Allgemein, Economics, European integration, International Market Dynamics, New Political Economy

After the BREXIT referendum: Europe seeking a new orientation?

EUROPÄISCHES INSTITUT FÜR INTERNATIONALE WIRTSCHAFTSBEZIEHUNGEN (EIIW)              www.eiiw.eu

European Institute for International Economic Relations

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

EIIW, Rainer Grünter Str. 21, D 42119 Wuppertal, Germany

Prof. Dr. Paul J.J. Welfens © welfens@eiiw.uni-wuppertal.de

 

 

After the BREXIT referendum: Europe seeking a new orientation?

The BREXIT referendum has witnessed narrow opinion poll results in the months prior to June 23rd – with the implied probability of a vote for leaving from betting firms lying below 45% a week before the referendum. The survey results have the weakness of having been confined to the UK so that the about 1.2 million British citizens living in other EU countries – obviously mostly in favor of remaining in the EU – are not included. The leave-position was thus overstated in the survey results of the UK. It should also be noted that a critical weight is assigned to the roughly 400 000 Irish residents in the UK that are eligible for voting in the BREXIT referendum. The tragic attack against Labour MP Mrs. Jo Cox is likely to finally tip the referendum for a No BREXIT majority.

As regards the result of the BREXIT referendum – the second EU referendum in the UK (the first was in 1975: 2/3 majority in favor of EU membership) – it will have a decisive impact on the UK and indeed the EU integration process. If the UK should leave the EU, the British economy will face massive depreciation of the pound and possibly a recession while the European Union would lose a heavyweight liberal member country which accounts for 18% of the EU’s gross domestic product, 12% of trade and 13% of the EU population. As the theory of regional economic integration shows, both country I and country II will benefit – in a two-country model; if now instead an existing regional integration club, namely the EU, is losing a key member, there will be economic welfare losses and transitorily or permanently lower output growth in the UK and in the EU27; by implication there will be a nominal and real depreciation of both the British Pound and the Euro (and other currencies of continental EU members which are not in the Euro area).

Secondly, major current international negotiations of the EU would face serious problems. For example, the TTIP project would probably be dead in the water as the German government has not been able to garner broad support for TTIP and the German industry’s campaign is also rather poor while anti-TTIP supporters from many environmental pressure groups have gained an upper hand in the public debate in 2015: Surprisingly, the EU country that is to gain most (relative to GDP) – along with the UK and Ireland – and has a large current account surplus-GDP ratio has not managed to establish a clear public majority in favor of TTIP. As regards the national government of France, that has many problems including a big long-standing current account deficit, it is also largely skeptical about TTIP; a position that is likely, however, to change if a conservative government would come to power in 2017. If the UK would leave the EU, one may thus argue that TTIP is unlikely. According to recent analysis by the European Institute for International Economic Relations at the University of Wuppertal, TTIP will bring about a 2% rise of Germany’s real GDP, mainly through innovation and FDI plus trade effects, and for the EU as a whole a similar order of magnitude would be missing without TTIP. A negative side-effect would thus be that the Brisbane promise of the G20 summit in 2014, according to which GDP should be raised by a least 2.1% relative to the business-as-usual benchmark development, could not be fulfilled by most of the big EU countries until 2018.

The EU’s capital market union will also be undermined if the UK should leave – knowing that the responsible Commissioner from the UK, Mr. Hill, is a lame duck will largely bury many EU financial market integration and modernization initiatives. It is also clear that the envisaged merger of the Frankfurt Stock Exchange and the London Stock Exchange will not take place in the case of BREXIT. All EU countries will take some time to sort out the mess that would be the consequence of BREXIT – beyond a decline of output in the UK. A major problem in the medium term would be the situation of some 600 000 Irish people living in the UK; once the UK is no longer an EU member country, say after 2018, many Irish citizens might want to leave the UK. Even worse, the easy daily travelling between Northern Ireland and the Irish Republic is likely to end and a new (old) border regime could even endanger the peace process in Ireland.

For the British universities, cooperation with EU universities will become rather complex and the UK is likely to seek more cooperation with the US in this situation. Rather difficult will also be the situation of about 1.2 million British citizens working in EU countries and of the roughly 3 million EU citizens working in the UK. Mr. Cameron would have to step down and Mr. Boris Johnson is likely to become the new British prime minister, but he would not be really welcome in EU countries after BREXIT. Several other EU countries are likely to also consider leaving the EU: Denmark and the Netherlands are two obvious cases and one should also not underestimate the risk that even France and Germany could start moving out of the EU. The political and economic prospects would be a disaster. More protectionism, less growth and more political instability and also political radicalization on the EU continent may be expected. Sooner or later the Western European countries will face a kind of 1910 situation in which the leading powers devote 4% of GDP for defense and this would be twice the share of GDP to devoted to defense in 2015. For Germany it would be almost 4 times as much. Higher income tax rates and lower growth again would be the economic price. Russia, facing an EU in disarray, will sooner or later start to become more aggressive again in the Ukraine and other parts of Eastern Europe. NATO could be the next victim of an EU in disarray. The US could come under pressure to seek broad compromise with China once the EU is no longer a stable partner and NATO looks like an unstable group. For Turkey, an EU in disarray will certainly reinforce those groups in Ankara seeking to establish a stronger regional role of Turkey in part of the former Soviet Union and this in turn will reinforce the risk of potential conflicts between Turkey and Russia.

The EU after a BREXIT would soon witness a much more protectionist economic policy since Germany’s traditional ally – along with Denmark and the Netherlands -, namely the UK, would no longer be on board. After a few years the UK might have regained, at a high price, including high net contributions to the EU without much say in Brussels, access to the EU single market. These uncertainties and technical problems will all undermine transitorily the EU growth.

While the UK citizens would henceforth save 80 pounds per year in net contributions to the EU, the net cost of BREXIT for the average UK citizen would be much higher. About 5% of GDP losses in both the UK and the EU27 over a decade or so could be the medium term costs in Europe. There will be an additional cost outside the EU, since EU disintegration is a sure recipe to stimulate disintegration in other parts of the world economy: ASEAN which just had started in 2015 an ASEAN single market modeled on the EU single market could come under pressure, as could MERCOSUR which already faces the disaster case of Venezuela in its own right since 2015. Other regional integration clubs in Africa and parts of the Arab world could also fall victim to BREXIT dynamics. The negative global economic effects would add up to a strong temporary decline of global output, more regional conflicts, stronger incentives to emigrate to the UK (the US and other countries) – certainly not what the BREXITEERs had anticipated or wished.

If the UK should leave the EU, this would not only be a signal that British voters are not really willing to support EU economic integration – although the UK net contribution per capita is less than 70€ per year – but that there is a broader mistrust of the British public against the political elites: This is an attitude that clearly dates back to the Transatlantic Banking Crisis of 2007-09 which has shaken the peoples’ confidence in both the political system, financial market regulators and leaders of big banking business in the US, the UK and some EU countries. So if government in the US suggests that it is in the self-interest of the UK that the country should remain in the EU, many voters are not believing this, moreover, many voters wish to effectively punish the political elites for the banking crisis – leading to massive wealth losses, higher government debt-GDP ratios (implying higher future tax rates) and higher tuition fees plus lower federal government transfers to the cities – via a non-EU vote. In this respect it is pure coincidence that the UK election calendar has the EU vote on the agenda; no referendum could be won by government in the present situation. Mr. Cameron has made things worse by undermining his own credibility when he announced that he would limit immigration to 150 000 per year – the UK government under EU single market rules has no instrument to easily limit immigration from other EU countries; only social benefits for immigrants from the EU could have been cut slightly, but this is unlikely to have a big impact. Rather some limitations on immigration from non-EU countries could be imposed. It is absolutely unclear why Mr. Cameron has promised something that he cannot deliver and why at the same time the British Prime Minister failed to pick up the key results of Economics Immigration Research saying that the UK has a clear net economic benefit from immigration since immigrants are relatively young and since the immigrant entrepreneurship in the UK is considerable. The fact that the EU referendum came on the agenda at all is finally the mistake of the strange institutional setup of the European Union in the field of European Parliamentary elections and the very construction of the EU. Mr. Cameron likes to argue – imitating the rhetoric of UKIP’s leader Nigel Farage – that the EU is too big and too much money is spent in Brussels. This, however, is nonsense as the research by the renowned Forschungsgruppe Wahlen (Germany’s leading election think-tank) in has shown: As regards German voters, they can easily tell you what the critical topics and issues at the local, regional and national policy layer are and hence a roughly rational voting behavior at these policy layers may be expected.

However, when it comes to the EU, the standard answer of voters asked is “no idea” and the consequence is a broad willingness to experiment in voting, usually in favor of smaller and radical parties. What is found in Germany is also relevant in the UK (and in probably any other EU country as well) and the consequence has been that the radical and small UKIP party has flourished at EU elections and has been able to use financial support from the EU for the votes obtained to start a broad political campaign at the national level where UKIP ended with about 1/3rd of the voter share obtained at the EU level. If the EU had clear and larger responsibilities where it makes sense in accordance with fiscal federalism, the voter turnout at European elections would have been much higher and the propensity of the average voter to squander his/her vote by experimenting with radical small parties would have been sharply reduced.

Mr. Farage’s party would almost certainly not exist and Mr. Cameron would never have faced the challenge to call for a national EU referendum that effectively mirrored the strange and actually unnatural strength of UKIP in the UK. The principle of subsidiarity, according to which tasks that can be better solved by the national level should not go to Brussels is ok, but the interpretation of this philosophy and the actually stated principle in the EU Lisbon Treaty is absurd in London’s conservative leadership. What would make sense is an EU allocation of tasks and supranational government expenditures that would look similar to the case of the US at its federal level where 9% of GDP was spent in 2014 – plus an additional almost 11% on social security. The EU expenditures should be not 1% of GDP – reduced under the pressure of Cameron in previous years down from 1,25% – but about 4-5% where key fields would be: large infrastructure projects, electricity market integration, ICT innovation policy, defense and paying for the first six months of unemployment, except for youth unemployment, rates (here national governments have a strong responsibility through their often irresponsible minimum wage policy such as is the case in Belgium and foremost in France, which is roughly five times the size of the average US state but which has imposed a very high nationwide minimum wage which was close to 10 € in 2015 while government handed out heavy subsidies, about 1% of GDP, to firms employing workers with a minimum wage). It should be noted that nobody needs a Commission with a hybrid institutional nature of being partly an executive government and partly a legislative body taking most initiatives for new laws in the European Parliament. The EU Parliament should be massively strengthened and half of the EU structural funds should be abolished as they generate no economic benefits in the respective regions of the EU. A bigger supranational EU government and a more efficient vertical division of labor in the EU would bring efficiency gains of overall government and hence allow to cut tax rates by 1 percentage point at least.

The UK referendum does not stand so much for Yes or No with respect to EU membership but it is reflecting the depth of political confusion in Downing Street. After the collapse of socialist Eastern Europe, the West has at first celebrated in certain political quarters the end of history and thought that only further market economy expansion would be the natural answer to all challenges in the world; and secondly, that financial markets would stand for superb economic wisdom and rationality. The first hypothesis – the end of history debate started by Francis Fukushima in the US – is nonsense. As regards big banks in the US and the EU, the best that one could say about these institutions is that they were largely led by managers with irresponsibly excessive ambitions, namely a rate of return on equity of about 25% (instead of about 12-13% that would already be a great return for banks and insurance companies) that would be possible only with excessive risk-taking. Big banks have organized frauds, exchange rate rigging and interest rate manipulations in many cases and have paid more than € 300 billion in damages and costs for out-of-court settlements, suggesting that this industry has not been properly regulated in the US and the EU for at least a decade. Hardly any of the, often foolish, directors of the incompetent prudential supervisors was held responsible by losing their jobs or sentenced in court – look at the UK, Ireland, Germany and the US.

This has ultimately created the impression that politicians cannot regulate big banks. Not only is this true, the IMF’s ability to come up with a consistent financial sector assessment programme (FSAP) has been poor in critical cases: The FSAP on Switzerland was totally wrong – saying prior to the Transatlantic Banking Crisis that UBS was in excellent shape while there were problems with Credit Suisse (in fact it was UBS that after 2008 faced the biggest financial loss in Swiss history and had to be rescued by the central bank); in the case of Ireland, the IMF published in mid-2006 an FSAP that argued that the banking system was fine, there were only problems in re-insurance – this report was ridiculous and to-date no consequences have been imposed due to these massive misreporting and misleading analyses. That the IMF did not dare to publish any FSAP analysis on the US was the biggest mistake, although one may argue that the US President George Bush Jr. prevented such a report from being published. However, the IMF should have written at least an internal FSAP on the US. It was the IMF and the western world that had argued in the aftermath of the Asian crisis that an FSAP would be necessary and helpful as a new regular instrument to avoid major regional financial crises in the future. As regards the Russian economic crisis of 1998, it was the IMF itself whose inadequate policy advice contributed massively to this economic disaster – the IMF suggestion had been to introduce fixed exchange rates in a country where the optimum currency area literature (decades old) would never have come with such a proposal for a country in which about 60% of export revenue was generated from just one sector, namely energy. The responsible head of the IMF’s Europe II department, Mr. Odlin Smeh, sent to Washington DC by the British government, never faced any consequences for his irresponsible strategy. This simply adds up to the finding that the western world’s biggest international organization is partly not contributing to more international prosperity and stability, rather occasionally, it actually destabilizes parts of the world economy.

The lack of parliamentary accountability of international organizations, such as the IMF, the WTO, the BIS and so on, is part and parcel of globalization risk and a creates a considerable risk of massive stabilization crises (having said this, one should not overlook that probably most standard working fields of the IMF deserve high respect and that its chief economist, Ragurham Rajan, gave a great presentation at the international central bankers’ Jackson Hole meeting in 2005, where he warned about the inadequate institutional framework of financial globalization and modern securitization, respectively). However, the majority of the western central bankers in Jackson Hole did not want to listen to this careful and excellent analysis. The list of the leading western central bankers at that time thus cannot stand for a high intellectual understanding of transatlantic banking; or to put it differently, the system that western governments have allowed to emerge in the 25 years after 1991 – the year of the end of the Soviet Union – is too complex for leading western central bankers to understand. Should the consequence not be to build a new system which is much less complex, creates less negative international external effects and carefully contributes more to prosperity and stability in the world economy? The fact that big banks can escape the identification of irresponsible and illegal management practices by resorting to out-of-court settlements on a super-large scale in the US and the EU is also not contributing to building a broader sense of responsibility and thus to nurture the reputation of institutions and the stable trust of voters in politicians. The rise of western right-wing populist parties and candidates after the Transatlantic Banking Crisis clearly testifies to this.

If BREXIT would come and be followed by US presidential elections won by Mr. Trump, the end of the post-1945 world would be seen. If populist parties would start to dominate the political process in the US and the UK, new uncertainties would undermine transatlantic economic growth and new rivalries would emerge among OECD countries.

If BREXIT can be avoided – a likely outcome -, the EU has some breathing space to reconsider all major issues, topics and problems. If no major reforms are adopted, the next BREXIT initiative will come soon – and if not in the UK a similar initiative could pop up elsewhere. Obviously, the European Commission and the European Parliament must come up with new ideas to make regional integration in Europe more attractive and EU policy far more consistent. A political euro union should be considered carefully.

 

 

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Allgemein, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy

British Referendum Pains and the EU Implications of BREXIT: an Update

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

April 6, 2016

British Referendum Pains and the EU Implications of BREXIT

On June 23, 2016, should a majority of British voters decide to leave the EU – nearly 45 years after joining the Community – the EU would lose 17% of its GDP and 12% of its population. This referendum result would reveal Prime Minister Cameron’s poor political calculations and he would now find that his pro-EU-membership campaign has failed miserably. The great winner of the British election of 2015 will step down as Prime Minister after the failed referendum, while the UKIP anti-EU activists cheer on the developments as do other anti-EU forces. As regards Cameron’s potential defeat, there has been a moral failure on the part of the Prime Minister: He had assigned a special taskforce of scientists to write a critical EU Report in 2014 and the result had been that in no field was the EU a serious impediment to British interest and British policy; the division of competences between Brussels and London could be improved in some fields but there were no serious inconsistencies – a message that was not clearly communicated to the British public. The final chapters of the report were published in 2015.

The main reason that so many British citizens are rather sceptical about EU membership and immigration, respectively, is the fact that after the Transatlantic Banking Crisis national government funding of local communities has strongly been reduced – sometimes not only reflecting adjustment pressure from high government deficit-GDP ratios but conservative ideology as well; in communities facing reduced government services and excess demand problems in the health care system, sustained immigration pressure from the EU partner countries (and other countries) has created a general impression of overcrowding problems. It is unclear whether or not the pro-EU supporters can convey the message that EU membership for the UK is a rational choice since leaving the UK will raise the question about the future relationship between the UK and the EU – if the UK would follow the Swiss or Norwegian model, the price tag for full access to the EU single market will be not only to accept most EU rules but to contribute to the EU budget as well.

It is true that Mr. Cameron is not the only element to blame for the negative British referendum result, Mrs. Merkel’s chaotic refugee policy of 2015 has certainly reinforced those British voters who are afraid of immigration and the EU’s immigration policy which has exposed just how poor the EU’s ability to defend its own southern external borders really is. As Mrs. Thatcher once said in the context of Britain potentially joining the EU Schengen Treaty which allows the free circulation of people in continental EU countries: We are not going to rely on Greek civil servants to effectively control the access of foreigners to the UK – and all the pictures of the EU refugee crisis of 2015 and early 2016 have simply illustrated the choatic refugee policy of Germany and the EU, respectively: with Greece being totally overwhelmed with the task of controlling its external borders and providing suffcicient humanitarian aid to the refugees.

Gideon Rachman’s contribution in the Financial Times of March 23, 2016 (p.9: Wake up – Brexit is looking ever more likely) describes the post-transatlantic banking crisis world where many voters are fed up with the old political elites. There exists the problem that “the political establishments in Washington and London find it hard to believe the public will ultimately make a choice that the establishment regards as self-evidently stupid. However, in Britain, as in the US, politics has taken a populist and unpredictable turn. The financial crisis and its aftermath have undermined faith in the judgement of elites. High levels of immigration and fear of terrorism have increased the temptation to try and pull up the drawbridge and retreat behind national frontiers.“

The Brussels terror attack of March 22, 2016, has reinforced the fear of terrorism and many British citizens think – reinforced by Leave activists – that living outside the EU, and thus being somehow protected from terrorist attack, is an argument in favor of BREXIT. Anti-terror specialists would not agree with this, but simple answers are always popular.

The anti-EU supporters think that the UK alone will be better off than being a member country of the EU. The economic logic contradicts this view completely – as the short-term economic gain is that the UK could save only about 0.5% of GDP in net contributions to the EU, but the rather poor future UK position at the international negotiating table will certainly cost the UK far more than this relatively small amount, while the UK will also experience a decrease in attractiveness for foreign investors which instead will want to invest more in continental EU countries in the future. A real depreciation of the British pound along with BREXIT means that British exports will increase in real terms, but in the end the key message is that, for a given amount of imports of goods, the average British citizen will have to export more domestically produced goods so that there is a welfare loss.

Moreover, a real depreciation means that foreign investors will obtain British assets at a discount, but this is only an advantage to investors from the US, euro countries, Russia and Arabian countries. In order to get access to the EU single market in the future, the UK would have to follow most EU regulations and would also have to make some payments towards the EU’s budget so that even on the budget side there would not be a net gain for the UK. The devaluation of the British pound in the run-up to June 23 can become very massive and force the Bank of England to massively intervene in the market as liquidity could dry out and asset prices could fall dramatically as international investors anticipate the UK leaving the EU. One cannot rule out that such financial turmoil will be a last minute signal to tilt the balance at the BREXIT-referendum in favor of pro-EU votes. Undecided voters will be influenced by financial market signals.

The UK will lose its position in all EU-funded research projects and British innovation dynamics will suffer from this as from the fact that UK tuition fees for students from the EU will strongly increase so that less skilled talent from the European continent will be attracted to study there. The UK will be a weaker actor in Europe and in the world economy – as will the EU itself without the UK. The European Union would look like a fragile union after BREXIT and this means that its political weight would decline internationally. The true winners in a global perspective will thus be Russia, the US and China. From a European perspective, the winners will also be anti-EU parties, particularly those in the euro area and this could also bring new problems for the euro area. Since March 2016, Germany is already facing political destabilization when the populist new AfD, a right-wing party expressing xenophobic sentiments, obtained double-digit voting shares in three German states, including the economic powerhouse of Baden-Württemberg which has 13% of the population of Germany.

The AfD is the mirror party of UKIP to some extent and it was created in 2013 as an anti-euro party mainly by a group of concerned German economists (Bernd Lucke, Joachim Starbatty, Olaf Henkel), none of them being an expert on monetary integration – and by late 2015 they already had left the AfD over internal conflicts and had created a new party “Alpha” which does not play any role in Germany. The AfD benefited from widespread uneasy feelings of many citizens that have become nervous not least from the very many alarmistic Ifo Institute reports on the Eurozone: In a biased approach to the issues only worst case scenarios were published that naturaly were picked up by the popular press according to the old saying “bad news is good news” – Hans Werner Sinn, the president of the partly government financed Ifo Institute in Munich argued in his worst case scenarios in 2012/2013 that German taxpayers could lose up to 30% of GDP in the euro crisis; the true costs are less than 1% of GDP so far. Mrs. Von Storch, a naïve leading AfD figure was so nervous at some point that she took AfD funds from the bank to keep it in cash at home since she was afraid that the euro could go out of business.

With more regional elections coming – and the national election in 2017 – the AfD will no doubt expand further and this undermines political stability in Germany and a fortiori in the EU. Less political stability implies that there will be a risk premium expected from the perspective of foreign investors and hence Germany will have lower foreign direct investment (disregarding a temporary higher inflow stemming from disappointed foreign investors after BREXIT shifting investment from the UK to Germany) and hence lower innovation dynamics and weaker economic growth. All this will be reinforced by the xenophobic AfD which also sends a negative signal to foreign investors. For Germany, there will be some temptation to really become the dominant EU country of this smaller Community, but that this would be a useful development for the EU as a whole may be doubted.

A weaker EU is less attractive as a political and economic partner of the US and China, the two economic superpowers of the 21st century. There is nothing that the UK could gain from less political stability and lower economic growth in contintental Europe. Instead the UK would most likely come under increased pressure from the US to more often support US foreign policy maneuvers and military actions – and this is certainly not a free lunch either.

It is absolutely clear, therefore, that the long run result of BREXIT will be quite negative for the UK. The British economy will directly be weakened, continental Europe will become weaker as well and the negative economic spillovers from the diminished EU to the weakened UK willl be strong. If the EU output should drop (disegarding the pure output reduction related to the UK’s leaving of the EU) by 2% in the long run through the immediate BREXIT effect, British output should decline by 1%-1.5%. This will come on top of the direct output reduction effect of BREXIT which could reach 3-5% in the long run. British output decline during the Great Depression of the 1930s was 6% over two consecutive years of recession. The main difference now will be that the British output decline will be spread over about a decade or so.

A shrinking and unstable EU will cause further instability in the world economy, as other regional integration schemes – e.g., ASEAN and Mercosur in Asia and Latin America – will also be destabilized. With the EU no longer being a stable integration club there will be doubts about the stability of other integration clubs as well and this will contribute to more regional conflicts and reduced global growth as well as more political nationalism and economic protectionism. Reduced international economic integration typically also means more conflicts so that military expenditures will increase in Europe and indeed world wide. The BREXIT equation has no winners, but will have many losers. Whether BREXIT will, in the end, also lead to a new Scottish independence referendum also remains to be seen. At the bottom line, BREXIT stands for political brinkmanship in the UK. The Panama Papers Affair might further undermine the credibility of the conservative government and thus make a pro-EU compaign of Mr. Cameron less convincing.

The only two eminent political personalities who could make a difference in the run-up to the British referendum are David Cameron – the Prime Minister must clearly announce that he would immediately step down in the case of a negative referendum result – and President Barack Obama. The visit of the US President could also make a difference – the US clearly has an interest in the UK remaining firmly anchored in the EU and President Obama will say so during his April visit to London. As regards the popular press, the US President’s visit is a powerful multiplier for the pro-EU camp; the US logic partly is that British EU membership in the EU will reinforce a liberal European Union and contribute to the stability of NATO. The invisibility of EU Commission President Juncker in the campaign is a historical shame: a Commission president who is unwilling to defend the integrity of the Community should not remain at the top of the European Commission.

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Allgemein, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy

European Terror Crisis: Relocating EU Institutions from Brussels and Improving Security in Europe

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

April, 5, 2016 (BrusselsEUterrorcrisis2016ENG)

 

The EU of 2016 is facing a fundamental crisis. The UK leaving after June 23 would deal a major blow to the process of EU integration and indeed the Juncker Commission – that Commission President Juncker has not made even one visit to London before June (in contrast to US President Obama) is an historical sign of weakness for which the whole Commission should be ashamed. What’s more, EU integration is facing a major security challenge from Brussels itself where dozens of ISIS supporters and several terrorists are living in the EU’s quasi-capital and the capital of Belgium, respectively. The terror attacks in Belgium on March 22 – at the Brussels airport and the Maelbeek metro station which is right in the centre of Brussels and just 400 meters away from top EU institutions – reveal the enormous weakness of the Belgian security forces. More than 30 dead and over 100 injured in March 2016 testify to the fact that the Belgian capital is not safe – Islamist terror groups can easily hide in Brussels; and it is also well known that several of the Islamist terrorists behind the brutal attacks in Paris in November 2015 also came from Brussels.

After almost two weeks, the closed Brussels airport could be reopened on April 3, however at a much reduced capacity, but Brussels still has a deeply rooted security problem which is visible in the form of the understaffing of security forces, a lack of cooperation between various police groups and security forces in Brussels in particular and in Belgium in general with its complex federal structure. Moreover, Belgium is similar to France, i.e. in a structurally bad position, since its youth unemployment rate has been twice as high as that of Germany for two decades and three times as high as in Switzerland. Terror experts have shown that Jihadists, to a considerable extent, are engineers or former students from technical fields on the one hand, while on the other hand they stem from petty criminal groups. High youth unemployment rates are a key driver of criminal careers of young men and this in turn implies that France and Belgium have a structural terror threat problem that is deeply rooted. The high youth unemployment rate in France and Belgium is large due to an excessively high minimum wage rate – the youth unemployment rate has been twice as high as in Germany for about two decades (see appendix).

There are several conclusions to be drawn if one wants to achieve full security in line with US or British standards: (1) massive investment in and a modernization of the Belgian security forces and enhanced cooperation in the EU; however, there is large mistrust of EU member countries amongst each other and the reputation of the EU – in the (likely) BREXIT year of 2016 – is very poor.

(2) As security in Brussels cannot be assured for many years to come, the EU’s main institutions should be relocated to Luxembourg or another major city (e.g. Trier which also could cooperate with Luxembourg); Luxembourg has the problem that about ½ of its labor force is from France (70 000 commuters per day), Belgium (70 000 commuters per day) and Germany (35 000 commuters per day). If border controls would be reimposed – possibly a necessary step after a terrorist attack – the economy of Luxembourg could collapse. The European Parliament has a second seat in Strasbourg, but this city in France does not seem any safer than Paris. Every year thousands of ordinary people visit the EU institutions and several dozen universities in Europe have a tradition of sending groups of students on excursions to EU institutions in Brussels. Millions of people visit Brussels as tourists, business people or as invited experts to the EU each year, but again security problems will remain unsolved for many years in Brussels. This also means that the many thousands of employees and civil servants working at the European Commission’s main institutions in Brussels face a threat to life when using the metro or using the airport in the future. The Belgian capital cannot be the capital of Europe – enjoying considerable economic benefits from this status – while not providing decent security for its own citizens, the people working in Brussels and the millions of visitors to Brussels every year. The reputation of the EU institutions has already weakened much since the Euro crisis and the younger generations will not broadly support EU integration if one cannot even visit the key EU institutions safely.

(3) Belgium must reduce the excessive minimum wage immediately and become much more serious in fighting youth unemployment; the same must be expected from France. For several years the borders with Belgium and France should be strictly controlled, the Schengen Treaty, meaning passport-free travel within the Schengen area, should be, in part, no longer applied.

(4) EU countries should be much more selective in inviting preachers from North African countries or even from Saudi Arabia, Qatar (the latter two stand for radical Islamist beliefs and also the generous financing of ISIS in Syria) and other Arab countries. It is strange that the Valls government under President Hollande has invited many Islamic preachers from Tunisia, whereas creating a decent education for Muslim clergy in France – similar to that in Germany – is cleary a better approach. It is also strange that investment funds from certain countries are accepted by the German government and the EU, respectively, e.g. in Germany – Qatar is a major investor in Mercedes Benz.

(5) The chaotic immigration and refugee policy that Chancellor Merkel has imposed on EU countries in 2015 should be stopped and reformed immediately; there can be no responsible immigration policy that leaves things unclear in relation to many thousands of immigrants or refugees entering Germany and other EU countries, respectively. In 2015, the German security forces, organized in the 16 states of Germany, used identification software that suffered from incompatibility issues so that an immigrant could be registered several times and possibly also under different names. Such technical pitfalls are totally unacceptable and endanger the whole of Europe; one terrorist attacker in Paris in January 2016 came from Germany – where he had seven different identities; he was shot while attempting to kill two policemen in the French capital. EU countries also suffer from the problem that the transliteration of Arabic or other foreign names are different in different languages and, since EU security forces are not using a multi-language algorithm for transaliteration, a terror suspect identified by French police can travel to Germany, Italy or Spain, and the national security forces of those other countries will most likely not identify this indiviudal as that person who has already been identified as a suspect individual in France. This lack of security integration is a scandal and highly dangerous.

(6) Several EU countries, above all France and Belgium, will attract lower foreign direct investment inflows from the US, China, Japan and Korea – security issues always figure high on the checklists of multinational companies. Lower economic growth and higher unemployment rates, new social conflicts and more political instability are likely side effects of this. Hence the threat of terrorism should be taken much more seriously in the future in the EU.

The poor impression created by Germany’s, and indeed the wider EU’s, immigration policy of 2015 and the Brussels terror attacks of 2016 have reinforced the fear of immigration in the UK and to the extent that the BREXIT debate is shaped by a fear of immigration, Chancellor Merkel’s poor refugee policy and the security problems in Belgium have tipped the balance in favor of EU ‘leavers’ in the United Kingdom in early 2016.

With the UK leaving the European Community and Brussels having become the most unsafe capital in the EU, the European Union and EU integration, respectively, are facing a serious problem. A process of EU disintegration has started in 2016 and EU member countries are silently watching this historical disintegration process unfold. If EU disintegration should proceed, it will lead to massive economic nationalism in Europe and to higher military expenditures relative to GDP, while political destabilization will bring about reduced economic growth.

Fighting Islamist terrorism requires a multi-pronged approach. Reducing youth unemployment rates is one critical aspect; no longer publishing pictures of terrorist attacks and media from ISIS websites with their threats of further terror is a desirable element of counter-terrorist policy – all the pictures shown on TV and in newspapers are broad propaganda in favor of terrorism as the terrorist achieves at zero cost an advertising platform to frighten even more people which is the very goal of all terrorism. EU countries should take the new wave of terrorism very seriously. The Schengen countries’ security standards are much weaker than those of the US and the UK; any extension of the Schengen area – e.g., including Croatia with its weakly patrolled southern borders to other Balkan coutries – is irresponsible. The EU should also put much more pressure on all neighbouring countries to also fight Islamist terrorism. The new terror risk will affect economic growth perspectives across EU countries in an asymmetric way, so that pressure on raising EU funds will increase in order to avoid a decline of economic and social cohesion. The cost of terror-related risks are enormous – if reduced security of consumption (including tourism) in the EU is equivalent to 0.5% of GDP of the EU, this amounts to € 140 bill.; add to this the extra cost of increasing the budget of security forces and the economic loss of all those poor people who have either been killed or injured in terror attacks, then the bill of terrorism is certainly above € 140 bill. in the EU. Without an EU Political Union there can be no security and no stable European Union. If there is continued disintegration, Europe will fall back into the late 19th century. This certainly is not in the interests of the 510 million people in the EU.

 

 

 

Fig. 1: Youth Unemployment Rate in Selected EU Countries (Age Group 15-25 Years)

Source: Eurostat

Fig. 2: Unemployment Rate in Selected EU Countries (Age Group 15-39 Years)

Source: Eurostat

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Allgemein, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy

British Referendum Pains and the EU Implications of BREXIT

 

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

Beijing, March 27, 2016

British Referendum Pains and the EU Implications of BREXIT

On June 23, 2016, should a majority of British voters decide to leave the EU – nearly 45 years after joining the Community – the EU would lose 17% of its GDP and 12% of its population. This referendum result would reveal Prime Minister Cameron’s poor political calculations and he would now find that his pro-EU-membership campaign has failed miserably. The great winner of the British election of 2015 will step down as Prime Minister after the failed referendum, while the UKIP anti-EU activists cheer on the developments as do other anti-EU forces. As regards Cameron’s defeat, there has been bitter moral failure on the part of the Prime Minister: He had assigned a special task force of scientists to write a critical EU Report in 2014 and the result had been that in no field was the EU a serious impediment to British interest and British policy – Mr. Cameron used taxpayers money to commission and pay for this report, but it was never actually published: for strategic reasons, read in order to get better negotations results from the EU, but even after the UK-EU negotiations had been completed in February 2016 the government stubbornly failed to publish the EU Commission’s findings. This is unfair and inadequate.

It is true that Mr. Cameron is not the only element to blame for the negative British referendum result, Mrs. Merkel’s chaotic refugee policy of 2015 has certainly reinforced those British voters who are afraid of immigration and the EU’s immigration policy which has exposed just how poor the EU’s ability to defend its own southern external borders really is. As Mrs. Thatcher once said in the context of Britain potentially joining the EU Schengen Treaty which allows the free circulation of people in continental EU countries: We are not going to rely on Greek civil servants to effectively control the access of foreigners to the UK – and all the pictures of the EU refugee crisis of 2015 and early 2016 have simply illustrated the choatic refugee policy of Germany and the EU, respectively: with Greece being totally overwhelmed with the task of controlling its external borders and providing suffcicient humanitarian aid to the refugees.

Gideon Rachman’s contribution in the Financial Times of March 23, 2016 (p.9: Wake up – Brexit is looking ever more likely) describes the post-transatlantic banking crisis world where many voters are fed up with the old political elites. There exists the problem that “the political establishments in Washington and London find it hard to believe the public will ultimately make a choice that the establishment regards as self-evidently stupid. However, in Britain, as in the US, politics has taken a populist and unpredictable turn. The financial crisis and its aftermath have undermined faith in the judgement of elites. High levels of immigration and fear of terrorism have increased the temptation to try and pull up the drawbridge and retreat behind national frontiers.“

The Brussels terror attack of March 22, 2016, has reinforced the fear of terrorism and many British citizens think – reinforced by Leave activists – that living outside the EU, and thus being somehow protected from terrorist attack, is an argument in favor of BREXIT. Anti-terror specialists would not agree with this, but simple answers are always popular.

The anti-EU supporters think that the UK alone will be better off than being a member country of the EU. The economic logic contradicts this view completely – as the short-term economic gain is that the UK could save only about 0.4% of GDP in net contributions to the EU, but the rather poor future UK position at the international negotiating table will certainly cost the UK far more than this relatively small amount, while the UK will also experience a decrease in attractiveness for foreign investors which instead will want to invest more in continental EU countries in the future. A real depreciation of the British pound along with BREXIT means that British exports will increase in real terms, but in the end the key message is that, for a given amount of imports of goods, the average British citizen will have to export more domestically produced goods so that there is a welfare loss.

Moreover, a real depreciation means that foreign investors will obtain British assets at a discount, but this is only an advantage to investors from the US, euro countries, Russia and Arabian countries. In order to get access to the EU single market in the future, the UK would have to follow most EU regulations and would also have to make some payments towards the EU’s budget so that even on the budget side there would not be a net gain for the UK. The devaluation of the British pound in the run-up to June 23 can become very massive and force the Bank of England to massively intervene in the market as liquidity could dry out and asset prices could fall dramatically as international investors anticipate the UK leaving the EU. One cannot rule out that such financial turmoil will be a last minute signal to tilt the balance at the BREXIT-referendum in favor of pro-EU votes. Undecided voters will be influenced by financial market signals.

The UK will lose its position in all EU-funded research projects and British innovation dynamics will suffer from this as from the fact that UK tuition fees for students from the EU will strongly increase so that less skilled talent from the European continent will be attracted to study there. The UK will be a weaker actor in Europe and in the world economy – as will the EU itself without the UK. The European Union would look like a fragile union after BREXIT and this means that its political weight would decline internationally. The true winners in a global perspective will thus be Russia, the US and China. From a European perspective, the winners will also be anti-EU parties, particularly those in the euro area and this could also bring new problems for the euro area. Since March 2016, Germany is already facing political destabilization when the populist new AfD, a right-wing party expressing xenophobic sentiments, obtained double-digit voting shares in three German states, including the economic powerhouse of Baden-Württemberg which has 13% of the population of Germany.

The AfD is the mirror party of UKIP to some extent and it was created in 2013 as an anti-euro party mainly by a group of concerned German economists (Bernd Lucke, Joachim Starbatty, Olaf Henkel), none of them being an expert on monetary integration – and by late 2015 they already had left the AfD over internal conflicts and had created a new party “Alpha” which does not play any role in Germany. The AfD benefited from widespread uneasy feelings of many citizens that have become nervous not least from the very many alarmistic Ifo Institute reports on the Eurozone: In a biased approach to the issues only worst case scenarios were published that naturaly were picked up by the popular press according to the old saying “bad news is good news” – Hans Werner Sinn, the president of the partly government financed Ifo Institute in Munich argued in his worst case scenarios in 2012/2013 that German taxpayers could lose up to 30% of GDP in the euro crisis; the true costs are less than 1% of GDP so far. Mrs. Von Storch, a naïve leading AfD figure was so nervous at some point that she took AfD funds from the bank to keep it in cash at home since she was afraid that the euro could go out of business.

With more regional elections coming – and the national election in 2017 – the AfD will no doubt expand further and this undermines political stability in Germany and a fortiori in the EU. Less political stability implies that there will be a risk premium expected from the perspective of foreign investors and hence Germany will have lower foreign direct investment (disregarding a temporary higher inflow stemming from disappointed foreign investors after BREXIT shifting investment from the UK to Germany) and hence lower innovation dynamics and weaker economic growth. All this will be reinforced by the xenophobic AfD which also sends a negative signal to foreign investors. For Germany, there will be some temptation to really become the dominant EU country of this smaller Community, but that this would be a useful development for the EU as a whole may be doubted.

A weaker EU is less attractive as a political and economic partner of the US and China, the two economic superpowers of the 21st century. There is nothing that the UK could gain from less political stability and lower economic growth in contintental Europe. Instead the UK would most likely come under increased pressure from the US to more often support US foreign policy maneuvers and military actions – and this is certainly not a free lunch either.

It is absolutely clear, therefore, that the long run result of BREXIT will be quite negative for the UK. The British economy will directly be weakened, continental Europe will become weaker as well and the negative economic spillovers from the diminished EU to the weakened UK willl be strong. If the EU output should drop (disegarding the pure output reduction related to the UK’s leaving of the EU) by 2% in the long run through the immediate BREXIT effect, British output should decline by 1%-1.5%. This will come on top of the direct output reduction effect of BREXIT which could reach 3-5% in the long run. British output decline during the Great Depression of the 1930s was 6% over two consecutive years of recession. The main difference now will be that the British output decline will be spread over about a decade or so.

A shrinking and unstable EU will cause further instability in the world economy, as other regional integration schemes – e.g., ASEAN and Mercosur in Asia and Latin America – will also be destabilized. With the EU no longer being a stable integration club there will be doubts about the stability of other integration clubs as well and this will contribute to more regional conflicts and reduced global growth as well as more political nationalism and economic protectionism. Reduced international economic integration typically also means more conflicts so that military expenditures will increase in Europe and indeed world wide. The BREXIT equation has no winners, but will have many losers. Whether BREXIT will, in the end, also lead to a new Scottish independence referendum also remains to be seen. At the bottom line, BREXIT stands for political brinkmanship in the UK.

The only two eminent political personalities who could make a difference in the run-up to the British referendum are David Cameron – the Prime Minister must clearly announce that he would immediately step down in the case of a negative referendum result – and President Barack Obama. The visit of the US President could also make a difference – the US clearly has an interest in the UK remaining firmly anchored in the EU and President Obama will say so during his April visit to London. As regards the popular press, the US President’s visit is a powerful multiplier for the pro-EU camp. The invisibility of EU Commission President Juncker in the campaign is a historical shame: a Commission president who is unwilling to defend the integrity of the Community should not remain at the top of the European Union.

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Allgemein, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy

EU Disintegration Pressure and Germany’s New Instability

 

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 years of award-winning EIIW research in Economics

 

March 21, 2016 EUdisintegrationEnglish2016MarchWelfens

EU Disintegration Pressure and Germany’s New Instability

After six decades of growing economic and political integration, in 2015/2016 the European Union is facing disintegration dynamics for the first time where the main impulses are Germany’s strange handling of the refugee wave in 2015 and the British BREXIT referendum of June 23, 2016. Both elements show that the EU cannot survive without a Political Union and that the collapse of the Soviet Union could indirectly translate into a collapse of the European Union: It was mainly a commonly shared fear of the Soviet Union and certain economic benefits which were the political glue keeping the EU together and without this common fear a lack of political discipline has become widespread – visible, for example, in the non-respect of the Eurozone/EU fiscal policy rules in the run-up to the euro crisis in Greece, Portugal, Ireland and Cyprus. Germany and other EU countries pretend that the Soviet collapse has not impacted the EU except for the fact that former eastern European member countries of the Soviet economic bloc would subsequently join the European Union.

An expansion of the EU budget, which could have generated new benefits for all EU member countries, was prevented, particularly by the British government, when the EU expenditures were reduced after the Transatlantic Banking Crisis from 1.24% to just 1% of GDP. It is the British government that now proposes to voters in the UK to consider a vote on the UK either remaining in or leaving the European Union and it effectively means that about three million UKIP voters – getting 12.6% at the national elections in 2015 – can put political pressure on 500 million people in the EU: Conservative Prime Minister David Cameron is under such pressure from UKIP – the British winner of the European elections – that he had to promise the aforementioned EU referendum. Such a referendum has become possible under the Lisbon Treaty which allows EU member countries to leave the European Union. One may point out that should the UK leave the EU other countries are likely to follow, since a smaller European Union is less attractive than a big EU (i.e. including the UK, which represents about 17% of the EU GDP) and since the external perception is that the EU is not a stable politico-economic club, this will reduce the international political leverage in all future negotiations of the EU; the latter effect might even occur if the pro-EU side should have a narrow victory in the BREXIT referendum. France under De Gaulle had always been resistant to allowing the British EU membership, as De Gaulle was not convinced that the UK would really be a strong member country in the EU.

Besides the UK, it is Germany under Chancellor Merkel which is leading the EU into disintegration. Until mid-2015, it was Germany’s standard political wisdom that the country would never again start a war in Europe, would defend Israel’s right of existence and would always be a reliable EU partner. The latter pillar of Germany’s political fundament was as good as destroyed in early September 2015 when Chancellor Merkel unilaterally – not calling for an EU summit to focus on the refugee crisis – decided to open Germany’s borders for refugees that had stranded in Hungary and Greece. Shortly after the decision, the German government then added that the refugee crisis was an EU problem. Most of the EU partners, having been ignored in September 2015, in effect said: No, Germany should take care of the problem itself.

Obviously, the Chancellor’s Office had become so arrogant in the context of the apparently bravely assumed EU leadership role in the face of the Euro crisis that Mrs. Merkel thought she could simply decide about an EU question on her own. Never would Helmut Kohl oder Helmut Schmidt, two former German Chancellors, have made a similar quasi-autocratic decision.

Founded upon of a very thin legal basis – so the view of renowned legal experts – Germany assumed the right to decide about more than half a million asylum-seekers whose case, under the so-called Dublin framework, could normally only be decided in Greece, the first EU country entered by so many refugees coming from Turkey – originally coming mostly from Syria, Iraq and Afghanistan. Greece in turn was unable to cope with its duties to examine the asylum requests of refugees – at first, due to its disastrous economic policy and as regards the sharp overall recession, which set a record for western industrialized countries after five years of consecutive recession, one could argue that Germany is also to blame for the Greek misery because the Merkel government has refused a debt haircut for sovereign creditors – although this would have been both possible and certainly also necessary economically speaking as the IMF has emphasized in 2015 (Germany’s Minister of Finance, Mr. Schäuble, claims that there are legal barriers to Greek debt cutting, but independent legal experts from several universities hold a different view). If Greece had been a normal country with a functional government and administration, Germany’s government would have had no right to assume the asylum examination procedures by effectively replacing Greece in 2015. The German government’s propensity, in the refugee crisis, to explore extreme interpretations of rules and laws – already partly visible in the euro crisis – is doubtful and has raised criticism among many legal experts who often have the impression that the EU no longer represents the traditional EU three pillars: the rule of law, democracy and the market economy.

The EU countries could, in late September 2015, agree that only 120 000 refugees who had at first landed in Italy and Greece would be reallocated across EU countries, but by mid-March 2016 less than 1 000 had actually been reallocated. The German approach to the refugee crisis did not work at all and the more than one million refugees coming to Germany in 2015 have revealed enormous overregulation and poor public service organization in Germany where many cities found themselves unable to cope with the big wave of refugees – fortunately, many private volunteers helped out in this difficult situation. The chaotic impression created by the refugee wave in Germany raised a very unfavorable impression about the federal government of Chancellor Merkel and on top of that came the incidents from the New Year’s Eve night at the Cologne central station, where more than 1 000 women reported being sexually molested and that mobile phones and/or wallets etc. had been stolen – apparently mostly by Muslim immigrants and refugees from North Africa. The political message understood by many voters in Germany was that the leading political parties and government at both a federal and regional level were unable to cope with the refugee challenge. The populist new right-wing AfD party harshly criticized Chancellor Merkel and partly joined forces with the east German xenophobic, anti-Islam Pegida movement.

The state elections – concerning Germany’s economic powerhouse Baden-Württemberg, the Rhineland-Palatinate and the small eastern German region of Saxony-Anhalt – ended with disastrous results for both parties in the federal grand coalition (i.e., the conservatie CDU and the social-democratic SPD; the latter could, however, gain about 0.5% of the votes in the election in Rhineland-Palatinate). The CDU and the SPD lost huge numbers of votes to the new populist right-wing party AfD (Alternative für Deutschland) who succeeded, on the basis of 240 party members in Saxony-Anhalt, in getting 24 members elected in the regional elections. The AfD, initially created by an economist from Hamburg University Mr. Bernd Lucke, who left the party in disappointment in 2015, had hovered in opinion polls at 3% in spring 2015, but due to Merkel’s strange refugee policy in autumn 2015 the AfD obtained double digit results in all three states (15% in Baden-Würrtemberg, 12% in Rhineland-Palatinate, 24% in Saxony-Anhalt). Part of the AfD, which is very well organized across Germany, is openly xenophobic, anti-US (e.g., in the context of the TTIP project) and favors physical violence coupled with racist prejudices.

A new problem since March 13, 2016, is that – following the bad precedent of the unstable Weimar Republic in the 1930s – a strong leftist party plus a strong populist party could, in the future, make a normal coalition of middle of the road parties unworkable; for example, in Saxony-Anhalt the two traditionally big parties, CDU and SPD, are so much weakened that they need the small Green Party to form a governing coalition and this is the only option existing. The AfD is likely to gain additional seats in upcoming regional elections as well as in the national election in autumn 2017. The rise of the AfD has been strongly supported in 2013-15 by the influential conservative newspaper Frankfurter Allgemeine Zeitung – more specifically, by its Economics and Business Section, with its strong long run opposition to the euro. A report by the Bertelsmann Foundation has shown in 2014 (spotlight Europe 2014/No. 2) that readers of the Frankfurter Allgemeine Zeitung internet-edition features a strong overlap with AfD voters. Who would ever think that a conservative newspaper would support a xenophobic right-wing populist party which destabilizes Germany and the EU? The level of economic competence of the Economics and Business Section is apparently quite low; e.g., for several years readers were told that the Eurozone countries’ euro rescue policy would lead to high inflation (in reality, the ECB had to start fighting deflation in 2015) and that civil servants are the richest group in Germany (complete nonsense as any careful statistical analysis shows: Entrepreneurs are, of course, the richest household group) – maybe this low level of analytical competence in key economic issues also extends to the quality of assessment of political developments.

In March 2016, the EU-Turkey summit brought a preliminary solution to the refugee crisis by undermining the business case of people smugglers and human traffickers in Turkey who had helped ship an estimated million people to Greece in 2015 when the country was totally overwhelmed by the refugee wave. The deal is such that as of March 20, 2016, illegal immigrants entering Greece from Turkey would be sent directly back to Turkey which could, in turn, send up to 72 000 Syrian refugees to the EU who would distribute the incoming refugees internally. Turkey would also get € 6 billion in EU support for the costs of refugee for Turkey, which has about 2.8 milllion refugees. Moreover, Turkish citizens will soon get visa-free access to the EU and the EU-Turkey membership negotiations would resume. The expectation is that the number of new refugees to the EU will strongly reduce in 2016, not least since the situation in UNHCR refugee camps in Iraq, Afghanistan, Lebanon, Jordan and Turkey should improve as the London donor conference of early 2016 raised new funds for bringing the provision of food and services back to a decent level – before the US, Kuwait and several EU countries had not paid over funds which had been promised to the UN, with the result that part of the refugee crisis was indeed triggered by the hunger and misery prevalent in many UNHCR camps.

Many EU countries have erected new national border controls in order to fend off refugees coming from Greece or via other EU entry countries. This in turn shows that there are serious problems with respect to controlling the EU’s external borders – with poor countries, such as Greece and Bulgaria, left to fend for themselves instead of organizing a joint financing of external border control. As a consequence of the resurrection of national border controls, the Schengen Treaty – relevant for all EU countries except for the UK and Ireland – that brings free movement of people without border controls between continental EU countries is impaired: Thus the GDP of the EU could be reduced by 0.8% in the long run and two to three million additional unemployed people can be expected. It is noteworthy that Mrs. Margaret Thatcher, in responding to a question about whether the UK should join the Schengen Treaty, responded (to paraphrase) ‘No, since we do not want a situation in which Greek civil servants would effectively control access to the UK’.

The EU will face serious challenges. With France facing serious economic problems plus a new broad fear of terrorism and Germany being politically destabilized through Merkel’s decision-making in September 2015 as regards the refugee crisis and the following enormous rise of the AfD, there will be lower economic growth in Germany and the eurozone, respectively (Germany accounts for about 23% of EU GDP; France for 16%); what’s more, the xenophobic AfD will impair Germany’s FDI inflow and thus innovation and growth dynamics and a move towards more well-paid skilled jobs. There will be lack of EU leadership and this in turn will undermine the EU’s stability. A weakened EU implies a weaker NATO and this should worry the EU.

Mr. Putin is likely to cheer this new EU weakness and the rise of the AfD and the number of populist xenophobic parties in many EU countries is bound to increase. The only positive perspective for 2017 in Germany concerns the election victory of the Green Party Baden-Württemberg Minister-President, Winfried Kretschmann, who was not only re-elected but his party is now No. 1 in that state with 31% of the vote. If Kretschmann should become the first green candidate for Chancellor in Germany, he should be able to get about 40% of the votes in Baden-Württemberg and about 20% for Germany as a whole in the national elections in 2017. This might be enough to create a conservative-green coalition government that may be expected to push for ecological innovation and green growth.

The political pitfall of a visible non-EU spirit of Chancellor Merkel is another argument for calling for an EU political union in the long run. An EU that spends only 1% of GDP in Brussels is much too small in fiscal terms. The US federal government expenditure relative to GDP of 9% (without social security expenditures) is so much higher than the relative level of EU expenditure, but Germany and the UK are the main countries that so far prevent an adequate reform of vertical government expenditure. With infrastructure and military expenditures largely concentrated in Brussels, the Eurozone/the EU could have a much more effective fiscal policy and fiscal federalism also gives clear arguments that the EU’s government expenditures are much too small. The strange hybrid institution of a European Commission that is both a legislative and an executive institution is also doubtful; a true Eurozone Parliament and a Eurozone government is what is needed, plus a distinct EU income tax. The overall tax burden should, however, fall in the EU, if all political layers are added up – efficiency gains in a political union could lead to this result. If the EU should disintegrate, there will be globally negative spillover effects since other regional integration schemes will also be destabilized (for example, ASEAN and Mercosur). The British steps towards a BREXIT will dearly cost the UK and continental Europe plus the world economy at large. Like Mrs. Merkel, Mr. Cameron is a conservative politician – both not having a bright intellectual perspective. The expansion of populist right-wing parties in the EU will lead to more protectionist policies in key European countries. This is neither in the interest of Europeans nor of the US, China, ASEAN or Japan. The AfD has also indicated that its leaders favor more cooperation with Putin’s Russia and they are against the proposed Transatlantic Trade and Investment Partnership of the EU and the US. The AfD, UKIP, Front National and other right wing populist parties will lead Europe back into the late 19th century. One can only worry about such irresponsible perspectives. Historically, Chancellor Merkel’s ill-guided refugee policy amounts to a broad political destabilization of Germany and the EU, respectively.

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Allgemein, Economics, European integration

BREXIT Referendum and Mr. Boris Johnson’s Immigration Story

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    BrexitWelfensEIIW2016feb, February 23, 2016

BREXIT Referendum and Mr. Boris Johnson’s Immigration Story

The EU summit in Brussels has brought a compromise which gives new priviledges to the UK – the British conservative government was mainly interested in being allowed to postpone the access by immigrants to British social security services for about four years and not to face EU pressure on the UK to join the euro area in the future. Prime Minister Cameron has decided, along with his government, that the compromise is good enough to call for a referendum on June 23 and he has recommended that the public vote for the UK to remain in the EU. Mr. Boris Johnson, the conservative Mayor of London on the other hand has declared that he will recommend voting for BREXIT, the UK’s leaving of the EU; the anti-immigration and anti-EU rhethoric of Mr. Johnson is part of his ideological voting perspective. He, as Mayor of London, has been unable in the EU’S richest capital city to solve the problem of helping keep poor eastern European immigrants from sleeping out in Hyde Park (and other parks) overnight and to either travel home or to find a job in the greater London Area. Clearly, many people in London, and also many tourists, did not enjoy the scenes of stranded immigrants from eastern European, Turkey and other countries. Mr. Johnson’s anti-immigrant and anti-EU attitude is strange for many reasons – one of his two grandfathers, namely Osman Ali, fled from Turkey to London many decades ago; interesting, isn’t?

If he does not want to accept, at very generous terms, migrants from EU partner countries, why would EU citizens continue to consider flying to London and investing in the British capital? Also, people in continental EU countries should remember that it was UK financial market deregulation (emerging under the pressure of irresponsible big banks in London etc.; and US financial market deregulation) which brought about the massive transatlantic banking crisis that has undermined growth to a large extent in almost all EU countries. Northern Rock was facing a bank run long before the collapse of Lehman Brothers, and many big London banks were involved in cheating on the Libor interest rate and in many other deals with millions of clients. It seems very odd that Mayor Johnson now takes this anti-EU attitude.

Politicians like Mr. Johnson will lead the UK and Europe back to the 19th century and sooner or later military expenditures relative to GDP would be back to about 4% – the relevant figure around 1900 for the leading European countries; more than twice as high as the level in 2015 and, in the historical perspective, during the period leading to the deadly World War I. The British people will make their decision independently in the referendum, but the outsider continental view favored here is to say that the UK would be very welcome to remain in the EU; at the same time, however, double-speaking politicians such as Mr. Boris Johnson will face strong opposition from millions of responsible European citizens. It is strange in any case that UKIP, with three million votes at the national election, could effectively hijack the Conservative Party in the UK and start a political blackmail maneuver against 450 million EU people on BREXIT (explanation to follow…).

Additional reflections from my January 2016 contribution

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 referendum 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?dd
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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

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

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 http://www.eiiw.eu

 

 

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