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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Allgemein, Economics, European integration

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

 

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

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

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

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

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

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

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

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

Prof. Dr. Paul J.J. Welfens

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

 

immigrationGermanyRisk2016

 

Jan. 21, 2016

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Self-inflicted Political Radicalization through European Elections

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

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

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

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

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

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

 

Complex Situation after the End of the Cold War

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

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

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

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

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

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

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

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

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Allgemein, Economics, European integration

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

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

01/01/2016 (AntiOilPriceShockEIIWWelfens2016)

 

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

 

Anti-Oil Price Shock Sustained

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

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

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

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

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

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Allgemein

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

 

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

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

 

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

 

 

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

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

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

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

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

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

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

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