Let's hear it for the Transatlantic Economic Council

Let's hear it for the Transatlantic Economic Council

Let's hear it for the Transatlantic Economic Council

Written by Philip Whyte, 23 May 2008

View the full insight article here

How to avoid a eurozone debt crisis

How to avoid a eurozone debt crisis

How to avoid a eurozone debt crisis

Written by Simon Tilford, 24 February 2009
From The Wall Street Journal

The wages of recovery

The wages of recovery

The wages of recovery

Written by Simon Tilford, 15 April 2009
From The Wall Street Journal

Should Europeans care about Doha?

Should Europeans care about Doha?

Should Europeans care about Doha?

Written by Katinka Barysch, 30 July 2008

by Katinka Barysch

Are the Doha trade talks finally dead? Following the failure of the latest ministerial meeting in Geneva on July 29th, there will be little appetite for another big push to resolve disputes over farm subsidies and manufacturing tariffs. But unless the 150-odd WTO members agree on the outline of a deal in 2008, the new US administration (and the new EU Commission) would pretty much start from scratch in 2009. A final deal could then take another five years or more. Perhaps it would be better to give up on Doha?

Europeans do not seem to care very much. They worry more about the impact of the global downturn on their mortgage, job and pension. Many EU governments have also appeared distinctly unenthusiastic about trade liberalisation lately. French President Sarkozy blamed the Irish No to the Lisbon treaty on the ‘overly liberal’ trade policies of Trade Commissioner Peter Mandelson. During the Geneva talks, eight other EU countries lined up behind France (including Italy, Greece, Poland and Hungary). They argued that Mandelson’s first responsibility was to protect European jobs and incomes – in particular in the farm sector – not to finish a round of trade talks of dubious economic value.

Would the failure of Doha be a disaster for Europe? Not on the face of it. Calculations of the direct economic benefits from finishing the round have gradually been reduced (and most estimates are now well below 1 per cent of global GDP). With many of its biggest trading partners – China, Russia, ASEAN, the EFTA countries – the EU has special agreements on trade and investment, or is in the process of negotiating them (albeit with limited success). And many poorer countries may be more willing to grant the EU better access to their markets on a bilateral basis – without having to extend the same privileges to China.

So should the EU just let Doha die? Is reviving the round worth the risk of internal EU divisions and grumpy European farmers? Yes, because the costs of its failure could be huge. Here are just four of the issues to take into account.

* While Sarkozy and Berlusconi are wrong to claim that Mandelson is ‘selling out’ European farmers, the EU’s offer on agriculture is not negligible. It includes a complete abolition of export subsidies and a considerable reduction in both domestic farm support and import tariffs. Many development experts say the offer does not go far enough. But at least it would lock in some progress on CAP reform. That matters since the EU is conducting its own ‘health check’ on the CAP this year. And the issue of farm-sector reform will come up again by 2012, when EU countries will haggle about the EU’s new long-term budget. Accelerated CAP reform would free up billions of euros that would be better spent on innovation, climate protection or development. To keep CAP reform going is particularly important now that some EU politicians use the global food crisis as a phoney argument for more, not less, farm support.

* It is true that Doha would not result in drastic new tariff cuts for manufactured goods. But business in Europe and elsewhere is wrong to conclude that the current trade round doesn’t matter for them. As Patrick Messerlin, a French trade economist, has convincingly argued, the Doha round is hugely important for locking in the progress that has been made over the last 15 years. Most countries around the world now apply tariffs that are much lower than the ceilings fixed in the Uruguay round in 1993 (so-called bound tariffs). They could push them up to their bound levels without penalty at any time. Some emerging markets, such as Brazil, have already responded to slowing growth by nudging up their tariff protection. Binding manufacturing tariffs nearer their currently applied levels would reduce that risk, and give companies the certainty that they need to trade and invest abroad.

* If Doha fails, the WTO could lose much of its credibility, and the trend towards bilateral and regional trade agreements would accelerate further (200 of those are already in place, another 200 are being negotiated or planned). Economists disagree over whether this bilateralism is a good thing (a push for market opening while global talks remain stuck) or a bad thing (leading to a dangerous and costly fragmentation of the international economy). It certainly weakens the multilateral trading system. With only half of all Americans now believing that international trade is good for them, protectionist sentiment rising in Europe, and many emerging economies becoming more assertive in their trade policy, the world needs stronger global trade rules and dispute settlement mechanisms, not weaker ones.

* Finally, as Charles Grant and I have argued in our recent report ‘Can Europe and China shape a new world order?’, this is a critical time for persuading emerging powers that multilateralism actually works for them. They should work through international rules and organisations, not follow narrow-minded power politics. The WTO (and its predecessor, the GATT) is one of the cornerstones of the post-war multilateral system and the one that arguably matters most for China, India, Brazil and other rising economies. If the WTO does not deliver, how can we persuade these countries that the UN, the World Bank or the Kyoto regime on climate change matter for them?

Katinka Barysch is deputy director of the Centre for European Reform.

Economic liberalism in retreat

Economic liberalism in retreat

Economic liberalism in retreat

Written by Simon Tilford, 16 July 2009
From The New York Times

Farewell, Polish plumber

Farewell, Polish plumber

Farewell, Polish plumber

Written by Philip Whyte, 07 August 2008

by Philip Whyte

When the EU expanded its membership in 2004, the UK was one of only three EU countries – Ireland and Sweden were the others – fully to open its borders to migrants from the ten new member states. The decision resulted in an unexpectedly large influx of migrants from central and eastern Europe. Ever since, the debate in the host countries has focused on the domestic impact of this wave of immigration. But it is time the debate moved on. For there is strong evidence that few of these migrants have any intention of settling permanently.

The host countries’ initial focus on migratory inflows is entirely understandable. When the EU enlarged its membership in 2004, the British government projected that the annual inflow of central and eastern Europeans to the UK would average between 5,000 and 13,000 through to 2010. It was being too modest. British statistics on migration are a mess, but most estimates suggest that official projections were out by a factor of twenty. Close to a million central and eastern Europeans are thought to have migrated to the UK since 2004.

The conservatism of the government’s initial projections was not unreasonable. By and large, Europeans are a sedentary bunch: they are disinclined to move within their own countries, let alone across national borders (with all the attendant difficulties of adapting to new languages and cultures). Previous enlargements – including the Iberian one in 1986 – had not provoked a dramatic increase in migration across national borders. So why expect the admission of the former Communist-bloc countries to produce different effects?

But the UK under-estimated the strength of the ‘push’ and ‘pull’ factors at play. Low income per heads, allied to housing shortages and high rates of joblessness (particularly among the young), encouraged many central and eastern Europeans of prime working age to seek their fortunes abroad. And by a happy coincidence, the EU countries that had thrown their borders open to them were enjoying buoyant economic growth and had numerous job vacancies to be filled. Migration was lubricated by low-cost airlines and Skype.

The scale of the influx did not go unnoticed in the host countries. Nor was it universally welcomed. Elements of the UK’s notoriously noisy press spoke of being ‘flooded’ and went out of their way to cast the new entrants as ‘benefit tourists’ – a scurrilous charge, given their exceptionally high rates of employment. Nevertheless, government policy was forced to adapt to this new context. When Bulgaria and Romania were admitted to the EU in 2007, the UK did not feel politically able fully to open its borders to nationals of these countries.

The irony, however, is that government policy has hardened at precisely the moment when the factors that drove migration to the UK in 2004-07 are going into reverse. The over-leveraged UK economy faces a nasty economic downturn and rising joblessness. Sterling has weakened markedly against most European currencies (reducing the relative wage that migrants earn in the UK). Meanwhile, unemployment in central and eastern Europe has been falling while incomes have risen. Against this backdrop, half of the 1 million central and eastern Europeans who came to the UK have returned to their home countries.

In other words, few migrants from the new member states have been escaping their home countries to settle in the wealthier EU member states. Instead, most have been using host countries as revolving doors through which they can enter and exit. Their aim is not to build a new life abroad, but a better one at home. The debate and policy response in the host countries needs to adjust to this reality – particularly as migratory flows will become more evenly distributed across the EU as restrictions on labour movement are gradually relaxed.

Philip Whyte is a senior research fellow at the Centre for European Reform.

Comments

Added on 10 Nov 2008 at 20:15 by Anonymous

From an American's perspective, Europe should be lessening its economic and defense dependence upon the US. We are not only broke we are fighting two wars as the teeth of a financial crisis and economic recession sink in.

Obama has already proven he's a corporate socialist/capitalist willing to bail out failing "too big too fail" institutions. But unlike Europe Americans are uneasy about the 'bailout' formula.

It only worked in the past because it was confined to one industry, i.e. Chrysler, then the S&Ls, followed by the Airlines. But this time its acroos the board simultaneously, which requires more socialism than most American taxpayers can stomach.

Europe, don't miss the key messages: US taxpayers were against the banking bailout. US taxpayers are against the Automaker bailout. They are soon going to learn that the banks are not fulfilling their side of the deal and AIG is going to cue up for a second round.

Obama's honeymoon is going to be very short-lived. The sparks are going to fly as the financial and economic dominoes continue to fall through the first half of 2009. Don't forget that Obama already signalled that he's going to shift the military focus to Afghanistan/Pakistan. Will that mean a re-allocation of troops from Iraq to Iran?

We simply cannot affort the accumulated costs of increased government spending in the face of a global recession. What is Europe going to do in the face of a belt-tightening US consumer angry at Congress and its so-called business continually asking for more money...

Merkels bezuiniging is onverantwoordelijk

Merkels bezuiniging is onverantwoordelijk

Merkels bezuiniging is onverantwoordelijk

Written by Simon Tilford, 14 June 2010
From NRC Handelsblad

In defence of Anglo-Saxon capitalism

In defence of Anglo-Saxon capitalism

In defence of Anglo-Saxon capitalism

Written by Charles Grant, 29 September 2008

by Charles Grant

Those who never liked ‘Anglo-Saxon’ capitalism are feeling smug. Marxists, fans of ‘Rhineland’ capitalism and those who simply cannot stand American power are crowing. “The US will lose its status as the superpower of the world financial system,” says Peer Steinbruck, Germany’s finance minister. “Self-regulation is finished, laisser faire is finished, the idea of an all powerful market which is always right is finished,” says France’s president, Nicolas Sarkozy. The British academic (and sometime fan of Margaret Thatcher) John Gray proclaims that “in a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of the government and the economy has collapsed.”

All this hyperbolic froth and windy rhetoric conceals a real danger for the European economy. The perceived failure of one model of capitalism, combined with growing protectionist pressure from all continents, could push EU governments to ban or discourage a whole range of ‘Anglo-Saxon’ practices and institutions. Cross-border takeovers and equity issues, the private equity and hedge fund industries, and even privatisations – all of which can help to make economies more efficient – may come under threat. Furthermore, some governments may think that because the EU’s ‘Lisbon agenda’ of economic reform is British-inspired, they can relax their efforts to carry out its painful but essential prescriptions.

Of course, the credit crisis has exposed huge weaknesses in the American and British financial systems. The so-called phantom banking industry of institutions and instruments that focused on fiendishly complex off-balance sheet financing was poorly regulated. Those in charge of many leading banks appear to have had no idea about the risks they were taking on. Their pay packages were ridiculous and unjustified, especially when those who had failed received tens of millions of dollars of ‘compensation’ for being fired. The property and credit booms in the US, the UK, Spain and Ireland were excessive. And the British decision to allow the building societies (mutuals) to turn themselves into banks – and their subsequent move into risky financial instruments and models of funding – may have been an error.

But politicians such as Steinbruck should not indulge in too much Schadenfreude. For the next few years, some of the core euroland economies may be lucky enough to escape some of the pain that will afflict the Anglo-Saxons. But the continental banks are certainly not immune from the crisis, as the rescue of the Dutch-Belgian Fortis shows. The capital ratios of some of the top continental banks are inferior to those of their American peers. And if a European bank involved in several members-states did head for the rocks, could the EU’s ramshackle regulatory system – with national authorities holding many of the key powers – move as quickly as Treasury Secretary Hank Paulson, Federal Reserve Governor Ben Bernanke and the Congress have done?

Many of today’s Cassandras mistakenly assume that financial crises are a uniquely Anglo-Saxon phenomenon. Very different sorts of financial system – such as those of Japan and Sweden in the early 1990s – have ended up being bailed out by governments. Financial crises are inherent in the nature of capitalism, rather than one particular brand of it.

However the current crisis turns out, many continental European governments will have to tackle serious structural flaws in their economies. They are held back by a lack of competition and restrictive practices in a host of sectors, especially services. Their universities cannot compete with the world’s best. In many of these countries, old-fashioned trade unions block reform and modernisation (look at the pitiful saga of Alitalia). Excessive state aid distorts the allocation of capital and may deter new entrants. Over the past 20 years, France, Germany and Italy have performed poorly on economic growth and job creation. Europe as a whole has a poor record on innovation and the adoption of new technologies.

Among the EU-27, the UK has not been the star of the class. In recent years the Nordic economies and the Netherlands have had the best record of combining on the one hand high employment and active labour market policies, and on the other generous welfare and high-quality public services. But the UK has many strengths (as well as notable weaknesses like infrastructure). Its liberal labour markets have helped to push the employment rate above 70 per cent of the workforce – the only other EU countries above 70 per cent are Denmark, Sweden and the Netherlands. And of the EU’s large economies Britain is the most open to foreign investment, which is one reason why it has a good record of adopting new technologies.

Moreover, the City of London remains a big British strength – despite everything that has happened. Much of what the City does is valuable not only to the UK, but also to Europe and indeed the world economy. If properly regulated, mergers and acquisitions, corporate advice, City law firms, hedge funds, private equity, the euromarkets, the fund managers, the Lloyds insurance market, the currency markets, the international equity markets, and much else, add value. The City is in for a lean few years, but it will come back – after some consolidation and regulatory reform – because the world needs a centre of expertise for international finance.

Nobody should write off the American economy. Compared to its European peers, its history of recovering rapidly from recession is impressive. Its track record on innovation and start-ups is the envy of the world. Where are the European Googles, Microsofts, Ciscos and Intels? The US has most of the world’s best universities. It consistently out-performs the EU on productivity. Despite the rise of the BRIC economies, at market exchange rates the US will remain the world’s leading economy for many decades. China’s leaders know this very well and have not resorted to the kind of hubris that we have heard from certain continental politicians.

Some European leaders may view the Lisbon agenda of economic reform as ‘Anglo-Saxon’, but they should not abandon it. Parts of the agenda are rather Anglo-Saxon, such as the emphasis on creating employment, liberalising utilities and enhancing competition. But much of the agenda has a broader scope: boosting innovation, improving R&D, reforming pensions and helping start-ups. All the European economies need the Lisbon agenda, whether they are Anglo-Saxon, Rhineland, Nordic, East European or Mediterranean. At some point the financial turmoil will settle down. Then EU leaders will need to return to two key questions: why is the trend growth rate of the EU economy about one percentage point less than that of the US, and what can Europe do to catch up?

Charles Grant is director of the Centre for European Reform.

Comments

Added on 15 Oct 2008 at 09:13 by G700

@ sd

Europe hasn't been much faster in its response to the crisis either. It's only been more effective when it decided to act. Not to mention that it got saved by British ideas. For Europe it is time to think seriously about linking the currency union to a fiscal federation and forming an economic government for times like this. Deep recession is coming with a probability of 80% and Europe's already overspent.

Added on 15 Oct 2008 at 09:02 by G700

Dear mr Grant,

there is no need to be apologetic or state the obvious. Both the US and the UK with their "anglo-saxon capitalism" as you call it and the market oriented reforms they adopted all these years, managed to become the global economic powerhouses for the last 3 decades having also managed to achieve good results on the social front.

However you got to be able to see that fundamental aspects of this model are in great need of revision, especially unregulated financial markets especially "phantom banking" as you call it.

What we are facing today is not only the burst of a bubble economy, but also the collapse of an economically irrational greedy capitalism of the "Gordon Gecko" kind. The world,especially the US and the UK, is given a chance to focus once again on the real economy, expand into new industries and adopt a new productive ethos.

Generation 700 Euros - Greece

Added on 01 Oct 2008 at 00:55 by SD

Charles, I agree with David (comment 1). It's not about smugness. It's about vindication. For years continental Europeans have been abused in Anglo-Saxon publications that their economic system (usually referred to as "socialism", and pronounced as an exceptionally dirty word) is inferior to that of the US (and UK). Slow, sluggish, unrewarding, meddling, nanny-ish, ... many more terms such as these were used for years.

It was rare to find an Anglo-Saxon author who focused on the positives of a European-style social market economy.

This form of peer-pressure (even bullying, in my opinion) has resulted in continental countries adopting some of the flawed practices, which now lead to renationalizations of banks in the Netherlands, Denmark, Belgium, ...

Do you honestly think it is not time now for the ultra-capitalists to eat their words and fall on their swords? They should be allowed to fail, so that 10 years from now they will not be tempted to go the same way. They need to accept that their version of capitalism has died and should not be revived.

PS. How swift have Paulson and Bernanke proven to be? The Benelux countries (three different governments) were able to act in mere days. Stop seeing the US as so superior. The emperor has no clothes.

Added on 30 Sep 2008 at 12:11 by NickCrosby

Charles
Up to a point, Lord Copper.
You are right to point out the resilience of the US and the UK' reforms over the past 20 odd years.

However, I do not think the term 'Anglo-Saxon' model means much anymore. The messianic belief of the neo-liberal movement has now been overextended- geo-strategically in Iraq etc... and economically in the USA.
What does Anglo-saxon model mean? There is an American economic-political system, a British one etc...Charles Hampden-Turner wrote an excellent work some years ago about the 7 cultures of Capitalism. That is more insightful. The emphasis is as much on ways of thinking and organising as it is of straight policies. Some US firms have highly Swedish 'business models'etc... Public authorities across the piece have flexible responses to issues of housing, environment etc..
The key is less the policy, more the philosophy/moral economy behind that policy. And in this sense the UK on most political-economic-social measures is much closer to our Continental partners than the US. The continuation of the neo-liberal project in the UK (by New Labour)- well beyond its stretching point- has as much to do with the peculiarities of the historic failures of the Labour Party than it does any attachment to the underlying philosophy of Buchanan, Leo Strauss,Goldwater etc... and the ideological/political drivers of the programme in the USA.
The idea of a nightwatchman state, of limited regulation, of 'privatising social protection to fundmentalist religious institutions' and a 'belief' in market solutions to all problems- if that is the Anglo-saxon model- and it is the policy/philosophy of large sections of the US-than that is revealed to be seriously flawed.And scary.
All of which is not an argument for some return to 1970s statism. But it also means that the current US election is the most important for 30 years; and we in the UK should be careful for what we wish for. If Cameron is Mc-Cain lite and a continuation of Thatcher by other means...
I agree this no time for schadenfreude. But for all those eurosceptics gleefully writing off the Continent as finished a few years ago, some feeling back the other way is only understandable.

Added on 30 Sep 2008 at 08:38 by David

But, Charles, it's not a question of feeling "smug". When a preacher is discovered to be a hypocrite, the congregation is entitled to feel resentful. During the Bush years a version of market fundamentalism has been preached from Washington and it has now been exposed. And that model, don't forget, has been based on growing inequality, boardroom excess and a wilful neglect of the consequences of financial decision making for jobs and corporate prospects.
Of course there is no single European version of capitalism. Across the EU the state and markets interact in a variety of ways. But there surely is a precious "European" concern for the social consequences of corporate decision taking, for equality within nations (as within a community of nations) and a useful habit of governments reminding companies that the pursuit of profitability cannot be untrammelled. Would you rather be poor in France or in Louisiana...the American model is deeply flawed. And you make a mistake if you don't see that the American model is itself a conflation of state and markets with government operating, in the american case, to protect the interests of certain groups. The idea which you seem to want to perpetuate is that somehow the American model is, as the ideologues in Washington have claimed, based on "free markets". In fact it's based on a distinct pattern of spending and taxation which - look at the fiscal crisis in the states - was always internally contradictory. Of course Europeans have to look to issue of innovation and flexibility but this posting by you is an odd attempt at defending the indefensible

Scapegoating the US lets others off too easily

Scapegoating the US lets others off too easily

Scapegoating the US lets others off too easily

Written by Simon Tilford, 02 October 2008

by Simon Tilford

Huge amounts have been said about the consequences of the credit crunch for the US and UK economies. They undoubtedly face major adjustments, and several years of very weak economic growth. There has also been trenchant criticism of spendthrift ‘Anglo-Saxons’ living beyond their means, derailing the global economy in the process. The US is a convenient scapegoat for politicians confronted with economic uncertainty, but it needs to be remembered that a number of European and East Asian economies benefited enormously from the credit boom. Indeed, it could not have happened without excess savings generated by the likes of China, Germany and Japan.

The credit booms in the US and UK, as well as in other countries such Spain and Australia, were not simply the result of poor commercial practices and policies in those countries. They were also the by-product of imbalances in the global economy. The US is regularly pilloried for running a large external (current account) deficit, for playing fast and loose with its currency, and hence for destabilising the global economy. This is misleading. The US did not cause the current problems all on its own. Those governments that believe a rising current account surplus is a symbol of national economic virility and competitiveness played a major role too. Indeed, their surpluses are the underlying cause of instability.

If some countries routinely run huge current account surpluses, others must run huge deficits. German and East Asian surpluses have to be invested somewhere and they got invested in housing and other assets in the US, UK and elsewhere. Criticism of the US Federal Reserve for pursuing an excessively weak monetary policy, and hence inflating asset prices is fine as far as it goes. But low interest rates were needed to encourage enough borrowing to soak up the excess liquidity produced by rising current accounts surpluses. Those condemning the US need to ask themselves where the global economy would have been without the demand generated by the US and other big deficit countries. China would certainly have grown much less rapidly and Germany and Japan would probably still be mired in economic stagnation.

Many in Germany, Japan and China argue that their dependence on the US is declining because the US accounts for a falling share of their respective current account surpluses. What they fail to notice is that the US has still been absorbing much of the liquidity that China, Japan and Germany have generated by running external surpluses with other economies. Furthermore, US demand has stimulated trade between other countries (for example, Chinese purchases of Japanese components or German machinery).

With credit conditions now tight and employment growth very weak, there will be a progressive narrowing of the US current account deficit (along with those of the UK, Spain etc). The governments that regularly criticise the US for the destabilising impact of its imbalances might not like the implications of this process. This unwinding poses a big problem for export-dependent economies. It exposes their domestic imbalances, which are just as much of a ‘problem’ as those of the US. An external surplus suggests that there are inadequate investment opportunities in an economy.

In a European context, it is imperative that the German government takes steps to rebalance the German economy. Domestic savings need to fall and investment needs to rise. Much is made of the competitive ‘gains’ the Germans have made in recent years and how this stands their country in good stead. Improved price competitiveness could help German firms to gain market share in the downturn, but collapsing export orders demonstrate that it will provide only so much support. Steep falls in investment in machinery and equipment and in purchases of cars in most of the country’s key export markets will hit the Germany economy hard next year.

The German finance minister, Peer Steinbruck, needs to spend more time thinking about how to address the country’s exceptionally weak domestic demand. Tax cuts would be a good first step. The German government needs to get over its obsession with fiscal probity. In the long-term, of course, fiscal discipline is a necessity, but at present it risks aggravating an already serious situation. China and Japan faces different challenges, but the underlying problem is one of excessive dependence on exports.

Unfortunately, there is little sign of any rethinking of economic strategy in these three economies. If anything, the problems experienced by the US have confirmed the belief that a competitive economy is one with a big external surplus and rising international reserves. This is bad news for everyone. Unless China, Germany and Japan make a net contribution to global demand, the world really could face a slump. Instead of gloating about the US’s comeuppance they should be considering what will drive their own and others’ economic growth.

Simon Tilford is chief economist at the Centre for European Reform.

Comments

Added on 08 Oct 2008 at 18:57 by Anonymous

Hi Simon,

Thank you for this interesting take on the situation. As a non-economist and lay person, I need help understanding something which you touched upon.

I believe you are speaking on a macroeconomic level with regard to trade and the "excess savings" of China, Japan, and Germany.

Can you tie it to a micro level--on individuals'/households' responsibility in this debacle? Various media talk about the massive savings rate of Japan, and I always thought they were referring to individuals who save by putting away yen in the bank (thereby providing banks with greater liquidity) instead of spending it on gadgets, travel, or what have you that Americans are always blamed for (and rightfully so).

Is there culpability on the part of Americans for their poor personal saving habits? If the US govt had continued with its deficits and international debt, but American citizens had saved a lot in the bank, would the picture today look much different?

In other words, does the average Joe who doesn't have a mortgage but spends more than he earns, using credit cards, etc. play a role in all of this? Or is he one of these "innocent" Americans the Congressmen have been railing on about as of late?

Thanks.

Another Great Depression?

Another Great Depression?

Another Great Depression?

Written by Katinka Barysch, 15 October 2008

by Katinka Barysh

Many observers have drawn parallels between the current economic crisis and the Great Depression of the 1930s. However, the stock market collapse of 1929 did not directly cause what turned out to be the deepest and most prolonged recession of modern times, ultimately ending in the Second World War. The blame lies with misguided macro-economic policies and protectionist reactions, such as the infamous Smoot-Hawley tariff of June 1930, which contributed to a collapse in international trade. The downturn that is now hitting the US and EU economies will fuel protectionist reflexes. But unless western countries are prepared to tear up the rulebook of the World Trade Organisation, their room for manoeuvre is in fact limited.

Trade flows will of course be affected by the current crisis: domestic demand in the US, UK and other big economies is falling, companies cannot get the credit needed to finance exports and imports, and high energy prices have been pushing up shipping costs (although pressures are abating as oil prices fall). The Economist Intelligence Unit predicts that world trade will grow by only 4-5 per cent next year. That is a lot less than the average of 8 per cent recorded in the previous five years. But it is nothing compared with the Great Depression when real world trade flows contracted by around 14 per cent.

Surveys show that support for free trade among Europeans has been in decline for a couple of years, as people have become more concerned about globalisation, and in particular the rise of China. But overall, Europeans still hold rather benign views on international trade: over 80 per cent of Germans, French, Italians, Poles and Spaniards think that growing trade ties are, on balance, good for their country. Remarkably, in the traditionally more liberal UK the share is lower, at 77 per cent, and in the US barely over half, according to a Pew Global Attitudes Survey published earlier this year.

With many EU economies descending into recession and unemployment rising, enthusiasm for foreign trade will of course diminish. People fearing for their jobs and incomes are often happy to blame outside competition. The worry is that protectionist voices are growing louder around the world at a time when the multilateral trading system is severely weakened by the collapse of the Doha trade talks in July. However, while there is little chance of Doha – or any other ambitious trade deals – being concluded before economic conditions improve, the risk of a full-scale protectionist backlash appears small.

Most European countries trade more with their EU neighbours than with the rest of the world. Intra-EU trade is governed by the strict rules of the acquis, which does not allow any tariff or non-tariff barriers. The current recession will weaken EU countries’ commitment to state-aid rules, competition policy, as well as the liberalisation of services sectors and network industries such as energy. But the economic downturn would have to become truly catastrophic for trade barriers to re-appear within the EU.

The EU’s hands are also bound when it comes to trade with the outside world. Since the Great Depression, the world’s trading powers have conducted eight rounds of multilateral trade negotiations. As a result, tariffs on almost all manufacturing imports into the EU are low. And there are strict rules governing the use of ‘safeguard’ measures (to guard against surges in imports) and anti-dumping and anti-subsidy duties (to punish overseas producers that sell at artificially low prices). The EU could of course stretch, bend or even breach these rules to give temporary reprieve to, say, car companies, steel makers or clothing manufacturers (until a WTO court ruling resolves the issue). But such actions would probably only affect EU trade at the margins.

The failure of the Doha round does not substantially alter the trade regime of developed countries. However, unlike in the EU (and the US and Japan), developing countries are applying tariffs that are a lot lower (in some cases 20-30 per cent) than what they legally agreed to in previous trade rounds. Countries such as Mexico, India, South Africa or Korea could ramp up their tariff protection without breaching WTO rules. European politicians, and the Commission, could then come under pressure to retaliate. Moreover, a heavily Democrat-controlled US Congress could be a lot more hawkish on international trade. The main risk then is not that the rich countries will abandon their WTO commitments on a grand scale. It is that angry exchanges about economics poison the political atmosphere and make it more difficult for countries to work together on other issues, such as climate change.

Katinka Barysch is deputy director of the Centre for European Reform.

Comments

Added on 21 Nov 2008 at 20:12 by Anonymous

Brilliant article

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