June 18, 2013 5:41 pm

The toxic legacy of the Greek crisis

Policy makers jumped at the chance to portray a tiny gain as a great feat
©Ingram Pinn

Two and a half thousand years ago, Greece shaped the western mind. More recently, it shaped the response to the financial crisis. Greece suffered a calamity – and others’ fear of following it justified the shift to austerity. The result has been a feeble recovery from the post-crisis recession, notably in the eurozone and the UK. Greece, alas, had the wrong crisis, at the wrong time.

Simon Wren-Lewis of Oxford university tells the story in an excellent blog post. He draws on a critical evaluation by the International Monetary Fund of the programme for Greece agreed in May 2010. Here is the report’s summary of the failings: “Market confidence was not restored, the banking system lost 30 per cent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment.

Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.”


While the programme forecast a 5½ per cent decline in real gross domestic product between 2009 and 2012, the outcome was a fall of 17 per cent. According to the OECD, the association of high-income countries, real private demand fell by 33 per cent between the first quarters of 2008 and 2013, while unemployment rose to 27 per cent of the labour force. The only justification for such a depression is that a huge fall in output and a parallel rise in unemployment is necessary to force needed reductions in relative costs on to a country that is part of a currency union. Since the Greeks want to remain inside the eurozone, they have to bear the resultant pain.

Yet even this cannot justify one aspect of the programme. The International Monetary Fund is supposed to lend to a country only if its debt has been made sustainable. But it was not, in the least, as a host of commentators pointed out at the time. Instead of making debt sustainable, the programme merely let many private creditors escape unscathed. In the end, a reduction in debt to private creditors was imposed. Yet Greek public debt remains, arguably, too high: the IMF forecasts it at close to 120 per cent of GDP in 2020. This debt overhang will make it hard for Greece to return to the markets and to economic health. Deeper debt reduction is still needed.

All this tells us depressing things about the politicisation of the IMF and the inability of the eurozone to act in the best interests of its weaker members. But the Greek crisis, alas, also had two global results.

First, inside the eurozone, the fact that Greece was the first country to fall into trouble cemented the view of northern Europeans that the crisis was fiscal. For Greece was, indeed, a case of remarkable fiscal profligacy, with net public debt at more than 100 per cent of GDP even before the crisis. But elsewhere the position was quite different: private borrowing was the root cause of the crisis in Ireland and Spain and, to a lesser extent, in Portugal. Italy’s public debt was high, but not because of recent profligacy. By deciding that the crisis was largely fiscal, policy makers could ignore the truth that the underlying cause of the disarray was irresponsible cross-border lending, for which suppliers of credit are surely as responsible as users. If the culpability of both sideslenders and borrowers – had been understood, the moral case for debt write-offs would have been clearer.

Second, the Greek crisis frightened policy makers everywhere. Instead of focusing efforts on remedying the collapse of the financial sector and reducing the overhang of private debt, which were the causes of the crisis, they focused on fiscal deficits. But these were largely a symptom of the crisis, though also, in part, an appropriate policy response to it. As I have noted, in June 2010, shortly after the first Greek programme, leaders of the Group of 20 leading countries, meeting in Toronto, decided to reverse the stimulus, declaring that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013”. A sharp tightening followed (see charts). Policy makers justified the shift with supportive academic research: the view that fiscal contraction could be expansionary was an encouragement; the view that growth would fall if public debt grew too high was a warning.

What looked, until mid-2010, to be a burgeoning recovery from the nightmare of the “Great Recession” was aborted, notably so in the UK and eurozone. The greater success of the US in surviving austerity was probably due to its more aggressive clean-up of the financial sector, greater acceptance of deleveraging by households and its more aggressive monetary policy, particularly relative to the eurozone’s. If the latest forecasts from the OECD are right, eurozone GDP will be lower in the fourth quarter of 2014 than it was in the first quarter of 2008 and a mere 0.7 per cent higher than in the first quarter of 2011. Did fiscal tightening cause such a weak recovery on its own? Certainly not. But it removed a still desperately needed offset to the contractionary forces emanating from crisis-hit private sectors.

What makes this story depressing is that it was unnecessary. At first, it might have made sense to fear the Greek crisis was the first outbreak of a fiscal-crisis pandemic. Yet it soon became clear that countries with their own floating currencies could still sell public debt at ultra-low interest rates. This was partly due to “quantitative easing” by their central banks. Possessing a central bank of your own gives a government a degree of freedom in managing its response to a financial crisis. For such countries, the time for rapid structural fiscal tightening comes only after the private sector starts to eliminate its structural financial surpluses. That would not be so soon after the crisis. It would also require prior restructuring of the financial sector and writedowns of excessive private debt.

In brief, the Greek crisis proved a triple calamity: a calamity for the Greeks themselves; a calamity for the popular view of the crisis inside the eurozone; and a calamity for fiscal policy everywhere.

The result has been stagnation, or worse, particularly in Europe. Today, we have to recognise that the huge falls in output relative to pre-crisis trends may well never be recouped. Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new, lower level. It is a sad story.

Copyright The Financial Times Limited 2013

06/18/2013 12:46 PM

Trade Talks

Deal Could Double German Exports to US

By Florian Diekmann

 The port of Hamburg: Germany would benefit greatly from a trans-Atlantic free trade agreement.

The EU and the US are set to start negotiations on a trans-Atlantic free trade agreement in July. A deal could have huge benefits for Germany and the rest of the EU. But there would also be losers according to a new study.

If the United States and the European Union are able to come together on a far-reaching free trade agreement, Germany would be one of the greatest beneficiaries. Fully 181,000 new jobs could be expected and per-capita income would spike by 4.68 percent. That is the result of a study released this week by the Bertelsmann Foundation together with the Munich-based Center for Economic Studies.

The report found that all members of the planned free trade area would benefit from the deal, with the US emerging as the biggest winner. But European Union member states stand to make large gains as well.

The report comes as the EU and the US agreed on Monday to begin talks on the sweeping new deal next month. European Commission President José Manuel Barroso said on Monday on the sidelines of the G-8 in Northern Ireland that talks were starting and that it would offer "huge economic benefits" on both sides of the Atlantic. US President Barack Obama said that reaching agreement on a deal is "a priority of mine" and that he is "confident we can get it done."

According to the study, the Trans-Atlantic Trade and Investment Partnership (TTIP) would provide the greatest benefits to the US and to Great Britain. Gross domestic product per capita would rise by 13.4 percent in the US and by 9.7 percent in the UK. More than a million new jobs would result in America. That number would be 400,000 in Britain.

Free Trade between the EU and US

Jobs Gained/Lost
US+ 1,086,000
United Kingdom+ 400,000
Germany+ 181,000
Spain+ 143,000
Italy+ 141,000
France+ 122,000
Poland+ 93,000
Portugal+ 43,000
Greece+ 34,000
Sweden+ 33,000
Netherlands+ 30,000
Hungary+ 23,000
Czech Republic+ 22,000
Finland+ 20,000
Ireland+ 18,000
Denmark+ 15,000
Slovakia+ 13,000
Austria+ 12,000
Belgium+ 4,000
Iceland- 1,000
New Zealand- 7,000
Norway- 12,000
Switzerland- 18,000
South Korea- 30,000
Australia- 52,000
Japan- 72,000
Turkey- 95,000
Canada- 102,000
Total + 2,043,000

Source: Center for Economic Studies | Bertelsmann Foundation

Rest of World Would Suffer

But the benefits would be felt across Europe, the study found, with average economic growth of 5 percent. The complete study can be read online here.

Still, the study makes it clear that the rest of the world would likely suffer as a result of a trans-Atlantic free trade agreement, including job losses and slower economic growth. Yet the overall effect of a deal, which would create the biggest free trade area in the world, would be a positive one, with global per-capita GDP rising by 3.3 percent as a result and the creation of an additional 2 million jobs. Both numbers take into account the inevitable losses that some countries will experience.

In theory, the study authors write, the TTIP could benefit even more countries were they to take on some of the regulations that may be included in the free-trade deal. Indeed, a far-reaching deal might encourage developing and emerging countries to reach a compromise on the Doha trade talks, which are currently in stasis.

For the study, researchers simulated the possible effects of the TTIP on 126 countries. The model they used allows them to see how the 2010 global economy would have looked had a free-trade agreement already been in place.

They worked through two possible scenarios. The first assumed merely the disappearance of tariffs that are currently in place between the US and the EU. The second scenario envisions a much broader deal including the elimination of all barriers to trade, including varying quality and legal standards, different packaging guidelines and licensing procedures.

Doubling Exports

Under the first scenario, the TTIP would have a relatively small effect on the German economy: instead of the 4.7 percent growth resulting from a full deal, the mere elimination of tariffs would boost the economy by just 0.24 percent. Levies between the US and the EU are already at a very low level.
In addition to economic growth, however, trans-Atlantic trade between the EU and the US would grow rapidly. Germany would see exports to and imports from the US almost double, and American trade with crisis-stricken euro-zone countries like Greece, Italy and Portugal would increase by more than 90 percent.
Still, the news is not all good for Germany. Trade with its European Union partners would suffer because the advantages currently in place would disappear. Trade with France, for example, would drop by 23 percent according to the study and by 40 percent with Britain. Trade with Italy, Greece and other EU member states suffering from the euro crisis would drop by around 30 percent. Such drops would be more than compensated for by increased trade with the US.
Germany would also see a 10 percent drop in trade with developing countries such as China, Brazil, India, Russia and South Africa. For the US, the drop would be fully 30 percent.

Limited Benefit for France

The study makes clear that there would be plenty of losers, particularly neighboring countries that are left out of the deal. Countries in North Africa and parts of Eastern Europe would see trade with the EU drop by some 5 percent. Mexico and Canada, for their part, would see per-capita GDP plunge by 9.5 percent.
Study authors point out, however, that benefits for the EU and the US would be such that they could afford to compensate those who lost out so that all would benefit. At the same time, some countries would be able to minimize their losses by eliminating some trade barriers currently in place -- essentially adopting some elements of the TTIP.
Within Europe, Sweden, Ireland and Spain would join Great Britain as the biggest beneficiaries of TTIP. France, on the other hand, would see its economy grow by just 2.6 percent due to its relatively low level of trade with the US.

June 17, 2013 6:54 pm

The west’s dominance of the Middle East is ending
Those calling for deeper US involvement in the Syrian conflict are living in the past
©Ingram Pinn

Should the west arm the Syrian rebels? That is the issue of the day in Washington, London and at the Group of Eight Summit. But behind this debate lies a bigger question. Can western powers continue to shape the future of the Middle East as they have for the past century?

The current, increasingly fragile borders of the Middle East are, to a large extent, the product of some lines on the map drawn by Britain and France in the Sykes-Picot agreement of 1916. The era when Britain and France were the dominant outside powers ended definitively with the Suez crisis of 1956when the US pulled the plug on the two nations’ intervention in Egypt. During the cold war, the US and the USSR were the big players. After the collapse of the Soviet Union in 1991, America stood alone as the great power in the Middle East: organising the coalition to defeat Saddam Hussein in 1991, protecting the flow of oil from the Gulf, containing Iran and attempting to broker a peace settlement between Israel and the Arab states.

Those who are urging the US to get more deeply involved in the Syrian conflict now are living in the past. They assume that America can and should continue to dominate the politics of the Middle East. But four fundamental changes make it no longer realistic, or even desirable, for the US to dominate the region in the old way.
These changes are the failures of the Afghan and Iraq wars; the Great Recession, the Arab spring and the prospect of US energy Independence.

Over the past decade, the US has learnt that while its military might can topple regimes in the greater Middle East very quickly, America and its allies are very bad at nation-building. A decade of involvement has left both Afghanistan and Iraq deeply unstable and wracked by conflict. Neither country is securely in the “western camp”.

The result is that even the advocates of western intervention in Syria, such as Senator John McCain, proclaim that they are opposed to “boots on the ground”. Instead, they are pushing to supply weapons to the Syrian rebelsarguing that this is necessary to secure a more desirable political outcome.

President Barack Obama has given some ground to the “arm the rebels camp. But his reluctance and scepticism are evident – and amply justified. If a full-scale western occupation of both Iraq and Afghanistan was unable to secure a decent outcome, why does anybody believe that supplying a few light weapons to the Syrian rebels will be more effective?

The Great Recession also means that the west’s capacity to “bear any burden” can no longer be taken for granted. European military spending is falling fast – and cuts in the Pentagon budget have begun.

With the direct and indirect cost of the Iraq war estimated at $3tn and the US government borrowing 40 cents of every dollar that it spends, it is hardly surprising that Mr Obama is wary of taking on new commitments in the Middle East.

The third new factor is the Arab spring. President Hosni Mubarak of Egypt was a long-time ally and client of the US. Nonetheless, Washington decided to let him fall in early 2011much to the disgust and alarm of other long-term American allies in the region, notably Saudi Arabia and Israel. But the Obama administration was right to drop Mr Mubarak. He could not have been propped up without risking a Syria-style bloodbath.

More fundamentally, the US has recognised that, ultimately, the people of the Middle East are going to have to shape their own destinies. Many of the forces at work in the regionsuch as Islamism and Sunni-Shia sectarianism – are alarming to the west but they cannot be forever channelled or suppressed.

Finally, the ability of the US to take a more hands-off attitude is greatly enhanced by the shale revolution in the US, which lessens American dependence on Middle Eastern oil.

Accepting that western domination of the Middle East is coming to an end, however, should not be confused with saying that western nations will not defend their interests.

The US has large military bases in the Gulf and, together with its allies, will still try to prevent the Middle East becoming dominated by a hostile power. Despite its role in Syria, Russia is not a plausible regional hegemon. But Iran worries the US; an attack on its nuclear programme remains an option, despite the encouraging result of this weekend’s presidential elections. Jihadist forces, linked to al-Qaeda, will also encounter western resistanceone reason why the Syrian opposition continues to be treated very warily. And the US and its European allies will remain deeply involved in regional diplomacy over Syria.

Western humanitarian instincts will play a role too – as they did in the decision to support the Libyan rebellion. But, as Syria is demonstrating, there is a limit to what the west will take on. Even former Australian foreign minister Gareth Evans, the intellectual godfather of the doctrine of the “responsibility to protectcivilians, is warning against military intervention in Syria.

Despite the US decision to begin to supply military assistance to the rebels, Mr Obama is obviously still wary of deep involvement in the Syrian conflicto. More than some of his advisers and allies, he seems to appreciate the limited ability of outside powers to control the new order that it is emerging in the region. The era of direct colonialism in the Middle East ended decades ago. The era of informal empire is now also coming to a close.

Copyright The Financial Times Limited 2013.

The Limits to Panic

Bjørn Lomborg

17 June 2013

 This illustration is by Pedro Molina and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

COPENHAGENWe often hear how the world as we know it will end, usually through ecological collapse. Indeed, more tan 40 years after the Club of Rome released the mother of all apocalyptic forecasts, The Limits to Growth, its basic ideas are still with us. But time has not been kind.

The Limits to Growth warned humanity in 1972 that devastating collapse was just around the corner. But, while we have seen financial panics since then, there have been no real shortages or productive breakdowns. Instead, the resources generated by human ingenuity remain far ahead of human consumption.
But the report’s fundamental legacy remains: we have inherited a tendency to obsess over misguided remedies for largely trivial problems, while often ignoring big problems and sensible remedies.
In the early 1970’s, the flush of technological optimism was over, the Vietnam War was a disaster, societies were in turmoil, and economies were stagnating. Rachel Carson’s 1962 book Silent Spring had raised fears about pollution and launched the modern environmental movement; Paul Ehrlich’s 1968 title The Population Bomb said it all. The first Earth Day, in 1970, was deeply pessimistic.
The genius of The Limits to Growth was to fuse these worries with fears of running out of stuff. We were doomed, because too many people would consume too much.

Even if our ingenuity bought us some time, we would end up killing the planet and ourselves with pollution. The only hope was to stop economic growth itself, cut consumption, recycle, and force people to have fewer children, stabilizing society at a significantly poorer level.
That message still resonates today, though it was spectacularly wrong. For example, the authors of The Limits to Growth predicted that before 2013, the world would have run out of aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten, and zinc.
Instead, despite recent increases, commodity prices have generally fallen to about a third of their level 150 years ago. Technological innovations have replaced mercury in batteries, dental fillings, and thermometers: mercury consumption is down 98% and, by 2000, the price was down 90%. More broadly, since 1946, supplies of copper, aluminum, iron, and zinc have outstripped consumption, owing to the discovery of additional reserves and new technologies to extract them economically.
Similarly, oil and natural gas were to run out in 1990 and 1992, respectively; today, reserves of both are larger than they were in 1970, although we consume dramatically more. Within the past six years, shale gas alone has doubled potential gas resources in the United States and halved the price.
As for economic collapse, the Intergovernmental Panel on Climate Change estimates that global GDP per capita will increase 14-fold over this century and 24-fold in the developing world.
The Limits of Growth got it so wrong because its authors overlooked the greatest resource of all: our own resourcefulness. Population growth has been slowing since the late 1960’s. Food supply has not collapsed (1.5 billion hectares of arable land are being used, but another 2.7 billion hectares are in reserve). Malnourishment has dropped by more than half, from 35% of the world’s population to under 16%.
Nor are we choking on pollution. Whereas the Club of Rome imagined an idyllic past with no particulate air pollution and happy farmers, and a future strangled by belching smokestacks, reality is entirely the reverse.
In 1900, when the global human population was 1.5 billion, almost three million peopleroughly one in 500died each year from air pollution, mostly from wretched indoor air. Today, the risk has receded to one death per 2,000 people. While pollution still kills more people than malaria does, the mortality rate is falling, not rising.
Nonetheless, the mindset nurtured by The Limits to Growth continues to shape popular and elite thinking.
Consider recycling, which is often just a feel-good gesture with little environmental benefit and significant cost. Paper, for example, typically comes from sustainable forests, not rainforests. The processing and government subsidies associated with recycling yield lower-quality paper to save a resource that is not threatened.
Likewise, fears of over-population framed self-destructive policies, such as China’s one-child policy and forced sterilization in India. And, while pesticides and other pollutants were seen to kill off perhaps half of humanity, well-regulated pesticides cause about 20 deaths each year in the US, whereas they have significant upsides in creating cheaper and more plentiful food.
Indeed, reliance solely on organic farming – a movement inspired by the pesticide fear – would cost more than $100 billion annually in the US. At 16% lower efficiency, current output would require another 65 million acres of farmland – an area more than half the size of California. Higher prices would reduce consumption of fruits and vegetables, causing myriad adverse health effects (including tens of thousands of additional cancer deaths per year).
Obsession with doom-and-gloom scenarios distracts us from the real global threats. Poverty is one of the greatest killers of all, while easily curable diseases still claim 15 million lives every year25% of all deaths.
The solution is economic growth. When lifted out of poverty, most people can afford to avoid infectious diseases. China has pulled more than 680 million people out of poverty in the last three decades, leading a worldwide poverty decline of almost a billion people. This has created massive improvements in health, longevity, and quality of life.
The four decades since The Limits of Growth have shown that we need more of it, not less. An expansion of trade, with estimated benefits exceeding $100 trillion annually toward the end of the century, would do thousands of times more good than timid feel-good policies that result from fear-mongering. But that requires abandoning an anti-growth mentality and using our enormous potential to create a brighter future.
Bjørn Lomborg, an adjunct professor at the Copenhagen Business School, founded and directs the Copenhagen Consensus Center, which seeks to study environmental problems and solutions using the best available analytical methods. He is the author of The Skeptical Environmentalist and Cool It, the basis of an eponymous documentary film.