Hungary Bucks Austerity Trend

 

November 30, 2010

In 1956 the Hungarians rose in revolt against the excesses of Soviet communism. During the 1980’s, the Hungarian society was already making the transition to what we now call the post-Soviet era and its communist politicians opened the country’s borders to East German refugees fleeing to the West . These days, Viktor Orban and his Fidesz Party have rallied the Hungarian public opinion against the excesses of a global economy gone astray, introducing additional taxes on global players operating in Hungary.

The so-called “crisis taxes” were introduced in order to narrow Hungary’s budget deficit. The novelty of these extra taxes, which will raise 520 billion Ft (or 2.67 billion dollars), lies in the fact that they are levied exclusively on banks, energy companies, the telecom and the retail sectors. Thus the telecom tax is expected to bring an extra 61 billion Ft, the energy sector to contribute with 70 billion Ft, whilst the retail sector to kick in 30 billion Ft. Introduced for a limited period of three years, the new taxes will help the Hungarian government avoid IMF / EU bailouts or the imposition of unpopular austerity measures, now very much in vogue in most European Union countries.

When communism fell, Hungary found itself without home-grown tycoons or, to use a Marxist cliché, a “capitalist class”. The void was filled by global companies, which during the 1990s acquired large chunks of the Hungarian economy via privatisations. After years of upsetting state authorities with their peculiar ways of syphoning off profits abroad and minimising their tax bill (by methods which I have described in my Asian crisis ebook), they are now called upon by the Orban government to give something back. Companies like Vodafone (telecommunications), Tesco (retail), Gaz de France or E-On (energy) and the banks will thus pay the bulk of the new “crisis taxes”. Needless to mention, Orban’s crisis policy enjoys huge public support.

To be sure, this is an unheard-of – even if fully justified – approach to raising the extra money needed to close the country’s deficit gap. Unlike the European conservative group of parties, of which Fidesz is a member, the Hungarians have decided that this time around it should be the rich global companies, and not the poor, that have to foot the bill for the damage caused by the financial and economic crisis. Why, even socialist governments in power in some EU countries – notably Greece or Spain – were strong-armed into adopting neoliberal austerity measures, which have sent their economies into the red, generated widespread unemployment and affected the incomes of millions.

During a recent state visit to Malta, Orban has declared that the measures undertaken by his government have brought back “national self-confidence” and that the 7 percent budget deficit inherited from his socialist predecessors will be cut to 3.8 percent next year. He has also told his Maltese host that an economic recovery happening only on paper, that does not reduce unemployment, is not worth having.

In many ways, Orban’s approach in dealing with the ill effects of the economic crisis is as revolutionary as the Imre Nagy – led uprising against the Soviets. Fortunately, Hungary is now a member of a different union, and Brussels is unlikely to send the tanks rolling into Budapest, although a speculative attack on the forint cannot be ruled out. Whilst neighbouring countries like Romania are unnecessarily subjecting their citizens to austerity measures which have been judged by experts as both unwise and much too savage, Orban and his team are cushioning the Hungarian nation against economic destitution. However salutary though, Orban’s novel way of solving his country’s budget woes is going to be lost on Bucharest politicians, who over the past three decades have developed the unhealthy habit of vampirizing their own conationals. (sources: The Economist, The Malta Independent, Magyar Hirlap, The Budapest Sun)

The OSCE Summit 2010

 November 18, 2010

This fall’s Deauville summit between Angela Merkel, Nicolas Sarkozy and Dimitri Medvedev has highlighted the need to include Russia in a pan-European security architecture, distinct from the decaying and confrontational-type North Atlantic Treaty Organisation (NATO). Fortunately since 1975 European nations, regardless of EU membership, have had one of the most advanced regional co-operative security structures in the world, the OSCE (Organisation for Security and Cooperation in Europe).

After an 11-year hiatus, an OSCE member states’ leaders summit is convened in Astana on the 1st and 2nd of December at the initiative of Kazakhstan’s president Nursultan Nazarbayev. Although lesser-known than NATO, the OSCE is more inclusive (it currently includes 56 states) and represents, in Fabio Liberti’s words, “the largest security forum in the world”.

From the start, the OSCE was created as a regional security organisation, the first one to approach security comprehensively. It encompasses not only politico-military activities (police, arms control, conflict prevention, border management), but also economic and environmental activities (control of money-laundering, integrated management of water resources, support for the elimination of hazardous materials) and human rights activities (promotion of human rights, minority rights, freedom of the press and gender equality).

During the cold war, the OSCE effectively contributed to the promotion of human rights behind the Iron Curtain and participated in the dismantling of the Soviet bloc. In 1990, member states have adopted the Charter of Paris for a New Europe and have decided to equip the OSCE with permanent institutions (secretariat, election bureau and a center for conflict prevention) in order to enable the organisation to respond to eventual crises. Subsequently, OSCE has installed missions in Kosovo, Sandjak, Voivodina and Macedonia. Together with the UN and NATO, it has participated in bringing to an end the ethnic conflict in Bosnia-Herzegovina and to the elaboration of an arms control agreement for the Balkans.

All these achievements, its regional focus and comprehensive approach to security matters qualify OSCE as the most adequate regional security arrangement for Europe, Russia and Central Asia alike.
Recent developments

The conflict between Russia and Georgia in the summer of 2008, the tensions in Transnistria between Moldova and Russia and the current crisis in Kyrghizstan have highlighted the need to rethink European security outside its current NATO-EU-Russia dialogue. Although Dimitri Medvedev has advanced the proposal of a new security architecture for Europe and Russia, distinct from NATO, the OSCE is perfectly capable of assuming this role. To achieve this, however, the organisation would have to become consistent with its regional focus and restrict its membership to 54 countries (all the European countries plus Russia and the 5 stans), but without the US or Canada, as is currently the case.

The presence of the US withion OSCE structures has become counterproductive, as the current negotiations in Kyrghizstan demonstrate. The State Department’s pressure to involve the OSCE in the stabilisation process there has led to the organisation’s failure to successfully participate to negotiations for an end to the ethnic conflicts in the area. In truth, the Eurasian focus of OSCE, which is regional and not global, comes into conflict with the vision of an OSCE “from Vancouver to Vladivostock”. Since 2001, Russia’s Far East security problems could be more adequately dealt with within the structures provided by the SCO (Shanghai Cooperation Organisation), and it’s even likely that the OSCE will have to bring its expertise to bear in Central Asia in cooperation with the SCO.

To summarize, instead of creating another EU-Russia cooperative structure, the leaders meeting in Astana could instead consider ways of re-focusing the OSCE exclusively on regional security matters, without the participation of the US and Canada, and of funding it more adequately than it is the case right now. (sources: Le Monde diplomatique, EurActiv, Project Syndicate)

Author : Spotlight on Geopolitics
 Print

English, External Relations  , E.U., OSCE, Russia

Towards Bretton Woods III

 November 9, 2010

The US Federal Reserve’s second round of quantitative easing has prompted near-universal condemnation by the financial leaders of Germany, China, Brazil, the ASEAN and the EU. From The People’s Daily to Der Spiegel, newspapers are full of criticism and dire predictions of an impending international currency war, which is bound to result from the flooding of the American banking system with largely un-needed liquidities. On the positive side, however, the Fed ‘s move has also accelerated calls for the replacement of the current international monetary system, also known as Bretton Woods II, with a less volatile one, which for convenience’s sake we might call Bretton Woods III.

Under the original Bretton Woods, the fixed exchange rates mechanism was anchored to the US dollar, which in turn was tied to the price of gold. In 1971, the gold standard was abandoned and exchange rates were allowed to float, an arrangement known as Bretton Woods II. The US dollar remained the world’s reserve currency. Floating exchange rates provided ample opportunity to speculators to bet against the fluctuations in the values of different curencies, or – as it happened in 1998 during the Asian financial crisis, to attack weaker currencies like the Thai baht or the South Korean won, halving their value.

The wisdom of having only one reserve currency underpinning the value of all other currencies, and floating exchange rates based on one currency alone has first been challenged by EU countries through the adoption of the euro. Its introduction has immediately lowered interest rates and eliminated the possibility of speculating the euro’s exchange rate in member countries, thus largely undermining the concept of the float.

The 2007-2008 financial crisis and two rounds of quantitative easing by the Federal Reserve have accelerated moves towards the demise of the current dollar-based international monetary system. Indeed, with only 25 percent of the world’s GDP, the US economy is already hard-pressed to provide enough reserve assets, mainly US treasury bonds, to finance world trade. According to the IMF’s projections, if current trends are any guide, the ratio of issued reserve assets, currently at 60 %, would increase in 10 years’ time to 200 % of the US’ GDP, which would greatly increase the risk for major holders of US assets, such as China, Japan or the ASEAN countries.

Floating exchange rates, on the other hand, beside generating volatility, have led to the hoarding of US assets, especially in the wake of the Asian financial crisis. Thus Asian countries hold in excess of 6 trillion US dollars and treasury bonds, which they feel they need for open-market operations aimed at stabilising the exchange rates of their currencies and safeguarding their exporters. The current crisis has proved them right, as countries like China and Brazil have fared better than countries with less adequate US dollar-denominated reserves.

The Chinese central bankers would like to see the dollar replaced with an artificial asset created in the post-WWII era, the SDR (special drawing rights), whose administrator is the IMF. The Economist has even suggested the possibility of replacing the dollar with the euro as the world’s reserve currency, taking as a guide the way in which the British pound was replaced by the American dollar in the 20th century.

Finally, Robert Zoellick, the director of the World Bank, has lobbied in The Financial Times for the replacement of Bretton Woods II with a multiple currency system (the dollar, the euro, the yen and possibly the yuan, if and when it becomes fully convertible) to be based on the price of gold. Gold, as Zoellick points out, has already become a parallel reserve asset as a result of exchange rate volatility. In other words, the new international monetary system will have, in broad terms, the essential features of Bretton Woods I.

As the value of dollar-denominated assets worldwide stands to be heavily diminished by the Fed’s easy money policy, and as the floating currency system generates asset bubbles and financial instability for many nations, there is an urgent need to replace the current system with one more credible, more stable and less crisis-prone. Already, during last week’s talks in Paris, Presidents Sarkozy and Hu Jintao have agreed to put the reform of the international monetary system at the top of the agenda at the upcoming Seoul summit.

It seems that in future no one country will have the privilege of issuing reserve assets to back the world’s currencies. The new system will most likely be based on the assets issued by a group of economically powerful countries and will feature managed, as opposed to floating, exchange rates. (sources: Le Monde, Deutsche Welle, Financial Times, Reuters, The Economist)

Author : Spotlight on Geopolitics
 Print

Economy & Euro, English, External Relations  , China, E.U., euro, Japan, USA

Austerity, QE2 and the Global Economy

 November 2, 2010

Last week’s top-level political meetings which took place in Brussels and Hanoi ended up with similar calls on the US to avoid stimulating the American economy by printing more dollars. Trying to stimulate growth by flooding the American banking system with liquidity is only of marginal importance to the US economy’s woes. Yet this is exactly the measure that the Federal Reserve is contemplating this week, one known euphemistically under the name of QE2 – which stands for the second quantitative easing. The measure involves the spending of minimum 500 billion US dollars by the Fed to buy assets like treasury bonds back from banks and thus infuse more liquidity in the banking sector, ultimately benefitting potential borrowers.

The “easy money” measure bears all the hallmarks of Friedman’s monetarist theories. According to him and his followers, a financial crisis is aggravated by a lack of adequate liquidity within the banking sector. Tackling the liquidity problem is deemed to reignite economic growth.

The Fed’s move will further lower the exchange rate of the US dollar and cause the appreciation of other currencies worldwide. Already, the Japanese yen is at a 15-year high against the dollar. In the past few months, the Thai baht has risen by 11 percent, the Philippine peso by 7 percent and the Brazilian real has acquired the unenviable reputation as the most over-valued currency on earth. Since this summer, the euro has also risen by 9 percent to 1.39 dollars, badly affecting exports and the feeble economic recovery of 2009-2010 as well.

The draconian austerity measures recently adopted within the EU, combined with a printing of money by the United States are thus further endangering an already anemic economic growth in the West. The situation is so serious that even a publication like The Economist has felt compelled to finally incriminate austerity and money-printing, as the wrong policies for leading the global economy back to a sustained growth pattern :

“there is a danger of overdoing the short-term budget austerity. Excessive budget-cutting poses a risk to the recovery, not least because it cannot easily be offset by looser monetary policy. Improvements to the structure of taxation and spending matter as much as the short-term deficits.”

Fiscal stimuli, not austerity, and changes to “the structure of taxation” (!) are therefore the policies needed to bring the global economy back to 2007 output and performance levels (which, by the way, The Economist does not expect to happen before 2015 !).

As worried central bankers from Frankfurt and Tokyo will also meet this week, it will be interesting to see what countermeasures, if any, they will decide upon in response to the Fed’s expected QE2 decision. Unfortunately, even central bankers disagree when it comes to measures like austerity, fiscal stimuli and changes to taxation levels, let alone Western politicians under pressure from their electorates to cut taxes further or to reduce the size of government payrolls. With an expected Republican win in the US midterm elections and with conservative politicians in power in the EU’s leading countries, the outlook is rather gloomy. The continuation of current policies will see the Western world condemned to a Japanese-type decade of economic stagnation or, at best, sluggish growth.

Meanwhile, the Chinese economy will ring up another decade of stellar growth rates, if current and past trends are any guide.