"The Real Global Economy is Intact"

 October 9, 2011

In an unprecedented development, on the 8th of October the three most important business associations in Europe – the French MEDEF, the German BDI and the Italian Confindustria – have launched a joint appeal calling for a deepening of political and economic integration among EU member countries.

The business leaders signing the appeal are thus taking the lead for further EU integration from politicians- the traditional promoters of European unity up until now. In a desire to restore economic growth within the Union, the authors of the appeal consider that a new EU treaty should replace the current one. The work on the new treaty should start in parallel with current efforts to replace the European financial stability facility (EFSF) by 2013. It should provide for further political and fiscal integration, with a view to improve stability and growth, as envisaged by the Maastricht Treaty. The aim of the proposal is to render the EU economically prosperous and politically strong, by improving the performance of all member countries.

The new permanent mechanism due to replace the EFSF by 2013 should, in the authors’ view, be an independent institution capable of assisting EU countries, subject to strict conditions. The competitiveness of EU economies would be improved by a thorough process of economic reforms, avoiding the piecemeal approach that has been the norm so far in countries from southern Europe.

By pointing out that the real world economy is actually intact, the business leaders are convinced that there is no reason to let it slide into another bout of recession, or worse, if only corrective action is taken by politicians in a timely and resolute fashion. Judging by the fact that unemployment in Germany dropped to 6,5 %, the lowest level since reunification, they might have a point (source: Reuters France).

Greek geo-economic agenda in shambles

 October 2, 2011

As a general rule, with the exception of Russia and China, few developed countries have a geo-economic agenda of their own. This, after all, is the task of multinational or global corporations. The latter can benefit from logistical state support, but to a much more limited extent than in the past.

The situation is somewhat different for weaker southern members of the EU, like Greece or Spain. The core businesses there have been known to act in concert and expand in geographical areas of the world in which competitive pressures are mitigated by the pre-existence of religious, cultural and/or historical ties. Thus, since the 1990’s, Spanish banking conglomerates and telecommunication operators have been aggressively pursuing an expansion strategy in Latin America, where a common language and former political ties has given them an edge over their North American counterparts.

Up until the debt crisis derailed the country, Greek businessmen were similarly following a geo-economic agenda in the Balkans, which enjoyed the full support of the Greek state, and even that of the Greek Orthodox Church. Accordingly, Greek expansion took place in weaker markets that were undercapitalised, new to competition rules and fairly corrupt. The target countries all happened to be Orthodox, as well, and Greek diplomacy has attempted over the past ten years to become this group’s spokesman and leader within the EU.

To be sure, the minuscule size of Greece’s home market had made such economic expansion plans imperative. Like Spain in Latin America, Greek banks and telecommunication operator OTE / Cosmote opened offices and acquired stakes in companies in Romania, Bulgaria, Serbia or Albania. Until 2010, Piraeus, Alpha or the National Bank of Greece became household names in the Balkans, and attracted a large share of deposits in the region. Their market share increased steadily, sometimes at the expense of better-capitalised Central European competitors with similar expansion plans, notably from Austria. OTE’s purchase of Romtelecom in Romania, for example, and the expansion of Cosmote mobile phone operator could be considered a regional success story.

Alas, the Greek economic expansion bonanza came to an abrupt halt once the true situation of Greece’s state finances became known. It is not that the geo-economic strategy was wrong, or that Greek companies operating abroad were poorly managed. Nothing of the sort. Rather, their carefully laid out expansion plans were first torpedoed, and then thwarted, by the doings of their home government. In some respects, the dire situation of Greek businesses operating abroad is similar to that of profitable Japanese companies operating globally, whose credit rating, public image and economic performance started being affected, at the turn of the millennium, by the Japanese government’s huge sovereign debt, which now stands at 225 % of GDP. In an effort to escape being overtaxed by a Tokyo administration desperate for cash, companies like Toyota, Sony and others had at one point even considered shifting most taxable assets overseas.

Nowadays, most Greek banks operating in Romania, for example, are posting losses, as depositors are fleeing them for safer banking operators Although relatively small in size, Greek banks are considered by financial analysts as conservative and well-managed, but, at the same time, saddled with quite a big chunk of the country’s treasury bonds. In the months and years to come, this might lead to some bank failures, as a result of the Greek state’s inability to honour its debts. Lending to Greek businesses operating abroad has also diminished considerably, further jeopardizing Greece’s expansion strategy adopted some fifteen years ago. Thus, deleveraging in Greece will not only affect the country’s public servants, but also its business community with operations abroad.

Turkey, the Indispensable Negotiation Partner

 September 30, 2011

Over the last two weeks, Turkish diplomacy went all out to capitalise on the country’s increasing international clout. President Abdullah Gul has made a 4-day visit to Germany, Turkey’s main European partner, whereas premier Erdogan has made a highly publicised visit to Egypt and has recently met with President Obama in New York to discuss the situation in Syria.

Turkey’s sustained economic growth and the pro-Islamic geopolitical agenda it adopted a few years ago have transformed the country into an indispensable partner for the West. Turkish diplomacy and influence could become instrumental in helping the EU, for instance, deal with the upheavals in the Maghreb and help stabilise the region. The US, too, needs Turkish assistance in dealing with the crisis in Syria and in resolving the Palestinian question. Finally, Russia might find it opportune in future to use Turkey’s help in dealing with the political upheavals in countries like Turkmenistan, Kyrgyzstan or others in Central Asia.

Even if Turkey’s increased international standing, as well as its status as a major regional power in Asia and within the Islamic world, are by now indisputable, a cooler approach to the Palestinian issue might make its efforts more effective than it has been the case so far. Pushing Israel too hard on the Palestinian question is – as the latest events prove – counterproductive. The Turkish diplomacy has to find a way to help Palestinians by working closely with EU diplomats and the US administration in order to persuade the Israelis to soften their resistance to international efforts of helping Palestinians achieve statehood. As cooperation on the issue brings more rewards than confrontation, threats to accompany Gaza-bound humanitarian convoys with Turkish warships could only aggravate matters and increase tensions in the Middle East. Such a display of hard power could only play in the hands of Israel’s military and undo the successes achieved by the Turkish diplomacy’s soft means over the last decade.

Most analysts, especially from Europe, believe that Turkey is in fact a responsible stakeholder in the Middle East and contributes to increasing the political stability of the region. By spreading the message of democracy and human rights around the Islamic world now in turmoil, Turkey is also viewed by many inside and outside the Arab world as a positive force for democratic change. These are but a few reasons why the Turkish diplomacy will have to tread much more carefully in future on the Palestinian question and avoid antagonising unnecessarily Israel and its main backer, the US. (sources: Today’s Zaman, Project Syndicate, Reuters, Al Arabiya)

Investing Our Way out of the Crisis: the Ben Rosen Model

 September 25, 2011

Resolving the EU’s debt crisis might be affected by political indecision. America’s economic recovery, however, is affected by political infighting and proposals of Keynesian-style stimulus packages that have no chance of being adopted by Congress and are inappropriate at this junction in time. The lessons of the 1980’s recovery could help end the current policy paralysis in Washington

The news that Steve Jobs has left Apple due to illness has brought to mind another outstanding American entrepreneur I have actually met in Sydney in 1985, the one and only Ben Rosen. At the time, I was a very young marketing and sales consultant at ComputerLand, promoting the products of a PC industry still in its infancy.At the beginning of the 1980’s when the microcomputer revolution started, the Anglo-Saxon world was going through a severe recession. To reduce unemployment, the Australian Labour government invested heavily in retraining the unemployed, enabling many, including myself, to get jobs in high tech industries – an area of the economy hitherto closed to them due to lack of adequate skills. Ben Rosen came down to Sydney to talk to us about the virtues of a new relational dbase product – Paradox – he happened to be involved in at the time. He was jovial, friendly and unassuming. His venture capital company had made Compaq Computers the most successful company in capitalist history and he was also behind the huge success of the Lotus 1-2-3 spreadsheet package. In fact, many of today’s hardware and software companies that are the pride and glory of Silicon Valley could not have seen the light of day without his stewardship and money. To be sure, the US federal government did its bit and helped the microcomputer industry take off, as it became its most important buyer, seconded by universities all over the country. As a graduate of the prestigious Caltech Institute and the holder of a Master’s in Engineering science, Ben Rosen decided to work on Wall Street as a technology consultant. He was known to carry around to his clients an Apple IIe computer and was eager to invest in the first-ever portable microcomputer, Compaq. Unlike today’s Wall Street advisers who prefer to recommend various speculative investments to their clients, he made his reputation and money the old-fashioned American way, that is by investing in start-ups and asking his friends and clients to do the same. Together with his brother, he also invested 24 million dollars of his own money in the production of a clean car engine, a venture that did not find favour with US car manufacturers at the time. Today, when neoliberal economics have been thoroughly discredited, the work of Ben Rosen the entrepreneur and investor should become a model to be emulated. The presence of too many MBA graduates specialising in financial transactions and the relative scarcity of technology consultants, such as Ben Rosen, underpins America’s current predicament. As matters now stand, the US economy has all but hollowed out, deriving more than 35 percent of GDP from financial transactions, including speculations. Naturally, there is a way back from the brink, if only the US’ two major parties could put ideology aside and work together with the private sector in addressing the ills of the American economy and the plight of the unemployed.

Is the Eurozone Shrinking ?

 September 14, 2011

Over the next few days, EU political leaders have to decide what to do about the Greek debt crisis. Leading economists and quite a number of EU politicians are deeply divided when it comes to putting together another large financial rescue package. Economists like Professor Hans-Werner Sinn and Professor Kenneth Rogoff argue for a shrinking of the eurozone in order to save the common currency. Romanian-born French professor Florin Aftalion was kind enough to answer some of my questions regarding the euro crisis and the possible shrinking of the eurozone.

Author of The French Revolution: An Economic Interpretation (Cambridge University Press), Mr. Aftalion is Professor of Finance at ESSEC (L’École supérieure des sciences économiques et commerciales), and has taught finance at New York, Northwestern and Tel-Aviv Universities.

Q: In an article published in May this year, “Let’s Save the Furniture”, you have advanced the solution of saving the euro by suspending countries like Greece, Portugal or Italy from membership in the eurozone. Why do you think that both southern European countries and the eurozone’s core countries, France and Germany, would benefit from adopting such a solution?

Prof. Florin Aftalion: – Given that with insufficient growth its debt can only inflate, whatever “help” Greece gets, at the end of the day it will have to leave the euro, restructure its debt and devalue its currency. This being the inevitable outcome, it would be less costly for everyone concerned to have it happen sooner rather than later.

Q: The qualifying criteria for membership, as outlined at Maastricht, have been ignored when countries like Italy or Greece were admitted in the euro-club. Italy’s public debt, for example, was from the start far above 60 percent of GDP, and apparently so was Greece’s.

Was this a case of sound economics being overridden by political considerations?

F.A: – Remember that the whole “single currency” project was essentially political. When, in 1998, it came to be decided which countries were ready to join the euro, if I remember well, only Finland should have been admitted. All the other countries used creative accounting in order to satisfy the Maastricht criteria. When even that wasn’t enough to qualify a country, it became sufficient for that country to have criteria tending towards the Maastricht norms.

However, in 1998 the case of Greece was beyond any possible compromise and this country was allowed to join the euro only in 2001. It is not that its economic situation had changed radically in the meantime, but more “sophisticated” accounting techniques have been used. Everybody should have known that Greece was cheating.

Q: Forking out hundreds of billions of euros in order to try to avoid the risk of country default for Greece and possibly Ireland, Portugal and Italy, seems like a losing strategy. For how long do you think EU politicians can prolong the moral hazard situation that is touching a raw nerve with German, Dutch or Finnish taxpayers?

F.A.: – Two outcomes are possible. Either Greece decides to leave the euro (and at the same time restructures its debt and devalues its new currency) because it doesn’t get all the “help” necessary for remaining solvent, or Germany and the other “Nordic” countries decide to restrict the euro zone to solvent economies like their own.

Q: In the long run, do you believe that a truly solid European monetary union could be viable in the absence of some form of fiscal policy convergence among member countries?

F.A.: – Even financial centralization wouldn’t be enough to keep the eurozone together. That’s because it wouldn’t solve the problems of inflation differentials and heterogeneous labor legislations (among other problems).

Q: According to professor Hans-Werner Sinn of Munich University, the interest rate convergence which followed the introduction of the euro has saved Italy some 6 percent of its GDP for the last decade, owing to reduced interest payments on the country’s public debt. It was calculated that if the windfall had been used to pay Italy’s national debt, this would have been reduced by about two thirds by now. In your opinion, who is responsible for not enforcing the fiscal discipline among the eurozone member countries?

F.A.: – At the time nobody seemed to care about enforcing the Maastricht criteria. France and Germany for instance ran “excessive deficits”, didn’t pay any penalties and nobody objected.

Q: Coming back to your May article, you have decried the fact that the politicians of the day at the time the euro was introduced have ignored the warnings of many economists who considered the initial group of countries as too heterogeneous to make the common currency be viable in the long run.

In your experience on both continents, how big a challenge is it for economists to contribute constructively in shaping policy, given that many politicians seem to misunderstand macroeconomic theory ?

F.A.: – Politicians use political means in order to attain political objectives. Given that economists never agree among themselves, politicians will always find some professor who will approve their positions and claim against all evidence that the euro zone is an optimal currency area.

Uncertainty Plagues the Eurozone

 September 9, 2011

Major trouble, we learn from the Chinese, can be likened to a tunnel we have to go through until we reach the other side. It is hard to say whether the sovereign debt crisis that hit the eurozone two years ago is about to be dealt with more decisively this fall. To be sure, a few austerity packages and hundreds of billions of euros later, Greece’s public debt is as high as at the beginning of the crisis. Even more alarming, the size of Italy’s public debt has started to worry the international markets in August, and the United States has been close to defaulting on its 14,000 billion dollar debt, losing its coveted AAA credit rating.

There are a few glimmers of hope, if not as yet light at the end of the tunnel. The new IMF chief, Christine Lagarde has strongly urged western governments to soften austerity measures and to adopt pro-growth policies instead. On the other side of the Atlantic, Warren Buffett has publicly called on his fellow billionaires to accept a 50 % tax rate in order to help reduce America’s debt. In France, sixteen prominent billionaires have published a manifesto stating their agreement with the introduction of a temporarily higher tax rate for the rich – a call supported by many leading French industrialists. The Italian, Hungarian and even Romanian parliaments – believe it or not – are considering introducing a special tax payable by those with incomes of 25,000 euros or more (Hungary) or of 90,000 euros or more per annum (Italy). For now, however, the Italian government has quickly withdrawn its proposal, while the Romanian 1 percent “solidarity tax” (a rather ridiculously low rate, considering that for the past twenty years the country’s “business” elite has achieved this status by pillaging Romanian banks and enterprises and by systematically siphoning off funds from the national budget) still needs debating…

At the EU’s periphery, austerity is slowly but surely choking off growth, in both the UK and Greece. Undaunted, the British government wishes to buck the trend and reduce the 50 % top tax rate for the rich, in spite of popular discontent which has erupted beyond expectations in August. Greece has recorded a second year of negative growth, but again, any talk of imposing extra taxes on the rich is still taboo.

Economists and bankers worldwide are hotly debating the euro’s future. Scenarios on the table range from an imminent implosion (Roubini, Alan Greenspan), to a possible shrinking of the eurozone (Kenneth Rogoff, Florin Aftalion) which would leave some of the Mediterranean countries – unable to reduce their public debt – out. American historian Harold James strikes a more optimistic note, pointing out that over the past two years the exchange rate of the euro has held steady despite the turmoil around it. Ironically, the most affected currencies have been the Swiss franc, the Australian dollar and the Japanese yen.

The eurobond issue seems dead and buried after the German Constitutional Court decision handed down on September 7, and the fiscal policies’ convergence seems to be in. At this point in time it is far from clear, however, whether the light at the end of the eurozone tunnel is within reach. We will probably find out by the middle of next year. (sources: Reuters, Le Monde, Deutsche Welle, La Vanguardia, Courrier International, Project Syndicate, The Economist).

A Beacon of Islamic Democracy

 June 15, 2011

When it comes to geopolitics, few major shifts are more important than the emergence of an Islamic democracy in Turkey. Long resisted by the Turkish military and its western allies, the accession to power of Erdogan’s AKP party in 2002 has provoked major changes for the better in Turkey’s economic performance, institutional architecture and foreign policy orientations.

For the first time since 1946 – the date a democracy of sorts was inaugurated – a political party has succeeded in securing a third consecutive mandate, bringing much-needed political stability to a crisis-prone Turkey. As a result of the June 12 elections, Erdogan’s party has obtained a solid 49.9 percent of the votes. The electoral score reflects not only the recognition of the government’s achievements in social and economic terms, but is interpreted by many as a mandate for further reforming Turkey’s outdated 1982 constitution.

Back in the ’90’s, I was unfortunately alone in publicly supporting the Turkish Islamic politicians in their quest to form a government. In the wake of the Iranian revolution, most western specialists feared that such an occurrence would shift Turkey’s allegiance from NATO to the Iranian camp, which currently enlists countries such as Lebanon. Turkey’s evolution in the past decade proves, however, that an authentic Islamic democracy is both possible and potentially beneficial. For the first time in decades, countries like Greece or Armenia have nothing to fear from their militarily powerful neighbour, whose foreign minister Ahmed Davutoglu inaugurated a “zero problems” neighbourhood policy.

Today, when the Arab revolutions are in full swing, it is the Turkish, and not the Iranian model, which has won the hearts and minds of many Arab reformers, from Egypt to Syria and beyond. In hindsight, it is worth pondering what would have been the potential consequences of thwarting Turkey’s Islamic political project again in 2002. In the current circumstances, however, the new Turkish foreign policy agenda and the projection of its soft power across the Middle East have so far succeeded in preventing the Arab world’s slide into despair and anti-western religious fundamentalism. (sources: Zaman, The Guardian, The Economist, EVZ)