Category: Europe (Page 2 of 2)
- Growth in Ireland was 4.8% last year and will probably be 4% this year. This is the highest growth rate in Europe
- 95000 new jobs have been added since 2012, and the IDA plans to attract a further 900 new investments by 2019, adding 80000 new jobs
- net emigration is likely to cease next year, on present trends
- The government deficit of spending over revenue was 15 billion euros, and it is now 4.5 billion euros
Spanish banks are carrying a lot of bad debt from the construction bubble there. The banks have not properly acknowledged this debt in their books, and this has sapped investor confidence in them.
The new Spanish Government has introduced sweeping labour market reforms that will improve Spanish growth potential in the next few years, but that is not immediate enough to kick start the Spanish economy today. The true financial position of many Spanish regional governments is obscure, and that saps confidence too.
Greece, despite all the austerity, still has a big balance of payments deficit. In other words, Greeks are buying more abroad than they are selling there. Until that is tackled, nobody will want to lend to Greece. It seems Greek banks are using cheap ECB money to lend to some Greek consumers who are spending it abroad.
Meanwhile, other Greeks have experienced big wage cuts, but, because the distribution system in Greece is riddled with monopolies and restrictive practices, Greek prices have not come down along with wages. This is why many Greeks are angry.
Portuguese banks have a big exposure to a possible Greek collapse. Total Portuguese exposure to Greek debt comes to 7% of Portuguese GDP, as against a comparable exposure of 5% for France, 4% for Germany, and 2% for Ireland. Relative unit labour costs in Portugal have hardly come down at all since 2007, whereas they have come down substantially in Ireland and Greece. All this makes Portugal particularly vulnerable to a loss of confidence that might come, if Greece defaults again.
The recent decline in voter confidence in the government of Mario Monti in Italy is also a big worry. His reform programme is only beginning to take effect, and the fear has to be of a return to populist politics, of a kind that would stop long overdue action Monti is taking to clear the arteries of the Italian economy, and lift its growth potential .
Two issues, growth potential and political capacity to implement decisions, are at the centre of our present dilemma.
The OECD has done some calculations on the growth potential of various countries from 2016 to 2025, making assumptions based on growth or decline in the working age population and likely productivity growth. These estimates show huge differences between euro area countries. OECD thinks Ireland has a growth potential in that period of 2.7% per year, whereas Germany only has a growth potential of 1.2%! This is explained by the likely decline in Germany’s working age population.
Interestingly, Spain has a growth potential of 2.3%, whereas Greece and the Netherlands are deemed to have a potential of just 1.4%, and Italy 1.5%, almost as low as Germany. These figures, if valid, may explain why Germany is emphasising productivity and is unwilling to underwrite the debts of other countries, unless and until it is first fully convinced that those countries will achieve or, better still, improve their growth potential.
The other part of the problem is capacity to make and implement decisions at EU level. A currency depends on confidence, and confidence comes from knowing that quick action can be taken in a crisis.
The EU system is designed for deliberative and consensual legislation, not speedy crisis management.
To make decisions, the EU has to bring along countries that are in the euro, countries that are not yet in the euro, and also countries that never want to be in the euro at all but want to share in all the benefits of the single market.
If an unforeseen problem comes up, the EU has to amend its treaties, and that requires ratification in 27 countries (and a referendum in at least one of them!).
Increasingly, because no European leader, like the President of the Commission, has a direct mandate from the European people, the really important decisions are being made by the 27 heads of Government, who each do have such democratic mandates in their own countries.
I believe the crisis is of a seriousness that it requires us to step outside the conventional ways of thinking, and tackle the economic and political problems of Europe together in one package. If necessary, leaders should continue meeting until they have worked out a global blueprint, covering the present banking crisis, the Greek issue, structural reforms to lift growth potential, and enhancing democratic decision implementation. Sometimes, the more issues are in the mix, the easier it becomes to find balancing compromises.
It is a two round election, with only the top two in the first round, contesting the second round three weeks later.
At the moment,it is likely the two in the second round will be François Hollande, the Socialist(now on 27.5%) and Nicolas Sarkozy (now on 29.5%).
The third and fourth candidates, Jean Louis Melanchon of the Left Front, and Marine le Pen of the National Front are both on 14%, so neither of them is likely to overtake the front runners. Francois Bayrou, the Centrist candidate, is on only 10%.
When voters are asked who they would vote for in a straight fight between Holland and Sarkozy, they plump for Hollande by a margin of 8 points.
This is because Hollande picks up a bigger share of the eliminated candidates’ votes. For example, Hollande has a margin of 81/3 among Melanchon’s voters, and 40/32 among Bayrou’s. Sarkozy beats Hollande by 49 to 16 among Le Pen’s electorate.
Sarkozy’s best chance to win is if he can convert Bayrou’s voters to his cause, possibly by offering the Prime Ministership to Bayrou, while still holding on to the National Front electorate. This would not be an easy task, because there is little or nothing in common between Bayrou’s electorate and that of the National Front
Some of the campaign debate is about taxing the rich. This is in response to the fact that incomes at the top in France have risen faster than incomes in the middle and lower range.
Clamping down on Islamic militants, and employing more teachers, are other recurring themes.
The fact that France has an excessive budget deficit, has lost competitiveness vis a vis Germany, and as a result has a big trade deficit, is not getting attention from the big parties.
FRANCE’S LOSS OF COMPETITIVENESS
Hourly labour costs in France are now 10% higher than in Germany , whereas ,in 2000, they were 8% lower.
The State in France spends 56% of GDP. Deductions from wages to pay for health and pensions (the retirement age is only 62) are extremely high and deter job creation. Yet French politicians blame things like the Irish 121/2% tax rate for their problems in attracting investment, rather than the cost of employing people in France itself.
If Hollande wins, he could find himself dependent on Deputies from the party of the Left Front, who favour a complete ban on redundancies, and a 100% tax rate on incomes above 350,000 euros. Hollande himself already favours a top 75% tax rate, and an increase in the wealth tax.
France has a revolutionary tradition and a passionate belief that political action can change things. The difficulty is that globalisation, European integration, and accumulating Government debts, have reduced political options more than French politicians are willing to admit.
FREE MOVEMENT OF CAPITAL IGNORED IN THE DEBATE
The policies of the French Left would be very difficult to implement, because as long as France continues to allow free movement of capital, people who feel they are being overtaxed can simply leave the country, and take their money, and their factories with them.
Free movement of people, and of capital, are requirements of EU and euro membership, and have allowed France to develop world class companies, like Pernod Ricard ,which owns Irish Distillers.
France is prepared to take the benefits from globalisation, but has not accepted that these benefits come with limitations on what is politically feasible.
I believe that the unreality of the debate in France about its public finances, and about its true economic options, could become a threat to the future of the euro.
Previously it has been addressed by then serving President Mary McAleese of Ireland, and by then former Presidents Giscard d’Estaing of France, Bill Clinton, and George HW Bush of the United States. John Major and Helmut Kohl have also addressed the Forum.
This year the former Prime Minister of Pakistan, Shaukat Aziz will speak.
Jeddah was founded as a fishing village in 500 B.C. It was incorporated into Saudi Arabia in 1924 after the end of the Ottoman Empire.
Today it is the commercial centre of Saudi Arabia and is internationally oriented as it is the gateway, through which Muslims from all over the world pass, on their way to Mecca on pilgrimage.
Jeddah is the headquarters of the Islamic Development Bank, and of the International Association of Islamic Banks. It was an important place to visit in promoting Ireland as an international financial services centre. Ireland has passed legislation to facilitate the provision of Islamic finance from an Irish base. Ireland also hopes to attract Saudi investment in renewable energy and other sectors.
There is a great deal of construction activity taking place in Jeddah.
GLOBALISATION – HOW SHOULD COUNTRIES COOPERATE?
I was asked to speak in a session on “Building Blocks-Models of Regional Cooperation”. The European Union is the most advanced model in the world of regional cooperation and there is a lot of interest in Asia in how it works.
There is a pervasive scepticism in the English language media about the prospects of success of the European Union. Many of the same people, who predicted that the euro would never even be established in the first place, are now enthusiastically predicting its imminent demise.
But events are proving that EU institutions are able to adapt, albeit slowly, to new challenges.
I explained how the EU works and spoke of the recovery under way in Europe after the economic crisis. It has, of course, been a difficult process.
Only in the last few weeks have adequate mechanisms been put in place to monitor overdue reforms, and to help remove underlying imbalances in the European economy. These things should have been done when the euro was originally launched in 1999.
During the down turn, Europe lost market share in export markets. Even Germany has had that experience.
If Europe is now to regain its dynamism, it will have to be able to reallocate resources, both human and material, more quickly from sectors where demand is in decline, to ones where it is on the increase.
Restrictive practices and unnecessary rules- in entry to the professions, in the setting of wages, in education-inhibit the efficient reallocation of resources, and thus prevent the creation of new jobs. Getting rid of these restrictions is just as important as restoring the state finances.
Reports by the European Commission to the heads of EU Governments are beginning to identify these bottlenecks. Passing laws to remove the bottlenecks will be a national responsibility, and vested interests will do their best to slow down progress, as we are seeing in Spain and Italy at the moment.
To meet the challenge of the rising, and more youthful, economies of Asia and Latin America, Europe will also have to put greater emphasis on efficient use of all its limited resources. For example much energy is wasted in badly insulated buildings. Only 40% of Europe’s waste is recycled. Huge amounts of food go to waste. Arable Land is being wasted too. An area the size of Cyprus in concreted over for development in Europe every ten years.
But the greatest waste of all, is the unemployment of young people.
There is something desperately wrong with a situation where, notwithstanding heavy investment in education and free movement of young people from country to country within Europe, youth unemployment is 19% in the UK, 22% in Belgium, 28% in Ireland 30% in Portugal, and 48% in Spain.
THE EU IS NOT BECOMING A POLITCAL UNION, A TRANSFER UNION, OR A FISCAL UNION—
IT IS SIMPLY BECOMING A DEEPER “UNION OF RULES”
Notwithstanding the major challenge to the euro posed by the sovereign debt crisis
+ the EU is not, as some suggest, only able to meet financial crisis if it first becomes a political union. Countries retain their own military forces and thus their own foreign policies. Their national cultural policies remain unaffected
+the EU is not about to become a transfer union either. Countries in difficulty are being offered interest bearing loans, not subsidies. Once the loans are paid back they will stand on their own feet.
+Nor is the EU becoming a fiscal union, because the vast majority of tax and spending decisions will continue to be taken at national level. The new EU rules will simply require that countries balance their books. It will for each to decide whether they want to do that at a high, or a low level ,of spending.
The EU is, however, under the recently agreed fiscal compact and other measures recently enacted, becoming a much deeper “Union of Rules”. This is a natural follow on from the development of the EU in the past
Originally , the EU set rules in regard to goods and services, so that these could be freely traded across borders.
Then, as people moved from country to country, the EU came to set rules on mutual recognition of qualifications and rights to social security.
With the establishment of the euro in 1999, the EU started to implement rules on debts and deficits.
Now these rules, which were too weak and imprecise and which were flouted by nearly every country, are being strengthened and made automatic.
New norms are being set, on how budgets are presented, on levels of private debt, and on excessive trade surpluses as well as on excessive trade deficits.
The aim is to ensure that the EU has a consistent economic policy, which will ensure that sort of difficulties ,which came to a head in 2008, will never again arise.
This is an evolutionary process. It involves trial and error.