Prime Minister, Minister of State Budget, Head of the government of the Republic of Côte d’Ivoire. Previously, he served as Secretary General of the Presidency. Minister of State, Minister of Agriculture (2003-2005). Director of Economic and Financial Studies at the Direction du Contrôle des Grands Travaux (DCGTX) and Deputy Director General (1994-1995). He has been mayor of Korhogo since 2001.
Publié le 16 juillet 2018
Virginie Robert, Les Echos
Le président américain a scandalisé l’opinion américaine en affirmant lundi, à côté du leader russe, qu’il n’y avait eu aucune collusion pendant la dernière campagne électorale.
« Il n’y a aucune collusion » : Donald Trump a été prompt à affirmer, lundi à Helsinki, qu’il ne croyait pas à l’ingérence des services de renseignements russe dans la campagne de 2016. « Nous avons fait une campagne [électorale] remarquable et c’est la raison pour laquelle je suis président », a-t-il ajouté.
A côté d’un Vladimir Poutine qui n’en demandait pas tant, il a assuré que « l’enquête était un désastre pour les Etats-Unis » et qu’elle ruinait un dialogue entre les deux pays qui aurait dû être repris depuis longtemps. Le président russe, qui a nié toute ingérence, a de son côté offert d’inviter les enquêteurs de l’équipe de Robert Mueller, l’ex-patron du FBI et procureur spécial, en Russie, à condition que les autorités russes puissent interroger des proches d’un donateur de Hillary Clinton, le financier Bill Browder.
Donald Trump’s press conference performance in Helsinki rises to & exceeds the threshold of “high crimes & misdemeanors.” It was nothing short of treasonous. Not only were Trump’s comments imbecilic, he is wholly in the pocket of Putin. Republican Patriots: Where are you???
— John O. Brennan (@JohnBrennan) 16 juillet 2018
L’entretien entre les deux chefs d’Etat aura duré plus de deux heures, avec l’aide de seulement deux interprètes, et s’est poursuivi par un déjeuner de travail avec leurs équipes. Avant même son entrevue avec Vladimir Poutine, le président américain a beaucoup choqué en attribuant aux Etats-Unis l’état de la mauvaise relation du pays avec la Russie. « Nous sommes d’accord », a d’ailleurs répondu le ministre des affaires étrangères russe, Sergueï Lavrov.
Our relationship with Russia has NEVER been worse thanks to many years of U.S. foolishness and stupidity and now, the Rigged Witch Hunt!
— Donald J. Trump (@realDonaldTrump) 16 juillet 2018
Le tweet a été d’autant moins apprécié que « la chasse aux sorcières » évoquée a eu pour conséquence la mise en examen d’une douzaine d’agents russes.
Privilégier la relation personnelle
Très impatient avec ses alliés de l’Otan, difficile avec la chancelière Angela Merkel comme avec la Première ministre britannique Theresa May, considérant Européens, Chinois et Russes comme des « ennemis » pour certains aspects, Donald Trump a voulu privilégier la relation personnelle avec son homologue russe. Plutôt qu’un adversaire, il voit « un compétiteur », avec lequel il a mené un premier round de « négociations » via « un dialogue profondément productif ». Rappelant qu’à eux deux ils représentent 90 % de la capacité nucléaire dans le monde, il a assuré que les deux Etats voudraient travailler ensemble pour améliorer, avec l’aide d’Israël, la situation en Syrie, stopper la prolifération nucléaire, lutter contre le terrorisme islamiste et ranimer les liens d’affaires entre Moscou et Washington. Le contrôle des armes, l’Ukraine et l’Iran ont également été mentionnés dans les conversations des deux dirigeants.
Donald Trump a proposé la création d’un forum d’experts (politologues, militaires) pour améliorer la relation entre les deux Etats. Vladimir Poutine a également proposé de coopérer dans le domaine de l’énergie. « Nous pourrions travailler de manière constructive pour réguler les marchés internationaux, car nous ne sommes pas intéressés par une baisse extrême des prix ».
En montrant plus de connivences avec le président russe qu’avec n’importe quel allié de l’Amérique, Donald Trump n’a pas manqué de susciter une pluie de critiques, y compris dans son propre camp. Le sénateur Républicain John McCain a notamment vu la conférence de presse commune des deux présidents comme l’« un des pires moments de l’histoire de la présidence américaine ».
17 july 2018
Prince Michael of Liechtenstein, GIS
Pedro Sanchez, who twice led Spain’s Socialist Party, the PSOE, to crushing electoral defeats, engineered a parliamentary coup last month that ousted the government of Mariano Rajoy by a tiny margin and succeeded in installing his own minority cabinet.
Mr. Sanchez was helped by two factors. First were the corruption allegations against members of Mr. Rajoy’s People’s Party (PP), and second was backing from the radical, broadly Marxist Podemos party, along with far-left Catalonian separatists. Since the Socialists have only 84 seats in the 350-seat Congress of Deputies, or lower house of parliament, Mr. Sanchez’s government can only function awith the support of these two allies.
Spain’s economic situation improved strongly over the last few years of Mr. Rajoy’s premiership (2011-2018), but voters were unhappy with the political establishment, and incidents of corruption were unfortunately real.
Mr. Sanchez, by contrast, is a far-left socialist, and will now have to consolidate his fragile position by catering to the Marxist ideology of Podemos on one side and the radicalism of Catalan nationalists on the other.
At the same time, the new prime minister is cultivating Brussels with pro-European rhetoric, creating the expectation of drastic improvements in Spain. Mr. Sanchez aspires to play a much stronger European role than his predecessors. He has received recognition on the European Union level by comforting language and a vow to continue Mr. Rajoy’s fiscal consolidation strategy.
Nevertheless, a closer look at Mr. Sanchez’s actions shows a disturbing push to consolidate power – both for ideological reasons, and also to satisfy the desires of his Marxist-leaning and separatist allies.
Showing his radical anti-Christian position, the prime minister refused – for the first time in Spanish history – to take the oath of office with a bible or a cross. Even for an atheist, this was an unnecessary demonstration, striking an ideological rather than a simply secular attitude.
Another of his first acts was to replace the head of RTVE, Spain’s public broadcaster, with a personality agreeable to Podemos. This will pave the way for news coverage of the government with a strong pro-left slant. One of Mr. Sanchez’s close associates was also installed at the Centro de Investigaciones Sociologicas (CIS), an influential state-owned institute for public opinion polling.
Optimism about Mr. Sanchez should not blind European observers to clear signs of an internal power grab
These are clear signs of a strong internal power grab from the left, and certainly not proof of a healthy democratic self-confidence about the government’s intended policies. Optimism about Mr. Sanchez’s “pro-EU” declarations should not blind European observers to these disquieting developments.
As indicated by his recent meeting with Catalan leader Quim Torra, Prime Minister Sanchez will also be forced to court the separatist movements in Catalonia with an opportunistic policy, as he needs their support.
Pedro Sanchez appears to believe that his youthful vocation to change and lead is irresistible. Youthful elan is certainly good, but it is likely to fail when hitched to an outdated socialist belief in the efficacy of government planning and intervention.
Both in terms of reviving the economy and improving social cohesion, experience has shown that these methods do not work – except sometimes as short-term fixes that bring adverse unintended consequences in the long run.
Certainly Spain – like many other European countries – needs action and reform. Pragmatic leadership and charisma are valuable, but do not express themselves in ideological demonstrations. A mix of ideology, power grabbing, opportunistic policies and activism could prove to be a dangerous cocktail for Spain.
On the European level, the new government could have a similarly detrimental effect. It may give French President Emmanuel Macron an energetic new ally to push his agenda for a more centralized EU. But that might only further alienate other member countries, especially Germany – polarizing rather than integrating an already battered Union.
Publié le 17 juillet 2018
Renaud Girard, Le Figaro
Le vote référendaire du 23 juin 2016, où le peuple britannique a décidé de quitter l’Union européenne (UE) a créé beaucoup de confusion et de colère de part et d’autre de la Manche. Maintenant que les émotions sont retombées et que les Européens ont découvert que la stratégie de leur allié américain pouvait être encore plus erratique que celle de leur allié britannique, le moment est venu pour la France de réfléchir calmement au futur de ses relations avec la Grande-Bretagne, sans laisser les technocrates de la Commission européenne gérer seuls ce dossier politique important.
L’été est propice à la réflexion, puis à la négociation, puisque tous les éléments sont désormais en place. Le 12 juillet 2018, après deux ans d’atermoiements, le gouvernement britannique de Theresa May a enfin publié un livre blanc, contenant ses propositions pour le futur des relations entre le Royaume-Uni et l’UE. En désaccord avec ce texte qui fait des concessions à Bruxelles, ses ministres les plus eurosceptiques, Boris Johnson et David Davis, ont démissionné. Le nouveau cabinet May souhaiterait qu’un accord soit trouvé avec le Conseil européen dès le mois d’octobre 2018, afin de laisser du temps pour les ratifications parlementaires, avant l’entrée en vigueur du Brexit, prévu pour mars 2019.
Il est évident que le Royaume-Uni devra payer à l’UE le montant de toutes les dépenses auxquelles il s’était engagé comme membre de l’Union (cela fait un total de l’ordre de 40 milliards d’euros). Il est évident que la City ne pourra plus jouer le même rôle dans les affaires financières européennes et qu’elle perdra le privilège, unique au monde, de tenir des comptes en euros. Aujourd’hui, les banques britanniques n’ont pas l’obligation d’avoir « un compte de correspondant » en euros dans une banque de la zone, elles peuvent ouvrir directement un compte en euros auprès de la Banque centrale européenne de Francfort.
Mais les Français ne sauraient souscrire à une intransigeance excessive de la Commission face au Royaume-Uni, au risque de se pénaliser eux-mêmes. Les traités de l’UE ont créé quatre libertés de circulation : pour les biens, pour les personnes, pour les services, pour les capitaux. Le gouvernement de Sa Majesté souhaiterait ne pas toucher à la première mais reprendre sa souveraineté sur les trois autres. Theresa May a compris l’importance de ne pas entraver les échanges industriels (majeurs, par exemple, pour Airbus, qui produit en Angleterre la voilure de ses avions, et qui y achète beaucoup de ses moteurs).
La Commission ne veut pas laisser le client britannique choisir à la carte, elle veut lui imposer soit le menu gastronomique, soit le menu diététique, mais rien entre les deux. Elle a peur du mauvais exemple que cela créerait envers d’autres membres de l’UE. Cette peur est excessive : le cas anglais est très particulier ; aucun autre membre ne songe sérieusement à partir.
La France a un excédent commercial de 6 milliards d’euros avec le Royaume-Uni. Elle n’a donc aucun intérêt à un changement des règles de commerce sur les biens avec lui. Dans le cas de figure où l’on accepterait la proposition de Theresa May, les Britanniques devraient bien sûr appliquer toutes les normes (de qualité, de santé, etc.) décidées par l’UE, sans pouvoir participer à leur élaboration. Si le maintien de la liberté de circulation des biens avec le Royaume-Uni ne coûte rien à l’Union européenne, pourquoi ne pas la maintenir ? Il est évident que tous les coûts administratifs de gestion de cette situation particulière devraient être pris en charge par les Britanniques.
En matière de sécurité, la coopération directe entre les polices devrait être maintenue. La Commission préconise le transfert des données par le biais d’officiers de liaison au sein d’Europol. C’est un détour superflu. La coopération franco-britannique directe en matière de lutte contre la criminalité organisée et contre le terrorisme fonctionne bien. Laissons-la en état. On ne change pas une équipe qui gagne. Tant pis si les fonctionnaires de la Commission n’y retrouvent pas le schéma logique auxquels ils aspirent. Ces technocrates prétendent aujourd’hui exclure la Grande-Bretagne du système satellitaire Galileo, qui donne à l’Europe une indépendance indispensable en matière d’accès au GPS. Considèrent-ils les Britanniques comme des alliés moins sûrs que les Maltais ou les Chypriotes ?
Soyons clair. La relation des Britanniques avec la construction européenne a été du grand n’importe quoi. Un jour, ils refusent d’y participer ; le lendemain, ils nous supplient d’intégrer le Marché commun ; le surlendemain, ils veulent en changer les règles, etc., etc.
Le général de Gaulle l’avait compris avant tout le monde, qui avait expliqué dans une Conférence de presse prophétique de 1963 que la Grande-Bretagne ne se sentirait jamais à l’aise dans ce club (conçu pour être à terme un contrepoids amical à la puissance américaine). Cédant à la pression des Hollandais, le président Pompidou a commis l’erreur stratégique de la faire entrer.
Mais ce qui est fait, est fait. Est-ce une raison pour punir la Grande-Bretagne ? Bien sûr que non. Nous, Français, devons accepter son caractère parfois fantasque et maintenir des liens d’excellence avec elle. Car nous devons prendre en compte des enjeux beaucoup plus importants. Historiquement, c’est une alliée depuis plus d’un siècle. C’est à elle que nous devons notre siège permanent au Conseil de sécurité des Nations Unies. C’est une démocratie parlementaire qui fonctionne admirablement (sauf quand elle commet l’erreur de recourir à l’instrument latin du référendum…). Militairement, c’est notre seul partenaire efficace sur le continent européen (où aucun autre pays, à part la France, n’a démontré un tel « fighting spirit »). Culturellement, beaucoup d’Anglais gardent une passion pour la civilisation des Français et réciproquement.
Punir les Britanniques serait nous punir nous-mêmes. Il nous faut au contraire aider Theresa May, actuellement en difficulté. Car elle a offert la pire des solutions, à l’exception de toutes les autres, pour paraphraser le mot célèbre de Churchill sur la démocratie…
President of Masen. Through the development of the Noor Solar Plan, Masen is now a reference on the regional and international scene of renewable energies. Before joining Masen, he has led one of the major institutions of Morocco, Caisse de Dépôt et de Gestion. Previously, he occupied senior positions in the banking sector, within the BNP Paribas group. He was also in charge of the development and financing of the activities of the National Urban Development Company (SONADAC). He is a graduate from the “Ecole Nationale des Ponts et Chaussées of Paris”and holds a degree in Banking and Finance in one of the leading French universities. He is currently President of the Casablanca-Settat region.
Consultant at McKinsey & Company in Brussels, Belgium. Former President of the King’s College London Students’ Union (KCLSU) (2013-2015). He was also President of King’s College London Think Tank, a non-profit activism group, now the largest student-led policy institute in Europe (2012-2013). He graduated from King’s College London, University of London and he has completed a master’s degree in Business Administration at Vlerick Business School (2015-2016).
11 juillet 2018
M.Miguel Angel Moratinos, ancien ministre espagnol des Affaires étrangères s’exprime au micro de «Matin TV» sur la troisième édition du Morocco Today Forum (MTF) prévu pour le 20 juillet prochain à Casablanca. Pour lui, le thème de la régionalisation avancée retenu pour cette année est de plein actualité.
July 3, 2018
Masood Ahmed, CGD
This note is adapted from a chapter that Masood Ahmed contributed to Pakistan at Seventy: A Handbook on Developments in Economics, Politics and Society (Europa Publications, forthcoming).
A brief history of Pakistan’s macroeconomic management
Over the past 50 years, Pakistan’s record on macroeconomic management has been mixed. In the face of a variety of internal and external shocks, the country has managed to avoid excessive macroeconomic instability in the form of hyperinflation or severe exchange rate volatility. While its internal and external public debt has grown as a share of gross domestic product (GDP), and is now approaching levels that warrant attention, Pakistan has so far managed this growth without resorting to sovereign defaults, which leave a long shadow on a country’s ability to access capital markets. Finally, Pakistan has also avoided the kind of large-scale banking crises that many other developing countries have experienced with lasting impact on credit availability and private sector development.
Alongside these positive features, however, Pakistan has demonstrated an almost unique proclivity to allow fiscal and balance of payments pressures to build up into a near-crisis situation every few years, which then must be dealt with through orthodox economic stabilization tools, often with the help of the International Monetary Fund (IMF). In general, these stresses have been contained before they could become a full-blown economic crisis, but the cumulative cost of these periodic crisis-aversion programs has been to slow down economic and social development, resulting in the mediocre—and in some cases, poor—comparative development indicators that we see today. And, because each episode was addressed with short-term actions that stabilized the economy without adequate follow-through on structural reforms, the underlying weaknesses simply manifested themselves again with the next external shock or period of internal economic mismanagement. Moreover, this preoccupation with managing short-term macroeconomic vulnerabilities has limited the attention that top policymakers can devote to more fundamental issues of economic development and structural transformation.
The next crisis is now approaching. After successfully containing macroeconomic imbalances under an IMF-supported program during 2013–16, irresponsible fiscal expansion and a misguided attempt to maintain an increasingly overvalued exchange rate have led to a large and unsustainable balance of payments imbalance, a steep decline in foreign exchange reserves, and a sharp buildup of external debt, some of it on short maturities and expensive terms. Most economists agree that the post-election government will have no alternative but to approach the IMF yet again for another bailout with associated policy conditionality.
Against this background, this note examines three questions that economists both within and outside Pakistan are asking:
- Why does Pakistan have these repeated episodes of macroeconomic distress?
- Why have 18 IMF-supported programs failed to deal with this problem in a sustainable way?
- Is the potential availability of IMF financing itself an impediment to the policy changes that would reduce the economy’s vulnerability to crisis, and would it be better if the IMF did not provide support to Pakistan the next time there was a macro-crisis?
The causes of repeated macroeconomic distress
The principal factors leading to periodic episodes of macroeconomic stress are chronic and uncorrected structural weaknesses in Pakistan’s economy. While—as in most developing countries—there are many areas of economic management that can be improved in Pakistan, the two principal causes of macroeconomic problems have been the imbalance between public sector spending and income, and Pakistan’s underdeveloped export base, which makes the country highly vulnerable on the external sector.
Income and expenditure of the public sector
There has been a chronic imbalance between the income and expenditure of the public sector. This is not because Pakistan’s public budget is much larger, in relative terms, than that of other emerging markets. Rather, it is because the government’s income from taxes, fees, and other sources is strikingly low compared with other countries.
This is not to say that there is no waste in public spending, or that it could not be better allocated. There are well-documented studies that show how both current and capital spending by the federal and provincial governments and their associated bodies could be dramatically improved to get “more bang for the buck.” Similarly, the persistent losses made by some public sector enterprises, and the even larger losses made in the energy sector, provide additional scope for improving public finances. The case is all the more compelling given the comparatively low level of public spending on health and education, which explains, at least in part, why Pakistan lags woefully behind on social indicators of development. Finally, inadequate public investment in infrastructure constrains the potential for sustained high growth. There is, therefore, a clear need to rationalize and improve the effectiveness of public expenditure.
However, it is on the revenue side that Pakistan is among the weakest performing countries in the developing world. Despite 40 years of efforts to improve both tax policy and tax administration, the ratio of taxes to GDP remains stuck in the low teens, below the middle-income countries (MICs) average of around 18.5 percent. In addition, the tax system is complicated, distorting, and not sufficiently progressive.
Two features of the tax structure are worth noting in particular: the high proportion of taxes collected through indirect taxes (60 percent of total tax revenue) and the small number of individuals who file income tax returns. Indirect taxes—essentially excise taxes, import duties, and fees of various sorts—are generally more regressive than direct taxes; in other words, their burden falls disproportionately on the poor and less well-off households. A further problem is that the second-best system of withholding and presumptive taxes has grown very complex, adding to the negative perceptions of the overall tax system. Attempts to introduce a VAT, a more efficient indirect tax, have failed in the face of political opposition.
The low number of income tax filers (just over one million out of an estimated working population of 116 million), and the prevalent underreporting of income by those who do file, has important consequences. First, it limits total tax revenue for the government. Indeed, it is hard to envisage how the tax to GDP ratio could be increased by 50 percent (to reach the norm for developing countries) without a substantial increase in the number of filers in the tax net.
Second, tax avoidance or under payment undermines public confidence in the fairness of the tax system. The perception (and reality) that people who are known to have very high incomes pay little or no income tax fosters a sense that the system is rigged to protect the rich and powerful. The annual publication of tax payments by parliamentarians, demonstrating in many cases a clear disconnect between their declared tax payments and their visible standard of living, has been a great advance in transparency, but, so far, it has not altered the underlying pattern of behavior.
Those who claim to derive their income from agriculture (on which no income taxes are paid), and those engaged in trading or professional services who are either unregistered as taxpayers or pay small amounts in relation to their perceived incomes, are also often viewed as benefiting from an inequitable system. Property is mostly undervalued for tax purposes, so the revenue from this potentially important source is also very low by international comparison.
Tax avoidance is also found in the corporate sector. Of the 72,500 firms registered with the Security and Exchange Commission of Pakistan in 2016, less than half filed a tax return and half of the filers had a “zero return.”
Many studies have considered the problems of tax policy and tax administration. On the policy side, the recommendations range from proposals to address specific anomalies or missed opportunities all the way to plans for a complete revamp, with a new simplified and efficient approach to setting up a tax system. Similarly, there are incremental as well as radical proposals to reform tax administration, which is generally seen as inefficient and plagued by corruption. There have also been a variety of projects over the years, many supported by international agencies with technical assistance and policy conditionality, to promote these recommendations.
Why have past programs failed to generate a substantial and lasting improvement in Pakistan’s tax outcomes? Many blame corruption and incompetence in the tax administration, and this is certainly part of the explanation. Others point to the large share of the informal sector in Pakistan’s economy, which makes it harder to track individual and small business incomes. Yet others will point to the fact that a large share of the working population would fall below any reasonable income threshold for paying taxes. Finally, there is the problem of lack of trust in the quality and integrity of government spending. Many observers point to the generous levels of private charity by people who pay little in taxes as demonstrating that people are willing to contribute to the larger social good if they are confident that the money will be put to good use. These observers maintain that lower levels of tax avoidance would naturally follow a demonstrated improvement in the coherence and effectiveness of government spending. All these points have some truth to them, but they also apply to other countries that have, nevertheless, succeeded in enrolling much larger numbers of their working population into the tax net.
The larger and more important explanation for Pakistan’s failure to improve its tax outcomes, in my view, is one of political economy. Pakistan simply lacks a powerful enough coalition of interests to raise more taxes and to push for real improvements in the quality of government spending. Normally, this would come from a combination of those in government who want to spend money without raising the deficit and private taxpayers who are increasingly resentful of the high tax rates they pay while their peers remain outside the tax net. While both groups exist in the country, they have not been able to come together and overcome the powerful interests on the other side.
In particular, governments have often backtracked on their efforts to widen the tax net when faced with opposition from their political constituencies or linked interests. As a result, in times of fiscal stress, it has proved easier to cut back on the already low level of public investment spending, with damaging—but lagged—consequences. Many donor agencies and international partners—including the World Bank, the IMF, and bilateral aid agencies—have tried to influence this process through a combination of carrots and sticks, but they too have not succeeded.
Until Pakistan can substantially raise tax revenue by broadening the base of direct taxpayers, it will remain constrained in its ability to expand the delivery of much-needed public services and infrastructure without building up unsustainable fiscal deficits. And without that extra infrastructure and improved human development, growth will remain elusive and the country’s place in an ever more competitive world economy will remain fragile. What events or forces will bring about the political consensus to overcome longstanding constraints in this regard remains a subject of discussion.
The external sector
The second source of macroeconomic vulnerability for Pakistan has been its external sector. Most successful emerging markets followed a strategy of promoting both the quantity and quality of their exports. Starting from low export levels comprised mainly of relatively unprocessed commodities or low value-added manufactures, these countries have dramatically expanded the volume, diversity, and sophistication of their exports. The most-often cited examples are China and the so-called East Asian tigers (Korea, Thailand, Vietnam, Malaysia), but countries in other regions also provide good case studies.
In contrast, exports have remained a much smaller share of Pakistan’s economy since independence. And over the past three years, a combination of factors—security and energy supply problems, lower commodity prices, and an appreciating real exchange rate—have brought exports down to well below 10 percent of GDP. As shown in table 1, exports from Pakistan would have to more than triple from their current level to match the average for MICs. Pakistan’s exports have also been remarkably concentrated in a few low value-added products. Cotton and cotton products, rice, and leather still account for over 70 percent of the country’s exports, and the bulk of exports in each of these categories is in primary or little processed form. Service exports, which have been a rapidly growing source of high value-added export revenue in many countries, remain a small fraction of Pakistan’s exports.
Table 1. Exports of goods in 2017
|Country or Group||USD billion||% of GDP|
|Middle-Income Countries Average||76.65||24.47|
Source: IMF Balance of Payments Statistics
Note: Data missing for numerous MICs. For a list of MICs, see footnote 3.
Given its low level of exports, Pakistan has relied in recent years on a large and growing volume of remittances and on official and private financing to cover its import bill. It is worth noting, however, that these international flows, especially private flows, can be volatile because they are subject to external and internal shocks. Pakistan has had a consistent rising trend of remittance flows for many years, but recent international economic developments suggest that this is unlikely to persist. Remittances from the Gulf countries, which have been a large and growing share of the total, are likely to plateau as these countries adjust their spending to the new lower price of oil. Pakistan will need to adjust to lower growth in remittances going forward.
In good years, these international inflows have been sufficient not only to meet the demands for foreign exchange—even with an appreciating real exchange rate—but also to lead to an increase in the country’s foreign exchange reserves. However, when there was an external shock—such as the increase in oil prices in the years leading up to 2014—or when an excessively loose fiscal stance or a misguided exchange rate policy translated into an increased demand for foreign exchange, as has been the case more recently, these reserves were drawn down, sometimes to a level that threatened a macroeconomic crisis and led to recourse to the IMF (figure 1). At the time of writing, after a few years of being on a positive trajectory, these reserves were again on a downward trend and hovering around $10 billion, below the three months of imports mark that is used by many institutions as a minimum for certain kinds of financial operations.
Figure 1. Liquid foreign exchange reserves with the State Bank of Pakistan
USD billion, end period
Source: State Bank of Pakistan
*Second week of June
There are many factors that underpin Pakistan’s long-term export performance. Security problems, energy shortages, poor infrastructure, and other shortcomings in the business environment provide a good part of the explanation. Pakistan is 147th in the ranking of countries in the World Bank’s Doing Business report—an indication of its less-than-favorable business climate. A lack of investment in the export sector; or in updating technology and research and development that would raise the value added of exports; or in the educational system to generate enough trained technicians, workers, and managers are other reasons.
Also contributing to the small share of exports in Pakistan’s economy is the protected environment for the domestic market, which has made import substitution a profitable and less risky endeavor for many businesses. It is noteworthy that the largest corporations in Pakistan are either in manufacturing for the domestic market or in the service sector. A few rely on explicit or implicit protection in the form of import barriers or administered prices for inputs and outputs.
Finally, over the years a misguided adherence to an overvalued exchange rate has made it harder for Pakistani exporters to compete in international markets (while also resulting in the loss of a substantial share of foreign exchange reserves in an attempt to prevent necessary exchange rate depreciation). In contrast, some of the more successful emerging market exporters have seen the exchange rate as a tool to preserve their competitiveness and to build foreign exchange reserves to enhance their resilience and economic independence.
Behind these specific factors is the political economy of reforming the anti-export bias. Under the current regime, consumers have benefitted from cheaper imports and entrepreneurs have moved into producing for the domestic market with some degree of protection or in other non-tradeable activities. Exporters have voiced concerns about the exchange rate and other factors affecting their competitiveness, but they have sought government financial support rather than effectively lobbying for a more export-friendly regime.
Can Pakistan’s economy be made more export oriented? The entrepreneurial capacity and business acumen is certainly there. The performance of the small and medium enterprises sector in Sialkot is a striking example of success despite the weaknesses in the business environment and in infrastructure. However, to generalize this type of success requires a combination of public policy and supportive infrastructure investments. In this context, recent improvements in the security situation are welcome, as are investments to increase the capacity for electricity generation and—less so—distribution.
These efforts will need to be supplemented, however, by a much more fundamental revisiting of the public policy and business environment to better align incentives towards exporting. Exchange rate policy will need to prioritize economic fundamentals over seeing a “strong” exchange rate as a mark of national pride. Incremental schemes to provide limited subsidies or special incentives to exporters will only have a limited effect. If Pakistani policymakers truly want to quadruple the volume of exports, it will take nothing short of a national drive sustained over at least a decade. And it will require the political will to resist the calls of vested interests that gain from the current protectionism and anti-export bias.
Why have repeated IMF-supported reform programs failed to deal with the causes of macroeconomic vulnerability?
These two main structural weaknesses—fiscal imbalance and weak export performance—have been present for many decades, and their role in generating macroeconomic vulnerability is well understood. It is legitimate then to ask why they were not addressed under the numerous IMF-supported programs. Of course, the IMF is only one external agency engaged with Pakistan on economic policy questions. Still, the IMF’s focus on macroeconomic stability and its unique access to senior policymakers make the question more directly relevant to it. To be sure, many IMF-supported programs did attempt to address these structural issues, but, in the end, they were only partially successful. Why wasn’t a better and more sustainable improvement achieved despite repeated recourse to IMF financing and the associated policy conditionality?
The answer is that while IMF policy conditionality can reinforce what national governments are committed to doing, it cannot by itself achieve sustained policy change where there is no national commitment to the underlying reforms. Moreover, by its nature, IMF engagement is more effective at addressing short-term problems of macroeconomic instability and can play only a limited role in promoting longer-term actions to address underlying structural issues. In some countries, governments have used the presence (and conditionality) of the IMF to undertake difficult structural reforms, but these were reforms that the government wanted to carry out. Where the IMF has been less successful is in pushing reforms that the host country government itself does not support. In these cases, good intentions generally remained just that.
In Pakistan, as in many other countries needing IMF support, the decision to ask the IMF for help is typically deferred until a crisis appears imminent. At that point, both the authorities and the IMF staff agree that the immediate focus of the IMF program should be, first and foremost, on arresting the deterioration in macroeconomic imbalances and restoring macroeconomic stability. And in most instances, the programs have been quite successful in doing that. Fiscal and current account imbalances were contained, reserves started to be rebuilt, and confidence in the economy was strengthened, leading to a pick-up in domestic investment and external financing. In parallel to these stabilization measures, the authorities and the IMF staff also usually agreed on a set of plans to address the underlying structural weaknesses. On the fiscal side, this has often comprised targets for increased tax revenues backed up by plans to enhance tax administration or to bring more people into the tax net. This has sometimes been accompanied by plans to reduce losses in public enterprises through tariff policy, better management, or privatization. On the external front, the structural agenda has mainly focused on improvements to the business environment or tariff policy to encourage increased exports.
In the majority of cases, these reforms were not fully implemented, leading to Pakistan abandoning the IMF assistance program before completion. Although each episode and each program are unique, there is a common pattern. In most cases, the initial year of the programs went well, with the government taking the urgent fiscal, monetary, and exchange rate measures necessary to stabilize the economy and restore a degree of confidence. However, in the later years, when the programs moved to tackling some of the underlying structural weaknesses that gave rise to the macroeconomic stress, the government’s ability and political will to follow through waned and, as the crisis-related pressures were also abating at the time, the programs were left to wither.
Sometimes, the IMF continued to support the country when the macroeconomic aggregates—such as the reduction of the fiscal deficit or the buildup of reserves—continued to show the anticipated progress. In these situations, the IMF staff and board have generally adopted an accommodative posture and given the benefit of the doubt to the country authorities, with the IMF board approving continued program funding with “waivers of conditionality.”
Is the availability of IMF financing a disincentive for reform?
It is sometimes asked whether the availability of IMF financing is itself a disincentive to fundamental reforms. Since policymakers know that the IMF will be there with a “bailout” if they run into a macro crisis, the argument goes, there is less of an incentive for them to undertake difficult reforms that would be counter to the interests of powerful stakeholders. Economists refer to this as the “moral hazard” problem. This is a serious argument with a foundation in both economic theory and empirical evidence. The work of respected economists like Michael Bruno has shown that many instances of fundamental economic reforms have been triggered by a major crisis.
The question then becomes whether, given the history of past programs, the IMF should refuse to finance a new program when approached by Pakistan, in the hope that the ensuing crisis would trigger reforms that would obviate the need for subsequent support. This is theoretically a possibility, but it faces intellectual, moral, and practical difficulties that make it unlikely to happen.
Intellectually, it is true that deep crises can lead to deep reforms, but this is not inevitable in any given episode. Reforms are generated by a variety of factors and conditions, and each country context is different. It is equally possible that a deep crisis will simply result in a prolonged period of chaos and stagnation. On a moral plane, the cost of crisis is borne disproportionately by the poor and vulnerable. Millions would fall below the poverty line, and some would suffer permanent damage to welfare and living conditions. It is not evident that any policymaker or international institution has the right to willingly bring about a crisis with such severe consequences for the poor in the uncertain expectation that it will lead to a change in national behavior. On a purely practical level, the IMF was created to help its members facing an imminent financial and economic crisis, and it would not be realistic to expect its staff or board to refuse assistance to a member to teach it a lesson and change its behavior.
Another question is whether the design of IMF programs is flawed in promoting stabilization over growth or structural change. This is a complex topic on which much has been written both by the IMF and by independent observers. However, at the end of the day, the fundamental problem is that a country facing an imminent balance of payments or economic crisis must make (often painful) adjustments to reduce fiscal or external account imbalances. While the pace and scope of these adjustments can be moderated by the additional funding that comes from the IMF, some adjustment remains necessary. The relevant question becomes how to design the adjustment to minimize the negative impact on growth or on the welfare of the more vulnerable sections of society. This requires the engagement of a broader set of policymakers—at both the federal and provincial level—than has sometimes been charged with managing the discussions with the IMF on macroeconomic issues.
Can the future be different?
How can Pakistan break out of the cycle of near-crisis to stabilization, to partial but inadequate structural reform, to buildup of vulnerabilities leading to a new crisis? One suggestion is for Pakistan to embark on a process to develop and agree upon a national economic agenda. A striking feature of successful emerging market countries is that there is a broad consensus around a core economic agenda. Politicians of different parties, private sector leaders, opinion makers, and economic experts all agree on the general direction and content of the economic program. To be sure, there are differences of emphasis on specific policies or on timing, but much of the content enjoys broad support. This has two advantages: first, when the government in power is trying to undertake a difficult reform—privatization or labor market reforms—there will be debate on the method or the manner in which it is carried out, but not on the basic objectives. And second, this broad consensus provides domestic and international investors with a degree of certainty about the future business environment within which they can operate and make long-term investment decisions.
In Pakistan, there is a broad consensus on a national security agenda and on the direction of foreign policy, but when it comes to economics, such a consensus is lacking. The result is that the party in power manages the day-to-day affairs of the economy, and if a crisis is looming, takes steps to restore macroeconomic stability. But it finds it much harder to implement more fundamental reforms. There is no shortage of visions for the future, but there is a disconnect between these visions and the willingness or ability to take the actions required to make the vision a reality.
Pakistan needs a national discussion on what kind of economy it wants to be in 10 years, and then it must agree on the actions needed to get there. This is a broad topic, but even at a narrow macroeconomic level, Pakistan needs a realistic plan of actions that will generate the growth rates that are often set as aspirations rather than objectives. A non-exhaustive list of questions that a national discussion could seek consensus on includes:
- What kind of macroeconomic policies would support Pakistan’s broader growth and distribution objectives?
- What level of inequality is Pakistan comfortable with as a society and what actions is it willing to take to reduce inequality?
- Do Pakistani policymakers want the government to have tax revenues that are close to the emerging market norm of 20 percent of GDP? If so, what would be the composition and structure of those taxes and what kind of revenue administration system would deliver that outcome?
- What is the appropriate level and composition of public spending and how should it be divided between the federal and provincial administrations?
- Where should defense spending be most effectively focused in the context of a tightly constrained overall resource envelope?
- Does the country want to raise exports from under 10 percent of GDP to 25 percent of GDP?
- If so, what actions are needed to change the incentive structure for exporting, and is there broad consensus to implement them?
- Are policymakers willing to support indefinitely a set of loss-making public enterprises, both in the energy sector and outside? If not, can they agree upon a plan for their restructuring and privatization?
- Does the government have a role in fixing administered prices for a variety of products, in effect protecting the producers from market forces? If so, which products and at what cost?
An often-voiced objection to developing a national economic consensus is that it has not happened in many decades and is unlikely to come about now. Perhaps. But it is also the case that attempting to make major structural reforms without such a consensus has failed so far, and there is enough underlying agreement across the political spectrum on core economic fundamentals that, with a degree of political leadership, forging such a consensus should be possible.
The immediate challenge for the next government will be to address a looming balance of payments crisis with a stabilization program that will inevitably impose short-term hardship and reduce growth. However, the more important agenda for Pakistan is to break through to a high-level equilibrium that would avoid the need for repeated stabilization through reforms that leverage the talent of its youth and the entrepreneurial skills of its private sector, and deliver the economic and social performance that its population demands and deserves.
 The cumulative losses of these enterprises stand at around 4 percent of GDP. (Source: IMF Staff Report, “Pakistan’s First Post-Program Monitoring Discussions,” IMF, 2018, www.imf.org/en/Publications/CR/Issues/2018/03/14/Pakistan-First-Post-Program-Monitoring-Discussions-Press-Release-Staff-Report-and-Statement-45724.)
 Electric power transmission and distribution losses stand at 17 percent of output. (Year 2014. Source: World Bank, https://data.worldbank.org/indicator/EG.ELC.LOSS.ZS?locations=PK.)
 For the year 2014. Source: IMF World Revenue Longitudinal Dataset. The list of middle-income countries can be found at the World Bank’s country income classifications webpage available at: https://datahelpdesk.worldbank.org/knowledgebase/articles/906519.
July 13, 2018
Steven Erlanger, The New York Times
BRUSSELS — European allies knew to expect the unexpected from President Trump, especially after their rancorous encounter last month at the Group of 7 summit meeting in Canada.
But Mr. Trump’s European tour has still rattled many on the Continent and in Britain, who have watched from a distance the chaos he creates on a daily basis in the United States but had not been directly exposed to it until this week.
More important, for the long term, they have begun to believe that underneath the presidential narcissism, sarcasm and bluster there is a strategy: to undercut European solidarity in NATO and the European Union so the United States can exercise its economic and military power to shape relations with individual countries, just as China and Russia seek to do.
The atmospherics have been awful. Mr. Trump happily broke protocol at NATO and in Britain, skipping appointments with other leaders, forcing changes in the agenda, scolding other leaders, calling an early news conference to get onto morning television programs in America, making unfounded claims about agreements and giving an interview to the British mass-market tabloid The Sun that deeply embarrassed his host, Prime Minister Theresa May.
But Europeans are now convinced that Mr. Trump has an agenda that is inimical to their interests, said François Heisbourg, a French political analyst. “Europeans realize that he’s not just a temperamental child, but that he wants to dismantle the multilateral order created 70 years ago that he believes limits American power.”
European leaders had already taken into account the disrupter Trump, said Tomas Valasek, the director of Carnegie Europe, a foreign policy think tank. “We’re not in the dark about him, but we’ve never dealt with this sort of political animal before,” Mr. Valasek said. “This is a new ballgame and we’re learning how to play it. We’re not necessarily more effective, but we’re getting wiser.”
Different leaders have tried different strategies with Mr. Trump, from the “buddy-buddy” approach of President Emmanuel Macron of France and Ms. May, to the cooler attitude of Chancellor Angela Merkel of Germany. “But we found that none of this matters,” Mr. Valasek said. “He’ll treat you like a competitor one way or another. He wants to pit countries against one another and use U.S. power and wealth against the others for his advantage.”
The frustration sometimes comes out in meetings. At the NATO meeting, for instance, Prime Minister Lars Lokke Rasmussen of Denmark told Mr. Trump that Danes had suffered as many casualties per capita as the United States had in Afghanistan, and that blood mattered more than money.
“In direct and clear speech, I have made it clear to him that Denmark’s contribution cannot be measured in money,” Mr. Rasmussen said afterward.
“Trump is becoming politically toxic in Western Europe,” Mr. Valasek said. “No one wants to be seen smiling with him after being berated on Twitter. Even more, Mr. Trump’s insults and his unpopularity among European voters make it harder for European leaders to do what he wants them to do, like increase military spending, even when they think they should do it.”
After Mr. Trump split with the Europeans on issues like climate change and the Iran nuclear deal, Mr. Valasek said, “leaders don’t want to be associated with anything he wants; it’s the kiss of death.”
They are also fearful of his populism, his support for Britain’s withdrawal from the European Union, or Brexit, and his affinity with their political adversaries, who share his nationalist, anti-immigration message.
Yet, Europe faces a dilemma with Mr. Trump, as Sigmar Gabriel, the former German foreign minister, said in an interview with Der Spiegel. “The truth is, we can’t get along with Trump and we can’t get along without the U.S.,” Mr. Gabriel said. “We therefore need a dual strategy: clear, hard and, above all, common European answers to Trump. Any attempt to accommodate him, any appraisal only leads him to go a step further. This must be over. From trade to NATO.”
He continued: “We cannot delude ourselves anymore. Donald Trump only knows strength. So we have to show him that we are strong.”
How to do that, however, is less clear, since Europe’s security dependence on the United States is both obvious and will not change soon, despite European talk of more money for a joint European defense.
The problem is visible not just in Germany but in Spain, distant from Russia. Pedro Sánchez, Spain’s new Socialist prime minister, outraged the leftist lawmakers who helped put him in office when he pledged to raise his country’s military spending to 2 percent from the current 0.9 percent of the country’s gross domestic product.
John C. Kornblum, a former American ambassador to Germany who still lives there, said that “the real problem is that postwar Europe seems not to have regained a sense of purpose and direction.”
“It cannot formulate self-confident and achievable goals,” Mr. Kornblum continued, “and above all seems unable to stand up for itself against the criminals of the world” — including the former Serbian leader Slobodan Milosevic in the 1990s and President Vladimir V. Putin of Russia now.
The European nations’ great accomplishments — continental peace and social welfare — have led them “to become self-righteous in their pride about them, but in reality these steps forward were only possible within an American bubble,” Mr. Kornblum said.
And now Mr. Trump has called them out on it and “spoken the unspeakable,” Mr. Kornblum said, and it is both unwelcome and uncomfortable.
If nothing else, Mr. Trump’s apparent willingness to turn over the table has gotten the attention of Western allies, creating a sense of urgency to meet the spending goals, and not everyone drew back in alarm.
The French newspaper Le Monde, for example, was relaxed. “Once again, Donald Trump brought on the show, but the damage was limited,” the newspaper said. “The NATO summit, which threatened to become a psychodrama because of the American president’s caprices, wound up reinforcing the alliance. The Europeans are ready to pay more for their defense, and the U.S. reaffirmed its military commitment to its historic allies.”
But the big question is whether any amount of spending would actually satisfy Mr. Trump, or whether his real attempt is to divide NATO and the European Union, both Mr. Heisbourg and Mr. Valasek said. Mr. Trump mixes his threats about more trade tariffs if the European Union does not come to better terms with his threat to withhold security from those same countries.
Of course, Mr. Trump also uses and misuses the figures he chooses. He often says that the United States pays for 90 percent of NATO, or sometimes he says 70 percent, when the figure is really about 67 percent, and includes the percentage of global military spending.
In fact, according to the International Institute for Strategic Studies, of the $603 billion the United States spends on defense, only about $31 billion goes to Europe. That number is increasing. But the European countries of NATO are spending about $239 billion and rising, even if their spending is not very efficient or coordinated.
Similarly, Mr. Trump likes to cite a $151 billion trade deficit with the European Union. But that figure is for goods only — not for services,which represent nearly 80 percent of the economy, where the United States has a small trade surplus with Europe.
For Mr. Heisbourg, Mr. Trump the businessman is simply “monetizing American power.” As Mr. Trump recently said, he regarded the European Union “possibly as bad as China, just smaller.” He sees Germany as dominating the bloc, and Germany, for which he has a special animus, as “the weak link in an organization vulnerable to linkage between trade and security,” Mr. Heisbourg said.
The same is true of Mr. Trump’s support of Brexit, on display again on Friday in Britain. Mr. Trump’s view is that “if you have a soft Brexit and stick with the European Union too closely, it doesn’t work for me, so goodbye, you’re on your own,” said Pierre Vimont, a former French ambassador to Washington. “For Trump there are no allies and no enemies, just partners or not, and the U.S. will deal with them separately. And the Europeans have no key to answer this new U.S. foreign policy.”
Mr Leung graduated from King’s College Hong Kong; Hong Kong Polytechnic and Bristol Polytechnic UK. He has been awarded Honorary Doctorate degrees by four universities in the UK, HK and Shandong. Between 1984 and 2011, he held senior positions in the entire political transition to the establishment of the Hong Kong Special Administrative Region, served as a member of the Executive Council of Hong Kong and was the Convenor of the non-official members. In 2012, Mr Leung was elected the fourth-term Chief Executive of the Hong Kong Special Administrative Region. He became Vice Chairman of the National Committee of the Chinese People’s Political Consultative Conference and he founded the Belt and Road Hong Kong Centre and the Greater Bay Area Centre in 2017.
Renaud Girard, Le Figaro
Dans les Relations internationales, il y a parfois des moments rares, qu’il faut savoir saisir.
Cet enchaînement particulier de la mi-juillet 2018 en est un. Les 11 et 12 juillet à Bruxelles se tiendra un sommet de l’Otan. Le 16 juillet un autre sommet, lui aussi en grande partie consacré à la sécurité en Europe, se tiendra à Helsinki entre les Etats-Unis et la Russie. Pourquoi ne pas préparer pendant le premier sommet un plan qui serait proposé lors du second ?
Le scénario attendu du sommet de l’Otan est connu : son Secrétaire général va dresser un tableau alarmiste des menaces potentielles en provenance de l’Ours russe ; le président américain va exprimer sa lassitude de payer pour la défense de ses riches alliés européens ; et ces derniers vont promettre de faire davantage d’efforts budgétaires en faveur de leurs forces armées. Le « si vis pacem, para bellum » ayant fait ses preuves dans l’Histoire, cette approche classique n’est pas sans justification.
Mais la France pourrait utiliser sa position particulière dans l’Alliance atlantique, marquée par sa tradition d’indépendance, pour faire acte d’inventivité à ce sommet de l’Otan. Elle pourrait faire valoir à ses alliés que la sécurité ne se recherche pas que dans l’armement, qu’elle se recherche aussi dans les traités.
Lors de la crise des missiles de Cuba (1962), le monde n’était pas passé loin de l’apocalypse atomique. S’ouvrit alors une seconde phase de la guerre froide, où les grandes puissances nucléaires mirent en place des arrangements (comme le téléphone rouge entre Moscou et Washington) et construisirent des traités, afin d’éviter les possibilités de dérapage, afin de réduire l’intensité de la course aux armements, afin de garantir la sécurité du continent européen. La plupart de ces traités sont aujourd’hui caducs. La France serait donc bien avisée de proposer à ses partenaires de l’Otan le principe d’une nouvelle grande Conférence sur la sécurité en Europe, qui aborderait tous les sujets qui fâchent : missiles nucléaires à portée intermédiaire théoriquement bannis (mais les Russes ont déployé dans l’exclave de Kaliningrad des missiles Iskander); « boucliers » anti-missiles de l’Otan en Pologne (dont les rampes de lancement peuvent aussi servir pour des missiles à portée intermédiaire) ; déséquilibre des Forces conventionnelles entre les différents pays ; manœuvres militaires ; cyberguerre, etc.
Le traité de Paris de réduction des forces conventionnelles de novembre 1990 a été suspendu, d’abord par la Russie, ensuite par les pays membres de l’Otan. Il n’est plus pertinent, car conçu bien avant l’élargissement de l’Otan aux anciens pays du Pacte de Varsovie, puis aux pays Baltes. Il a besoin d’être refait de fond en combles.
Le traité ABM de Moscou de 1972 limita à deux, puis à un, le nombre de sites de missiles antimissiles autorisé pour chacune des deux superpuissances. Il a été abandonné par George W. Bush au début de l’année 2002. Il mériterait d’être réactivé.
La cyberguerre est un nouveau type de conflit, très à la mode. C’est vraiment la « continuation de la politique par d’autres moyens » chère à Clausewitz, car, sans vacarme, elle permet d’avertir, d’intimider, de désorganiser, un adversaire qu’on a secrètement décidé de faire plier. Les Russes l’ont pratiqué contre les Etats Baltes ou, plus récemment, contre l’Ukraine. A commencer par la Russie, les Etats parties à cette nouvelle Conférence pourraient adopter un code de conduite où ils renonceraient à s’attaquer les uns les autres sur les réseaux informatiques.
N’est-il pas absurde de tenir une telle Conférence de sécurité en Europe alors que la crise ukrainienne de 2014 n’est toujours pas résolue ? L’hostilité Kiev-Moscou ne se résorbera pas du jour au lendemain car le sang a coulé au Donbass et l’armée ukrainienne y a été humiliée à deux reprises. Mais il faut à tout prix éviter que cette crise en catalyse d’autres. La persistance de la guerre au Donbass milite justement pour l’utilité de cette Conférence. L’absurde est qu’une forme de guerre froide soit revenue à l’Est de l’Europe, alors que l’intérêt des Occidentaux, face à la montée en puissance de la Chine, est qu’ils parviennent à ramener la Russie de leur côté.
Trump est affaibli car son Secrétaire d’Etat s’est fait ridiculiser par la Corée du Nord. C’est donc le moment pour les Européens de lui tendre la main et de l’aider à obtenir un succès diplomatique. L’Otan doit montrer son unité, afin que Trump arrive en position de force face à Poutine. Mais une fois renforcé, le président américain doit aussi proposer une ouverture à son homologue russe. Face à une Russie qui a besoin de réduire son budget militaire, quoi de mieux que la perspective d’un nouveau traité de sécurité ?
Les dirigeantes de Grande-Bretagne et d’Allemagne sont trop affaiblies chez elles pour prendre une telle initiative. A Macron donc de jouer !
Prince Michael of Liechtenstein, GIS
The January 1999 introduction of a common currency, the euro, for several European Union countries was a great, visionary concept. It proved extremely helpful in facilitating business and afforded Europe a stronger position in global currency markets. Today, the eurozone faces a crisis that can no longer be ignored or fixed painlessly.
The criteria for joining the euro club were set with great foresight and clarity nearly two decades ago. They included restrictions for governments on the use of the common currency, with its comparatively lower interest rates and availability, to increase public debt. Limiting eurozone countries’ budget deficits to 3 percent of their gross domestic product (GDP) and the total accumulated debt to 60 percent of GDP was supposed to avert such a threat.
If enforced, the limits would have led the weaker economies to gradually improve their productivity and become competitive. Before they joined the euro system, such countries could achieve competitiveness by devaluating their currency. To assure the maintenance of healthy regional competition in Europe, the eurozone’s rules excluded imposition of a common economic policy. Equally wisely, bailing out excessively indebted governments was ruled out.
Everything was set for a good start. Optimism was also based on the belief that with the politically independent European Central Bank (ECB) in place, the legendary stability of the old German mark would be extended to the entire eurozone.
So much for good intentions. No later than two years after the common currency’s launch, the two largest eurozone members, Germany and France, violated the deficit criteria. Although Germany corrected its behavior later on, a terrible example had been set. The ECB, too, became politicized and the dam broke.
More and more members embarked on unsustainable growth strategies financed with low-cost debt while expanding oversized welfare programs. Political parties bought votes with debt-financed gifts. Next, to forestall inevitable bankruptcies, the ECB betrayed its mission and engaged in such rule-bending schemes as zero-to-negative interest rates and “quantitative easing” to shore up the troubled eurozone governments.
A country like Italy cannot leave the eurozone without going bankrupt
These travesties appeared helpful – but only on the surface and in the short term. Today, most EU leaders remain stuck in the mind-set in which the right remedies are excluded and the steps considered possible can merely delay the catastrophe. The idea of creating a common eurozone economic and fiscal policy, and common debt, might buy another few years. But it would in no way solve the problem. To the contrary, such measures would turn the eurozone into a transfer union.
Lately, concerns about the Italian debt have surfaced. Justifiably so, given the size of the Italian economy. In contrast to Greece, a bailout of Italy would be too huge to finance. And Italy’s problem is not the only one the EU faces.
Several European countries lament the competitive edge enjoyed by some countries in the north, especially by Germany’s export sectors. It is true that the euro has proven highly beneficial for Germany and the Netherlands, which steadily increased their productivity and kept a lid on public spending. The countries that took advantage of abundant “hard” currency are in a fix today that reveals the scope of the problem for all. The bill for the spenders’ profligacy shows in the target balances of the ECB, where the amount – unpaid and practically unpayable – due to Germany, approaches a trillion euros.
However, a country like Italy cannot leave the eurozone without going bankrupt. If Italy introduced its own currency to become more competitive, the value of that currency would inevitably and drastically weaken against the “hard” euro. Italy’s debt, though, would remain denominated in euros. As a result, the existing, already nonrepayable debt would balloon in the local currency, in which Italy’s income would be generated.
Skating on thin ice
The situation in the eurozone reminds me of a dancing party on dangerously thin ice with the beat of the music quickening and the number of dancers growing, while the temperature keeps rising.
At this point, all of the correct solutions appear unthinkable, as too painful to the interested parties. But as responsible and realistic individuals, we need to face the scenarios – bitter as they may be – and try to make the best choice.
One such solution would be to allow member countries to leave the euro and go bankrupt. This is the simplest way out, albeit with grave consequences to all debt holders who trusted the governments and rating agencies – even after the triple AAA ratings and mathematical models of these agencies proved worthless in the 2008 financial crisis. Under this scenario, the broke governments would need to sell quite a few of their assets to the private sector or pension funds and subject themselves to stricter spending discipline (increasing taxes is certainly not the right way to go).
The responsibility for fixing the eurozone’s problem rests with the politicians, as it has been caused by the states, not a market failure.
The states’ bankruptcies and leaving the eurozone are tough measures, difficult to entertain. In the long term, however, this is the best solution. It offers the only sure path to restoring vibrant economies, solving the liquidity problems and easing the social tensions. Such a cure also would be less damaging for Europe’s global position than any alternative.
Another possible way to go, also politically difficult and considered “unthinkable” for various reasons, would be to split today’s eurozone into two parts. Germany and other highly productive northern countries like the Netherlands could leave the euro and create a “hard” currency system of their own. The remaining eurozone members, including big countries such as France, Italy and Spain, soon would see their euro weaken, their competitiveness improve and the total sum of their debt decrease.
The approach has several drawbacks. The northern block countries would find themselves under even harsher pressure to ramp up their productivity (to remain competitive despite their very strong currency). On top of that, the “northerners” would still need to write down a big part of the receivables from foreign government debt and the ECB, due to the devaluation in the eurozone. Also, the split would send an ominous signal about the prospects of the EU’s internal market, not to mention the “political union” project. Worst of all, it again could create the wrong incentives for fiscally irresponsible governments.
Although this script may seem quite far-fetched, it has a chance of becoming a reality. At the moment, though, it looks like muddling through as usual, for as long as possible. This is irresponsible: if the eurozone countries fail to address their biggest problem, they may quickly get caught on the wrong foot by a sudden political crisis or global economic slowdown.
The responsibility for fixing the eurozone’s problem rests with the politicians, as it has been caused by the states, not a market failure. The governments and some in the media will, of course, try to scapegoat business, as they frequently have done in the past. Business and savers need to be extraordinarily cautious and hedge against the worst consequences of the inevitable crisis.
July 11, 2018
By Steven Erlanger and Julie Hirschfeld Davis, The New York Times
BRUSSELS — President Trump wasted no time. NATO’s secretary general, Jens Stoltenberg, could barely finish the greetings at Wednesday’s breakfast when Mr. Trump launched into a clearly planned attack.
It wasn’t directed at terrorism. It wasn’t against a military threat. Instead, it was aimed at Germany, one of the alliance’s most important members.
“Germany, as far as I’m concerned, is captive to Russia because it’s getting so much of its energy from Russia,” Mr. Trump told the startled Mr. Stoltenberg at the opening of the NATO summit meeting. “We have to talk about the billions and billions of dollars that’s being paid to the country we’re supposed to be protecting you against.”
“I think it’s something that NATO has to look at,” Mr. Trump said.
Chancellor Angela Merkel of Germany, politically weakened at home, reacted mildly but pointedly to Mr. Trump’s remarks, noting that she grew up in Soviet-occupied East Germany.
“I myself experienced a part of Germany that was controlled by the Soviet Union, and I am very happy today that we are united in freedom as the Federal Republic of Germany,” Ms. Merkel said as she entered the NATO building. “We decide our own policies and make our own decisions, and that’s very good.”
(Our reporters fact-checked President Trump’s claims about Germany’s energy imports from Russia.)
The quiet rejoinder given by Ms. Merkel, leader of Europe’s most powerful country, seemed to encapsulate the complexities she faces in dealing with Mr. Trump. It also reflected her seeming reluctance to be the Western democratic voice that publicly stands up to him.
Ms. Merkel has rebuked Russia’s aggression in Ukraine and has defended multilateral institutions like the European Union, NATO, the United Nations and the World Trade Organization. She also has spoken openly about the need for Europe to do more in its own interests and rely less on the United States in the age of the Trump administration.
But Ms. Merkel has been hesitant to engage in harsh exchanges with Mr. Trump. In fact, her foreign minister, Heiko Maas, gave a much sharper response to Mr. Trump’s disparaging remarks on Wednesday, writing on Twitter, “We are no captives — neither of Russia nor of the United States.”
Ms. Merkel and the American president clearly have a strained personal relationship. German officials say that when Mr. Trump speaks on the phone with Ms. Merkel, he harangues her from the start about Germany’s military spending and its trade surplus with the United States, almost before the usual pleasantries are made.
While it is clear Ms. Merkel makes Mr. Trump uncomfortable, she hesitates to speak for Europe — especially now that her own political position in Germany is weaker and subject to challenge, both from the right and from her coalition partners on the left, the Social Democrats.
They have called the idea of spending 2 percent of gross domestic product on defense — which Mr. Trump has not only insisted on but now says he wants to double — ludicrous and arbitrary.
That view is shared by many Germans, which led Ms. Merkel to record a video over the weekend explaining why she believed Germany must spend more on defense, as pledged. But the more Mr. Trump attacks Germany, the less its people feel like appeasing him on military spending or with trade concessions.
While President Emmanuel Macron of France has tried to curry favor with Mr. Trump, playing the role of the devoted mentee, Ms. Merkel has kept her distance. Neither approach has worked with Mr. Trump. And when he becomes aggressive or mocking, as he did in private sessions during the Group of 7 summit meeting last month in Canada, Ms. Merkel simply does not react, perhaps to avoid setting him off further.
By charging that Germany is in thrall to Moscow, through a new gas pipeline from Russia called Nord Stream 2, Mr. Trump appeared to be trying to deflect criticism that he is too accommodating toward President Vladimir V. Putin of Russia, suggested Derek Chollet, a former assistant secretary of defense who is now with the German Marshall Fund in Washington.
Mr. Trump and Mr. Putin are scheduled to meet on Monday in Helsinki, Finland.
“This is like throwing a match on kindling, since Germany was anticipating something like this after the Group of 7” meeting in Canada, Mr. Chollet said. “Trump went out of his way in his first meeting to send this unprovoked attack.”
Mr. Trump and Ms. Merkel talked later Wednesday in a bilateral meeting that lasted an hour, and appeared to go out of their way to be cordial.
“We have a very, very good relationship with the chancellor, we have a tremendous relationship with Germany,” Mr. Trump said. “We’re having a great meeting. We’re discussing military expenditure, we’re talking about trade.” Noting Germany’s “tremendous success,” Mr. Trump added, “I believe that our trade will increase and lots of other things will increase, but we’ll see what happens.”
Asked if the pipeline issue had come up, Mr. Trump said that it had. For her part, Ms. Merkel was nonconfrontational. “I am pleased to have this opportunity to be here for this exchange of views,” she said, which extended to economics, migration and “the future of our trade relations.”
She concluded: “We are partners, we are good partners, and wish to continue to cooperate in the future.”
Mr. Trump had been advertising his intention to read the Riot Act to NATO allies about military spending, calling Americans “the schmucks that are paying for the whole thing” and vowing last week: “I’m going to tell NATO — you got to start paying your bills. The United States is not going to take care of everything.”
But his animus toward Germany, which spends about 1.24 percent of its G.D.P. on defense and has a large trade surplus with the United States, came out in fierce and startling terms. Mr. Trump has regularly criticized Germany for what he has described as the prevalence of German-made cars on American streets and for taking advantage of American largess to spend less on defense and more on education and social welfare. He has threatened the European Union with new tariffs on imported cars, as well as those already imposed on steel and aluminum.
But in the meetings on Wednesday, Mr. Trump framed his criticism in security terms.
“I have to say, I think it’s very sad when Germany makes a massive oil and gas deal with Russia where we’re supposed to be guarding against Russia,” Mr. Trump went on. “We’re supposed to protect you against Russia, but they’re paying billions of dollars to Russia and I think that’s very inappropriate.”
The Nord Stream 2 pipeline project has been opposed by the United States for many years, including under President Barack Obama, as well as by some European countries, like Poland, that warn it will give Russia too much leverage.
Nord Stream 2 would add two pipelines to the existing Nord Stream pipeline and increase overall annual capacity to 3.9 trillion cubic feet.
The Germans argue that they have been diversifying their gas supplies, that they now get only about 9 percent of their energy from Russia — not the 70 percent that Mr. Trump claimed — and that Washington is angling to sell liquid natural gas to Germany instead.
10 juillet 2018
Xerfi Canal a reçu Thomas Gomart, Directeur de l’Institut Français des Relations Internationales, pour parler de l’impact de la politique extérieure de Donald Trump.
Une interview menée par Ivan Best.
Special Assistant to the Foreign Minister of Japan. Former Director-General for Economic Affairs of the Ministry of Foreign Affairs of Japan and Chief Negotiator of the Japan European Union Economic Partnership Agreement Negotiations and Former Ambassador to France. Previoulsy, he was Deputy Permanent Representative of Japan to the World Trade Organization (WTO) in Geneva, Japan’s G8 Foreign Affairs Sous Sherpa, and Ambassador to Singapore. He received a law degree LL.B from Hitotsubashi University, Tokyo and is a graduate of the Ecole Nationale d’Administration of France (ENA).
By Steven Erlanger, July 9, 2018
CreditGabriella Demczuk for The New York Times
BRUSSELS — NATO summit meetings were once ritualistic events, with the member nations assembling to proclaim that the alliance had never been stronger and pledging to work together on the security issues of the day.
In the Trump era, however, they have become anxiety-producing confrontations where the main object is to avoid long-term damage to the alliance. For the allies, that has meant figuring out how to handle President Trump, who arrives on Tuesday for this year’s summit meeting having already sent letters to some NATO member countries pressuring them to expand their military budgets.
The allies see the President Trump of 2018 as different from the one who came to NATO last year — more aggressive, less willing to be moderated or guided by his senior staff and cabinet secretaries, more confident, especially after his meeting with the North Korean leader, Kim Jong-un, in his own diplomatic prowess. They worry about his propensity for off-the-cuff pronouncements, like calling for abandoning sanctions against Russia or suspending NATO military exercises.
The allies believe they have a decent story to tell about military initiatives to deter Russia, and they are expected to emphasize the considerable progress they have made in reaching spending targets, increasing spending on equipment and improving the readiness of their forces. And they have learned from the last year that handling Mr. Trump with kid gloves only seems to prompt his contempt.
That being said, the Europeans will still be operating at a disadvantage, analysts say. “They’re caught between dependency and outrage,” said Jan Techau of the German Marshall Fund in Berlin. “Outrage means to push back, it’s a question of dignity, but the strategic dependency is real, so you have to endure it,” he said.
Nevertheless, he favors some pushback against Mr. Trump’s expected criticisms. “We need to stick together, and I’d nominate one of the Europeans to speak in clear terms to Trump.”
Douglas Lute, a retired American general and former ambassador to NATO, said that Mr. Trump “would be true to form: He isn’t going to fly to Brussels and be a different person, but he’ll be disruptive and play to his base.”
Mr. Trump argues that NATO countries have committed to spending 2 percent of GDP by 2024, and “owe” money to NATO. But countries decide their own military budgets, and at the Wales NATO meeting of 2014, they only committed to increase military spending and “aim to move toward” the 2 percent guideline by 2024.
“The spending pledge is a 10-year program and we’re just in the fourth year of it,” Mr. Lute said, adding that European allies had already increased their spending by $87 billion a year, “and that’s real money.”
In the face of anticipated criticism from the president, the allies are expected to emphasize the gains they have made in combat readiness and military expenditure.CreditLaetitia Vancon for The New York Times
The allies cannot control Mr. Trump’s messages or Twitter outbursts, but they can control their own, analysts say. Preparing for Mr. Trump is mostly about strategic messaging in the room — what he is told — and ensuring the right strategic messaging outside the room, the official said, especially with Mr. Trump scheduled to meet the Russian president, Vladimir V. Putin, in Helsinki next week.
A core element of deterrence is making it clear that the political will exists to use military force if NATO is challenged — a more difficult sell when the United States president appears to be more in conflict with his NATO allies than with Mr. Putin, the leader of the nation NATO is intended to deter.
As one indication of how to handle the criticism, the Canadian prime minister, Justin Trudeau, who Mr. Trump derided as “dishonest and weak” at the disastrous Group of 7 meeting last month, and who received one of the more aggressive pre-summit letters from Mr. Trump about increasing military spending, is visiting Latvia before coming to Brussels.
Although Mr. Trump’s letter did not mention it, Canada took the leading role in Latvia in one of NATO’s new “spearhead” commands, which are based in the three Baltic nations and Poland and aimed at Russia. Ottawa has also committed to increasing its defense budget by more than 70 percent over the next decade.
Germany, too, promises to increase military spending to 1.5 percent of its economy by 2024. While not the 2 percent level, Berlin will argue that will still be more than any other NATO country other than the United States. Mr. Trump, who appears to have a special animus toward Germany, believes that Berlin has developed a vibrant social system and thriving export-driven economy unfairly and on the back of the United States, by not spending enough on defense.
Germany is currently spending 1.24 percent of gross domestic product on its military, which will rise to 1.31 percent next year, an increase of $5 billion to $43 billion, a sizable if still insufficient increase, said Norbert Röttgen, chairman of the German Parliament’s Foreign Relations Committee.
The best answer to Mr. Trump is “to accept he has a point, and respond by displaying more European strength and enhancing European defense in cooperation with NATO,” Mr. Röttgen said. As a whole, the alliance’s European members spend about $200 billion a year.
“That’s a lot, but it’s cost inefficient, militarily ineffective and lacks political weight and impact,” he said. “We need to strengthen the European pillar of NATO.”
The allies are happy to have Mr. Trump take credit, some of which he deserves, for the significant increase in alliance military spending.
But allies are also concerned that Mr. Trump sees no political benefit in a calm meeting, and that he will not only be loudly critical, but may also try to bargain American troop strength in Europe for increased military spending by others.
That might entail a threat to reduce American spending on the European Reassurance Initiative to improve force readiness, while challenging allies to make up the difference, said Tomas Valasek, a former Slovak ambassador to NATO and now director of Carnegie Europe.
Mr. Trump with the secretary general of NATO, Jens Stoltenberg, at the White House in May.CreditDoug Mills/The New York Times
“To be honest, no one really knows how Trump will act during the summit,” Mr. Valasek said. “His unpredictability is not a byproduct but a design feature — he likes it that way. He comes to this meeting not only prepared to go into confrontation with his peers and allies but with his own staff.”
Robin Niblett, director of Chatham House, said that the Europeans should respond by telling Mr. Trump that “NATO is a success story, with increased military spending across the board and two new commands.”
But another fear, he and others said, is that Mr. Trump will seek to bargain — “to conflate trade and security,” as he has already done with South Korea and Japan. Europeans cannot accept making collective security transactional or dependent on actions on tariffs or specific spending targets in a relationship that is mutually beneficial, Mr. Niblett said.
“It can feel like a protection racket, trading security for economic return,” he said, especially as “he then goes off to see Putin.”
That meeting worries NATO allies, because Mr. Putin is expected to flatter Mr. Trump and play on the American president’s notion of himself as a great negotiator in face-to-face meetings. They cite the Singapore summit with Mr. Kim, when Mr. Trump emerged to announce the cancellation of longstanding military exercises with South Korea — without consulting or informing either the South Korean government or the Pentagon.
They worry that Mr. Trump might unilaterally cancel planned NATO exercises, in particular Trident Juncture, a large one planned for late October, and Anakonda, for November, to practice the defense of Poland.
They worry he will even announce the withdrawal of some American troops from Germany, though Congress would have something to say about that. They fear he will abandon sanctions on Russia over Crimea and eastern Ukraine. And bizarrely enough, they express hope that Mr. Trump’s hard-line national security adviser, John R. Bolton, will restrain him from rash acts.
“Putin wants to deepen the schism between NATO, Europe and America,” Mr. Niblett said. Mr. Trump’s world is one of interests, no allies, with Europe a competitor and NATO “as bad as Nafta,” as Mr. Trump has averred, referring to the North American Free Trade Agreement. That world fits Mr. Putin’s aims.
“Even if Trump simply says that he and Putin have agreed ‘to continue the dialogue,’ that will put the cat among the pigeons among European allies,” he said.
Ivan Krastev, director of the Center for Liberal Strategies in Sofia, Bulgaria, said that for the Europeans, “it’s hard to imagine a world without allies.” But Mr. Trump is a disrupter, he said.
“In the world of Trump, allies don’t exist — allies are like ex-wives, who only make moral and financial claims. Disrupters don’t need allies.”
A version of this article appears in print on , on Page A8 of the New York edition with the headline: Allies Brace As Trump Makes Way To NATO.
Deputy Director-General of the WTO. His areas of responsibility include the two legal divisions dealing with the WTO’s dispute settlement system (Rules and Legal Affairs), the division for administration and general services including budget and finance as well as the human resources division. Prior to joining the WTO, he held the position of Director General for external economic policy in the German Federal Ministry of Economics in Berlin for 12 years. He is a lawyer by profession, with degrees from Germany and the United Kingdom (Cambridge). He started his career in the legal department of the Federal Ministry of Economics in Bonn in 1983. In 1986-87, he worked at the German Mission to the United Nations in New York. Further postings abroad were in Athens and Sydney.
Chairman and Chief Executive Officer, Renault-Nissan-Mitsubishi. Chairman and Chief Executive Officer, Renault. Chairman, Nissan Motor Company and Mitsubishi Motors. Mr. Ghosn joined Renault as Executive Vice President in 1996. After the Renault-Nissan Alliance was formed, Mr. Ghosn joined Nissan Motor as Chief Operating Officer in 1999 and was named Chief Executive Officer in 2001. CEO of Renault since 2005, he was appointed President and CEO of Renault in 2009, while keeping the same responsibilities at Nissan. Mr. Ghosn has been the industry’s leading advocate for sustainable transportation; Renault and Nissan were the first automakers to launch a range of affordable zero-emission cars and commercial vehicles. Mr. Ghosn is also establishing the Alliance as a leader in the development of future automotive technology, such as autonomous drive and connected vehicles and services. Before Renault, Mr. Ghosn held several positions in Michelin, the last being Chairman and CEO of Michelin North America starting 1989. Having obtained degrees from École Polytechnique and École des Mines in Paris, Mr. Ghosn started his career at Michelin in 1978.
Deputy Secretary-General, G20-2020 Saudi Secretariat and Sous-Sherpa, Saudi G20. Board member at the National Center for Strategic Development in Saudi Arabia and Riyadh Economic Forum. Previously, he held several senior positions including Associate Professor and Director of the Governance and Public Policy Program at MBRSG- UAE, a fellow at Harvard University and Assistant Professor at ASU in the USA, a Partner and Managing Director of Accenture Strategy and Public Sector Transformation Lead in the Middle East as well as KPMG. He also served a senior advisor to several international organizations including World Bank, UNDP, OECD, Swedish International Development Agency, Bill Gates Foundation, Shell, and Citi Foundation. He completed his post-doctoral study at Harvard University, a Ph.D. from University of Connecticut in Comparative Public Policy and Management.
July 4, 2018
Ashoka Mody, Independent
Even if the Chinese economy merely slows down global trade deceleration will continue and if, in addition, the global trade war escalates, global economic conditions could deteriorate rapidly. Italy will face the ill-effects of a global slowdown most acutely.
World trade has decelerated sharply. This ill omen portends severe risks in the months to come. The greatest risks are in the eurozone– where Italy is the fault line along which the most acute vulnerabilities lie.
In the three months ending in April, the annual pace of world trade growth dipped slightly below 4 percent, a sharp decline from 5.5 percent rate in the second half of 2017.
Trade growth in 2017 was both a barometer and cause of rare “synchronized” GDP growth with nearly every country experiencing buoyant conditions. That sweet spot is fading because the Chinese economy is slowing down.
With its huge size and extensive global trade relationships, changes in Chinese domestic economic priorities have a huge impact on trade and the world economic outlook. A blistering pace of Chinese imports propped world trade growth until January this year, and a slowdown since then in Chinese imports has dampened world trade.
The shift is a consequence of the attempt by Chinese leadership to diffuse a grossly oversized credit bubble. But reduced credit has squeezed investment in infrastructure projects and, hence, in the imports of goods and materials to support those projects. Recently, retail sales have also slowed.
China’s credit bubble may yet burst, causing global economic and financial mayhem. Even if the Chinese economy merely slows down, which it seems almost certain to, global trade deceleration will continue. If, in addition, the global trade war escalates, global economic conditions could deteriorate rapidly.
Growth deceleration is already evident in the eurozone. German growth relies to an extraordinary degree on exports to China and, not surprisingly, German industrial production has been in the doldrums in the past few months. Moreover, when German exporters face weaker growth prospects, they buy less from their largely European suppliers, which significantly dampens economic growth in Europe.
Italy will face the ill-effects of a global slowdown most acutely. After abysmal performance through much of the last decade, Italian GDP growth had picked up to annual rate of 1.8 percent in the second half of 2017. But that did not last. Already, Italian GDP growth is slowing and forecasts for the 2018 have are down to just above a 1 percent annual growth rate.
Even these forecasts may prove too optimistic. If world trade growth stays below 4 percent a year for an extended period of time—as now seems likely— the Italian economy will face headwinds via Germany’s slowdown and direct limits on exports to the rest of the world. In that case, the Italian economy would stop growing in the second half of 2018.
Italy could then face the perfect storm. The European Central Bank’s monetary policy is too tight for Italy. The real interest rate (the interest rate adjusted for inflation) for many Italian borrowers is above 2 percent. The euro is too strong for Italian exporters.
With such demanding monetary conditions, the Italian economy could tip over quickly into recession. The government’s already high debt burden on over 130 percent of GDP would rise rapidly. Delinquent borrowers would add to the pressure on the country’s fragile banks.
Italy is large. Italian government debt is €2.5 trillion, about the same size as the debt owed by the German and French governments. Italian banking assets are only slightly smaller than those of German and French banks.
An Italian financial crisis could run through the defences that eurozone authorities constructed during the prolonged crisis from 2009 to 2013. The signature lending facility, the European Stability Mechanism (ESM) may well be downgraded if called on support Italy financially. Credit rating agencies had briefly threatened to downgrade Germany and the ESM even during the Greek crisis, and the Greek government debt and financial system are about one-eight the size of Italy’s.
The ECB’s promise to buy unlimited quantities of bonds of a eurozone member country does not face technical limits—the ECB can, in principle, print money. But the ECB would almost certainly face political limits on it the scope of its actions.
To make good on its promise, the ECB would require a fiscal austerity program and deep reforms from the Italian government. Any Italian government that tried to deliver on such measures would face a public rebellion, fueling more political instability. Fear that the Italian government may end up defaulting on the debt that the ECB has bought will give other member states pause because they will be called on to top the ECB’s capital.
The world faces challenging prospects. If the Chinese credit bubble continues to grow, the global economy would hum for a while longer but the bubble could burst uncontrollably with dire consequences. Continuation of a controlled Chinese slowdown would dampen global growth, causing economic stress in the eurozone and sending tremors along Italy’s financial fault line. Throw into this mix a trade war, and it could be a cold and long winter.
9 juillet 2018
Propos recueillis par Marie Charrel et Philippe Escande, Le Monde
L’ancien chef économiste du FMI estime qu’une désagrégation de l’euro n’est pas exclue, mais que l’Union européenne pourrait lui survivre.
Face à la montée du populisme, les gouvernements doivent s’attaquer d’urgence aux inégalités, prévient Olivier Blanchard, économiste au Peterson Institute de Washington. Présent aux Rencontres économiques d’Aix-en-Provence vendredi 6 juillet, l’ancien chef économiste du Fonds monétaire international (FMI) s’inquiète également des fragilités de la monnaie unique.
Les tensions commerciales entre les Etats-Unis et la Chine menacent-elles la reprise mondiale ?
A court terme, le principal risque porte sur l’investissement. Face au comportement aussi imprévisible d’un dirigeant comme Donald Trump, la décision la plus rationnelle que les entreprises sont susceptibles de prendre est d’attendre. Au niveau macroéconomique, cela peut se traduire par une baisse de l’investissement de 1 ou 2 points de PIB : ce n’est pas rien, mais ce n’est pas catastrophique au point de déclencher une récession mondiale.
A moyen terme, les conséquences sont bien plus préoccupantes, au regard de ce que cela pourrait signifier pour l’avenir et les relations internationales. Et ce, alors que si l’on s’en tient aux seuls chiffres, l’économie mondiale va mieux. Les grands déséquilibres ont été résorbés. Le véritable danger est aujourd’hui de nature politique.
L’Union européenne doit-elle repenser sa stratégie économique et commerciale afin de se passer des Etats-Unis ?
Nous n’en sommes pas là, même si les relations entre les deux continents risquent d’être plus compliquées. En outre, il ne faut pas oublier que les hausses tarifaires se traduisent en général par un ajustement par les taux de change, compensant en partie les effets négatifs. Dans le cas de l’union monétaire, l’euro se déprécierait. Mais les secteurs ne seraient pas tous affectés de la même façon.
Les gouvernements populistes hongrois et polonais prônent une hausse des dépenses sociales tout en dénonçant l’échec des politiques d’austérité…
July 6, 2018
Ana Palacio, Project Syndicate
The upcoming NATO summit does not have to be a high-drama, make-or-break moment for the transatlantic alliance, as some have presented it. It can instead be a constructive meeting that emphasizes strengthening the foundations for defense – even if Donald Trump refuses to cooperate.
MADRID – Sixty-nine years ago, the foreign ministers of 12 countries in North America and Western Europe gathered in Washington, DC, to sign the North Atlantic Treaty, in which they “resolved to unite their efforts for collective defense and for the preservation of peace and security.” The organization that emerged, the North Atlantic Treaty Organization, has undergirded the longest period of sustained peace and prosperity in the West’s modern history. And yet, on July 11, NATO’s 29 members will begin what is likely to be the most fraught summit in the organization’s history.
At last year’s summit, US President Donald Trump’s hostile tone sent shockwaves through the transatlantic alliance. America’s allies had already known, of course, that Trump could be erratic and extreme, but they had expected his administration’s more seasoned members to keep him in check. That belief turned out to be misplaced, to say the least.
The blows to the transatlantic alliance have kept coming. Trump has unilaterally imposed tariffs on other NATO members, citing national security concerns, of all things. And, most notably, at last month’s G7 summit in Quebec, he showed unprecedented hostility toward America’s closest allies, launching personal attacks against Canadian Prime Minister Justin Trudeau and backing out of the final communiqué in response to a perceived slight.
In view of such actions, expectations for Trump’s behavior at the upcoming summit have gone from prickly to dangerous. The sense of foreboding has been heightened by the announcement that, just four days after the summit ends, Trump will meet with Russian President Vladimir Putin, in Helsinki. The nightmare scenario is easy to imagine: Trump lays bare NATO’s fractures, including by questioning mutual defense, before selling his allies down the river by publicly embracing Putin.
But this does not need to be the outcome. Rather than a high-drama, make-or-break moment for the entire transatlantic alliance, as some have presented the summit, it can instead be a constructive meeting – even if Trump refuses to cooperate.
The agenda for the summit should include planning for Brexit’s impact on the alliance and addressing the unraveling relationship with its most problematic member, Turkey, which has, among other things, undermined US policy in Syria. Participants should also consider how to combine NATO’s activities with the budding European security and defense system.
What the summit’s participants should not do is allow all the focus to be put on NATO members’ obligation to spend 2% of GDP on defense, even though it is true that countries must increase their defense expenditure further. Nor should they fixate on the mutual defense commitment contained in Article 5 of the NATO Charter, even though the principle that an attack on one NATO member is regarded as an attack against all is crucial to the alliance.
The problem with this approach was on stark display last year, when the stage was set for Trump to reaffirm his administration’s commitment to mutual defense. After all, Trump would be speaking at the dedication of a memorial to the September 11, 2001, terrorist attacks in the US – the only time Article 5 has been invoked. It was a moment manufactured to press Trump on the point.
But Trump did not take the bait. While he declared that the US would never “forsake the friends” that supported it after 9/11, he did not explicitly mention, let alone endorse, Article 5. Instead, he lashed out at his NATO partners yet again about their inadequate defense spending. Rather than showing the world that NATO remains strong and united, he exposed it as uncertain and divided. NATO cannot afford to make that mistake again.
The truth is that, as important as Article 5 and the 2%-of-GDP spending requirement are, NATO’s value and relevance extend far beyond these issues. Consider Articles 2 and 3 of the NATO Charter. They are rarely referenced, yet both are of paramount importance to fulfilling NATO’s purpose.
Article 2 encourages NATO members to collaborate economically and to bring “about a better understanding of the principles upon which” their free institutions are founded. More important, Article 3 calls upon members to work together to build and maintain a capacity for defense, thereby boosting resilience.
Whereas Article 5 has become a source of leverage for Trump to use to pressure his allies to spend more, while impressing his domestic supporters, Articles 2 and 3 are practical and direct. They focus not on visions of war, but on the building blocks of peace, including public education, improved institutional relations, and effective organization. These are the areas where NATO – especially its European members – has the most work to do.
In Europe, one rarely hears the word “defense” without “security.” This is no accident: pairing these ideas makes them more palatable for European publics that, traumatized by history, have long been lukewarm on defense. But, with a revanchist Russia to their east and chaos to the south, Europeans can no longer afford to live in denial. They must strengthen defense at the foundations, with Articles 2 and 3 as their guides.
Europe has long been given a free pass on defense, but the expiration date is approaching fast. At this moment of uncertainty, it can be tempting to focus on the high-stakes politics of Article 5. But what NATO really needs is not to grab more headlines, but to build its own resilience, methodically and even tediously, from the bottom up.
Appointed Chief Executive Officer of the American Hospital of Paris on March 1, 2017, Robert Sigal, MD, PhD, was formerly with Institut Gustave Roussy for 20 years, where he served as Executive Medical Director, after practicing as a physician, chief of radiology, and university professor. In 2007, he joined the Hospital and Health Solutions department of General Electric Healthcare France, later taking on the role of Chief Executive Officer. Most recently, he was President and Chief Commercial Officer of InSightec, a medical technology company and the market leader in MRI-guided Focused Ultrasound.
June 29, 2018
Jean Pisani-Ferry, Project Syndicate
Global governance requires rules, because flexibility and goodwill alone cannot tackle the hardest shared problems. With multilateralism under attack, the narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions.
FLORENCE – Rewind to the late 1990s. After an eight-decade-long hiatus, the global economy was being reunified. Economic openness was the order of the day. Finance was being liberalized. The nascent Internet would soon give everyone on the planet equal access to information. To manage ever-growing interdependence, new international institutions were developed. The World Trade Organization was brought to life. A binding climate agreement, the Kyoto Protocol, had just been finalized.
The message was clear: globalization was not just about liberalizing flows of goods, services and capital but about establishing the rules and institutions required to steer markets, foster cooperation, and deliver global public goods.
Now fast-forward to 2018. Despite a decade of talks, the global trade negotiations launched in 2001 have gotten nowhere. The Internet has become fragmented and could break up further. Financial regionalism is on the rise. The global effort to combat climate change rests on a collection of non-binding agreements, from which the United States has withdrawn.
Yes, the WTO is still there, but it is increasingly ineffective. US President Donald Trump, who does not hide his contempt for multilateral rules, is attempting to block its dispute settlement system. The United States pretends against all evidence that imports of BMWs are a threat to national security. China is brutally ordered – outside any multilateral framework – to import more, export less, cut subsidies, refrain from purchasing US tech companies, and respect intellectual property rights. The very principles of multilateralism, a key pillar of global governance, seem to have become a relic from a distant past.
What happened? Trump, for sure. The 45th US president campaigned for the job like a bull in a china shop, vowing to destroy the edifice of international order built and maintained by all of his predecessors since Franklin Roosevelt. Since taking office, he has been true to his word, withdrawing from one international agreement after another and imposing import tariffs on friends and adversaries alike.
Still, let’s face it: today’s problems did not start with Trump. It was not Trump who, in 2009, killed the Copenhagen negotiation on a climate agreement. It was not Trump who is to blame for the failure of the Doha trade round. It was not Trump who told Asia to secede from the global financial safety net managed by the International Monetary Fund. Before Trump, problems were dealt with more politely. But they were there.
There is no shortage of explanations. An important one is that many participants in the international system are having second thoughts about globalization. A widespread perception in advanced countries is that the rents from technological innovation are being eroded precipitously. The US factory worker of yesterday owed his standard of living to these rents. But as the economist Richard Baldwin brilliantly shows in The Great Convergence, technology has become more accessible, production processes have been segmented, and many of the rents have gone.
A second explanation is that the US strategy toward Russia and China has failed. In the 1990s, Presidents George H.W. Bush and Bill Clinton thought that the international order would help transform Russia and China into “market democracies.” But neither Russia nor China has converged politically. China is converging in terms of GDP and sophistication, but its economic system remains apart. As Mark Wu of Harvard argued in a 2016 paper, although market forces play a strong role in its economy, coordination by the state (and control by the Communist Party) remains pervasive. China has invented its own economic rules.
Third, the US is unsure that a rules-based system offers the best framework to manage its rivalry with China. True, a multilateral system may help the incumbent hegemon and the rising power avoid falling into the so-called “Thucydides’ trap” of military confrontation. But the growing perception in the US is that multilateralism puts more constraints on its own behavior than on China’s.
Finally, global rules look increasingly outdated. Whereas some of their underlying principles – starting with the simple idea that issues are addressed multilaterally rather than bilaterally – are as strong as ever, others were conceived for a world that no longer exists. Established trade negotiation practices make little sense in a world of global value chains and sophisticated services. And categorizing countries by their development level is losing its usefulness, given that some of them combine first-class global companies and pockets of economic backwardness. But inertia is considerable, if only because consensus is required to change the rules.
So what should be done? One option is to preserve the existing order to the greatest extent possible. This was the approach adopted after Trump withdrew the US from the Paris climate agreement: the other signatories continue to abide by it. The advantages of this approach are that it contains the damage from one country’s peculiar behavior. But, to the extent that the US attitude is a symptom, the conservationist approach does not address the disease.
A second option is to use the crisis as an opportunity for reform. The EU, China, and a few others – including, one hopes, the US at some point – should be the ones to take the initiative, salvaging those aspects of the old multilateralism that remain useful, but fusing them into new arrangements that are fairer, more flexible, and more appropriate for today’s world.
This strategy would have the advantage of identifying and absorbing the lessons offered by the exhaustion of traditional arrangements and the emergence of new ones. But is there enough leadership and enough political will to go beyond empty, face-saving compromises? The downside risk is that failed reform could lead to a complete unraveling of the global system.
In the end, the solution is neither to cultivate the nostalgia of yesterday’s order nor to place hope in loose, ineffective forms of international cooperation. International collective action requires rules, because flexibility and goodwill alone cannot tackle hard problems. The narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions. For those who believe that such a path exists, there is no time to lose in finding it.
July 4, 2018
The issue is whether the recovery and the expected growth have a robust, sustainable basis – or are substantial caveats appropriate?
The growth in recent years has been largely driven by consumption. Unfortunately, this was, to a non-negligible extent, due to abundant consumer and housing credit based on cheap money, provided by the central banks in nearly all major economies. At the same time, most governments did not take the opportunity to reduce their deficits, but continued high levels of spending and increasing their countries’ debt.
The cheap-money drug
All major central banks arrived at the limit of their ability to reduce interest rates (being already near zero or below) and have begun to talk of “tapering.” The United States Federal Reserve has already started, while the European Central Bank announced its more than 2.6 trillion-euro bond-buying program would end in September. Believing in the magic that some 2 percent inflation enhances growth, the officials at the ECB have concluded that this goal has finally been reached, so they can also slowly increase interest rates.
However, there are two problems: First, even if we believe in the 2 percent magic, this figure is mainly driven by an increase of 8 percent in energy prices and some 3 percent in food prices. Significantly, core inflation rose by just 1 percent.
But what really aggravates the situation is this: an economy that grows mainly due to abundant, cheap money is a bit like a drug addict. It cannot function without additional money supply – it always needs more, or else it collapses.
The world is arriving at the possible end of a growth cycle, while households and governments have not just empty pockets, but also a high debt burden. At the same time, the central banks have used up all their ammunition. The necessary and overdue increase in interest rates will be disastrous for budgets, both public and private.
Treating the symptoms
The history of the last quarter century’s fiscal and monetary policies mainly consists of treating symptoms, and less so the underlying causes of economic imbalances. If we look at the world’s financial mechanisms, we can see that they are built to avoid situations that can trigger a crisis, but lack the courage to implement real corrective measures. These could be painful, and would expose fundamental weaknesses that are less due to market conditions than significant political “manipulation” of the economy. Some of the main problems have been populist overspending, too much government involvement in the economy and excessive intervention in markets and business.
The recent increase in oil prices could be a real threat to growth. Cheap energy is a good economic driver. The rise might have initially been welcomed as boosting inflation, a sign expected by central bankers, but the increase in costs creates a braking effect. OPEC was aware of this phenomenon and decided to increase output to stabilize prices. The White House also strongly urged such action. It is concerned about the adverse impact of higher energy prices on a fragile world economy (and not only in the context of its new sanctions on Iran).
It may be necessary to introduce a long overdue open debate, with the objective of freeing trade from restrictions
For a long time, a big problem has been protectionism. The public was not too aware of this issue until President Donald Trump, in his usual very direct way, started to retaliate against unfair practices by a number of U.S. trade partners, especially China. However, even Western blocs, including the U.S. and even more so the European Union, are not innocent. Protectionist policies have not only used tariffs as political tools, but also introduced quotas, regulatory barriers, product specifications, foreign-exchange policies, subsidies and investment restrictions. They put up layers of bureaucratic red tape and numerous other obstacles.
The U.S.’s current retaliation has certainly not created the problem, but it could trigger a crisis. It may be necessary to introduce a long overdue open debate, with the objective of freeing trade from these restrictions. Unfortunately, protectionism under the pretext of shielding consumers or securing jobs is popular, and therefore a valuable tool for populist politics. Such measures are applied – to the detriment of prosperity – in authoritarian countries and in democracies alike.
A combination of rising energy prices, trade restrictions and slowing growth in certain countries (especially China), are adverse indicators for the world economy. The staggering debt of both governments and households allow little margin for additional consumption. Due to quantitative easing and low interest rates, central banks will not have room to head off a strong recession. We have to recognize that already, central banks’ balance sheets are overextended.
And although we should also not overestimate them, political misjudgments and crises are adding to the problem. We need not panic, but it is time to make a cautious, critical assessment and not be misguided by false hope.
It is time that the real causes are treated, and not just the symptoms.
July 5, 2018
Joseph S. Nye, Project Syndicate
For years, political leaders have warned of the danger of a “Cyber Pearl Harbor.” Thus far, however, cyber weapons seem to be oversold, more useful for signaling or sowing confusion than for physical destruction.
CAMBRIDGE – For years, political leaders such as former US Secretary of Defense Leon Panetta have warned of the danger of a “cyber Pearl Harbor.” We have known for some time that potential adversaries have installed malicious software in our electricity grid. Suddenly the power could go out in large regions, causing economic disruption, havoc, and death. Russia used such an attack in December 2015 in its hybrid warfare against Ukraine, though for only a few hours. Earlier, in 2008, Russia used cyber attacks to disrupt the government of Georgia’s efforts to defend against Russian troops.
Thus far, however, cyber weapons seem to be more useful for signaling or sowing confusion than for physical destruction – more a support weapon than a means to clinch victory. Millions of intrusions into other countries’ networks occur each year, but only a half-dozen or so have done significant physical (as opposed to economic and political) damage. As Robert Schmidle, Michael Sulmeyer, and Ben Buchanan put it, “No one has ever been killed by a cyber capability.”
US doctrine is to respond to a cyber attack with any weapon, in proportion to the physical damage caused, based on the insistence that international law – including the right to self-defense – applies to cyber conflicts. Given that the lights have not gone out, maybe this deterrent posture has worked.
Then again, maybe we are looking in the wrong place, and the real danger is not major physical damage but conflict in the gray zone of hostility below the threshold of conventional warfare. In 2013, Russian chief of the general staff Valery Gerasimov described a doctrine for hybrid warfare that blends conventional weapons, economic coercion, information operations, and cyber attacks.
The use of information to confuse and divide an enemy was widely practiced during the Cold War. What is new is not the basic model, but the high speed and low cost of spreading disinformation. Electrons are faster, cheaper, safer, and more deniable than spies carrying around bags of money and secrets.
If Russian President Vladimir Putin sees his country as locked in a struggle with the United States but is deterred from using high levels of force by the risk of nuclear war, then perhaps cyber is the “perfect weapon.” That is the title of an important new book by New York Times reporter David Sanger, who argues that beyond being “used to undermine more than banks, databases, and electrical grids,” cyberattacks “can be used to fray the civic threads that hold together democracy itself.”
Russia’s cyber interference in the 2016 American presidential election was innovative. Not only did Russian intelligence agencies hack into the email of the Democratic National Committee and dribble out the results through Wikileaks and other outlets to shape the American news agenda; they also used US-based social-media platforms to spread false news and galvanize opposing groups of Americans. Hacking is illegal, but using social media to sow confusion is not. The brilliance of the Russian innovation in information warfare was to combine existing technologies with a degree of deniability that remained just below the threshold of overt attack.
US intelligence agencies alerted President Barack Obama of the Russian tactics, and he warned Putin of adverse consequences when the two met in September 2016. But Obama was reluctant to call out Russia publicly or to take strong actions for fear that Russia would escalate by attacking election machinery or voting rolls and jeopardize the expected victory of Hillary Clinton. After the election, Obama went public and expelled Russian spies and closed some diplomatic facilities, but the weakness of the US response undercut any deterrent effect. And because President Donald Trump has treated the issue as a political challenge to the legitimacy of his victory, his administration also failed to take strong steps.
Countering this new weapon requires a strategy to organize a broad national response that includes all government agencies and emphasizes more effective deterrence. Punishment can be meted out within the cyber domain by tailored reprisals, and across domains by applying stronger economic and personal sanctions. We also need deterrence by denial – making the attacker’s work more costly than the value of the benefits to be reaped.
There are many ways to make the US a tougher and more resilient target. Steps include training state and local election officials; requiring a paper trail as a back-up to electronic voting machines; encouraging campaigns and parties to improve basic cyber hygiene such as encryption and two-factor authentication; working with companies to exclude social media bots; requiring identification of the sources of political advertisements (as now occurs on television); outlawing foreign political advertising; promoting independent fact-checking; and improving the public’s media literacy. Such measures helped to limit the success of Russian intervention in the 2017 French presidential election.
Diplomacy might also play a role. Even when the US and the Soviet Union were bitter ideological enemies during the Cold War, they were able to negotiate agreements. Given the authoritarian nature of the Russian political system, it could be meaningless to agree not to interfere in Russian elections. Nonetheless, it might be possible to establish rules that limit the intensity and frequency of information attacks. During the Cold War, the two sides did not kill each other’s spies, and the Incidents at Sea Agreement limited the level of harassment involved in close naval surveillance. Today, such agreements seem unlikely, but they are worth exploring in the future.
Above all, the US must demonstrate that cyber attacks and manipulation of social media will incur costs and thus not remain the perfect weapon for warfare below the level of armed conflict.
Bertrand Badré, Project Syndicate
Today’s strengthening economic recovery has not overcome the understandable but devastating loss of trust in the financial system that followed the crisis a decade ago. Restoring trust will require reasserting control over the financial sector, to ensure that it is serving the economy, not the other way around.
WASHINGTON, DC – The decade since the global financial crisis has been tumultuous, to say the least. True, no great war has erupted, and we have more or less avoided the mistakes of the Great Depression, which led in the 1930s to greater protectionism, bank failures, severe austerity, and a deflationary environment. But renewed market tensions indicate that these risks have not been eradicated so much as papered over.
In a sense, the story of the 2008 financial crisis begins when the global order was created from the ashes of World War II. Initiatives like the Bretton Woods institutions (the World Bank and the International Monetary Fund), the Marshall Plan, and the European Economic Community supported the reconstruction of significant portions of the world economy. Despite the Cold War (or perhaps because of it), they also re-started the globalization that WWII had brought to a halt.
This globalization process was interrupted during the late 1960s and early 1970s, owing to the Vietnam War, the suspension of the US dollar’s convertibility into gold, the 1973 oil price shock, and the great stagflation. But the United States and the United Kingdom then underwent a kind of conservative revolution and a revival of neoliberal economic policies, including widespread deregulation, trade liberalization, and unprecedented capital-account openness.
Minister of Justice of Hungary since 2014. Dr László Trócsányi is a lawyer by profession. He graduated from the Faculty of Law and Political Sciences of Eötvös Loránd University in 1980 and was admitted to the bar in 1985. He served as an assistant professor, then a reader (1991-1994) and a senior lecturer (1994-2000) at the Faculty of Law and Political Sciences of the University of Szeged. Since 2000, he is professor and head of department at the same university. Since 2004, he serves as Director of the European Studies Centre of Szeged University. Dr Trócsányi has been appointed Hungarian Ambassador to both Belgium and Luxembourg between 2000 and 2004 and to France between 2010 and 2014. He holds various awards that he received from France, Belgium and Hungary.
Faced with an existential threat to European Union cohesion, not to mention the government of Chancellor Angela Merkel in Germany, European leaders fashioned a last-minute compromise in Brussels on June 29 to deal with their immigration crisis. Announced at 5 a.m. after marathon negotiations, the agreement set in motion potentially crucial reforms of the EU’s rickety and fragile immigration framework in the coming months—an achievement that has of course eluded lawmakers in the United States.
EU leaders agreed that immigration is a common challenge requiring a multifaceted European response. They introduced potentially far-reaching proposals for so-called regional disembarkation platforms to expedite the controlled screening of asylum seekers and repatriation of rejected ones, agreed to deepen their cooperation with African immigration origin states, and signaled their willingness to dedicate more resources to external border control. Important details, however, of how the accord will be implemented remain to be decided.
Where does this late-night compromise leave Europe at this crucial moment?
Since 2015–16, Europe has struggled to deal with the flood of inward migration and to reconcile national sovereignty with public concerns about immigration. And the regionwide internal freedom of movement implemented through the Schengen Agreement in the early 1990s, enabling Europeans to travel anywhere they want, has come under severe threat. Anti-immigrant sentiment has flared with a new government in Italy and restiveness over the issue in Germany ahead of the Bavarian regional elections in October 2018.
To understand the tensions, it is important to recognize that three main groups of immigrants are involved: economic migrants looking for work and a better life; family-based migrants reuniting with loved ones; and humanitarian asylum-based migration of recognized refugees. EU member states are within their rights to regulate the number of economic and family-based non-EU migrants they take in according to national preferences. Because these two groups account for the vast majority of migration, immigration remains mostly a member state responsibility.
The latest crisis sprang not from immigrants in the first two categories but from refugees fleeing armed conflicts in the Middle East and North Africa, posing a test to Europe’s longstanding obligation to provide asylum based on the humanitarian principles in the UN Refugee Convention. The number of asylum seekers in 2015–16 was very large, threatening both the capacity of individual member states and Europe’s open internal borders. It has since come down significantly again, but the risk remains of another wave of refugees to Europe from political instability in its neighboring countries and nearby regions. Hence a European-level policy response is essential to address this challenge in a legitimate and politically sustainable way, while respecting member states’ sovereignty over immigration in the process.
A coherent reform of asylum-based EU immigration must embody two main components: control over external borders and a new set of internal EU rules. As reflected in the Brussels announcement, EU leaders have made some progress on the first part, but the outlook concerning the second remains vague.
This blog post makes some suggestions, in particular on internal EU rules.
CONTROLLING EXTERNAL BORDERS
To achieve this goal EU leaders must greatly expand Frontex, the embryonic European border control and coast guard agency. Offshore processing centers should be established in several African countries or on islands or in other geographically separated locations inside the EU. The centers would determine if asylum seekers are genuine, including persons intercepted on European territorial waters in the Mediterranean Sea. This common approach necessitates one set of harmonized EU rules for granting asylum to refugees at the processing centers.
The processing centers would not prevent individual member states from continuing to administer their own national asylum rules, however. Nor would they bar member states from granting asylum according to national rules governing applications made directly in each member state.
In Brussels, EU leaders went some of the distance to align themselves with these principles. They agreed to (1) establish “regional disembarkation platforms” outside the EU and “controlled centres…[for] rapid and secure processing” of asylum seekers inside the EU; (2) grant Frontex “increased resources and an enhanced mandate”; and (3) call for a “speedy solution” in the search for a common EU asylum procedure. These decisions introduce required elements to the EU’s immigration framework and are tangible steps forward for the EU. Still, many details will have to be filled by the incoming Austrian EU presidency in the second half of 2018.
INTERNAL EU RULES
To ensure that rules on refugee intake succeed, the EU should have a new set of internal rules. We believe two components are needed.
First, EU leaders must adopt a bottom-up approach to national quotas. The existing system of top-down mandatory national quotas for resettlement in the EU of refugees who arrived first in Greece and Italy has been failing since 2016. Newly established refugee quotas in the EU must work from the bottom up, not the top down.
One might wish that all countries were generous and open to people in need. But EU members have the right to decide how many refugees they can accept. Recent political developments illustrate how imposing more refugees on a country than it wants is a recipe for backlash. The only politically feasible approach is to add up at the EU level the member states’ voluntary commitments to accept asylum seekers admitted through offshore asylum centers. In this spirit, the EU Council has explicitly reiterated that member state commitments must be voluntary.
The number of asylum seekers in Europe has been volatile, however, and it is important to further distinguish between periods of “normal inward humanitarian migration” and “crisis episodes.” The latter includes 2015–16, when a very large number of people genuinely needed protection due to the armed conflict in Syria. The bottom-up quota for asylum seekers accepted through offshore processing centers can realistically address asylum demand only during normal periods of inward migration. In periods of crisis migration, just as is the case during the most severe financial downturns when losses have to be allocated, EU members will have to reach a new political settlement reflecting circumstances at the time.
Second, there must be full EU-level mutualization of costs associated with refugees admitted through offshore processing centers. The EU Council conclusions state that immigration is “a challenge not only for a single Member State, but for Europe as a whole.” The Council calls for “full EU support” to member states and continuing EU financing of the Facility for Refugees in Turkey, the EU Trust Fund for Africa, and other such vehicles. This statement represents acceptance of the principle of centralized financing of immigration-related expenses in the EU. But more resources will no doubt be needed.
All countries should contribute to the common pool, in an amount sufficient to pay for the costs of addressing Europe’s current asylum-based migration predicament. This common fund should finance the offshore processing centers, Frontex enforcement of the common border, and all administrative and relocation costs of asylees within the country, including housing, language, and labor market training. Thus, a member state that wants to close its doors to refugees could do so but would then be making a net financial contribution to the common EU immigration fund. On the other hand, a member state that is more generous and willing to accept many refugees would receive more from the common fund than it contributes. Meanwhile member states would remain fully financially responsible for any migrant—work-, family- or asylum-based—granted residency under national migration rules.
For sure, the cost of accepting refugees will differ among member states. But the central EU budget should cover the costs for member states at a single fixed level, sufficient to provide governments with a financial incentive to accept more refugees. Relying on a single fixed reimbursement rate will also encourage poorer member states (especially in Eastern Europe) to accept more refugees. Similarly, all member states will have an incentive to make acceptance of asylum seekers more cost effective. Additional EU financing would also have to be made available to member states to pay for migration spikes during crises.
The proposals outlined here should reduce political and economic tensions in Europe, within and among EU members. At the same time, the collection and distribution of funds earmarked for immigration seem like a natural function for parts of a reformed and—given these new common responsibilities—significantly expanded EU budget.
Strong financial incentives alone will likely not overcome political bigotry and anti-immigrant sentiment in some member states, but they will help adapt the EU’s immigration framework to the rising challenges in a politically realistic manner.