Mediterranean Sea to the shores of Greece. The Dublin rules put too much burden on the border countries of the EU and better rules should be considered.

The situation for refugees in Greece was so desparate that the European Court of Human Rights decided in 2014 that asylum seekers who had left Greece and entered any other EU country could not be sent back to Greece. Germany’s government was still eager to teach Greece a hard lesson regarding stability policy in 2015 and refused any debt cutting for contradictory reasons: It was argued by the Ministry of Finance that forgiving part of Greek debt was impossible, although renowned legal experts from several German universities had a different view.

Some concessions were considered with respect to debt maturity and the interest rate, but Germany did not really help Greece to get out of a very dangerous economic situation. Hence there was a choatic situation in Greece with no implementation of the EU’s Dublin rules relevant for refugees/asylum seekers in the EU and the refugees, often having escaped dangerous situations in their home countries, moved to Germany and other countries in an uncontrolled way – naturally, not all of the refugees were asylum seekers (the asylum seeker status is an invididual status given to those that obviously have to fear political prosecution or face risk of life in their respective home country). More than half a million asylum seekers passed through Hungary and very many continued on to Austria, Germany and Sweden. The EU situation partly reflected the inconsistent situation of both external EU borders which are not being sufficiently controlled and the Schengen Accord which allows free movement of people within continental EU countries. If the EU’s external borders cannot be protected the Schengen Accord might no longer be implemented; this will impair not only the movement of labor but also make the exchange of goods in the EU single market more complex – hence there will be negative welfare cost of giving up the Schengen Accord.

As Germany lost, in summer 2015, the control over its borders, the government indirectly undermined security not only in Germany but in the whole EU; the German government partly does not really know who has come to Germany and where the refugees are living – if there should be any obvious terrorists among them and they commit terrorist attacks in Europe, Germany’s government will be held responsible for this. Most likey for more than 99% of all refugees the main motive in coming to Europe was the willingness to survive as individuals or with their family. Many people in all EU countries generously helped the refugees and even in poor Greece many people showed a strong humanitarian commitment. There is reason to be proud about this, but there is also reason to critically highlight the problems and policy reactions of 2015 in Germany and the EU. Germany’s problems in coping with the refugee wave has revealed considerable institutional weaknesses, including understaffing of the policy and the legal system as well as excessive bureaucracy and poor organization of government institutions.

For many refugees the situation is dramatic and the unclear status of many is also a problem. The relevant public authorities in Germany were so poorly organized and so seriously unterstaffed that in 2015 only about 60% of all asylum applications could be formally started (the Eurostat statistics which show about 1 million asylum-seekers for the whole EU is therefore quite misleading, since those refugees who did not submit an application are not counted). About 400,000 people could not even submit an application in Germany in 2015. For Germany’s public authorities the situation, with more than 1 million refugees arriving in 2015, was apparently impossible to handle and the various software systems used by both the sixteen federal states and the national government were so poor (and mostly incompatible with each other) that it lead to the absurd situation that some refugees could easily obtain several identities. The man who tried to kill several policemen in Paris in early January 2016 had previously been living as an asylum seeker in the German city of Recklinghausen and he is said to have had seven identities – so he had given his finger print seven times but the German software incompatability problems are so enormous that his scheming was not recognized by any of the many public authorities involved in the asylum process; this is a very dangerous pitfall of Germany’s public authorities and it will take years to remedy this problem. This testifies to the fact that German authorities might have at least half a million refugees whose identities are not clear and who are not definitively known to the authorities. In the era of international terrorism such a situation is totally irresponsible.

The mantra of Chancellor Merkel that there is no upper limit on the number of incoming refugees is inadequate since competing legal requirements and political goals automatically imply that there is indeed a critical upper limit. It is fairly clear that one million refugees a year would not come to Germany if the UNHCR refugee camps were not in such a disastrous situation as a result of major UN member countries having not paid normal contributions for many years – the US and Kuwait are two of the leading culprits here – however, the German government is totally silent on this. These wealthy countries and other non-payers are responsible for the fact that many UNHCR refugee camps can spend only 40% of the standard requirement per refugee. It is also fairly obvious that €10 billion spent by the German government on refugees in Germany would buy the equivalent of about three times this amount in low-income Arab countries: So building and modernizing refugee camps in these countries and in Turkey in order to help the many refugees from Syria and Iraq would be much more effective than the current strange open door policy of the German government. Turkey is a key partner for Germany/the EU and certainly could help to reduce the refugee wave to Europe.

That refugees from as far afield as Afghanistan are fleeing to Germany is also not a welcome situation, they should be encouraged to find neighboring countries that could give them support and shelter. Many refugees from Islamic countries have a very different cultural background than the populations of western countries, and this often includes a considerable emotional and intellectual distance to the Western values – this, of course, is understandable since the French Revolution and the Glorious Revolution took place in France and England, not in Arab countries. One should not rule out that in the long run many young immigrants will be able to adjust to the Western world, so that cultural as well as economic integration could be possible (and Europe received Greek classical ideas actually via Arab philosophers). However, it is not realistic to assume that this is a standard case. The Arab world consists of many different intellectual currents, with Islamistic voices gaining weight sind 1979.

It should also be emphasized that massive youth unemployment in certain EU countries, for example France and Belgium, is not the fault of young immigrants; rather, in both countries, irresponsible minimum wage legislation has brought these countries youth unemployment rates double that of the Germany and triple that of Switzerland. The successful integration of immigrants and foreign refugees without finding adequate jobs for all the young people is impossible.

The situation in France under President Hollande is strange and irresponsible: The government knows that the minimum wage of nearly €10 per hour is much too high as a national minimum wage, but instead of lowering the excessive minimum wage, government pays firms employing people on the minimum wage massive subsidies which cost the equivalent of 1% of GDP – the implication is that the income tax has to be raised by 1 percentage point (or the deficit-GDP ratio has to be increased by 1% which implies with a 1.5% trend output growth rate that the long term debt-GDP ratio from this subsidy alone will amount to 67%: more than the upper limit set out in the Stability and Growth Pact!) and this in turn reduces the level of the growth path by half a percentage point. Some countries face serious problems, but if politicians do not have the courage and capability to adopt adequate reforms then social and political instability will follow; it would not really be difficult to introduce a regionally differentiated minimum wage system and thus to get rid of the subsidies – output would increase, unemployment rates would fall.

Germany, having made bold reforms under Chancellor Schröder in the labor market and in cutting part of social security, has found – albeit benefitting from other reforms as well – the way back to full employment: This now makes Germany the most desired destination country for millions of people, either migrating or considering it, in the world. If Germany would be able to organize immigration and refugee streams in a realistic and sustainable way, the German economy and its political system could benefit in the long run. There is, however, also a need to define new rules of representation at the European Parliament that so far is not reflecting demographic and immigration dynamics in an adequate way (this situation is much in contrast to the US and its representation of the population in the Congress and the parliament, respectively).

The first democratic new requirement for the European Parliament should be that the number of seats for Germany – and other countries with populations increasing relatively quickly – should be raised adequately. Such a rule would encourage timely economic reforms and greater political wisdom in the EU; the reform laggards in Greece, Portugal and other countries would finally pay a political price, namely less political power in Brussels. Major immigration countries such as Germany, France, Spain, Italy, the Netherlands, Belgium and Sweden stand to benefit. Looking towards a Euro Political Union in the medium term should bring these questions onto the political agenda in Europe; countries which are not willing to accept this basic principle of democracy cannot be considered as strategic partners of Germany, France, Italy and Spain.

The western world (broadly defined in geographical terms) has faced an enormous lack of political discipline since the end of the Cold War. Never would a conservative Greek government have made the attempt during the Cold War period to inform the European Commisison that the country would have a 4% deficit-GDP ratio and then implement expenditure and revenue schedules in an election year (2009) resulting in the end in an actual deficit-GDP ratio of 15.6%; the fact that this could happen in an EU country but could never happen in the US (as a political union) in turn indicates how much stronger the US is, institutionally speaking, than the EU. To date, a repetition of such a Greek deficit fraud is still possible. On the other hand, Germany, the UK and France have not helped Greece to avoid the plague of seven consecutive years of recession and a cumulated output decline of 25% – as big as occurred in the US in the early 1930s in four consecutive recession years. The IMF has imposed an austerity policy that was very strict and due to overindebtedness of government this was partly necessary. However, due to a rather high negative fiscal multiplier (in an environment of very low ECB interest rates; see IMF working paper of Blanchard/Leigh, WP 13/1) this has reduced output and employment dramatically. Fiscal consolidation was necessary, but the better alternative – actually a complementary measure – would have been broad privatization that was not much considered by the IMF despite the fact that in late 2010 the value of government assets clearly exceed that of Greek government debt. Greek governments were very reluctant to privatize at all and this points to institutional problems with the euro area’s institutional architecture. The EU is facing serious challenges (including the risk that the UK could leave the EU after a referendum on EU membership in 2016)

The economic collapse in Greece has all but destroyed the political system and the economic costs of this are enormous for the EU in general and Germany in particular. The Dublin framework for refugees and asylum seekers thus is not implemented and a lack of political will in Germany to forgive Greece some of its debt is responsible for an unsustainble situation for Greece and the EU.

With the critical accentuation of the German refugee crisis in 2015, it has been revealed that Germany is rather politically isolated in the EU. The euro crisis to some extent has reinforced this unpleasant position of Germany. Instead of accepting that the Greek debt could be reduced by €100 billion in a conditional deal (with about 30% taken by Germany which would be 1% of annual GDP) which would impose on Greece the task of returning to the implementation of the Dublin regime, which requires that refugees have to submit a request for asylum in the first EU country that they enter (and finger prints have to be taken), the German government is behaving stubbornly and rather seems to be willing to impose very high costs in the context of uncontrolled refugee immigration on Germany over many years. The economic and social cost of uncontrolled immigration into the EU and Germany, respectively, could easily exceed €50 billion for Germany alone within a few years and this would be well above the share of Germany for a Greek debt reduction. Even with a large number of incoming refugees there is no reason to rush to contradictory conclusions – although a more intensive debate on policy aspects is necessary. Working or living together with people from other cultures is a great experience: millions of workers, employees and entrepreneurs in Germany and other EU countries can testify to this. Powerful countries such as the US, Canada, Australia as well as Germany owe much to centuries of successful immigration.

If several million Muslim immigrants should come to Germany in the future, the values emphasized by the society will shift: the support for the Constitution as it is now will be much weakened. The German democracy and the people of Germany have a fundamental right to control who is coming to Germany and to consider what would be the consequences of mass immigration from countries with a very different culture – where people do not emphasize western values but other values. This statement does not mean to overlook that millions of Muslim people have well integrated into European countries and certainly within Muslim communities there are different views about values: Discussing at an individual level is important and looking at the individual is quite important.

It would be very strange if European countries would not be willing to help refugees on the one hand, but on the other hand it would be equally strange for European countries not to defend the current basic constitutional consensus which prevails within them. Refugees coming to Europe should be expected to return to their home countries within a few years, say within seven years or so (assuming that peace can be restored in the respective countries).

As law experts have emphasized for decades in the western world: The constitution is defended by nobody except the population and the values it emphasizes. Of course, there have been immigrants and refugees from all cultures and countries of the world who have adapted to US culture and its political values over the past 200 years or so, but the US clearly expects immigrants and refugees to integrate into the US society. Germany and other EU countries should follow the US example here. Respecting the constitution and the law are two necessary elements for a peaceful society. It is quite obvious that Germany’s reduction in the number of policemen and of other groups of civil servants in past years was inadequate: facing the refugee crisis, the course of policy in this regard should change quickly. It should also not be overlooked that the EU is facing the risk of terrorist attacks. Humanitarian aid is needed from the refugees’ perspective, but there are many ways in which, and countries from which, such support could be delivered. One should also not overlook the critical role of the internet and satellite TV which often makes the integration of immigrants rather difficult – one can live in Germany but never watch any German TV show or receive any German news information since digital technology allows a virtual cultural foreign identity to persist for many decades. The implication is that Germany and other EU countries should spend more on integration measures and should also finance more research on integration. More Arab language programs in the EU or in Germany, France, the UK etc. could also be a way to create a broader dialogue.

With three state elections coming in March 2016 – and federal elections in 2017 – the pressure on politicians of the ruling parties in Germany is enormous, not least in the wake of the incidents which occurred in Cologne during the 2015/2016 New Year’s Eve festivities (similar incidents were reported from Stuttgart and Hamburg). Right in front of the famous Cologne Cathedral about 1,000 men had gathered and many are said to have molested dozens of womens and stolen valuables from more than 500 people, mostly women. The police presence was poorly organized that evening in Cologne and they obviously tried to hide the fact that it was mainly young men from Maghreb countries who are suspected of having been the attackers and robbers. As reported by the Neue Züricher Zeiting on January 16 (p.1) – from twenty-one suspects indentified, nine were asylum seekers while a further nine were illegal immigrants from Maghreb countries.

There has been a huge public outrage about this incident which suggests that many young men from Arab countries do not have much respect for women; that equality between men and women is by and large not accepted in parts of the Muslim world makes the problems even more complex; in addition traditional sexual repression in many Maghreb countries of Northern Africa are part of the cultural background of many young men who immigrate into the EU. From this perspective, it is not convincing to argue that the incidents in Cologne stand for a general problem of sexism in Germany (although sexism, of course, is also a problem in the German stratae of the population in Germany) – there seems to be a broader problem with regards to the cultural background of some of the refugees, certainly only a minority but with more than one million refugees in Germany in 2015 this aspect should not be ignored.

It is rather unclear why thousands of young men from Tunisia and Morocco –some with long criminal records in Germany – have not been sent home to these countries; except for the fact that these countries refuse to take back their own citizens. Here there are considerable diplomatic challenges. Illegal immigration is, of course, a different challenge than refugees, but the fact that there are many illegal immigrants and refugees from Arab countries brings considerable confusion in the public. In the perception of the general public, the government in Germany is weak and there is an increasing fear that law and order are not implemented and this in turn undermines the acceptance of refugees and the refugee policy of the Merkel government, respectively. The reaction at upcoming elections will be a massive increase of right-wing parties’ voter shares (mainly the party AfD whose leading members have expressed racist attitudes in public – the party was initially founded as an anti-EU political party; one also should not overlook that violence against asylum homes has been encouraged by AfD politician).

Lack of legal immigration opportunities contribute to part of the problems in Germany, however, the most important challenge in many Northern African countries is poor economic policy – and the military conflicts among varioius Muslim groups – and thus the lack of prospects for job and prosperity. A modified neoclassical growth model suggests how to raise the level of the growth path and the trend growth rate which depends mainly on human capital formation and innovation dynamics. That Islamic radicalism is not a natural ingredient for more innovation, higher growth and better jobs might not be apparent to many; but the history of Western civilization shows that liberal economic and political approaches are needed for a process of economic taking-off. Incidentally, China’s economic catching-up process over four decades 1978-2016 has clearly shown key elements of successful economic development as well.

It is the task of the German government to organize a political deal resulting in these illegal immigrants being sent back to their home countries. The fact that many young people in Maghreb countries have poor economic prospects is no reason to accept illegal immigration from these countries, rather adequate economic policy reforms should be encouraged.

At the same time, it is clear that the broad aggressive missionary activities supported by Saudi Arabia have targeted Germany and many other EU countries for years – the textbooks of the Saudi Arabian-sponsored school in Bonn were sharply critizied by the German weekly DER SPIEGEL many years ago, but the then Foreign Minister Joschka Fischer refused to critize these intolerant and aggressive textbooks. Poorly judged political correctness has lead to many strange developments in Germany over the last number of decades. There is no reason not to respect people of the Muslim, Jewish, Christian etc. faiths, or indeed those with no religious affiliation at all, human rights are relevant for all people; and respect before the law should also be relevant for everybody.

In this respect, in some Arab countries Islamic preachers are often viewed to stand above the law and the judicial system – this is claimed as being the case in Algeria by Kamel Daoud who is an Algerian writer. In an interview in November 2015 with the French newspaper Le Monde, Daoud has argued that Islamist radicals are above the law. The courts have no courage to make any verdict against violations of laws by Islamic radicals. An erosion of the rule of law means legal uncertainty and new economic risk, weaker economic performance plus higher unemployment – and more illegal immigration to the EU. So this is all a serious problem not only for Algeria, but for the EU as well. The growing role of the internet is a difficult challenge since Arab immigrants in Germany and other EU countries are exposed to the digital radicalim of radical Muslim preachers: often with a religious ideology that implies that rights of women are much weaker than that of men. As regards long term integration there is a key task that immigrants learn the language of the respective host country – otherwise there are no prospects for immigrants to learn about the rules and laws in the EU; and in Germany about the special historical responsibility in the context of World War II.

The emphasis of chancellor Merkel that Germany has a special responsibility with respect to Israel and Jewish citizens living in Germany. With the mass immigration of Arab refugees this political mantra is getting doubtful. Many refugees might at present have no interest in the Arab-Israeli conflict, but there is not much doubt that in medium term the Jewish-Arab Middle East conflict is likely to spill-over to Germany/Europe more than before. This could imply that German and the EU will have to push Israel and key Arab countries more towards a peaceful settlement of the long-standing conflict – a very difficult challenge and not much discussed so far in the debate about refugees; the conflicts of reality will have to be considered in the refugee policy in Germany/the EU.

Islamic radicalism – and a lack of tolerance in some Arab countries and in Iran – prospers for several reasons: One reason is the popular confusion of religion and scientific truth; and the failure to translate Karl Popper’s famous book Logic of Scientific Discovery of 1934 which clearly explains the difference between the concept of empirically founded scientific truth (with empirical evidence corroborating certain hypotheses that are then accepted as temporary scientific truth) and religious beliefs. One should, however, not overlook that certain Arab countries have modern approaches to science, society and economic policy and certainly the Arab culture has a long history of scientific progress and certain periods in time and countries have represented examples of considerable tolerance as well. The Austrian and German governments would be wise to support an Arab translation of the famous Logic of Scientific Discovery by Popper. With low oil and gas prices the political situation in Algeria is likely to deteriorate and the unstable situation in Libya – caused by Western military intervention – further destabilized Algeria. If Algeria should fall into the hands of Islamic radicals, the stability of Morocco and Tunisia – the starting point of the Arab Spring – would be in serious danger.

 

Self-inflicted Political Radicalization through European Elections

France is a country in which mistakes in domestic economic policy and immigration problems have for many years contributed to a dramatic rise of the populist right-wing Front National under the leadership of Marine Le Pen. Her party did win the relative majority in France at the European elections in 2014. Moreover, a right-wing populist party in the UK – also a country with many immigration problems (and a lack of differentiated debates in the public, since it is clear that the UK not only has an immigration burden, but has actually massively benefitted in economic terms from immigration) – has also won the European elections in 2014. The German right-wing, anti-euro, populist party Alternative für Deutschland (AfD) obtained a considerable share of votes in 2014 at the European elections: It is a very young party that may be expected to win double digit voter shares in the regional elections in Germany in 2016. The incidents in Cologne and the generally falling confidence of voters in the Merkel government in 2015/2016 is likely to raise the AfD voting shares further in 2016/2017. For Germany, the combination of an unsolved mass refugee problem – related to the war in Syria, but also the instability in Iraq and Afghanistan from which many asylum seekers are coming – and the rise of the right-wing AfD is quite dangerous and could indeed destabilize the EU and contribute to its disintegration.

The rise of right-wing populist parties is, however, largely a self-inflicted problem of governments of EU countries which have created massive pitfalls with respect to European elections and the architecture of the EU. While in the US the federal level stands for government consumption of roughly 9% of GDP (and another 11% for social security), the supranational EU level in Brussel represents a ridiculously low 1% – having been reduced from 1.2% at the end of the banking crisis to just 1% currently.

Many politicians in Germany justify this on the basis of the principle of subsidiarity. However, it is a totally inadequate view to say that whatever the national policy layer can do as well as the supranational policy layer should remain at the national level. This is mainly an excuse not to shift the main parts of military expenditure, infrastructure expenditure and part of the unemployment insurance payments to Brussels and the current situation has the drastic consequence that voters indicate, for example in interviews with the German research group Forschungsgruppe Wahlen, that they have no idea what exactly the EU stands for in terms of competences and expenditures – by contrast, voters in Germany have a clear idea about the relevant topics at local, regional or national elections. At supranational elections, voters facing the low level of government activity in Brussels have no idea about key topics and thus declare that they are quite willing to cast an emotional vote and this even in the context of supporting small radical parties.

This same stupid political logic applies in the UK, France and in many other countries, so that European elections – with ever falling voter turnout (with an exception in 2014 that might not be of long term significance) have become a breeding ground for radical parties. The parties get money from Brussels for every vote received in the ballot box at the European Elections and so the small radical parties can use success at elections for the European Parliament to invest the money received from the EU on the next election campaign at the national level. Rarely has the modern world witnessed such political ineptitude as has continued now for so many years and could ultimately contribute to destroying the European Union from within: Through more anti-EU parties and political programs at the national level in EU member countries and through an outright anti-EU majority in a future EU Parliament. Moreover, the European Commission, with its dual role as an institution which plays both an executive role plus the role of a quasi-parliament with the right to initiate laws for the European Union, is a violation of the basic principles of a division of power in a modern democracy (the only country that finds this strange so far is the US whose government will have problems in the proposed Transatlantic Trade and Investment Partnership TTIP to engage in regulatory cooperation with the EU and the European Commision with its double nature as just described).

Given the inherent contradictions of Merkel’s immigration policy and the massive contradictions of European elections, it is only a question of time until Germany’s political and economic stability will seriously be endangered – unless major reforms are implemented in a timely fashion. One cannot rule out that within less than a decade autocratic and populist right-wing parties will dominate continental Europe and that the EU will disintegrate.

Even the fact that a leader of such a right-wing party as the Front National in France talks absolute nonsense in key political fields will obviously not undermine the political support for the Front National: In an interview with DER SPIEGEL in 2014 she called for France to once again become the leader of the Bloc-free Movement (a group of non-aligned countries which emphasized during the Cold War that neither a close cooperation with the US nor with the Soviet Union was their strategic interest); the fact of the matter is that not only was France not the leader of this bloc, it was never even a member country of the Bloc-free Movement – this is a typical example of the way right-wing populist party leaders seem to confuse reality and fiction in a very dangerous manner.

 

Complex Situation after the End of the Cold War

While the West won the Cold War and has enjoyed a feeling a certain level of triumph in many capitals, the sad truth is that the collapse of the East-West conflict has brought about a massive revival of religious radicalism and some elements of a clash of civilizations. The Islamist revival partly dates back to 1979 when the Ayatollah Khomeni replaced the Shah in Iran and organized an aggressive Shiite political and religious movement. In that very year the Great Mosque of Mecca in Saudi Arabia was attacked by hundreds of Islamic radicals and the militiary intervention of Saudi Arabia was at first a complete disaster. It was only with the help of French military experts that the government’s troops were able to reconquer the Great Mosque. Since then, Saudi Arabia has partly cooperated with the West and it has also made some progress in political modernization (for example in 2015 for the first time women were allow to vote and to be elected – at local elections), however, the country is also an aggressive counterpart of Iran.

Iraq is the victim of the ill-conceived US-UK military intevention and war against the dictator Saddam Hussein; with the collapse of stability in Iraq and Syria – the latter in the context of the Arab Spring and various interventions from abroad in support of various sides – the so-called Islamic State has spread and it is not just an informal network but indeed has quasi-governmental structures and vast amounts of money and funding, respectively.

Western countries and Arab allies should be able to fight IS successfully, provided that Russia is integrated in an adequate strategy. This in turn is quite important in reducing the number of refugees coming to the EU and Germany, respectively. However, one should not underestimate that the recent massive refugee wave is the first in the internet age and sustained migratory pressure could still be large even after a successful fight against IS. Germany and the EU will have to face the challenge of stabilizing Greece – an economic and political disaster which undermines the ability of the EU to control its external borders. Taking a closer look at the European Union it seems that the EU is rather weak, poor in delivering promises – hence not very credible – and lacking any consistent leadership from Germany and France. The EU has promised that 120,000 refugees would be reallocated within the EU as part of burden sharing, after more than six months less than 200 refugees have been reallocated to other EU countries.

In the period from 2008-2015, the EU economic growth gap vis-à-vis the US is 10%; for every citizen in the euro area this amounts to €3,000. The EU could be much stronger and it might indeed be a powerful “country” in the future. If EU member countries do not adopt reforms however, the EU will disintegrated – and become a very bad role model for many regional integration groups around the globe.

Germany is a key player in this critical situation but it is as yet quite unclear whether leadership from Berlin will be strong in the near future. Problems could be solved, but realism and the developing of a consistent concept is urgently required. The Grand Coalition is largely a failure, there is a lack of a strong opposition and the fact that no liberal party is represented in the German Parliament is also a very serious problem (the former liberal coalition partner in many former German governments, the FDP, lost most of its credibility in the context of the banking crisis for which they bear part responsibility by naively calling for a sweeping liberalization of the financial markets and allowing big banks to effectively live outside the rules of a true market economy – whether the new leaders of the liberal party in Germany have any understanding of what went wrong is unclear).

The Federal Republic of Germany, along with France, has for decades been a stable economic and political anchor in Europe. The latter has lost this role due to its serious economic problems; and Germany could itself, within a few years, face very serious instability in political and economic terms. One can only wonder why the US has left key EU countries make so many political mistakes in past years. The NATO that has served Western countries well – and prevented war between Greece and Turkey in the 1970s – will face a massive weakening if both Germany and France should fall into a sitution of instability and stagnation. The civil war in Syria is a dangerous situation that has not only contributed to expansion of the so-called Islamic State, it also has become the field of military intervention of several Nato countries plus Russia and this is conflict-prone in itself. Ending the war in Syria should be high on the agenda of the EU, but the ability of EU countries and the EU, respectively, to achieve a diplomatic solution for this very complex conflict obviously is limited.

Should the wave of refugees to the EU continue at the same level in 2016/2017 both Greece and Germany could be massively destabilized, and disintegration of the EU might start. The new government in Poland with its strange policy – removing the EU flag from the press room was a first initiative of the government – is setting the tone of a new nationalist policy and the conservate British government is not much better. The price of disintegration would be high: not only losing benefits from free trade and capital flows and labor migration, but military expenditures relative to GDP could return from 2% of GDP (or even less as in the case of Germany) to the level of 4% in big countries – the historical norm before World War I. The contradictions in the EU are big, and all this disunion becomes visible in a situation in which China and Asia, respectively, has been increasing its power over decades. The traditional ambition of the EU to shape the rules of globalization in the interest of the Community and its member countries looks increasingly illusory in a situation in which the EU cannot even shape Europe. All this happens in a situation in which immigration pressure from Africa is rising continuously. There the population of 1 billion in 2010 is expected to rise to 2.5 billion in 2050 – this could be the next field for which the EU has no concept. In the internet age information on migration routes and international income differentials are spreading at lightening speed. Slow policymakers so far are not up to the new challenges.

The refugee crisis of 2015 has been a wakeup call for many reasons: There is all the more need to develop a new concept in Germany and in the EU and to adopt diplomatic initiatives – which include Russia – to end the war in Syria quickly and to start reconcilation and rebuilding the country. Refugees in Germany and the EU should get continued support from European citizens, at the same time Germany and the EU are facing major political challenges for urgent reforms.

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Allgemein, Economics, European integration

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris, Research Fellow, IZA, Bonn, Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington D.C.             welfens@eiiw.uni-wuppertal.de

2015 = 20 years EIIW/award-winning research in Economics and Economic Policy

01/01/2016 (AntiOilPriceShockEIIWWelfens2016)

 

Oil price reduction is permanent * Major implications for OECD countries, China and India: economic expansion, low inflation, higher output and employment growth plus lower deficit-GDP ratios; * OPEC countries plus Russia and Brazil to face major new problems in the context of low oil prices; * Adjust investment policy in line with economic logic explained

 

Anti-Oil Price Shock Sustained

The 1970s witnessed two drastic oil price shocks which caused major recessions and rising inflation rates, plus higher unemployment rates as well as high deficit-GDP ratios in OECD countries. The massive fall of oil prices in 2014/2015 – by about 60% – is viewed by many observers as a transitory oil price decline. However, while some rebound effect is likely the general perception is wrong: Since 2014, there has been a massive regime switch in global oil markets and oil prices should be expected to remain low and to even decline further, to below $30 in the medium term; and it will be quite interesting to analyze the European and global effects the “anti-oil” price shock of 2014/2015 will have. The standard wisdom, maintaining that oil prices will quickly return to circa $80-100, is nonsense and therefore the implication that inflation rates could soon rise considerably is also nonsense.

The regime switch of 2014/2015 is not really well understood and the International Energy Agency is just one of the traditional forecasters who misread the international energy price dynamics. Firstly, 2014 was the first year in which investments in renewable energy in the world economy exceeded those in fossil fuel resources. This tendency should be expected to be reinforced over time and this will contribute to cutting the global oil demand substantially. The global oil and gas demand is, of course, driven by global economic growth, at the same time one should not overlook the massive technological progress in electricity grids – the development of smart grids that merge digital communication with modern electricity in a way that allows major efficiency gains leading to reduced electricity demand during the year is also a crucial element to be considered in energy markets. Moreover, the well-known progress achieved through fracking technology in oil and gas production is the second important technology factor which helps reducing the price dynamics in oil markets.

It is true that there is no symmetry between the oil price shocks of the 1970s and the anti-oil price shock of 2014/2015, as the energy intensity of production of OECD countries in 2014 was hardly half of what it had been in 1974. However, it is still clear that OECD countries, along with China and India, will benefit from the anti-oil price shock in the form of higher employment and output as well as lower inflation rates and smaller deficit-GDP ratios. The output increase in OECD countries in 2016-2020 could be around 2-3% which implies a net increase of global output if one factors in the negative output effects in OPEC countries plus Russia and Brazil – about 5-10% in the same period. Indeed, the OPEC countries, along with Russia and Brazil, are bound to suffer in the form of high exchange rate depreciation rates, rising inflation rates and higher unemployment rates, higher deficit-GDP ratios and possibly also from social and political unrest. Saudi Arabia already recorded a 15% deficit-GDP ratio in 2015 that caused government to cut subsidies for water supply, electricity prices and gas prices at the pump – moreover, they have engaged in privatizations and imposed higher excise taxes as a means to control the deficit. The sustained fall of oil prices will not only destabilize Arab oil-rich countries, but also negatively affect Venezuela and Iran whose budgets had been designed with an obvious overconfidence in stable high oil prices. Political unrest in these countries could potentially be a major problem for the future, and possibly result in new waves of refugee as well. As regards Russia, it is likely that the Russian government might want to adopt a less aggressive policy stance in the wake of low oil prices, however, President Putin might seek out foreign policy “adventures” to compensate for declining popularity in an environment of massive devaluation, recession and rising domestic prices.

The switch to a higher share of renewables in energy generation is a global one, not only because of climate policy concerns but also because the economies of scale in solar energy and wind energy generation have been considerable, and will continue to play a major role. It is not only OECD countries plus China and India which will reinforce the role of renewable energy, rather there are two additional countries with massive benefits to be expected; namely Chile and Argentina – the sustained strong winds of the southern Patagonia region could in the long run allow to produce electricity for the whole of Latin America, once massive investment in grids have been undertaken. The decline of oil prices, however, also implies a new potential problem for measures aimed at combatting climate change as low prices discourage consumers from buying more fuel-efficient cars. In this regard, policymakers should reinforce the tendency to consume energy in a more sustainable way: Subsidies for electric cars and greater support for electric trucks – with the right lane of modernized highways in the future employing an overhead electrical grid system similar to electric trains. Here massive public investment is needed in Europe, North America and China. By 2030, 90% of all transportation could be with electric vehicles powered up to 60% by electricity from renewable sources so that the majority of transportation is from renewable electricity.

The European Commission would be wise to consider such new mobility policies and here Europe could team up with China and the USA such that ambitious innovation and modernization goals could be achieved quickly and at fairly low cost. Saudi Arabia and other countries which have financed radical Islamic missionaries abroad face new constraints for such activities once the oil and gas prices have remained rather low for a number of years. From a Western perspective this is a welcome side-effect of low oil prices.

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EIIW-vita Sustainability Indicator: A new approach for the Paris Climate and Energy Conference (COP21)

 

Prof. Dr. Paul JJ Welfens, president of European Institute for International Economic Relations (EIIW) at the University of Wuppertal (www.eiiw.eu), Non-resident Senior Research Fellow at AICGS/Johns Hopkins University; IZA Research Fellow, Bonn. Alfred Grosser Professorship 2007/08, Sciences Po (www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

2015 = 20 years of EIIW; two decades of excellence in research

 

December 12, 2015 (new book: Welfens et al. (2015), Towards Global Sustainability, Heidelberg)

 

 

EIIW-vita Sustainability Indicator: A new approach for the Paris Climate and Energy Conference (COP21)

The UN has organized a large climate conference, taking place in Paris during the first half of December 2015 (Nov. 30 to Dec. 11), that should bring a follow up framework for the Kyoto Protocol: Reducing greenhouse gas (GHG) emissions is high on the agenda of the conference which brings together about 150 heads of governments and presidents from all around the world. Germany’s self-imposed goal for cutting GHG emissions amounts to a reduction of emissions by 40% compared to 1990. Until 2050 government wants to achieve a reduction of 80-95% so that an almost climate-neutral economy would be established in Germany. Previously, in 2007, the European Council of the EU had announced the goal of cutting GHG emissions by 20% (compared to 1990) by the year 2020; the reduction would achieve 30% if other countries would come up with similarly ambitious reduction plans. Secondly, the share of renewable energy in total energy consumption is to achieve 20% by 2020. Thirdly, energy efficiency is to be raised considerably – compared to previous forecasts – so that energy consumption should be reduced by 20%. In October 2014 the European Council declared that there will be a continuation of the triple goals established previously. The share of renewable energy in total EU energy consumption is to be raised to 27% by 2030 – the new reference point ahead. Energy efficiency is to be raised further so that there should be a reduction of energy consumption by 27%, compared to 1990. GHG emissions should reduce by 40%. CO2 emission certificate trading is expected to increase. However, this focus is rather narrow and overlooks the need for more environmental innovation and the opportunities associated with a broader Schumpeterian climate policy approach as suggested by the EIIW-vita Sustainability Indicator and related policy suggestions (see the book Welfens et al., 2015). This new composite sustainability indicator has been developed since 2010 (Journal International Economics and Economic Policy) – the financial support of the Vita Foundation, Oberursel, is gratefully acknowledged.

In Paris, countries’ governments are expected to make pledges declaring the aim of major reductions of GHG emissions. The international conference is, however, not emphasizing green innovations and the export of environmentally-friendly products, respectively. This, however, is done by the EIIW-vita Sustainability Indicator which was presented for the first time in the Journal International Economics and Economic Policy. It is a composite indicator that is in line with the OECD methodology for composite indicators. This innovative indicator (Global Sustainability Indicator GSI), which covers 143 countries, has several advantages

  • From a methodological perspective, it can be considered as adequate in economic, ecological and economic policy terms; moreover, it gives adequate signals for investors interested in long term growth prospects plus sustainability. In November/December 2015, Allianz and ING have announced that investment will no longer support companies with a high share of CO2 intensive production in the natural resources sector. The aforementioned insurance company and bank have obviously followed an earlier announcement by the Norwegian national wealth fund. The approach of the EIIW-vita Indicator has three pillars: Renewable energy, the “true” savings rate and international competitiveness in environmentally-friendly exports. The indicator calculates national indicator values for all 143 countries for which data are available (this is equivalent to about 95% of the world economy).
  • The critical pillars of the share of renewables in energy, the true savings rate (based on the World Bank concept) and green export competitiveness – the latter calculated by the EIIW for more than 140 countries, using OECD definitions for environmentally-friendly products – puts the focus on a long term concept for sustainable growth. The green export competitiveness indicator reflects previous and current innovation dynamics in the economy in general and in the field of environmentally-friendly products, respectively. In an enhanced approach, water productivity has also been added. An adequate positive net savings rate – net means that capital depreciations have been taken into account – will allow future generations to enjoy a similar standard of living as the previous generation. Compared to the traditional savings rate in the System of National Accounts, the World Bank concept adds expenditures on human capital formation (relative to GDP) and subtracts the depreciation rate of natural resources as well as damage effects related to both particulate and CO2 emissions. Some OPEC countries, Mexico and Russia have weaker true savings rates than the official savings statistics show. As regards the overall EIIW-vita Sustainability Indicator, Germany has a leading position. China has improved its position considerably during the period between 2005 and 2012, mainly due to an improved position in green export competitiveness (one should, however, not overlook the recurrent problems that China faces in terms of water quality management and air quality standards).
  • The EIIW-vita Sustainability Indicator is the only OECD-methodology compatible sustainability indicator that can be calculated for individual countries and the world economy, respectively. All sub-indicators – pillars – are in the range -1/+1. The situation of the world economy can be assessed on the basis of all national indicators (weighted or unweighted); over time a slight improvement can be found. The indicators (2000-2012) are shown here for Germany and China.

EIIW-vita Global Sustainability Indicator (EIIW-vita-Nachhaltigkeitsindikator), Germany

EIIW-vita Global Sustainability Indicator (EIIW-vita-Nachhaltigkeitsindikator), China

Investors and politicians are very much encouraged to take the EIIW-vita Sustainability Indicator into account. The high export-GDP ratio of certain countries – such as Germany or Switzerland – should be discussed, not only in a macro perspective, but also because the structure is important; successful green specialization implies that the net exporter countries contribute to problem-solving in the field of sustainability abroad. As regards the broader environmental policy approach, it is strange that Denmark’s environmental tax revenue relative to GDP is around 5%, while that of the US is only 0.5% – that of China is about 1.5% in 2015. More joint international green R&D can be recommended. Joint international research projects and innovations are, unfortunately, not on the agenda in Paris.

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Protests Funded by European Commission and Anti-TTIP Movement in Public TV

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

www.eiiw.eu; welfens@eiiw.uni-wuppertal.de

Tel +49 202 4391371    

Anti-TTIP-Background2015welfens (fin)

 

October 11, 2015

* Germany’s main public TV channels with clear hidden anti-TTIP agenda; * major NGOs get massive funding from government, including the EU, so that the Commission is indirectly funding an anti-TTIP wave in Germany and Europe; *the unfair anti-TTIP debate and the role of certain NGOs undermines rational debate in Europe

 

Protests Funded by European Commission and Anti-TTIP Movement in Public TV

The project of a Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA is controversial. Different groups are either pro- or contra-TTIP in Europe and one may expect that an open and fair debate on TTIP should take place, which would, in the end, lead the European Parliament – and possibly also the national parliaments of certain EU member countries – to vote on the final outcome of the TTIP negotiations rounds. The reality, however, is very different and Germany is a key country in which, surprisingly, a small majority of the people are against the EU-US free trade agreement (see PEW survey results). This is remarkable since from an economic perspective Germany, the UK and Ireland are among those countries in the EU which would benefit the most from a TTIP agreement. What is behind the German anti-TTIP puzzle? There is the strange role being played by the public TV channels in Germany and an inconsistency with regard to EU-funding of some major anti-TTIP groups, a fact which is not much known amongst the public: Effectively, the European Commission’s implicit subsidization of many non-governmental organizations – often through project funding – amounts to the Commission itself financially supporting an element of the anti-TTIP demonstration dynamics in Germany and the EU.

Looking a bit closer at the political economy of TTIP reveals two strange und unacceptable developments that help shaping the debate against an EU-USA free trade agreement. A hidden major driver against TTIP is the public TV system in Germany which consists of the public channels ARD and ZDF. Both seem to fear more competition in a future under TTIP and both have become members of the Deutscher Kulturrat: a non-governmental organization whose membership includes groups from the music industry and from the media sector. The Deutscher Kulturrat has exhibited a clear anti-TTIP agenda and has called for people to join the big anti-TTIP demonstration in Berlin in October 2015. Both the ARD and the ZDF are leading TV stations with a dominant joint market position in terms of TV news including in the coverage of TTIP. The latter has, over many years, been characterized by anti-TTIP activists and representatives from anti-TTIP non-governmental organizations receiving an undue amount of airtime in the debate. Both the ARD and ZDF are financed from user fees and payments from almost all private households, respectively, and the statutes of both big TV stations clearly stipulate that the ARD and ZDF should never indulge in the biased coverage of major political topics, rather a broad and balanced coverage of key topics and issues is expected. In the field of TTIP, however, this is not the case. Unnoticed by the public and the political system, both the ARD and the ZDF have a clear anti-TTIP position and it is obvious that influential journalists in both networks have been free to pursue ARD/ZDF interests from an implicit anti-TTIP perspective between 2013 and 2015. This perspective has been typical of almost all discussions on TTIP in ARD/ZDF (the latter including the channel 3sat). It is absolutely unacceptable that ARD and ZDF follow their own hidden anti-TTIP agenda and this holds all the more since both channels often invite anti-TTIP activists from non-governmental organizations as guest contributors which often themselves are not really independent but pursue their own agenda; paradoxically often on the basis of funds from the European Commission.

On October 10th, 2015, there was a big anti-TTIP demonstration in Berlin at which more than 150 000 people protested against the proposed free trade agreement between the EU and the USA. Among the main organizers were several non-governmental organizations (NGO), including the powerful environmental pressure groups NABU and BUND. The latter, in turn, is part of Friends of the Earth of Europe in which one major environmental NGO from each EU country is a member. The following critique is not as such a critical voice against environmental lobbying, but the point being emphasized is that an NGO should – obviously – not have major or even dominant funding from government, since this undermines the independence and credibility of the respective NGO and transparency is needed. A distorted civil society with opaque financing amounts to a distorted democracy.

From a historical perspective, many NGOs have played a crucial role in, for example, supporting the UN in developing countries – without NGOs, the UN would often be unable to achieve its key development goals; and given the lack of direct democratic control, one may also welcome the role of NGOs at the IMF or G7 meetings, since this generates some useful critical voices in many international fields. However, the role of NGOs in the European Union is strange since the European Commission does not really want NGOs to replace the Commission as a policy maker. However, it seems that the European Commission – facing weak and recently further declining legitimacy in Europe – uses hundreds of NGOs to effectively buy scarce legitimacy. Environmentally concerned NGOs obviously play a crucial role here: with Friends of the Earth in Europe receiving more than 50% of its annual funding from the Commission for many years. So, is Friends of the Earth and its network standing for non-government organizations?

The German environmental organization BUND benefits in turn from such EU funding (and it also gets funding from the German government). This then leads to the paradoxical situation that BUND, as an environmental NGO – or a quasi-NGO, i.e. Quango, – gets money from the European Commission and the European taxpayer, respectively, and this funding can, indirectly, be used for reinforcing the presence of BUND in social media and for organizing anti-TTIP campaigns in Berlin and elsewhere. The European Commission pursues a dangerous power game when it tries to buy legitimacy through NGOs instead of reinforcing the European Parliament, but is, in the end, actually financing rising anti-TTIP protests in a situation in which the European Commission is negotiating with the US on TTIP.

From the perspective of economists conducting research on TTIP – almost all finding major benefits for the EU and the US (and sometimes for the world economy as well) – the hidden influence of quasi-non-governmental organizations with their broad anti-TTIP agenda is not acceptable in that large amounts of taxpayers’ money is allocated to such organizations in an opaque way, while the respective NGO continues to claim that it is an independent actor in the overall debate.

As regards the European Commission, the obviously often uncritical and generous funding of many NGOs by the Commission is not politically intelligent and is not politically correct, as in this way the public debate and political competition in the democratic system is distorted in a hidden way: through a massive increase of the political clout and influence of certain NGOs. If one would want to follow Kant’s moral imperative, according to which one should consider as a morally acceptable decision that which could in principle become the basis of a general legislation, it is clear that the strongly privileged government-funding of certain NGOs through government/the EU in Europe is not in line with the eminent philosopher’s fundamental principle. Certainly, NGOs have a crucial role to play in democracy, but the emphasis cannot be on government funding and the “buying” of legitimacy by policymakers which would otherwise not do well in a political competition at the ballot box. The Association of Accredited Public Policy Advocates to the European Union estimates that the EU directly and indirectly allocates about €7.5 billion to NGOs annually, this would represent an enormous 5% share of the overall EU budget. There are many NGOs which receive considerable funding from the European Commission, but to get detailed information on this is quite difficult. More transparency is needed here.

Thilo Bode from the NGO Foodwatch in Germany has, in a popular book against TTIP, written a few hundred pages of claims and arguments against TTIP – and in his introduction he emphasizes that he once studied Economics and wants to highlight critical aspects of TTIP. Instead, Bode shows no familiarity with the scientific economic literature on TTIP and occasionally his text is without any basic logic: For example, he argues that Germany’s highly intensive farming causes an extra ca. €1,500 of annual water treatment costs for a family of four and that these costs would offset the roughly €500 of benefits resulting from TTIP that Bode finds in the Commission’s official TTIP study. This is complete nonsense as the costs of water treatment have nothing to do with TTIP, moreover, Bode obviously did not read Chapter 6 of the Commission study which implies another 0.3% income gain from TTIP in the context of more transatlantic direct investment flows – not to mention the additional benefits of about 1% of GDP identified by EIIW research, namely economic gains from induced transatlantic innovation dynamics. Bode, in his piece in the German newspaper Handelsblatt, has also claimed in 2015 that the low transatlantic tariff rates imply that the benefits from TTIP will be minimal; this is beside the point since TTIP negotiations focus primarily on reducing non-tariff barriers (e.g. standards) which, on average, account for about a 17% tariff equivalent – cutting such high non-tariff barriers considerably would indeed generate major income gains for the EU and the US. Despite not knowing much about the theoretical models relevant for understanding TTIP and International Economics, respectively, Mr. Bode is a leading figure in the German TTIP debate and a popular commentator on anti-TTIP shows on TV. Given his poor understanding of integration economics, he also suggests in his book that experiences from NAFTA integration – with the USA/Canada joining Mexico for a free trade area – naturally deliver relevant insights for the effects of TTIP in Europe and the US. This, however, is wrong as TTIP is an integration between two economies with high per capita income and similar factor endowment, namely, both the USA and the EU are richly endowed with physical capital and skilled labor; by contrast NAFTA stands for a case where the US/Canada have a high per capita income while Mexico – richly endowed with labor – has low per capita income. The anti-TTIP book of Bode raises some interesting points, but the text is chiefly a platform for the airing of prejudices and exhibits lack of any basic understanding of International Economics.

Mr. Gabriel, the Minister of the Economy in Germany, has published a full page of pro-TTIP argument in many German newspapers on October 10th, 2015, but this will not help much if the two leading public TV networks in Germany pursue a hidden anti-TTIP agenda and if NGOs with a strong anti-TTIP approach receive large amounts of funding from the European Commission. TTIP is not only about free and fair trade, it also is about a fair public debate in Europe. Anti-TTIP groups have effectively captured Germany’s two leading TV networks – exploiting the self-interest of their channels – and powerful quasi-NGOs mobilize their media power, including that in the social digital media, to rally against TTIP with taxpayers’ money. This is not in line with the democratic rules and principles of an open society.

The European Parliament should adopt clear rules that NGOs should never receive more than 5% of the respective annual budgets from governmental sources, otherwise they should be classified as government-sponsored private organizations. Funding information in the annual reports of NGOs should, in the future, clearly indicate all financing from government. Leading public TV channels should not be allowed to be pawns of international lobbying groups and if for specific reasons such partisanship is realized, the relevant conflict of interest must clearly be indicated.

If TTIP would fail in Germany and the EU, respectively, because of an unfair anti-TTIP debate this would be a double disaster for Europe and the world economy. The German government and the European Parliament should quickly adopt reforms and new legislation to cope with the very serious problems and distortions pointed out here.

The USA has closed successful TPP (Trans-Pacific Partnership) negotiations with countries in the Pacific area in early October 2015 and Thailand, Korea and Taiwan, as additional Asian countries, have expressed an interest in joining TPP which includes Japan and Australia as key partners. The relative opening-up of the US for many Asian countries implies a disadvantage for firms from Europe as long as TTIP is not adopted.

If TTIP should fail, the EU would not only not realize the major economic benefits and employment gains possible under TTIP, but the European model of a social market economy would become much less influential in the world economy. With a weakening Europe, it would only be a question of time until the EU would be forced to increasingly implement standards from China – not exactly what the large majority of the population in the EU would really want. TTIP is not a box of Christmas presents, rather it will hopefully be a solid compromise which brings benefits to both the EU and the US; and a joint transatlantic political initiative which should help to minimize the negative market access problems for firms from the South in the context of TTIP would indeed be desirable, namely as an element which makes TTIP a Win-Win-Win situation.

 

 

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Volkswagen’s Emission Cheating is Part of a Greater Problem of Globalized Capitalism

Volkswagen Emission Scandal, Economic Globalization

Prof. Dr. Paul JJ Welfens, Präsident des Europäischen Instituts für internationale Wirtschaftsbeziehungen (EIIW) an der Bergischen Universität Wuppertal; Non-resident Senior Research Fellow at AICGS/Johns Hopkins University; IZA Research Fellow, Bonn. Alfred Grosser Professorship 2007/08, Sciences Po (www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

2015 = 20 Jahre EIIW/preisgekrönte Analysen, weltweite Vernetzung,

 

VW2015scandalENG

September 30, 2015

 

VW’s emission test cheating in the US is a serious problem for Germany’s largest car manufacturer, for the German economy and for transatlantic economic relations as a whole. When Volkswagen admitted on September 21 that it had cheated with its diesel engine emission data in the US vis-à-vis the US Environmental Protection Agency, not only did the stock market price decline within one day by almost 20% – that is about € 14 bill. – but on September 22; VW further declared that it would put aside reserves of € 6.5 bill. in 2015 for the expected costs of the cheating affair in the US; this is partly reflecting the high penalty payments of VW USA to the Environmental Protection Agency (EPA), which could eventually reach a figure of $ 18 bill. On top of this, punitive damage payments have to be expected in the US. The manipulation of emission software relating to millions of VW diesel engines by Volkswagen is a blow to the reputation of Europe’s largest car producers and it implies that VW was using emission measurement fraud which has, in effect, raised the price of VW cars through incorrect information on the emission performance of VW diesel cars. The overstatement on the side of Volkswagen was large and certainly stands for a deliberate misleading of the US EPA and consumers as well as investors.

The emission test cheating of Volkswagen is a serious challenge and raises the more general issue of manager’s behaviour in large international companies whose organizational structure is very complex. The remuneration of the VW CEO Mr. Winterkorn was about € 15 mill. per year and in September 2015 he resigned his position as head of the company. The loss of value of the VW company and VW stocks, respectively, was about € 30 bill. € in September 2015 which is about 1/3rd of the company value immediately before the emission cheating – involving about 11 million VW diesel engines worldwide – was revealed. Since the CEO of VW did not know about the emission cheating through manipulated software, it is clear that Volkswagen has a governance problem, at the same time one may ask why this has happened at Germany’s biggest company: Too big to report numbers correctly?

In the US there had been manipulation of financial data in the 1990s in ENRON, Worldcom and several other companies. As a consequence, the US has adopted the Sarbanes-Oxley Act in 2002 which stands for new legislation that imposes greater liability on the CEO and the chief financial officer with respect to correct financial reporting and solid balance sheets. In the spirit of Sarbanes-Oxley, which applies to all companies quoted on the US stock market, one may suggest a similar law for big companies’ emission statements: Both with respect to the emissions from production and for the emission of the products sold. The CEO and the chief technology/innovation manager should bear a special responsibility for special statements on the reliability of emission figures – this would be an additional item of information to be attached to the annual balance sheet. Germany’s parliament and government, respectively, should quickly adopt such a system and other major producer countries of cars as well. Indeed, all countries with considerable industrial production should adopt similar legislation; thus increasing pressure on companies to really come up with better governance and much more reliable emission statements. Legislation should also impose a requirement that retired CEOs will lose part their respective pension if a false declaration of emissions is found by government authorities. It would be wise if the EU would adopt a framework directive in this field. Cheating on emission figures by industrial and other firms is unacceptable.

Economic globalization brings about bigger and often also more integrated markets; competition is enhanced in some sectors. It seems that very large banks and companies often have poor governance – at least if one is to judge by the Transatlantic Banking Crisis and the very many cases of some bankers’ tricks and the VW crisis, respectively. The international economic welfare gain from economic globalization will remain rather limited if effective and efficient governance cannot be achieved. The European Commission should thus come up with a new initiative in this field. Subsidization of diesel cars should be reduced strongly as effective diesel emissions are much higher than notional emission levels in Europe – this seems to hold not only for Volkswagen but for some other EU car producers as well.

 

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Allgemein

New Greek Coalition Government with Brinkmanship and Lack of Reforms

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202

4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris,

Research Fellow, IZA, Bonn, Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC; welfens@eiiw.uni-wuppertal.de , www.eiiw.eu

EIIW 2015 = 20 years of award-winning research

Welfens has testified before the US Senate, the German Parliament, the European Parliament, the IMF etc

           

February 11, 2015

                                                                                                                                            prEgreece2015febWelfens(e)

  • Election in Greece brings serious new challenges
  • Seeking a growth-enhancing compromise with new Greek government
  • Issues of Euro-Marshall plan for Greece
  • Growth-enhancing tax reform needed
  • Greek finance minister Varoufakis with irresponsible attitude towards Euro

 

New Greek Coalition Government with Brinkmanship and Lack of Reforms

The new Greek government has announced that it wants a new haircut on Greek debt, to rehire public sector workers and to raise the minimum wage. This economic policy program is inconsistent since it is neither realistic nor addresses the key challenges facing Greece. The government in Athens could easily reduce the debt-GDP ratio by means of a broad privatization of the real estate owned by government – estimates of the value of this real estate range from € 200-300 bill. (exceeding the GDP of Greece in 2014).

The OECD country report on Greece for 2013 has pointed out that the government revenue from value-added taxation is 6 percentage points lower than in other comparable OECD countries; from this perspective a decrease of the average income tax rate might be useful, namely as an impulse for raising output and closing the output gap – the Greek central has pointed out that VAT efficiency is reduced by 0.4% for each point of output reduction. Hence a growth-enhancing tax reform, including measures to better implement value-added taxation, would be advisable. According to the European Commission (2014, DG 2 Paper) the export-GDP ratio of Greece is only half of that which one would expect for a country with the economic characteristics and size of Greece; the previous Greek government had adopted inadequate reforms for promoting exports and creating new companies, but it is as yet unclear whether or not the new coalition of the left-wing Syriza and the right-wing ANEL will implement a better reform program for export promotion. The creation of special economic zones, public investment in information and communication technology – important for productivity and export growth – and facilitating export financing could be crucial elements. However, in early February, 2015, the ECB informed Athens that Greek government bonds are no longer accepted as collateral by the ECB and henceforth shaky Greek banks will have to rely on national emergency liquidity assistance; this is a rather expensive liquidity channel and will further undermine export financing of Greek firms.

While the strange new coalition government of Greece rightly points out that five consecutive years of recession have been an economic disaster for the country and that millions of Greek people were without health insurance coverage in 2014, it also is obvious that the new government has not found an adequate way of negotiating with its partners in the Eurozone and the EU, respectively. One cannot rule out the possibility that in the end Greece will face a sudden case of bankruptcy – whether or not it would like to leave the Eurozone is unclear. Greece runs the risk that inadequate government policies are undermining the expected growth acceleration in the medium term.

The European Commission and EU partner countries might envisage supporting growth in Greece with a further prolongation of loan maturities, however, this will not be achieved without a more cooperative policy stance on the side of the new Greek coalition government. One might want to consider the creation of an international Greek Reform Foundation by OECD countries, a joint initiative spearheaded by France, the UK and Germany could be a starting point for such a foundation that would put a particular focus on reducing youth unemployment rates and helping to finance new start-ups in Greece. The Greek government should encourage the more intensive use of internet-based matching tools for the creation of new jobs and the reduction of unemployment rates, respectively. Countries such as Greece, Portugal and Italy are surprisingly weak in terms of the population using the internet to find a new job – at least when compared to leading OECD countries such as Canada, the US and Sweden. Government should assign a high priority to encouraging more domestic investment and more foreign direct investment inflows. Moreover, government should quickly implement best practices in the national health system; this should include a broader reliance on cheaper pharmaceuticals, namely me-too products. The share of such medical drug prescription in Germany in 2012 was much higher than in Greece.

In 2015/2016 the Greek banking system is likely to face a bank run since the contradictory government policy of the new government will undermine the confidence of private households. It is true, however, that Greeks have, since late 2014, already started to withdraw a large amount of cash from banks. One may point out that it is no surprise that wealthy Greeks, facing a situation with a government composed of extremist parties, want to shift financial wealth abroad – running down bank deposits is likely to seriously destabilize the Greek banking system within a few months.

The new Greek Finance Minister, Mr. Yanis Varoufakis, expressed in an interview with RAI (Italy) that the Eurozone is likely to collapse like a house of cards once Greece should leave the euro: capital markets would ask which country would leave next, e.g. Portugal. This type of thinking is anti-European, irresponsible and unrealistic; it cannot be accepted that Greece try to take Portugal as a political hostage in its attempt to obtain another haircut. Mr. Varoufakis’ talk will cause political sympathy for Greece to reduce. If the Greek Finance Minister continues his irresponsible rhetoric, Greece might leave the Eurozone faster than Mr. Varoufakis was thinking in even a hypothecial scenario. The European Commission should point out to Greece that leaving the Eurozone could have the result that the country will also have to leave the European Union.

Looking at the government’s program one can only have doubts about the economic wisdom behind the new approach; much higher minimum wages are not coupled with any minimum skill upgrading requirements, the incentive effects of the promise to give free electricity and free tickets for local transportation for the unemployed are strange – the number of unemployed is likely to rise. The new coalition government’s strange economic policy approach gives signals which lead to many Greek people withdrawing money from Greek banks and are likely to mean that not many foreign investors will be left; facing an imminent bank run, Greece will soon have to impose capital controls and then no further capital inflows can be expected. Greece will be forced to reduce its imports of goods and services down to the level of its exports of goods and services. 2015 is likely to witness a new recession in Greece – the Tsipras government is about to destroy the economic growth which had resumed in Greece in 2014.

The new Greek coalition government is engaging in brinkmanship by not implementing adequate reform policies. The Greek government under Prime Minister Tsipras is trying to encourage radical political forces in Spain and Portugal to adopt similar policy concepts as in Greece and to also push for a haircut on debt. However, this is not what a majority of voters in Spain and Portugal are likely to wish for. Economic growth has returned to these two countries in 2014/15 and the combination of low oil prices, the ECB’s quantitative easing policy and the European Commission’s expansionary fiscal policy program under President Juncker could stimulate economic growth in the Eurozone considerably in the medium term. However, if the Greek government should contribute to a new economic recession in Greece, not only will there be further destabilization of Greece itself but EU integration could also face serious problems. The fact that a small open economy such as Greece is able to potentially undermine the stability of the whole Eurozone shows how important steps towards a Euro Political Union really are. The faster Germany and other EU countries push this topic, the better the prospects for a rational institutional economic reform are.

If the Greek government is more cooperative and willing to implement a broader supply-oriented reform package, then the EU should consider establishing a European Marshall Plan program for Greece to the tune of € 20-40 billion (Hans-Werner Sinn from Ifo, Munich, has argued that Greece already has received more than the equivalent of 100 Marshall Plan benefits of Germany, however, this is not true as has been pointed out by Albrecht Ritschl from the London School of Economics in the Economist in 2012). Measures for enhancing economic growth will also be crucial and here new policy initiatives from the European Commission – with a strong focus on raising public investment – could be useful as complementary elements for stimulating growth in Greece and other EU countries in the region. Confidence is a scarce resource in the Greek reform process; in Athens some progress had already been achieved by the end of 2014 and one can only hope that the new coalition government will adopt a consistent policy approach.

The possibility of Grexit – Greece leaving the Eurozone – cannot be excluded, although it is quite doubtful that Greece stands to win much from such a step; indeed, Grexit would be a total disaster if Greece would also be forced to leave the European Union – from which it receives more than 1% of GDP in transfers annually.

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