Tagged: eurozone

Mathis Lohaus

Scenarios for European External Relations in 2025

Dahrendorf Symposium

Last week I had the pleasure of attending (parts of) the 2016 Dahrendorf Symposium hosted by Hertie School of Governance, LSE and Mercator foundation. The event focused on European foreign policy. I will summarize the debates on the final day in a separate blog post.

A few months ago, Hertie School hosted a scenario planning workshop as part of the Dahrendorf project. It focused on the EU’s relations to other world regions, trying to draw up scenarios for the year 2025. Meeting in five different working groups, the participants developed scenarios for the future relations between the EU and the U.S., China, Russia and Ukraine, Turkey, and the MENA region. Given my interest in forecasting and curiosity about scenario planning, I gladly signed up and contributed to the EU/U.S. working group.

At the Dahrendorf Symposium last week, Monika Sus and Franziska Pfeifer (who are coordinating the scenario project) briefly described our method and results to the audience. The publication with our 18 (!) brief scenarios is available via the Dahrendorf blog: European Union in the World 2025 – Scenarios for EU relations

The results are interesting and I really encourage you to download the document! Personally, I particularly enjoyed the process. It was a great exercise to think about  basic assumptions we have about transatlantic relations; to identify key drivers relevant for change; and to come up with scenarios that reflect the most relevant combinations of key drivers taking particular directions.

Transatlantic mistrust on tech
Illustrations for the scenario report by Jorge Martin

Let me indulge in a bit of self-promotion and quote the intro to my group’s scenario:

“In the years up to 2025 there will be a situation of balkanised technological regulation in the EU, driven by political debates which emphasise the need to shield national markets and societies against the uncertain effects of technological progress. On the other side of the Atlantic, political leaders will continue to embrace new technologies, with an emphasis on keeping the competitive edge also in terms of offensive capabilities in the cyber and AI realms. Only after a series of trigger events, increasing the pressure on decision-makers, will transatlantic leaders be willing to invest in a new institutional framework to manage the political problems associated with technological progress.” (‘Transatlantic Frankenstein’ scenario)

Then, of course, there was the Dahrendorf Symposium, which included a couple of workshop sessions (that I couldn’t attend) and two round-table panels on the final day. I will put my summary of these discussions into a separate post.

Vincent Dreher

Seven years in crisis: Some questions for the Eurozone

DER SPIEGEL 29 2015Recently, German media entered uncharted territory. While conservative newspapers have always identified the Greek government’s profligacy as root cause of the ongoing crisis, the liberal press had maintained more balanced positions. Yet on July 9, 2015, the weekly DIE ZEIT asked: ‘The Greek trap – the crisis-ridden country has a culture inimical to achievement. How can it be overcome?’ DER SPIEGEL proclaimed (in its July 11 issue) the necessity of ending the German romanticization of its arcadia in Attica. The title read: ‘Our Greeks – rapprochement with a strange people’.

Since when has culture advanced as main explanation for a country’s (economic) misery? How can shortcomings in a state bureaucracy be taken to explain an entire people’s failure of achieving prosperity and societal welfare?

In logical consequence of this narrative, the subsequent Eurozone-Greece agreement of July 13, 2015 figured as ‘the most intrusive economic supervision program ever mounted in the EU’ (FT). The drastic measures alongside the required ‘ownership’ of reforms revealed the deep mistrust in Greek institutions. The source of most, if not of all, failures was located in the Greek government’s incapacity, or reluctance, to accept conditionalities and implement reforms.

Unit labor costs and competitiveness in the Eurozone

This is yet another instance of misinterpreting the symptoms of a disease rooted in the fundamental misalignments within the Eurozone. There have been idiosyncratic issues in Greece (reporting failures, unsustainable debt since 2010), just as there have been home-grown issues in other crisis-hit member states contributing to the current escalation. However, these problems represent only the tip of the iceberg. It is not the misbehavior of individual governments, let alone cultures, which underlie the seven-year-old crisis. It is persistent failures in the economic governance of the Eurozone. Recent data from other Southern members are hailed as heralding the end of misery (EC, Reuters, FT, WSJ). The following discussion will demonstrate to the contrary: as long as the shortcomings in the institutional set-up of the Euro and the failures of member state coordination of fiscal policies persist, the crisis will continue. Greece today, who tomorrow?

Unit labor costs, the ratio of total labor costs to productivity, are interpreted as the best approximation of an economy’s competitiveness. Judged by these standards, today’s Germany is competitive. This is not merely due to its superior productivity though. German multinationals as well as the famed Mittelstand are very capable. But the great divergence of unit labor costs compared to Southern European economies was due to wage restraints and welfare cuts, beginning with Schröder’s Agenda 2010 in the early 2000s (Mickey Levy, Flassbeck, Spiecker, The Economist). Addressing ‘the sick man of the Euro’, the reforms (and other factors) put the German economy ahead. This was achieved, however, at the cost of society’s lower strata and its Euro partners, as evidenced by subsequent divergences in balance of payments across the Eurozone (Gavin Davies). Bound by the Euro, others could no longer devalue their national currencies to improve competitiveness. During the decade of the European boom, no one seemed to worry. Southern economies expanded strongly, while Northern capital was flowing in and financed investments and consumption. Consumption of Northern, of German goods for that matter. Apparently unnoticed, Eurozone’s North and South diverged.

Since the onset of adjustment programs across Europe, however, unit labor cost convergence has moved center stage. Yet this is not a joint effort – i.e. via wage restraint, reforms and export-orientation in the South combined with wage increases, fiscal expansion and domestic consumption in the North. Instead, the benchmark has been set by Germany and Northern Europe, and the others are asked to adjust. During the past years, Southern economies have undertaken enormous efforts. Greece, above all, is the star pupil (OECD, Economonitor). But to little avail. And even if the recent recovery across Europe (except Greece) proved sustainable – when every Eurozone member strives to become  ‘competitive’, who will act as counterpart? The German ‘Sparpolitik’ in the 2000s was offset by Southern expansion. Who is buying now, when everyone is saving?

The structure of the Eurozone and the European Central Bank

Divergences of unit labor costs, clouded by the boom, were further reinforced by the ECB’s single nominal interest rate. Paul de Grauwe and Notre Europe argue that increasing inflation in booming Southern economies lowered real interest rates, thereby rewarding further economic expansion. The reverse was true for the North, which still profited of huge export-gains. Additionally, due to increasing real exchange rate spreads the prices of comparable products across member states diverged, making Northern manufacturing more and more attractive (Vistesen, Dadush, Wyne). Hence economic dynamics pushed states further into imbalances, not merely the often denounced human fallacies. Where is the public discussion about these curious, and obviously significant, dynamics?

A second issue identified by de Grauwe is the lack of a lender of last resort. Since the late 19th century, any central bank’s mandate has included the provision of unlimited liquidity in times of financial panic; not so in the Eurozone. When the financial crisis hit Europe, each member had to clean its own doorstep. Capital fled to presumably safer Northern countries and Southerners dried up. The lack of affordable refinancing forced spending cuts, thereby inducing immediate austerity programs. The cuts diminished GDP, which made servicing debt even harder. And only then the European austerity programs were devised and implemented. The question arises: were state budgets ultimately unsustainable and Southerners righteously punished for profligacy? Or did they simply look weaker relative to Northern neighbors, which were favored by investors in times of uncertainty? Evidence points to the latter. Nevertheless, these are the discussions we Europeans should hold.

The Eurozone is not ready for the challenges ahead

Despite improvements in financial governance, such as the banking union or the ECB’s perennial setting of precedents, the economic structure of the Eurozone has seen little of the desperately needed changes (e.g. Hans Tietmeyer, Euractiv). As long as there is not some kind of fiscal union, as long as there are not some kind of common Eurozone debt instruments, the inherent fragilities persist. Furthermore, the majority of European policymakers remain bound to their national constituencies – why should they care for the whole of Europe, when their electoral mandate stems from a fraction of the people?

We need a European debate. A debate about the flawed narrative that the Greek government’s profligacy is said to have caused the economic and political crises; a debate concerning the interpretation of the crisis as a mere lack of competitiveness (what about the European welfare state by the way?); and a debate with regard to the absurd claims about “cultural” limits to economic growth.

Vincent Dreher is a PhD student at the Berlin Graduate School for Transnational Studies. He works on the Political Economy of International Money and Finance, with a focus on international institutions.

Mathis Lohaus

Predicting the Effects of TTIP, or: Whose Crystal Ball Can We Trust?

In a paper called “TTIP: European Disintegration, Unemployment and Instability”, economist Jeronim Capaldo argues that there are flaws in four prominent studies on the effects of the proposed TTIP agreement between the U.S. and the European Union. The problem is two-fold. First, all studies use similar models and data, which means that they all share the same set of assumptions and should thus not be treated as independently reaching similar conclusions:

Methodologically, the similarities among the four studies are striking. While all use World Bank-style Computable General Equilibrium (CGE) models, the first two studies also use exactly the same CGE. The specific CGE they use is called the Global Trade Analysis Project (GTAP), developed by researchers at Purdue University. All but Bertelsmann use a version of the same database (again from GTAP).

A detailed discussion of the shared heritage of the different CGE models can be found in a paper by Werner Raza and colleagues (pp. 37-49), which Capaldo cites.

He then goes one step further and alleges that the underlying econometric models are simply false, or at least inappropriate. According to him, CGE models rely on several flawed assumptions:

  • High labor mobility is supposed to allow workers in less competitive industries to switch to those that benefit from trade liberalization, which are assumed to grow enough to absorb the new workforce.
  • Overall, the gains for workers with the right skills are supposed to outweigh the losses for others.
  • The model assumes that new trade between countries/regions is created (rather than diverted from elsewhere, which would be a zero-sum result).

While I have no training in economics and don’t know the econometrics literature, I realize that all large-scale models of social science need to rely on simplified assumptions. Nevertheless, it seems to me that Capaldo has a point. If his account is correct, then European policymakers should look for more diverse academic input. More generally, if the most widely used models really are blind to potential downsides for labor, then that goes against the interest of European citizens. (As they ought to be very loss averse when it comes to employment as well as skeptical about the distribution of pay-offs from economic gains.)

So how do we come up with an estimate that pays more attention to potential negative effects? Capaldo uses the UN Global Policy Model (GPM), which models economic activity as demand-driven, explicitly models different regions, and includes an estimate of employment. (Again, I lack the knowledge to assess how this works and how much sense it makes.) In this model, unemployment and household income are projected to deteriorate in the long term (2025) for several European countries, as aggregate demand is lowered due to trade diversion (see pp. 10-19 for this and other findings).

capaldo-figure4
Jeronim Capaldo, “The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability”, Global Development and Environment Institute Working Paper No. 14-03, October 2014, p. 14.

Capaldo is pretty transparent about the limitations of this approach:

  • the non-TTIP baseline scenario (which serves as a comparison) might be wrong
  • the chosen model might be as ill-specified as the ones he is criticizing
  • policy responses down the road are not included (and that’s hardly possible)
  • …and the paper completely ignores the investment dimension of TTIP (which is a weakness shared by the CGE models, according to Raza et al., p. 49)

So the headline “TTIP will lead to a loss of 600,000 jobs” does not really do the paper justice, although the author himself uses pretty strong language in the conclusion.

No matter which forecast turns out to be better in the end, this discussion shows that policy decisions should not rely on a single strand of academic analysis. There is a lot of uncertainty involved in these negotiations, and I don’t see how there can be a confident forecast of net effects.

One final note for the political debate in general: TTIP opponents should not forget that the status quo will not necessarily be maintained or improved just by inaction. The people likely to lose from TTIP are probably heading for difficult times anyway, leading to questions about how to compensate them. Whether European leaders will decide in favor or against TTIP, they are making high-stakes bets on how globalization will play out over the next decades.

Thanks to Zoe for pointing me to the study. And if anyone can add insight regarding the comparison between the different models, please let me know!

Mathis Lohaus

Steinmeier on Transatlantic Relations

steinmeier-brookings

This morning, I went to see German foreign minister Steinmeier’s speech at the Brookings Institution. Under the heading “Transatlantic Ties for a New Generation”, he argued that to be attractive for young people, the European-American partnership has to be based on shared values and standards of governance. The text is on the ministry’s website. In addition, Brookings published the audio and video recordings of the speech and the Q&A.

To be fair, this speech was more interesting and better prepared than the last foreign policy speech delivered by a Social Democrat that I have attended. Still, if you go beyond the personal anecdotes and jokes he made, Steinmeier said very little, let alone . The Q&A, regrettably, was hurt by the fact that Steinmeier – who had given the speech in English- answered in German. So a lot of time was spent on translation and we only covered four or five (pretty harmless) questions in total.

So, here are the few concrete things I took away from this event. (Plain English translation in italics.)

  • The “no spy” treaty is a non-starter. Instead, Steinmeier wants to have several rounds of talks between U.S. and European officials, which should cover both eavesdropping on government leaders and large-scale surveillance of general population. These talks should include civil society and academia. (We know that’s kind of embarrassing, but what are we gonna do? Nobody wants to kill TTIP because of civil rights.)
  • On the choice to spy: the U.S. government should realize that their surveillance/ spying practices are inappropriate in a setting of close partnership. It must be made clear that democratic bodies have the last words rather than corporate or intelligence interests. (Please be a little bit nicer, for old time’s sake, OK?)
  • Europeans and in particular Germans are committed to show more leadership in foreign policy (“expand the toolbox of diplomacy”). As head of the G8 group in 2015, Germany will push for climate change politics. (But please don’t mention Syria, because we really don’t know what to do.)
  • On Europe: Between Germany and the UK, fundamental disagreements remain about the general trajectory of EU integration. We might see more subsidiarity in select issue areas, but no reversal of integration. (Those ***** Brits! As if we didn’t have enough problems already. Oh, and maybe we should tweak those austerity policies in Southern countries, but please don’t ask about specifics).
  • While the Russian human rights ombudsman Vladimir Lukin played in a constructive role in the talks with German, French, Polish FMs last week, Steinmeier is just as puzzled about Crimea as everybody else. (Nobody knows what’s going on in Ukraine, and even if we knew, we probably couldn’t do much about it. It’s not like we’re a  superpower or anything.)

So, as you can see, no grand commitments or surprise announcements were made today. German foreign policy remains, ahem, underwhelming.

Sören Stapel

Links: Protests in Brazil, Eurozone, Spying, MOOCs

2º_Junta_Brasil_em_Juiz_de_Fora_-_bandeiras_arco-íris_e_cartaz_contra_a_cura_gay
People protesting in the streets of Rio de Janeiro. Source: Wikimedia (public domain)

Usually, I try to find common themes for the links when it’s my turn in the link duty. Today I do not live up to that. So, here’s a rather cursory collection of what I’ve read over the last couple of days.

So far, we did not cover much of the protests in Brazil and I expect this to change soon. Meanwhile, Natalia Bueno shows who is protesting in Brazil. In case you missed it, check out Jay Ulfelder’s critique regarding laundry lists of causes for social unrest. At least, Gamman and Young’s argue that protests in Brazil are not just about the economy. Robert Kelly speculates whether the protests could spread to Asia’s corrupt democracies.

Continue reading

Mathis Lohaus

“The Euro will never succeed, and it will never fail.”

"Please find me the most generic euro image you can think of!" Source: Wikimedia
“Please find me the most generic euro image you can think of!” Source: Wikimedia

On Friday, Benjamin J. Cohen gave a talk at FU Berlin. Cohen, who is a professor of International Political Economy at UC Santa Barbara, is probably most famous for his work on the Geography of Money. He was invited by the KFG and the International Research Training Group “Between Spaces” to talk about the future of the euro as an international currency.

As the somewhat pessimistic title of the lecture – “The Euro Today: Is There A Tomorrow?” – suggests, this was not meant to be a pep talk for worried Europeans. In fact, Cohen’s short answer to his own question is: No, the euro will not bounce back from its current crisis, but instead face a “long, lingering slide into marginality”.

First, some preliminaries: Cohen was not talking about the future of the currency as such, but specifically about the euro’s role as an international currency: To what extent will it be used by non-members of the eurozone – not as a substitute domestic currency (“dollarization“), but for international purposes? More technically, the question is about the use of a currency as a unit of account, store of value, and/or medium of exchange.

To put it short, the argument here is that the euro is nowhere close to the dollar both in scope (which functions it fulfills) and in domain (where / by whom it is used).

Continue reading

Mathis Lohaus

Steinbrück’s Missed Opportunity

Peer Steinbrück at FU Berlin
Peer Steinbrück at FU Berlin – June 4, 2013

Peer Steinbrück, the Social Democratic challenger to chancellor Angela Merkel in the upcoming election, gave a speech at Freie Universität Berlin on Tuesday. You can watch it online (in German). This was not meant to be a typical campaign talk, but a speech on the “guidelines of social democratic foreign and security policy”.

The speech was disappointing. For people familiar with the issue area, in particular the first half of the speech seemed very much rooted in the general wisdom, or rather, the commonly shared worries about the state of the world. Steinbrück failed to clearly distinguish his position from vague and all too familiar boilerplate statements. Europe is important for Germany and a historic achievement that should be cherished. International law and the UN Security Council must be considered in decisions about employing the German army. Drones that kill people are undesirable. Oh my, who would have thought?

Steinbrück was unable to clarify how and why his positions represent social democracy, let alone an alternative to Merkel-style realpolitik. His dismissive response when asked about this weakness: “If a social democrat gives a speech, than this a speech about social democratic positions.” Well, what might these positions be? Continue reading

Mathis Lohaus

Links: Parenting, R&R, horrible neighbors

Back from California, back to serious work … I mean, blogging. Here we go:

  • Over at the Duck, Amanda Murdie has a great post on doing a PhD as a parent, similar to ours in its positive conclusion
  • A widely cited working paper on public debt and growth by Reinhart & Rogoff is under fire for weird omissions and the weighting of cases as well as mistakes made in MS Excel (R&R paper & the critique by Herndon, Ash and Pollin / coverage on Marginal Revolution & FT Alphaville). Worrying, given how influential R & R are regarding austerity policies!
  • It’s unclear, however, to what degree their findings hold despite the errors — and what their policy advice was in the first place. Which is even more worrying, right? (And maybe I should finally read that book.)
  • The Duck, again: Brian Rathbun’s “enduring rivalry” with his neighbors is a great case of applying IR concepts in real life, and his response (take a look at the pictures!) seems like “naming and shaming” to me.
Maurits Meijers

On Dijsselbloem

Why everyone should calm down – and be careful when speaking in their second language

Jeroen Dijsselboem
Jeroen Dijsselboem

The last two days the European media (and markets) were in a state of shock. Eurogroup president Jeroen Dijsselbloem had supposedly said in an interview with the Financial Times and Reuters that the Cyprus bail-in strategy could be a template for resolving banking crises in the future. The result was a truly Europeanized response.

There seemed to be a great consensus that Dijsselbloem was disquieting the markets, that he is unfit for the job, while he was even labeled as ‘chaos crisis manager’. The Süddeutsche Zeitung noted that the inexperienced, agricultural economist Dijsselbloem should ‘choose his words’ wiser.

Dijsselbloem subsequently published a short statement saying:

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

Four brief points on this whole charade are in order. Continue reading

Mathis Lohaus

Links #3: “No time” edition

'Detector! What would the Bayesian statistician say if I asked him whether the--' [roll] 'I AM A NEUTRINO DETECTOR, NOT A LABYRINTH GUARD. SERIOUSLY, DID YOUR BRAIN FALL OUT?' [roll] '... yes.'
xkcd #1132
What’s this, not even a handful of links? Well, sorry, but the whole editorial team is busy attending a workshop on process tracing, Bayesian reasoning (see above) and, uh, Sherlock Holmes.

“you are once again a representative of the Secret One World Government, and you have been temporarily flown in to pull the strings in the island of Surpyc, which is currently experiencing a bailout crisis…”