Allgemein, Economics, European integration

International Spillover of EU Disintegration

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 (EIIW), 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; EIIW 2015= 20 years of award-winning economic research ,

EUcrisis2016springEIIWwelfens, February 18, 2016


International Spillover of EU Disintegration

The Western European message of the 1960s, 1970s, 1980s and 1990s was fairly clear: More regional economic integration and the building of joint institutions is good for the European Union and could serve as a model for other regions in the world economy that are interested in higher economic growth and more politico-economic stability. The ASEAN countries in Asia, the Mercosur countries in South America and many other regional integration schemes were interested in EU integration dynamics: A typical question raised at many international economic conferences was about what one could learn from Europe, and in several Asian countries leading universities offered master programs in “European Studies” which attracted many brilliant applicants from which the respective university could choose the best students. Since 2013/2014/2015 the situation has changed considerably: a much lower number of applications and students in this field clearly indicates that the attractiveness of EU integration dynamics has started to lose much of its previous shine.

The EU in 2008-2015 has indeed exhibited large inconsistencies and experienced policy pitfalls – its previous integration dynamics have been lost and it looks increasingly weak; it could even be on the way towards disintegration. What were the key problems in the EU?

  • When the Transatlantic Banking Crisis emerged it took the European Parliament and national parliaments in major EU countries many years to sort out the problems and respond with major reforms – these reforms were so much slower in coming and so much weaker in practice than in the US that the delayed and lacking reaction explains much of the 10% growth gap vis-à-vis the US in 2008-2015: standing for an income gap of € 3000 per capita in the euro zone and the EU, respectively.
  • When the Transatlantic Banking Crisis fully erupted in mid-September 2008 – with the collapse of the US investment bank Lehman Brothers – it was immediately clear that the international risk appetite of investors would dramatically shrink and that the first victims of this regime shift would be countries with high debt-GDP ratios and high deficit-GDP ratios and/or high foreign indebtedness. So this author wrote at the end of October, in the manuscript of a book on the banking crisis, about a scenario in which Greece, Spain and Italy could face a major refinancing crisis for sovereign debt (at that time I was not aware of the incredible problems in Ireland, i.e. the total absence of any serious prudential supervision and massive corruption, so that my book Transatlantische Bankenkrise/Transatlantic Banking Crisis had a small blind spot in terms of the description of the upcoming crisis in Europe).
  • Under the weight of the banking crisis, the EU member countries decided – largely following British pressure – that the EU’s government expenditures should be cut in a period of tightening budget constraints: from 1.24% of GDP to 1%, which is absolutely the wrong decision. While the US, a top political player, spends about 9% on federal government expenditures relative to GDP and another 11% on federal social security expenditures, the EU stands for almost nothing. This implies that the EU fiscal policy is largely inefficient and the IMF has argued that a 1% GDP reduction – a standard shock to the economy – will reduce the EU’s consumption-GDP ratio by roughly three times as much as in the US. Part of this bad result is due to the homeopathic expenditure-GDP ratio in Brussels. Infrastructure expenditures and military expenditures plus short-term unemployment benefits should be financed via Brussels, in doing so the overall tax rate in the EU should reduce by about 1%. Political competition in the European elections would increase massively if the economic and political role of the EU could be reinforced: More intensive political competition – with a stronger European Parliament (and the Commission no longer playing a twin role as both legislative and executive body) – would reinforce the efficiency of the EU and the EU’s spending of taxpayers’ money. The role of radical small populist parties would be strongly reduced and this would bring more stability for Europe.
  • As regards monetary union and the creation of a single EU currency, there is a lack of consistent rules and in this perspective there is the problem of a missing political union. The Eurozone could have major benefits – more than 0.5% of GDP – if the euro remains a strong international reserve currency. The enormous privilege of being a reserve currency is an important benefit of the dollar and the euro. If the euro countries are not willing to establish a political union, the Eurozone will disintegrate.
  • If the EU or the Eurozone should disintegrate, there will be strong economic disadvantages and in Europe military expenditures relative to GDP would rise from about 1.5% of GDP to about 4% – as in the decade before World War I. The risk for economic and political stability and peace would be enormous. Other regional integration schemes in the world economy also could become rather unstable.
  • The problems in the EU, and in Germany and France etc., could certainly be solved, but the current policy of merely muddling-through is poor – better concepts and more professional economic policy are urgently needed. If the EU should disintegrate, this would stimulate the disintegration of regional integration clubs worldwide and thus contribute to international economic instability.

The EU has only a few short years remaining to sort out its problems. So far, the German government – under Chancellor Merkel – has not given many impulses for a strong Europe, rather the poor political management of the refugee wave of 2015 and the euro crisis have served only to destabilize the EU further. The TTIP project (EU-US regional economic integration) offers new prospects for higher economic growth, but again the political management in the EU is rather weak. In a period in which the US political attention increasingly is focusing on Asia – this reduces the relative weight of EU-US economic cooperation – a successful TTIP project would be a crucial for element for better EU-US cooperation.

On the latest EIIW research paper 212 (on TTIP) see



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

(    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?
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.   

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.

European integration

Greek Economic Disaster Is Expected While Remedies Are Obvious

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 (EIIW) 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; ,                               (file GreeceEIIWwelfens2015June)

Welfens has testified before the US Senate, the German Parliament, the European Parliament, the IMF etc; Internationally, Welfens is one of Germany’s most published economists; he also is the Managing Co-editor of the Journal International Economics and Economic Policy.

For more information on the 20-years EIIW Conference in the Allianz Forum, Berlin (June 25, 2015), with US ambassador John B. Emerson, the head of the German Trade Union Federation, Reiner Hoffmann, and many other distinguished speakers, see:

Klicke, um auf EIIW2015JuniWorkshopBerlinTTIP.pdf zuzugreifen



June 28, 2015




Greek Economic Disaster Is Expected While Remedies Are Obvious

Odysseus became famous for his courage, he faced several crucial challenges and he passed all tests with bravery and cleverness. By contrast, although the new Greek coalition government under Tsipras makes a lot of heroic gestures, however, after six months in power, it has achieved no reform progress and has destroyed the incipient growth that had emerged in late 2014. Greece under his leadership has switched towards complete self-isolation within the European Community – except for the government of Cyprus. Tsipras’ sudden call for a referendum on the night of June 26 is a signal of his inability to assume the responsibility of leadership and to announce that the government in Athens will recommend that the people not accept the proposals of the euro partner countries is like an outright announcement that the Greek government does not want to cooperate. There is no doubt that the policies of the Euro leader countries, including Germany and France, were also not particularly convincing in the five years of crisis management in the period 2010-2014. Germany’s own historical experience in the early 1930s has shown that three years of consecutive economic decline – with cumulated output loss of 16% – were sufficient to topple the democratic system and usher a negative extremist political majority into parliament. Nobody in the Merkel government should have been surprised that five years of consecutive recession in Greece – with cumulated output loss of 25% – would be more than sufficient to kill the old political system. Economic historians in German universities these days have become somewhat of a rarity and within the German government relevant knowledge has apparently not been considered.

Looking at the Euro zone from the perspective of New York or Beijing, makes the EU look weak. However, this is only a partial perspective. Greece will most likely go bankrupt and then cleaning up the mess in this small open economy will finally have to start under rather dramatic circumstances. However, with the exception of Greece, the Eurozone is characterized by economic recovery and declining medium term debt-GDP ratios. Disregarding Greece, the remaining euro countries’ ministers of finance have made clear with their decision of June 27 that they will no longer allow that Greece ignores all rules of political fair play in the Community. Greece is likely to face bankruptcy and negotiations over its debt vis-à-vis the euro countries and some other countries. In the Paris Club, which is a small institution in the French Ministry of Finance, practically the same countries will sit at the table as were meeting in Brussels on June 27; whether or not the addition of the US, Canada, UK, Japan and Russia will make a difference remains to be seen. However, an IMF program will also be required by the members of the Paris Club.

The Tsipras government has not adopted any major reforms in six months of being in office, the big left wing party SYRIZA and its smaller right-wing populist partner have not even concluded negotiations on some policy platforms. Their only goal was to obtain another haircut on government debt. This, however, is not enough. This stands for cowardliness in economic policy-making, as one can see from a comparison with the eastern European countries in the early 1990s when they faced enormous problems in the course of systemic transformation. At least in that instance all kinds of privatizations were adopted, while previous Greek governments and the new government have achieved the incredible results of privatizing only about 1% of the enormous government assets, which were estimated in an IMF report as being worth more than € 300 bill. in December 2010 – more than government debt. The EBRD in London, having experience with privatization, competition policy and restarting banking systems in 29 post-socialist countries, could have helped Greece, however, it took until early 2015 that the EBRD and the Greek government finally came together.

Tsipras has complained that the Troika institutions – IMF, European Central Bank and European Commission – were trying to humiliate Greece and in some form Athens has tried to portray itself with moral political superiority. However, this claim was shattered after the Tsipras government, in its urgent looking for a conservative candidate for the election of a new president in early 2015, decided to recommend to the Parliament to come up with a Committee which would scrutinize the reasons for the Greek economic disaster in the period 2010-2014: the election year of 2009, when the conservative Greek government laid the foundations for the Greek debt disaster, was ignored: In 2009 the ruling conservative government had signaled to the European Commission that the deficit-GDP ratio would be around 5%, while in reality it was 15.6% – which is five times the maximum limit under the Maastricht Treaty in the euro area. The strange time frame foreseen to be examined by the Greek Parliament is like a policy inquiry in the case of a bank that was robbed and lost all its cash but the inquiry starts investigating from one day after the robbery – ridiculous. It shows that the claim of moral superiority of the Tsipras government is unfounded.

The EU and the euro zone, respectively, have made economic progress in overcoming the banking crisis and the euro crisis as well. Greece remains a special case and might cost the German taxpayer 2% of a year’s GDP, but fortunately, Greece is a rather small country – and it might even remain in the euro zone. The EU cannot allow political chaos to emerge in Greece in the present situation, as from the Ukraine to Turkey and the Arab countries, there is already all kind of political unrest and military conflicts, respectively, which will contribute to rising numbers of refuges migrating towards western. The output of Greece, having already fallen back into recession in early 2015 under the Tsipras government, is likely to fall by at least five percent within a year and huge emigration waves can be anticipated. Bulgaria and Romania could face some destabilization. What is clear in the end is that Greece has an irresponsible government with many egocentric politicians and no willingness to adopt major economic reforms. The euro finance ministers’ decision not to give in to the brinkmanship strategy of Greece is adequate since people in Ireland, Spain and Portugal were already asking why they had incurred all the adjustment costs during past years – would holding out like Greece and non-cooperation with the euro partners not have been the better course of action? Finally, it is also clear that the euro area needs better governance and indeed a political union. As regards Greece, the biggest deficit is the lack of credible government institutions: without a new constitution, Greece is unlikely to have a lasting economic recovery since without clear responsibilities and a more efficient government, investment of domestic and foreign investors within Greece will remain very low.