Ligjërata master 2012-2013 syllabusi 2012-2013

We're all paying for Europe's gift to our aristocrats and utility companies
Dukes, water companies and wildlife charities will be relieved to know their plunder of farm subsidies under the common agricultural policy can last until at least 2020

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  George Monbiot
  
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  guardian.co.uk, Monday 28 November 2011 20.30 GMT
  

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  What would you do with £245? Would you: a) use it to buy food for the next five weeks; b) put it towards a family holiday; c) use it to double your annual savings; or d) give it to the Duke of Westminster?
  

Let me make the case for option D. This year the duke was plunged into relative poverty. Relative, that is, to the three parvenus who have displaced him from the top of the UK rich list. (Admittedly he's not so badly off in absolute terms: the value of his properties rose last year, to £7bn.) He's the highest ranked of the British-born people on the list, and we surely have a patriotic duty to keep him there. And he's a splendid example of British enterprise, being enterprising enough to have inherited his land and income from his father.

Well there must be a reason, mustn't there? Why else would households be paying this money – equivalent to five weeks' average spending on food and almost their average annual savings (£296) – to some of the richest men and women in the UK? Why else would this 21st-century tithe, this back-to-front Robin Hood tax, be levied?

I'm talking about the payments we make to Big Farmer through the common agricultural policy. They swallow €55bn (£47bn) a year, or 43% of the European budget. Despite the spending crisis raging through Europe, the policy remains intact. Worse, governments intend to sustain this level of spending throughout the next budget period, from 2014-2020.

Of all perverse public spending in the rich nations, farm subsidies must be among the most regressive. In the EU you are paid according to the size of your lands: the greater the area, the more you get. Except in Spain, nowhere is the subsidy system more unjust than in the UK. According to Kevin Cahill, author of Who Owns Britain, 69% of the land here is owned by 0.6% of the population. It is this group that takes the major payouts. The entire budget, according to the government's database, is shared between just 16,000 people or businesses. Let me give you some examples, beginning with a few old friends.

As chairman of Northern Rock, Matt Ridley oversaw the first run on a British bank since 1878, and helped precipitate the economic crisis that has impoverished so many. This champion of free market economics and his family received £205,000 from the taxpayer last year for owning their appropriately named Blagdon estate. That falls a little shy of the public beneficence extended to Prince Bandar, the Saudi Arabian fixer at the centre of the Al-Yamamah corruption scandal. In 2007 the Guardian discovered that he had received a payment of up to £1bn from the weapons manufacturer BAE. He used his hard-earned wealth to buy the Glympton estate in Oxfordshire. For this public service we pay him £270,000 a year. Much obliged to you guv'nor, I'm sure.

But it's the true captains of British enterprise – the aristocrats and the utility companies, equally deserving of their good fortune – who really clean up. The Duke of Devonshire gets £390,000, the Duke of Buccleuch £405,000, the Earl of Plymouth £560,000, the Earl of Moray £770,000, the Duke of Westminster £820,000. The Vestey family takes £1.2m. You'll be pleased to hear that the previous owner of their Thurlow estate – Edmund Vestey, who died in 2008 – managed his tax affairs so efficiently that in one year his businesses paid just £10. Asked to comment on his contribution to the public good, he explained: "We're all tax dodgers, aren't we?"

British households, who try so hard to keep the water companies in the style to which they're accustomed, have been blessed with another means of supporting this deserving cause. Yorkshire Water takes £290,000 in farm subsidies, Welsh Water £330,000, Severn Trent £650,000, United Utilities £1.3m. Serco, one of the largest recipients of another form of corporate welfare – the private finance initiative – gets a further £2m for owning farmland.

Among the top blaggers are some voluntary bodies. The RSPB gets £4.8m, the National Trust £8m, the various wildlife trusts a total of £8.5m. I don't have a problem with these bodies receiving public money. I do have a problem with their receipt of public money through a channel as undemocratic and unaccountable as this. I have an even bigger problem with their use of money with these strings attached. For the past year, while researching my book about rewilding, I've been puzzling over why these bodies fetishise degraded farmland ecosystems and are so reluctant to allow their estates to revert to nature. Now it seems obvious. To receive these subsidies, you must farm the land.

As for the biggest beneficiary, it is shrouded in mystery. It's a company based in France called Syral UK Ltd. Its website describes it as a producer of industrial starch, alcohol and proteins, but says nothing about owning or farming any land. Yet it receives £18.7m from the taxpayer. It has not yet answered my questions about how this has happened, but my guess is that the money might take the form of export subsidies: the kind of payments that have done so much to damage the livelihoods of poor farmers in the developing world.

In one respect the government of this country has got it right. It has lobbied the European commission, so far unsuccessfully, for "a very substantial cut to the CAP budget". But hold the enthusiasm. It has also demanded that the EC drop the only sensible proposal in the draft now being negotiated by member states: that there should be a limit to the amount a landowner can receive. Our government warns that capping the payments "would impede consolidation" of landholdings. It seems that 0.6% of the population owning 69% of the land isn't inequitable enough.

If subsidies have any remaining purpose it is surely to protect the smallest, most vulnerable farmers. The UK's proposals would ensure that the budget continues to be hogged by the biggest landlords. As for payments for protecting the environment, this looks to me like the option you're left with when you refuse to regulate. The rest of us don't get paid for not mugging old ladies. Why should farmers be paid for not trashing the biosphere? Why should they not be legally bound to protect it, as other businesses are?

In the midst of economic crisis, European governments intend to keep the ultra-rich in vintage port and racehorses at least until 2020. While inflicting the harshest of free market economics upon everyone else, they will oblige us to support a parasitic class of tax avoiders and hedgerow-grubbers, who engorge themselves on the benefactions of the poor.

• A fully referenced version of this article can be found at www.monbiot.com

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EU nations offer Greece big bailout in currency crisis

By Raf Casert

Associated Press

Tuesday, November 29, 2011

Bottom of Form

BRUSSELS — Eurozone ministers offered Greece a $10.7 billion Christmas rescue package Tuesday to stem an immediate cash crisis, yet failed to resolve fears that the common euro currency might be doomed.

The 17 finance ministers insisted they found a veneer of credibility to coat the euro's rescue fund with enough leverage to deal with potential financial crises much bigger than the one facing peripheral Greece. And they called on the International Monetary Fund for resources to help further protect Europe's embattled currency.

"We made important progress on a number of fronts," Jean-Claude Juncker, the eurozone chief, said late Tuesday.

After asserting earlier that the eurozone's rescue fund would be able to leverage up to one $1.3 trillion, the fund's chief remained vague about how beefed up it was after the Tuesday meeting in Brussels. Klaus Regling said it would grow according to demands and market conditions, but assured reporters the fund was more than big enough to deal with Europe's immediate debt problems.

Still, making progress on the fund — a firewall to keep Europe's debt problems from engulfing nation after nation — "shows our complete determination to do whatever it takes to safeguard the financial stability of the euro," Mr. Juncker said.

Italy remained an enormous concern. Carrying five times as much debt as Greece, Italy was battered for the third straight day in the bond markets, seeing its borrowing rates soar to unsustainable levels of 7.56 percent. Investors appear increasingly wary of the country's chances of avoiding default — and making matters worse, the eurozone's third-largest economy is deemed too big for Europe to bail out.

Still, the ministers insisted Italy's new prime minister would come through, saying he has promised to balance the country's budget by 2013.

"We have full confidence that Mario Monti will be able to deliver this program," Mr. Juncker said

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Europe is Not the United States

Martin Feldstein

2011-11-29

CAMBRIDGE – Europe is now struggling with the inevitable adverse consequences of imposing a single currency on a very heterogeneous collection of countries. But the budget crisis in Greece and the risk of insolvency in Italy and Spain are just part of the problem caused by the single currency. The fragility of the major European banks, high unemployment rates, and the large intra-European trade imbalance (Germany’s $200 billion current-account surplus versus the combined $300 billion current-account deficit in the rest of the eurozone) also reflect the use of the euro.

European politicians who insisted on introducing the euro in 1999 ignored the warnings of economists who predicted that a single currency for all of Europe would create serious problems. The euro’s advocates were focused on the goal of European political integration, and saw the single currency as part of the process of creating a sense of political community in Europe. They rallied popular support with the slogan “One Market, One Money,” arguing that the free-trade area created by the European Union would succeed only with a single currency.

Neither history nor economic logic supported that view. Indeed, EU trade functions well, despite the fact that only 17 of the Union’s 27 members use the euro.

But the key argument made by European officials and other defenders of the euro has been that, because a single currency works well in the United States, it should also work well in Europe. After all, both are large, continental, and diverse economies. But that argument overlooks three important differences between the US and Europe.

First, the US is effectively a single labor market, with workers moving from areas of high and rising unemployment to places where jobs are more plentiful. In Europe, national labor markets are effectively separated by barriers of language, culture, religion, union membership, and social-insurance systems.

To be sure, some workers in Europe do migrate. In the absence of the high degree of mobility seen in the US, however, overall unemployment can be lowered only if high-unemployment countries can ease monetary policy, an option precluded by the single currency.

A second important difference is that the US has a centralized fiscal system. Individuals and businesses pay the majority of their taxes to the federal government in Washington, rather than to their state (or local) authorities.

When a US state’s economic activity slows relative to the rest of the country, the taxes that its individuals and businesses pay to the federal government decline, and the funds that it receives from the federal government (for unemployment benefits and other transfer programs) increase. Roughly speaking, each dollar of GDP decline in a state like Massachusetts or Ohio triggers changes in taxes and transfers that offset about 40 cents of that drop, providing a substantial fiscal stimulus.

There is no comparable offset in Europe, where taxes are almost exclusively paid to, and transfers received from, national governments. The EU’s Maastricht Treaty specifically reserves this tax-and-transfer authority to the member states, a reflection of Europeans’ unwillingness to transfer funds to other countries’ people in the way that Americans are willing to do among people in different states.

The third important difference is that all US states are required by their constitutions to balance their annual operating budgets. While “rainy day” funds that accumulate in boom years are used to deal with temporary revenue shortfalls, the states’ “general obligation” borrowing is limited to capital projects like roads and schools. Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1% of its GDP and a general obligation debt of just 4% of GDP.

These limits on state-level budget deficits are a logical implication of the fact that US states cannot create money to fill fiscal gaps. These constitutional rules prevent the kind of deficit and debt problems that have beset the eurozone, where capital markets ignored individual countries’ lack of monetary independence.

None of these features of the US economy would develop in Europe even if the eurozone evolved into a more explicitly political union. Although the form of political union advocated by Germany and others remains vague, it would not involve centralized revenue collection, as in the US, because that would place a greater burden on German taxpayers to finance government programs in other countries. Nor would political union enhance labor mobility within the eurozone, overcome the problems caused by imposing a common monetary policy on countries with different cyclical conditions, or improve the trade performance of countries that cannot devalue their exchange rates to regain competitiveness.

The most likely effect of strengthening political union in the eurozone would be to give Germany the power to control the other members’ budgets and prescribe changes in their taxes and spending. This formal transfer of sovereignty would only increase the tensions and conflicts that already exist between Germany and other EU countries.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research.

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Italy’s debt must be restructured

Nouriel Roubini

November 29, 2011Permalink

It is increasingly clear that Italy’s public debt is unsustainable and needs an orderly restructuring to avert a disorderly default. The eurozone’s wish to exclude private sector involvement from the design of the new European Stability Mechanism is pig-headed – and lacks all credibility.

With public debt at 120 per cent of gross domestic product, real interest rates close to five per cent and zero growth, Italy would need a primary surplus of five per cent of gross domestic product – not the current near-zero – merely to stabilise its debt. Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression.

While the technocratic government headed by Mario Monti is much more credible than Silvio Berlusconi’s former government, the constraints it faces are unchanged: debt is unsustainable and the policy to reduce it will make matters worse. That is why markets have shrugged off news of the new government and pushed Italian spreads to yet more unsustainable levels. The government is born wounded and weakened, as Mr Berlusconi can pull the plug on it at any time.

Even if austerity and reforms were eventually to restore debt sustainability, Italy and countries in a similar position would need a lender of last resort to support them and prevent sovereign spreads exploding while they regained market credibility. But Italy’s financing needs for the next twelve months alone are not confined to the €400bn of debt maturing. At this point most investors would dump their entire holdings of Italian debt to any sucker – the ECB, European Financial Stability Facility, IMF or whoever – willing to buy it at current yields. If a lender of last resort appears, Italy’s entire debt stock of €1,900bn will be soon supplied.

So using precious official resources to prevent the unavoidable would simply finance the exit of others. Moreover, there is no official money – some €2,000bn would be needed – to backstop Italy, and soon Spain and possibly Belgium, for the next three years.

Even current attempts to ramp up EFSF resources from the IMF (which is reportedly readying a €400 to €600bn programme to backstop Italy for the next 12-18 months), and from Brics, sovereign wealth funds and elsewhere, are bound to fail if the eurozone’s core is unwilling to increase its own contributions, and if the ECB is unwilling to play the role of an unlimited lender of last resort.

If, as appears likely, Italy remains stuck in an uncompetitive recession and is unable to regain market access in the next twelve months, then even if such large official resources were mobilised, they would be wasted on financing investors’ exit and thus postponing an inevitable debt restructuring that would then be more disorderly.

So Italy’s public debt needs to be reduced now to at worst 90 per cent of GDP from the current 120 per cent. This could be done by offering investors the choice to exchange their securities either for a par bond – with a longer maturity and a low enough coupon to reduce the net present value by 25 per cent – or for a discount bond that has a face value reduction of 25 per cent. The par bond would suit banks that hold bonds to maturity and don’t mark to market. There should be a credible commitment not to pay investors who hold out against participating in the offer – even if this triggers the payment of credit default swaps.

With appropriate regulatory forbearance, it would allow banks to pretend for a while that no losses had occurred and thus give them more time to raise fresh capital. Since about 40 per cent of Italy’s public debt is held by non-residents, a debt restructuring will also imply some burden sharing with foreign creditors.

Some influential figures in Italy have suggested a capital levy, or wealth tax, could achieve the same reduction in public debt. But a debt restructuring is superior. To reduce the debt ratio to 90 per cent of GDP, a wealth tax would need to raise €450bn (30 per cent of GDP). Even if payment of such a levy were spread over a decade that would imply an increase in taxes equivalent to three per cent of GDP for ten years running; the resulting drop in disposable income and consumption would make Italy’s recession a depression.

To reduce such negative effects one would have to focus the tax on the wealthy – raising the rate to ten per cent of their wealth. Leaving aside the political risks of such a move, a debt restructuring is still preferable, as the burden would be shared with foreign investors. It would therefore hit consumption and growth less. Since Italy is running a small primary surplus, a debt restructuring would be feasible even without significant official external financing.

So debt restructuring is preferable to a Plan A that will fail and then cause a bigger, disorderly restructuring or default down the line. Even a debt restructuring would not resolve the problems of lack of growth and outright recession, lack of competitiveness and a large current account deficit. Resolving those requires a real depreciation that may well demand the eventual exit of Italy and other member states from the euro.

But exit can be postponed for a while. Restructuring, however, has to be implemented now. The alternative is much worse.

The writer is chairman of Roubini Global Economics and professor at the Stern School of Business at New York University

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Martin Feldstein

Martin Feldstein is Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He chaired President Ronald Reagan’s Council of Economic Advisers from 1982-1984, and is currently a member of the President's Council on Jobs and Competitiveness, as well as a member of the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the National Committee on United States-China Relations.

Avoiding a New American Recession

30 November 2012

CAMBRIDGE – The United States may be headed for a recession in 2013. Even if the country avoids going over the “fiscal cliff,” a poorly designed political compromise that cuts the deficit too quickly could push an already weak economy into recession. But a gradual phase-in of an overall cap on tax deductions and exclusions (so-called tax expenditures), combined with reform of entitlement spending, could achieve the long-run fiscal consolidation that America needs without risking a new recession.

The US economy has been limping along with a growth rate of less than 2% during the past year, with similarly dim prospects in 2013, even without the shock of the fiscal cliff.  That is much too weak a pace of expansion to tolerate the fiscal cliff’s increase in tax rates and spending cuts, which would reduce demand by a total of $600 billion – about 4% of GDP – next year, and by larger sums in subsequent years.

President Barack Obama’s proposed alternative to the fiscal cliff would substantially increase tax rates and limit tax deductions for the top 2% of earners, who now pay more than 45% of total federal personal-income taxes. His budget would also increase taxes on corporations, and would end the current payroll-tax “holiday,” imposing an additional 2% tax on all wage earners.

Together, these changes could lower total demand by nearly 2% of GDP. And the higher marginal tax rates would reduce incentives to work and to invest, further impeding economic activity. All of that could be fateful for an economy that is still struggling to sustain a growth rate of less than 2%.

The Congressional Budget Office and the Federal Reserve predict that going over the fiscal cliff would cause a recession in 2013, with Fed Chairman Ben Bernanke recently saying that the Fed would be unable to offset the adverse effect on the economy. He could have said the same thing about the fiscal drag that would be created by Obama’s budget proposal.

Although Congressional Republicans rightly object to raising tax rates, they appear willing to raise revenue through tax reform if that is part of a deal that also includes reductions in the long-run cost of the major entitlement programs, Medicare and Social Security. Although some Republicans would like to see revenue increased only by stimulating faster economic growth, that cannot be achieved without the reductions in marginal tax rates and improvements in corporate taxation that the Democrats are unlikely to accept. Raising revenue through tax reform will have to mean reducing the special deductions and exclusions that now lower tax receipts.

The potential recession risk of a budget deal can be avoided by phasing in the base-broadening that is used to raise revenue. A desirable way to broaden the tax base would be to put an overall cap on the amount of tax reduction that each taxpayer can achieve through deductions and exclusions. Such an overall cap would allow each taxpayer to retain all of his existing deductions and exclusions but would limit the amount by which he could reduce his tax liability in this way. An overall cap would also cause many individuals who now itemize deductions to shift to the standard deduction – implying significant simplification in record-keeping and thus an improvement in incentives.

A cap on the tax reductions derived from tax expenditures that is equal to 2% of each individual’s adjusted gross income would raise more than $200 billion in 2013 if applied to all of the current deductions and to the exclusions for municipal-bond interest and employer-paid health insurance. Even if the full deduction for charitable gifts is preserved and only high-value health insurance is regarded as a tax expenditure, the extra revenue in 2013 would be about $150 billion. Over a decade, that implies nearly $2 trillion in additional revenue without any increase in tax rates from today’s levels.

Extra revenue of $150 billion in 2013 would be 1% of GDP, and could be too much for the economy to swallow, particularly if combined with reductions in government spending and a rise in the payroll tax. But the same basic framework could be used by starting with a higher cap and gradually reducing it over several years. A 5% cap on the tax-expenditure benefits would raise only $75 billion in 2013, about 0.5% of GDP; but the cap could be reduced from 5% to 2% over the next few years, raising substantially more revenue when the economy is stronger.

Slowing the growth of government spending for Medicare and Social Security is necessary to prevent a long-term explosion of the national debt or dramatic increases in personal tax rates. Those changes should also be phased in gradually to protect beneficiaries and avoid an economic downturn.

America’s national debt has more than doubled in the past five years, and is set to rise to more than 100% of GDP over the next decade unless changes in spending and taxes are implemented. A well-designed combination of caps to limit tax expenditures and a gradual slowing of growth in outlays for entitlement programs could reverse the rise in the debt and strengthen the US economy. America’s current budget negotiations should focus on achieving a credible long-term decline in the national debt, while protecting economic expansion in the near term.

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Nouriel Roubini

Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

The Year of Betting Conservatively

19 November 2012

NEW YORK – The upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: with no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs. If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months.

Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe). Economic growth in the United States has remained anemic, at 1.5-2% for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the eurozone, has already endured a double-dip recession, and now even strong commodity exporters – Canada, the Nordic countries, and Australia – are slowing in the face of headwinds from the US, Europe, and China.

Meanwhile, emerging-market economies – including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa – also slowed in 2012. China’s slowdown may be stabilized for a few quarters, given the government’s latest fiscal, monetary, and credit injection; but this stimulus will only perpetuate the country’s unsustainable growth model, one based on too much fixed investment and savings and too little private consumption.

In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. But now it is permeating the eurozone’s core. And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming “fiscal cliff,” spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1% of GDP. In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.

The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronized fiscal austerity in most advanced economies will dim global growth prospects in 2013. So, what explains the recent rally in US and global asset markets?

The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets. The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). The European Central Bank’s announcement of its “outright market transactions” program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union. The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.

Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well. And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high). It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies.

But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook. At the same time, the eurozone crisis remains unresolved, despite the ECB’s bold actions and talk of a banking, fiscal, economic, and political union. Specifically, Greece, Portugal, Spain, and Italy are still at risk, while bailout fatigue pervades the eurozone core.

Moreover, political and policy uncertainties – on the fiscal, debt, taxation, and regulatory fronts – abound. In the US, the fiscal worries are threefold: the risk of a “cliff” in 2013, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity. In many other countries or regions – for example, China, Korea, Japan, Israel, Germany, Italy, and Catalonia – upcoming elections or political transitions have similarly increased policy uncertainty.

Yet another reason for the correction is that valuations in stock markets are stretched: price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low. With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly.

Indeed, there are now greater geopolitical uncertainties as well: the risk of an Iran-Israel military confrontation remains high as negotiations and sanctions may not deter Iran from developing nuclear-weapons capacity; a new war between Israel and Hamas in Gaza is likely; the Arab Spring is turning into a grim winter of economic, social, and political instability; and territorial disputes in Asia between China, Korea, Japan, Taiwan, the Philippines, and Vietnam are inflaming nationalist forces.

As consumers, firms, and investors become more cautious and risk-averse, the equity-market rally of the second half of 2012 has crested. And, given the seriousness of the downside risks to growth in advanced and emerging economies alike, the correction could be a bellwether of worse to come for the global economy and financial markets in 2013.

{Meqë konsumatorët, firmat, ashtu edhe investitorët bëhen më të kujdesshëm dhe më pak të ekspozuar rrezikut, tregjet e kapitalit, në gjysmën së dytë të vitit 2012, kanë vënë kreshtë (has crested). Dhe, duke pasur parasysh seriozitetin e rreziqeve-dobësive të rritjes në ekonomitë e avancuara dhe në zhvillim, njësoj, korrigjimi mund të jetë një parashikim i keqësimit që do të vijë për ekonominë globale dhe tregjet financiare në vitin 2013.}

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Benedicta Marzinotto

Benedicta Marzinotto is a Research Fellow at Bruegel and Lecturer in Political Economy at the University of Udine.

Europe’s Dysfunctional Growth Compact

29 November 2012

BRUSSELS – Recently, a €10 billion ($13 billion) shortfall in this year’s European Union budget came to light. As a result, the EU cannot reimburse member states for recent unexpected expenditures, including emergency outlays, such as aid to Italian earthquake victims, and spending aimed at boosting economic growth and employment, such as the accelerated absorption of unused Structural and Cohesion Funds. Member states have refused the European Commission’s request for extra contributions to cover the shortfall, causing talks over next year’s budget to collapse.

Meanwhile, negotiations over the 2014-2020 Multiannual Financial Framework (MFF), the central-planning instrument for the use of EU funds, have broken down, owing to disagreement over key issues, including the size of the budget and the composition of expenditure. The decision has been postponed until early next year.

The situation has highlighted the ambiguity surrounding the EU budget’s role in European integration. While all EU leaders have advocated using the budget to stimulate economic growth, little action is being taken. This raises doubts about the so-called “growth compact” launched by the European Council in June, particularly about the political commitment to mobilize €120 billion quickly by reallocating unused Structural and Cohesion Funds and increasing the European Investment Bank’s lending capacity.

Indeed, although European governments have agreed to encourage faster absorption of EU funds in crisis countries, they have refused to pay into the EU budget to enable the funds’ disbursement. This contradiction signals that national interests continue to prevail in EU budget negotiations, which are often exploited for domestic political gain in member states. Unless a mechanism is introduced that facilitates the rapid disbursement of EU funds, thus insulating the budget from destructive politicization, these funds cannot be used to stimulate growth in times of crisis.

Not all member states contribute equally to the EU budget; some are net contributors, while others are net beneficiaries. At the end of EU-financed investment projects – payments for which are agreed and executed in the annual budget framework – the money is transferred to the beneficiary. Cash to net beneficiaries is paid in by net contributors.

One country’s inflow of EU money is thus another country’s outflow – and these are grants, not loans. As a result, agreement every seven years on overall expenditures is inadequate to preclude conflict on annual budgets.

Nonetheless, steps can be taken to prevent political deadlock in budget negotiations, while increasing the budget’s flexibility so that it can be used to stimulate growth. For example, some leveraging of the budget could be allowed, although this would spark controversy, given that EU treaties require that the budget remains balanced at all times.

But the EU budget has already enabled an indirect form of leveraging: the European Commission’s use of implicit budget guarantees to raise capital on financial markets. These funds are used to provide financial assistance to non-eurozone EU countries through the Medium-Term Financial Assistance Facility, to eurozone countries through the now-expired European Financial Stabilization Mechanism, and to partner third countries.

Between the MTFA, the EFSM, and payments to third countries, the total exposure this year is €70.5 billion. Some borrowing over the seven-year MFF period may be possible, while upholding the medium-term objective of a balanced budget.

Such leveraging of the EU budget would complement the recently established European Stabilization Mechanism (the successor to the EFSM) and the MTFA. Countries receiving assistance should be given the option of applying for an anticipated disbursement of EU funds. Following a request by a member state, the Commission would be entitled to borrow on capital markets under the implicit EU budget guarantee, with the maximum amount determined by the size of the country’s unused (pre-allocated) Structural and Cohesion Funds. The capital would be repaid in annual installments as the funds become available through the EU budget, while the national co-financing rate would apply to interest payments.

This framework would reduce incentives for using annual EU budget negotiations to advance political agendas. Net contributors would be locked into a relationship with the markets – a convincing creditor. At the same time, imposing conditionality on this kind of disbursement would enhance legitimacy, as opposed to the current framework, in which beneficiaries seek entitlements. Indeed, all EU countries – not just eurozone members – would benefit from such a framework.

Such an initiative could co-exist with European Council President Herman Van Rompuy’s proposal to create a risk-sharing mechanism only for eurozone countries. The revamped growth compact would more effectively allocate European resources and increase the flexibility of permanent transfers from rich to poor countries – provided that the money is used for productive investment. Van Rompuy’s budget would also help to stabilize the eurozone in the event that asymmetric shocks require temporary transfers from unaffected to crisis-stricken countries.

In fact, the two instruments may well be complementary in eurozone countries. Crises are typically associated with a drop not only in actual growth, but also in a country’s growth potential, owing to deferred investment. A risk-sharing facility could limit the decline in actual growth after a crisis, while prompt EU-financed investment would prevent a country from shifting to a lower growth path.

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Kenneth Rogoff

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly.

Innovation Crisis or Financial Crisis?

04 December 2012

CAMBRIDGE – As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise?

Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries’ weakness reflects secular stagnation in technology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy.

Economist Robert Gordon takes this idea even further. He argues that the period of rapid technological progress that followed the Industrial Revolution may prove to be a 250-year exception to the rule of stagnation in human history. Indeed, he suggests that today’s technological innovations pale in significance compared to earlier advances like electricity, running water, the internal combustion engine, and other breakthroughs that are now more than a century old.

I recently debated the technological stagnation thesis with Thiel and Kasparov at Oxford University, joined by encryption pioneer Mark Shuttleworth. Kasparov pointedly asked what products such as the iPhone 5 really add to our capabilities, and argued that most of the science underlying modern computing was settled by the seventies. Thiel maintained that efforts to combat the recession through loose monetary policy and hyper-aggressive fiscal stimulus treat the wrong disease, and therefore are potentially very harmful.

These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis.

There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen. Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem.

No, the main cause of the recent recession is surely a global credit boom and its subsequent meltdown. The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative. The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation. It is no accident that the current era looks so much like what followed dozens of deep financial crises in the past.

Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalization and new technologies. As Carmen Reinhart and I emphasize in our book This Time is Different, such fugues of optimism often accompany credit run-ups, and this is hardly the first time that globalization and technological innovation have played a central role.

Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. Credit contractions almost invariably hit small businesses and start-ups the hardest. Since many of the best ideas and innovations come from small companies rather than large, established firms, the ongoing credit contraction will inevitably have long-term growth costs. At the same time, unemployed and underemployed workers’ skill sets are deteriorating. Many recent college graduates are losing as well, because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earnings.

With cash-strapped governments deferring urgently needed public infrastructure projects, medium-term growth also will suffer. And, regardless of technological trends, other secular trends, such as aging populations in most advanced countries, are taking a toll on growth prospects as well. Even absent the crisis, countries would have had to make politically painful adjustments to pension and health-care programs.

Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer. If the Kasparov-Thiel-Gordon hypothesis is right, the outlook is even darker – and the need for reform is far more urgent. After all, most plans for emerging from the financial crisis assume that technological progress will provide a strong foundation of productivity growth that will eventually underpin sustained recovery. The options are far more painful if the pie has ceased growing quickly.

So, is the main cause of the recent slowdown an innovation crisis or a financial crisis? Perhaps some of both, but surely the economic trauma of the last few years reflects, first and foremost, a financial meltdown, even if the way forward must simultaneously treat other obstacles to long-term growth.

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Andres Velasco

Andrés Velasco, a former finance minister of Chile, is a visiting professor at Columbia University's School of International and Public Affairs. He has consulted for the International Monetary Fund, the World Bank, and the Inter-American Development Bank, as well as for several Latin American governments.

Europe’s Debt-Relief Calculus

13 December 2012

SANTIAGO – Europe has long been menaced by the threat of two crises. The first would erupt with a successful speculative attack on a large eurozone country’s bonds, immediately jeopardizing the single currency’s survival. European Central Bank President Mario Draghi’s vow to do “whatever it takes” to prevent a sovereign default in the eurozone seems to have diminished that danger – at least for now.

The other looming danger is a growth crisis – a threat that has become increasingly serious. The ECB’s most recent macroeconomic forecast, which cut expected GDP growth for both 2012 and 2013, makes the threat all too clear: The eurozone will certainly contract this year, and grow by just 0.3%, at best, next year.

Europe persistently undershoots its growth targets because European policymakers persistently underestimate fiscal multipliers, pursuing austerity instead. And slower growth means lower revenues, which imply larger deficits and heavier debt burdens – at which point, as Wolfgang Munchau of theFinancial Times and others have stressed, the entire belt-tightening exercise begins to look self-defeating.

This is all pretty worrisome. But things could get worse. The problem is not just that slow growth is driving up debt levels. It is also increasingly plausible that the debt overhang is itself becoming the cause of slow growth.

Few people want to go down that route, because it leads directly to the question of debt forgiveness. But the issue can no longer be ignored – and not just in the case of Greece.

The concept of a debt overhang has been around forever, but it became prominent during the Latin American debt crisis of the 1980’s. Like many aspects of that crisis, it is applicable to Europe’s situation today.

A debt overhang exists when a country’s debt is large enough that the benefits of adjustment and growth go entirely to the creditors. As the Nobel laureate economist Paul Krugman pointed out a quarter-century ago, a country in this situation will be unwilling to undertake additional painful adjustment, because it gets nothing in return. And, because the proceeds of any new investment will be taxed away to service existing obligations, the debt overhang discourages private investment and growth.

If the disincentive is large enough, then a larger debt burden may cause the country’s repayment capacity to fall. This gives rise to a debt-relief Laffer curve. For low levels of debt, increasing the debt burden increases the flow of payments that creditors get; but this relationship is reversed once the debt volume crosses a certain threshold. Reducing the face value of the debt is good not just for debtor countries on the “wrong side” of the curve; it is also good for creditors, who stand to get more of their money back.

But, while this neat theoretical construct clarifies the problem, figuring out where a country lies on its debt-relief Laffer curve is no easy matter. Many doctoral dissertations were written on this issue during the Latin American debt crisis of the 1980’s.

In retrospect, two things seem clear. First, Latin American countries did not start growing again until debt had been substantially reduced through a series of initiatives – the most important being the Brady Plan of 1989, under which Latin American countries enacted reforms in exchange for debt relief. Second, creditors who stayed in – by swapping old obligations either for new Brady bonds or for local equity – typically did very well.

Skeptics will reply that Europe is not Latin America, and that the interest rates levied on European governments today are much lower than what Argentina or Mexico had to pay back then. Perhaps. But many European countries are more indebted than their Latin American counterparts were.

France’s public debt is 90% of GDP and rising, and five European countries’ debt/GDP ratios are above 100%. Latin American countries had to seek debt reduction when their debt burdens were smaller. And the recent spike in the interest-rate spread on Italian government bonds should remind optimists that, with sovereign debt so high, many things can go wrong at any time.

More and more Europeans are coming around to the view that Greece needs to have its debt cut yet again, and that this time official claims on Greece should be cut as well. But few Europeans today believe that Italy, Spain or Portugal, much less France, will need debt reduction. Give them time. It was not so long ago that few Europeans could imagine a euro crisis.

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Dani Rodrik

Dani Rodrik is Professor of International Political Economy at Harvard University’s Kennedy School of Government and a leading scholar of globalization and economic development. His most recent book is The Globalization Paradox: Democracy and the Future of the World Economy.

Global Capital Rules

13 December 2012

CAMBRIDGE – It’s official. The International Monetary Fund has put its stamp of approval on capital controls, thereby legitimizing the use of taxes and other restrictions on cross-border financial flows.

Not long ago, the IMF pushed hard for countries – rich or poor – to open up to foreign finance. Now it has acknowledged the reality that financial globalization can be disruptive – inducing financial crises and economically adverse currency movements.

So here we are with yet another twist in the never-ending saga of our love/hate relationship with capital controls.

Under the classical Gold Standard that prevailed until 1914, free capital mobility had been sacrosanct. But the turbulence of the interwar period convinced many – most famously John Maynard Keynes – that an open capital account is incompatible with macroeconomic stability.  The new consensus was reflected in the Bretton Woods agreement of 1944, which enshrined capital controls in the IMF’s Articles of Agreement. As Keynes said at the time, “what used to be heresy is now endorsed as orthodoxy.”

By the late 1980’s, however, policymakers had become re-enamored with capital mobility. The European Union made capital controls illegal in 1992, and the Organization for Economic Cooperation and Development enforced free finance on its new members, paving the way for financial crises in Mexico and South Korea in 1994 and 1997, respectively. The IMF adopted the agenda wholeheartedly, and its leadership sought (unsuccessfully) to amend the Articles of Agreement to give the Fund formal powers over capital-account policies in its member states.

As long as it was developing countries that were whipsawed by global finance, it was fashionable to blame the victim. The IMF and Western economists argued that governments in Mexico, South Korea, Brazil, Turkey, and elsewhere had not adopted the policies – prudential regulations, fiscal restraint, and monetary controls – needed to take advantage of capital flows and prevent crises. The problem was with domestic policies, not with financial globalization, so the solution lay not in controls on cross-border financial flows, but in domestic reforms.

Once the advanced countries became victims of financial globalization, in 2008, it became harder to sustain this line of argument. It became clearer that the problem lay with instability in the global financial system itself – the bouts of euphoria and bubbles, followed by the sudden stops and sharp reversals that are endemic to unsupervised and unregulated financial markets. The IMF’s recognition that it is appropriate for countries to try to insulate themselves from these patterns is therefore welcome – and comes none too soon.

But we should not exaggerate the extent of the IMF’s change of heart. The Fund still regards free capital mobility as an ideal toward which all countries will eventually converge. This requires only that countries achieve the threshold conditions of adequate “financial and institutional development.”

The IMF treats capital controls as a last resort, to be deployed under a rather narrow set of circumstances – when other macro, financial, or prudential measures fail to stem the tide of inflows, the exchange rate is decidedly overvalued, the economy is overheating, and foreign reserves are already adequate. So, while the Fund lays out an “integrated approach to capital flow liberalization,” and specifies a detailed sequence of reforms, there is nothing remotely comparable on capital controls and how to render them more effective.

This reflects over-optimism on two fronts: first, about how well policy can be fine-tuned to target directly the underlying failures that make global finance unsafe; and, second, about the extent to which convergence in domestic financial regulations will attenuate the need for cross-border management of flows.

The first point can be best seen using an analogy with gun controls. Guns, like capital flows, have their legitimate uses, but they can also produce catastrophic consequences when used accidentally or placed in the wrong hands. The IMF’s reluctant endorsement of capital controls resembles the attitude of gun-control opponents: policymakers should target the harmful behavior rather than bluntly restrict individual freedoms. As America’s gun lobby puts it, “Guns don’t kill people; people kill people.” The implication is that we should punish offenders rather than restrict gun circulation. Similarly, policymakers should ensure that financial-market participants fully internalize the risks that they assume, rather than tax or restrict certain types of transactions.

But, as Princeton economist Avinash Dixit likes to say, the world is always second-best at best.  An approach that presumes that we can identify and directly regulate problematic behavior is unrealistic. Most societies control guns directly because we cannot monitor and discipline behavior perfectly, and the social costs of failure are high. Similarly, caution dictates direct regulation of cross-border flows. In both cases, regulating or prohibiting certain transactions is a second-best strategy in a world where the ideal may be unattainable.

The second complication is that, rather than converging, domestic models of financial regulation are multiplying, even among advanced countries with well-developed institutions. Along the efficiency frontier of financial regulation, one needs to consider the tradeoff between financial innovation and financial stability. The more of one we want, the less of the other we can have. Some countries will opt for greater stability, imposing tough capital and liquidity requirements on their banks, while others may favor greater innovation and adopt a lighter regulatory touch.

Free capital mobility poses a severe difficulty here. Borrowers and lenders can resort to cross-border financial flows to evade domestic controls and erode the integrity of regulatory standards at home. To prevent such regulatory arbitrage, domestic regulators may be forced to take measures against financial transactions originating from jurisdictions with more lax regulations.

A world in which different sovereigns regulate finance in diverse ways requires traffic rules to manage the intersection of separate national policies. The assumption that all countries will converge on the ideal of free capital mobility diverts us from the hard work of formulating those rules.

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Fiscal Cliff Deal Averts the Crisis… But Now What?

JANUARY 2, 2013
[Editor's Note: A last-minute deal means the U.S. has avoided the fiscal cliff. Since the agreement was completed after we had gone to press, we have decided to follow up today's issue with a special edition from Keith Fitz-Gerald that breaks down the deal...]

BY KEITH FITZ-GERALD, Chief Investment Strategist, Money Morning