John Bruton

Opinions & Ideas

Category: EU Countries

DIFFERING OPINIONS ABOUT THE EU

eurobarometerThe recent Eurobarometer poll (taken in September/October 2016) gives a good insight into the problems European Union leaders will face in crafting a unified response to the multiplicity of challenges it now faces.

It tells us that voters, in the different EU countries, see the EU very differently.

IS IT GOOD TO BE IN THE EU?

On the question of whether membership of the EU is a good thing,

  • 81% of Luxemburgers,
  • 74% of Irish, and
  • 72% of the Dutch agree.

But at the other end of the scale, only

  • 31% of Greeks,
  • 33% of Italians, and
  • 32% of Czechs agree.

Interestingly 47% of British voters said they thought it was good for the UK to be in the EU, which is a better score than 8 other EU states.

The finding in regard to opinions in Italy about the value of being in the EU is very worrying, in light of the forthcoming referendum there, and the huge debt problems Italy faces, for which it may need help from the rest of the EU.

If Italians have such a low opinion of the EU, are they likely to accept EU terms for help?

It would appear that Italian voters blame the EU for the fact that their economy is growing more slowly, for a longer time, than almost any other EU state.

Before the euro, Italy was able to adjust to a loss of competitiveness by devaluing its currency . Now Italy and its banks owe money in a hard currency and they no longer have the option of devaluing some of their debts away.

HAS YOUR COUNTRY BENEFITTED ECONOMICALLY FROM BEING IN THE EU?

60% of EU voters think their country has benefitted from being in the EU,

But only 38% in Italy think so, only 44% in Greece and Cyprus, and only 48% in Austria.

Remarkably 56% of UK voters said they felt their country benefitted from being in the EU, even though they had just votes to leave it!Obviously non economic factors swayed the vote in the UK referendum.

The countries , where the biggest majorities feel their countries have benefitted from being in the EU, are

  • Lithuania(86%),
  • Luxemburg( 84%) and
  • Ireland (84%).

WHAT IS THE QUALITY OF EUROPEAN DEMOCRACY?

Some argue that there is a crisis in European democracy, in the sense that voters do not feel that their vote counts, in their own country, or in the EU.

Denmark and Sweden are the countries where voters feel their vote counts the most, at both EU and national levels.

The countries where people feel their vote counts the least include Greece, Lithuania, Cyprus, Italy and Spain.

Generally it seems, that if people feel their vote counts (or not) at national level, they also tend to feel that their vote counts at EU level . Ireland comes in the middle of the field on both measures.

These findings would suggest that action to improve voter involvement in decision making need to be taken both by states themselves and at EU level.

WHAT DO YOU THINK OF THE EUROPEAN PARLIAMENT?

Another question asked was about whether voters had a positive view of the European Parliament.

The voters with the least positive view are to be found in France (only 12% of voters have a positive view).

38% of Irish voters have a positive view of the Parliament, which is the 3rd highest score of the 28 countries.

Anti EU feeling in France is a worry, as the French Presidential election nears.

WHAT HAPPENS IF GREECE DEFAULTS? HOW DISHONEST “ANTI AUSTERITY“ RHETORIC MAY LEAD EUROPE TO AN AVOIDABLE DISASTER

If Greece defaults on its debts, and leaves the euro, the effects will be very hard to calculate. 
Nobody really knows what will happen. Nobody even wants to talk about it.
But a very serious precedent will have been established.

That precedent, that of a euro zone country defaulting on its debts and leaving the euro, will eventually place upward pressure on the interest rates charged to small euro zone countries with substantial debts. Financial markets are emotional and erratic and often fail to make distinctions that should be made.

The effect of a Greek default may not, of course, be felt immediately, thanks to quantitative easing, but the underlying precedent will tend to corrode of confidence in government bonds generally and confidence in the irreversibility of the euro, and confidence is the basis for all money. 

Maintaining confidence, and doing what is just and rational in an abstract sense, are not always the same thing.

Just as in the private sector, a risk of not being repaid in full usually leads to a higher interest rate…a risk premium.

For example, if , for legal political or cultural reasons, banks  have difficulty getting hold of properties, given as security for loans that are no longer  being serviced by  borrowers,  they will tend to charge a higher interest rate on such loans. The gap between the rate of interest banks charge, and the rate they pay for funds, will be wider than it would be if they knew they could easily realise their security, if a borrower defaults.

The rules for capital adequacy of banks, set by global banking regulators, have treated government bonds held by banks as risk free, and this has meant that banks buy a lot of government debt. If, thanks to a Greek default, government bonds are no longer risk free, this will call these rules into question. That , in turn, would make government  borrowing more difficult.

The present Greek crisis was not inevitable. It is the result of a decision by Greek voters.

A few months back, it looked as if the Greek economy was about to start growing again, admittedly from a low base. For example, as recently as August 2014, Deutsche Bank forecast that the Greek GDP would grow by 2.2% this year. This was to be almost twice the forecast growth for the euro zone as a whole, and second only to the forecast growth for Ireland of 2.3%, which has proved to be a big underestimate in the Irish case. 

Greece had put in place a lot of structural reforms, under the previous Greek government, more than almost any EU country by some measures. The labour market reforms improved the competitiveness of the Greek economy, but the full benefit of these reforms was not achieved because of cartels protecting some professions and services. The reform programme of the previous government was not a “failure”, but it was delivering results too slowly for an impatient electorate in Greece.

40% of loans in the Greek banking system were non performing, but the banks were not dealing with this. Greece was suffering a brain drain.

That prospect of 2.2% growth in the Greek economy was blown away by the uncertainty caused by the Syriza election victory, and the nationalistic rhetoric and grandstanding that surrounded it. This led to a flight of confidence, and money, from the Greek banking  system and an unwillingness of foreigners to invest in Greece as long as the political uncertainty persisted. It did nothing to slow the brain drain.

The new government threatened to undo the labour market reforms and to make it more difficult for Greek banks to deal with non performing loans.

The  structural reforms, put in place by the previous Greek government, had begun to work, when they were derailed by politics. 

Syriza won office on a false platform which asserted that the previous structural reform programme had been a “failure”. It had not been a failure, it had  brought Greece to the pont where its forecast growth rates for this year were second best in the euro zone. It had simply taken longer to work than it would if international conditions were more favourable, and if it had been extended as vigorously to  the professions, and to tax evasion, as  it had been to employees.

Syriza  convinced Greek voters the “austerity” was a “failure”, without saying what those terms meant in practice, but implying instead that others should pay Greece’s debts for it, as part of some sort of moral obligation the rest of the world had to Greece. This was naive. Greeks forgot that other EU nations have electorates too!

If one is spending more than one is earning, “austerity” is inevitable, sooner or later, unless you can achieve a rate of economic growth that is faster than the growth in your state’s obligations. That was always going to be difficult for an ageing society like Greece, with an under funded  pension system, and a  disproportionate amount of early retirement.

The tragedy is that modern election campaigns have become shouting matches, that do not lend themselves to the sort of informed discussion that would have  led voters to see, in time, the fallacy of policies that imply that one can persistently consume more than one is earning, without eventually facing  “austerity”.

There is some ground for hope. A deal can be reached.  Because of the nature of  its support base, Syriza may have more freedom to tackle tax evasion and  cartels in the professions, than the previous government. This could get Greece back on a growth path, so long as  Syriza does not attempt  to reverse  the reforms  the previous government HAD put in place.

THE EU’S SYSTEM FOR KEEPING EURO STATE BUDGETS ON TRACK IS AS IMPORTANT AS EVER NOW…..ESPECIALLY WHEN INTEREST RATES ARE LOW

Bond markets are notoriously fickle. They often seem to be driven by sentiment rather than deep analysis. The experience of 2006-2008 shows that they are not infallible. They are not a good guide to long term economic prospects. Rating agencies seem to follow sentiment rather than lead it. They are like a bus driver who is looking out the back window of the bus rather that at the road in front.

This is the context in which France and Italy should be assessing the wisdom of submitting draft budgets this month to the European Commission, in accordance with the Stability and Growth Pact,  that go back on commitments they had previously given to reduce their budget deficits to below 3% of GDP.

The low rate of interest at which most European governments can borrow at the moment can be explained by two factors, which are not necessarily permanent

1.) Sovereign bonds, that is bonds issued to allow governments to borrow, are treated as entirely risk free assets in the balance sheets of banks under the rules the EU has set for calculating the solvency and adequacy of capital of banks.  This is a somewhat artificial assumption, in that it implies that there is a ZERO risk that a European Government will ever default on its bonds ie. fail to pay all the interest due and repay the bond in full and on time. The scale of debt relative to income of some European countries might lead some to question this assumption, unless of course there is a big surge in either inflation or economic growth

2.) Prevailing interest rates are now so low, the amount of money seeking a home is so great, and high yielding investments are so scarce, that it is not surprising that investors are turning to government bonds, and thus driving down their interest rate. But if the flow of funds slowed, or if the availability alternative better yielding investments were to increase, the demand for government bonds would immediately slow. Then the interest on government bonds would have to increase, if governments were to sustain their borrowing levels.

It is against this background that the budget plans to be submitted by member governments of the euro  on 15 October will have to be assessed. The European Commission, in assessing the draft budgets of member states, would be unwise to assume that present low interest rates on government bonds are a permanent condition.

Ironically, while governments may defy the European Commission, they would not be able to defy the bond markets, if, for any reason, bond markets were to change their minds about sovereign bonds, and look for a higher interest rate. Bond markets can be less forgiving and less attentive to rhetoric or political argument than the European Commission or Ministerial colleagues in the European Council of Ministers.

That could happen quickly, leaving little time for adjustment. 

It is less likely to happen if the EU’s system for coordinating the budget policies of the 18 euro area states (the Two Pack and the Six Pack) are seen to be respected, especially by the big countries like France and Italy. This is backed up in a very specific way by Article 126 of the European Treaties.

If the system is defied, or reinterpreted in a way that removes its meaning, the fickle bond markets could get nervous again.

Ireland knows, better than most, how difficult that can be for a state that needs to borrow to fund services, or repay maturing debts. 

BETTER PRODUCTIVITY IS THE KEY TO EUROPEAN PROSPERITY……… PRODUCTIVITY IN THE LEGAL SYSTEM AND IN THE HEALTH SERVICE IS AS IMPORTANT AS THAT IN EXPORT SECTOR

Raising productivity should be Europe’s top goal for the next ten years.

A recent OECD report highlighted low productivity growth as the key challenge facing the European Union.

It pointed out that, since 2000, labour productivity in the EU countries had risen by only 0.6% per year, whereas the average productivity growth, in OECD countries not in the EU, was 1.2% per year…twice as fast. 

Lagging productivity growth is even a bigger problem than the debt aftermath of the banking crisis. Economic growth that derives from increases in property prices and associated consumer spending is inherently temporary, whereas growth derived from productivity increases will last.

If EU countries become more productive, they will generate the revenue to reduce their private and public debts to manageable proportions. But if productivity remains low, debts will accumulate.

Since the crisis, EU countries have focussed on reducing costs, but have neglected investments that might boost long term productivity. 

Germany, for example, has a low level of public investment, even though it can borrow very cheaply to invest. In Ireland, public investment is still at two thirds the level it was in 2007.

Given that most EU countries will have to have big medium term increases in Government spending to pay pensions and provide healthcare to an ageing population, it is necessary for them to curb deficits now.  Already the EU has only 7% of the world’s population, but 48% of the world’s social spending by government.

Life expectancy in the EU is expected to increase from 76 years in 2010 to 84 years by 2060, which means a longer period during which pensions will have to be paid, and healthcare provided.

But cutting deficits, by reducing investments that might generate the revenue to meet those medium term expenses, is unwise.

One concrete step that could be taken to privilege investment over current spending, would be to amend the EU Stability and Growth Pact, to exempt from the deficit calculations co financing by member states of investments being jointly financed with the EU. 

The number of employable age in the EU will peak in 2022 at 217 million. After that, the number will fall. So if tax revenues, and services, are to be maintained, productivity must be continually improved.

The productivity of an economy is determined by the efficiency of the entire economy, not just of the export sector.

If Government services, the professions, the courts, or the transport system are inefficient, that can do just as much damage, as lack of research or unduly high wages in the export sector. 

Ireland, in particular, needs to look at the productivity of its health services, of its training systems, and of its legal system, all of which appear to be performing relatively poorly, and are shielded from external competition.

In Germany, the delays in setting up a new business are big barrier to improved productivity. Full scale EU wide competition in the services sector is a key to solving this problem.

COPYRIGHT JOHN BRUTON & CONTENT

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