Friday, November 4, 2016

Should Greece, Spain and Portugal have joined the Eurozone?

In a previous piece I looked at the range in unemployment rates in the EU28 and pointed out that the Eurozone19 has a 1.5 pc points higher unemployment rate than the EU28 average. That this difference comes from high unemployment in Greece, Spain, Cyprus, Italy, Portugal and France (all Eurozone, all South and mostly Mediterranean) plus Croatia (the EU's newest member, since 2013).

One reason for these statistics is that in these countries flexible employment (eg part time, mini jobs) is not as wide as eg in the UK, Germany and the Netherlands.

So why have these countries-economies not been able to produce enough jobs?

The Euro was established as a tool by the 1992 Maastricht Treaty of the EU. It was part of Economic and Monetary Union. And was implemented ten years later. The criteria for entry were public debt (as a % of GNP), convergence of inflation and interest rates as well as public deficit (as a % of GNP).

Many economists, eg German had pointed out that these macro-economic criteria were not enough and that the real economies had to converge before they joined (not after). The EU was not a US with strong regional policies and funding to help lagging areas. EU regional funding existed by it was not comparable to the US. Economies had to be prepared to join.

All countries mentioned above joined from the start except Greece that joined one year later and Cyprus that joined even later (it after all joined the EU in 2004).

The Euro reduced lending rates (including bonds) and allowed states and companies and people to borrow at much lower rates. That led to consumption increases.

The Euro was managed as a hard currency (I will do a separate piece on that) and thus it encouraged imports to the Eurozone and discouraged exports for many of its goods categories.

Post subprime crisis and in the last few years Greece, Spain and Portugal went through crises (Greece of course faced and still faces the biggest one). So did Cyprus.

None of these economies have become economic powerhouse, but they were supposed to do so before they joined. They did not become competitive by simply joining the "Champions League" of the Eurozone. But that was not supposed to be the case.

The Euro became a reality because Germany was willing to join. It is natural that the Euro and the European Central Bank was designed based on the DM and the Bundesbank (for example, unlike the US Fed, only inflation is the ECB's concern, not growth/employment).

Countries rushed to join the Euro as a status symbol and it seems that they paid a price. It more than clear Greece joined the Euro too early ie unprepared from a real economy point of view). Evidence shows that this partly applies to Spain and Portugal too.

Should some member leave the Eurozone? That is a very complicated issue. The Eurozone is not a country club that one can easily join, leave and re-join. Entry and exit cause major adaptations.

What members lost was the ability to absorb loss of competitiveness by changes in the exchange rates of their national currencies and that means that once you are in the Eurozone you have to be extremely mindful of your competitiveness.

There are anti-Euro feelings in Greece and in Italy. But in the Netherlands and even Germany too. One way to make the Euro more economically sound at this stage is to make the Eurozone an even closer economic union (and possibly political too). Make the Eurozone more of a "Single Economy" I have referred to in previous posts. With 19 or less. With a Eurozone tax system, especially in corporate taxation, and other features too.

But one drawback will always exist: Linguistic barriers, both in the Eurozone and the EU. Nothing can be done about it but it has to be taken into account in every new design idea in EU Reform.

Thursday, November 3, 2016

Brexit: An analysis of the UK court's ruling from a European POV

So the UK Parliament must vote on whether the UK government triggers Article 50 or not. That seems rather straightforward. Either it thinks that leaving the EU is a good thing or not.

Yet this is quite more complicated and disturbing as far as the rest of Europe as well as Europeans in the UK are concerned.

Let's first see what the Court said:

The Lord Chief Justice, Lord Thomas of Cwmgiedd, declared: "The government does not have power under the Crown's prerogative to give notice pursuant to Article 50 for the UK to withdraw from the European Union".

The three judges ruled there was no constitutional convention of the royal prerogative being used in legislation relating to the EU. That triggering Article 50 would fundamentally change UK people's rights and that the government cannot change or do away with rights under UK law unless Parliament gives it authority to do so.

Based on that, one would think that MPs and Lords would say a pure Yes or No.

Yet it has been interpreted as a need for government to present its negotiations plan.

Let's see what the leaders of the two main opposite parties said:

Labour's Jeremy Corbyn : "This ruling underlines the need for the government to bring its negotiating terms to Parliament without delay. Labour respects the decision of the British people to leave the European Union. But there must be transparency and accountability to parliament on the terms of Brexit."

Why on Earth should the government reveal its negotiations terms, to weaken them? The decision should be about Yes or No to triggering Article 50.

Liberal Democrats' Tim Farron: "Ultimately, the British people voted for a departure but not for a destination, which is why what really matters is allowing them to vote again on the final deal, giving them the chance to say no to an irresponsible hard Brexit that risks our economy and our jobs."

The reactions of both Corbyn and Farron are troubling from a European point of view.

a) Both seem to choose to ignore that the ref was non binding. They are conveniently yielding to the political pressure placed on them by Theresa May (side note: good for her). As Remainers point out I) the ref was non binding II) the decision was 52-48 not 65-35 III) much of the population did not vote.

At the end of the day, all that is the UK's business. What those of us not British in the EU have a say in is:

b) What Tim Farron says involves the rest of the EU. As I pointed out in a previous post, he seems to be under the impression "Europe" is going to wait for the end of negotiations and give the UK the chance to change its mind and remain in the EU if it the UK does not like the Brexit deal! Does he even consider the precedent that would set for other members?

As a non British analyst of UK affairs (and European ones), it seems to me that:

1) Once Article is triggered, Brexit is Brexit (as May says). The choice set becomes what type of Brexit. If MPs give it the go ahead, Brexit is Brexit, no turning back.

2) The only way to avert Brexit is for Parliament to reject triggering of Article 50, clearly and directly, have a second referendum, this time binding and well informed, and decide, for good, for all sides concerned.

There are no trial separations and wait and see how the divorce negotiations work out. The UK has been a complaining "spouse" in the "marriage" with the EU for decades, the ref was not the start but the end.

It is maybe up to the 48%, the Remainers, to explain these facts of life to MM Farron and Corbyn.

The role for us in the rest of the EU is to make clear, here and now, that once article 50 is triggered, Brexit is Brexit and there is no turning back.  Maybe in 15-20 years, but not in two.

PS. Some people I have spoken to have suggested that a No vote by the Parliament and a new ref would lead to civil unrest and that the drafter of Art 50 has said that is reversible.

a) About Art 50: This is not a law that carries an explanatory memorandum. What matter is what the text says. And it does not foresee untriggering. Of course the ECJ will have the final say if need be.

b) About unrest:  If in 2 yearrs there is 60-40 Remain ref the 40% will not cause unrest then? People are afraid to speak a foreign language in the street, the damage has been done.
Tbh I think Brexit is by now a done deal, the best scenario is soft Brexit. Not what we would have wanted but events have proved too many in the UK don't want the EU or foreigners. Sadly. Very sadly.

A Single Economy

Why are unemployment rates so diverse in Europe? Why is it 19.5% in Spain and less than 5% in Germany? Are Northern European hardworking and the Southern Europeans lazy? Not really. For example Greeks work the third longest hours in the OECD and yet they are in a huge crisis. Is bad weather conducive to productivity and the Mediterranean sun counter productive? Not really.

Then why are companies manufacturing mostly in North and Central Europe and not in the periphery? Of course there are factories in Portugal and in Spain but why aren't there more of them?

Are Southern Europeans well educated but not in the right fields?

Why are Ireland and Finland doing so well? Why does Malta have record low unemployment while Cyprus high (and it even higher during the crisis)?

Well, like in most issues, there are many reasons aka factors.

Some like to dismiss countries for not having the right work culture or for state corruption. That is superficial treatment.

The indirect cost of labour may be high eg in Greece but it is no that low in other EU members either. Why did auto makers from other continents invest and produce in the UK and not in Spain, Portugal or Greece? The simple answer is English and a flexible labour market. But what does one really mean by the term "flexible"?

All companies are not allowed to fire at will in the EU, there are caps on monthly firing volumes via EU directives. In some countries when you fire an employee you have to pay him/her off a high severance pay than in others, but multinationals in general like to send off an employee with a gift higher than what the law says.

Very few people have a thorough understanding of what it's like to do business in the EU 28 member states as well as outside the EU and they are usually not available to policy makers (because they are not sought by them). With Brexit, some governments have sent letter to corporations luring them with low tax rates. But when companies make location decisions they look at many factors. Infrastructure, hard and soft (human capital), logistics, etc. On the other hand cars and other equipment is being made in Asia and shipped to the EU and they are still competitive.

Why are so many companies locating in Ireland which is in the periphery? Is it just low taxation and the English language (as well as proximity to the large UK market, asset which is now being lost due to Hard Brexit)?

In a well performing economy each geo segment has some competitive advantages. Plus there is aid by the government (eg Wales by the UK). How well has east Germany adjusted in the 25 years since reunification?

The EU Single Market which started in 1993 required many regulations and directives. It was a major breakthrough. But it was not panacea. As a UKIP supporter argued in a recent debate, only 6% of UK companies export. For a large number of companies in the EU doing business beyond the national borders is still an orama not a reality. One has to look at the real life reasons for that and not rely on economic theories and traditional business analysis.

The EU economy is not doing badly but it is underperforming. People are not satisfied and blaming the EU, globalization, foreigners in addition to their national policy makers.

"It's the economy stupid" I have argued applies to the 2016 EU too. The Dutch have in the last few years seen cuts in their social security, the Germans had Hartz including mini jobs. Their unemployment benefits have been cut (yet they are still generous compared to those of the Greeks or the Polish). So of course they are easily upset by money given to Greece or other periphery members.

Germany wants convergence of tax rates (corporate ones) and seems to want France. It makes sense. But why will others agree? In a united states or federal republic of Europe maybe they would agree. But we are nowhere near that and many leaders across Europe think it is not feasible. A Gordian Know? Is there a need for a new Alexander the Great? Tusk is obviously not that. Delors conveyed a vision that may not have been shared in the UK but was largely effective. Of course the EU at that time had 12 members. Now it has 28 (soon 27).

So is "union of sovereign nations (or states)" the only feasible solution politically? It may be, but does it make economic sense?

A Single Economy will of course require further surrender of national sovereignty.

A single or converged tax rates for companies
A single VAT rate for all
Single labour laws/rules
Use of a single business language (!)
An EU IRS and EU personal tax rates

Can such endeavor be marketed to the people of the EU27 in 2016 or 2017? Maybe it can, when it is sold on the USP (unique selling proposition) of Jobs (more and better ones). An EU27 (or even EU26 or EU25) will be powerful as a Single Economy, inside and outside (in trade negotiations).

A single immigration policy (for refugees and economic migrants)
Single environment rules (we have them already largely)

Some say these will come, eventually. That it took centuries to build the US. True, but maybe the EU is now in a do or die situation. Why? Because like any half built house, it is not easy to live in.

Leavers in the UK are starting to realise that life outside the EU is not going to be that easy. Federalists have not been convincing in Marketing Europe.

If Europe does not move forward it will move backwards. A federal republic of Europe does not 460 mio, it can work with even 320, thus with 25 lander or less.

More Europe for more Economy and for more Jobs.

If the EU economy is doing so great at its core today why are AfD in Germany and PVV in NL doing so well?

Tomorrow: Argumentation for Less Europe

Wednesday, November 2, 2016

Jobs in Europe

When one takes a look at unemployment rates in the EU, one notices the wide range. In July, they ranged from 3.9% to 23.5%!

The Eurozone's average is 1.5 points higher than the EU one. That is because Eurozone members tend to have higher unemployment rates than the non Eurozone ones. Could that be attributed to Eurozone policies, eg the 3% budget constraint?

Before we look into that, let's see who has the really high unemployment. Greece, Spain, Croatia (non Eurozone, the EU's newest member), Cyprus, Italy, Portugal and France. These job markets are above the Eurozone average and other than Croatia, they are all Eurozone members.

But they have something else in common. They are all South states and all except Portugal are Mediterranean ones.

Add to that one fact: The lowest unemployment rate in the EU can be found in a very small Mediterranean member, Malta, a member of the Eurozone!

Next to Malta is a former Comecon member, the Czech Rep and then Germany (Eurozone member). Then the UK, Hungary (another ex-Comecon) and the Netherlands (another Eurozone member).

One could say that non Eurozone members, because they have wider economic policy options than Eurozone members have better performing economies, thus lower unemployment and that Germany and NL are part of Eurozone core thus best adjusted to the Eurozone. Whereas Greece, Spain, Italy, Portugal and Cuprus are not Eurozone's best members.

One other theory could be that flexible employment contracts (part time, zero hours, mini jobs) are more predominant in Germany and NL, as well as the UK, and that ex-Comecon member have low wages thus more jobs compared to the Southern states that have less flexible labour markets than Germany, NL and the UK and higher wages than the ex-communist states.

Add to that the language barriers to mobility in the intra-EU labour market and you may have an explanation why rates vary so much.

What is the net result? An inefficient EU labour market.

What can be done? Not much.

a) Establish English as the language in the EU labour market? Not possible.
There types of jobs (medical, IT/engineering, cleaning/care services) where there is high intra-EU mobility, from the poor member economies to the richer ones. But if you are working in Marketing or PR in Hungary or Spain or Greece why would a company in Germany or the Netherlands hire you, especially if you do not speak German or Dutch? That is a feature of the EU market compared to the US.

b) So in effect the 28 (soon 27) national EU labour markets remain "sovereign". How do you then explain the high penetration of non EU migrants? Well, a very large % is in blue collar - manual jobs. A very good example of that is Greece.

With respect to EU Reform, are there any insights? Not really, other than the EU needs to become more of a united/single economy. Feel free to send me a comment at if you think there are.

Would Greece, Spain, Cyprus, Italy, Portugal have been better off outside the Eurozone, ex post? That is a topic for a future post.