Allgemein

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

Volkswagen Emission Scandal, Economic Globalization

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

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

 

VW2015scandalENG

September 30, 2015

 

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

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

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

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

 

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Economics

After the Referendum in Greece – Greek Economic Drama

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris, Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

July 10, 2015(www.eiiw.eu) welfens@eiiw.uni-wuppertal.de 2015 = 20 years of award-winning research

 

File EIIW2015GreekEuropeEIIWwelfensJuly8

 

After the Referendum in Greece – Greek Economic Drama

The Greek referendum of July 5, 2015, has resulted in the refusal of the latest offer of the creditor euro countries. This was to be anticipated after five years of recession. Greece has experienced a real income decline of 25% in 2010-2014, a slight increase of real income occurred in the third quarter of 2014. However, anticipation of the victory of the left-wing SYRIZA party in the then upcoming elections brought down investment dynamics. Indeed with the Tsipras-led coalition government, established after early elections in January 2015, the investment GDP ratio has further declined. From 25% in 2007 it has reduced to about 12% in 2014 which is a drastic decline. 2015 will witness further reduction of the investment-GDP ratio and of the real GDP. The unemployment rate is also very high – close to 30% in mid-2015. Problems with the banking system will put further pressure on the real economy. The Tsipras government left the negotiation table in Brussels on June 25 and it effectively walked away from some € 17 billion which the country could have obtained as a bridging loan and extension of the second adjustment programme.

The Greek government had suggested that after a referendum a quick compromise would be achieved – within 48 hours; this, however, was illusory. Any agreement will take much longer to be completed since money from the ESM rescue fund would have to be mobilized to give Greece additional loans. The ESM could give new loans to Greece, but this will be possible only if the Greek government adopts more reforms. Tsipras has so far adopted no serious reforms, instead the left-wing rhetoric of the Tsipras government has discouraged investors further and the new recession of 2015 is a politically triggered economic downswing.

Alexis Tsipras has argued that the referendum – with 61% Greek vote No to the euro partner countries’/the Institutions’ proposals – will bring EU integration back to more political cooperation and an approach which would place less emphasis on the role of rules: This, however, is wishful thinking based on an inadequate analysis and similar to the fallacious hypothesis of Mr. Varoufakis, the resigned Greek Minister of Finance, who had argued that Greece would be like Italy, Spain and Portugal. However, the reaction of financial markets with regard to these countries’ interest rates on June 25 and 26 – after the collapse of the talks between Greece and the Eurozone partners – has been very small, so that the Varoufakis hypothesis is not valid.

The creditor countries of the Eurozone negotiated with Greece on June 24 without offering any debt haircut; however, this was not convincing in a situation in which the German government had declared that cooperation with Greece would be based on the involvement of the IMF; the IMF, in turn, had already indicated in a report on Greece in late June that a haircut on Greek debt would be needed to achieve sustainable debt-GDP ratios, which is the basis to keeping the IMF on board. The IMF report, Greece. Preliminary Draft Debt Sustainability Analysis, was published on June 26, however the findings were certainly available a few days in advance for all EU member countries. If all IMF member countries knew about a week before June 26 that there is no debt sustainability, why did the offer of the euro partner countries/the Institutions not suggest at least a small conditional haircut on Greek debt? This strategic mistake fuelled – one could argue – the large No majority of the Greek referendum. The fact that the Maastricht Treaty has a ‘no bail-out’ clause does not exclude the possibility that a technical approach to a haircut could be created; certainly with a strategy to make sure that, from the creditors’ perspective, the remaining debt is ‘safer’.

  • The IMF itself could offer a conditional haircut. As the IMF’s stake is about € 30 bill., one may argue that a haircut of € 15 bill. might be considered – this could be split into two halves so that some conditionality can be attached.
  • The euro countries could decide to transform part of the loans to Greece into a marketable product that would have a market price below 100%. Under very strict conditions, the Greek government could obtain the right to buy back part of this debt at a market price. A formula could be, for example, that for every € 50 bill. translated into an effective debt reduction, Greece must privatize the same amount of government assets, namely in an approach that involves the EBRD, which has broad experience in privatization. A maximum of € 100 bill. could thus be privatized which then would go hand in hand with a debt reduction of almost 1/3rd of the Greek government debt.
  • Greece should definitely avoid the problems associated with failing to make the repayment of € 3.6 bill. to the ECB which is due on July 20. If the Greek government, which has assets of more than € 300 billion at its disposal, would be unwilling to quickly mobilize some of these large assets for privatization in order to make sure that the payments to the ECB scheduled for July 20 and August 20 are made, this would be absolutely irresponsible. It would testify to a lack of economic professionalism and an obsession with ideological goals in a situation in which about 10 million Greek people are facing dramatic economic hardship.

The ECB is likely to extend ELA (Emergency Liquidity Assistance) credits for a short period, in order to allow Greek banks to operate at a minimal level. The European Central Bank is in a critical position, namely that it can give a green light for loans of the national central bank vis-à-vis commercial banks in the country, however, the green light for giving extra liquidity to Greek banks is based on the assumption that the banks have a liquidity problem but are still solvent. Here there is a crucial problem since the bankruptcy of Greece could translate into the bankruptcy of the major banks.

Indeed, on July 20 the ECB is expecting a repayment of loans from Greece. Should this payment not be made, a prolongation of ELA is unlikely, since non-payment to the ECB implies the bankruptcy of Greece; this, in turn, undermines banks’ equity capital – banks would thus face insolvency. More than 1/3rd of the major banks’ equity capital in Greece consists of expected tax refunds from government, but if government is bankrupt, then the value of expected tax refunds will be zero. With the equity capital of banks falling dramatically, the four main Greek banks are likely to be bankrupt within a few days. A strong economic collapse would follow in Summer 201 and output could reduce by about 10% within two years.

There is no investor confidence in the Tsipras government. Hence the investment GDP ratio, having already fallen from 25% in 2007 to 12% in 2014, is likely to decline further and this implies that Greece will face a massive recession in 2015/2016. This reinforces the need for a haircut on Greek government debt. This should have been anticipated by the leading negotiators in Brussels – which was obviously not the case.

GREXIT – Greece leaving the Eurozone – cannot be excluded as the Greek government has shown a lack of cooperation with its partners and its apparent lack of professionalism in economic policy could easily generate a “Grexidant” (involuntary leaving of the Eurozone). Greece’s return to the Drachma would be a drama.

The natural starting point of Eurozone countries/the Institutions in new negotiations with Greece should be to focus on structural reforms, institution building and the issue of debt sustainability: Here, Greece itself has not delivered the promised privatization revenues; Greek government assets were estimated to be more than € 350 bill. in a 2010 IMF Report (Dec. 2010), however, by early 2015, only about 1% had been privatized. Greece could be offered a haircut on its outstanding government debt vis-à-vis public debtors, say of about € 100 billion, strictly conditional on Greece proceeding seriously with privatization and reforms plus a redesign of the Greek constitution.

If Greece should decline to cooperate along a formula of debt relief plus privatization plus structural reforms, the Eurozone countries have no reason to seek any compromise with the Greek government. A country with more than € 300 bill. of sovereign debt which has not privatized more than € 3 bill. within five years is certainly not contributing the minimum effort to solve its own serious economic problems. Such “negative solidarity” in the EU is unacceptable – thus far privatization in Greece lags far behind all the efforts that eastern European post-socialist countries made in the transition period of the 1990s.

The ESM rescue fund could take over the current position of Greek bonds held by the ECB. The ECB’s role in monetary policy should no longer be compromised through the ECB’s holding of Greek government bonds. The political and psychological strategy of Eurozone countries vis-à-vis Greece has been inadequate in Spring 2015: The impression was created that Greece could order its partners to the negotiating table almost at will. The Eurozone countries and the EU, respectively, are, however, not only facing the challenge of contributing to helping Greece sort out its economic problems – rather there are also major challenges in the field of economic globalization, amongst others, the rise of China as an economic power: the global No. 1 since mid-2015 – with income evaluated at purchasing power figures. Moreover, there is the challenge of an expansion of information & communication technology.

A useful option could be to shift all negotiations to the Paris Club, which naturally will involve, as a standard ingredient of negotiations, the IMF; there has never been an agreement in the Paris Club without the IMF. The Paris Club has been active in the debt restructuring of many developing and some eastern European countries.

What could be recommended? Greece should get a first haircut of about € 10 billion upfront on the basis of an international privatization scheme which should involve the EBRD in London, an institution which has great expertise in privatizations in almost 30 countries so far. At the Paris Club, the US, Canada, Japan, Russia and the UK would also sit at the table, in addition to the Eurozone countries. However, if the Greek government is not offering policy reforms in the form of modernizing public administration, reinforcing competition policy and accepting broad privatization, it is highly unlikely that the required political support of creditor countries – from Germany or Ireland for example – will be achieved. Without majority decisions in parliaments in several Eurozone countries, no third loan package for Greece will be possible.

Greece needs a new constitution which gives clear financial autonomy to local and regional authorities plus universities and hospitals. If such autonomy is not guaranteed, the Eurozone countries should not sign any long-term agreement with Greece, since the government in Athens could take these institutions as “hostages”. The Greek government has forced local authorities, hospitals and universities to send liquidity to the central government, however, the main idea behind this move is to organize a maximum bankruptcy case if the Greek government does go bankrupt. Moreover, the main reason that Greece has made so little progress with economic reforms in the period 2010-15 is that the quality of government and the public administration is rather poor; there is massive inefficiency in government and this will not be changed without adopting a new constitution. The quality of institutions in Greece is also rather poor. The modest reforms achieved in some fields should be acknowledged, however the speed of reforms has been rather slow. Privatization has been almost non-existent in 2010-2015.

A haircut of € 100 billion for Greece would be a burden to the taxpayer of about 1% of GDP – here assuming that only public creditors are involved. However, an adequate deal would raise the GDP of the Eurozone by at least 0.1% per year, as Greek instability would be removed, so that after a decade, taxpayers’ costs would be close to zero. The Greek problems could be solved, however, with the strange Tsipras government this will be very difficult. It cannot be excluded that Greece will, in the end, leave the Eurozone and massive chaos would emerge in Greece thereafter. The case of Greece shows that a country which does not manage its public debt in a responsible way could experience a massive economic decline and political and social instability.

The German leadership, in terms of the management of the Greek crisis, has been rather weak in some points. There was no realistic strategy for stabilizing Greece within a few years. The IMF’s forecasts of fast economic recovery in Greece have turned out to be much too optimistic – and thus the disappointment both in Greece and in the euro partner countries was considerable in the second half the crisis period 2010-2015. The key to economic recovery in Greece is higher investment and this in turn requires political stability and a consistent economic policy as well as a stable banking system.

Finally, it is clear that a Eurozone without a political union could be rather unstable; whether or not Germany and France can generate the required political momentum for a future political union remains to be seen. The Greek crisis can be solved within a few years if adequate reforms are adopted. There is no doubt that the Euro monetary union and the EU also require reforms. The picture that the EU has presented to the partners in the world economy between 2010 and 2015 has been dismal. The new Juncker Commission might bring major improvements here provided a broad reform programme is adopted.

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European integration

Greek Economic Disaster Is Expected While Remedies Are Obvious

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris,

Research Fellow, IZA, Bonn, Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC; welfens@eiiw.uni-wuppertal.de , www.eiiw.eu                               (file GreeceEIIWwelfens2015June)

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

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

Klicke, um auf EIIW2015JuniWorkshopBerlinTTIP.pdf zuzugreifen

 

 

June 28, 2015

 

 

 

Greek Economic Disaster Is Expected While Remedies Are Obvious

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

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

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

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

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

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Allgemein

New Greek Coalition Government with Brinkmanship and Lack of Reforms

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

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

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

EIIW 2015 = 20 years of award-winning research

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

           

February 11, 2015

                                                                                                                                            prEgreece2015febWelfens(e)

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

 

New Greek Coalition Government with Brinkmanship and Lack of Reforms

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

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

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

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

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

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

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

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

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

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

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Allgemein

ECB’s Policy of Quantitative Easing Will Work

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

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

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

EIIW 2015 = 20 years of award-winning research

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

January, 26, 2015

                                                                                                                                            prEecbQEpolicy2015Welfens(e)

  • ECB’s switching to quantitative easing policy is reasonable, but not without risk
  • New policy mix in Eurozone likely to help in avoiding disinflation and raising GDP

 

ECB’s Policy of Quantitative Easing Will Work

The European Central Bank has announced on January 22, 2015, that it will adopt an expansionary open market policy: Quantitative Easing (QE) – to pick up the word used for the similar previous operations of the US central bank (FED) and the Bank of England in 2008-2014. Starting in March 2015, and continuing until September 2016, the ECB will buy government bonds and commercial bonds in order to fight deflationary pressure in the Eurozone. The ECB will buy bonds for € 60 bill. per month in that period: 1/5th by the ECB itself, 4/5ths will come in the form of an expansionary monetary policy of national central banks of the Eurozone countries; there is, however, a double limit: no more than 33% of the outstanding debt and no more than 25% of new bonds placed in the market. The overall order of magnitude of € 1140 bill. is slightly more than 10% of the GDP of the Eurozone.

While it is not clear that it was really necessary to start a policy of QE by the ECB so early in 2015, one may defend the measures announced as a deflation rate of 0.2% was observed in December and declining inflation rates down to 1% had already occurred in the first half of 2014 – well ahead of a strong decline of the oil price in the second half of that year.

The main effects will be (taking the Branson model as a theoretical background; plus additional aspects from Welfens, PJJ, Innovations in Macroecomics, 3rd edition, 2011):

  • (1) A decline of the nominal and real interest rate – this should be observed more strongly in southern countries of the Eurozone than in Germany and France which have benefitted strongly for several years from a safe haven effect that has depressed interest rates very much in both countries. A lower real interest will stimulate consumption and investment and that in turn should raise real income and employment;
  • (2) A nominal and real depreciation of the euro: The real depreciation of the euro should stimulate net exports of goods and hence raise real income (gross domestic product) in the medium term; hence aggregate demand is rising so that capacity utilization is rising and thus the price level should be raised.
  • (3) The real depreciation should also stimulate foreign direct investment inflows which bring with them a technology transfer effect – potentially also a rise of the capital stock – and a rise of aggregate supply: This effect dampens the desired rise of the price level as capacity utilization is falling.
  • (3) A rise of the stock market index – this effect is linked to (1) and (2); higher investment should result from this.
  • (4) The rise of real income in the Eurozone will stimulate exports of the US – and of other countries – and this in turn will raise real income of the US: This, also in turn, will stimulate exports of the Eurozone so that world real income will increase. The rise of the US gross domestic real product will partly be stimulated by an interest rate spillover effect from the Eurozone to the US; there, the real interest rate also will reduce.
  • (5) The improvement of the Eurozone’s current account in 2015 will bring about a modest appreciation of the euro and a slight increase of the interest rate: The second part of the QE programme of the ECB in 2016 thus will be less effective than the first programme in 2015 (there is a risk that inadequate handling of the problems of Greece could undermine the success of the ECB’s QE programme) .

The new policy mix – expansionary fiscal policy of the EU and Germany, plus QE policy – and the fall of the oil price should raise output growth for Germany to more than 1.5% in 2015 and a bit more in 2016. Output growth in the Eurozone in 2015 could be a bit more than 1% and in 2016 about 1.5%, so that the deflation process might be stopped.

Assuming that the ECB will neutralize the QE-related expansion of the monetary base, there will be no dangerously strong inflationary effect in the Eurozone (this fear was voiced by H.W. Sinn on 22.1). Quantitative Easing in the US did not bring any inflation problem, but it has helped to avoid deflation and it has contributed to a rise of real income. There are some risks in the programme:

  • Crisis countries could reduce the speed of structural reforms; the election victory of Mr. Tsipras in Greece could reinforce this problem.
  • There is a modest risk of a stock market bubble.

There is no prospect for a strong medium-term increase of oil and gas prices – fracking technologies and the global rise of the share of renewable energy dampen oil price dynamics in the medium term: In 2014, and for the first time, the global share of investment in renewable energy has exceeded – according to Irena data – the share of investment in conventional energy fuels. The Eurozone is facing the problem that there are no Eurobonds; such supranational bonds could be created only if there are steps towards a Euro Political Union. Here, there is a lack of leadership from the side of Germany and France.

The QE policy of the ECB will reduce the interest rates of European partner countries, including the UK and Switzerland. The main problem of the Eurozone is a lack of political cooperation and an inadequate weighting of the supranational policy layer: The EU spends 1% of GDP in Brussels – compared to the 9% spent in the US in Washington; Eurozone countries should shift public investment and defense expenditures to Brussels, so that a GDP ratio of about 6% will be realized, possibly increased by another 0.5% of GDP for spending on unemployment insurance for the first six month of unemployment. The supranational level should be almost exclusively responsible for anti-cyclical fiscal policy and a debt brake with a maximum structural deficit-GDP ratio of 0.5% would be adequate. The weight of Brussels must be strong enough to impose the no-bail out clause of the Maastricht Treaty. If there would be another Greek deficit fraud like that of the election year of 2009 or a repeat of the Irish non-imposition of EU banking supervision rules – and a loss of access to capital markets – the consequence should be that countries can go bankrupt. This is the only way that there can be successful Euro integration and economic benefits of about € 10 000 per capita could be realized.

Looking at the US: The FED has held 14.07 percent of US Marketable Securities in 1989-2013: with peaks in 2003/04, 2007 and 2012 (in the range of 17-19%); 2009 was 8%.

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Early Elections in Greece Should Not Translate into Another Haircut

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

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

Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

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

EIIW 2015 = 20 years of award-winning research

Prof. Welfens has testified before the US Senate, the German Parliament, the EP, the IMF etc.  

January, 11, 2015

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  • Another haircut for Greece is inadequate
  • Five years of refusing to privatize € 350 bill. government assets is a scandal

 

Early Elections in Greece Should Not Translate into Another Haircut

 

The early elections in Greece on January 25th could spell trouble for the euro area. Mr. Tsipras, head of the opposition party Syriza, is calling for a second haircut – the first haircut was made in 2012 and affected private investors. The burden of a second haircut would have to be mainly borne by those countries which rescued Greece from bankruptcy by giving large loans to Greece; the respective € 260 bill. would be partly at stake in the context of a second haircut and this would indeed affect taxpayers in all euro partner countries of Greece. There is, however, no reason to implement a second haircut since the low average interest rate of 2.7% for Greece translates the debt-GDP ratio of 175% into an interest payment-GDP ratio of only about 5%; this is much lower than the respective ratio in 2000-2005. Greece had achieved modest growth in 2014 – after five years of a recession – and 2015 could also bring economic growth, but a Tsipras policy as announced, namely raising employment in the public sector and rolling-back privatization, would clearly undermine economic growth massively.

In the field of the privatization of government assets, estimated by the IMF to be about € 350 bill., various governments between 2010 and 2014 have failed miserably; less than 1% of assets have been privatized and not even the old airport of Athens – worth several billion Euro and closed in 2004 – has been privatized within a decade. Too many party friends from both the right and the left enjoy economic rents, for example from living in houses and apartments owned by government, which often collects less than half the rent payable in line with market prices. Eastern European EU countries privatized, under very difficult conditions, all kind of assets very successfully in the 1990s, so Greece should follow their example; it is, however, true that the EU should have sent EBRD experts from London, with their experience in privatization in 29 post-socialist countries, to Greece between 2010-2014 with the goal of supporting Greek privatization activities.

If there were a second Greek haircut this would very much undermine economic recovery not only in Greece but also in Italy, Spain and other countries. Investors in the bonds of Italy and Spain would anticipate future haircuts in these countries and a top-up on the current low interest rates would be the main effect of a second haircut in Greece; the latter is 2% of the GDP of the euro area, but the combined GDP of Spain and Italy is 20%, so that the adverse spillover interest rate effects would be the decisive impact of a second Greek haircut. Moreover, such a haircut would not only be a reward for the totally irresponsible Greek deficit policy of the election year of 2009 when government there notified an expected deficit-GDP of 4% of GDP to the European Commission while the true figure was actually 15.6%. It would also encourage irresponsible future deficit policies in other euro area countries and this certainly is not in the interest of a stable euro area and the public in the Eurozone. If a new Greek government should violate the contracts with its partners, Greece should leave the euro area and the EU. The country, getting EU transfers of about 2% of GDP every year, will certainly not want this.

What is really urgent is the need to implement a harmonized budget software in all Eurozone countries and thereby to get full transparency of national budget developments for the European Commission and the public in the Eurozone. Moreover, as a second measure to avoid the potential problem of a repetition of the Greek deficit fraud, one should start a debate on creating a Euro Political Union with a special Parliament and a distinct supranational government which should spend about 6% of GDP in Brussels – much more than the current 1%, but still 1/3rd less than is the case with respect to Washington DC in the US. Add to this 0.5% of GDP for supranational payments for the first six months of unemployment insurance – again much less than the 11% of GDP for social security expenditures in Washington DC. Additional expenditures on the supranational level should mainly concern infrastructure expenditures and defense expenditures whose volume would be correspondingly reduced at the national level. The supranational policy layer thus would be exclusively responsible for stabilization policy and naturally there would also be Eurobonds and a supranational income tax rate.

The combination of the national income tax rate and the supranational income tax rate would be about 1 percentage point lower than currently, namely due to the saving of interest expenditures on government debt and to the exploitation of efficiency gains in the overall public administration. In such a new setting, a renewed deficit fraud at the national level would go along with the bankruptcy of the respective country. Finally, the supranational maximum structural deficit relative to GDP should be 0.5%, while at the national level the structural deficit-GDP ratio should be zero; this, along with a complementary debt brake rule, should be enshrined in the national constitution; countries which are not willing to adopt such constitutional changes should not be part of the Euro Political Union.

The proposed reforms represent the only institutional arrangements which can bring about long-term Eurozone stability and contribute to overcoming the current euro crisis. The transatlantic growth advantage of the US vis-à-vis the euro area is about 10% in 2008-2015 (based on 2015 forecast) and thus it would be quite important for the Eurozone to catch up. Giving in to calls for a second haircut for Greece would massively undermine political support for the euro project and the EU and would also impair economic growth in the euro area. One should not rule out the possibility that a Greek government, acting responsibly, will get additional support for growth-enhancing measures to help to bring down the very high unemployment rate in Greece. The benefits of a functional and stable euro are enormous for both the euro area and the world economy. A stable euro could achieve a market share of about 30% in global currency reserve markets; this implies that the Eurozone will be able to import about 0.5% of GDP for free and this amounts to about a 500 € income gain per household per year. These benefits come on top of the standard benefits from a more integrated euro capital market and a more competitive EU single market. The main problem is the lack of willingness at the national level of many member countries to shift economic power to the supranational policy layer. An incentive could be to shift national debt of about 20% of GDP to the supranational level and to basically exchange national bonds – covered by government assets – for euro bonds. Such a swap should be allowed for all those euro countries whose debt-GDP ratio shows a decline towards the 60% level or is already below 60%. Thereby the Euro Political Union will start with some debt but also equivalent assets.

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Many Clear Arguments in Favor of Transatlantic Free Trade Agreement

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

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

Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

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

EIIW 2015 = 20 years of award-winning research

Prof. Welfens has testified before the US Senate, the German Parliament, the EP, the IMF etc.  

January, 3, 2015

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  • Major gains from transatlantic free trade
  • Gains from TTIP much higher than pure trade analysis suggests
  • Investment partnership needs no separate investor protection

Many Clear Arguments in Favor of Transatlantic Free Trade Agreement

The negotiations over a Transatlantic Trade and Investment Partnership (TTIP) Agreement between the European Union and the US stand for a historical challenge. The basic idea is to eliminate tariffs for all sectors and to reduce the considerable non-tariff barriers which represent, in some sectors, the equivalent of an import tariff of 10 to 20%. A study for the European Commission has argued that benefits will be 0.5% of GDP on both sides of the Atlantic within a decade. This order of magnitude is actually too low as only trade liberalization effects are considered. If one considers the certainly also relevant positive effects from increasing transatlantic foreign direct investment and enhanced innovation dynamics on both sides of the Atlantic – analyzed in an EIIW paper by WELFENS/IRAWAN (see www.eiiw.eu) – the order of magnitude is much higher: more than 1% of GDP. From a global perspective, one key issue is whether or not the effects of transatlantic liberalization are also positive for the rest of the world. Based on a CEPII-study, the finding is that transatlantic trade liberalization has a slightly negative impact on the rest of the world, but it is conceivable that this could be changed into a positive sign through a joint transatlantic policy initiative intended to help developing countries to successfully adjust to the new more advanced industrial standards in the USA+EU area through technical assistance. This joint initiative should be launched by the European Commission plus the European Council in cooperation with the US government plus the US President in 2015. Such an initiative would make TTIP a global win-win-win package.

There is considerable opposition against TTIP in Germany and in some other EU countries and many non-governmental organizations have raised their voices against either certain elements of TTIP or indeed the overall project. The initiative Stop TTIP represents a network of about 330 organizations and in December this network presented about 1 million signatures against TTIP in Brussels. This opposition shows, to some degree, understandable concern against the chapter on investor protection, but most other arguments are rather expressions of emotional feelings and lack scientific foundation. Investor protection in a treaty with the US so far concerns nine eastern European countries which have all concluded a bilateral treaty with the US before they joined the European Union. No western EU15 country ever had an investor protection treaty with the US, as such treaties had typically been an element to raise investor confidence in both developing and post-socialist transition countries in which the rule of law was not firmly established. As ten post-socialist eastern European countries have since joined the EU, there is no need to raise doubts about the rule of law in these countries. Investor dispute settlement rules in a TTIP agreement should be confined to confirming the existing international framework and no extra provisions strengthening multinational companies are needed.

A streamlined TTIP agenda can generate all the key benefits which one may expect from more trade, foreign direct investment and enhanced innovation dynamics. Stronger transatlantic economic links will not only generate economic benefits but will also reinforce the position of the West and of partner regions in the global economy and this can help to strengthen human rights, economic freedom, equal opportunities and democracy worldwide. Not to conclude a TTIP agreement would imply that the global trade network and its rules will increasingly be shaped by China whose economic and political weight continues to grow over time; and China’s political agenda is certainly different from that of the West. It is also clear that TTIP would reinforce security links between the US and the EU, and here the European Union member countries certainly stand to benefit again. It is also obvious that the US initiative for a Trans-Pacific Partnership with many countries in Asia will reinforce both economic dynamics in Asia and the links between the US and Asia, hence it is all the more important for EU countries to create a strong transatlantic trade and investment pillar for the 21st century.

It is certainly necessary to explain the economic benefits to the wider public in the EU on the one hand, on the other hand there is a need for a broader quantification of the combined benefits from transatlantic trade liberalization, the rise of foreign direct investment and enhanced innovation dynamics. One should also not overlook the fact that US environmental organizations – such as the Sierra Club – hope that TTIP will help to raise US environmental standards; for example safety standards in the chemical industry in the USA where standards from the 1970s are clearly weaker than those of the EU’s Reach Directive for the chemical industry in EU countries. Moreover, the rise of per capita income through TTIP will reinforce the demand for a clean environment on both sides of the Atlantic, as this demand is a positive function of per capita income. A serious joint challenge is data protection – with TTIP only covering rules for firms; not for private households. The increasing number of hackings targetting big firms, including Sony in December 2014, clearly indicate the need to establish a joint task force and to take data security and privacy rules very seriously: The world economy cannot exploit all the great digital growth opportunities in an optimum way if there is not adequate investment in data protection and if minimum standards for data security are not raised and monitored. There is a need for a broader transatlantic public debate as part of democratic consensus-building on the rules for a digital transatlantic economy. Since the internet is global this should be a starting point for a more global initiative with the International Telecommunications Union, as a key UN organization relevant in this field.

These are all good reasons to create a reasonable TTIP solution which should eliminate 99% of all import tariffs and sharply reduce all non-tariff barriers. Public procurement should become more open on both sides of the Atlantic – so far, the US has been much less open than EU countries. A successful TTIP project should not mean neglecting the long run challenge to also achieve more trade liberalization in the current liberalization round of the World Trade Organization. A balanced TTIP package is urgently needed.

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