SECRETARIA DE ESTADO DE ECONOMIA Y APOYO A LA EMPRESA

MINISTERIO DE ECONOMÍA Y DIRECCION GENERAL DE POLÍTICA ECONOMICA COMPETITIVIDAD '$' S.G. ANÁLISIS POLÍTICA ECONÓMICA Y FINANC. EMP.

CUADERNO DE DOCUMENTACION

Número 108 Anexo

Alvaro Espina 11 de Octubre. de 2016

Entre el 22-VII-2016 y el 1-X-2016

Anti-globalists Why they’re wrong Globalisation’s critics say it benefits only the elite. In fact, a less open world would hurt the poor most of all Oct 1st 2016 | From the print edition

IN SEPTEMBER 1843 the Liverpool Mercury reported on a large free- rally in the city. The Royal Amphitheatre was overflowing. John Bright, a newly elected MP, spoke eloquently on the merits of abolishing duties on imported food, echoing arguments made in The Economist, a fledgling newspaper. Mr Bright told his audience that when canvassing, he had explained “how stonemasons, shoemakers, carpenters and every kind of artisan suffered if the trade of the country was restricted.” His speech in Liverpool was roundly cheered. It is hard to imagine, 173 years later, a leading Western politician being lauded for a defence of . Neither candidate in America’s presidential election is a champion. Donald Trump, incoherent on so many fronts, is clear in this area: unfair competition from foreigners has destroyed jobs at home. He threatens to dismantle the North American Free , withdraw from the Trans-Pacific Partnership (TPP) and start a with China. To her discredit, Hillary Clinton now denounces the TPP, a pact she helped negotiate. In Germany, one of the world’s biggest exporters, tens of thousands took to the streets earlier this month to march against a proposed trade deal between the European Union and the United States (see article). In this section//Lessons of the debate/ Grozny rules in Aleppo/ A messy but necessary peace/For life, not for an afterlife The backlash against trade is just one symptom of a pervasive anxiety about the effects of open economies. Britain’s Brexit vote reflected concerns about the impact of unfettered migration on public services, jobs and culture. Big businesses are slammed for using foreign boltholes to dodge . Such critiques contain some truth: more must be done to help those who lose out from openness. But there is a world of difference between improving globalisation and reversing it. The idea that globalisation is a scam that benefits only and the rich could scarcely be more wrong.

The real pro-poor policy Exhibit A is the vast improvement in global living standards in the decades after the second , which was underpinned by an explosion in world trade. of goods rose from 8% of world GDP in 1950 to almost 20% a half-century later. - led growth and foreign investment have dragged hundreds of millions out of poverty in China, and transformed economies from Ireland to South Korea. Plainly, Western voters are not much comforted by this extraordinary transformation in the fortunes of emerging markets. But at home, too, the overall benefits of free trade are unarguable. Exporting firms are more productive and pay higher wages than those that serve only the domestic market. Half of America’s exports go to countries with which it has a free-trade deal, even though their economies account for less than a tenth of global GDP. Protectionism, by contrast, hurts consumers and does little for workers. The worst-off benefit far more from trade than the rich. A study of 40 countries found that the richest consumers would lose 28% of their purchasing power if cross-border trade ended; but those in the bottom tenth would lose 63%. The annual cost to American consumers of switching to non-Chinese tyres after Barack Obama slapped on anti-dumping tariffs in 2009 was around $1.1 billion, according to the Peterson Institute for International Economics. That amounts to over $900,000 for each of the 1,200 jobs that were “saved”. Openness delivers other benefits. Migrants improve not just their own lives but the economies of host countries: European immigrants who arrived in Britain since 2000 have been net contributors to the exchequer, adding more than £20 billion ($34 billion) to the public finances between 2001 and 2011. Foreign direct investment delivers competition, technology, management know-how and jobs, which is why China’s overly cautious moves to encourage FDI disappoint (see article). What have you done for me lately? None of this is to deny that globalisation has its flaws. Since the 1840s advocates of free trade have known that, though the great majority benefit, some lose out. Too little has been done to help these people. Perhaps a fifth of the 6m or so net job losses in American manufacturing between 1999 and 2011 stemmed from Chinese competition; many of those who lost jobs did not find new ones. With hindsight, politicians in Britain were too blithe about the pressures that migration from new EU member states in eastern Europe brought to bear on public services. And although there are no street protests about the speed and fickleness in the tides of short-term capital, its ebb and flow across borders have often proved damaging, not least in the euro zone’s debt- ridden countries. As our special report this week argues, more must be done to tackle these downsides. America spends a paltry 0.1% of its GDP, one-sixth of the rich-country average, on policies to retrain workers and help them find new jobs. In this context, it is lamentable that neither Mr Trump nor Mrs Clinton offers policies to help those whose jobs have been affected by trade or cheaper technology. On migration, it makes sense to follow the example of Denmark and link local-government revenues to the number of incomers, so that strains on schools, hospitals and housing can be eased. Many see

2 the rules that bind signatories to trade pacts as an affront to democracy. But there are ways that shared rules can enhance national autonomy. Harmonising norms on how multinational firms are taxed would give countries greater command over their public finances. A co-ordinated approach to curbing volatile capital flows would restore mastery over national monetary policy. These are the sensible responses to the peddlers of protectionism and nativism. The worst answer would be for countries to turn their backs on globalisation. The case for openness remains much the same as it did when this newspaper was founded to support the repeal of the Corn Laws. There are more—and more varied—opportunities in open economies than in closed ones. And, in general, greater opportunity makes people better off. Since the 1840s, free-traders have believed that closed economies favour the powerful and hurt the labouring classes. They were right then. They are right now. From the print edition: Leaders http://www.economist.com/news/leaders/21707926-globalisations-critics-say-it- benefits-only-elite-fact-less-open-world-would-hurt

Trade deals Hard bargain Lacking clear American leadership, the global trade agenda is floundering Oct 1st 2016 | GENEVA | From the print edition

ROBERTO AZEVEDO, the head of the World Trade Organisation (WTO), is not the architect of grand global trade deals that his title suggests. Sitting in his Geneva headquarters, he remembers only too well how the WTO’s Doha round collapsed under the weight of its own ambition. “Let’s do the trade deals that are in reach,” he says. Overambition is not the only problem. “Anti-trade rhetoric is catchy,” sighs Mr Azevedo. So catchy that it has infected deals beyond the WTO. The world’s most trumpeted regional trade deals are drifting out of grasp just when pep is most needed: on September 27th the WTO forecast that for the first time in 15 years, global trade growth this year, at just 1.7%, would not keep pace with global GDP. The Trans-Pacific Partnership (TPP), a deal between America, Japan and ten other countries around the Pacific, was signed in February but is now faltering. On September 26th Hillary Clinton and Donald Trump, the Democratic and Republican nominees for the American presidency, fought to distance themselves from it in their first televised

3 presidential debate. Mr Trump labelled the deal “almost as bad as NAFTA” (the North American Free Trade Agreement, which came into force in 1994 and which he sees as the worst thing ever to happen to American manufacturing). In this section// Hard bargain/ The little cartel that could/ Slip slidin’ away/ Taking it to 11/ Warping the loom/ Tests of character/ Cornering the market/ Fat help/ Down to earth The TPP is deeply controversial among the minority of Americans who have heard of it (a recent poll found that only 29% had, and most of them were unaware it excludes China). Nevertheless, Barack Obama wants to push it through in the “lame-duck” session of Congress at the end of this year. There he faces a mixture of poisonous partisan politics and genuine concerns over the deal. Many Republicans would relish thwarting an important part of Mr Obama’s legacy. Winning the Democratic votes he needs would be a stretch.

The EU is also choking on its own processes when it comes to trade deals. After a recent bout of energetic protests against the Comprehensive Economic and Trade Agreement (CETA), a trade deal between the EU and Canada, an informal meeting of European trade ministers in Bratislava on September 23rd gave it the green light. But it could yet be undermined by any one EU member that refuses to ratify. The Austrians look particularly reluctant. If CETA is fragile, the Transatlantic Trade and Investment Partnership (TTIP), a deal still being hammered out between the EU and America, is flailing. Negotiations have proceeded at a snail’s pace. Britain’s vote to leave weakens the EU’s clout and makes the Americans even less amenable to meeting European concerns. Looming French and German elections have made protests against it harder to ignore. In Bratislava the ministers grudgingly agreed to continue talks. If the deal is not done by the time the next president is inaugurated, “there will be a natural pause,” says Cecilia Malmstrom, the EU’s trade commissioner. A revival would not be imminent. A nasty brew of opportunistic politicking and sceptical (and often misinformed) electorates is largely to blame for this halting progress. But there are other reasons why trade liberalisation is getting harder. TPP reduces some bilateral tariffs and quotas, such as those covering America’s of cars and Japan’s of beef. But since the deal includes the other NAFTA members (Canada and Mexico) and four other countries with which America already has bilateral free-trade agreements, most of it focuses on “behind the border” non- barriers: ie, on harmonising regulations, removing privileges for state-owned enterprises, protecting and so on. Such issues raise even greater hackles than old-style tariff-reduction talks; they inevitably encroach on areas covered by domestic law. The drugs don’t work Since tariffs are already on average below 3% between America and the EU, TTIP is even more focused on this sort of deep integration. But, to take just one example, persuading one drug-approval authority to update its regulations along with another is really hard; negotiators underestimated the difficulty of the task at hand. In both TPP and TTIP, investor-state dispute settlement provisions have provoked particular controversy. These set up a system for foreign investors to sue national governments if they breach standards of fairness. Opponents see them as a way for corporate fat cats to sue elected governments for things they don’t like. Christian

4

Odendahl, an economist at the Centre for European Economic Reform, a think-tank, says that including such a controversial provision in TTIP was probably a mistake; legal systems in America and Europe are developed enough for investors not to need the extra legal certainty. The short-run trade impact of the collapse of TPP and TTIP would not be huge, because of their focus on rule-setting rather than tariff-scrapping. But it would mean an American retreat from its leadership role in global trade liberalisation. Mr Obama has advertised TPP as essential if America, not China, is to set the “rules of the road” for trade in the 21st century. A trade agenda led by China would be less ambitious than the American-led one. Hopes for global rules covering trade unions, competition from state-owned enterprises and free movement of data would fade, in favour of tariff reduction. Attention would shift to the Regional Comprehensive Economic Partnership (RCEP), a more traditional deal between the ten members of the Association of South-East Asian Nations and six other countries, including China, India and Japan. RCEP would, however, harvest much more of global trade’s low-hanging fruit. Its member countries cover 36% of global goods exports in 2015, compared with 28% for the TPP. Tariff walls protecting emerging markets are much higher than those around developed countries—China still has on average 10% tariffs, compared with 5% in Europe and under 4% in America—so the immediate boost to the economy from lowering them would be higher. As for the WTO, it will for now push “plurilateral” deals of its own, which embrace enough WTO members to be significant but which avoid the quagmire of having to secure the agreement of all its 164 members. It already boasts some successes: in September, for example, China started cutting tariffs on technology goods as part of the plurilateral Information Technology Agreement. Indeed, the failure of TPP and TTIP could provide an opportunity for the WTO to re- emerge as the main forum for the trade-liberalisation agenda. A return to the ambitious visions of the past, however, is unlikely. Mr Azevedo can imagine the WTO brokering another global trade deal, but only when expectations have been managed down from Doha. Above all, the politics needs to be fixed. Few political leaders around the world have done much to squash the anti-trade bug. To them Mr Azevedo says: “You have to speak up for trade.” But Mr Trump is speaking up for protectionism; and Mrs Clinton would rather change the subject. From the print edition: Finance and economics http://www.economist.com/news/finance-and-economics/21707940-lacking-clear- american-leadership-global-trade-agenda-floundering-hard

5

Business in China Mixed messages A missed opportunity to improve the environment for foreign companies in China Oct 1st 2016 | SHANGHAI | From the print edition

LI KEQIANG, China’s prime minister, made a big promise to the world’s leading businessmen at the ’s annual gathering in Davos in January 2015. It was that China would introduce a new legal regime for foreign investment that would “treat Chinese and foreign companies as equals”. Its government has duly unveiled a set of revisions to its foreign-investment laws that come into force on October 1st. The standing committee of the National People’s Congress adopted the laws earlier this month and bureaucrats have drafted detailed rules. The revisions, and the extent to which they fulfil Mr Li’s grand pledge, are an important indicator of how serious the government is about pursuing other initiatives to liberalise rules on foreign investment. China is currently negotiating a bilateral investment treaty (BIT) with the United States. American businesses hope it will lead to greater market access. A BIT with Europe is scheduled to follow. In this section// Jump-start/Blot on the landscape/Doesn’t ad up/Not always in clusters/Prick up your ears/Don’t limit the revolution How, then, do the changes measure up? On the face of it, they involve a welcome shift away from the current regime, which obliges foreign firms to win numerous approvals and is both burdensome and often influenced by domestic politics. The new framework pursues efficiency. Instead of demanding approvals, it seeks to usher in a simpler, registration-based system. Whereas the current approach is based on a long list of strategic industries in which foreign investment is either restricted or off-limits, the overhaul promises to replace it with a relatively short “negative list” of forbidden investments in areas such as defence and media. According to some, such as Hogan Lovells, a law firm, the reforms herald a sea-change in China’s foreign direct investment (FDI) regime.

Yet the revisions leave intact much that is wrong. China has kept a complex set of rules restricting inflows for decades. As well as the long-standing practice of deeming many industries strategic, the government still requires foreign firms to form joint ventures with Chinese companies and to hand over intellectual property via technology transfers. Repatriation of profits is tightly controlled. And because the approvals-based approach

6 is likely to persist, despite official promises, every foreign investment is subject to the vagaries and corruption that comes with a one-party, highly bureaucratic state. Most glaringly, there is nothing in the new changes that genuinely places foreign firms on an equal legal footing with local ones. The EU Chamber of Commerce in China dismissed the new reforms as “not bold enough”. It issued a thinly veiled warning that the EU may make it harder for Chinese to invest in Europe. Another big omission is the government’s failure to tackle the problem of offshore legal structures known as variable interest entities (VIEs). Foreign investment is banned in Chinese internet companies, but by getting foreigners to put money into VIEs to which the Chinese firm promises to pay dividends, many firms have got around this ban. A proper reform would have ended the ambiguity surrounding these vehicles. It was not forthcoming. The tape is red There are already signs of bureaucratic resistance even to the government’s modest revisions. It is questionable, for example, whether officials will accept the shift from an approvals-based scheme to a registration system. Bureaucrats at the top economic planning agency, the National Development and Reform Commission, are said to reject the idea that the approvals-based system is coming to an end. They say the new rules are just a modification of the existing approach to foreign investment.

Meanwhile, multinationals are no longer clamouring to put money into China’s slowing economy. FDI has been flooding into the Middle Kingdom for two decades. Inbound direct investment reached a peak of nearly $300 billion in 2013 but has cooled off since. Foreign inflows are slowing just as Chinese outward investments are skyrocketing (see chart). It seems exactly the right moment to roll out the welcome mat, but the changes going into effect fall well short of what multinationals had hoped for. As Jake Parker of the US China Business Council, a lobby group for big American firms, points out, Chinese leaders have talked about lots of reforms but “the lack of implementation has created uncertainty about the policy direction and undermined confidence.” From the print edition: Business http://www.economist.com/news/business/21707954-missed-opportunity-improve- environment-foreign-companies-china-mixed-messages

7

Graphic detail /Daily chart What explains today’s falling interest rates? Sep 28th 2016, 14:17 BY THE DATA TEAM

SOMETHING is amiss in global bond markets. This month, Sanofi, a French drugmaker, and Henkel, a German manufacturer of detergent, both issued bonds with a negative yield. Investors will make a guaranteed cash loss if they hold the assets to maturity. In July, Germany became the first euro-zone government to issue debt that promises to pay back to investors less than the sum it raised from them. More than a dozen rich-country sovereign bonds now have negative yields. The debt-laden are delighted with the persistence of low rates. But savers are increasingly grumpy. Economists are simply baffled. The current combination of low nominal and real interest rates is unprecedented. Mervyn King, a former governor of the Bank of England, and David Low of New York University have estimated a real interest rate for G7 countries, excluding Italy, using data on inflation-protected bonds going back to the mid-1980s. It shows a steady decline over the past 20 years. From 1985 to 2008, real rates fell from above 4% to around 2%. Since the start of 2008, real long-term rates have fallen further, and faster, to around -0.5%. Today’s interest-rate mystery has several possible explanations. Many blame central banks, which have pushed short-term interest rates to zero and kept them there. They have also spent huge sums of electronic cash buying long-term bonds. Others argue that central banks are merely responding to underlying forces such as ageing populations and the integration of China into the , two developments which may be contributing to a worldwide “savings glut”. Some reckon the drop in interest rates reflects a downwards shift in underlying trend growth, a phenomenon Larry Summers of has dubbed “secular stagnation”. Whatever the cause, it looks like savers will have to pay someone else to hold their money for the foreseeable future. http://www.economist.com/blogs/graphicdetail/2016/09/daily-chart-21

8

Charlemagne A tale of two ethics Why many Germans think impractical idealism is immoral Oct 1st 2016 | From the print edition

THE phrases “ethic of conviction” and “ethic of responsibility” mean little to most English-speakers. In Germany the equivalent terms—Gesinnungsethik and Verantwortungsethik—are household words. Pundits drop them casually during television talk shows. Hosts use them as conversation-starters at dinner parties. The concepts draw on the opposition between idealism and pragmatism that runs through politics everywhere. But they also capture a specific moral tension that is “very German”, says Manfred Güllner, a sociologist and pollster. Anyone interested in understanding German politics, on anything from the euro to refugees, would do well to get a handle on them. The terms come from the sociologist Max Weber, who used them in a speech he gave in January 1919 to a group of leftist students at a Munich bookstore. Germany had just lost the first world war. The Kaiser had abdicated, the country was in the throes of revolution and Munich was about to become the capital of a short-lived “Bavarian Soviet Republic”. Armed with only eight index cards, Weber gave a talk that would become a classic of political science. (“Politics as a Vocation” was published in English only after the second world war.) The lecture ranged broadly through history, but its main purpose was to curb the Utopian romanticism then gripping the ideologues fighting over the direction of the new Germany, including those sitting in front of him. In this section// Boundary issues/ Chains of command/ Brought to BUK/ Immune to reason/Cocoa by candlelight Weber described an “abysmal opposition” between two types of ethics. Those following their convictions wish to preserve their own moral purity, no matter what consequences their policies may have in the real world. “If an action of good intent leads to bad results, then, in the actor’s eyes, not he but the world, or the stupidity of other men, or God’s will who made them thus, is responsible for the evil.” By contrast, someone guided by responsibility “takes account of precisely the average deficiencies of people… (H)e does not even have the right to presuppose their goodness and perfection.” This sort of politician will answer for all the consequences of his actions, even unintended ones. Weber left no doubt about his sympathies. Ethicists of conviction, he said, were “in nine out of ten cases windbags”. The prevailing view today, like Weber’s in 1919, is that “Germany has a surfeit of Gesinnungsethik,” says Wolfgang Nowak, who served as an adviser to Gerhard Schröder when he was chancellor. The postwar yearning of Germans to atone for their

9 nation’s Nazi past through extravagant moral posing exacerbates the tendency. In general, the ethic of conviction is most prevalent among leftists and Protestants, and slightly less so among conservatives and Catholics, says Mr Güllner. Thus the Social Democrats, who view themselves as crusaders for social justice, often give the impression that they are not only “unable but unwilling” to govern, lest they bear actual responsibility, Mr Güllner thinks. That may explain why there has been a Social Democratic chancellor for only 20 years since 1949, compared with 47 years under the Christian Democrats. Many of Germany’s most strident pacifists, meanwhile, are Lutherans. Margot Käßmann, the church’s former leader, dreams of Germany having no army at all. She disavows force even to prevent or stop a genocide. But an ethic of conviction also runs through the centre-right, which since the 1950s has approached the European project as an end in itself, a way for Germany to become post-national and dissolve its guilt along with its sovereignty. In the process, Germans deliberately overlooked the fact that most other Europeans never shared this goal. Once the euro crisis erupted, many conservatives opposed bail-outs out of an ethic of conviction, argues Thilo Sarrazin, a controversial pundit. They wanted to decry rule-breaking by crisis countries as inherently bad—even at the cost of letting the zone unravel. The ethic of responsibility holds that such stances are not merely impractical but wrong, and that what will not work cannot be moral. Those governing Germany have mostly been of this camp. In the 1980s millions of Germans marched against the modernisation of NATO’s nuclear arsenal, but Chancellor Helmut Schmidt let the missiles deploy, accepting the grim logic of deterrence. (His reward from his fellow Social Democrats was largely disdain.) In the euro crisis, Angela Merkel reluctantly agreed to bail-outs in order to hold the currency zone together. Transports of joy That is what makes Mrs Merkel’s historic opening of Germany’s borders to refugees on September 4th, 2015 so remarkable. “She galloped away with an ethic of conviction,” says Konrad Ott, a professor of philosophy and author of a book on migration and morality. At the time this aligned her with a euphoric “welcome culture”, as ordinary Germans volunteered to help refugees and the press celebrated the country’s humanitarian example. Mrs Merkel refused to put a numerical limit on accepting human beings in dire need, a position she still maintains. But as predicted by ethicists of responsibility (in whose ranks Mrs Merkel is usually found), the mood soon turned. Other Europeans accused Germany of “moral ”, the flip side of Gesinnungsethik. And many Germans felt that too much was being asked of their society. Some, in a development that would not have surprised Weber, turned xenophobic. The history of the past year can thus be seen as Mrs Merkel’s attempt to return to an ethic of responsibility without betraying her convictions. This includes biting her tongue as she deals with an increasingly authoritarian Turkey, whose cooperation she needs to reduce the migrant flows, and other moral compromises. Max Weber would have found her dilemma compelling. Even someone with an ethic of responsibility, he said, sometimes “reaches the point where he says: ‘Here I stand; I can do no other.’ That is something genuinely human and moving.” http://www.economist.com/news/europe/21707959-why-many-germans-think-impractical-idealism- immoral-tale-two-ethics?fsrc=permar|text2

10

Daily Morning Newsbriefing September 30, 2016 Thank God it's Friday Deutsche Bank is back at the top of the headlines today, after it became known that a number of hedge funds had withdrawn excess liquidity from its prime brokerage unit, which admitted "perception issues". Thank God it's Friday, and Monday is a bank holiday in Germany, because that will give Deutsche Bank a couple of days or three to work on those perceptions. That the holiday is celebrating German unification adds a further ironic twist to the narrative. In what could be a very expensive disclosure of confidental client matters, "a person familiar with the situation who declined to be identified talking about confidential client matters" told Bloomberg that about ten hedge funds using Deutsche Bank as an intermediary had moved some of their holdings of listed derivatives to other firms. The explains that these hedge funds have imposed position limits on their exposure to Deutsche Bank because of the recent negative news on the bank and its elevated credit risk as measured by credit default swaps. Although the German stock market was closed, trading on Deutsche Bank continued in American and Asian exchanges through depository receipts, which are securities backed by holdings of foreign shares. ADR closed under 7% down for the day in New York. US bank stocks were dragged down between 1% and 4% as a result. How serious is the liquidity situation? We can't know the size of the withdrawals that have been made, but with this all over the financial news one could expect more hedge funds to follow suit. Deutsche Bank reported in its latest quarterly financial statements that its funding from "other customers" including prime brokerake added up to €71bn (net). The bank also reported a liquidity reserve of €223bn, including cash, highly liquid securities, and other central-bank eligible collateral. Its total external funding was €992bn, but it also reported a regulatory liquidity coverage ratio of 124%. This means Deutsche Bank has 24% more high quality liquid assets than it needs to meet its liquidity needs for 30 days, in a stressed scenario of lack of access to market liquidity. Is this a new Lehman moment? There are a number of important differences between now and 2008. Derivative positions are generally backed by cash collateral these days. There is the requirement to hold high quality liquid assets with an ample liquidity coverage ratio, and central banks are ready to provide unlimited liquidity (against good collateral) as a matter of course and not as an emergency measure. But, like we said at the beginning, it would be a good thing if the long weekend of German unity were used to put to rest the perception issues surrounding Deutsche Bank since the $14bn figure for the DoJ fine was leaked. Our other stories We also have stories on Commerzbank laying off 10,000 staff; on Pedro Sanchez' future, or lack thereof; on a CDU revolt over Greece; on French budget promises; on what happened to Arnaud Montebourg's campaign; and on why a hard Brexit is far from inevitable.

11

12

Daily Morning Newsbriefing September 29, 2016 The PSOE's slow-motion implosion The PSOE is in an open internal conflict after 17 members of its federal executive commission resigned yesterday to force the ouster of party leader Pedro Sánchez, which together with three earlier vacancies brings the executive down to 18 members out of its original 38. That the move was expected since Monday does not lessen the shock of it. At the moment opinions range from calling the move a coup by the party machine to those seeing it as a necessary measure to save the party from Sánchez. El País, which carries a lot of weight with the PSOE base but probably much less than thirty or even ten years ago, writes in an editorial that any level-headed party leader would have resigned after the poor results in the regional elections held in Galicia and the Basque country last weekend, but that Sánchez is "a fool without scruples." The rebellion against Sánchez was precipitated by his decision to call a party congress in six weeks' with a leadership contest in mid-october. His internal opponents would have preferred him to resign, allowing them to set up a steering committee that would have diluted the responsibility of abstaining to enable Mariano Rajoy to renew his PM mandate. Sánchez instead doubled down on his intention to seek an alternative majority to Rajoy, with Podemos and the centre-right Basque and Catalan nationalists if necessary - given that Ciudadanos excludes a deal with Podemos and insists the responsible thing is for the PSOE to allow the PP to govern. Much of the manoeuvering within the Socialist party since the elections last December has been about preventing Sánchez from making a deal with Podemos and the Catalan separatists. Former PSOE leader Felipe González is widely seen as having triggered the rebellion with a radio interview yesterday, in which he said he felt deceived by Sánchez - who according to González had told him after the June elections that he would allow a Rajoy minority government. Sánchez responded that the decision to vote no to Rajoy had been taken by the party's federal committee. What will happen now? El País' editorial articulates the argument of the rebels: that the resignations should give way to a steering committee which should call a party congress after Spain has a government, and that Sánchez' refusal to step down even now sets the PSOE on a course to self-destruction. The interpretation of the loyalists is that the PSOE bylaws require the now decimated executive commission to call a meeting of the nearly 300-strong federal committee which must then call a party congress to appoint a new executive. In the meantime, the critics claim that the current executive is effectively dissolved and cannot continue to function. The executive commission, which meets this morning, had already convened a federal committee this coming Saturday, to vote on Sánchez' proposed congress and leadership contest. The most likely outcome is that the Saturday meeting will go ahead as planned, and will decide whether to hold the congress immediately according to Sánchez' plan, or to appoint a steering committee. What does this mean for Spain's government? There are three scenarios under which Mariano Rajoy can be voted as PM before November 1st, when the parliament would be dissolved for new elections. Either a PSOE steering committee gets appointed this weekend and decides the party will abstain to wave Rajoy through; or Sánchez will get

13 his congress but lose it - presumably to Andalusian regional premier Susana Díaz; or after Sánchez wins the congress a small group of PSOE MPs break ranks and abstain on Rajoy anyway. Rajoy needs eleven abstentions to become PM, or only one if he can convince the Basque nationalist PNV to vote for him in exchange for PP support for the PNV in the Basque country. Even if Sánchez wins the PSOE congress and keeps control of his parliamentary group, the odds that he can successfully negotiate an alternative majority to Rajoy are slim. In the best scenario he would have a week after the leadership contest to get appointed PM. Repeat elections would probably not take place on Christmas day, but a week earlier, on December 18. The political parties have struck a deal that will allow them to reform the election law to shorten by one week the time between when elections are called and election day. This is expected to make it through parliament by the end of October. Our other stories We also have stories on whether a rescue of Deutsche Bank is likely; on doubts over the French budget; on doubts over the Italian budget; on legal obstacles to Brexit; on Greek debt relief; and on whether debt matters.

14

Fedea pide subir impuestos para evitar más recortes en el Estado del Bienestar El gasto público de España se acerca a la media europea tras la crisis por las secuelas de la crisis

Jesús Sérvulo González

Madrid 26 SEP 2016 - 19:34 CEST

RAFAEL RICOY Un informe presentado por Fedea, un reconocido think tank económico, defiende la necesidad de aprobar una reforma fiscal con el objeto de aumentar la recaudación fiscal y evitar así nuevos recortes de gastos sociales como la educación, sanidad y prestaciones sociales. Los investigadores, que analizan la evolución del gasto público entre 2007 y 2014, concluyen que las Administraciones españolas están entre las que menos dinero consumen de toda la Unión Europea. MÁS INFORMACIÓN • España tiene el segundo déficit público más abultado de Europa • España sostiene pensiones y ayudas al paro y recorta educación y sanidad La brecha entre el nivel del gasto público de España y el del resto países de la Unión Europea (UE) se ha reducido en los últimos años. “Esta evolución no se debe a un proceso de convergencia con los Estados de bienestar europeo sino más bien a aumentos de partidas estrechamente ligadas con el envejecimiento de la población (pensiones) y la crisis (desempleo e intereses)”, señala el informe Evolución del gasto público por funciones durante la crisis: España frente a la UE, elaborado por Ignacio Conde-Ruiz, Manuel Díaz, Carmen Marín, y Juan Rubio-Ramírez, investigadores de Fedea, la fundación de estudios de economía aplicada, patrocinada por empresas del Ibex. El nivel de gasto público español ha crecido en cinco puntos de PIB desde el estallido de la crisis financiera, desde el 38,3% del PIB en 2006 al 43,3% el año pasado, según Eurostat, la oficina estadística europea. Este aumento se produce a pesar de la estela de recortes en los servicios públicos que se produjo durante el segundo tramo de la Gran Recesión.

15

“Los ciudadanos deben darse cuenta que no es posible mantener un país con un fuerte Estado de bienestar, similar al de la media europea, y al mismo tiempo tener una recaudación inferior”, advierten los economistas. Y remachan: “La única salida a la crisis fiscal es continuar con el recorte del Estado de bienestar o aumentar los ingresos públicos”. Y ante esta disyuntiva, los analistas recomiendan subir impuestos. Los investigadores de Fedea dividen la crisis en dos fases: Una primera entre 2007- 2009, cuando los países europeos trataron de combatir la depresión con aumentos de gasto, mucho del cual se destinó a rescatar a entidades financieras europeas. En este periodo, “España aumenta todas las partidas de gastos destacando el aumento del destinado a desempleo (un 1,5% del PIB más), servicios generales (aumenta un 1,1%), pensiones (1,1% más) y sanidad (una subida del 1,1%)”, contiene el estudio. En esos primeros años de turbulencias financieras, el Gobierno socialista de la época introdujo el Plan E y el fondo especial de I+D para sectores estratégicos. “Las finanzas públicas pasaron de un superávit del 2% del PIB a un déficit del 11% en 2009”, recuerda el informe. El aumento del gasto en los grandes países europeos en esos años fue del 5,6 puntos porcentuales del PIB mientras que en España subió un 7%. Austeridad a ultranza

16

A partir de 2009 los vientos fríos del norte de Europa hicieron cambiaron las políticas presupuestarias. Se extendió por el continente la tesis de que la austeridad a ultranza era el bálsamo para reparar las ajadas cuentas públicas. Desde las autoridades comunitarias se recetaron grandes dosis de ajustes y recortes. En España se redujo el sueldo de los funcionarios, se congelaron pensiones en 2010, se subieron impuestos y en 2012, el Ejecutivo popular, dio un tajo al gasto social, Se redujo la sanidad, la educación, prestaciones por desempleo... Aún así el gasto de las Administraciones Públicas españolas se redujo solo un 2,5% a partir de 2010 —el aumento de las pensiones de jubilación por el efecto demográfico se comió buena parte de los ajustes— frente al 2,9% que lo bajó de media los 15 grandes países de la UE. La fotografía completa del periodo 2007-2015 refleja una imagen de España en la que subió el gasto más que la media de la UE al principio de la crisis y lo bajó menos en la segunda parte. El estudio insiste en que durante todo el periodo el gasto sanitario, educativo y de protección social se ha reducido pero está evolución se compensa con el alza de los intereses de la deuda —que casi se ha triplicado hasta el 100% del PIB—, el gasto por paro y en pensiones. A pesar de ello, “si analizamos el gasto total sin intereses y desempleo, España es el segundo país de la UE-15 con un menor nivel de gasto tan solo por detrás de Irlanda”, abundan los expertos. http://economia.elpais.com/economia/2016/09/26/actualidad/1474885405_700267.html

17

Daily Morning Newsbriefing September 28, 2016 Zombies everywhere A big piece of news in European banking that got eclipsed by the Deutsche Bank scare is Unicredit's plan to raise as much as €16bn with a combination of asset sales and a rights issue. Unicredit has an analyst-estimated capital shortfall of €7bn to €8bn, but intends to cap the size of its rights issue at €5bn-€6bn, for which it is said to consider selling the online broker FinecoBank, and a 40% stake in its Polish subsidiary Bank Pekao. The bank had already sold bits of both shortly after replacing its CEO in July. This is in addition to disposing of €20bn in gross NPL, as well as the already announced sale of asset manager Pioneer. A source for indicated that Unicredit may be trying to front-run Monte dei Paschi di Siena by executing its capital increase in November. Another €5bn rights issue and €20bn gross NPL sale will make it all the more difficult for MPS to raise its own €5bn and sell €27bn gross NPL by year-end as planned. Corriere della Sera writes that MPS is preparing to approve its industrial plan next month and then to pass its capital increase through a general meeting in mid November. Then there will be an offer for the voluntary equity conversion of €4.5bn in subordinated bonds, of which €2.2bn are in the hands of 40,000 retail customers. The goal is to bring the size of the necessary right issue down from €5bn, for which there is little appetite in the markets. To bolster the success of the rights issue, MPS is said to be looking for an Asian or Middle-Eastern "anchor investor" that would take a stake in the bank. In Germany, Spiegel writes that Commerzbank will this week launch a drastic restructuring plan involving cutting 9,000 jobs - nearly one in five - and withholding dividends, which have averaged €250m per year. The bank intends to improving its IT, which would make part of its back-office staff redundant, and to outsource some functions to external firms. According to Spiegel there will also be a restructuring of business lines, with its small firm customers being directed to the private banking arm, and large firms to the investment banking arm. The magazine writes Commerzbank is settling for the role of a large savings bank. Despite the restructuring plan, Handelsblatt writes Commerzbank is bidding to acquire Oldenburgische Landesbank (OLB) from Allianz. Apollo, a US private equity firm, is also said to be after OLB, a regional bank in northwest Germany capitalising about €300m. There have been rumours that Allianz wanted to get out of the banking business for years, having sold Dresdner bank in 2009. As over the future of Deutsche Bank rages, Andreas Dombret, Bundesbank head of supervision, butted in comparing Europe's large banks to dinosaurs facing extinction from a changed environment including reduced debt levels, fintech competition, demographic pressures and low interest rates, reports Reuters. He also suggested the focus on business models may be misplaced and the banking sector as a whole needs to shrink. For this, political support for banks should end. For what it's worth, DB CEO John Cryan told Handelsblatt that the bank does not need to raise capital.

18

Our other stories We also have stories on the stagnation of world trade; on Spain's dismal budget execution; on how to screw VW without bankrupting it; on the Greek multi-bill; on a Greek pension fund in trouble; on Irish water charges; on Ireland's budget; on Sarkozy's outlandish plan to reverse Brexit; on Sarkozy's friend-turned-enemy; and on slowly dawning Brexit realism.

19

Compétitivité : la France a progressé Le Monde.fr avec AFP | 28.09.2016 à 01h08 • Mis à jour le 28.09.2016 à 10h18 Pour la deuxième année de suite, la compétitivité de la France a continué de s’améliorer, révèle le dernier rapport (2016-2017) sur le sujet, établi par le Forum économique mondial (WEF – World Economic Forum) et rendu public mercredi 28 septembre à Genève (Suisse).

L’Hexagone occupe désormais le vingt et unième rang mondial, après le vingt- deuxième en 2015-2016 et plusieurs années de reculs successifs. La France reste cependant encore éloignée de la quinzième place, qu’elle avait obtenue en 2010, selon le WEF, qui organise chaque année le Forum de Davos.

Lire aussi : Pourquoi le « paradoxe de la productivité » est une réalité

L’étude, réalisée auprès de 140 000 chefs d’entreprise dans 138 pays, donne un classement mondial des pays les plus compétitifs, sur la base de douze piliers, perçus comme des indicateurs, comme par exemple les infrastructures, l’environnement macroéconomique, la santé, l’éducation primaire, l’efficacité du marché du travail ou encore l’innovation.

« Garder et recruter des talents »

Concernant la France, les économistes du WEF relèvent que deux éléments lui ont permis de gagner une place : « une amélioration de l’environnement macroéconomique », grâce à la réduction du déficit budgétaire public, et une « amélioration de la sophistication des entreprises » – terme représentant « la qualité des réseaux d’entreprises » ainsi que la qualité du management et des services de marketing.

Lire aussi : Déficits : les raisons d’une transgression

Le rapport rappelle également les points faibles du pays, telles une « lourde dette publique et une inflation proche de zéro », qui restent des « sujets de préoccupation et un important frein économique ». Le WEF salue en outre les efforts du gouvernement français à faire adopter la loi travail, en dépit « d’une opposition considérable », qui devrait donner un coup d’élan à la compétitivité.

La France devrait aussi veiller « à garder et à recruter des talents ». Dans ces domaines, elle a perdu respectivement vingt-trois et neuf rangs, illustrant le fait que de nombreux diplômés préfèrent quitter le pays , qui par ailleurs attire moins de scientifiques et d’ingénieurs étrangers.

Percée de l’Inde, recul du Brésil

20

Le trio gagnant du classement 2015-2016 occupe encore les premières places de celui de 2016-2017, soit la Suisse, Singapour et les Etats-Unis. Les Pays-Bas, l’Allemagne et la Suède occupent les quatrième, cinquième et sixième rangs, suivis par le Royaume- Uni (septième), le Japon (huitième), Hongkong (neuvième) et la Finlande (dixième).

Parmi les pays émergents, la Chine reste première et occupe globalement la vingt- huitième place. L’Inde a fait une énorme percée, gagnant seize rangs. Elle est désormais trente-neuvième. La Russie et l’Afrique du Sud gagnent aussi deux places pour se hisser, respectivement aux quarante-troisième et quarante-septième rangs. Le Brésil continue en revanche de reculer et occupe désormais la quatre-vingt-unième place.

Concernant le Moyen-Orient, le WEF relève que la baisse des prix du pétrole ne fait que renforcer l’urgence de promouvoir des programmes de développement de la compétitivité dans l’ensemble du monde arabe. Dans cette région, trois pays figurent parmi les trente premiers du classement, soit les Emirats arabes unis (seizièmes), le Qatar (dix-huitième) et l’Arabie saoudite (vingt-neuvième).

En Afrique subsaharienne, le Rwanda est l’un des pays qui a le plus progressé, gagnant six places pour se hisser au cinquante-deuxième rang. http://www.lemonde.fr/economie/article/2016/09/28/competitivite-la- france-a-continue-a-ameliorer-son-rang_5004481_3234.html

21

Daily Morning Newsbriefing September 27, 2016 Germany's toxic bank All eyes this morning are on Hillary Clinton's supposed victory. Our focus over the last 24 hours has been the astonishing events surrounding Deutsche Bank. Hardly a day passes by when somebody is not asking us what will happen to it. Will the German government bail it out? What would be the consequences? What would be the implications for the rest of Europe, especially on the Italians, who have been observing EU rules fastidiously. Deutsche Bank yesterday took a new hit in the financial markets: share price down over 7%, CoCos down 3%, CDS spread over 250bp. Deutsche bank's CDS have been elevated since the start of the year, and the recent stock price movements fit an 18- month trend where the share has lost two thirds of its value. What's different this time is the external circumstances. Monday's movements are likely the reaction to reports - denied by both parties - that the bank sought help from the German government in relation with an impending US Department of Justice fine over the mis- selling of subprime mortgage-backed securities. The German government would neither provide diplomatic help, nor consider a bail-out. The problem is not the fine itself, but its size, which according to leaks could reach $14bn. This is well above the €5.5bn that the bank said earlier this year that it had provisioned for legal costs. As long as there is uncertainty over the possibility that the fine exceeds Deutsche Bank's legal provisions, markets can be expected to be nervous. About half of DB's legal provision is reportedly earmarked for the mortgage case. Frankfurter Allgemeine suggests that the leak of the larger DoJ figure may have been in reaction to the bank disclosing that it expected to be fined up to $2.5bn in the case. In a comment on Frankfurter Allgemeine, Franz Nestler blames DB's CEO John Cryan for this, which is strange given that he cannot be blamed for the original malfeasance as he's only been in charge for some 15 months. Nestler also criticises Cryan for not having a plan to raise capital. The question is, then, will the DoJ fine exceed DB's ability to pay it, and how would that be resolved? Compared to DB's €1.8 trillion balance sheet, €14bn is a relatively small amount. In its Q2 financial statement, the bank reported under €21bn in retained earnings and €62bn in shareholders' equity, though its market capitalisation has dropped to under €15bn. The bank has over €160bn in long-term debt, €8bn of which subordinated. In its annual report it listed €12bn in hybrid Tier 1 and €8bn in Tier 2 capital instruments. And a fine does not impair its assets. So, it does not look like government help would be necessary. The problem is not Deutsche Bank, but the knock-on effects of, say, a bail-in of subordinated debt. We don't know who holds DB's subordinated debt - could there be German pension funds caught in there? The German government needs to worry about the systemic implications. While Deutsche Bank's activities are mostly outside Germany these days, the bank remains central to German interbank liquidity and foreign clearing operations. The bank is

22 clearly too large to fail, which is why the German government's principled denial of a readiness to help recapitalise the bank lack credibility. They don't want to be drawn into a recapitalisation debate ahead of the elections. And they certainly don't want to trigger any bail-in procedures, or break EU state aid rules. Our other stories We also have stories on Italy’s constitutional referendum in December; on the apparent lack of of a Brexit effect; on Pedro Sánchez challenged by his party; on Syriza’s different battle fronts; on Emmanuel Macron leading the polls on the left; and on Portugal still on track to reach the deficit target against all odds.

Campus

Article sélectionné dans la matinale du 26/09/2016 Découvrir l’application Comment le système éducatif français aggrave les inégalités sociales LE MONDE | 27.09.2016 à 05h36 • Mis à jour le 27.09.2016 à 07h26 | Par Aurélie Collas et Mattea Battaglia Des inégalités sociales à l’école, produites par l’école elle-même… C’est la démonstration que fait le Conseil national d’évaluation du système scolaire (Cnesco), en rendant publiques, mardi 27 septembre, les conclusions d’une vingtaine de rapports. Tout un spectre de la recherche – des sociologues aux économistes, des didacticiens aux psychologues, français et étrangers – a été mobilisé deux années durant, pour interroger ce mythe de l’égalité des chances dans notre système éducatif. Et rendre plus transparente la fabrique de l’injustice scolaire. Ce n’est pas la faute de l’enseignement privé, dont la responsabilité a encore été pointée du doigt, récemment dans nos colonnes, par l’économiste , en tout cas concernant Paris. Pas non plus celle des stratégies familiales ou de la crise économique. Ce vaste travail met en cause trente ans de politiques éducatives qui, au lieu de résorber les inégalités de naissance, n’ont fait que les exacerber. On le sait maintenant depuis plusieurs années : d’élève moyen dans les années 2000, l’école française est devenue la plus inégalitaire de l’Organisation de coopération et de développement économiques (OCDE). L’enquête internationale PISA, dont on attend la prochaine mouture en décembre, vient le rappeler tous les trois ans. Baisse des résultats des élèves défavorisés, amélioration du niveau des élites : le fossé se creuse. Lire aussi : Ecole : des inégalités profondes et persistantes L’éducation prioritaire, cause de discrimination négative Et c’est là une singularité française : la plupart des pays, à commencer par l’Allemagne, la Suisse ou les Etats-Unis, un temps considérés, eux aussi, comme très inégalitaires,

23 ont su mener, ces quinze dernières années, des politiques volontaristes. Encaisser le « choc PISA » et en tirer des conséquences. Pas la France. La synthèse du Cnesco détaille une « longue chaîne de processus inégalitaires » qui se cumulent et se renforcent à chaque étape de la scolarité : inégalités de traitement, inégalités de résultats, inégalités d’orientation, inégalités d’accès au diplôme et même inégalités d’insertion professionnelle. Limités à l’école primaire, les clivages explosent à partir du collège. C’est, par exemple, à ce niveau-là de la scolarité que les élèves des établissements les plus défavorisés, en fin de 3e, ne maîtrisent que 35 % des compétences attendues en français contre 80 % dans un contexte privilégié. A même niveau scolaire, ils ont deux fois moins de chances d’intégrer le lycée général. Voilà pour le diagnostic. Mais le Cnesco va au-delà en interrogeant les responsabilités. En premier lieu, la politique des ZEP en prend un coup. Fondée en 1981 sur le principe de la discrimination positive – « donner plus à ceux qui ont moins » –, l’éducation prioritaire aboutit, aujourd’hui, à produire de la discrimination négative : on donne moins à ceux qui ont moins. « Au départ pensé comme temporaire, le dispositif s’est étendu, les moyens se sont dilués, avec des effets de stigmatisation assez forts : dès lors qu’un établissement passe en éducation prioritaire, il y a une désertion des familles pour scolariser leur enfant dans un autre collège », résume Georges Felouzis, sociologue à l’université de Genève. Lire aussi : Réussite scolaire et employabilité, la France des inégalités En éducation prioritaire, la taille des classes n’est pas suffisamment réduite pour avoir un impact : seulement 1,4 élève en moins au primaire ; 2,5 élèves de moins au collège. Les enseignants y sont moins expérimentés : 17 % ont moins de 30 ans dans le secondaire, contre 9 % hors éducation prioritaire. Et beaucoup ne font qu’y passer. Réquisitoire sévère Mais là où un tabou tombe, c’est sur la qualité et le temps d’enseignement dispensés. Ainsi, au collège, les enseignants de ZEP estiment consacrer 21 % du temps de classe à « l’instauration et au maintien d’un climat favorable », contre 16 % hors de l’éducation prioritaire et 12 % dans le privé. C’est autant de temps en moins dédié à l’enseignement. Les 4 heures de français par semaine programmées en 3e deviendraient 2 h 30 en ZEP, 2 h 45 hors ZEP et 3 heures dans le privé. Problèmes de discipline mais aussi exclusions, absences d’élèves et d’enseignants, pèsent sur les emplois du temps. Qualitativement, aussi, le réquisitoire est sévère. « Les élèves de milieux défavorisés n’ont pas accès aux mêmes méthodes pédagogiques que ceux de milieux défavorisés, souligne la sociologue Nathalie Mons, présidente du Cnesco. En mathématiques par exemple, les tâches sont moins ambitieuses, les attentes plus basses, l’environnement pédagogique moins porteur. » Et cette différence de traitement est plus importante en France qu’ailleurs. Pour réduire son noyau dur d’échec scolaire, la France a, au fil du temps, toujours avancé les mêmes recettes par-delà les alternances politiques : plans de relance de l’éducation prioritaire, dispositifs dits de « compensation », ou encore formes diverses d’aide individualisée. Peu efficaces, ces aides ont été malgré tout reconduites dans le temps, faute d’évaluation, explique Nathalie Mons. Lire aussi : Le système éducatif français de nouveau très mal classé La mixité sociale, grande absente

24

L’organisme qu’elle préside en a dressé une frise chronologique impressionnante : depuis le « soutien aux élèves » de 6e et 5e institué en 1977, jusqu’à « l’aide personnalisée » instaurée par la réforme du collège de 2016, en passant par « l’aide individualisée » dans années 1990-2000, l’aide au travail personnel, etc. Leur limite est qu’elles « travaillent à la marge de l’école et des heures de cours, soutient le Cnesco, sans changer le quotidien des élèves ni insuffler une véritable pédagogie différenciée au sein de la classe ». Que penser de ce qui se joue depuis le début du quinquennat, alors que la lutte contre les inégalités a été inscrite au cœur de la loi de refondation de l’école (2013) ? Si le Conseil reconnaît des orientations « encourageantes » – scolarisation des enfants de moins de 3 ans, nouveaux programmes, heures dédiées au travail en petits groupes dans le « nouveau collège » –, il tacle « un défaut de mise en œuvre ». Surtout, toute politique restera peu efficace si « les écoles et les collèges les plus ségrégués ne font pas l’objet d’une politique volontariste de mixité sociale », estime le Cnesco. Or, la lutte en faveur de la mixité reste le grand absent des politiques scolaires depuis trente ans. Et ce ne sont pas les expérimentations à petite échelle engagées en fin de quinquennat, dans une vingtaine de territoires volontaires, qui sont de nature à amorcer un virage. http://www.lemonde.fr/campus/article/2016/09/27/comment-le-systeme-francais- aggrave-ineluctablement-les-inegalites-scolaires_5003800_4401467.html

25

Low long-term rates: bond bubble or symptom of secular stagnation? By: GRÉGORY CLAEYS DATE: SEPTEMBER 26, 2016 Executive Summary • Yields on European sovereign bonds have reached historically low levels in 2016, to between 0 percent and 1.5 percent in most cases, compared to above 10 percent at the beginning of the 1980s. This secular decline in long-term sovereign yields is not limited to the euro area, and can also be observed in the United States, the United Kingdom and Japan. • The decline in yields over the last 30 years and the most recent fall are the result of various factors: reduced inflation, low risk premia in European countries and, most importantly, the fall in the real (ie inflation adjusted) interest rate. • The decrease in the real rate is itself driven mainly by the secular decline of the ‘neutral’ rate – the short-term equilibrium rate between demand for and supply of funds compatible with full employment and price stability. • Central banks therefore cannot be blamed for the actual level of long-term real rates: they adopt, to fulfill their mandates, the necessary policies to influence market rates in order to make them consistent with neutral rates, over which they have little influence. • Given that the neutral rate is an important guide to monetary policy (and a good benchmark to determine if the current level of rates is justified), a growing empirical literature has tried to estimate where this neutral rate is. • Although there is uncertainty around the results, there is some evidence of time- variation in the neutral rate, with a downward trend since the 1980s. This suggests that the decline in real rates of the last 10 years is not the result of an overly accommodating monetary policy but of a combination of structural and cyclical factors. • The determinants of the fall in the neutral rate are all the factors affecting the supply and demand for funds. These include demographics, lower productivity growth, lower investment, rising inequality and shifting preferences for less risky assets. • The disappointing recoveries in advanced countries have raised the possibility that we might have entered a period of secular stagnation. Understanding the mechanism at work behind this phenomenon could thus be crucial to understand why rates are currently so low. • The main driver of secular stagnation appears to be the structural mismatch between the high proclivity of people to save and the low demand for those savings

26

to be translated into risky productive investment, leading to a lower and possibly negative real interest rate to clear the market for funds. • Although secular stagnation is an appealing hypothesis that provides an explanation for many of the economic features of the last 30 years, including the decline in real rates, it is too early to settle the debate. Nevertheless, even if secular stagnation remains a hypothesis, most of the structural features of secular stagnation are already weighing on growth and on interest rates. • Low rates are the symptoms of our diseases, not their cause. It is therefore crucial to tackle the structural causes behind the fall in long-term rates, but also to find solutions for the harmful consequences that lower equilibrium rates could have for the conduct of monetary policy. Introduction Yields on European sovereign bonds have reached historically low levels in 2016: German 10-year government bond yields stand at 0.03 percent, French at 0.25 percent, and Italian and Spanish yields are respectively at 1.37 percent and 1.07 percent. All were well above 10 percent at the beginning of the 1980s (Figure 1a). This secular decline in long-term sovereign yields is not limited to the euro area; it is also observed in the United States, the United Kingdom, Japan and Switzerland. Short-term policy rates in the euro area and elsewhere are also at historically low levels and far from their long-term average (Figure 1b). Given that short-term rates are constrained by the zero lower bound, this has resulted in a flattening of the whole yield curve. FIGURE 1: EUROPEAN INTEREST RATES

Source: Bruegel based on OECD Statistics, Bloomberg. Note: DF and MRO rates refer respectively to the European ’s Deposit Facility and Main Refinancing Operations rates. The German Discount Rate is the equivalent of today’s ECB Marginal Lending Rate. It is therefore legitimate to ask if the current levels of long-term yields on European sovereign bonds are justified, or if there is some kind of European bond market bubble

27 fuelled by ECB monetary policy. Unwarranted unconventional monetary policies that keep rates artificially low could distort the allocation of resources and produce harmful side effects. There is concern about a potential increase in financial stability risks because investors are searching for yield and because the profits of insurers, pension funds and banks are being strongly squeezed. There is also a fear that inequality could increase because of the rise in prices of assets that are held by only a small fraction of the population1. It is legitimate to ask if the current levels of long-term yields on European sovereign bonds are justified, or if there is some kind of European bond market bubble fuelled by ECB monetary policy. Of course, a bubble is generally difficult to identify in real time and is more easily characterised ex post by the rapid escalation in an asset price2 that is unwarranted by its fundamentals and is followed by its contraction. The objective of this Policy Contribution is therefore to try to understand why interest rates are currently so low and to determine if this level is justified by fundamental factors, or if it is an artificial phenomenon. What are the determinants of long-term rates? Nominal rates can be primarily decomposed into real (ie inflation-adjusted) safe rates, term premia including inflation expectations, and risk premia (to compensate investors for various risks, such as default and liquidity). Movements in long-term yields can be explained by changes in these three main components. Let’s take a look at them in turn. First, a big part of the story behind the decline of nominal long-term rates in the last 35 years has been the fall in inflation and inflation expectations. On average, inflation in the euro area fell from more than 15 percent per year at the beginning of the 1980s to around 2 percent at the end of the 1990s (Figure 2). This is mainly a consequence of the adoption by the central banks of advanced economies of credible inflation targeting regimes (with a clear mandate of price stability defined by low and stable inflation, generally around 2 percent) after the surge in inflation at the end of the 1970s and the beginning of the 1980s. In that sense, central banks have had a clear impact on long- term rates by anchoring inflation expectations around their targets. In addition, Figure 2 also shows a more recent fall both in headline inflation, which has been trending around 0 percent for the past two years (Panel A), and in market-based inflation expectations to well below the ECB’s target of “below but close to 2 percent” (Panel B). This has surely contributed to the recent decline in nominal rates. Second, long-term sovereign bond yields are also affected by changes in the risk premium. As Figures 1 and 3 illustrate, this was the case during the euro-area crisis when there was a rapid increase in the probability of default and the re-denomination risk related to a potential break-up of the monetary union. Independent central banks generally do not have a direct impact on this component of long-term interest rates because it depends mainly on the solvency of governments and therefore on the health of public finances. However, the recent crisis has shown that sovereign bond markets can also be affected by self-fulfilling liquidity crises. Central banks can avoid these bad equilibria in which there is a run on the bond market by playing the role of lender of last resort in the same way that they do for the banking sector to avoid self-fulfilling bank runs (De Grauwe, 2013). The ECB decided to assume this role in 2012 when it announced the creation of its OMT (Outright Monetary Transactions) programme, a potentially unlimited but conditional purchase programme for bonds issued by euro-area

28 governments, aimed at “safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”. This put an end to the and resulted in a quick fall in country risk premia across the euro area. However, the spreads did not return to the negligible pre-crisis levels because market participants realised that credit risks still differed in the different countries of the euro area, despite the monetary union (see again Figures 1 and 3). FIGURE 2: EURO-AREA INFLATION

Source: Bruegel based on World Development Indicators (World Bank), Bloomberg. Most of the decline in nominal rates over the last 15 years is a result of the global fall in long-term real safe rates. FIGURE 3: 10Y SOVEREIGN CREDIT DEFAULT SWAP IN THE EURO AREA (BASIS POINTS)

Source: Bruegel based on Eikon Reuters. Note: Credit default swaps (CDS) are financial agreements under which the seller will compensate the buyer in the event of a loan default or other credit event. Finally, while inflation might have been the most important factor behind the downward trend in nominal rates from 1980 to the end of the 1990s, most of the decline over the last 15 years is a result of the global fall in long-term real safe rates3 (Figure 4). In turn, real long-term rates are mainly determined by the expected path of short-term rates over

29 the life of the asset plus a small additional term premium for holding long-term debt instead of rolling over short-term debt across the entire period. FIGURE 4: LONG-TERM ‘WORLD’ REAL INTEREST RATE (%)

Source: Bruegel based on Bloomberg. Note: The ‘world’ real interest rate is based on data for G7 countries’ real 10-year yields (except Italy) computed by Bloomberg (as the difference between the generic 10-year yield and core CPI) and weighted according to the real average GDP per country over the whole time period. Note that our measure takes into account the availability of the data across countries by including them gradually into the sample. The concept of neutral rate of interest and monetary policy Does that mean that central banks are responsible for the fall in real rates because they have signalled their willingness to leave their policy rates at very low levels for a long time? Yes and no. To understand why real rates have steadily declined over the last 15 years, it is very useful to introduce the concept of the ‘neutral rate of interest’ (also called the natural rate, Wicksellian rate, or simply r* by some economists4). This rate is defined as the short-term equilibrium rate between demand and supply of funds compatible with full employment of capital and labour resources and with price stability (ie inflation around the central bank’s target). This concept was first introduced by Wicksell (1898) before being resuscitated a century later in New Keynesian models, in particular by Woodford (1998), and in practice thanks to the advent of inflation- targeting regimes in most of the world’s central banks and their use of the short-term rate as the main monetary policy instrument. Central banks cannot be held responsible for the actual level of long-term real rates. They influence market rates to make them consistent with neutral rates over which they have little influence. The neutral rate points to the level of the real interest rate when monetary policy is neither stimulating nor restraining economic growth. If market rates are above neutral rates5, investment and consumption are discouraged: the economy cools down and could ultimately end up in recession and in deflation if rates are maintained at that level for too long. On the contrary, if market rates are below neutral rates the economy heats up and inflation rises above target. That is why central banks are not really responsible for the actual level of long-term real rates as they adopt, to fulfil their mandates, the necessary policies to influence market rates in order to make them consistent with neutral rates over which they have little influence.

30

In normal times, central banks simply adjust the short-term rate up and down to influence medium to long-term market rates that are relevant for economic decisions related to investment or consumption of durable goods. However, when short-term rates reach the zero lower bound, central banks need to rely on unconventional tools to affect directly the medium and long-term part of the yield curve. To do that, they have developed a diverse array of tools: forward guidance (ie communication about the likely future course of monetary policy), negative policy rates and, most importantly, changes in the size, composition and maturity of their balance sheets, mainly through asset purchases. Since 2008, the ECB has gradually resorted to all of these policies. First, it reduced its policy rates, and at -0.4 percent its deposit rate is now even slightly in negative territory (Figure 1b). The ECB also provided very quickly long-term lending to European banks with favourable conditions. Since 2013, the ECB has provided forward guidance on the future path of its policy interest rates. Finally, the ECB has put in place a diversified asset purchases programme that originally included Asset Backed Securities (ABS) and covered bonds, but which was vastly expanded in 2015 with the inclusion of sovereign and European supranational bonds and, later, of corporate and local government bonds6. The current level of the short-term neutral rate of interest As we have seen, the neutral rate is an important guide to monetary policy, and thus represents a good benchmark to answer our original question and determine if current interest rate levels are justified by fundamentals or if rates are distorted by the central bank’s policies. It is therefore critical to know where this neutral rate is. Unfortunately, this value is not directly observable. In addition, historical averages of past real rates do not shed light on the current or future level of neutral rates and therefore on the adequate level of interest rates: what was considered ‘normal’ in terms of interest rates in the past might not be ‘normal’ in the future. It is therefore necessary to estimate the neutral rate. In theory, this neutral rate depends mainly on the following factors: the saving behaviour of households and the potential growth rate of an economy (mainly determined by productivity growth and ). In a simple model, such as the Solow model (1956), the saving behaviour of households is fully exogenous, so the equilibrium rate depends only on technological change and population growth. In micro-founded models, such as the Ramsey model or New Keynesian models, household preferences (their patience represented by the discount rate, and their inter- temporal elasticity of substitution for consumption) will, combined again with population and productivity growth, determine the equilibrium rate in the long run. However, in more sophisticated models, such as Eggertsson and Mehrotra (2015), in which households can transition from borrowing to saving over their lifecycles, an increase in inequality or a tightening of borrowing limits can also impact negatively on the equilibrium rate. In practice, various empirical approaches have been proposed to estimate the neutral rate, ranging from statistical filters extracting unconditional trends of observed real interest rates to fully-fledged DSGE models, and including semi-structural approaches. For instance, Holston, Laubach and Williams (2016), whose main results are reported in Figure 5a, use a semi-structural approach to filter the data on output, inflation and short- term interest rates to extract highly persistent components of the natural rate of output, its trend growth rate and the natural rate of interest for the US, the UK, Canada and the

31 euro area. They find evidence of time-variation in the neutral rate of interest in all four economies, with a clear downward trend in estimated neutral rates since the 1960s, accelerating after 2008. Their results also indicate substantial co-movement in the estimates of the neutral rate across economies, suggesting an important role for global factors. These main findings appear to be robust to alternative methodologies7. FIGURE 5: EXAMPLES OF ESTIMATED NEUTRAL RATES

Source: Holston, Laubach and Williams (2016) and Fries et al (2016). Focusing on the euro area, Figure 5a suggests a collapse in the equilibrium real rate after 2008 and points towards a negative value for the last few years. Fries et al (2016), using a similar method, estimated time-varying national natural rates of interest for each of the euro area’s largest four economies (Germany, France, Italy and Spain) since the creation of the euro in 1999. Their results (Figure 5b8) also suggest that neutral rates in the euro area’s biggest countries have drifted very far into negative territory in recent years. The determinants of the fall in the neutral rate are all the factors affecting the supply and demand for funds. These include demographics, lower productivity growth, lower investment, rising inequality, shifting preferences for less risky assets at home and abroad. Another interesting empirical exercise is therefore to attribute more precisely the decline of the neutral rate to these various components. Rachel and Smith (2015) explain the fall of global real rates by 450 basis points (bps) since 1980 as follows: while a reduction in the growth trend explains a decline of rates by 100bps (and 50 bps are left unexplained), demographics, the increase in savings in emerging markets invested in safe assets, the rise of inequality, and lower investment (coming from a fall in relative prices of capital goods and from lower public investment) have exerted a drag on real rates equivalent to 300bps. However, the empirical version of the equilibrium rate estimated in most of these papers is slightly different from the one described in the previous section. The estimated neutral rate, commonly called r*, is generally defined as the long-run equilibrium rate that should prevail once all cyclical factors have died out, while the neutral rate described previously is the optimal rate that ensures full employment and price stability at all times, taking both the structure of the economy and cyclical shocks into account.

32

FIGURE 6: ‘TAYLOR RULE’ FOR THE ECB USING A TIME-VARYING R* (%)

Source: Bruegel based on Eurostat, AMECO, Holston, Laubach and Williams (2016). Note: The ‘Taylor rules’ take the following form: r=inflation+r*+0.5(inflation- target)+0.5(output gap), using the latest output gap estimations from the , either core HICP or headline HICP inflation for the euro area, and r* either constant and equal to 2 percent or the time-varying estimates of Holston, Laubach and Williams (2016). Hence, central banks should not try to set their policy rates precisely at the level of this estimated r*, but at a level compatible with this r* and the current economic situation (determined by the output and inflation gaps). In a simple Taylor rule, this r* could be thought as the, now time-varying, ‘intercept’ of the rule. To illustrate this point, we plot several versions of a simple Taylor rule for the ECB in Figure 6, following Taylor’s original specifications and coefficients (Taylor, 1993). We use headline and core inflation data from Eurostat and the (albeit imperfect9) output gap estimates from the European Commission, while for r* we use either the time-varying estimates of Holston, Laubach and Williams (2016), or a constant r* equal to 2 percent (the value that was used originally by Taylor but that happens to be also the pre-crisis average of equilibrium rates in the euro area). Comparing the two versions of the simple rule with core inflation (the blue and red solid lines of Figure 6), we can see that although their prescriptions were pretty similar before the crisis, they have diverged since 2008. The prescribed monetary policy taking into account both the economic situation and the evolution of the equilibrium rate has indeed been trending between 150 and 250 basis points below the one implied by a constant equilibrium rate. Moreover, this modified Taylor rule calls for a negative policy rate since the end of 2012, suggesting that the current level of ECB rates and additional unconventional policies to push the yield curve lower are justified. The overall trend and the order of magnitude of the neutral rate estimates do not suggest the build-up of a bubble in the bond market. Nevertheless, these numbers should not be taken too literally. A lot of uncertainty surrounds these neutral rate estimates: their values are volatile10 and the confidence intervals reported in the literature are generally quite large. Given the limitations of estimation methods – in real time in particular – neutral rate estimates should not be

33 used as a direct target of monetary policy (either directly or in a Taylor rule as we have done11) but as one important indicator among others to inform the decision making of the ECB governing council. In any case, given the complex and dynamic nature of today’s economies, some discretion in policymaking is preferable to following a simple rule. However, to come back to our original question, the overall trend and the order of magnitude12 of these estimates do not suggest the build-up of a bubble in the bond market. On the contrary, this growing empirical literature shows that the substantial decline in real rates observed over the last 10 years is not the result of an over- accommodative monetary policy but of a fall in the neutral rate, itself a result of a combination of structural and cyclical factors. The decline in the neutral rate of interest and the secular stagnation hypothesis As we have seen, the current decline in interest rates is strongly associated with pessimistic expectations about future economic prospects, in particular in advanced countries. The disappointing recoveries (in terms of both GDP and employment rates) observed in the US and even more in European countries, and the continuous downward revisions of potential growth estimates, have raised the possibility that we might have entered a period of secular stagnation. Understanding the mechanism that might be at work behind this phenomenon could thus be crucial to help understand why rates are currently so low. The term secular stagnation was coined by Hansen (1939) to describe “sick recoveries which [...] leave a hard and seemingly immovable core of unemployment” taking place in the aftermath of the Great Depression. The main symptoms of secular stagnation described by Hansen were low growth, low employment and low interest rates because of the combination of low capital formation and a high savings rate. Hansen believed that the driving forces behind this phenomenon were the low population growth of the time and the fact that there were no new territories or techniques in which to invest. Ultimately, Hansen was proved wrong by the massive increase in government spending triggered by the second world war and, most importantly, by the post-war economic boom, the baby boom and a new wave of innovation. FIGURE 7: CURRENT ACCOUNT SURPLUSES TO WORLD GDP (%)

Sources: World Development Indicators (World Bank). Economies prone to secular stagnation oscillate between two unenviable situations: a chronic insufficiency of aggregate demand or financial instability.

34

However, the secular stagnation hypothesis was resurrected by Summers (2013) and Krugman (2011, 2013a, 2013b) in the aftermath of the Great Recession. The secular stagnation concept describes well many features of the current slow recovery affecting the US, Japan and Europe. Unlike Hansen’s original idea, today’s version of the secular stagnation hypothesis does not rely as much on a technological slowdown, even if some research – eg Gordon (2014) – focuses on this aspect. The main driver of secular stagnation today appears to be the structural mismatch between the high proclivity of people to save and the low desire for those savings to be translated into (risky) productive investment, leading to a lower and possibly negative real interest rate to clear the market for funds. According to this hypothesis, economies prone to secular stagnation (ie with low neutral rates) tend to oscillate between two unenviable situations. Either the real interest rate is constrained from equilibrating at full employment by the zero lower bound on nominal interest rates, leading to a chronic insufficiency of aggregate demand. With an inflation target of 2 percent, real rates cannot go below -2 percent, which might not be low enough to ensure full employment. Or the real interest rate consistent with equating investment and saving at full employment is so low that it is not consistent with sustainable finance and generates bubbles. Permanent negative real rates might not be compatible with financial stability if, at negative rates, some investors have a tendency to invest in ‘unworthy’ projects (bubbles) instead of ‘worthy’/productive projects (maybe because of a relatively lower elasticity of supply of ‘worthy’ projects to the real rate), and if the regulation and supervision of the financial system is not effective enough. This theory could therefore explain the current situation but also some important features of previous decades: the fact that full employment was obtained only at the price of increased leverage and bubbles (.com, housing), and the secular downward trend in inflation and long-term real interest rates. Secular stagnation would explain today’s slow recovery but also the Great Moderation13 and Greenspan’s conundrum14 (Greenspan, 2005). The main factors behind secular stagnation are found on both the supply side and on the demand side for savings. On the supply side, the last two decades have seen an increase in savings concentrated in the hands of savers with a low propensity to invest in risky activities. As highlighted by Bernanke (2005) in his famous ‘Global Savings Glut’ speech, some governments in emerging markets – China and oil-exporting countries in particular – have been accumulating huge international reserves since the end of the 1990s, overwhelmingly invested in safe assets (ie sovereign bonds from advanced countries). This was fuelled by significant current account surpluses (Figure 7) resulting from an over-reliance on exports and interventions. In addition, an historical rise in inequality in advanced countries took place, driven by a massive increase in wages and capital gains at the very top of the income distribution, and a stagnation in real revenues for the bottom half of the distribution since the end of the 1970s (Piketty, 2014). This resulted in an increase in savings/wealth of the most affluent part of the population, characterised by a lower propensity to consume. This increase in savings at the global level should have supported an increase in capital expenditure across the world, but this is not what we observed in practice. One explanation might be that these particular savers might not maximise their risk-adjusted returns but might have other objectives with a preference for ‘nominal safety’ or liquidity, resulting in the absence of risk-taking investors and a high demand for safe assets (a movement amplified during the crisis by the drastic decrease in the global safe-asset supply: from

35

$20 trillion in 2007 to $12 trillion in 2011, as highlighted by Caballero and Farhi, 2014). FIGURE 8: GROSS CAPITAL FORMATION (INVESTMENT) AS % OF GDP

Source: World Development Indicators (World Bank). On the demand side, a variety of structural changes could explain the lower demand for savings for financing investment in advanced countries (see Figure 8). There could be a lack of profitable, or more probably sufficiently safe, private investment opportunities in advanced economies: this would also explain the tendency to invest in bubbles that could be seen as safer during the build-up phase, in particular in housing, despite all the evidence to the contrary15. As suspected by Hansen in the 1930s, low population growth in advanced countries could translate into low future demand for goods and services and could weigh on current investment. Other factors could also drive the decline in capital expenditure: the fall in the relative price of durable equipment; a broken financial sector or one that has wrong incentives (Claeys, 2016); poor managerial incentives to invest within companies; a technological slowdown or at least a difficulty in rewarding innovators; monopoly positions in some industries leading to huge rents leading to disincentives to increase production; and finally the reduced capital intensity of leading industries (think General Motors, 220,000 employees worldwide, 400 offices and plants, market capitalisation of $48bn vs. Whatsapp, 55 employees, 1 office and valued at $19bn, ie 40% of GM). Should we take the secular stagnation hypothesis seriously? Although secular stagnation is an appealing hypothesis that provides an explanation for many of the economic features of the last 30 years, it is still very early to settle the debate. In the euro area in particular, the recovery has just started, so it is so far very difficult to distinguish the secular from the cyclical trend. The cyclical component could still be very strong in the aftermath of a one-in-a-century crisis, in particular because the European crisis was characterised by some significant policy mistakes, with a that was on aggregate pro-cyclical from 2011 to 2014 (and broadly neutral in 2010 and 2015 at a time where it should have been counter-cyclical), and a monetary policy that was often very slow and behind the curve. In terms of investment, a vicious circle of weak demand and sluggish investment also emerged during the crisis. Various hysteresis effects are also at work, leading to lower productivity growth resulting from

36 cuts to investment and R&D during the crisis and from the destruction of human capital because of the prevalence of very high unemployment rates for almost a decade now. In particular, as suggested by Rogoff (2015), the current slow recovery and the low-rate environment could more simply be the result of the “debt super-cycle”. Unlike the V- shaped recovery of ‘standard’ recessions, financial crises are often followed by U- shaped recoveries, because of the length and the difficulty of the deleveraging process. This would also imply low safe real rates, because of the deleveraging taking place after an asset price bust and the move away from risky assets, as shown by Gourinchas and Rey (2016). In that case, the policy response should be straightforward and twofold: support the deleveraging process by facilitating debt write-downs and maybe by increasing temporarily the inflation target, while implementing strong micro- and macro-prudential policies to avoid a repeat. This could well be a good description of the current European situation in which the banking sector has not been totally cleaned up (eg non-performing loans still represent a big part of some banks’ portfolio, especially in the periphery) and private debt is still very high. Given that the global savings glut is mostly the result of bad government policies, secular stagnation could prove temporary if those policies are changed. Given that the global savings glut – one of the main factors behind the secular stagnation hypothesis – is mostly the result of bad government policies, secular stagnation could also prove temporary if those policies are changed, as argued by Bernanke (2015). A transformation of the Chinese away from exports towards internal demand, and the steep fall in the oil price, should result in a reduction of excess savings in emerging markets. In order to accelerate the end of the global savings glut, it would thus be important for emerging countries to avoid intervention in foreign exchange markets, while advanced economies should reduce the remaining barriers to capital flows towards emerging markets. The cyclical arguments clearly have some merit and are definitively playing a big role in the current situation, but they do not explain fully why the decline in long-term real rates preceded the crisis. In fact, the trend in real and neutral rates between 2000 and 2007 (Figures 4 and 5a) has continued in the aftermath of the crisis with a very similar slope. In addition, although the sum of global current account surpluses has receded since the global savings glut peak of 2005, the equilibrium real rate has continued to decline, suggesting that the external factor is important but that it might not be the main factor. Focusing on the euro area in particular, the monetary union also displays some of the most worrying features of secular stagnation. Even Germany, the top-performing country of the union, is characterised by low domestic demand, low wage growth, low inflation, an aging society and a heavy reliance on exports to ensure full employment. In addition, Germany’s ever-increasing current account surpluses could be seen as a symptom of too much saving and not enough investment. In many countries of the periphery, growth and full employment before 2008 were obtained through leverage and bubbles. Today, these countries are characterised by low investment, lower potential growth and also low population growth. The periphery is now following the same export-led economic model as Germany by regaining competitiveness through prices to improve exports, but domestic demand is still very weak. This has led to an even larger current account surplus for the whole euro area, driving fears that the euro area could soon replace China and oil exporters in the global savings glut as the main savings’ exporter.

37

Overall, the secular stagnation hypothesis is still an hypothesis, but a frightening one, and even if the particular mechanism described by Summers and Krugman or its secular nature is proved wrong over time, most of the features of secular stagnation are already present today and are weighing on growth and – to come back to the main topic of this paper – on interest rates. Imbalances leading to a global savings glut in emerging markets and now in Europe, the historical rise of inequality, the various disincentives to invest, aging populations and slowing productivity growth, are real structural problems in need of solutions, whether secular stagnation is underway or not. Concluding remarks and future challenges for policy The decline in long-term rates on European sovereign bonds in the last few years results from a combination of factors: a fall in inflation expectations, a return of risk premia to levels more in line with credit risks (unlike before or during the euro crisis) and most importantly a fall in real rates driven by a secular decline in neutral rates. These fundamental factors are the main drivers of the decline in long-term yields in Europe, making it very difficult to qualify the current state of the bond market as a bubble. In our view, low rates are the symptoms of our diseases, not their cause. Instead of accusing central banks, it is crucial to tackle the causes behind the fall of long-term rates, but also to find solutions for the harmful consequences that lower equilibrium rates could have for the conduct of monetary policy. A lower neutral rate implies that episodes in which monetary policy is constrained by the zero lower bound are likely to be more frequent and longer. If the neutral real rate is negative or around zero, even if inflation is around the 2 percent target, steady-state policy rates would be around 2 percent. This would give less leeway to cut rates when next recession arrives. For comparison, in the US, the average reduction during the past nine recessions in the Fed policy rate was equal to about 5.5 percentage points. All else being equal, a lower neutral rate implies that episodes in which monetary policy is constrained by the zero lower bound are likely to be more frequent and longer. This implies that the ECB would need to rely more heavily on unconventional policies, the effects of which are less certain, and which are more difficult to calibrate given their relative novelty. Moreover, given the particular institutional arrangement of the monetary union, the use of these policies has been politically controversial, which in turn delayed their implementation in the euro area. The ECB’s quantitative easing programme started six years after the beginning of asset purchases by the US Federal Reserve and the Bank of England. The reluctance to use this type of policy could lead to permanent suboptimal monetary policymaking in the euro area, should this set of policies become the ECB’s main instruments because of a fall in the neutral rate. If the equilibrium rate remains very low or even negative for a prolonged period, the ECB should reassess its monetary policy framework and its inflation target. This target is not set in stone and is defined by the ECB itself. The (below but close to) 2 percent target might have been suitable for the first years of the ECB and may have helped anchor inflation expectations at a low and stable level at a time when the neutral rate was around 2 percent, but it might not be a well-suited inflation target for a low neutral rate era. The ECB should determine if it would be wise to raise its inflation target (for instance to 4 percent) so that the market can clear at a lower real rate. Of course, this is a very serious decision and there would be some risks involved. Some have argued that a change to the target could lead to a loss of credibility of the central bank and dis- anchor fragile expectations. We don’t think that this would be the case, but the main

38 benefit of the 2 percent inflation target is that, at this level of inflation, many economic agents behave as if there were no inflation at all. A higher level could change that and revive indexation of contracts and thus second-round effects when there is a shock to headline inflation (for instance from energy prices). Lower neutral rates and their potential impact on monetary policy should also lead to a reassessment of the role of fiscal policy in tackling recessions. Finally, lower neutral rates and their potential impact on monetary policy should also lead to a reassessment of the role of fiscal policy in tackling recessions and slow recoveries and in supporting monetary policy in that regard. In this type of episode, governments should take advantage of the high demand for safe assets and the low rates on long-term sovereign bonds to finance a surge in public infrastructure and R&D. As suggested by De Long and Summers (2012), given the current negative real rates, the higher multiplier at the zero lower bound and the positive impact of public investment on future potential growth, this could even result in a decrease in the debt-to-GDP ratio in the long run. As shown by Claeys, Darvas and Leandro (2016), the current European fiscal framework is, in practice if not in theory, highly ineffective and has contributed to the anaemic economic recovery in Europe. That is why it is time to design better and maybe more systematic fiscal policies in the euro area that would support the economy during recessions and recoveries, first by reforming the fiscal rules and then by enhancing the automatic stabiliser properties of European fiscal policies at the national and European levels. References Bernanke, B. (2005) ‘The global saving glut and the US current account deficit’, Speech (No. 77), Board of Governors of the Federal Reserve System, 10 March Bernanke, B. (2015) ‘Why are interest rates so low, part 3: The Global Savings Glut’, Brookings Blog, 1 April Brzoza-Brzezina, M. and J. Kotłowski (2014) ‘Measuring the natural yield curve’, Applied Economics 46(17): 2052-2065 DeLong, J.B. and L.H. Summers (2012) ‘Fiscal policy in a depressed economy’, Brookings Papers on Economic Activity 2012(1): 233-297 De Grauwe, P. (2013) ‘The as lender of last resort in the government bond markets’, CESifo Economic Studies 59(3): 520-535 Caballero, R.J. and E. Farhi (2014) ‘On the role of safe asset shortages in secular stagnation’, in C. Teulings and R. Baldwin (eds) Secular Stagnation: Facts, Causes and Cures: 111-122, CEPR Press eBook Claeys, G. (2014) ‘The (Not So) Unconventional Monetary Policy of the European Central Bank since 2008’, paper prepared for the Economic and Monetary Affairs Committee (ECON) of the , available at http://bruegel.org/2014/07/the-not-so-unconventional-monetary-policy-of-the-european- central-bank-since-2008/ Claeys, G. (2016) ‘Quelle place pour les marchés financiers en Europe ?’ Revue d’Économie Financière 123, forthcoming Claeys, G. and Z. Darvas (2015) ‘The Financial Stability Risks of Ultra-loose Monetary Policy’, Policy Contribution 2015/03, Bruegel

39

Claeys, G., Z. Darvas and A. Leandro (2016) ‘A Proposal to Revive the European Fiscal Framework’, Policy Contribution 2016/07, Bruegel Claeys, G., Z. Darvas, A. Leandro and T. Walsh (2015) ‘The Effects of Ultra-loose Monetary Policy on Inequality’, Policy Contribution 2015/09, Bruegel Claeys, G., A. Leandro and A. Mandra (2015) ‘European Central Bank Quantitative Easing: the Detailed Manual’, Policy Contribution 2015/02, Bruegel Claeys, G. and A. Leandro (2016) ‘The European Central Bank’s Quantitative Easing Programme: Limits and Risks’, Policy Contribution 2016/04, Bruegel Darvas, Z. and A. Simon (2015) ‘Filling the gap: open economy considerations for more reliable potential output estimates’, Working Paper 2015/11, Bruegel Eggertsson, G.B. and N.R. Mehrotra (2014) ‘A model of secular stagnation’, NBER Working Paper Series, No. 20574 Fries, S., S. Mouabbi, J.S. Mésonnier and J.P. Renne (2016) ‘National Natural Rates of Interest and the Single Monetary Policy in the Euro Area’, paper presented at the 3rd IAAE annual conference, Milano Bicocca, 23 June, revised version: September 2016 Gordon, R.J. (2014) ‘The Demise of US Economic Growth: Restatement, Rebuttal, and Reflections’, NBER Working Paper Series, No 19895 Gourinchas, P.O. and H. Rey (2016) ‘Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound’, NBER Working Paper Series, No. 22618 Greenspan, A. (2005) ‘Federal Reserve Board’s Semi-annual Monetary Policy Report to the Congress’, testimony to the Committee on Banking, Housing, and Urban Affairs, US Senate, 16 February Hansen, A.H. (1939) ‘Economic progress and declining population growth’, The American Economic Review 29(1): 1-15 Hamilton, J.D., E.S. Harris, J. Hatzius and K.D. West (2015) ‘The equilibrium real funds rate: Past, present and future’, NBER Working Paper Series, No. 21476 Holston, K., T. Laubach and J. Williams (2016) ‘Measuring the natural rate of interest: International trends and determinants’, in NBER International Seminar on Macroeconomics 2016, Journal of International Economics Jordà Ò., M. Schularick and A.M. Taylor (2016) ‘The great mortgaging: housing finance, crises and business cycles’, Economic Policy 31(85): 107-152 Kiley, M. (2015) ‘What Can the Data Tell Us About the Equilibrium Real Interest Rate?’ Finance and Economics Discussion Series 2015-077, Washington: Board of Governors of the Federal Reserve System Krugman, P. (2011) ‘The Return of Secular Stagnation’, , 8 November Krugman, P. (2013a) ‘Bubbles, Regulation, and Secular Stagnation’, The New York Times, 25 September Krugman, P. (2013b) ‘Secular Stagnation, Coalmines, Bubbles, and Larry Summers’, The New York Times, 16 November

40

Lubik, T.A. and C. Matthes (2015) ‘Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches,’ Federal Reserve Bank of Richmond Economic Brief, EB15-10 Piketty, T. (2014) Capital in the Twenty-First Century, Harvard University Press, Cambridge MA Rachel, L. and T.D. Smith (2015) ‘Secular drivers of the global real interest rate’, Staff Working Paper No. 571, Bank of England Rogoff, K. (2015) ‘Debt supercycle, not secular stagnation’, remarks at Closing Panel, Rethinking Macro Policy III, IMF, Washington DC, 16 April Solow, R.M. (1956) ‘A contribution to the theory of economic growth’, The Quarterly Journal of Economics, 65-94 Summers, L.H. (2013) Speech at the IMF 14th Annual Research Conference in Honor Of Stanley Fisher, International Monetary Fund, 8 November Taylor, J.B. (1993) ‘Discretion versus policy rules in practice’, in Carnegie-Rochester conference series on public policy (Vol. 39: 195-214), North-Holland Wicksell, K. (1898) Interest and Prices, English translation reprinted New York: Augustus Kelley, 1962 Woodford, M. (1998) ‘Doing without money: controlling inflation in a post-monetary world’, Review of Economic Dynamics 1(1): 173-219 http://bruegel.org/reader/low-long-term-rates-bond-bubble-or-symptom-of-secular- stagnation?mc_cid=82fbbf6332&mc_eid=070e2974a4#executive-summary

41

Daily Morning Newsbriefing September 26, 2016 A weekend of insurrection It was a weekend of anti-establishment insurrection. In Britain, Jeremy Corbyn was re- elected Labour leader with an even wider margin than last year. The Swiss Canton of Ticino voted in favour of a bill to discriminate against EU workers; and, over in the US, Donald Trump has caught up in the polls with Hillary Clinton on the eve of their first TV debate. The return of Corbyn tells us a lot about what is going on in European politics right now. As the FT points out, his 61.8% victory underestimates the true scale of his support. Many people who signed to join Labour in support of Corbyn were not eligible to participate because Labour's National Executive Committee managed to discriminate against Corbyn supporters. The scale of his victory against Owen Smith constitutes a massive defeat for the Blairite/Brownite wings of the party, which the press still calls moderate. But equally important, especially for us, has been the defeat of a candidate who made the promise of a second euro referendum the key plank of his campaign. This issue has not been talked about much in recent days, but we cannot see any candidate within the Labour or Conservative party now putting forward a credible back-to-the-EU path. The FT writes this morning that the moderates have decided not to separate and to create a new party, but to try to work from inside Labour, presumably in the hope that Corbyn will eventually self-destruct. In his analysis of what happened, George Eaton makes an important observation: Smith had the backing of all the Labour grandees - Sadiq Khan, the London mayor, Kezia Dugdale, the Scottish Labour leader, Neil Kinnock, Ed Miliband and Tony Blair. One Smith ally is quoted as saying that it had been "like the Remain campaign and the Archbishop of Canterbury" - no one is listening to the grandees anymore. We also noted an interesting comment by Richard Rose on Scotland - where we could see the next stage of insurrection. Given the low support for independence after the June 23 referendum, it has been assumed that Scotland would not go down this route. But this may be wrong. The Scottish first minister, Nicola Sturgeon, is preparing for a referendum, and is currently busy drumming up support. The longer Theresa May takes to invoke Art 50, the more time Sturgeon has. And, by the middle of next year, May's honeymoon will be over and the economic costs of Brexit may be clearer. We note a number of commentaries in the British press on whether Switzerland could be a model for the UK. We always thought this to be a particularly silly idea, not least because the EU itself no longer supports messy bilateral agreements such as the one with Switzerland. The 58% vote by the canton of Ticino to support a curb on foreign - and especially Italian - workers will not make the political process any easier. The country had voted in favour of immigration curbs in 2014. The government is trying to implement the referendum result through a law that would favour Swiss workers over foreign ones, which the EU considers as discriminatory. The Renzi administration said that if Switzerland imposed those restriction, the EU would retaliate with curbs on

42

Swiss trade - which we also think is very likely. At that point, we presume that there will be less of talk of a Swiss model in the UK as well. And finally, Wolfgang Munchau has a column the four major lessons for Brexit for policymakers from established political parties. The first one is not to trust the polls, as pollsters find it hard to assess the impact of non-establishment politicians on traditional non-voters. When turnout is the decisive factor in an election, polls err. The second is not to double down. Voters have a reason to be unhappy. These concerns need to be acknowledged and addressed. The third is: do not insult the voters. And finally: do not try to scare them. Economic scare stories no longer work with people whose real incomes have fallen for decades. Munchau concludes that Brexit was a cautionary tale of how quickly established positions can crumble, and how the improbable becomes the inevitable. Our other stories We also have stories on Rajoy's victory in Spain's local elections; on Italy's referendum date; on the ECB becoming an election issue in Germany; on the radicalisation of French politics; on the implications of the UK leaving the union; and on the significance of the referendum in Bosnia.

43

Free exchange The emperor’s new paunch No holds are barred in Paul Romer’s latest assault on macroeconomics Sep 24th 2016 | From the print edition

PAUL ROMER made his name modelling the production of knowledge and the growth of economies. Now the World Bank’s chief economist, his latest, unusual, contribution to economics includes a “meta-model” of himself. “For more than three decades,” he alleges, “macroeconomics has gone backwards.” Why, his meta-model asks, is he one of the few willing to say so? What Mr Romer says is unusually brutal. After over 30 years of “intellectual regress”, the study of booms and busts now reminds him of a lipstick-wearing pig or an obsolete scientific embarrassment like the phlogiston theory of fire. The field is dominated by a tight-knit congregation, he argues, unified by deference to authority, not facts. Their revered leaders rely on high-handed assumptions to make their models work. But they do not admit to these inadequacies, pretending their naked assumptions are clothed in fine theoretical robes. One illustration is their answer to an old scientific problem: identification. This problem besets even the simplest blackboard model of demand and supply, represented in textbooks by two intersecting diagonal lines, one sloping upwards (because sellers supply more when prices are high) the other downwards (because buyers demand more when prices are low). Drawing these lines is necessary to answer many big economic questions, such as how many extra jobs will be created if a payroll is cut (increasing the demand for labour by reducing its price) or how many additional rigs become viable when the oil price rises. But how do we know a curve’s true slope and position? The lines themselves are unobservable. A diligent economist can only note their intersections, recording each combination of price and quantity, perhaps as dots on a graph. If supply (and only supply) moved randomly, the resulting dots would trace out the demand curve: they would show how much demand expands and contracts when prices fall and rise, thanks to variations in supply. The curve’s slope and position would be “identified”. But that is not how the world typically works. Instead, the pattern of dots will probably reflect shifts in demand as well as supply. That makes it impossible to identify either curve from the dots alone. This identification problem is particularly severe in macroeconomics, which has a lot of moving parts, many of which move each other. To estimate one popular macroeconomic model, an economist must pin down the equivalent of 49 “slopes”, Mr Romer points out.

44

Solving this problem is fiendishly difficult. Economists can hunt for scraps of relevant microeconomic evidence, such as household surveys. They can wait for natural experiments. Or they can make flat assumptions: presuming, for example, that the monsoon affects food supply but not demand. Alternatively, they can rely on theory. Through logical reasoning they can try to deduce some law of markets or behaviour (perhaps that pay reflects productivity or that markets clear). Whatever the merit of these deductions, they make it far easier to draw lines through dots. Indeed, many economists cling to stark, crude theories about market efficiency or rational behaviour precisely because it helps them pin down all those slopes and other parameters. If they did not care about these defining numbers, they could afford to entertain messy, finespun beliefs about human nature and market institutions. But then they would be called sociologists. The pressures of identification can thus lure macroeconomists into bad or narrow theories. But Mr Romer also accuses them of something worse: hypocrisy and obfuscation. They purport to solve the identification problem by relying on deep theory, but in fact resort to shallow assumptions. Indeed, economists used humbly to admit they had pinned down their models by assuming one thing or another. Now, they do so by theorising one thing or another. But these deductive proofs often rely on earlier, questionable assumptions. In between the assumptions and the proof is enough mathematical “blah blah blah” (as Mr Romer puts it) to hide the assumptions’ full role. And an arbitrary assumption in one part of the model can affect everything else in it. The ridicule-intimidation equation Mr Romer says these analytical habits flow from the top. If Nobel laureates indulge in them, others will follow suit. Even sceptics clever enough to spot what is going on will keep quiet. But will they? Several prominent economists have voiced similar doubts about the field. One paper Mr Romer cites is entitled “back to square one”; another complains about “unappealing assumptions”. A third, uncited, even argues that macroeconomics has cultivated a “pretence of knowledge”: it acts as if it is better than it is. These contributions back up Mr Romer’s complaints about economics, but not his gibes about deferential economists. In his meta-model of himself, Mr Romer explains that because he is now a practitioner, with no need to add to his research credentials, he faces an unusually low price of dissent. Other leading critics are also professionally secure. But their continued interest in research proves that you do not have to leave the ivory tower to criticise it. What distinguishes Mr Romer’s dissent is not the content but the tone, full of what the kids call “snark”. He observes that the emperor has no clothes, then laughs at his paunch. Mr Romer’s meta-model of himself can explain what he says, but not how he says it. It is, in effect, missing one equation. To complete Mr Romer’s model, we could rely on theoretical deduction. Instead we turned to survey evidence: asking the man himself. He replied, via his blog, that gentle criticism had failed and that “ridicule is the best antidote to intimidation.” Through satire, he wants to allay people’s fears of criticising the macroeconomic papacy. But if the intimidation is less than he supposes, perhaps the ridicule had a sharper gradient than he intended. http://www.economist.com/news/finance-and-economics/21707529-no-holds-are-barred-paul- romers-latest-assault-macroeconomics-emperors?fsrc=permar|image3

45

The global economy The low-rate world Central banks have been doing their best to pep up demand. Now they need help Sep 24th 2016 | From the print edition

THEY do not naturally crave the limelight. But for the past decade the attention on central bankers has been unblinking—and increasingly hostile. During the financial crisis the Federal Reserve and other central banks were hailed for their actions: by slashing rates and printing money to buy bonds, they stopped a shock from becoming a depression. Now their signature policy, of keeping interest rates low or even negative, is at the centre of the biggest macroeconomic debate in a generation. The central bankers say that ultra-loose monetary policy remains essential to prop up still-weak economies and hit their inflation targets. The Bank of Japan (BoJ) this week promised to keep ten-year government bond yields around zero. On September 21st the Federal Reserve put off a rate rise yet again. In the wake of the Brexit vote, the Bank of England has cut its main policy rate to 0.25%, the lowest in its 300-year history. Come Yellen and high water But a growing chorus of critics frets about the effects of the low-rate world—a topsy- turvy place where savers are charged a fee, where the yields on a large fraction of rich- world government debt come with a minus sign, and where central banks matter more than markets in deciding how capital is allocated. Politicians have waded in. Donald Trump, the Republican presidential nominee, has accused , the Fed’s chairman, of keeping rates low for political reasons. Wolfgang Schäuble, Germany’s finance minister, blames the European Central Bank for the rise of Alternative for Germany, a right-wing party. This is a debate on which both sides get a lot wrong. It is too simple to say that central bankers are causing the low-rate world; they are also reacting to it. Real long-term interest rates have been declining for decades, driven by fundamental factors such as ageing populations and the integration of savings-rich China into the world economy (see article). Nor have they been reckless. In most of the rich world inflation is below the official target. Indeed, in some ways central banks have not been bold enough. Only now, for example, has the BoJ explicitly pledged to overshoot its 2% inflation target. The Fed still seems anxious to push up rates as soon as it can. Yet the evidence is mounting that the distortions caused by the low-rate world are growing even as the gains are diminishing. The pension-plan deficits of companies and local governments have ballooned because it costs more to honour future pension promises when interest rates fall (see article). Banks, which normally make money from the difference between short-term and long-term rates, struggle when rates are flat or negative. That impairs their ability to make loans even to the creditworthy. Unendingly

46 low rates have skewed financial markets, ensuring a big sell-off if rates were suddenly to rise. The longer this goes on, the greater the perils that accumulate. To live safely in a low-rate world, it is time to move beyond a reliance on central banks. Structural reforms to increase underlying growth rates have a vital role. But their effects materialise only slowly and economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments. To anyone who remembers the 1960s and 1970s, that idea will seem both familiar and worrying. Back then governments took it for granted that it was their responsibility to pep up demand. The problem was that politicians were good at cutting taxes and increasing spending to boost the economy, but hopeless at reversing course when such a boost was no longer needed. Fiscal stimulus became synonymous with an ever-bigger state. The task today is to find a form of fiscal policy that can revive the economy in the bad times without entrenching government in the good. That means going beyond the standard response to calls for more public spending: namely, infrastructure investment. To be clear, spending on productive infrastructure is a good thing. Much of the rich world could do with new toll roads, railways and airports, and it will never be cheaper to build them. To manage the risk of white- elephant projects, private-sector partners should be involved from the start. Pension and insurance funds are desperate for long-lasting assets that will generate the steady income they have promised to retirees. Specialist pension funds can advise on a project’s merits, with one eye on eventually buying the assets in question. But infrastructure spending is not the best way to prop up weak demand. Ambitious capital projects cannot be turned on and off to fine-tune the economy. They are a nightmare to plan, take ages to deliver and risk becoming bogged down in politics. To be effective as a countercyclical tool, fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require. Small-government Keynesianism Politicians will not—and should not—hand over big budget decisions to technocrats. Yet there are ways to make fiscal policy less politicised and more responsive. Independent fiscal councils, like Britain’s Office for Budget Responsibility, can help depoliticise public-spending decisions, but they do nothing to speed up fiscal action. For that, more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example. Sales taxes, income-tax deductions or tax-free allowances on saving could similarly vary in line with the state of the economy, using the unemployment rate as the lodestar. All this may seem unlikely to happen. Central banks have had to take on so much responsibility since the financial crisis because politicians have so far failed to shoulder theirs. But each new twist on ultra-loose monetary policy has less power and more drawbacks. When the next downturn comes, this kind of fiscal ammunition will be desperately needed. Only a small share of public spending needs to be affected for fiscal policy to be an effective recession-fighting weapon. Rather than blaming central bankers for the low-rate world, it is time for governments to help them. http://www.economist.com/news/leaders/21707533-central-banks-have-been-doing- their-best-pep-up-demand-now-they-need-help-low-rate-world

47

Daily Morning Newsbriefing September 23, 2016 The moral treason of Europe's elites The appearance of Neelie Kroes in the Bahamas leaks would be bad enough by itself but, together with the controversy over José Manuel Durão Barroso's job at Goldman Sachs, it is causing the European Commission massive reputational damage. So far, Jean-Claude Juncker retains a modicum of public support, but that might change very quickly. The situation is highly accident-prone. In a strongly worded editorial, Le Monde speaks of the moral treason of the elites, who have had a sickly attraction to money for twenty years. The paper writes "The Commission cannot spend its time demanding of the people of Europe a probity and ethics inspired by Montequieu and Max Weber, which some of its members happily flaunt." Le Monde then launches into a defence of Juncker, who it writes is subject to "a denigrating campaign" in Brussels because he fights with the zeal of the convert - against Apple and tax dodging, for a European redistribution of refugees, and for a less strict fiscal policy. From the tone of public pronouncements on the case, we would expect the Commission to give Kroes at least the treatment meted out to José Manuel Durão Barroso, who should then be satisfied he isn't being discriminated against. Commission spokesman Margaritis Schinas told reporters "There are certain things that even the strictest rules, like ours, cannot fix. This was the case of our former president who made the choice to go to work for a certain bank and this is now the case of a former commissioner, who apparently did not respect the rules, and apparently did not inform the Commission." The Commission is not hiding its displeasure at the personal choices made by former commissioners, over which the Commission has no control. But they do control how they react to them. The EU ombudsman, Emily O'Reilly said the Kroes case raises concerns about the ability of the Commission's code of conduct to restrain commissioners, and reiterated her call - made on the Barroso case - to strenghten the code of conduct. O'Reilly played a leading part in the process leading to Barroso losing his "red carpet" treatment as a former commission president in reaction to his Goldman Sachs directorship. Kroes could face the loss of her Commission pension, were it not for the fact that she isn't drawing it. She could also lose the three-year "transitional allowance" intended to smooth out Commissioners' incomes after they leave their post, given the 18-month cooling-off period during which they must seek authorisation to work in the private sector. Kroes, who holds positions at three major corporations, might be drawing the allowance minimally, if at all. Transparency International's European director Carl Dolan, mindful of the meagre impact of economic sanctions, is hoping for "social sanctions." In addition to being treated as a lobbyist, he suggests she should even not be welcome as one.

48

It should come as no surprise that Jean Claude Juncker yesterday sent a letter to Neelie Kroes asking her for "clarification" regarding her failure to disclose ties with the Bahamas company Mint Holdings, uncovered by the ICIJ from the so-called "Bahamas leaks." What is a bit shocking is that Kroes' lawyers had written to Juncker about this last Friday - after being contacted by journalists - but the email remained unnoticed until the story broke in the press on Wednesday, reports . Le Monde's "zeal of the convert" is a peculiarly à propos turn of phrase to describe Juncker, who just two years ago in his first months in office was fighting the Luxleaks PR disaster. On this, we have found a quite extraordinary recent video interview with Juncker reported by Le Point, in which - asked how he can credibly fight , having for 18 years been the finance minister of "Europe's biggest " - he answers with a straight face "poachers make the best gamekeepers." He then turns the question around on his French interviewer, asking whether she's sure France hasn't been engaging in the maligned practice of tax rulings, and warning her that if she investigates her own country she "may not like what she finds." Our other stories We also have stories on Renzi asking for even more flexibility; on Sánchez' political plans; on the IMF's report on Portugal; on the Greek parliament getting another multi- bill; on Unicredit's sale of its asset management business, and its wider European implications; on the ECB's legal constraints in expanding the QE programme; on why soft Brexit options are hard; and on the arrival soon of helicopter money.

49

Daily Morning Newsbriefing September 22, 2016 Towards a price level target? It struck us yesterday as we read comments by Erkki Liikanen that we may soon have a big and angry debate among ECB policymakers about price level targeting, in particular because it came on the day that the Bank of Japan announced a policy to overshoot its 2% inflation target in the future on the grounds that they undershot the target for too long. This announcement is not exactly the same as the official adoption of a price level target, but it is a step in that direction. Under a price-level target you compensate target deviations in one direction with offsetting deviations in the other direction until the price index reaches the desired level. With an inflation target, you let bygones be bygones. The promise to overshoot was one of two important decisions taken by the BoJ. The other is to impose a cap on the ten-year bond yield of zero per cent, which constitutes a form of monetary financing, as noted in his blog. The question the BoJ predictably had to confront is how it can credibly commit to a higher target than 2%, even temporarily, if it cannot even manage to hit the existing target. The BoJ said it took the new measures in order to raise inflation expectations, but if an increase in the target is not credible, it may not have that effect. Liikanen, meanwhile, suggested in an interview with Bloomberg that the ECB might be going down the same route. As ever with newsagency interviews, we don't have the full transcript but his argument appears muddled, as though he is mixing the idea of a symmetric inflation target with the idea of a price-level target. “You can never have average inflation close to 2% if you are never above two; it’s arithmetic...We must be consistent in both ways. My approach is symmetric in both directions.” There is clearly symmetry in a price level target, while an inflation target is also symmetrical but in a different sense. You are indifferent about positive or negative deviations but, crucially, you do not compensate. Liikanen is stating clearly that the ECB would do precisely this. Mario Draghi himself also said in a couple of press conferences that he would allow inflation to exceed the target for a while, but he has not gone quite as far as Liikanen, who has effectively announced a change in the ECB's target (or he may be confused about this whole thing, or deliberately muddling things up). While this appears to be a technical issue, we should note that it could easily give rise to big disagreements within the ECB's governing council. A policy of negative rates and QE at a time when inflation overshoots the target would trigger an extremely hostile reaction - not only from the Bundesbank. This could become a much bigger conflict than QE. The Fed, meanwhile, appears a step closer to an interest rate increase as three out of ten voting members favour an increase right now, while the majority conceded that the case for a rate hike had strengthened.

50

Our other stories We also have stories on Neelie Kroes and the latest Bahamas leak; on whether Deutsche bank needs a bailout; on BPI clearing the way for a takeover by Caixabank; on Portuguese plans to decentralise social policy; on the virtues of plastic money for Greek VAT revenues; on European Defence after Brexit; and on Sigmar Gabriel's pep talk ahead of his visit to Moscow.

The New Yorker Currency Elizabeth Warren and the Wells Fargo Scandal By Sheelah Kolhatkar September 21, 2016 Senator Elizabeth Warren’s verbal evisceration of Wells Fargo C.E.O. John Stumpf is a reminder that very little has changed about banking culture since the financial crisis. In case there was any doubt about Elizabeth Warren’s feelings toward John Stumpf, the C.E.O. of Wells Fargo, it was cleared up on Tuesday during a hearing before the Senate Banking Committee. “Okay, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive,” Warren said to Stumpf, during an interaction that might properly be characterized as a verbal evisceration. “Instead, evidently, your definition of ‘accountable’ is to push the blame to your low-level employees who don’t have the money for a fancy P.R. firm to defend themselves.” Warren kept going, articulating a very pointed attack on the head of the company. She estimated that Stumpf’s stock holdings had increased by two hundred million dollars in value during the time that “this scam,” as Warren put it, occurred, in which fifty-three hundred employees opened unauthorized customer bank accounts in order to meet sales targets. “You should resign,“ she finally said. “You should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.” The banker was ostensibly there to defend his company’s handling of the falsified accounts, which were first reported in detail in 2013, but which became major news after the Consumer Financial Protection Bureau fined the bank a hundred and eighty- five million dollars, earlier this month. At the same time, though, the episode seemed designed to remind the public that, almost exactly eight years after the collapse of Lehman Brothers and one of the worst financial crises in history, very little about the unrestrained, incentive-driven banking culture that caused so many problems has changed. Wall Street has always been bonus-driven; the amount of money an employee receives in January or February each year is seen as a direct reflection of a person’s worth. Even the staid retail portion of the industry—checking, savings, mortgage, and credit-card accounts–came to mimic the culture of Wall Street trading firms. Dozens of regulatory investigations since the crisis have shown that this high-stakes incentive culture that works so well to motivate employees to push and take risks has no apparent mechanism in place to moderate bad decisions. This was evident in the causes of the crisis itself. In the years leading up to 2008, when real-estate prices went up exponentially, mortgage lenders and banks went into overdrive, processing new mortgages, lending money to people who had no way to pay

51 it back (at Countrywide Financial, to take one example, this was famously called “the hustle”), packaging them into securities, and selling them to investors. A similar phenomenon could be seen during the Justice Department’s multi-year investigation of insider trading at hedge funds, where traders were offered enormous financial rewards to seek out information they could use to make money trading, with little regard to where the information came from. At many hedge funds that were investigated, there was little infrastructure in place to shut the trading down, even when there were signs that the information in question was obtained in a dubious—or illegal—manner. In Wells Fargo’s case, lower-level bank-branch employees were under intense pressure to cross-sell additional products to the bank’s customers: if you had a checking account, they would try to sell you a mortgage loan or a credit card, for example. The goal was to sell each bank client eight different products. The employees were afraid that they’d lose their jobs if they didn’t deliver. It seemed that even the mechanisms to prevent cheating to achieve the sales goals, such as ethics workshops, were no match for the company’s aggressive sales culture. As one former Wells Fargo employee told the New York Times, “They warned us about this type of behavior and said, ‘You must report it,’ but the reality was that people had to meet their goals. . . . They needed a paycheck.” When announcing the Wells Fargo settlement, Richard Cordray, the director of the C.F.P.B., summed up the problem as “Unchecked incentives can lead to serious consumer harm, and that is what happened here.” According to one estimate, banks have paid a hundred and ten billion dollars in fines to settle cases arising from the financial crisis. Most of those cases involved no admission of wrongdoing. No senior executives have gone to jail, and only one or two have been charged. Similarly, regulators are not in the habit of requiring senior Wall Street executives to return any portion of their compensation as a result of and investments that went bad. Higher-level workers are rarely fired. The result of such a system is that any connection between egregious behavior and negative consequences for that behavior in the financial world is strangely absent, even though the two should be closely linked. With little threat of criminal prosecution, most companies resolve their bad behavior through writing checks and, occasionally, instituting other corporate reforms. The numbers often sound enormous—the largest banks were required to pay hundreds of millions or billions of dollars to resolve financial-crisis-related cases, and, in April, Wells Fargo itself settled a mortgage-fraud case for $1.2 billion—but, as my colleague Adam Davidson has pointed out, these fines are levied on institutions that are so profitable that they barely register as an expense. In the case of Wells Fargo’s thousands of falsified customer accounts, the hundred and eighty-five million dollars that the C.F.P.B. demanded is a speck compared to the eighty billion dollars in revenue that the bank generates each year. (A criminal investigation is reportedly still ongoing.) The executive who led the consumer-banking division, the department at Wells Fargo where the most recent troubles occurred, is leaving the company, reportedly while keeping a hundred-and-twenty-five-million-dollar compensation package. At the hearing, Stumpf said that he was “deeply sorry” for what had happened, even as he later acknowledged under Warren’s insistent questioning that no senior executives had been fired. In such an environment, the only cost to any of the people responsible, really, is public shame, and it’s unclear how strong a motivator that is. On Tuesday, Warren tried her best to find out. http://www.newyorker.com/business/currency/elizabeth-warren-and-the-wells-fargo-scam

52

Inditex, the Superstar Retailer By Andrea Felsted Sep 21, 2016 7:01 AM EDT INDUSTRIA DE DISENO TEXTIL Women don’t want new clothes any more. There aren't enough hot new fashions. The weather's too warm. The excuses have been coming thick and fast from apparel retailers to explain their poor performance. Inditex, in contrast, has once more shown them up. The owner of the Zara store chain said Tuesday that sales rose by 16 percent, excluding currency movements, in the six months to July 31, with same-store sales up by 11 percent. Crucially, sales excluding currency movements were up 13 percent between Aug. 1 and Sept. 18 -- a period when others, including rival Hennes & Mauritz, were warning of difficult conditions due to warm autumn weather. Inditex's outperformance is down to several factors. First, its business model enables it to quickly transform the hottest trends into high street hits within weeks. That means it can respond quickly to changing fashions, and periods of unusually hot or cold weather, where others are left flogging winter coats during a heat wave. World Domination Inditex's global reach has helped it to outperform rivals Source: Company report Inditex also makes about half of its clothes close to its headquarters in northwest Spain, as well as Portugal and North Africa. A further 20 percent is made in Turkey, leaving about 30 percent sourced from Asia. Rival H&M sources about 80 percent of clothes from Asia, and since these are usually priced in dollars it's more vulnerable to the impact of a stronger dollar than Inditex. Finally, Inditex has also been investing in its online business and sprucing up its stores, focusing more on big flagships in major markets. And, it has been keeping pricing stable. With cheap chic Primark expanding in Europe and the U.S., no retailer can afford to move too far from its discount base. Founder Amancio Ortgega, Europe's richest person, is no longer chairman, but he continues to remain on the board and no doubt still influences the direction of the business. Catch Me If You Can Inditex's same store sales growth leaves other apparel retailers trailing in its wake Source: Bloomberg Intelligence It seems churlish to find fault in such a stellar performance. But if there is one niggle, it's that profits are not expanding as quickly as sales, as all that investment takes its toll. Net income rose 8 percent year on year, lagging the level

53 of sales growth. And the gross margin, the difference between the price at which a retailer buys and sells goods, fell by just over 1 percentage point in the first half. Wrinkle in the Dress Growth in earnings before interest and tax has slowed as Inditex invests in stores and online Source: Bloomberg Intelligence Still, Inditex is right to keep investing. Many retailers focus too much on cutting costs, and not enough on innovation to keep their brands and stores fresh. Shares in Inditex trade on a forward price to earnings ratio of about 29 times, almost twice the sector average. That looks deserved, given the sustained outperformance compared with other non-food retailers. But the premium looks substantial enough for now until that final wrinkle -- earnings growth lagging sales growth -- is ironed out of that Zara frilled dress. This column does not necessarily reflect the opinion of Bloomberg LP and its owners. https://www.bloomberg.com/gadfly/articles/2016-09-21/inditex-zara-deserves-top- premium-but-for-profit-niggle

54

Daily Morning Newsbriefing September 21, 2016 Will Austria veto Ceta? Maybe Canada's trade minister Chrystia Freeland should have paid a visit to Austria, not Germany, because this is where the Canada-EU trade agreement is now in acute trouble. Austria's SPÖ, the senior partner in the grand coalition government led by chancellor Christian Kern, asked its members what they wanted about Ceta, the EU's trade deal with Canada. The predictable answer they got was a 'No'. In fact, 92% of the votes were negative. Communist leaders would have been proud to receive such results. Since Austria has a veto in the ratification process, such a strong party mandate can hardly be ignored. The government cannot wiggle out of this dilemma by allowing itself to be outvoted in the council. On Monday, the German SPD's party congress voted in favour of Ceta after Freeland gave a passionate speech in favour of the deal, and even managed to get portrayed, wrongly, in the German press as a former anti-globalisation activist. FAZ makes the point that the difference in outcomes between Austria and Germany has been the position taken by the party leader. Gabriel campaigned strongly in favour of Ceta, while Kern campaigned against. There is an issue whether the Austrian referendum is representative. Only 14.400 people turned out for the vote, including 9.300 non- members. That leaves a single-digit percentage of SPÖ party members. However, polls suggest that Ceta and TTIP are highly unpopular among the electorate, so this result may be representative. FAZ notes that there may be ways to circumvent the national veto through a de facto backdoor implementation, whilst awaiting ratification. But the paper writes that there are currently no indications that they EU will go this way. The only qualification made by Austria's government, which would allow them to accept a backdoor ratification, would be an acceptance in principle of additional declarations and improvements, notably on the question of investor tribunals, social and environmental standards, and a host of other areas. The paper writes the European Commission interpreted this position as a movement towards the position of the SPD, which also has made a number of requests - but crucially none of them require opening up the treaty itself, only the insertion of protocols. EU trade ministers are going to meet in Bratislava (of all places) this Friday where they might take a decision on how to proceed. The all-important question is now how Chancellor Kern will play this. Andreas Schnauder writes in a comment in Der Standard that Kern is playing a dangerous game. Perhaps the EU can manage to negotiate some special exemptions for Austria, which will allow him to sign the treaty with a straight face. More probable, however, is that he has manoeuvred himself into a dead end from which he will not be able to get out of - meaning he will veto Ceta, and risk a full-blown government crisis in Austria and a larger EU crisis. Our other stories We also have stories on why trade growth is slowing down; on politicians hiding behind hyperglobalisation; on Catalan independence; on the dire state of the Syriza government; on Nicolas Sarkozy’s outlandish remarks; and on what the single passport is worth.

55

Caffe ReggioPeriodismo de opinión Europa impugna la precariedad de los precarios, de Fernando González Urbaneja en República de las ideas el 20 septiembre, 2016 en Comunicación, Derechos, Economía, Igualdad, Justicia, Laboral, Libertades, Política, Sociedad, Sociología, Valores OPINIÓN Dos sentencias europeas solicitadas por jueces españoles ponen patas arriba algunas de las prácticas de contratación precaria por parte de la administración española, la una referida a la sanidad pública y la otra referida a personal civil del ministerio de Defensa. En ambos casos el elemento central es el recorte de derechos a los precarios, sean interinos, temporales y demás especies de contratación en penuria. El sistema laboral vigente, tras las múltiples reformas, alienta la precariedad y los contratos temporales. Lo que fue una solución de emergencia en los años ochenta (el contrato temporal) se convirtió en el contrato habitual, especialmente tras la última Recesión. Nueve de cada diez contratos son precarios y un tercio de los contratados actuales es precario, porcentaje creciente ya que los indefinidos que se jubilan son relevados por temporales crónicos. Los empleadores explican que la rigidez laboral y el coste del despido aconsejan mucha cautela a la hora de contratar y que antes que despedir es preferible que los contratos se extingan de forma automática. El coste social y real de ese modelo es incalculable. La lealtad entre empleador y empleado se debilita con consecuencias funestas. ¿Para qué formar a un empleado temporal que en breve se irá a otro empleo o sector? Es bastante obvio que sin formación continua la productividad se debilita, lo cual conspira contra la competitividad. Y también es obvio por conocido que el principal problema de la economía española se refiere a la productividad y la competitividad. Sin acabar con la precariedad y la temporalidad no habrá oportunidad para la productividad. Las sentencias del Tribunal Europeo, que son de obligado cumplimiento, ponen patas arriba las prácticas de precariedad del sistema sanitario público español, Sus gestores se justifican por la carencia de recursos, pero no son capaces de calcular los costes por falta de competencia, de adaptación, de motivación… que produce la precariedad. Que médicos españoles que han superado el MIR, y enfermeras bien formadas (con alto coste para el estado que ha invertido miles de millones durante años) emigren a países ricos del norte de Europa que les ofrecen mejores salarios y estabilidad debería ser una advertencia, una señal de algo va muy mal. La sentencia del Tribunal Europeo es otra señal más sonora para acabar con el actual modelo perverso, degenerado y, ahora ilegal. Las Comunidades Autonómicas que gestionan la sanidad pública y el propio estado como garante de la legalidad deberían intervenir decididamente para acabar con la actual y creciente precariedad. Seguramente tendrá costes importantes a corto plazo, aparentemente insoportables en estos momentos, pero a medio y largo plazo produciría mejoras de calidad, más productividad y satisfacción para los pacientes y de los profesionales de la sanidad y de otros servicios públicos. Desde el Parlamento deberían salir recomendaciones, mandatos, a las Administraciones públicas para cumplir las sentencias europeas, para extender su aplicación, y para poner punto final a la precariedad en los empleos públicos y en los privados sin justificaciones muy claras y evidentes. http://www.caffereggio.net/2016/09/20/europa-impugna-la-precariedad-de-los- precarios-de-fernando-gonzalez-urbaneja-en-republica-de-las-ideas/

56

What Have We Learned From The Crisis? September 2016

According to most chronologies, the global financial crisis began in July 2007, when BNP Paribas closed withdrawals from two of its funds, the modern equivalent of a bank shutting its doors. By early 2008 the financial panic had translated into a ; in September 2008 the failure of Lehman turned it into a free fall. And the aftershocks are still very much with us: although the free fall ended in mid-2009, growth rates thereafter were generally lower than growth pre-crisis, so the world economy has never made up the lost ground. At this point, then, we’re talking about an 8- or 9-year and counting episode, which is longer than the famous era of stagflation in the 1970s and early 1980s. The costs of the crisis and postcrisis slump were also much larger than those of the stagflation era, with steeper and more prolonged drops in income, more unemployment, more social and political disruption. But here’s a funny thing, striking to those of us of a certain age – that is, old enough to have already been studying or doing economics in the 70s. Stagflation had a huge impact on economic thinking, both at the level of academic research and on conventional wisdom among policymakers. The global financial crisis and the recession/stagnation that followed seem to have had much less impact. To a remarkable extent, economists and economic policymakers are still saying the same things in 2016 that they were saying in 2007. For some reason, there doesn’t seem to be a clear consensus about what, if any, lessons we should draw from years of terrible economic performance. Yet I would submit that there are some very important lessons for those willing to see them,and those lessons are what I want to talk about in this lecture. I was tempted, when I began writing up my thoughts here, simply to present a checklist of things we have learned or should have learned since 2007. It seems to me, however, that it’shelpful to put some more structure on the discussion, and I ended up with three main categories of things we should have figured out by now given the past 9 years’ events. First, we’ve seen a lot of vindication for old, unfashionable ideas – oldies but goodies that got deemphasized, and in some cases effectively blackballed, in the decades following the 1970s, but have turned out to be remarkably useful practical guides to policy and its effects in the post-crisis world. Second, there have been some revelations about financial markets, especially the role of liquidity and the failure of arbitrage when you need it most, that have definitely changed how I see the world, and have important policy implications. Third, we’ve made some important and uncomfortable discoveries about the politics and sociology of economics itself – about the resistance of both the economics profession and public officials to changing their views in the face of contrary information.

As you might expect, I will end this lecture with a plea for doing better. But let that wait; right now, I want to get into the substance of what went down, how that compared with what we should have expected, and what we should learn from the difference. Imaginary There’s a widespread impression out there that the crisis and aftermath have been devastating for the credibility of economists, proving that they know nothing. But my personal experience has been almost the opposite. Here’s a confession: Until the crisis struck, and especially given what happened in the next few years, I was always a bit unsure about my own bona fides. Obviously I’d been a professional success, but why? Was it truly because I’d been making a real contribution to our understanding of how the world works, or was I simply good at playing an academic game? I wasn’t trying to fake it, but where was the clear, unambiguous demonstration that the models I deployed to interpret the world actually added value? Then came the crisis and policy response, and there were several immediate questions in which

57 popular intuitions and simple macroeconomic models were very much at odds. Would budget deficits cause interest rates to soar? Practical men said yes; economists, at least those of us with certain tools in our boxes, said no. Would huge increases in the monetary base cause runaway inflation? Yes, said practical men, politicians, and a few economists; no, said I and others of like mind. Would fiscal austerity depress output and employment? No, said many important people; on the contrary, it would be expansionary, because it would raise confidence. Yes, a lot, said Keynesian-minded economists. And my team won three out of three. Goooaaal! OK, seriously: there was a fairly old-fashioned framework for macroeconomic thinking that some of us, at least, carried into the post-crisis landscape with quite a lot of success. How oldfashioned? Well, I think I’ve said in the past that economists from 1970 or so – that is, from before the intellectual revolution brought on by stagflation – might well have done a better job responding to the crisis than the economists we actually had on hand. So let me enlarge on that point by introducing a character I sometimes think of as “imaginary James Tobin,” a prestagflation Keynesian who thought deeply about macroeconomic policy and financial markets. What would IJT have said about the post-2008 environment? Tobin these days is mainly remembered for his magnificent work on financial markets and the determination of aggregate demand, of which more shortly. But I want to start with an argument he was widely perceived as having lost – the argument about aggregate supply, specifically about unemployment-inflation tradeoffs. For Tobin was one of the last prominent holdouts against the Friedman-Phelps natural rate hypothesis, which said that there is no long-run tradeoff between unemployment and inflation. Friedman, Phelps, and their followers argued that any attempt to hold unemployment persistently below the natural rate would lead to ever-accelerating inflation; and their models implied, although this is rarely stressed, that an unemployment rate persistently above the natural rate would lead to ever-declining inflation and eventually accelerating deflation. Tobin was, however, skeptical. In his 1972 presidential lecture to the American Economic Association he took on the natural-rate hypothesis, arguing that the prediction of accelerating deflation from high unemployment was contradicted by evidence from the 1930s. He suggested that there is a basic reluctance on the part of firms and workers to cut nominal wages, and that given the inevitable churn and disequilibrium of labor markets, at any given time there are likely to be some workers whose equilibrium wages – but not, perhaps, their actual wages -- are declining in nominal terms. How frequent such episodes are will depend on the overall rate of inflation, and the result will be Phillips tradeoffs that persist in the long run, at least at low inflation.

I was a graduate student in the 1970s, and I remember the attitude toward Tobin’s views on this issue in the age of rational expectations: it was basically dismissive, even among those who honored his contributions elsewhere. But we’ve now had multiple years of unemployment clearly above any notion of the natural rate in most advanced countries, and while inflation has fallen, it hasn’t turned into runaway deflation anywhere. So Tobin was right about that. And he also seems to have been right about downward nominal wage rigidity: if you look at the

58 distribution of nominal wage changes in depressed economies, like the case of Portugal shown in Figure 1 (chart courtesy of ), you see a large spike at zero. For reasons not completely persuasive to me, the standard response of macroeconomists to the failure of deflation to materialize seems to be to preserve the Friedman-Phelps type accelerationist Phillips curve, but then assert that expected inflation is “anchored”, so that it ends up being an old-fashioned Phillips curve in practice. We can debate why, exactly, we’re going this way. But what I don’t think you can deny is that when it comes to inflation and aggregate supply, Tobin’s 1972 last stand against the natural rate turns out to be a better guide to the post-2008 landscape than just about anything written in the 35 years that followed. But let me move on to even bigger triumphs for the old-fashioned macroeconomics of imaginary James Tobin, which have come on the demand side.

The U.S. Federal funds rate hit zero in late 2008, with the economy still in a nosedive. The Fed responded with the first round of quantitative easing; later rounds would eventually lead to an almost 400 percent increase in the monetary base. Meanwhile, the budget deficit soared to heights never before seen in peacetime, mainly because of plunging revenues and increased mean-tested spending, but also to some extent because of deliberate fiscal stimulus. So what effect would these radically unusual policies have? The answer from quite a few public figures was to predict soaring inflation and interest rates. And I’m not just talking about the goldbugs who infest TV business channels. Monetary economists like Allan Meltzer and Martin Feldstein warned about the coming inflation, joined by a Who’s Who of the Republican establishment. Academics like Niall Ferguson and John Cochrane warned about massive crowding out of private investment. But old-fashioned macro, with something like IS-LM at its base, offered startlingly contrary predictions at the zero lower bound. My imaginary James Tobin – OK, also me personally, not trying to emulate IJT -- predicted no inflationary impact of monetary expansion, in fact not much impact at all, because at the ZLB money and bonds are near-perfect substitutes; no crowding out, because the zero lower bound is also a regime of excess desired savings. And sure enough, inflation stayed low, as did interest rates. IJT-style macro also made a prediction about the output effects of fiscal policy – namely, that it would have a substantial multiplier at the zero lower bound. There was a lot of dispute about that proposition, of several kinds. Chicago’s Cochrane insisted that the old-fashioned macro behind it had been “proved wrong.” Robert Lucas denounced Christina Romer’s use of multiplier analysis as “shlock economics,” basing his argument on a garbled version of Ricardian equivalence. And, from a different perspective, Jean-Claude Trichet sunnily declared that warnings about the contractionary impact of austerity were “incorrect,” because budget discipline would improve confidence. A few years on, and the old-fashioned Keynesian analysis looks pretty good. There was a sort of natural experiment in the euro area, in which some countries were forced into severe austerity over the period 2009-2013, while others were not; Figure 2 shows what the outcome looks like. Figure 2

59

It sort of looks like a multiplier around 1.5, doesn’t it? Which just happens to be the multiplier Christy Romer was assuming in her stimulus analysis. Now, this wasn’t a perfect natural experiment in the sense that there may have been common factors driving both austerity and economic contraction. But more sophisticated estimates of the multiplier, like Blanchard-Leigh or Nakamura-Steinsson, also seem to converge on a number around 1.5, which is pretty much what IJT analysis of an economy with large automatic stabilizers from a big public sector would have suggested. But wait, we’re not quite done. One aspect of the post-2008 story that apparently surprised many people, even smart economists like Martin Feldstein, was that huge increases in the monetary base didn’t seem to produce much rise in broader monetary aggregates, leading to claims that something strange was going on – that maybe it was all because the Fed was paying interest on excess reserves. But the same thing happened in Japan in the early 2000s, without any special interest payments. And it was, in fact, completely predictable if you were aware of Tobin’s 1960s work with William Brainard on his “general equilibrium” approach to monetary theory. What was this approach? Basically, it was an application to asset markets, including the role of intermediates, of an approach similar to IS-LM: general equilibrium, yes, but with an ad hoc if plausible treatment of aggregate behavior. This approach told you right away that the volume of bank deposits, which are the non-cash component of broader money aggregates, was determined not by some mechanical multiplier but by incentives – and that in a just swapping monetary base for zero-interest securities would have no effect on these incentives, and hence no effect on deposits. Oh, and this wasn’t an ex post rationale: it’s what those of us who knew the golden oldies were saying in advance. Me in 2009: “Central banks don’t control the money supply, they only control the monetary base. Broad aggregates like M2 may well be unaffected by what the central bank does: increase the monetary base, and all that happens is an offsetting fall in the money multiplier.” The bottom line is that the crisis and its aftermath have actually provided a powerful vindication of macroeconomic models. Unfortunately for many economists, the models it vindicates are more or less vintage 1970. It’s far from clear that anything later added to our ability to make sense of events, and developments in macro over the course of the 80s and after may even have subtracted value.

Whatever it takes Ask macroeconomic theorists what we learned from the crisis, what their models have been missing, and you don’t often hear that we need to relearn 1970-vintage macro. Yet it’s pretty hard for DSGE theorists, even of the New Keynesian brand, to say with a straight face that their models worked well. So what you usually hear is that macro needs to incorporate the financial sector in a way it hasn’t. Is this the right response? I don’t think so. It’s true that banks and their role were underemphasized in the formal models, and that this should be better handled. But I don’t see this as a key failing. As I’ll explain in a minute, I would argue that (a) we had a fairly reasonable understanding of the logic of banking crises – our failure was more empirical than conceptual; and (b) the financial sector ended up being less central to the story than it might have seemed in 2009. The real conceptual surprises have come elsewhere. So, let’s talk briefly about banking crises in theory and practice. If I had to summarize the way I talked to myself during 2007, it went something like this: “This housing bust is going to be nasty, but banks are protected by deposit insurance. Wait – more than half the system is shadow banking? Yikes! Diamond-Dybvig!” The point is that we had a pretty good story about how bank runs, even contagious bank runs, can happen, formalized in the famous Diamond-Dybvig paper. True, it wasn’t integrated with the DSGE models that had come to dominate journal articles, but real-world oriented economists knew about it. If they didn’t make allowances for a modern version of the early-30s banking crises, it was because they imagined that regulation and safety nets had contained that threat. What was missing was institutional understanding, the realization that new forms of finance had recreated the old risks by repackaging the functions of banking in forms that

60 weren’t regulated and protected. And once that realization struck home, it took no time at all to recognize what we were seeing. I don’t recall seeing anyone agonizing over the events of 2008, wondering how such things were possible given our models. On the contrary, it was more or less immediately obvious that we were seeing a new version of an old, fairly well-understood story. Furthermore, while the financial sector played a central role in the hottest part of the crisis, over the medium term it’s far from obvious that banking is the most important thing to focus on. For financial disruption was a big issue for a relatively short time, while economic troubles have gone on and on. To see what I mean, look at any of the widely used measures of financial stress, like the St. Louis Fed stress index (Figure 3): Figure 3

What you see in all cases is a severe but brief spike in 2008-9, then a quick return to normal conditions; yet recovery took a very long time in the US, and Europe went on to have a whole new set of problems. Maybe banking wasn’t that central after all? But if it wasn’t banking, what was it? Well, we did have a hell of a housing bust: residential investment in the U.S. as a percentage of potential GDP fell by more than four points. Add in the effect of the lost wealth from plunging housing prices on consumer demand, and maybe an additional squeeze from deleveraging when the housing bust led to a reevaluation of what levels of indebtedness are acceptable. Given all this, it really isn’t clear that banking is all that central to the story of the past 8 years. Still, something important did happen during that period of financial stress, and again in Europe in 2011-2012. In both cases we saw prices of important classes of assets drop sharply in a short period of time, then recover with almost equal speed despite little obvious change in the fundamentals. I know these episodes aren’t usually treated as closely related, but I think they are, and they both have big implications for policy. Let’s start with 2007-9. What people (myself included) often focus on when looking at that period is the TED spread – the difference between the rates at which banks lend to each other and the rate at which the U.S. government can borrow. This spread spiked as the extent of the subprime mess became apparent. And this is often taken as evidence that banks really doubted each others’ solvency. But here’s the thing: lots of spreads, many of them not obviously tied to banks, spiked during the same period. Figure 4 shows the difference between yields on 10-year U.S. government inflation- protected securities (TIPS) and ordinary nominal securities of the same maturity. That spread is normally negative, reflecting expected positive inflation, but it shot up to zero in the height of the crisis. Why?

61

Figure 4

It wasn’t about solvency, since these were two kinds of debt instruments issued by the same, ultra-solvent borrower. Was it a collapse of inflation expectations? Probably not: survey-based measures of expected inflation, like that collected by the Survey of Professional Forecasters, don’t show anything like the apparent plunge. By all accounts, what happened was a drying up of liquidity for all but the most heavily traded assets – basically, everything except plain-vanilla Treasury securities ended up being sold at a huge discount. But if that’s what it was, why weren’t investors rushing in to buy the underpriced assets? The answer, I think, is to ask, which investors? Again, we have an existing model we can pull off the shelf to understand the issue, but one less familiar to macroeconomists than Diamond-Dybvig. Back in 1997 Shleifer and Vishny published an insightful paper, “The limits of arbitrage,” which pointed out that the investors we often assume will step in to profit from obvious underpricing of assets are usually a small group of specialists with limited capital and substantial leverage. More than that: they are heavily invested in the very assets that are underpriced. Their argument was, in part, that this reality means that really severe cases of mispricing can be self-fulfilling. Think of a fairly thinly traded security – for example, debt of a smallish developing country. The main investors in that debt are likely to be specialized intermediaries for whom it is a large part of their portfolio. If some event, or even a rumor, causes the price of that debt to plunge, those investors will also be plunged into financial distress, and therefore be unable to buy into the profit opportunity. What I’m suggesting is that what happened between the fall of Lehman and the late spring of 2009 was a giant example of this phenomenon. The prices of just about everything except the most widely held, plain-vanilla securities – basically nominal U.S. government securities – plunged, creating widespread distress among leveraged investors of all kinds, and therefore preventing arbitrage that would correct this mispricing. The virtue of this story, as I see it, is that it explains both how things got so bad and why financial conditions improved so rapidly in mid-2009. At the time, many people – myself included – were very skeptical about the Treasury’s “stress tests” and all that. But by giving banks a relatively clean bill of health, even as the Fed made it clear that it would provide liquidity as needed, Treasury ended up breaking the vicious circle: prices of distressed securities began to rise, freeing leveraged investors to buy more of these securities, causing them to rise further. And the same logic helps us to understand one of the most dramatic episodes of the ongoing crisis: the moment when Paul DeGrauwe saved the euro. OK, he had a bit of help from Mario Draghi. In 2011-2012 it seemed very plausible that the whole euro system would be blown apart by speculation against southern European debt. Greece was a small player; but Italy and Spain combined account for around a third of the euro area economy. And in that scary period their soaring interest spreads against Germany seemed like the harbingers of imminent doom:

62 markets seemed to have decided that they were fundamentally insolvent. Yet DeGrauwe, in an analysis that deserves to be considered an instant classic, noted that Spain’s finances looked no worse than those of Britain, which was paying very low rates. Why? He argued that it was really about liquidity: Britain, which retained its own currency, faced no risk of a cash crunch, while Spain, having joined the euro, was very much at risk of running out of money. Figure 5

DeGrauwe suggested that Spain’s situation gave rise to multiple equilibria – that investors were refusing to buy Spanish debt over fears that a cash crunch could push Spain into default, and that such a default might lead to repudiation of debt, which would end up justifying investors’ fears. One might alternatively argue that a Shleifer-Vishny story was at work: the main buyers of Spanish and Italian debt were the countries’ own banks, and plunging prices of that debt were pushing the banks into financial distress, forcing them to pull back even as the debt became greatly undervalued. (This was pretty much the gist of the “doom loop” diagnosis one heard at the time.) Either way, the analysis suggested that relatively small actions by the ECB could salvage the situation – that all it would take was for the ECB to act as a lender of last resort, or even simply promise to do so. Sure enough, Mario Draghi said three words – “whatever it takes” – and all was well. OK, it wasn’t quite that easy: Draghi had to back up those words with masterful political maneuvering, getting his board to accept in principle the idea of outright monetary transactions. But it was still a remarkable turnaround. And my point is that it should be seen as fundamentally similar to the financial recovery that took place in the United States in spring 2009. In both cases we’re talking about obvious asset mispricing that markets couldn’t correct without an assist from central banks and other public institutions. Which brings me back to the issue of how we do macroeconomics. When macroeconomists talk about integrating the financial sector in DSGE models, my question is, what would that integration look like? Would it involve adding banks, but doing so in a way that preserves efficiency except for the possibility of Diamond-Dybvig-type runs? If so, it wouldn’t help much in making sense of how the crisis and aftermath actually played out. On the other hand, making allowances for the possibility of liquidity crunches and failures of arbitrage would be really helpful. But can this even be done in the kind of macroeconomic frameworks we’ve been using for the last few decades? I really doubt it. What looks useful is a sort of looser-jointed approach: ad hoc Hicks-Tobin-type models, with simple models of financial market failure on the side to be applied as seems necessary. For those seeking a definitive, integrated approach this will seem pitifully inadequate; and if I were a young academic seeking tenure I’d run away from all of this and either do empirical work or shun macro altogether. But models don’t have to rigorously dot all i’s and cross all t’s – let alone satisfy the peculiar criteria that modern macro calls “microfoundations” --to be very useful in practice. And let me further suggest that this loose-jointed framework suggests a broader rationale for policy activism than most macroeconomists – even self-proclaimed Keynesians – have generally offered in recent decades. Most of them – or, I guess I should say, most of us, since I was fairly comfortable with the Great Moderation policy consensus for a while – have seen the role for

63 policy as pretty much limited to stabilizing aggregate demand. Correcting asset markets when they go wrong wasn’t part of the mandate, because who were policymakers to claim that they were smarter than private investors? Once we admit that there can be big asset mispricing due to liquidity and collateral constraints, however, the case for intervention becomes much stronger. It’s still easy to see how this could go overboard, with officials deciding that any market results they don’t like are the result of misperceptions or manipulation by the gnomes of Zurich. (I know, that was always a silly phrase – everyone knows that the gnomes are actually in Basel.) But a fixed belief in financial market efficiency would have ruled out both the successful stabilization of U.S. markets in 2009 and the Draghi stabilization of 2012. There is more potential for and power in intervention than was dreamed of in efficient-market models.

Delusions of progress? Let me now turn to the question of what economists have learned about themselves and about economic policymakers as a result of the crisis. It is not a happy story. Earlier I pointed out that events suggest that we need to revisit the Friedman-Tobin debates of the 1960s. The way we all learned the story was that it was a straightforward battle of ideas, decided by evidence: stagflation proved that Friedman was right and Tobin was wrong, and both the profession and policymakers adjusted accordingly. Macro models emphasized monetary policy over fiscal, and assumed a vertical long-run Phillips curve; policy focused on stabilization, not full employment, and turned to independent central bankers and Taylor rules to prevent inflationary license. But in the light of events since 2008, the first part of the story looks all wrong. Actually, Tobin was right both about the limits of monetary policy and the long-run Phillips curve under low inflation. And what about the second part, in which economists did what they are supposed to do, and adjusted their views in the light of compelling evidence? If that were how we actually behave, the long slump after 2008 should have produced changes in theory and practice comparable to those of 1970s stagflation. But it hasn’t. To be fair, some economists have shifted their views; and there’s a lot of excellent empirically oriented work that implicitly or explicitly acknowledges the realities of large fiscal multipliers at the zero lower bound, apparent downward nominal wage rigidity, and more. But equilibrium macro theorists have shown themselves utterly unwilling to admit that anything they had been saying proved wrong. What we get instead are elaborate excuses – which is how, for example, I see the so-called “neo-Fisherian” models (Fisher himself would surely have considered them ridiculous) that claim that cutting interest rates is deflationary rather than inflationary. At the level of supposedly policy-relevant economics, we also see a remarkable pattern of learning nothing. People who published articles in 2009 declaring “inflation is coming” just kept on publishing articles declaring that “inflation is coming,” with no hint of being chastened by their earlier errors. And while the ice may be breaking a bit among actual policymakers, we have yet to see any major central bank admit that the 2 percent inflation target is wrong, or many finance ministers openly call for bigger deficits. What all this suggests to me is that we need to rethink our account of intellectual history. Maybe the evidence in favor of a natural rate, against old-fashioned Keynesianism, wasn’t all that compelling; maybe stagflation seemed to have such a profound effect on thinking mainly because it provided a plausible cover story for a shift that many economists wanted to make for other reasons. For there was a clear rightward drift of politics, a shift toward free-market ideology, already underway in the 1970s. So perhaps stagflation was not so much a rude shock as an excuse for going all in on that ideology, without much second-guessing. And conversely, the crisis of 2008 and its aftermath have taken place in an environment in which conservative ideology retains a powerful position in real-world politics and the academy alike. So relatively few economists or policymakers have been willing to reconsider their views despite overwhelming empirical refutation. Or to put it another way, one thing we seem to have learned from the crisis is that many of our

64 colleagues are less engaged in something like science, an attempt to understand the world as it is, than we would like to think. Instead, when they invoke evidence it’s the way a drunkard uses a lamppost: for support, not illumination. The best excuse one can offer is that even hard scientists are often reluctant to change their views – “Science progresses one funeral at a time,” said Max Planck. But what I’m pointing out here isn’t just that too few economists were willing to learn from the Great Recession, but that there’s a notable contrast with the way the profession seized on the troubles of the 1970s. This asymmetry is what’s troubling, and suggests that politics and ideology have distorted our field. OK, at this point you’re going to ask me for a solution. And I don’t really have one, except to urge everyone who does or talks about economics to be a bit self-aware. Nobody is pure; everyone is tempted to read evidence as supporting what he or she wants to believe. But some people fight it; they make a conscious effort to avoid seeing what they want to see, they always ask, “Is this the evidence talking, or my preconceptions?” And you want to be one of those people. If your initial reaction to the incredible and terrible events of the past 9 years is that they just show that you were right all along, consider how unlikely that is, and challenge yourself. If there’s any offsetting benefit to economic crisis, it is that it can be a learning experience. Let’s not waste that opportunity. Opening lecture of the academic year Tuesday 20 September 2016, 18:30 - 20:00 What have we learnt from the crisis? Paul Krugman, Distinguished Professor of Economics at City University of New York// Auditorium Ivan Pictet Maison de la paix, Geneva INSTITUT DE HAUTES ÉTUDES INTERNATIONALES ET DU DÉVELOPPEMENT GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES

SundayReview | Opinion Put to Work for Democracies By SEPT. 17, 2016

Credit Andrew Holder A Chinese student once described his country’s globalization strategy to me. China, he said, opened a window to the world economy, but placed a screen on it. The country got the fresh air it needed — nearly 700 million people have been lifted from extreme poverty since the early 1980s — but kept mosquitoes out. China benefited from the flourishing of trade and investment across national borders. For many, this was the magic of globalization. But it’s not the whole story. Look closely at the economies that converged with richer counterparts — Japan, South Korea, China — and you see that each engaged globally in a selective, strategic manner. China pushed exports, but it also placed barriers on

65 imports to protect employment in state enterprises and required foreign investors to transfer know-how to domestic companies. Other countries that relied on globalization as their growth engine but failed to put in place a domestic strategy became disillusioned. For example, few countries tried as hard as Mexico to integrate with the world economy, through Nafta and liberal trade and financial policies. Yet the country’s economic growth in recent decades has been sluggish, even by the modest standards of Latin America. The bigger worry today is that unmanaged globalization is undermining democracy. Democratic politics remain tethered to nation-states, while institutions that make the rules for global markets are either weak or seem too distant, especially to middle- and lower-class voters. Globalization has deepened the economic and cultural divisions between those who can take advantage of the global economy and those who don’t have the resources and skills to do so. Nativist politicians like Donald J. Trump have channeled the resulting discontent as hostility to outsiders: Mexican or Polish immigrants, Chinese exporters, minorities. We need to rescue globalization not just from populists, but also from its cheerleaders. Globalization evangelists have done great damage to their cause not just by underplaying the real fears and concerns on which the Trumps of this world thrive, but by overlooking the benefits of a more moderate form of globalization. We must reassess the balance between national autonomy and . Simply put, we have pushed economic globalization too far — toward an impractical version that we might call “hyperglobalization.” The transition to hyperglobalization is associated with two events in particular: the Organization for Economic Cooperation and Development’s decision in 1989 to remove all restrictions on cross-border financial flows, and the establishment in 1995, after almost a decade of negotiations, of the World Trade Organization, with wide-ranging implications for domestic health and safety rules, subsidies and industrial policies. The new model of globalization stood priorities on their head, effectively putting democracy to work for the global economy, instead of the other way around. The elimination of barriers to trade and finance became an end in itself, rather than a means toward more fundamental economic and social goals. Societies were asked to subject domestic economies to the whims of global financial markets; sign investment treaties that created special rights for foreign companies; and reduce corporate and top income taxes to attract footloose corporations. Some simple principles would reorient us in the right direction. First, there is no single way to prosperity. Countries make their own choices about the institutions that suit them best. Some, like Britain, may tolerate, say, greater inequality and financial instability in return for higher growth and more financial innovation. They will opt for lower taxes on capital and more freewheeling financial systems. Others, like Continental European nations, will go for greater equity and financial conservatism. International firms will complain that differences in rules and regulations raise the costs of doing business across borders, but their claims must be traded off against the benefits of diversity.

66

Second, countries have the right to protect their institutional arrangements and safeguard the integrity of their regulations. Financial regulations or labor protections can be circumvented and undermined by moving operations to foreign countries with considerably lower standards. Countries should be able to prevent such “regulatory arbitrage” by placing restrictions on cross-border transactions — just as they can keep out toys or agricultural products that do not meet domestic health standards. For example, imports from countries that are gross violators of labor rights, such as Pakistan or Vietnam, may face restrictions when those imports demonstrably threaten to damage labor standards at home. Otherwise, national institutional diversity would be meaningless. Emphasizing the primacy of norms and social bargains embedded in our domestic regulations would ensure that global commerce was not used to override them. It would also shield us from misguided protectionism in the great majority of cases where trade poses no danger. Third, the purpose of international economic negotiations should be to increase domestic policy autonomy, while being mindful of the possible harm to trade partners. The world’s trade regime is driven by a mercantilist logic: You lower your barriers in return for my lowering mine. But lack of openness is no longer the binding constraint on the world economy; lack of democratic legitimacy is. It is time to embrace a different logic, emphasizing the value of policy autonomy. Poor and rich countries alike need greater space for pursuing their objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. Both objectives require placing some sand in the cogs of globalization. For example, developing nations may be allowed to subsidize some industries in return for rich nations being allowed to use tariffs against countries “dumping” goods produced under substandard labor or environmental standards. Fourth, should focus on enhancing democracy, not globalization. Global governance cannot overcome major problems like inequality, social exclusion or low growth, but it can help by devising norms that improve domestic policy making, like requirements on transparency, public deliberation, broad representation, accountability and use of scientific or economic evidence in domestic proceedings. To some extent, the World Trade Organization already advocates these disciplines. They deserve greater priority over trade liberalization and regulatory harmonization. And finally, nondemocratic countries like Russia, China and Saudi Arabia — where the rule of law is routinely flouted and civil liberties are not protected — should not be able to count on the same rights and privileges in the international system as democracies can. When a nation is not democratic, we can no longer presume that its institutional arrangements reflect the preferences of its citizens. Therefore it lacks a prima facie argument for shielding its market rules from international scrutiny. It would be appropriate for democracies to consider less permissive rules for them — for example, by requiring a higher burden of proof from non-democracies when they file a trade complaint against democracies. When I present these ideas to globalization advocates, they say the consequence would be a dangerous slide toward protectionism. But today the risks on the other side are greater, namely that the social strains of hyperglobalization will drive a populist backlash that undermines both globalization and democracy. Basing globalization on defensible democratic principles is its best defense.

67

Globalization, within limits, has been good economics. Globalization, within limits, can be good for our democracies, too. Dani Rodrik, a professor at the John F. Kennedy School of Government at Harvard, is the author of “Economic Rules: The Rights and Wrongs of the Dismal Science” and “The Globalization Paradox: Democracy and the Future of the World Economy.” http://www.nytimes.com/2016/09/18/opinion/sunday/put-globalization-to-work-for- democracies.html?partner=rss&emc=rss&_r=0

68

A WEEKLY COLUMN ABOUT ECONOMICS AND POLITICS, FORMERLY OF THE BOSTON GLOBE, INDEPENDENT SINCE 2002 David Warsh, proprietor It Takes (an Invisible) College September 18, 2016 Victory is claimed by all, defeat assigned to one alone, wrote the Roman historian Tacitus. That’s certainly the case with the emerging field described as behavioral economics. Thus Richard Thaler, of the Booth School of Business of the , in his autobiography, Misbehaving: The Making of Behavior Economics, tells the story of the “Anomalies” column he wrote for many years, criticizing standard theory for the Journal of Economic Perspectives, In The Undoing Project: A Friendship that Changed Our Minds, forthcoming in December (Norton), author Michael Lewis agrees with Thaler in assigning credit. Danny Kahneman and Amos Tversky, Israeli psychologists, who worked in tandem for nearly thirty years, “are more responsible than anybody for the powerful trend to mistrust human intuition and defer to algorithms,” the book’s advance material states. (Tversky died in 1996, at 59; Kahneman shared a in Economic Sciences in 2002). In fact, a good many seminal thinkers besides Kahneman and Tversky have contributed to the creation of behavioral economics, and what today is becoming part of economics’ engineering wing – perhaps as many as two or three dozen. Some have died; more than a dozen have been recognized by the Swedes; several others may yet win a Nobel Prize. A celebration last week of the sixty-fifth birthday of David Kreps, of Stanford University’s Graduate School of Business, marked the scholarly contributions of one of the leading figures in the integration of game theory into economics. Somewhere near the beginning of the two-day Krepsfest, Joel Watson, of the University of California at San Diego, observed, Writing books gives an author greater flexibility than afforded in journal articles. Journals want simple ideas (so readers don’t have to work hard to get the main point) with fairly complicated analysis (to show muscle and credibly assert that others might not have been able to do it) that is very well connected to existing lines of thought in the literature (so that it makes others in the profession feel relevant and good about themselves). With a book, the author can ruminate broadly (putting more ingredients into the picture) and speculate (sketch some ideas that may stimulate further research). Hence Kreps’ reputation: he has done it all that As a graduate student enrolled in Stanford’s operations research program, he shared a Palo Alto house apartment with future Nobel laureate Alvin Roth and Robert Leary. A third student in the program. He burst on the scene in the late 1970s with series of papers on financial markets, dynamic programming, and the theory of choice. When in 2010 the American Economic Association made Kreps a Distinguished Fellow, the citation listed at the very end his contributions to finance. “Characterizing no-arbitrage

69 restrictions in terms of martingale equivalent measure is the foundation of modern asset pricing theory,” the citation affirmed. Non-economists will recognize only the word “foundation.” At Krepsfest, finance came first on the program/ With Kreps’ student Chi-fu Huang, of DeepMacro.com, away on family business; Huang’s student, Ayman Hindy, of Capula Investment Management, filled in, delivering retrospective remarks. Both witnessed the spectacular rise and fall of Long Term Capital Management from the back of the bus. (Kreps, who grew up near Montclair, N.J., and attended Wesleyan University and Dartmouth College, was a mathematician before he was an economist, thanks to summer math camps organized by the National Science Foundation. I asked him about that and he replied, “The summer I spent in 1966 at Ohio State was one of the transformative moments in my life. I always ‘knew’ I wanted to do mathematics – at least, past third grade – up to that point I thought astronomy was cool – but it wasn’t until that summer that I figured out what mathematics was. So Arnold E. Ross sits first among the teachers and mentors I’ve had. I don’t know how much your column has of biography, but despite what I’ve done in and around economics, one tiny accomplishment of which I am inordinately proud is that I have a tiny extension of the Hahn-Banach Theorem in mathematics with my name attached.” It was in 1982 that a little paper with Paul Milgrom, John Roberts and Robert Wilson, appeared in the Journal of Economic Theory. “Rational Cooperation in the Finitely Repeated Prisoners’ Dilemma,” showed how, with a little uncertainty about the each other’s personality, cooperation could emerge among players whom standard theory predicted would inevitably choose to betray one another at the end of the day – a phenomenon ubiquitous in daily life but, to that point, about which economics had little or nothing to say, “intractable” as it seemed. The authors were quickly dubbed the “gang of four”; the joke being that, by joining forces, the authors (and the editor, Karl Shell) assured that whatever path might lead one or more to an eventual Nobel Prize, would be pursued separately, since the Swedes never cited more than three persons in one award. Kreps and Wilson’s “Reputation and Imperfect Information” and Milgrom and Roberts’s “Predation, Reputation, and Entry Deterrence,” appeared separately in the same issue. “Sequential Equilibrium,” by Kreps and Wilson, subsequently elaborated the tool. With Drew Fudenberg, Kreps wrote papers modeling aspects of learning that started skeins of influential work; with In-koo Cho, he showed how players dealt with new facts they learned about each other. In 1989, Kreps was recognized with the John Bates Clark Medal as having made the most significant contributions among his economist cohort before the age of forty. The next year came A Course in Microeconomic Theory, a textbook for first-year graduate students – the “Black Book,” so called for its lightly-decorated cover. It was here that many of the best students of the next generation discovered that ideas previously taught in advanced “topic” courses in the second year had become basic for talented undergraduates: moral hazard and adverse selection, signaling and screening behavior, entry deterrence, implicit collusion, and reputation effects. Ahead lay incentive alignment and mechanism design. The format was pure Kreps: larger type for essential matters, technical material confined to in smaller type, designed to be read after the gist was mastered; interspersed with occasional philosophical digressions and, every once in a while, a sly joke. “It was like having a highly interesting and patient mentor in the room, talking with you and explaining things,” is the way political scientist Jonathan Bendor, of GSB Stanford, recalled. Here is the way Kreps introduced

70 the notions of behavioral type and reputation formation at the heart of sequential equilibrium: Imagine two individuals, whom we will call (without much imagination) player 1 and player 2. Player 2 is unhappily something of a bully. He likes to pick fights with cowards. But he is equally averse to picking one with someone with courage; he will pick a fight with someone only if he assesses probability .5 or more that this individual is a coward. (He is indifferent between picking and not picking a fight at assessment.5.) He considers picking a fight with player 1, but he is uncertain whether player 1 is a coward or is brave. He initially assesses probability .8 that player 1 is brave and .2 that player 1 is a coward (these being the only possibilities), and so it seems that he will not pick a fight with this individual. Before deciding whether to pick a fight with player 1, player 2 gets a signal about player 1’s disposition that may be of value, namely what player 1 will have for breakfast. If player 1 is brave, then she prefers a breakfast of beer to a breakfast of quiche. If player 2 is a coward she prefers quiche to beer. So, it might seem, player 2 should observe what player 1 has for breakfast and conclude: if player 1 has quiche, she is certainly a coward; pick a fight. But if she has beer, she is certainly brave; avoid a fight. But complicating this is that whether brave or a coward, player 1 prefers player 2 not pick a fight with her, and cares more about this than she does about the type of breakfast that she has. And player 1 realizes that player 2 is lurking at the street corner, watching carefully what player 1 has for breakfast. The eighties were a time of high excitement in microeconomics. In an essay for a special issue of the quarterly Daedalus, “American Academic Culture in Transformation: Fifty Years, Four Disciplines,” Kreps explicated the transformation of microeconomics in the last quarter of the twentieth century. Twenty years later, Kreps’s account remains the clearest I know of why so much has changed. He describes the effects of the mathematization of economics in terms of translation of one language to another. The powers of formal deductive models and statistical techniques were great, he wrote; as was the status that their use conferred. Armed with mathematical methods, he says, economists tackled the easiest problems first: the price theory that had emerged from natural language over two hundred years. The study of economic institutions – a big portion of mainstream economics before World War II – dwindled in importance. The newly dominant dialect of mathematical modeling lacked some topically important vocabulary; rather than speak in an unfashionable dialect, some things were just not discussed…. From 1975 to the present, what we have seen in economics is 1) the development of further techniques that play by the basic rules of established (mathematical) economics but that broaden its scope; and 2) the application of those techniques to specific contextual questions, with the result that the field seems to be returning to something like the breadth of the discipline before World War II. Borrowing a conceit from economist Paul Romer, then a GSB Stanford professor, Kreps compared the process to the image of an hourglass: broad traditional concerns in natural language narrowing dramatically as the initial process of translation takes place, then broadening out again as novel forms of the new language are devised to analyze familiar features of the economic landscape. In 2000, Kreps became senior associate dean for academic affairs at GSB Stanford, and, over the next nine years worked with Dean Robert Joss to build a large new campus,

71 improve relations with the rest of the university, and continue to press the annual contest with Harvard Business School to enroll the students who have a choice. Stanford’s share of home-grown senior faculty, its preferred method of transmitting and preserving the school’s culture, rose steadily to the desired 50 percent. Plans were laid for an extensive new campus. Cooperation with the economics department has catapulted Stanford into a newly prominent position in the profession, vying with the combination of Harvard and MIT in the East. Five of the last ten Clark medal winners are on campus – Yuliy Sannikov, Matthew Gentzkow, Raj Chetty, Jonathan Levin, and Susan Athey. Levin, for several years chair of the economics department, recently agreed to put aside his research career to become GSB dean. Meanwhile, Stanford has replaced Princeton as the university that Harvard views as it principal institutional competitor. Against the odds, Kreps returned to teaching and research at 60. He began a new series of graduate texts: Microeconomic Foundations I (the math of pre-game theory economics), with volumes II (covering information economics and game theor(y and III (behavior and institutions) not yet in sight. Meanwhile, The Other Big Mo: Motivation on the Job, a Norton trade book, is expected to appear next year. Its point of departure (after review of the literature): “Pay for performance, in the form of piece-rate pay or year-end bonuses or, more generally, any rewards for performance, can be a powerful motivational tool. That is clearly shown in the case of Safelite Glass. But, as the other anecdotes from the last chapter make clear, for jobs more complex than that of Safelite technician, pay for performance can be difficult to get right; and it may even be dysfunctional.” At dinner, Robert Gibbons, of MIT”s Sloan School of Management, one of the organizers of the conference, summed up: In my view, for about the decade of the 1980s, Stanford GSB was more than a great business school: it gave the world one of the two greatest epochs in business-school history (the other being Carnegie, for a decade around 1960) .It’s tough to prove that Kreps’s arrival in 1975 caused this spectacular epoch, but he clearly played a huge role – not just by his celebrated contributions to economics, but also by the bridge he helped build from economics to finance, accounting, and other management fields, as well as by the tone he modeled for the school’s teaching and research. Given the enormous impact of David’s research on economics, it surprises me to realize that, at this institutional level, his contributions to the school’s tone may have been even more important than his academic work. So much, at least for today, of some of the victories of behavioral economics. What about its most recent embarrassing defeat? I mean, of course, the persistent nudge, codified in corporate culture at Wells Fargo Bank, which led more than 5,000 people to fake those new accounts – a spectacular example of organizational engineering gone wrong. Some practitioner or strategist or architect came up with the design. Others elaborated it, studied it and signed off. Eventually case studies will be written, after the shouting dies down; some are doubtless taking shape already, and there will be Kreps’s book, which of course isn’t about Wells Fargo per se. Many accidents happen naturally in the early days of new technologies. It’s how engineers have always learned. Behavioral and institutional economics, along with their engineering wings, market and organization design, will continue to improve, if that’s the word. http://www.economicprincipals.com/issues/2016.09.18/1926.html

72

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists

Political foundations of the lender of last resort Charles Calomiris, Marc Flandreau, Luc Laeven 19 September 2016 The Global Crisis has raised concerns over how far ‘lender of last resort’ policies by central banks should go. This column examines the history of the development of these policies throughout the world. Last resort lending is a locus of political power, and as such, its creation should be viewed as the outcome of a political bargain. It is therefore not surprising that countries differed in their propensity to create such policies, and in the powers with which they chose to endow them. Related// The European Central Bank as a lender of last resort Paul De Grauwe/ Establishing a global lender of last resort / The lender of last resort of the 21st century Xavier Freixas, Bruno Parigi The recent Global Crisis has prompted the major central banks to conduct lender of last resort (LOLR) operations on an unprecedented scale and stirred up a debate on the constraints and boundaries of LOLR policies (see Bindseil 2014 for an overview of such operations in the recent crisis). For instance, the Federal Reserve, the ECB and the Bank of England have each assisted banks with special loans and asset purchases designed to bolster banks’ positions, expand the supply of liquidity, and reduce the risk of deposit withdrawals. Yet, the degree to which central banks provided LOLR assistance to banks during the crisis was not uniform, nor was structure of such assistance the same across countries. Interestingly, such differences have been commonplace throughout history (see Bordo 1990 for an early account of the LOLR function throughout history; and Bignon et al. 2012 for a modern appraisal). For one, while central banks empowered to act as LOLR were commonplace in Western Europe by the middle of the 19th century, central banks were not created in the US until 1913, in Canada until 1935, and in Australia until 1959. The techniques of lending of last resort varied across countries and were deeply influenced by local conditions and institutions. Collateral rules for LOLR loans, including haircuts, have varied markedly across institutions and over time. In some cases only banks were eligible for emergency lending, in other cases such as in the influential British experience, lending was extended also to nonbanks. Finally, LOLR assistance sometimes has not been limited to loans, or to central bank operations. Government assistance through credit guarantees, preferred stock, and common stock investments has been a feature of LOLR assistance in response to particularly severe financial system shocks as early as the late 19th century. History of the lender of last resort In a recent paper (Calomiris et al. 2016), we examine the history of the development of the LOLR throughout the world, and explore how politics and economics interacted to produce the heterogeneous evolution of LOLR structures and actions around the world. Do such differences merely reflect differences in economic fundamentals that LOLR

73 respond to, or also differences in the operational frameworks of central banks and political support for government assistance? We define LOLR as central bank or government assistance to financial intermediaries in the form of emergency loans, guarantees, or asset purchases (including preferred or common stock purchases) to provide the needed liquidity or financial strength to end runs on short-term debt claims. Those actions allow financial intermediaries to continue to provide transaction services through the payments system and to provide credit to borrowers without access to capital markets. Our historical account shows that differences in the structure and function of lenders of last resort reflect major political obstacles to establishing LOLRs and adopting effective rules for LOLR policy, and cannot be explained by economic differences alone. This was the case in early 19th century Britain, where the institutional changes that gave the Bank of England LOLR powers and responsibilities, following a succession of banking crises, were controversial and contested. In the US, the development of a LOLR was delayed as a result of political opposition, and when the Federal Reserve System was created in 1913, its structure and powers were circumscribed by restrictive legislation. The Fed’s powers were narrowly confined to engaging in collateralised rediscounts and advances on certain classes of assets with member banks. In contrast, the Bank of England was permitted ample room for improvisation. The experiences of Canada and Australia also illustrate unique central bank chartering outcomes, which reflect their own political histories. Canada’s classically liberal political environment eschewed central banking until 1935. Instead, Canada relied on interbank coordination to avoid banking crises. The establishment of the Bank of Canada in 1935 reflected monetary goals rather than any perceived failings due to the absence of a LOLR. Australia did not create a full-fledged central bank until 1959, which was the culmination of a protracted political struggle over the appropriate allocation of power over money and credit. More recently, political constraints that reflect the allocation of political powers within the euro area have played an important role in defining and limiting LOLR actions of the ECB to deal with banking crises within the euro area. The LOLR is a locus of political power, and as such, its creation should be viewed as the outcome of a political bargain (Calomiris and Haber 2014). It is therefore not surprising that countries differed in their propensity to create LOLRs, and in the powers with which they chose to endow them. LOLRs began as collateralised lenders empowered and required to provide credit to banks that were otherwise unable to fund their needs during crises, but LOLRs’ statutory powers changed over time in varied ways. We trace changes over time in the approaches used by central banks and governments to deal with financial crises from the late 19th century to the late 20th century. We identify a shift in the scope of LOLRs away from a narrow reliance on collateralised lending to an approach including also other forms of support, including credit guarantees, preferred stock assistance, and other mechanisms. We relate this shift in part to the need to expand LOLR activity to a broader set of interventions in the case of systemic banking crises. Although the mechanisms and reach of LOLRs expanded to include a wide variety of tools, which were employed to deal with varied circumstances, until the 1980s, most countries managed to construct policies that dealt with systemic threats while avoiding blanket protection of all banks’ liabilities. Even though LOLR assistance evolved to

74 include approaches other than collateralised lending, historical assistance was selectively used only to address systemic threats, and when assistance was provided, it adhered to what we refer to as ‘Bagehot’s Principles’, building on Bagehot’s (1873) treatise: central banks were encouraged to focus on the health of the financial system, rather than on the fate of individual banks. Failure of financial institutions was permitted unless there was a credible systemic risk associated with their failing. During episodes of systemic crises, LOLRs would take on some default risk as a necessary part of their role in assisting the banking system, but only within limits – banks as a whole had to bear most of the risk from such assistance. The participation of banks in risk sharing ensured that assistance would be selective. Although historical LOLR assistance did not follow an explicit rule, because its structure generally adhered to Bagehot’s principles, assistance minimised adverse fiscal and moral hazard consequences. In many countries, including Britain and France, the structure of LOLR operations was explicitly intended to prevent severe fiscal consequences. While effective interventions necessarily involved risk taking by the LOLR, they usually turned out to be profitable – at least when measured on an ex post, cash-flow basis – because support was provided at a high price and with limited risk, taking advantage of the central bank’s monopoly position in the provision of liquidity. After WWII, and especially after the 1970s, generous safety net protection became the norm, and in some cases offered unlimited depositor protection (at least ex post). Unlimited protection eliminates the risk of depositor loss and prevents any bank of significant size from failing, regardless of whether the bank poses a true systemic risk. Such protection is generally achieved via a combination of deposit insurance and ad hoc government bailouts of banks through injections of taxpayer funds. Protecting risky banks from the discipline of deposit withdrawals keeps bank credit flowing, which can be particularly beneficial to politicians anticipating an election, but such protection entails social costs in the form of greater risk-taking and large potential fiscal consequences due to long-term financial losses of protected banks, and output losses from the financial crises that protection encourages. A comparison across countries We perform a detailed comparison of 40 countries’ statutory provisions for central bank lending in 1960, and follow the changes in LOLR legislation in 12 of those countries from 1960 to 2010. We measure differences in central banks’ LOLR powers across several dimensions and consider possible explanations of those differences. We find that countries differ greatly in the extent of their LOLRs’ statutory powers. Those powers change little over time, except in response to crises. Countries with relatively powerful LOLRs in 1960 – in particular, those whose LOLRs enjoyed the power to issue guarantees – tended to be less generous in their level of deposit insurance coverage as of 1980. These findings suggest there may be some substitutability between LOLR activities and depositor protection. Our historical analysis shows that, in general, there has been a lack of clear rules established by government that determine what sort of assistance can be supplied by the LOLR, and the process that determines how assistance would be provided. Instead, assistance by central banks and governments usually has been provided through ad hoc responses to events. Obviously, rules matter because they affect incentives of market participants and thus can limit moral hazard. If banks know that assistance will be limited to certain

75 circumstances and provided according to pre-established rules, that creates an incentive for banks to manage risk and maintain liquidity and capital to protect themselves from risks that are not protected. Furthermore, if market participants are aware of a commitment by the government or the central bank to provide LOLR assistance to address systemic risks, the expectation of assistance can help to stabilise the financial system by acting on market participants’ expectations. Concluding remarks We conclude that the LOLR function should strike a balance between the need to respond to severe systemic shocks in a flexible and timely manner and the desire to mitigate moral hazard through pre-established ruled that set limits on assistance. We also recognise, however, that failures to achieve the proper balance reflect the central reality of LOLR design, which is that LOLRs are the outcomes of political bargains. Authors’ note: The views expressed here are our own and should not be interpreted to reflect the views of the ECB. References Bagehot, W. [1873] (1962), Lombard Street: A Description of the , Homewood, IL: Richard D. Irwin. Bindseil, U. (2014), Monetary Policy Operations and the Financial System, Oxford: Oxford University Press. Bignon, V., M. Flandreau, and S. Ugolini (2012), “Bagehot for Beginners: The Making of Lender-of-Last-Resort Operations in the Mid-Nineteenth Century.” The Economic History Review, 65, pp. 580–608. Bordo, M. D., (1990), “The Lender of Last Resort: Alternative Views and Historical Experience,” Economic Review, Federal Reserve Bank of Richmond, January/February, pp. 18-29. Calomiris, C. W., M. Flandreau, and L. Laeven (2016), “Political Foundations of the Lender of Last Resort: A Global Historical Narrative,” CEPR Discussion Paper No 11448. Calomiris, C. W., and S. H. Haber (2014), Fragile By Design: The Political Origins of Banking Crises and Scarce Credit, Princeton: Princeton University Press. http://voxeu.org/article/political-foundations-lender-last-resort

76

VOX CEPR's Policy Portal Research-based policy analysis and commentary from leading economists ESBies: Safety in the tranches Markus K Brunnermeier, Sam Langfield, Marco Pagano, , Stijn Van Nieuwerburgh, Dimitri Vayanos 20 September 2016 The lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk. Related// Sovereign and banking risk Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo/ Stability bonds for the Eurozone Ángel Ubide// Making sense of Eurobond proposals Stijn Claessens, Ashoka Mody, Shahin Vallee/ESBies: A realistic reform of Europe's financial architecture The Undersigned The Undersigned The Eurozone does not provide a union-wide safe asset. In its absence, financial stress triggers cross-border capital flights to safety, which create distortions (Lane 2013). During sovereign debt crises, a diabolic loop sets in whereby banks holding risky sovereign debt suffer losses to their net worth, causing them to cut back on their lending to the real economy and increasing governments’ contingent liabilities (Farhi and Tirole 2016, Brunnermeier et al. 2016a). The policy challenge is to create a union-wide safe asset without joint liability among sovereigns. Brunnermeier et al. (2011) propose a design for such an asset, named ‘European safe bonds’, or ESBies. ESBies are the senior tranche of a diversified portfolio of Eurozone sovereign bonds (see Figure 1). Sovereigns remain responsible for their own bonds, which would still be traded at a market price, exerting discipline on borrowing decisions. A sovereign could default on its own obligations without others bearing any bail-out responsibility and without holders of ESBies bearing any losses. Figure 1. Stylised balance sheet of a securitisation vehicle for ESBies

Source: Brunnermeier et al. (2011).

77

In a new paper, we investigate why and how ESBies would contribute to the stability of the Eurozone (Brunnermeier et al. 2016b). First, we carry out numerical simulations to gauge the safety of ESBies. Second, we study their effects on the diabolic loop between sovereign risk and bank risk by extending the workhorse model in Brunnermeier et al. (2016a). Third, we describe the politically feasible steps that policymakers can take to make ESBies a reality. Simulating the properties of ESBies for fixed correlation structures Can ESBies be designed to be as safe as the German bund? If so, would their supply be adequate for banks to use them as a safe store of value? We answer ‘yes’ to these questions, based on simulations of a stochastic model of default and loss-given default rates for Eurozone sovereign bonds. In a benchmark scenario, expected loss rates are calibrated to CDS spreads. In an adverse scenario, we envisage considerably higher loss rates and cross-country correlations. In the benchmark scenario, we find that ESBies with a 30% subordination level would be as safe as German bunds. If the underlying portfolio had a face value of €6tn, equivalent to 60% of GDP, ESBies would amount to €4.8tn – approximately double the current supply of euro safe assets. The remaining €1.2tn of the securitisation would comprise moderately risky European junior bonds (EJBies), which would be attractive to high-yield investors owing to their embedded leverage. Moreover, EJBies could be further securitised to cater to various investor groups. Default correlations tend to go up during crises, lowering the benefits of diversification. To test the resilience of ESBies, we consider an adverse scenario with higher default probabilities than in the benchmark scenario and greater correlations across countries. In this scenario, ESBies with a 30% subordination level continue to be as safe as German bunds. To turn off flight-to-safety capital flows, ESBies should be constructed out of all Eurozone member states. Our simulations show that this principle of inclusiveness does not conflict with a policy objective of maximising the supply of safe assets, since including even risky nation-states enlarges the pool from which safe assets can be generated. Modelling the impact of ESBies on sovereign default Our numerical simulations of the properties of ESBies are conservative, as they assume fixed correlation structures for sovereign defaults. However, the introduction of ESBies will affect the equilibrium of the economy – and therefore also the likelihood of default and its correlation across countries. In fact, the intended effect of ESBies is to weaken the diabolic loop between sovereign risk and bank risk. To capture this effect, we extend a model of the diabolic loop proposed in Brunnermeier et al. (2016a). In the model, sovereign debt crises can be triggered by sunspots that occur independently in each country. A sunspot reduces the market value of domestic sovereign bonds. Banks, which hold sovereign bonds, might need to be bailed out in order to continue lending to the real economy. If turns out to be lower than expected, the bailout forces the government to default on its obligations, ultimately bringing down the banks. Banks are initially endowed with some equity, plotted on the horizontal axes of Figure 2, and a sovereign bond portfolio. Their portfolio comprises domestic bonds and some fraction of foreign bonds – the extent to which they are internationally diversified is

78 plotted on the vertical axes in Figure 2. With cross-border holdings, there are two effects: a diversification effect such that banks are less exposed to a domestic sunspot, and a contagion effect such that banks are more exposed to a foreign sunspot. Figure 2. Diabolic loop regions without and with ESBies

Sources: See Brunnermeier et al. (2016b). Without tranching, both effects – diversification and contagion – are present. As shown in Figure 2, diversification prevails when bank equity is sufficiently high and sovereign bond portfolios are sufficiently balanced – in this region, the diabolic loop can occur only when there is a sunspot in both the home and foreign currency. Instead, when equity is sufficiently low, contagion can set in – in this region, a sunspot in either country can induce a diabolic loop in both countries. With the introduction of tranching, diversification occurs at lower values of initial equity. The contagion region shrinks, and the safe region – in which no diabolic loop can occur – expands. The intuition for this result is that tranching shifts default risks to junior bond holders outside of the banking sector. Tranching is thus a positive sum game, as it reduces the endogenous risk of a diabolic loop. Putting ESBies into practice ESBies are innovative sovereign debt securities. As such, a natural concern is that they might create so many complications as to undermine their effectiveness or make them infeasible. In fact, ESBies are entirely feasible, both politically and technically. To bring them about, policymakers should take three steps. • First, decide who should issue ESBies. In principle, the securitisation could be done by a public entity (such as the European Stability Mechanism, European Investment Bank or ECB) or private entities (such as primary dealers, other banks, and large asset managers) – or even both. • Second, publish an ESBies handbook to define the standards to which ESBies should adhere. In particular, the handbook should define the subordination level and underlying portfolio that shall characterise ESBies.

79

• Third, commence with issuance. In an initial experimental phase, the volume of ESB issuance could be relatively limited, allowing technicalities to be worked out. Afterwards, policymakers could expand the market for ESBies via a centralised market mechanism, such as an auction, by which banks would swap their existing sovereign bond portfolios for a portfolio of ESBies and EJBies. The ECB could facilitate this process by accepting ESBies in its monetary policy operations. Once the market for ESBies attains a critical mass, policymakers will be able to reform the currently deficient regulatory treatment of sovereign exposures in banking regulation that facilitates the diabolic loop. This can be done, for example, by setting non-zero risk-weights for national sovereign debt. By virtue of their safety, ESBies should be exempt from such risk weights, while banks’ holdings of EJBies should be subject to a capital charge according to a ‘look-through principle’ – so that the combined capital charge of ESBies and EJBies equals that of the underlying securities. Conclusion Despite their importance for the smooth functioning of financial markets, safe assets are currently inadequately and asymmetrically supplied in the Eurozone. ESBies are a solution to this quandary. They would increase the supply of safe assets and preclude distortionary flight-to-safety capital flows across countries. The availability of this union-wide safe asset would also weaken the diabolic loop between sovereigns and banks, insofar as banks are encouraged to hold such a safe asset instead of national sovereign bonds. In this sense, there is a natural complementarity between the introduction of ESBies and the reform of the prudential regulation of banks’ sovereign exposures. In sum, ESBies offer to Europe the benefits that the US enjoys from federal Treasuries – namely safety, as well as symmetric and abundant supply – without the downside of mutualisation. References Brunnermeier, M, L Garicano, P Lane, M Pagano, R Reis, T Santos, D Thesmar, S Van Nieuwerburgh, and D Vayanos (2011), “European Safe Bonds”, The Euronomics Group, Summary available at VoxEU.org. Brunnermeier, M, L Garicano, P Lane, M Pagano, R Reis, T Santos, D Thesmar, S Van Nieuwerburgh, and D Vayanos (2016a), “The sovereign-bank diabolic loop and ESBies”, American Economic Review Papers and Proceedings, 106 (5), 508-512. Brunnermeier, M, S Langfield, M Pagano, R Reis, S Van Nieuwerburgh, and D Vayanos (2016b), “ESBies: Safety in the tranches”, European Systemic Risk Board Working Paper No. 21. Farhi, E, and J Tirole (2016), “Deadly embrace: Sovereign and financial balance sheets doom loops”, NBER Working Paper No. 21843. Lane, P (2013), “Capital flows in the euro area”, European Commission Economic Papers 467. http://voxeu.org/article/esbies-safety-tranches

80

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Income inequality in a globalising world Miguel Niño-Zarazúa, Laurence Roope, Finn Tarp 20 September 2016 Since the turn of the century, income inequality has risen to be among the most prominent policy issues of our time. This column looks at inequality trends in recent decades. While relative global inequality has fallen, insufficient economic convergence, together with substantial growth in per capita incomes, has resulted in increased absolute inequality since the mid-1970s. The inclusivity aspect of growth is now more imperative than ever. Related// Globalisation and polarisation in the wake of Brexit Wolfgang Keller, Hâle Utar/ African poverty: Falling faster than you think Xavier Sala-i-Martin, Maxim Pinkovskiy/ The globalisation paradox: more trade less inequality Robert Lawrence Since the turn of the century, inequality in the distribution of income, together with concerns over the pace and nature of globalisation, have risen to be among the most prominent policy issues of our time. These concerns took centre stage at the recent annual summit in China. From President Obama to President Xi, there was broad agreement that the global economy needs more inclusive and sustainable growth, where the economic pie increases in size and is at the same time divided more fairly. As President Obama emphasised, “[t]he international order is under strain.” The consensus is well founded, following as it does the recent Brexit vote, and the rise of populism (especially on the right) in the US and Europe, with its hard stance against free trade agreements, capital flows and migration. These are clear manifestations of a growing discontent among the working middle classes, particularly in the industrialised world, who see globalisation as the primary source of growing inequalities, and an obstacle to their prosperity. These views have no doubt been fuelled in large part by the Global Crisis of 2008-09 and the Great Recession that followed immediately afterwards. However, in reality, concerns about inequality are not new. From Plato and Aristotle to classical economists such as Adam Smith and Karl Marx, some of history’s greatest thinkers have stressed the undesirable effects of inequality on the social fabric. Not only are high levels of inequality widely perceived to be socially unfair. As present events are making abundantly clear, they also have negative implications for political stability (Alesina and Perotti 1996), crime (Kelly 2000) and corruption (Jong-sung and Khagram 2005), among other things. It is now also understood that inequality reduces the efficacy of economic growth for reducing poverty (Ravallion 2001). So what has actually happened to global inequality? Has global income inequality gone up (or down) in recent decades? In a new paper, we show that relative global inequality, as measured by the , declined steadily over the past few decades from 0.739 in 1975 to 0.631 in 2010 (Niño-Zarazúa et al. 2016). The relative Gini takes the value zero for a society where all are equal, and the value of one for a society where all income goes to one

81 person. The fall over the past 35 years (i.e. the blue line in Figure 1) was driven primarily by declining inequality between countries, arising from the extraordinary economic progress observed in fast developing countries such as China and India. And this overall trend was achieved despite an increasing trend of inequality within countries. In contrast, absolute inequality, as measured by the absolute Gini coefficient, which is based on absolute changes in income, and depicted by the red line in Figure 1, has increased dramatically since the mid-1970s. Figure 1 Trends in global inequality from a relative and absolute perspective

‘Relative’ versus ‘absolute’ inequality What’s the difference between ‘relative’ and ‘absolute’ inequality, and which trend is more important? As one of us (Finn Tarp) recently explained in an interview, take the case of two people in Vietnam in 1986. One person had an income of US$1 a day and the other person had an income of $10 a day. With the kind of economic growth that Vietnam has seen over the past 30 years, the first person would now in 2016 have $8 a day, while the second person would have $80 a day. So if we focus on ‘absolute’ differences, inequality has gone up, while a focus on ‘relative’ differences suggests that inequality between these two people has remained the same. Relative inequality indicators have been by far the most widely used in empirical economic analysis, but, based on economic theory and empirical evidence, it is far from clear that we should favour relative over absolute notions of inequality. The evidence suggests that many people do perceive absolute differences in incomes as being an important aspect of inequality (Amiel and Cowell 1992, 1999). What has happened across world regions? In contrast to the clear trends in global inequality, we found substantial differences in trends across the different regions of the world. For example, Figure 2 shows that inequality, both relative and absolute, increased substantially and steadily throughout 1975–2010 in North America, and also in Europe and Central Asia, South Asia and sub- Saharan Africa, though with some ups and downs along the way according to relative inequality measures. Absolute inequality rose in Latin America, East Asia, and the Pacific, while relative inequality fell. We also observed considerable variation within regions with respect to levels of, and changes in, domestic inequality over the period of analysis. For example, in Europe, the UK experienced an increase in relative inequality of 38%, while France saw a reduction of 16%; in Latin America, relative inequality in Argentina increased by 25%, while Brazil managed a reduction of 10%; in South Asia, Bangladesh experienced an increase of 60%, while Nepal saw a reduction of 38%.

82

Figure 2 Regional relative and absolute inequality

83

Could the increased absolute global inequality have been prevented while achieving the same rates of economic growth observed in the past 40 years? Declining relative inequality between countries, driven by the emergence of China and India as economic powerhouses, has, as noted, been the main factor in reducing global relative inequality. Yet insufficient economic convergence, together with substantial growth in per capita incomes, has meant that the increased absolute differences in mean incomes between countries have resulted in increased absolute global inequality. Could this increased absolute inequality have been avoided, while maintaining the same economic growth that has lifted many millions of people in poorer countries out of poverty? The answer is not straightforward. There are both technical considerations and issues of political economy associated with this question. As can be inferred from a paper by one of us (Roope 2015), economic growth of the magnitude observed in the past four decades, together with falling absolute inequality, is technically possible. However, as we demonstrate in our latest study, at current national levels of per capita incomes, without even greater convergence among countries, the answer is no (Niño-Zarazúa et al. 2016). Although average incomes in large developing countries are now much closer proportionally to those in high-income countries, the absolute gaps in income between countries are so high that even if domestic inequality were completely eliminated in all countries (which is obviously impossible), absolute inequality today would still be much higher than it was 40 years ago. Thus, while redistributive policies and investment in public goods like health and education are likely to mitigate both types of inequality, further convergence among countries is essential to bring global absolute inequality down to the levels seen before the recent era of globalisation. Thus, it is, in our judgement, necessary to exercise care when discussing reducing absolute inequality, especially in poor countries. Over the past 40 years, over one billion people around the world have been lifted out of poverty, driven largely by substantial growth in income in developing countries. While this growth has been accompanied by a striking rise in absolute inequality, it has also improved the lives of hundreds of millions of people. It is difficult to imagine how in practice such growth, and the associated poverty reduction, could have occurred without an increase in absolute inequality. There would be huge implications for the fight against global poverty if attempts were made to halt economic growth in order to appease absolute inequality. Instead, the policy emphasis should be on creating more inclusive growth with falling ‘relative’ inequality – these two goals are complementary. The inclusivity aspect of growth is now more imperative than ever. Globalisation has not been a zero sum game. Overall perhaps more have benefitted, especially in fast- growing economies in the developing world. However, many others, for example

84 among the working middle class in industrialised nations, have seen their incomes stagnating in real terms for over 20 years. It is unsurprising that this has bred considerable discontent, and it is an urgent priority that concrete steps are taken to reduce the underlying sources of this discontent. Those who feel they have not benefitted, and those who have even lost from globalisation, have legitimate reasons for their discontent. Appropriate action will require not only the provision of social protection to the poorest and most vulnerable. It is essential that the very nature of the ongoing processes of globalisation, growth, and economic transformation are scrutinised, and that broad based investments are made in education, skills, and health, particularly among relatively disadvantaged groups. Only in this way will the world experience sustained – and sustainable – economic growth and the convergence of nations in the years to come. References Alesina, A and R Perotti (1996) "Income distribution, political instability, and investment", European Economic Review, 40(6): 1203-1228. Amiel, Y and F A Cowell (1992) "Measurement of income inequality", Journal of Public Economics, 47(1): 3-26. Amiel, Y and F A Cowell (1999) Thinking about inequality: Personal judgment and income distributions, Cambridge: Cambridge University Press. Jong-sung, Y and S Khagram (2005) "A comparative study of inequality and corruption", American Sociological Review, 70(1): 136-157. Kelly, M (2000) "Inequality and crime", Review of Economics and Statistics, 82(4): 530-539. Niño-Zarazúa, M, L Roope and F Tarp (2016) "Global inequality: Relatively lower, absolutely higher", Review of Income and Wealth. Ravallion, M (2001) "Growth, inequality and poverty: Looking beyond averages", World Development, 29(11): 1803-1815. Roope, L (2015) "Critical percentiles for equalizing growth", Centre for the Study of African Economies, University of Oxford.

Miguel Niño-Zarazúa Research Fellow, UNU-WIDER

Laurence Roope Researcher, Health Economics Research Centre, University of Oxford

Finn Tarp Director, UNU-WIDER http://voxeu.org/article/income-inequality-globalising-world

85

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Trade globalisation in the last two centuries Michel Fouquin, Jules Hugot 17 September 2016 Historians and economists generally identify two periods of trade globalisation, the first beginning around 1870 and the second during the 1970s. The column argues that new data from 1827 onwards shows globalisation beginning as trade barriers were lowered around 1840, and that both periods of globalisation were surprisingly fuelled by a regionalisation of world trade. If globalisation continues to grow in future, regionalisation may decline. Related// Early globalisation and the law of one price Mario Crucini, Gregor Smith/ Revisiting the death of distance David Jacks// Globalisation and trade costs: 1870 to the present Dennis Novy, Christopher Meissner, David Jacks Most studies based on trade statistics date the emergence of the First Globalisation around 1870. These studies, however, generally rely on data that begins in 1870. To better understand the chronology of globalisation, we put together the most comprehensive bilateral trade dataset to date. It tells us that the First Globalisation began in Europe in the 1840s, before expanding to other continents later in the 19th century. Technological innovations (oceangoing steamships, transcontinental telegraph) and pro-trade policies (bilateral free trade treaties, the gold standard) of the second half of the 19th century are considered the sparks for globalisation. This can't be the case if globalisation began before they were created. To create the TRADHIST dataset, we collected more than 1.9 million bilateral trade flows from 1827 to 2014 (Fouquin and Hugot 2016b), using a common framework to make it possible to compare both periods of globalisation. Data for the 1827-1870 period have not been collected before now. To do this, we aggregated six pre-existing sources as well as data directly extracted from customs archives, particularly before 1870. We also provided series of aggregate exports and imports, GDP, exchange rates, and bilateral distance. What do openness rates tell us? Figure 1 shows the evolution of export openness ratios (total exports/GDP) for three samples. Export openness doubles between 1827 and 1870 before stagnating until WWI. During the interwar period, openness falls below its level in the early 19th century, before rising again after 1960. It is only in the late 1970s that openness returns to the levels already reached a century before. Trade openness, however, is a crude measure of globalisation. Average openness in 2014 is 22% for our sample of 110 countries. But is that figure high or low, compared to what it would be in the absence of any international trade barrier?

86

Figure 1 Export openness for three country samples: 1827-2014

Openness ratios are also sensitive to the global distribution of economic activity. If one country concentrated almost all economic activity, then aggregate openness would be very low because most goods would be produced and consumed in the same country. On the other hand, in a world of scattered economic activity, countries are naturally more interdependent. Trade openness is much higher. The difference between the two situations shows the degree of concentration of the world economy. It has nothing to do with the importance of trade barriers. What we call ‘globalisation’ is the convergence between observed world trade and a theoretical situation in which international trade barriers would be equally as constraining as domestic ones. This means we need a theoretical prediction of what international trade would have been in the absence of obstacles specific to it. The cost of international trade barriers as an indicator of globalisation Comparing observed trade to the prediction that emerges from the structural gravity model created by Head and Mayer (2014) evaluates the importance of the obstacles that are specific to international trade. The difference between observed trade and a counterfactual in which there would be no international trade barriers then reveals the aggregate cost that is specifically associated with international trade. These costs come from transportation and protectionist policies, but also factors like communication and exchange rate volatility (Jacks et al. 2008). Figure 2 shows the evolution of aggregate international relative trade costs for the entire sample. It shows that trade barriers have fallen by more than 70% since 1840, relative to intranational trade barriers. Of this, 50% occurred in the period before the Great Depression, and 20% since 1960.

87

Figure 2 Evolution of average world international relative trade costs: 1827-2014

The First Globalisation had therefore already begun in the 1840s, before steamships, the telegraph or the gold standard, and before the wave of bilateral trade treaties signed by Western European countries in the 1860s. This was, however, a period of political stability in Europe after the Congress of Vienna in 1815. In the mid-19th century there were also unilateral reductions of trade protection, for example the repeal of the British Corn Laws in 1846. We found similar examples in other European countries. In the 1870s the Russian and American ‘grain invasion’ prompted higher tariffs in most of continental Europe. Trade costs, however, kept falling during this protectionist backlash, which suggests that it was compensated by the decline of other trade barriers. After 1918, totalitarian regimes emerged in the USSR, Italy and Germany, and the protectionist measures that were adopted after the Great Depression condemned any possibility of returning to the liberal golden age. High protectionism lasted until after WWII and the adoption of the GATT in 1947, which created multilateral liberalisation among developed economies. The Treaty of Rome (1957) began European integration, and internal customs barriers were abolished altogether in 1968. Finally, the generalisation of containerisation in the 1970s reduced transport costs. The more trade grows, the more distance matters Our research shows that globalisations are also regionalisations. Estimating the trade cost index of Figure 2 for various subsamples, we found that the decline of intra- European trade barriers after 1840 preceded the reduction of transatlantic trade barriers that happened around 1890. In Europe, the fall of trade costs in the northwest preceded the fall in the south.

88

We also isolated the effect of distance across partners on bilateral trade and show that both globalisations were associated with an increase in distance elasticity (Figure 3). In 1830, a 10% difference in the distance between two countries would have reduced bilateral trade on average by 3%. On the eve of WWI, it would have reduced trade by 13%; and in 2010, the reduction would have been 19%. Combes et al. (2008) and Disdier and Head (2008) found this result for the second half of the 20th century, but it applied in the 19th century too. Figure 3 Elasticity of bilateral trade to distance: 1827-2014

During both periods of globalisation, nations focused on long-distance trade. The First Globalisation was built on colonial trade, and the Second was inspired by European- American and Asian-American trade. So the major role of regionalisation in both globalisations is surprising. Several hypotheses may explain this phenomenon. First, pro-trade policies have been primarily adopted between neighbouring partners. The post-war integration of Europe is the most obvious example. Second, regionalisation may also be due to the increased complexity of the goods that are traded. Language and cultural barriers, which are highly correlated to distance, may have become more important. Also, the fixed costs associated with trade (for example information gathering on local preferences, loading and unloading) may also have decreased relative to the actual cost of carrying goods from one country to another, which is strongly linked with distance. Future globalisation and regionalisation The rise of international trade during the 19th century was supported by European liberal trade policies and, later, by technological improvements in transportation and communication. The Great Depression and the two world wars challenged this trend,

89 while trade was partly reallocated to more distant partners due to geostrategic reasons and European colonialism. Both globalisation and regionalisation resumed in the 1960s. But regionalisation has recently been fading, as the WTO has grown to include almost all countries in the world. The conversion of emerging and former socialist countries to free trade in the 2000s has stimulated long-distance trade. The dynamism of trade between Asia and the rest of the world is expected to persist, especially with the emergence of new actors such as India and Bangladesh. On the other hand, continued sluggish growth in Europe could limit the growth of intra-European trade. If so, the margin of growth for trade seems to be particularly large for long- distance trade, which gives a central role to TTIP and the TPP. Alternatively, perhaps globalisation has already peaked? The reorientation of Chinese growth to the domestic market should reduce its dependence on international trade. Growing inequalities in western countries generate opposition to globalisation. Renewable energies may reduce trade in hydrocarbons. Finally, the development of foreign direct investment substitutes local production for international trade. References Combes, P-P., T. Mayer and J-F. Thisse (2008), Economic Geography: The Integration of Regions and Nations, Princeton University Press. Disdier, A-C. and K. Head (2008), “The Puzzling Persistence of the Distance Effect on Bilateral Trade”, Review of Economics and Statistics, 90(1): 37–48. Fouquin, M. and J. Hugot (2016a), “Back to the Future: International Trade Costs and the Two Globalisations”, CEPII Working Paper N°2016-13. Fouquin, M. and J. Hugot (2016b), “Two Centuries of Bilateral Trade and Gravity Data: 1827-2014”, CEPII Working Paper N°2016-14. Head, K. and T. Mayer (2014), “Gravity equations: Workhorse, toolkit, and cookbook.” In: Gita Gopinath, Elhanan Helpman, and (eds), Handbook of International Economics, Vol. 4. Amsterdam: Elsevier North-Holland. Jacks, D., C. Meissner and D. Novy (2008), “Trade Costs, 1870-2000”, American Economic Review: Papers and Proceedings, 98(2): 529–534. http://voxeu.org/article/trade-globalisation-last-two-centuries

90

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Reinhard Selten: Pioneering analyst of rationality and human behaviour Benny Moldovanu, Axel Ockenfels 14 September 2016 Reinhard Selten, co-recipient of the 1994 Nobel Memorial Prize in Economic Sciences, passed away in August. This column outlines the intellectual life and career of a pioneering analyst of strategic interaction of both fully rational players (game theory) and real human beings with ‘bounded rationality’ (experimental economics). Selten called himself a ‘methodological dualist’, making a sharp distinction between normative game theory and descriptive theories of social and economic interaction. Nobody else has made such substantial and important contributions to both lines of research. Related// The economics of John Nash Kevin Bryan/ Just enough trust, from one generation to the next Jeffrey Butler, Paola Giuliano, Luigi Guiso/Bounded rationality and the credit crisis Leigh Caldwell Reinhard Selten was born in Breslau, Germany (now Wroclaw, Poland) in 1930. His father was Jewish and the small family business had to be sold in the mid-1930s, shortly before his father’s death. Selten and his family became refugees at the end of WWII and settled in West Germany. He studied mathematics at the University of Frankfurt and was awarded an MA in 1957, and a PhD in 1961. After a visiting professorship at Berkeley — where he began a long-term collaboration with John Harsanyi — Selten returned to Germany. From 1969 to 1972 (during the rather chaotic years of the student protests), he was professor at the Free University of Berlin; and from 1972 to 1984, at the University of Bielefeld. From 1984 until his death in 2016, he was associated with the University of Bonn, where he established one of the first experimental laboratories in economics. In 1994, Selten was awarded the Nobel Memorial Prize in Economic Sciences, together with John Harsanyi and John Nash, “for their pioneering analysis of equilibria in the theory of non-cooperative games” (Nobel Foundation 1994). Game theory Game theory analyses strategic interactions between agents with possibly conflicting interests, assuming that agents obey normative principles of rationality. It offers a common language and techniques to describe a broad range of social phenomenon, and it has been successfully applied to economics, political science, law, psychology, computer science, and evolutionary biology, among others. Although the first formal game theoretical analysis stems from the time of the French Revolution, the first major breakthrough was John von Neumann and Oskar Morgenstern’s Theory of Games and Economic Behaviour (1944), which mainly discussed cooperative games (where binding agreements can be made among agents),

91 and zero-sum two person non-cooperative games (where binding agreements are not possible, and where the interests of the two parties are diametrically opposed). John Nash (1951) included games where the nature of conflict is more general (non zero-sum), and defined Nash equilibria as a profile of strategies — one strategy for each player — from which no participant has an incentive to deviate. Think, for example, about the game we are all playing when deciding on which side of the road to drive. For about two decades after the publication of Theory of Games and Economic Behaviour, it was thought that the basic analysis of von Neumann, Morgenstern and Nash can be equally well applied to dynamic games, where the strategic interaction occurs over time. In such games, a strategy calls for the formulation of a complete plan that recommends an action for all possible future contingencies. In particular, players have to anticipate the rational behaviour of others in these future contingencies, and make adequate plans for them. But how can players commit to execute their future actions at a later point in time, maybe after some major ‘game-changing’ decisions have been already taken by other players? Selten observed that the static description and analysis obscure this important point, and he paved the way for a revolution that would allow a consistent analysis of rational play in dynamic situations. Consider a simple example where a firm decides whether or not to enter a market. After observing that decision, an incumbent can start a price war or not. The price war is costly for the incumbent, but may well make entry unprofitable in the first place. If the entrant believes that the incumbent will start a war for sure post-entry, then it may decide to stay out of the market altogether. In the language of game theory, the profile where the entrant stays out and the incumbent fights entry if it occurs constitutes a perfectly valid Nash equilibrium. In a sense, the threat of a ruinous price war is enough to convince the entrant to stay out. But note that the threat need not actually be carried out in this equilibrium! Selten (1965) dismissed it as implausible: once entry has happened, the incumbent will realise that a price war is also very costly from its own point of view, and may actually find it profitable not to engage into one. Anticipating this reasoning by the incumbent, the entrant should enter the market! Depending on the specific payoffs attached to the various actions, the outcome where the entrant enters and the incumbent acquiesces constitutes the unique subgame perfect equilibrium, since it prescribes an optimal course of action after each possible contingency. Note how our reasoning proceeded backwards (we first look at the incumbent’s decision), although the game itself is actually played such that the entrant decides first. The consequences of such ‘backward induction’ reasoning were pushed to the limit in the famous, repeated entry war analysed in Selten (1978), where he questions the power of such classical, rational analysis to explain observed phenomena. The subgame perfect Nash equilibrium devised by Selten (1965), with its emphasis on the difficulty of commitment and on credible plans of action, remains the main concept for the strategic analysis of dynamic games. It has been applied myriad times in diverse models ranging over all social sciences, but also in biology and computer science. Modern industrial organisation, with its emphasis on multi-stage games played by oligopolies (and regulators), would be unthinkable without the concept of subgame perfection. But even remoter areas of economics, such as dynamic macroeconomics, profited immensely — for example, the fundamental work on the time consistency

92 problem in public policy. The Nobel citation for Finn Kydland and Edward Prescott explicitly mentions the intellectual debt to Selten (Nobel Foundation 2004). Selten (1975) made another seminal contribution to game theory, one that shaped the research agenda for decades to come. He defined a new, finer notion of perfectness, called ‘trembling hand perfection’, which better captured the idea of forward–looking rationality and credibility in all conceivable extensive form games. The idea was to focus only on those equilibria that were the limits of equilibria of perturbed games where agents could make some mistake with a small probability. In particular, this definition suggests that a robust definition of rationality must also deal with some deviations from rationality by the other players. Although this concept is somewhat more difficult to apply directly, it spawned an enormous literature on so-called ‘refinements of Nash equilibria’ where both axiomatic and evolutionary approaches are analysed. A particular highlight of this literature, the sequential equilibrium due to Kreps and Wilson (1982), combines ideas from Harsanyi and Selten (1988), and shifts the attention to the beliefs that players have about each other to define an equilibrium concept for dynamic games of incomplete information that is a close cousin of Selten’s perfect equilibrium. Human behaviour Selten made a sharp distinction between normative game theory and descriptive theories of social and economic interaction. He insisted that rational decision-making as pictured by game theory and other economic approaches does not capture actually observed human behaviour, and that it is therefore necessary to develop theories of ‘bounded rationality’ based on empirical evidence. Following the tradition of Simon (1957), Selten used the term ‘bounded rationality’ to describe the kind of rationality exhibited by actual human behaviour — as opposed to the kind of rationality based on axioms and principles that are ‘invented in the armchair’ (Selten 1994). To study bounded rationality, he started running experiments in the late 1950s when the field of experimental economics did not yet exist. His first publication, Sauermann and Selten (1959), was an experimental study of oligopoly behaviour, and his famous 1965 paper, where he first defined subgame perfectness, was motivated by his experimental studies of oligopoly behaviour. Throughout his career, Selten continued working towards establishing “a descriptive branch of decision and game theory, which takes the limited rationality of human behaviour seriously” (Selten 1994). Selten (1998a) differentiated three roots of human behaviour: motivation (the driving force), adaptation (routine adjustment without reasoning), and cognition (reasoning). He particularly emphasised the important influence of cognition on motivation and adaptation, and eventually on behaviour. For example, in a series of papers starting with Selten and Stoecker (1986), Selten developed his idea of learning direction theory and impulse balance equilibrium. For a class of repeated decision tasks, these models describe an influence of cognition on adaptation. The idea is that decision-makers tend to follow a principle of ex post rationality: they tend to change behaviour towards what would have been better in the last period. Importantly, the decision-maker is not just guided by trial and error, nor by sophisticated Bayesian or other predictions, nor by the result of some maximisation procedure. Yet, this kind of reasoning nevertheless involves a cognitive model of the world, about what previously would have been a better choice. Selten and his students

93 further developed the model so that it could successfully predict various behavioural patterns in different experimental contexts such as bargaining, auctions, newsvendor games, and other settings (e.g. Ockenfels and Selten 2014). Other models of human decision-making developed by Selten also do not rely on the maximisation of some goal function by the decision-maker — see, for example, Selten’s models of aspiration adaptation (Selten 1998b, Sauermann and Selten 1962), reciprocal behaviour in oligopoly experiments (Selten et al. 1997), and qualitative reasoning (Selten 2004). Selten’s approach was rather based on experimentally observed features of human behaviour, such as that decision processes tend to start with a superficial analysis, avoid circular concepts, are influenced by recent experiences in an ex post rational manner, and only rely on low memory depth. When asked whether his studies of full rationality in game theory and of observed human behaviour in experimental economics are contradictory, he often responded that he saw himself as a ‘methodological dualist’. Both descriptive theory and normative theory are important perspectives for understanding the nature of social and economic interaction. Concluding remarks Selten was a pioneer of the analysis of strategic interaction of both fully rational players (game theory) and boundedly rational humans (experimental economics). Nobody else has made such substantial and important contributions to both lines of research. Selten was also an inspiring teacher, with a seemingly limitless knowledge of the relevant literatures across disciplines, tremendous methodological originality, and remarkable curiosity, also regarding other sciences (he also contributed to philosophy, psychology, evolutionary biology, political science, linguistics, and botany). One of us (Benny) had the honour and pleasure of being Selten’s doctoral student, his postdoc and later his colleague on the Bonn faculty. The other (Axel) had the honour and pleasure of work with him for 20 years, after Selten supervised his diploma thesis. While many academics spend much of their time and energy chasing publications in prestigious journals, or chasing funds, status, influence, and power within their organisations, Reinhard did none of these. He had one, and only one, thing in mind: advancing understanding through science. It was the best lesson a teacher could teach his student. References Harsanyi, J., and R. Selten (1988), A General Theory of Equilibrium Selection in Games, Cambridge, MA: MIT Press. Kreps, D., and R. Wilson (1982), “Sequential Equilibria”, Econometrica 50: 863-94. Nash, J. (1951), “Non-cooperative Games”, Annals of Mathematics 54(2): 286-95. Nobel Foundation (1994), “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1994”, Nobel Media AB 2014. Web. 6 Sep 2016. Nobel Foundation (2004), “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2004”, Nobel Media AB 2014. Web. 6 Sep 2016. Ockenfels, A., and R. Selten (2014), “Impulse Balance in the Newsvendor Game”, Games and Economic Behaviour 86: 237–47. Sauermann, H., and R. Selten (1959), “Ein Oligopolexperiment”, Zeitschrift für die gesamte Staatswissenschaft 115: 427-71.

94

Sauermann, H., and R. Selten (1962), “Anspruchsanpassungstheorie der Unternehmung”, Zeitschrift für die gesamte Staatswissenschaft 118: 577-97. Selten. R. (1965), “Spieltheoretische Behandlung eines Oligopolmodells mit Nachfrageträgheit – Teil I Bestimmung des dynamischen Preisgleichgewichts”, Zeitschrift für die gesamte Staatswissenschaft 121: 301–24. Selten, R. (1975), “Re-examination of the Perfectness Concept for Equilibrium Points in Extensive Games”, International Journal of Game Theory 4: 25–55. Selten, R. (1978), “The Chain Store Paradox”, Theory and Decision 9: 127–59. Selten, R. (1994), “Biographical”, Nobelprize.org. Nobel Media AB 2014. Web. 6 Sep 2016. Selten, R. (1998a), “Features of Experimentally Observed Bounded Rationality”, European Economic Review 42(3-5): 413-36. Selten, R. (1998b), “Aspiration Adaptation Theory”, Journal of Mathematical Psychology 42: 191-214. Selten, R. (2004), “Boundedly Rational Qualitative Reasoning on Comparative Statics”, in Advances in Understanding Strategic Behaviour, Game Theory, Experiments and Bounded Rationality edited by Steffen Huck, Palgrave Macmillan, Basingstoke. Selten, R., M. Mitzkewitz, and G. Uhlich (1997), “Duopoly Strategies Programmed by Experienced Players”, Econometrica 65(3): 517-55. Selten, R., and R. Stoecker (1986), “End Behaviour in Sequences of Finite Prisoner’s Dilemma Supergames’, Journal of Economic Behaviour and Organization 7: 47-70. Simon, H. (1957), “A Behavioural Model of Rational Choice”, in Models of Man, Social and Rational: Mathematical Essays on Rational Human Behaviour in a Social Setting, New York: Wiley. von Neumann, J and O Morgenstern (1944), Theory of Games and Economic Behavior, Princeton, NJ: Princeton University Press. http://voxeu.org/article/ideas-reinhard-selten

95

A Bratislava, les Européens veulent relancer une Union « attrayante » LE MONDE | 16.09.2016 à 22h26 • Mis à jour le 17.09.2016 à 12h19 | Par Blaise Gauquelin (Bratislava, envoyé spécial) et Cécile Ducourtieux (Bratislava, envoyée spéciale)

Le président français Francois Hollande (à gauche) et la chancelière Angela Merkel lors d’une conférence de presse commune, au terme du sommet informel des 27, qui s’est tenu le 16 septembre, à Bratislava en Slovaquie. STEPHANE DE SAKUTIN / AFP Il faisait pourtant beau, vendredi 16 septembre à Bratislava, pour le premier sommet des dirigeants européens à vingt-sept, sans les Britanniques. Les photos étaient réussies, devant le château surplombant la vieille ville, comme lors d’une croisière-déjeuner sur le Danube. Lire aussi : A Bratislava, un sommet européen pour « reprendre le contrôle » Les chefs d’Etat et de gouvernement semblaient loin de Bruxelles et de toutes les crises que la capitale de l’Europe incarne désormais. La famille européenne, ébranlée par le Brexit, paraissait de nouveau unie, pour tenter de surmonter l’onde de choc suscitée par le résultat du référendum britannique en juin. La chancelière allemande, Angela Merkel, et le président français, François Hollande, avaient même mis en scène, lors d’une conférence de presse commune éminemment symbolique, un moteur franco-allemand qu’ils promettaient de faire fonctionner. Mais le chef du gouvernement italien, Matteo Renzi, a cassé l’ambiance en refusant de se joindre à l’exercice : « Je n’ai pas pu [y] participer, je ne peux pas me contenter de suivre un script pour laisser penser aux gens que je suis d’accord. » Lire aussi : Trois mois après le référendum sur le Brexit, les fractures de l’Union européenne Un peu plus tôt, les Vingt-Sept étaient pourtant tombés d’accord sur une déclaration commune, une « feuille de route » – ce qui n’était pas gagné d’avance, à en croire les diplomates –, indiquant : « Nous nous sommes engagés à offrir à nos citoyens, dans les

96 mois qui viennent, la vision d’une UE attrayante, dans laquelle ils puissent avoir confiance et qu’ils pourront soutenir. » Bratislava est le « début d’un processus » qui se poursuivra par un autre sommet informel à vingt-sept à Malte, pour s’achever en Italie en mars 2017, à l’occasion des célébrations du soixantième anniversaire des traités fondateurs de l’Union. Paris et Berlin « vont très intensément s’engager dans les prochains mois pour faire de tout ça un succès », a promis la chancelière aux côtés du président français. Gages aux pays de l’Est M. Renzi aurait-il réagi par dépit, regrettant de n’avoir pas été convié à la conférence franco-allemande, lui qui serait si soucieux de rester dans la « cour des grands » en s’affichant aux côtés de Mme Merkel et de M. Hollande, comme lors de la conférence de Ventotene (Italie), fin août ? A moins que l’Italien n’ait pas apprécié que la « relance » de l’Europe se fasse à coups de gages donnés aux pays de l’Est ? « Je ne suis pas satisfait des conclusions du sommet sur la question [des relocalisations de réfugiés], mais aussi concernant la croissance », a-t-il déclaré en quittant Bratislava. « Sa sortie n’a pas de rapport avec la feuille de route. Pendant la réunion, il était très clair qu’il la soutenait », relativise un diplomate bruxellois. Il faut dire que les sujets sur lesquels ont insisté les dirigeants correspondaient plus aux priorités du « groupe de Visegrad » (Pologne, République tchèque, Slovaquie et Hongrie) qu’à celles exprimées lors du sommet des « pays de la Méditerranée » organisé début septembre. Quasiment pas un mot n’a été prononcé sur l’économie et la relance budgétaire réclamée par Rome et Athènes, un sujet très sensible en Italie, alors que le président du conseil italien met son poste en jeu dans les mois qui viennent, lors d’un référendum sur une réforme constitutionnelle. La priorité fut en effet donnée à la défense et à la sécurité, seuls sujets sur lesquels un semblant d’unité européenne émerge. Il ne s’agit pas d’aller vers une « armée européenne », encore un vrai tabou pour nombre de capitales, mais d’appliquer les récentes propositions franco-allemandes – sécurisation des frontières, coopération plus étroite, mutualisation des moyens, création d’un fonds pour l’industrie européenne. Une solidarité « flexible » Par ailleurs, la relocalisation des demandeurs d’asile entre pays européens, pour soulager l’Italie et la Grèce, n’apparaît même plus. Les pays de l’Est avaient très mal digéré « l’imposition » de quotas de réfugiés par la Commission, avec le soutien de la plupart des Etats en 2015, et depuis, le premier ministre hongrois, Viktor Orban, multipliait les marques de défiance à l’égard de Bruxelles. Lire aussi : L’Europe saisie par la peur de l’implosion La Commission elle-même a changé sa rhétorique. Son président, Jean-Claude Juncker, n’a pas parlé de cette relocalisation dans son discours de l’Union, mercredi 14 septembre, préférant évoquer une « solidarité qu’on ne peut pas imposer » – presque ce que le groupe de Visegrad énonce dans sa position commune, publiée en plein sommet, vendredi. Ses quatre membres y parlent de « solidarité flexible ». « Les relocalisations restent nécessaires pour soulager l’Italie et la Grèce. Mais il est vrai que la solidarité doit être encouragée et accompagnée plutôt qu’imposée », confie un diplomate européen.

97

Un processus fragile A Bratislava, quelque chose semblait pourtant s’être passé. Comme si tout le monde y avait mis un peu du sien, tentant de mettre de côté son agenda national, pour souder les rangs à peine trois mois après la victoire du Brexit. Le groupe de Visegrad a ainsi évité les déclarations trop provocatrices. Viktor Orban n’a plus fait mention de sa « contre- révolution » européenne, et n’a pas traité à nouveau M. Juncker de « nihiliste »… Lire aussi : La Hongrie d’Orban persona non grata en Europe ? Un « esprit de Bratislava » peut-il souffler sur le continent, comme l’a prétendu Mme Merkel, basé sur le sens du travail en commun et du compromis ? « J’ai eu l’impression que les uns étaient plus à l’écoute des intérêts des autres, qu’il y avait cette compréhension qu’il n’est pas possible d’imposer une décision à un dirigeant incapable de la défendre ensuite devant son Parlement », a ainsi déclaré à la presse le premier ministre belge Charles Michel. Un constat établi juste avant la sortie de son homologue Matteo Renzi, qui prouve à quel point ce « processus » de Bratislava est fragile. Lire aussi l’entretien avec Martin Schulz, président du Parlement européen : « Les dirigeants ne sont pas assez engagés en faveur d’une Europe unie et forte » http://www.lemonde.fr/europe/article/2016/09/16/a-bratislava-les-europeens- veulent-offrir-la-vision-d-une-union-attrayante_4999128_3214.html

98

The Fed Is About to Make a Mistake

Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015. Read More. Sep 16, 2016 7:00 AM EDT By Narayana Kocherlakota

Next week, officials at the U.S. Federal Reserve will hold a crucial meeting on whether to raise interest rates. Whatever they do, it will probably be a mistake. More than seven years after the recovery began in mid-2009, inflation remains below the central bank's 2-percent target, indicating that the economy is still operating below potential. As of July, consumer prices were up just 0.8 percent from a year earlier. Excluding volatile food and energy goods and services, they were up 1.6 percent. Worse, markets appear to be losing confidence that the Fed will ever reach its target: Yields on Treasury bonds suggest that traders expect inflation to average less than 2 percent five to 10 years from now. As the experience of the Bank of Japan indicates, restoring such confidence is not easy. The Fed is also falling short of its goal of "maximum" employment. Although the unemployment rate has returned to its 2007 level of 5 percent, the fraction of Americans in their prime working years who have a job remains well below its pre-recession level. All this argues for the Federal Open Market Committee, the central bank's policy- making arm, to provide added stimulus by cutting interest rates a quarter percentage point at its Sept. 21 meeting. This is all the more important because the Fed's capacity to respond to further shocks is limited, given its reluctance to take interest rates below zero and the large amount of bond-buying that it has already done. It should thus do all it can to ensure that the economy is healthy enough to weather whatever may come. Unfortunately, I'm confident that the Fed won’t cut rates. Doing so now might require officials to raise rates more rapidly in the future -- an outcome that they are, for reasons that are unclear to me, determined to avoid. So the central bank will either raise rates by a quarter percentage point or do nothing. The latter appears more likely, given that two Fed governors have spoken out in favor

99

of caution. The last time the Fed took an action from which two governors dissented was in 1993. In either case, it will be the wrong move.

1. See the great data on FOMC dissents being maintained by the Federal Reserve Bank of St. Louis. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. https://www.bloomberg.com/view/articles/2016-09-16/the-fed-is-about-to-make-a- mistake mainly macro

Comment on macroeconomic issues

Simon Wren-Lewis Winner of the New Statesman SPERI Prize in Political Economy 2016 Friday, 16 September 2016 Economics, DSGE and Reality: a personal story As I do not win prizes very often, I thought I would use the occasion of this one to write something much more personal than I normally allow myself. But this mini autobiography has a theme involving something quite topical: the relationship between academic macroeconomics and reality, and in particular the debate over DSGE modelling and the lack of economics in current policymaking. [1] I first learnt economics at Cambridge, a department which at that time was hopelessly split between different factions or ‘schools of thought’. I thought if this is what being an academic is all about I want nothing to do with it, and instead of doing a PhD went to work at the UK Treasury. The one useful thing about economics that Cambridge taught me (with some help from tutorials with Mervyn King) was that mainstream economics contained too much wisdom to be dismissed as fundamentally flawed, but also (with the help of John Eatwell) that economics of all kinds could easily be bent by ideology. My idea that by working at the Treasury I could avoid clashes between different schools of thought was of course naive. Although the institution I joined had a well developed and empirically orientated Keynesian framework [2], it immediately came under attack from monetarists, and once again we had different schools using different models and talking past each other. I needed more knowledge to understand competing claims, and the Treasury kindly paid for me to do a masters at Birkbeck, with the only condition being that I subsequently return to the Treasury for at least 2 years. Birkbeck at the time was also a very diverse department (incl John Muellbauer, Richard Portes, Ron Smith, Ben Fine and Laurence Harris), but unlike Cambridge a faculty where the dedication to teaching trumped factional warfare. I returned to the Treasury, which while I was away saw the election of Margaret Thatcher and its (correct) advice about the impact of monetarism completely rejected. I was, largely by accident, immediately thrust into controversy: first by being given the

100 job of preparing a published paper evaluating the empirical evidence for monetarism, and then by internally evaluating the economic effects of the 1981 budget. (I talk about each here and here.) I left for a job at NIESR exactly two years after I returned from Birkbeck. It was partly that experience that informed this post about giving advice: when your advice is simply ignored, there is no point giving it. NIESR was like a halfway house between academia and the Treasury: research, but with forecasting rather than teaching. I became very involved in building structural econometric models and doing empirical research to back them up. I built the first version of what is now called NIGEM (a world model widely used by policy making and financial institutions), and with Stephen Hall incorporated rational expectations and other New Classical elements into their domestic model. At its best, NIESR was an interface between academic macro and policy. It worked very well just before 1990, where with colleagues I showed that entering the ERM at an overvalued exchange rate would lead to a UK recession. A well respected Financial Times journalist responded that we had won the intellectual argument, but he was still going with his heart that we should enter at 2.95 DM/£. The Conservative government did likewise, and the recession of 1992 inevitably followed. This was the first public occasion where academic research that I had organised could have made a big difference to UK policy and people’s lives, but like previous occasions it did not do so because others were using simplistic and perhaps politically motivated reasoning. It was also the first occasion that I saw close up academics who had not done similar research but who had influence use that influence to support simplistic reasoning. It is difficult to understate the impact that had on me: being centrally involved in a policy debate, losing that debate for partly political reasons, and subsequently seeing your analysis vindicated but at the cost of people becoming unemployed. My time at NIESR convinced me that I would find teaching more fulfilling than forecasting, so I moved to academia. The publications I had produced at NIESR were sufficient to allow me to become a professor. I went to Strathclyde University at Glasgow partly because they agreed to give temporary funding to two colleagues at NIESR to come with me so we could bid to build a new UK model. [3] At the time the UK’s social science research funding body, the ESRC, allocated a significant proportion of its funds to support econometric macromodels, subject to competitions every 4 years. It also funded a Bureau at Warwick university that analysed and compared the main UK models. This Bureau at its best allowed a strong link between academia and policy debate. Our bid was successful, and in the model called COMPACT I would argue we built the first UK large scale structural econometric model which was New Keynesian but which also incorporated innovative features like an influence of (exogenous) financial conditions on intertemporal consumption decisions. [4] We deliberately avoided forecasting, but I was very pleased to work with the IPPR in providing model based economic analysis in regular articles in their new journal, many written with Rebecca Driver. Our efforts impressed the academics on the ESRC board that allocated funds, and we won another 4 years funding, and both projects were subsequently rated outstanding by academic assessors. But the writing was on the wall for this kind of modelling in the UK, because it did not fit the ‘it has to be DSGE’ edict from the US. A third round of funding, which wanted to add more influences from the financial sector into the model

101 using ideas based on work by Stiglitz and Greenwald, was rejected because our approach was ‘old fashioned’ i.e not DSGE. (The irony given events some 20 years later is immense, and helped inform this paper.)

As my modelling work had always been heavily theory based, I had no problem moving with the tide, and now at Exeter university with Campbell Leith we began a very successful stream of work looking at monetary and fiscal policy interactions using DSGE models. [5] We obtained a series of ESRC grants for this work, again all subsequently rated as outstanding. Having to ensure everything was microfounded I think created more heat than light, but I learnt a great deal from this work which would prove invaluable over the last decade. The work on exchange rates got revitalised with Gordon Brown’s 5 tests for Euro entry, and although the exchange rate with the Euro was around 1.6 at the time, the work I submitted to the Treasury implied an equilibrium rate closer to 1.4. When the work was eventually published it had fallen to around 1.4, and stayed there for some years. Yet as I note here, that work again used an ’old fashioned’ (non DSGE) framework, so it was of no interest to journals, and I never had time to translate it (something Obstfeld and Rogoff subsequently did, but ignoring all that had gone before). I also advised the Bank of England on building its ‘crossover’ DSGE/econometric model (described here). Although my main work in the 2000s was on monetary and fiscal policy, the DSGE framework meant I had no need to follow evolving macro data, in contrast to the earlier modelling work. With Campbell and Tatiana I did use that work to help argue for an independent fiscal council in the UK, a cause I first argued for in 1996. This time Conservative policymakers were listening, and our paper helped make the case for the OBR. My work on monetary and fiscal interaction also became highly relevant after the financial crisis when interest rates hit their lower bound. In what I hope by now is a familiar story, governments from around the world first went with what macroeconomic theory and evidence would prescribe, and then in 2010 dramatically went the opposite way. The latter event was undoubtedly the underlying motivation for me starting to write this blog (coupled with the difficulty I had getting anything I wrote published in the Financial Times or Guardian). When I was asked to write an academic article on the fiscal policy record of the Labour government, I discovered not just that the Coalition government’s constant refrain was simply wrong, but also that the Labour opposition seemed uninterested in what I found. Given what I found only validated what was obvious from key data series, I began to ask why no one in the media appeared to have done this, or was interested (beyond making fun) in what I had found. Once I started looking at what and how the media reported, I realised this was just one of many areas where basic economic analysis was just being ignored, which led to my inventing the term mediamacro. You can see from all this why I have a love/hate relationship to microfoundations and DSGE. It does produce insights, and also ended the school of thought mentality within mainstream macro, but more traditional forms of macromodelling also had virtues that were lost with DSGE. Which is why those who believe microfounded modelling is a dead end are wrong: it is an essential part of macro but just should not be all academic macro. What I think this criticism can do is two things: revitalise non-microfounded

102 analysis, and also stop editors taking what I have called ‘microfoundations purists’ too seriously. As for macroeconomic advice and policy, you can see that austerity is not the first time good advice has been ignored at considerable cost. And for the few that sometimes tell me I should ‘stick with the economics’, you can see why given my experience I find that rather difficult to do. It is a bit like asking a chef to ignore how bad the service is in his restaurant, and just stick with the cooking. [6] [1] This exercise in introspection is also prompted by having just returned from a conference in Cambridge, where I first studied economics. I must also admit that the Wikipedia page on me is terrible, and I have never felt it kosher to edit it myself, so this is a more informative alternative. [2] Old, not new Keynesian, and still attached to incomes policies. And with a phobia about floating rates that could easily become ‘the end is nigh’ stuff (hence 1976 IMF). [3] I hope neither regret their brave decision: Julia Darby is now a professor at Strathclyde and John Ireland is a deputy director in the Scottish Government. [4] Consumption was of the Blanchard Yaari type, which allowed feedback from wealth to consumption. It was not all microfounded and therefore internally consistent, but it did attempt to track individual data series. [5] The work continued when Campbell went to Glasgow, but I also began working with Tatiana Kirsanova at Exeter. I kept COMPACT going enough to be able to contribute to this article looking at flu pandemics, but even there one referee argued that the analysis did not use a ‘proper’ (i.e DSGE) model. [6] At which point I show my true macro credentials in choosing analogies based on restaurants. Posted by Mainly Macro at 01:11 https://mainlymacro.blogspot.com.es/2016/09/economics-dsge-and-reality- personal.html A Fine Theorem

By afinetheorem Diffusion, Economic History, Innovation “Scale versus Scope in the Diffusion of New Technology,” D. Gross (2016) I am spending part of the fall down at Duke University visiting the well-known group of innovation folks at Fuqua and co-teaching a PhD innovation course with Wes Cohen, who you may know via his work on Absorptive Capacity (EJ, 1989), the “Carnegie Mellon” survey of inventors with Dick Nelson and John Walsh, and his cost sharing R&D argument (article gated) with Steven Klepper. Last week, the class went over a number of papers on the diffusion of technology over space and time, a topic of supreme importance in the economics of innovation. There are some canonical ideas in diffusion. First, cumulative adoption on the extensive margin – are you or your firm using technology X – follows an S-curve, rising slowly,

103 then rapidly, then slowly again until peak adoption is reached. This fact is known to economists thanks to Griliches 1957 but the idea was initially developed by social psychologists and sociologists. Second, there are massive gaps in the ability of firms and nations to adopt and quickly diffuse new technologies – Diego Comin and Burt Hobijn have written a great deal on this problem. Third, the reason why technologies are slow to adopt depends on many factors, including social learning (e.g., Conley and Udry on pineapple growing in Ghana), pure epidemic-style network spread (the “Bass model”), capital replacement, “appropriate technologies” arriving once conditions are appropriate, and many more. One that is very much underrated, however, is that technologies diffuse because they and their complements change over time. Dan Gross from HBS, another innovation scholar who likes delving into history, has a great example: the early tractor. The tractor was, in theory, invented in the 1800s, but was uneconomical and not terribly useful. With an invention by Ford in the 1910s, tractors began to spread, particularly among the US wheat belt. The tractor eventually spreads to the rest of the Midwest in the late 1920s and 1930s. A back-of-the-envelope calculation by Gross suggests the latter diffusion saved something like 10% of agricultural labor in the areas where it spread. Why, then, was there such a lag in many states? There are many hypotheses in the literature: binding financial constraints, differences in farm sizes that make tractors feasible in one area and not another, geographic spread via social learning, and so on. Gross’ explanation is much more natural: early tractors could not work with crops like corn, and it wasn’t until after a general purpose tractor was invented in the 1920s that complementary technologies were created allowing the tractor to be used on a wide variety of farms. The charts are wholly convincing on this point: tractor diffusion time is very much linked to dominant crop, the early tractor “skipped” geographies where were inappropriate, and farms in areas where tractors diffused late nonetheless had substantial diffusion of automobiles, suggesting capital constraints were the binding factor. But this leaves one more question: why didn’t someone modify the tractor to make it general purpose in the first place? Gross gives a toy model that elucidates the reason quite well. Assume there is a large firm that can innovate on a technology, and can either develop a general purpose or applied versions of the technology. Assume that there is a fringe of firms that can develop complementary technology to the general purpose one (a corn harvester, for instance). If the large firm is constrained in how much innovation it can perform at any one time, it will first work on the project with highest return. If the large firm could appropriate the rents earned by complements – say, via a licensing fee – it would like to do so, but that licensing fee would decrease the incentive to develop the complements in the first place. Hence the large firm may first work on direct applications where it can capture a larger share of rents. This will imply that technology diffuses slowly first because applications are very specialized, then only as the high-return specialties have all been developed will it become worthwhile to shift researchers over to the general purpose technology. The general purpose technology will induce complements and hence rapid diffusion. As adoption becomes widespread, the rate of adoption slows down again. That is, the S-curve is merely an artifact of differing incentives to change the scope of an invention. Much more convincing that reliance on behavioral biases! 2016 Working Paper (RePEc IDEAS version). I have a paper with Jorge Lemus at Illinois on the problem of incentivizing firms to work on the right type of project, and the implications thereof. We didn’t think in terms of product diffusion, but the incentive

104 to create general purpose technologies can absolutely be added straight into a model of that type. https://afinetheorem.wordpress.com/2016/09/16/scale-versus-scope-in-the-diffusion-of- new-technology-d-gross-2016/

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists| Subscribe Keeping up with the Joneses: Consumption network effects Giacomo De Giorgi, Anders Frederiksen, Luigi Pistaferri 17 September 2016 Household consumption can be influenced by the consumption behaviour of peers. This column examines why this is the case, and considers some policy implications. The tendency for individuals to under-save (or over-borrow) in an attempt to ‘keep up with the Joneses’ appears to be driven by the average consumption of their peers, rather than by the consumption of conspicuous items. If fails to consider these peer effects, it risks wrongly estimating the effects of tax reforms that target certain groups. The idea that we may be influenced by the consumption behaviour of our peers dates back at least to Thorsten Veblen’s theory of conspicuous consumption: "the competitor with whom [an individual] wishes to institute a comparison is [...] made to serve as a means to the end. He consumes vicariously for his host at the same time that he is a witness of that excess of good things which his host is unable to dispose of singlehanded" (Veblen 1899). Duesenberry (1948) followed up and emphasised the role of social influences on consumption in his relative income hypothesis, stating that "the strength of any individual’s desire to increase his consumption expenditure is a function of the ratio of his expenditure to some weighted average of the expenditures of others with whom he comes into contact". Recent studies of peer effects in consumption confirm the existence of important consumption externalities for the US and other countries (Ravina 2007, Maurer and Meier 2008, Charles et al. 2009, Kooreman et al. 2011). These studies have been very influential. However, since they rely on aggregate definitions of peers, small samples, or strong identifying assumptions, they also have important limitations. In new work, we use administrative data for the entire population of Denmark to study consumption externalities (De Giorgi et al. 2016). In particular, once we verify that household consumption is affected by peers’ consumption, we address two sets of questions. We first ask why this is the case, and second, whether those effects are large enough to be important for policymaking. We focus on the influences that a husband’s and wife’s co-workers have on the household’s consumption. Co-workers (rather than neighbours and relatives, for example) seem a natural reference group, as adults spend most of their waking time at the workplace. Moreover, friendship often causes co-employment due to job search

105 strategies adopted by job seekers. To make the definition of peers even tighter, we focus on co-workers sharing similar characteristics in terms of education, age, and occupation. Our measure of consumption at the household level is constructed from information on disposable income and assets, available in administrative tax records and register data. We merge this information with data on the individual’s demographics, and to information on the workplace. Finally, we match our administrative dataset with a household consumption survey where we observe household expenditures on various goods, such as food, entertainment, clothing, jewellery, and durables (home appliances, etc.). This latter data source allows us to distinguish between competing hypotheses when we interpret our results on consumption network effects. In particular, we can classify goods according to their conspicuousness or visibility, hence allowing a direct test of Veblen’s theory for the presence of consumption peer effects. In our analysis, we find sizeable network effects, which translate into a non-negligible social multiplier. We estimate an elasticity of own consumption with respect to peers’ consumption of about 0.3. This effect is similar for the husband’s and wife’s co- workers. While the positive peer effect translates into a non-trivial aggregate effect, its magnitude depends upon the degree of connectedness of peers and households in the population. To illustrate this point, we propose three policy experiments transferring the equivalent of 1% of aggregate consumption equally among (1) households in the top 10% of the consumption distribution, (2) a 10% random sample of households, and (3) households in the bottom 10% of the consumption distribution. These three policies are financed by issuing debt and running a government deficit. As an alternative to a debt- financed policy, we also consider (4) a purely redistributive policy in which the receivers of the transfers are households in the bottom 10%, and the policy is financed by a ‘tax’ to the top 10% of households. From experiment 1, we learn that consumption policies targeted at the top 10% of the consumption distribution (presumably also the wealthier households) have limited aggregate effects, and in particular the effects do not spread along the distribution of consumption. Experiment 2 reveals that policies that target a random sample of households have larger and more far-reaching consequences. This is because those households are located throughout the consumption distribution and thus tap into larger and denser networks. Even larger aggregate effects are found when the policy targets the bottom 10% of households (experiment 3), where individuals presumably work in very tight networks. An added consequence is that redistribution towards the lower part of the income distribution implies a noticeable reduction in consumption inequality (a 13% decline in the standard deviation of log consumption). In experiment 4, where we consider a balanced budget experiment in which a transfer to poorer households is financed by a tax imposed on the richer households (who hence mechanically reduce their consumption), we obtain an intermediate multiplier effect and a large reduction in consumption inequality. With positive peer effects influencing aggregate consumption, it becomes important to understand what drives such effects. We hence run a horse race of three models that have enjoyed favour among researchers. The first model revisits Veblen’s idea of conspicuous consumption and suggests that the allocation of consumption among goods may be tilted towards goods that are ‘conspicuous’, such as jewellery, luxury cars, restaurants, and so forth. The second model is the ‘keeping up with the Joneses’ model, in which individual utility depends on the average consumption of peers (and not necessarily the visible one). The third model is one where risks are shared among members of the reference group, which creates correlation among their consumptions

106 with peer effects being, effectively, a spurious manifestation of the risk sharing agreements. We find empirical support for a ‘keeping up with the Joneses’ model – based on our empirical analyses, we can rule out models of conspicuous consumption as well as full or partial risk sharing. Hence, our results point towards an inter-temporal distortion of the spending profile rather than a tilting of consumption towards luxury and conspicuous goods. In sum, why is the study of consumption network effects important? There are at least two reasons. • First, measuring and understanding the type of distortions induced by the presence of peer effects is important from a welfare point of view. Our results point towards an intertemporal distortion of spending profiles, in which case the saving profile differs from the optimal one obtained if agents had acted atomistically (without considering what their peers do). In turn this implies under-saving (or over- borrowing) in the attempt to keep up with the Joneses. Had the underlying mechanism been status-seeking, it would have implied an inflated share of ‘visible’ or conspicuous goods in the household’s budget. Since visible goods are typically luxuries (cars or jewellery being the most notable examples), consumption peer effects would have implied welfare consequences in the form of excess consumption of goods that are typically disfavoured by the tax system. Had risk sharing been the main reason for correlated consumption profiles it would have been associated with important welfare gains. • Second, consumption network effects are relevant for policymaking. Our tax simulations show that uninsured idiosyncratic shocks, such as a tax changes targeting particular taxpayers, have dramatically different consequences that depend on the peer effects and the underlying network structure of peers and households. Hence, studies neglecting peer effects would tend to either overestimate or underestimate the effects of tax reforms that target certain groups (the rich) and neglect the percolation of effects to groups not targeted by the reform but potentially connected to them through network effects (even in the absence of general equilibrium effects). References • Charles, K, E Hurst, and N Roussanov (2009), "Conspicuous Consumption and Race", Quarterly Journal of Economics, 124 (2), 425-467. • De Giorgi, G, A Frederiksen, and L Pistaferri, (2016), “Consumption Network Effects”, CEPR Discussion Paper 11332. • Duesenberry, J S (1948), “Income-consumption relations and their implications” in Lloyd Metzler et al., Income, Employment and Public Policy, New York, WW Norton & Company, Inc. • Kooreman, P, P Kuhn, A Soetevent, and A Kapteyn (2011) "The Effects of Lottery Prizes on Winners and their Neighbors: Evidence from the Dutch Postcode Lottery", The American Economic Review, 101 (5), 2226-2247. • Maurer, J, and A Meier (2008), "Smooth It Like the `Joneses’? Estimating Peer-Group Effects in Intertemporal Consumption Choice", The Economic Journal, 118 (2), 454- 476. • Ravina, E (2007), "Habit Persistence and Keeping Up with the Joneses: Evidence from Micro Data", mimeo., Columbia University. • Veblen, T (1899), The theory of the leisure class: An economic study in the evolution of institutions, Macmillan. http://voxeu.org/article/consumption-network-effects

107

09/16/2016 06:10 PM An Interview with Seehofer 'We Want a Solution to the Immigration Problem' Interview Conducted by Markus Feldenkirchen and Ralf Neukirch For months, the refugee policy rift between Chancellor Angela Merkel and her nominal political ally Horst Seehofer, the powerful governor of Bavaria, has been widening. In an interview with SPIEGEL, Seehofer says the rift could worsen if Merkel doesn't agree to a hard ceiling on immigration. The debate has been raging for more than a year now. Ever since German Chancellor Angela Merkel opened up the country's borders to refugees in early September of 2015, Horst Seehofer has been using every opportunity at his disposal to voice his disagreement. As head of the Christian Social Union (CSU) party, he is not someone who can easily be shrugged off. The CSU is the Bavarian sister party to Merkel's Christian Democratic Union (CDU). The two parties, which collectively are known simply as the "union," have a long tradition of campaigning together ahead of general elections and of divvying up cabinet posts should the center-right end up in government, which, for the last 12 years, it has. The CSU has no chapters in any other state while the CDU has no state chapter in Bavaria. As the rift has widened, Seehofer has begun calling that long partnership into question, even raising the possibility that his party might campaign on its own ahead of next year's parliamentary elections and put up a CSU chancellor candidate. To avoid that eventuality, he is demanding that Merkel take clear steps toward reversing her immigration policies and adopting a ceiling on the number of refugees Germany is willing to take in, a step Merkel has refused to take, citing potential inconsistencies with the German constitution. Last week, the CSU released a paper, called "Germany Must Remain Germany," outlining steps it would like to see taken, including the abolishment of dual citizenship and a preference for migrants from the "Christian-Western culture." It is demands such as these that have led some to compare the CSU with the right-wing populist party Alternative for Germany (AfD), which has gained significant amounts of support in recent months in Germany. DER SPIEGEL spoke with Seehofer about his relationship with the chancellor, his vision for the country's immigration policy and accusations of populism that have been levelled against him.

SPIEGEL: Mr. Seehofer, when a husband spends an entire year maligning his wife in public, should he not at some point gather the courage to put an end to the relationship? Seehofer: Every married couple has disputes from time to time, and in every good marriage, an attempt is made to overcome the dispute. That is what we are currently trying to do. SPIEGEL: The intensity and abrasiveness of your criticism of Angela Merkel is without precedent. When are you going to finally actually do something, like pull the CSU out of the federal government? Doing so wouldn't even trigger a political crisis,

108 since the CDU and the center-left Social Democrats (SPD) would still have a parliamentary majority without the CSU. Seehofer: Leaving the government would be disadvantageous for both the CSU and the CDU. That's why we aren't giving up and are continuing to search for a future-oriented solution. Angela Merkel and the CDU have in the meantime adopted several of our demands. What we now need is a system of rules, a kind of guarantee, for drastically limiting the influx of refugees. The past cannot be allowed to repeat itself. SPIEGEL: Angela Merkel still hasn't received an invitation from you to attend the CSU party convention. And you have said you're not certain you will attend the CDU party convention. Such mutual appearances have decades of tradition in Germany. Don't you think your bickering has sunk to a playground level? Seehofer: Our politics are steered by logic. If Angela Merkel was to appear at the CSU convention and I was to visit the CDU, despite the fact that we are miles apart on the essential coordination of our policies, you know full well the damage that would do to the union. The expectation is that party leaders solve problems. That's why substantial differences must first be cleared up. I can't yet tell you today if we will be successful. But since last weekend, I am quite a bit more confident that we will be. SPIEGEL: You have threatened to file a legal complaint against the federal government and you invited Angela Merkel's political adversary Hungarian Prime Minister Viktor Orbán to a meeting of CSU leaders. Given such provocations, can one still speak of "sister parties" and of a "union"? Seehofer: Yes, of course. We are sisters and we are a union. The last year has been a difficult period for the CDU and the CSU, the most difficult period that I myself have actively experienced. We have seen election results that can make none of us happy. In Baden-Württemberg, the CDU is behind the Green Party and in Mecklenburg-Western Pomerania it is behind the Alternative for Germany (AfD). But we are now looking ahead to the future. SPIEGEL: Your party can bluster and threaten all it wants, but you will ultimately have to find common ground with the CDU so as not to do too much damage to the CSU. Seehofer: No one has to tell me that constant conflict, and I emphasize constant conflict, is damaging. But it is also true that policies will have to change if we want to win back trust. SPIEGEL: There is something else that your party has to worry about: If the CDU was to establish a chapter in Bavaria at some point, it would be the end of the CSU's absolute majority in the state. Former CDU general secretary Ruprecht Polenz recently mentioned the possibility. Seehofer: There are many brainy people from the past, but we're not particularly impressed with such talk. Our contact people are in Berlin, the chancellor first and foremost. SPIEGEL: We have examined dozens of interviews that you have given in recent months. You talk a lot about refugee policy, but one thing is constantly left ambiguous, perhaps intentionally. What concrete steps does Angela Merkel have to take before you will say: "Okay, now we'll back off?"

109

Seehofer: We want a solution to the immigration problem. To do that, we first need a ceiling. We don't want unlimited immigration like we saw last year and that's why we need binding measures as a guarantee. When announcements are made that we are combatting the root causes of flight, then they must be combined with concrete measures. When it is said that those who don't have a right to asylum will be sent back, then we together with the federal government must enact a detailed, binding repatriation program. We want a clear system of rules that clearly and credibly reduces immigration to a reasonable level. SPIEGEL: So you are sticking to your demand for a hard ceiling of 200,000 immigrants per year despite its potential inconsistencies with the guaranteed fundamental right to asylum? Seehofer: Yes. We want a policy that safeguards this ceiling. We also, by the way, already changed the constitution to make this possible 23 years ago. With the support of all parties. Our constitution does not require us to take everybody who appears at our borders and demands asylum. And when someone comes from a safe country of origin, we can immediately repatriate them. The ceiling will work and it is consistent with the constitution. SPIEGEL: The chancellor and several other CDU politicians have repeatedly insisted that they will not accept a ceiling. If the approval of such a ceiling is the prerequisite for an agreement, then there won't be any agreement. Seehofer: We'll see. We will not back away from the 200,000 ceiling. It's about our credibility, plain and simple. SPIEGEL: Given that anything seems possible at this point, is a situation conceivable whereby the CDU enters the campaign with Merkel as its candidate for chancellor and the CSU says: We won't support her? Seehofer: We as a party will make personnel decisions in the first quarter of 2017. German history is full of serious mistakes pertaining to premature personnel decisions. SPIEGEL: Last weekend, CSU leaders presented a paper containing the party's refugee policy demands and it is full of odd sentences. Such as this one: "We are opposed to our cosmopolitan country being changed by immigration or refugee flows." How cosmopolitan can a country be if it doesn't want to be changed by immigration? Seehofer: The paper's title is: "Germany Must Remain Germany." The chancellor has used almost the exact same formulation. When she says it, it's considered liberal and future oriented. When we say it, it's seen as reactionary and backwards. SPIEGEL: Merkel never said that immigration cannot be allowed to change the country. Seehofer: Look, Bavaria is a dynamic, cosmopolitan state. Those who don't adapt fall behind. But we need ground rules. In every governmental speech I give before state parliament, I say: Bavaria will remain Bavaria. That's not a contradiction. SPIEGEL: There are other controversial sentences in your paper. "In the future, immigrants from our Christian-Western culture must be given priority." Do you intend to select immigrants based on their religion? Seehofer: Nonsense. For people who must fear for their lives because of their religion or political convictions, the protection provided by Article 16a of the German constitution, the right to asylum, applies. Nobody is questioning that. Irrespective of

110 that, there is immigration that must be regulated, to bring skilled personnel to Germany, for example. We have to establish criteria for that. Their affiliation with the Christian- Western culture should be one of them. Such people are the easiest to integrate. SPIEGEL: You don't want any computer specialists from India in Bavaria? Seehofer: We say "priority." That doesn't exclude a Chinese vice president of a Bavarian university, as we've had before. But even if we remain flexible, we need ground rules. That is what we are trying to express with this sentence. SPIEGEL: The paper is full of sentences that lack clarity. Seehofer: Oh my God, every Saturday I read sentences in SPIEGEL that lack clarity. SPIEGEL: We just wonder whether the ambiguity is intentional. Whether you perhaps consciously intend to send messages to the far-right spectrum for which you have a different explanation in an interview with us. Seehofer: Our thinking isn't nearly that serpentine. Our paper is being interpreted in all kinds of ways that aren't explicitly stated. SPIEGEL: We just want to find out how certain things were meant. Seehofer: I know full well what is being said about us in this one square kilometer of the Berlin government quarter and which false trails are being laid. We are always presented as the evil Bavarians who only want to throw a wrench in the system. When we say how we see things, we are instructed to adopt a more moderate tone. It's always the same game. And it's always the same people. SPIEGEL: In the Bundestag recently, the chancellor called for the use of more moderate language. Do you think she was talking about you? Seehofer: I wondered who she was talking about. One day later, I spoke with (SPD head) Sigmar Gabriel and he was wondering the same thing. There are nice political formulations that can apply to everyone and to nobody. I wouldn't know how I could be more reserved in my formulations than I already am. SPIEGEL: Another question about your paper: In rejecting dual citizenship, the paper says that it is impossible to "serve two masters." We always thought that it wasn't citizens who served their state, but the other way around. Seehofer: You aren't asking why we are opposed to dual citizenship. Instead, you are quibbling over locution. The sentence is true and completely okay. I am allergic to this paternalism and censorship. SPIEGEL: In the paper, it says that the constitution applies in Germany and not Sharia law. Why do you insist on emphasizing something that goes without saying? Seehofer: Unfortunately, that doesn't go without saying. You should conduct an interview with security policymakers about parallel justice systems in immigrant communities. SPIEGEL: The sentence suggests that there is currently a struggle underway as to whether the constitution or Sharia applies. You are presenting it as a larger problem than it really is. Seehofer: The only thing left is for you to ask: "When was the last time you encountered somebody wearing a burqa and does that justify the debate you are conducting?"

111

SPIEGEL: We mostly encounter women wearing burqas in the expensive shopping streets of Munich. Seehofer: It's great if you don't think there are any problems. The people see things differently and they have a clear stance on burqas. As a party of the people, we make it clear that we take people's concerns seriously. That is our job. It's the best way to combat extremism from both the right and the left. SPIEGEL: Cardinal Rainer Maria Woelki of Cologne has accused you of doing the work of the right-wing populists. Seehofer: I don't understand Mr. Woelki on that point. But I would be happy to speak with him about this misunderstanding. SPIEGEL: The right-wing populist AfD has three main enemies: Angela Merkel, immigrants and the public broadcasting system. Ever since you went after public broadcasters ARD and ZDF and demanded their consolidation, one has the impression that the AfD's enemies are the same as the CSU's enemies. Seehofer: First of all, Angela Merkel and the CDU are not our political adversaries. The CDU and the CSU are sister parties. When it comes to ARD and ZDF, I am interested in the question as to how they can be more efficient in the future. They are, after all, financed by contributions from German citizens. That is completely different than the "lying press" accusations made by the AfD. SPIEGEL: You have often complained about the news coverage of the public broadcasters. And now you want to consolidate them. Seehofer: The focus here is on media policy. You at SPIEGEL also talk about how you should adjust to the changing media world. I am on the ZDF administrative board. There are myriad structures at this broadcaster that remind one of a government agency. I want to talk about how we can improve programming while at the same time lowering contributions. SPIEGEL: You are constantly emphasizing how dissatisfied you are with politicians in Berlin. Would you be happy if Angela Merkel was to break Helmut Kohl's record of 16 years as German chancellor? Seehofer: I hold Angela Merkel in high regard. But you won't get an answer from me to that question. SPIEGEL: Mr. Seehofer, thank you for this interview. URL: http://www.spiegel.de/international/germany/interview-with-seehofer-on-immigration-merkel-and-the-afd-a- 1112607.html Related SPIEGEL ONLINE links: • Merkel's Challenge: Navigating the Post-Fact Era (09/13/2016) http://www.spiegel.de/international/germany/opinion-merkel-faces-challenge-in-post-fact-era-a-1111976.html • Clinging to Power: Is The Merkel Era Coming To an End? (09/09/2016) http://www.spiegel.de/international/germany/refugee-policy-sees-waning-of-power-for-merkel-a-1111668.html • Two Weeks in September: The Makings of Merkel's Decision to Accept Refugees (08/24/2016) http://www.spiegel.de/international/germany/a-look-back-at-the-refugee-crisis-one-year-later-a-1107986.html • The AfD Wedge: Bavarian Conservatives Weigh Split from Merkel's CDU (05/10/2016) http://www.spiegel.de/international/germany/merkel-conservatives-divided-by-right-wing-afd-a-1091491.html • Lying Press? Germans Lose Faith in the Fourth Estate (02/24/2016) http://www.spiegel.de/international/germany/most-germans-think-the-press-is-lying-to-them-about-refugees-a- 1079049.html

112

La terrible vérité derrière les taux d’intérêt négatifs

JEAN-MARC VITTORI / Editorialiste Le 19/09 à 14:59

Fabien Clairefond pour Les Echos La crise financière que nous subissons depuis près d’une décennie est née d’un excès de dettes. Ceux qui ont trop prêté doivent accepter de prendre leurs pertes. Ou d’être prélevés sur leur épargne, ce qui revient au même. Mais pourquoi donc cette étrange folie ? Après les banques centrales et les Etats, les entreprises se mettent aux taux d'intérêt négatifs. La française Saint-Gobain et l'allemande Henkel ont levé des centaines de millions en faisant miroiter un taux négatif de 0,05% par an. Un peu comme si elles attrapaient des mouches avec du vinaigre. Ce n'est pas fini car la Banque centrale européenne (BCE) achète des obligations à tour de bras, à tel point que cette matière première de la finance se raréfie. Les prix vont donc encore monter, et les taux d'intérêt encore baisser. La Banque du Japon est sur la même tendance. Et même si la Réserve fédérale des Etats-Unis semble pour l'instant regarder plutôt vers la hausse des taux, les Américains s'inquiètent de ce qui se passera lors de la prochaine récession. En décortiquant les propos tenus par Janet Yellen, la présidente de la Fed, lors de l'université d'été des banquiers centraux à Jackson Hole, certains experts ont trouvé dans une note de bas de page l'indice que la Fed pourrait alors baisser son taux directeur jusqu'à... -9%. Les banquiers centraux ont d'excellentes raisons de pratiquer l'inondation. Il faut relancer l'investissement trop faible, pénaliser l'épargne trop forte, redonner le goût du risque aux investisseurs. Tant pis si les banquiers souffrent, peinant à prendre une marge sur un produit de base au prix négatif ! Mais les grands argentiers visent en réalité une autre cible : les épargnants. Même s'ils ne l'avoueront jamais. Pour comprendre pourquoi les épargnants sont visés, il faut remonter le fil d'une décennie de crise. Comme toutes les grandes tempêtes financières, celle de 2007-2008 est venue d'un excès de crédit. Trois économistes qui scrutent cet excès depuis des années, Oscar Jorda, Moritz Schularick et Alan Taylor, décrivent dans leur dernier article académique un mouvement en forme de « crosse de hockey ». Dans les dix-sept pays étudiés, le crédit bancaire au secteur privé a par exemple bondi de 80% du PIB en 2000 à 120% en 2009. « Jamais dans l'histoire du monde industriel le levier n'avait été plus grand ». Les emprunteurs ont trop emprunté. Le pendant de l'histoire est souvent oublié : si des emprunteurs ont trop emprunté, cela signifie fatalement... que des prêteurs ont trop prêté.

113

Le problème, c'est que les prêteurs sont des épargnants. Ils ont le défaut d'être beaucoup plus nombreux que lors de la dernière dépression, celle des années 1930. Ils sont aussi souvent âgés, ce qui veut dire qu'ils votent beaucoup. Pas question de les froisser et encore moins de les effaroucher, ce qui pourrait les amener à vider leur compte en banque. « Je n'accepterai pas qu'un seul déposant perde un seul euro parce qu'un établissement financier se révélerait dans l'incapacité de faire face à ses engagements », avait ainsi déclaré à Toulon Nicolas Sarkozy quand il était président de la République, dix jours après la faillite de la banque Lehman Brothers en 2008. Mais si les prêteurs ne perdent rien, cela implique que les emprunteurs ont trop à rembourser. On a perdu le mode d'emploi des deux seuls leviers qui permettent d'échapper à cette loi d'airain : la croissance (qui accroît l'argent disponible pour rembourser) et l'inflation (qui diminue le montant réellement remboursé). C'est tout le drame de la Grèce. Sauf que le même Nicolas Sarkozy, encore président de la République, avait fait une déclaration très différente le 19 octobre 2010 à Deauville, avec son amie Angela Merkel. Les deux dirigeants avaient estimé que les futurs sauvetages d'Etats via le nouveau Mécanisme européen de stabilité devraient forcément se traduire par des pertes pour les créanciers privés. Autrement dit, les épargnants devront perdre. Et pas seulement un euro. Le Sarkozy de Toulon avait été loué pour sa vision, celui de Deauville vilipendé pour son inconscience. Pour nombre d'observateurs, la petite phrase de Deauville est le déclencheur de la crise européenne, qui a culminé en 2011-2012 avec les attaques spéculatives contre l'Espagne et l'Italie, seulement enrayées par la promesse de Mario Draghi, président de la BCE, de faire « ce qu'il faudra » pour sauver la monnaie unique. Mais c'est le Sarkozy de Deauville qui avait raison. Pour sortir de la crise, ceux qui ont trop prêté devront prendre leurs pertes. C'est ce qui s'est passé lors de la crise de la dette latino-américaine des années 1980, même s'il a fallu perdre une décennie pour en arriver là. C'est ce qui s'est passé aux Etats-Unis à partir de 2009. En cinq ans, 465 banques ont fermé leurs portes. Les autres ont essuyé des centaines de milliards de dollars de pertes sur leurs prêts immobiliers. Les futurs retraités vont découvrir peu à peu que leurs fonds de pension rapporteront beaucoup moins que ce qu'ils espéraient (le célèbre fonds Calpers annonce encore un rendement de 6,5% alors que ses placements lui ont rapporté dix fois moins l'an dernier). C'est ce qui ne s'est pas encore passé en Europe et au Japon, ou trop peu. Les actionnaires français ont certes l'impression d'avoir été tondus (-25 % pour l'indice CAC40 depuis le pic de 2008), mais ce n'est pas le cas des Britanniques (le FT100 est étal) ou des Allemands (+30 % pour le Dax30). L'idée avancée par le FMI en 2013 d'une taxe de 10% sur les patrimoines pour solder la crise avait amusé la galerie. La taxation des dépôts au-delà de 100.000 euros dans les banques chypriotes la même année avait été regardée avec commisération. Mais quand une banque bavaroise applique depuis le 1er septembre 2016 un taux négatif de 0,5% sur les dépôts des particuliers au-delà de 100.000 euros, elle prend exactement la même mesure, en l'étalant dans le temps. Voilà pourquoi les taux d'intérêt négatifs sont là pour longtemps : c'est le moyen rampant de faire payer la facture de la crise à ceux qui l'ont jusqu'à présent évitée. http://www.lesechos.fr/idees-debats/editos-analyses/0211305520881-la-terrible-verite- derriere-les-taux-dinteret-negatifs-2028429.php#xtor=EPR-8-%5B18_heures%5D- 20160919-%5BProv_%5D-1998886%402

114

Daily Morning Newsbriefing September 20, 2016 The Berlin aftermath These are important days in German politics because they will shape the next German government, and of course, of Angela Merkel's future as well. Her lukewarm mea culpa yesterday did not really cut it - she blamed herself for not communicating her policies better, which is the exact opposite of what her critics want to hear. Horst Seehofer, CSU chief, said it was not sufficient to tell the people that we have done everything right, we only have to explain it better. He said the CDU and the CSU have a few weeks to find an agreement. Otherwise he would not be in a position to support Merkel. Merkel spoke at the CDU executive meeting, in which she also criticised herself for not preparing the country adequately for the stream of refugees. But she was also just as adamant that she is not going to change her policies. FAZ quotes one of the participants of the meeting as saying that her comments had cleared the air, but it is not clear to us how that is possible. While Merkel was trying to extricate herself from her refugee policies Sigmar Gabriel, the SPD chief and her coalition partner, scored an important victory at a party congress which approved the Ceta trade deal with Canada by a majority of two thirds. This was a big personal victory for Gabriel, who is also economics minister and who sold his party a deal to approve a modified Ceta in exchange for blocking TTIP if it was ever proposed. There are hopes among the left for a three-party coalition of the left at the federal level, following the Berlin elections which are likely to lead to a such a coalition at state level. At the moment the three parties - SPD, Left and Green - score between 42% and 44% in the polls, well short of a majority. The three parties would, however, have a theoretical majority in the current Bundestag. The most likely coalition constellations are currently either another CDU/CSU/SPD coalition, or a three-party coalition, always with the CDU/CSU. It is only if the CDU/CSU were to fall below 30% that an alternative option becomes more realistic. That would be the moment when Merkel would lose the support of her own party. That has not happened yet - and we don't think that it will. In this context we noted two comments. Berthold Kohler notes that until recently Merkel used to benefit her party - she pulled the numbers up. She has now become an electoral liability. Her party has tolerated that for as long as she was able to take the SPD down with her. That has now changed. The more Gabriel distances himself from her, the more nervous the CDU becomes. Kohler notes that Merkel's self-criticism only relates to her over-reliance on the Dublin system. She does not really understand the political reaction in Germany against mass immigration. He notes that Merkel's promises to explain her policies better constitute the ultimate threat to her party. If she succeeds, the party would be in real trouble. And finally, we have a comment by Heribert Prantl of Suddeutsche, one of the few German commentators who is not particularly worried about the AfD which he dismisses as a three-year phenomenon. The AfD is the anti-party, anti-everthing: EU,

115 euro, Nato, refugees. One of the effects of the current political constellation is that the CDU will move to the right and the SPD will move to the left. This is not a bad thing for German democracy, he writes. Our other stories We also have stories on the rising tensions at Greek hotspots; on the apparent slowdown of eurozone internal and external trade; on a proposal for a European Safe Bond; on Marcelo Rebelo de Sousa's red lines; on whether Slovakia's good economic performance vindicates the euro; on the increasing likelihood of a hard Brexit; on Macron's godfather outing himself; and on the Bundesbank defending the ECB against charges that QE increases inequality.

116

DROIT DU TRAVAIL La loi Travail vue par les DRH: "On agrandit notre terrain de jeu" Par Tiphaine Thuillier, publié le 15/09/2016 à 07:19 , mis à jour à 16:42 La plupart des centrales syndicats appellent à la grève contre la loi Travail ce 15 septembre. De leur côté, les DRH se frottent au texte promulgué le 8 août dernier. afp.com/FRANCK FIFE Alors que les syndicats appellent à manifester contre la loi Travail ce 15 septembre, un mois après sa promulgation, les entreprises tentent de se familiariser avec un texte complexe. Certains salariés s'offrent ce jeudi un baroud d'honneur en défilant une nouvelle fois contre la loi Travail. Et côté entreprise, leurs dirigeants cherchent encore comment s'adapter à ce nouveau texte. Promulguée dans la torpeur de l'été, la loi Travail n'est pas encore forcément claire dans la tête de tous les DRH. Mais, rentrée oblige, ces derniers commencent à s'y familiariser. "Suivre les nouveaux textes de loi fait partie du travail des DRH. Que ce soit dans son intégralité ou sous forme de synthèses, ils s'informent sur la loi En Khomri", commente Jean-Christophe Sciberras, DRH de Solvay. Un travail d'appropriation qui prend du temps, mais qu'ils ont déjà entamé. "J'ai déjà lu le texte et extrait les thèmes qui concernent notre entreprise et son secteur d'activité", commente Sandrine Wetter, DRH chez Intelcia. LIRE AUSSI >> Loi Travail: le texte du gouvernement en 25 mesures clés "Je lis çà et là qu'on attend les décrets comme s'il n'allait rien se passer avant décembre, mais plusieurs dispositions de la loi comme la signature d'accords ou la tenue d'un référendum n'ont pas besoin d'être précisées par décret. Et sont donc négociables dès maintenant dans les entreprises", conclut Jean-Christophe Sciberras. LIRE AUSSI >> Loi Travail: les mesures qui s'appliquent déjà "C'est une loi dense et complexe qui ne s'appréhende pas immédiatement, explique Jean-Paul Charlez, président de l'ANDRH et en charge des relations humaines chez Etam. Elle va entraîner un mouvement de fond dont les effets ne sont pas visibles en quinze jours." "On agrandit notre terrain de jeu" De cette loi qu'il juge "intelligente" et plutôt "positive", le DRH du groupe Etam retient plusieurs points. Il se réjouit d'abord de la philosophie du très controversé ex-article 2 désormais numéroté article 8 sur les accords d'entreprise, qui permet de "traiter les sujets là où ils se posent, au plus près des salariés". LIRE AUSSI >> Loi Travail: l'article 2 permettra-t-il au patron de faire ce qu'il veut? "Prenez la question du travail du dimanche, c'est souvent plus facile de signer des accords au sein de l'entreprise qu'au niveau des branches. Dans la mienne, par exemple, il a été paraphé par les syndicats sans problème." Pour Jean-Christophe Sciberras, tout

117 ce qui donne plus d'espace de liberté pour négocier au coeur de l'entreprise est à saluer. "D'une certaine façon, on agrandit notre "terrain de jeu"", remarque-t-il. Sandrine Wetter, elle, regrette un peu que le terrain ne soit pas plus vaste. "Nous avions déjà la possibilité de signer des accords de modulation du temps de travail donc il n'y a pas d'avancée majeure, se désole-t-elle. Mais c'est déjà ça." La loi prévoit par exemple la possibilité pour les entreprises de fixer elle-même le taux de majoration des heures supplémentaires, qui ne pourra pas être inférieur à 10%. Une possibilité pour de futures négociations, que Jean-Christophe Sciberras et Sandrine Wetter ne jugent pas "prioritaire" pour le moment. LIRE AUSSI >> 35 heures, heures sup'... Ce que la loi Travail va changer Le grand principe de liberté pourrait se heurter à quelques limites dans l'exécution. "Je trouve que ce principe d'accords majoritaires est excellent, mais il risque de ne pas être si facile à mettre en place selon les entreprises, relève le DRH d'Etam. Dans celles où cinq ou six syndicats sont jugés représentatifs, il va falloir déployer des trésors de patience et tisser de nouveaux liens pour que la moitié d'entre eux accepte de signer." Un point sur lequel le rejoint Jean-Christophe Sciberras qui souligne tout de même: "un accord majoritaire est nettement plus crédible pour les salariés." Éviter les référendums L'autre point qui fait sourciller les professionnels, c'est celui du référendum d'entreprise (désormais appelé consultation dans le texte de loi). "Je suis contre, réagit Jean-Paul Charlez. A mon sens, l'entreprise n'a pas à être un lieu de démocratie directe. Et il existe des représentants syndicaux avec lesquels nous traitons. Je pense que cet outil sera peu utilisé." Un avis partagé par le DRH de Solvay. "Organiser un référendum dans une entreprise, surtout une grande, c'est un sacré bazar organisationnel: on ne va pas en faire tous les jours! A mon sens, l'objectif de la loi est de faire qu'ils aient lieu le moins fréquemment possible, qu'on trouve des accords majoritaires avec les syndicats. On devrait donc pouvoir les éviter autant que possible." A l'inverse, Sandrine Wetter, se déclare très favorable à la mesure. "Pour moi, il est très important d'entendre la voix des salariés, réagit-elle. On peut tout à fait échanger de façon directe avec eux sans pour autant contourner ou "squeezer" les syndicats." LIRE AUSSI >> Pourquoi le référendum en entreprise ne sera pas une alternative aux syndicats Que pensent-ils de la nouvelle définition du licenciement économique censée lever les freins à l'embauche? "Ca n'aura pas d'effets sur les embauches, lance d'emblée Jean-Paul Charlez. Le DRH regrette l'abandon du périmètre national pour l'appréciation des difficultés de l'entreprise, mais se réjouit de la mise en place de critères (comme la taille), qui vont "objectiver les décisions". Pour Jean-Christophe Sciberras, en revanche, le texte n'a rien "d'une révolution" sur ce point même "s'il peut sans doute aider un peu les PME en leur apportant un cadre juridique plus précis". LIRE AUSSI >> Loi Travail adoptée: trois mesures phares qui divisent déjà les avocats Pas la peine d'attendre les décrets Le compte personnel d'activité (CPA), l'une des principales innovations du texte, "est un sujet dans l'ensemble de la profession plutôt consensuel", affirme le DRH de Solvay. Auteur d'un rapport sur le bulletin de paie simplifié, il avoue s'intéresser à ce nouveau dispositif d'abord sous l'angle du bulletin de paie dématérialisé, qui devrait figurer dans le CPA. "L'idée est superbe, s'enthousiasme Jean-Paul Charlez. Mais il faut espérer que

118

ce ne sera pas trop compliqué dans la mise en oeuvre." Pour Sandrine Wetter, le sujet n'est pas une priorité. "Je sais que je ne vais pas travailler sur ce compte personnel d'activité à court terme." + Plus d'actualité sur : Réforme du code du travail: la loi El Khomri (ou loi Travail) décryptée • Loi Travail: après la rue, une dernière lutte syndicale dans les prétoires? • EN IMAGES. Loi Travail: au moins 78 000 manifestants dans toute la France • Loi Travail: et si le 49.3 arrangeait tout le monde? http://lentreprise.lexpress.fr/rh-management/droit-travail/la-loi-travail-vue-par-les-drh- on-agrandit-notre-terrain-de-jeu_1830722.html

119

Daily Morning Newsbriefing September 16, 2016 Hyperactive in Bratislava We are going to kick off today with a commentary on today's meeting in Bratislava, which we see as a classic example of political attention-deficit syndrome. 27 leaders, without Britain, will come together to discuss the future of the EU post-Brexit. Donald Tusk's letter, on which we reported, will set the agenda, a greater emphasis on security co-ordination, internally and externally, but no further institution building, and no Treaty change. This raises the question whether it will solve the problem, or, as we believe, whether this is just meant as a superficial fix. The underlying anger among voters in the EU, the rise of extremist parties, and of course the Brexit vote, are not caused by a liberal immigration policy. They are the result of at least a decade and a half of economic mismanagement that has produced low real income growth in large parts of Europe, rising inequality within countries, and imbalances between countries. UK government statistics show that over a period of 13 years, your median British voter suffered a fall in real incomes after taking into account housing costs. The situation is similar in Greece and Italy, and only a little less extreme in other parts of the eurozone. This is dramatic, accumulated policy failure. It is when policies fail in such spectacular way that people use secondary targets to express their frustration: they turn on immigrants, either physically as in Germany, or through the ballot box, as in the Brexit vote. By ruling out treaty change and institutional reform, EU leaders will today rule out any action that might actually solve the problem, such as a shift in the fiscal rules that hold back investment and growth, and new institutions and instruments to manage the eurozone in particular. If you compare the EU to a car with engine failure, Bratislava is the equivalent of upgrading the car stereo. We don't want to downplay the usefulness of further co-operation on defence and security. But it strikes us as a deflection - the wrong emphasis at the wrong the time. First they created a monetary union and left it in limbo with the job half done. And now they are turning to the next toy and mess up defence. The comments by Angela Merkel and Francois Hollande at their bilateral pre-Bratislava meeting last night show that this is the direction the EU will take at least until after the next year's round of elections. For now, this is about appearances. Merkel said she wanted something to celebrate at the March 2017 anniversary summit in Rome. Hollande talked about a clear perspective for the future. And what he means by this is the protection of the EU's external border, or better co-ordination in the fight against terrorism, as FAZ notes this morning. For different reasons, they are both in trouble politically at home, which is what determines the agenda. We doubt that the attempt to deflect from the EU cumulated and abject failures of economic policy is going to work even in the short run, not even for the leaders themselves. We would expect to see more terror attacks closer to next year's elections, which will make a mockery of what has been agreed or proposed at Bratislava.

120

Electorates will rightly be wondering whether more co-ordination really is the answer to Europe's security problems - or whether it is a case of insufficient funding. Our other stories We also have stories on Deutsche Bank balking at a $14bn subprime settlement offer; on French primary candidates openly campaigning on higher deficits; on the latest turns in the Spanish corruption cases; on the low growth predictions for Portugal; on stumbling blocs in the second review; on Corbyn’s Brexit strategy; and on a charged standoff between Syriza and the central bank.

121

Economics

Joseph E. Stiglitz Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former senior vice president and chief economist of the World Bank and chair of the US president’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. His most recent book is The Euro: How a Common Currency Threatens the Future of Europe. SEP 14, 2016 A Better Economic Plan for Japan NEW YORK – It’s been a quarter-century since Japan’s asset bubble burst – and a quarter-century of malaise as one “lost decade” has followed another. Some of the criticism of its economic policies is unwarranted. Growth is not an objective in itself; we should be concerned with standards of living. Japan is ahead of the curve in curbing population growth, and productivity has been increasing. Growth in output per working- age person, especially since 2008, has been higher than in the United States, and much higher than in Europe. Still, the Japanese believe they can do better. I agree. Japan has problems on both the supply and the demand side, and in both the real economy and finance. To address them, it needs an economic program that is more likely to work than the measures policymakers have recently adopted, which have failed to achieve their inflation target, restore confidence, or boost growth to the level desired. For starters, a large , if accompanied with “green finance,” would stimulate enormous investment to retrofit the economy. Almost surely, this stimulus would exceed the contractionary effect of money being taken out of the system and the negative wealth effect of the decreased value of “carbon assets.” The adverse wealth effect from the decrease in the value of carbon assets would be small; and, with the capital stock badly out of sync with the new price system, the investment unleashed would be large, unless there were bottlenecks in closing the gap. In that case, the money generated by the tax could be used to reduce government debt; otherwise, it could be used to finance investments in technology and education – including supply-side measures to improve the productivity of Japan’s service sector. These expenditures could simultaneously stimulate the economy in ways that would finally pull it out of deflation. Many outsiders worry about Japan’s debt, which is easy to service at the low interest rates prevailing today, but would not be if rates increased to more normal levels. While I don’t see that happening anytime soon, Japan could undertake two policies to inoculate itself against such concerns. First, it could exchange some of its debt for perpetuities, bonds that are never repaid, but pay a (small) interest rate each year. This would shift the risk entirely off the

122 government’s books. Some might worry that this would be inflationary; but in Japan’s upside-down economy, inflation is exactly what’s needed. I believe worries about a sudden increase in interest rates are greatly overblown; but, out of an abundance of caution, the government could exchange say 5% of its debt every year, unless and until excessive inflationary pressures appeared. Alternatively, the government could exchange the debt for non-interest bearing money – the long-feared monetization of government debt. Even if monetary finance was more likely to boost inflation than the exchange of debt for interest-bearing perpetuities, this is hardly an argument against it: it is only an argument for going more slowly. The second way Japan could protect itself from an interest-rate spike starts from the recognition that a large share of the money the government owes it owes to itself. Many on Wall Street don’t seem to understand that what matters is the net debt – what the government owes to the rest of society. If the government repaid the money it owes to itself – netting it out, in effect – no one would know the difference. But those on Wall Street who look only at the headline debt-to-GDP ratio would suddenly feel better about Japan. If after all of this, there is still evidence of a lack of demand, the government could reduce its consumer taxes, increase investment tax credits, expand programs to help low- and middle-income households, or invest more in technology and education, financing all of this by issuing money. Again, old economics would worry about inflation; but Japan wants those “fears” to come true. Japan does have more than a demand-side problem. Data on output per hour worked suggest a supply-side problem, most clearly manifested in the service sector, where the impressive ingenuity seen in so many manufacturing industries typically is nowhere in evidence. A natural niche for Japan would be technology developments in the service sector – such as the development of diagnostic instruments in the health-care industry. Prime Minister Shinzo Abe, however, has taken a very different approach, supporting the Trans-Pacific Partnership trade deal with the US and ten other Pacific Rim countries. Abe believes that the TPP would force needed reforms in domestic agriculture (though, interestingly, no one in the US thinks it would help the US move away from its highly distortionary agricultural policies). In fact, such reforms would have a miniscule effect on GDP, simply because agriculture is a very small part of output. Nonetheless, such reforms remain desirable and provide another arena in which young Japanese could show their ingenuity (though the TPP is not the best way to bring that about). On the other hand, Abe is right to pursue policies to integrate women more fully and equally into the labor force. If successful, such measures should provide a boost to both productivity and growth. Even after a quarter-century of stagnation, Japan remains the world’s third-largest single economy. Policies that can help raise standards of living there will stimulate demand and growth elsewhere in the global economy. Equally important, just as it has shared its innovative goods and technologies with the world, Japan could end up exporting successful policies, with the same or similar measures increasing standards of living in other advanced countries as well. http://prosyn.org/wvQv9Sl

123

Daily Morning Newsbriefing September 15, 2016 Merkel-Dämmerung The most frequently asked - and unanswered - question about German politics is the future of Angela Merkel. The vast majority of commentators believe that she will run again, and only wait until the December CDU party congress to announce her decision. We note, however, that one of Germany's most reliable political commentators believes that she may not run after all. What Gunter Bannas of FAZ writes is not based on hard information, but on an analysis of her own incentives, her actions and her statements. These, he said, are at least consistent with a strategy to leave. The first indication of all is rather baroque wording with which she fobs off reporters when they pop the question: "On the question of how I decide with respect to a further chancellor candidacy, I will give account in due course or make a statement." This is a little officious in style and dictatorial in substance even for Merkel. Bannas says that even highly-respected CDU chancellors would normally say that they have to consult with their colleagues before making a decision. He also notes that the messages by other CDU party leaders contain hidden criticisms of the chancellor together with a not so subtle pressure on her to change her policies or to quit. The message directed to her is that she and Horst Seehofer, CSU leader, have to make a deal on refugees. Implicit in this demand is that not only Seehofer has to move, but so does Merkel. When the other CDU leaders say that the policies are good but not the communication, than that, too, is a criticism of Merkel. Who else is in charge of communicating the policies? And Merkel made it clear that she will not compromise. We would, in addition, like to point out that the polls have been going pear-shaped for the CDU. The latest Forsa poll has the party at a four-year low of 32%, while Insa has only 30.5%. CDU/CSU could lose a third of their MPs at the next elections. And finally, Bannas notes that her statements are at least consistent with a decision to quit. If she had said earlier that she would quit, she would have opened the door to a long drawn-out political cat fight between the various crown princes and princesses. And a point we would add: the minute a successor as CDU chairman is nominated, that person would want Merkel to step aside ahead of the elections, so that he or she would enjoy the usual bonus that comes with a candidacy. While Merkel's future is uncertain, there is now no longer any doubt about the intentions of Wolfgang Schauble. The German finance minister, who will be 75 years old at next year's elections, says he will run for another term. Given his seniority, he is thus a very likely candidate for a senior ministerial job - we would presume the finance or interior minister. Our other stories We also have stories on the EP disagreeing with the Commission on investment information rules; on the Five Star Movement's readiness to lead an interim government in Italy; on a new real estate tax in Portugal; on the farce of the EU refugee agreement; on MEPs supporting Vestager's Apple ruling; on Andrew Duff's treaty of London; on Russia's economic recovery; and on Sarkozy turning into a sceptic.

124

Tobin Was Right (Implicitly Wonkish) September 10, 2016 9:25 am September 10, 2016 9:25 am 106

Right now, when not trying to do something about the political horror unfolding, I’m revising macro chapters and also preparing for several European speeches, including this one on macroeconomic lessons from recent experience. And I found myself returning to a theme I’ve touched on a few times over the years: it seems to me, all too often, that both economists and economic policymakers might actually have done a better job responding to the crisis if they has been using an old-fashioned theoretical toolkit, say what smart Keynesians believed circa 1970. Lately I’ve found myself sort of putting a face on my hypothesis: I like to imagine how we would have responded if we were taking advice from a character I think of as “imaginary James Tobin.” And along the way I’ve found myself rereading some writings of actual James Tobin from the time; and it has been a revelation. Let me focus in particular on Tobin’s 1972 presidential address to the American Economic Association, “Inflation and unemployment” (sorry, I don’t see an ungated version.) I remember how that address was seen among my fellow grad students a few later: it was seen as Tobin’s last stand, a desperate rearguard action in the debate with Milton Friedman over the natural rate hypothesis. And everyone knew that Friedman won that debate, vindicated by stagflation. Except if you read Tobin again now, he’s the one who looks vindicated. He argues that the long-run Phillips curve probably isn’t vertical at low inflation, perhaps because of downward nominal wage rigidity combined with churn so that some labor markets are at that lower bound while others aren’t — exactly the framework Daly and Hobijn (who do cite Tobin) have applied recently. (Akerlof and Perry also made similar points in the 1990s.) And he offers an acute empirical observation to justify his position: the need to avoid the empirically questionable implication of the usual natural rate hypothesis that unemployment rates only slightly higher than the critical rate will trigger ever- accelerating deflation. Phillips curves seem to be pretty flat at high rates of unemployment. During the great contraction of 1930-33, wage rates were slow to give

125 way even in the face of massive unemployment and substantial deflation in consumer prices. Finally in 1932 and 1933 money wage rates fell more sharply, in response to prolonged unemployment, layoffs, shutdowns, and to threats and fears of more of the same. Sure enough, the return of mass unemployment after 2008 didn’t produce much in the way of wage decline, except, finally, after years of Depression-level unemployment in Greece. When talking about the things an earlier generation got more right than all too many modern macroeconomists, I usually focus on the demand side — on how IS-LM-type reasoning could and should have given people a pretty good read on monetary and fiscal policy. But on the aggregate supply side, too, the oldies were goodies. http://krugman.blogs.nytimes.com/2016/09/10/tobin-was-right-implicitly- wonkish/?_r=1

126

European Union A two-tier model to revive Europe Rather than viewing Brexit as a threat, the EU should treat it as an opportunity Gideon Rachman

Read latest: Juncker’s State of the union: EU is not at risk from Brexit 2 SECONDS AGO SEPTEMBER 12, 2016 by: Gideon Rachman Later this week, EU leaders will meet in Bratislava — minus one country. The Slovakia summit will be the first to take place without the UK. But Britain will loom large in discussions, as Europe grapples with Brexit. The mood of EU leaders is understandably sombre. Sigmar Gabriel, the deputy chancellor of Germany, spoke for many when he warned that Britain must be shown that it cannot keep “the nice things” about the EU without paying a price. Any other approach, he said, would leave the bloc “in big trouble”. Emotionally and politically, Mr Gabriel’s approach is understandable. Nonetheless, it is a mistake. Rather than treating Brexit as a threat, the EU should treat it as an opportunity. The process of negotiating a new relationship with Britain should be used to address the many other problems afflicting the union. More specifically, it is now clear that Britain is not the only current member of the club that is unhappy with the high level of political integration involved in belonging to the EU. Just last week, the Visegrad Four — Hungary, Poland, Slovakia and the Czech Republic — issued a demand for a looser bloc with some powers returned to nation states. The negotiations around Brexit should be used as an opportunity to create a two-tier EU that meets these concerns. The first tier could press ahead with much closer political integration, pursuing the longstanding goal of “ever closer union” in Europe. The countries on the second tier would restrict themselves to participation in the single market and co-operation on foreign and security policy. This two-tier approach could potentially meet the needs of both federalists and Eurosceptics. The federalists have long complained that Britain has acted as a drag on deeper integration. But suspicion of the idea of “political union” is now widespread across the bloc. The antifederalists include not just the Visegrad Four, but also probably the Irish, the Dutch, the Swedes and the Danes. If those countries were to opt for the outer tier,

127 the remaining federalists — such as Germany, , Italy, Spain and (probably) France — could press ahead with deeper integration. Creating two tiers of membership would allow the union as a whole to continue to fulfil its two most important missions: preservation of the single market and the projection of European interests on the world stage. A two-level structure could also solve the Brexit problem, since the UK could probably slot quite easily into the second tier rather than leave the bloc outright. In time, even non-EU members such as Switzerland, Norway, Turkey and Ukraine might join the second tier. Of course, there is plenty of “devil” in the detail. Countries and legal powers would not be placed neatly and obviously into the first or second tier. Would France go with the federalists or the antifederalists? The answer might depend on the outcome of the French presidential election next year. Could a country that has adopted the European single currency really opt for second-tier membership? That might be difficult given the degree of fiscal integration that the euro might ultimately demand. The question of free movement of people would also be very sensitive. It is already clear that post-referendum Britain is highly unlikely to accept full-scale free movement of people from the rest of the EU. And there are also other union members that want to see some restrictions on free movement. The Dutch would like to see an “emergency brake” procedure, in which an individual country could restrict inflows of people from the rest of the EU if they exceeded a certain preset level. France is threatening to stop applying the EU law on “posted workers”, which allows bosses to pay lower wages to employees seconded from other EU countries. The difficulty is that while restrictions on free movement of people would be an important demand for the antifederalist countries in western Europe, the antifederalists in eastern Europe regard the maintenance of free movement as a vital national interest. Brexit Briefing The risk of remaining vague MPs who seek a hard exit from EU could fill the vacuum Yet there is still plenty of room for creative negotiation in dealing with this issue. One possibility would be to adopt the Dutch idea of the emergency brake, preserving the substance of free movement while providing reassurance that immigration will not be unlimited. Another idea would be to make a much clearer distinction between free movement of labour and free movement of people, allowing full labour mobility within the EU, but restricting migration rights to those who have a job. Many of the political class in Brussels would regard all these proposals as dangerous heresy. They want the union to hang on to all its current powers (the “acquis”), and to prove the folly of “leaving Europe” by making Britain’s divorce as painful and as difficult as possible. But the idea that the EU is best preserved by treating it like Alcatraz — and demonstrating that anybody who attempts to escape will inevitably suffer a terrible fate — is not ultimately a good way of keeping the bloc together. It would be far better for European leaders to acknowledge that some of Britain’s complaints about the EU are quite widely shared. Rather than trying to preserve the

128 current structures at all costs, they should design a new two-tier union that could, potentially, keep everybody happy. https://www.ft.com/content/2b113d6c-76a2-11e6-bf48-b372cdb1043a

Central Banks Monetary policy in a low-rate world Premature rises in interest rates might trigger a sharper slowdown than people expect Martin Wolf

Read latest: Bond sell-off resumes in Europe; yields hit 3-month highs 1 SECONDS AGO by: Martin Wolf Central banks are, as Mohamed El-Erian has written, “the only game in town”. They are certainly the main players of the game of macroeconomic stabilisation. So do they know what they are doing? By signing up you confirm that you have read and agree to the terms and conditions, cookie policy and privacy policy. One line of attack, popular among libertarians, is that it is arrogant for central banks to attempt macroeconomic stabilisation. They should be either abolished or forced to follow a mechanical rule: the gold standard, for example. The lesson of history seems absolutely clear: a democracy will not accept that money is outside purposeful control. For now and the foreseeable future, we will remain in a world of monetary policy. But, ever since the financial crisis, central banks have done unusual and unpopular things. In unusual circumstances, that was inevitable. Unfortunately, the unusual circumstances now appear to be usual. The reasons for — and implications of — this come clearly out of a critique by of thespeech by Janet Yellen, chair of the Federal Reserve, at this year’s Jackson Hole symposium. As he wrote, “countering the next recession is the major monetary policy challenge facing the Fed”. But, he fears, the Fed is in a disturbingly poor position to do so. Much the most important symptoms of the state of the world economy are today’s low real and nominal long-term interest rates. Yet these represent a continuation of trends over 20 years. Both a sustained decline in real interest rates and a fall in inflation expectations lie behind these trends. The latter is, in large part, the result of monetary policy. But monetary policy cannot set the real interest rates over the long run. Indeed, monetary policy actions may not have much impact on these even in the short run. Powerful real factors are at work. John Williams of the San Francisco Fed, has recently reported estimates of the natural rate of interest. He describes this as the short-term, inflation-adjusted interest rate that “balances monetary policy so that it is neither accommodative nor contractionary”. By 2015 these estimates had dropped to 1.5 per cent in the UK, near zero for the US and

129 below zero for the eurozone. Note: these are the levels one would expect not in recessions but in normal times. The determinants of the secular decline in the real natural (or neutral) rate of interest are forces affecting the supply and demand for funds. These include ageing, slowing productivity growth, falling prices of investment goods, reductions in public investment, rising inequality, the “global savings glut” and shifting preferences for less risky assets. A study by the Bank of England has found that such factors could explain most of the 4.5 percentage-point fall in the neutral real rate of interest since the early 1980s. Both the steep decline in estimated natural real interest rates and the analysis of what lies behind it have big implications. The most important is that it is hard to see what would reverse the trends in the near term. We are likely to be living with ultra-low interest rates for an extended period. This means that handling the next recession in the normal way would be quite difficult. Suppose short-term nominal interest rates were a little above the natural rate on the eve of the next recession. In the US, they might then be 3 per cent. In the eurozone, they might be even lower. But, as Ms Yellen’s speech shows, in all US recessions since the late 1960s, short-term interest rates have fallen by at least 5 percentage points. That would seem to mean a move to highly negative rates. The Fed is sure that the range of instruments it has to hand would work in such circumstances. But, as Mr Summers notes, there is good reason to question whether that would be the case: the efficacy of large-scale asset purchases is debatable (and the side effects on asset markets arguably damaging), while the political and institutional feasibility of strongly negative interest rates is also questionable. Presumably for such reasons, Mr Williams argues that “countercyclical fiscal policy should be our equivalent of a first responder to recessions”. Indeed, making that possible would seem to be a first order of priority for policymakers. Also relevant are forms of monetary policy that are complementary to fiscal policy or even an alternative to it. “Helicopter money” — direct support of spending — comes at once to mind. It is also possible to raise targets for inflation or target price levels, instead. Above all, one must not assume all is bound to be well. It is necessary to prepare the future tool kit now. It might be needed quite soon. Two further points arise. The first concerns what to do now. Above, I assumed that rates will have risen substantially, before the next recession. Yet this is far more likely if the economy is allowed to build up a substantial head of steam. Premature rises in interest rates might trigger a sharper slowdown than people expect and put central banks in the worst possible situation: tackling recession when rates remain extremely low. For this reason, as Fed governor Lael Brainard argues, “the costs to the economy of greater- than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness”. The riskier policy is tightening policy too soon, not too late. The second point is that a dominant aim of policy should now be to tackle the causes of the ultra-low natural rates. Matching bigger fiscal deficits with greater public investment would be doubly blessed. This would not only make the job of the monetary authorities easier, but, if done well, would also raise potential economic growth. A widespread view is that public investment must always be wasteful. But this is far too pessimistic. Historically, public investment has often been a catalyst for private investment. Today’s remarkably low real interest rates mean that a big push on public

130 investment has never been more opportune. Central banks must not remain the only game in town. https://www.ft.com/content/7dc78be4-78d5-11e6-a0c6-39e2633162d5

Central Banks Bond sell-off resumes in Europe; yields hit 3-month highs AN HOUR AGO by: Joel Lewin A sell-off in government bonds has continued this morning, driving gilt and Bund yields up to three-month highs and adding to jitters that this could be start of a painful market wobble. The 10-year Bund yield has climbed as much as 3 basis points this morning to a three- month high of 0.08 per cent. It is now holding firmly in positive yield territory, having surged 28bps from the record low -0.204 per cent hit at the start of July. The European Central Bank’s failure to add to its stimulus package last Thursday has intensified concerns that central banks may have run out of ammunition, fuelling painful wobbles in bond markets. Japanese government bonds are in the midst of their most painful sell-off in two decades. A late surge yesterday afternoon took the 10-year gilt yield up to a three-month, post- Brexit vote high, and this morning it has scrambled even higher, up 1.2bps to 0.93 per cent. The 10-year gilt yield has climbed 29bps this month, its biggest monthly rise in 19 months. A slew of surprisingly decent economic data have boosted the UK growth outlook and dampened expectations of more immediate easing from the Bank of England, stopping the gilt rally in its tracks and driving up yields in tandem with a broader sell-off in global fixed income. There are concerns this could herald the start of a global back up in yields. BNP Paribas is wary, but does not expect the start of a sustained, brutal sell-off yet: There was evidence yesterday that it was premature to view stabilisation as the start of a new bullish tone. Bond markets remains fragile as the selloff in cash markets resumed, pushing 10y Bund yields above Monday’s highs. Markets remain wary of next week’s Fed and BoJ meetings as JGB curve steepening chatter continues, with quarter-end also looming large. But adds: At this juncture, the potential for further sell-off is now very limited. We see a limited additional setback better opportunity to re-entering long positioning. https://www.ft.com/content/b67451ee-232e-3c83-9d0d-ff03449d992b The Big Read

131

US economy: Citizenship for sale Miami is the latest city to embrace a scheme that grants visas to wealthy investors YESTERDAY by: Kara Scannell From the 36th floor of a downtown Miami office tower, Ronald Fieldstone has a 360- degree view of the construction boom that he has had a hand in fostering. There is the high-speed rail line that will connect the city to Orlando, home of Disney World. To the west is the newly renovated Langford Hotel and to the north is the building site of the Paramount Miami Worldcenter, a 60-storey condominium and retail complex, where construction crews are digging the foundations. All of those projects are funded, in part, via an investor visa programme known as EB-5 that gives investors a path to US citizenship. For a $500,000 investment in a project that creates at least 10 jobs in a high-unemployment area, a foreign national can eventually receive a green card that allows him or her to live and work permanently in the US. Miami, already a magnet for wealthy families from Venezuela, Brazil and Argentina, is using the EB-5 programme as a tool to attract cash from China. Officials hope to transform Miami into an international banking centre with close ties to China, which they hope to cement by persuading Chinese airlines to begin nonstop flights from the mainland. Miami’s embrace of the EB-5 is not without controversy. Critics say it is rife with fraud and used to launder money. Canada ditched a similar programme while Australia tightened its requirements after finding there was little economic benefit. Some US lawmakers say it sends a bad signal — trading visas for cash from the wealthy while much of the money has gone to well-off areas, not the distressed regions the programme was designed to help. Congress will vote later this month on whether to renew the programme. Even supporters like Mr Fieldstone say it needs more regulatory oversight to limit fraud and protect the national security interests of the US. Advocates of the programme say it has pumped hundreds of millions of dollars into mega-projects in New York and California, including the 12.7m sq ft Hudson Yardsoffice complex in Manhattan. Now Florida wants a bigger piece of the action. Lawyer Ronald Fieldstone spends 50% of his time dealing with EB-5 cases For decades, Mr Fieldstone’s legal practice dealt primarily with corporate securities work, but today he spends 50 per cent of his time working on EB-5. “The success rate is really high for EB-5 funded projects,” he said. “South Florida is a special place. You can’t duplicate it — the climate, transportation and beach. I think the Chinese look at it as a gateway city.” The EB-5 programme was created in 1990 as part of the Immigration Act to spur the US economy and promote job growth. Since then it has brought in $15.5bn in investments

132 and created 84,400 jobs, according to the US Citizenship and Immigration Services, a unit of the Department of Homeland Security, which oversees the programme. Applicants need to loan $1m to a job-creating business or $500,000 if the project is in an economically depressed area. After roughly five years the investor receives a green card and, if they are lucky, their money back with a profit. Other countries have investor immigration programmes of varying levels. France requires a €10m investment in a project that creates 50 jobs. Malta’s programme, which issues an EU passport for €650,000, has drawn the ire of the European Commission. The UK raised its requirement to a £2m investment in government bonds. 10,000 Annual limit for EB-5 visas, which was reached for the first time in 2014 The US programme sputtered along largely unused until the 2008 global financial crisis made it harder for real estate developers to obtain financing. Canada’s 2014 decision to close its programme, which had been extremely popular with wealthy Chinese, also gave the US version a boost. The US scheme is capped at 10,000 visas annually, which it hit for the first time in 2014. Chinese investors are by far the biggest users, accounting for 86 per cent of the visas issued last year. That has created a backlog for Chinese applicants entering the programme, which is now up to 18 months. Some fear they will choose other countries given the delays. Shutdown threat The programme’s fast growth has exposed vulnerabilities in the system. There have been criminal cases alleging investor money was stolen. A Chicago man was charged with stealing $160m from investors that he purported to use to build a convention centre. He pleaded guilty earlier this year. Two government watchdogs have found deficiencies in oversight. An accountability audit found USCIS failed to consistently enter information, such as names or dates of birth, in its system to track individuals for potential fraud. USCIS says it has consolidated its examination staff in Washington and has started random visits to regional centres. It is also expected to propose regulatory changes later this year to strengthen the programme, including raising the minimum investment. Congress is divided over whether to improve the programme or simply end it, as Canada did. One lawmaker, Senator Dianne Feinstein, a Democrat from California who is the vice-chair of the Select Committee on Intelligence, says it should be shut down. “I believe the programme is deeply unfair, sends the wrong message about this country’s values and is prone to fraud and abuse,” Ms Feinstein wrote in an op-ed last year. “It says that American citizenship is for sale, and that’s not what our country stands for.” “It’s cash for a green card,” adds David North, a frequent critic of the EB-5 programme, who is a fellow at the Center for Immigration Studies, a conservative think-tank. “I don’t think we should be selling visas to anybody.” $15.5bn

133

Value of investments through the EB-5 scheme, which has created 84,400 jobs One of his concerns, which are shared by some lawmakers and law enforcement agencies, is ensuring that cash is not being laundered or that the individual receiving the visa is not a threat to national security. “It’s very hard to trace money through particularly obscure Middle Eastern or Chinese financial systems,” Mr North says. Hotting up In Miami, the view is that the influx of capital will raise the city’s profile internationally and attract more business. Developers have been on the ground in China promoting the city as the best place to park their cash. Real estate developers began their effort to recruit Chinese buyers five years ago, but now those efforts are interwoven with EB-5 financing. Marketers for the Paramount Miami Worldcenter began pitching the residences in China last year. Paramount’s builders hired a feng shui expert who advised them on introducing the right earth, wood, metal, water and fire elements in the development. They were advised to position the chairs in the lobby to face the door and green potted plants were added to the seating area. A fireplace was also added. A condominium development in Florida © Getty For the first time the developers of Paramount decided to use EB-5 to finance a project. In March, following the Chinese new year, they deployed a team to the southern city of Guangzhou to pitch to potential EB-5 investors. “There seemed to be a much greater interest by the Chinese for investment opportunities in the US,” says John Montani, a business consultant to the developer. For many of the overseas investors there are other appeals, from access to the US education system for their children and a safeguard against political difficulties in their home country. The Miami Chamber of Commerce 18 months ago launched an Asia task force. “We have very few people here who speak Mandarin and who really are familiar with Asian and Chinese culture and customers. We have to build up our troops,” says Seth Gordon, chair of the task force. He says the city also needs to hedge its bets against cycles of instability in Latin America, where countries such as Venezuela and Brazil have been hit by the commodities bust. “When China began to pay attention to us [it’s like] when somebody is passing an approving look at you across the bar and you smile,” Mr Gordon says. “You begin to think, ‘Maybe we should have a relationship.’” One hurdle is changing the image of Florida that many associate with Mickey Mouse or drug trafficking. The Chamber of Commerce arranged a visit of a group of Chinese journalists to help promote the images of sandy beaches, clean air and ocean breezes. In February, members of the chamber, the mayor of Miami and others met the Chinese consulate’s Houston office to discuss opening a branch in Miami, according to three attendees. A representative for the Chinese consulate did not have an immediate comment. 86% Proportion of applicants for EB-5 visas that were Chinese investors

134

Two months later, a delegation including the Miami-Dade County Commissioner flew to China and made presentations to China Eastern Airlines, China Southern Airlinesand Hainan Airlines to discuss offering a nonstop service, according to a written memorandum summarising the mission, and viewed by the Financial Times. China Eastern put Miami on its “shortlist” for introducing the new service within one to two years, according to the memo. Eyes on Cuba Angie Ki was among those in the Miami delegation. Ms Ki had grown up in Malaysia and lived in North Carolina for 25 years with her husband and children, working in real estate. During a family visit in 2014 to Hong Kong, she was struck by the televised broadcasts of US President Obama’s visit to China when he spoke of the US lifting sanctions on Cuba and the expansion of the Panama Canal. Seeing parallels between Cuba and the lost opportunity for many to capitalise on the growth of China’s economy, Ms Ki had an idea. “I had to be in Asia to discover Miami,” she says. After some persuasion, her husband agreed to relocate to downtown Miami in May 2015 and Ms Ki has been recruiting Chinese to Florida. Chinese investors “look at Cuba as almost 20 years behind China. They’re more excited about Cuba than Florida to be honest. But Miami is a stepping stone to go to Cuba,” Ms Ki says. When a group of Hong Kong businessmen came to visit, Mr Ki took them on a boat ride around the city. “They look at the buildings from the boat and say, ‘Oh my god, there is so much room to build high-rises. You’ve got so much room to spend’,” she recalls. Ms Ki helps parents seeking EB-5 visas for their children, who will then go to university in the US and, with a green card, be in a better position to compete for jobs after graduation. “Miami is just waking up to the Asian market. If I was here three years ago I couldn’t get a job. Now, I can speak Chinese and have connections in Asia. It’s hot,” she says. “You’re going to see a lot of them coming,” Ms Ki predicts.

Regulation: Offshore marketing raises concerns on oversight The EB-5 investor visa programme that attracts thousands of Chinese millionaires a year, eager for a foothold on the path to a green card, is now luring Chinese developers to the US. Construction groups including state-owned Greenland Holding Group, Xinyuan Real Estate Co and China State Construction Engineering Corp are tapping the EB-5 programme to partially fund construction of residential and office towers. A Chinese-based developer is behind five of 27 new projects in the US, according to a March paper written by two professors at New York University. In exchange for a $500,000 loan in a project that creates at least 10 jobs, a wealthy individual can receive a green card after a typical investment of five years.

135

After the 2008 housing crisis, traditional loans for large real estate developers dried up. Since investments under EB-5 are less expensive than bank loans they have become a normal part of financing for large developers. But the programme has been criticised by government watchdog groups for lack of integrity. “There isn’t really any oversight at all because the marketing is happening overseas,” says Mona Shah, a New York-based lawyer who specialises in EB-5. “We don’t know what’s being said and what deals are being made under the table. USCIS isn’t really able to easily scrutinise who the developers” are because they are offshore, she adds. “It’s changing the game. I think it is taking profits away from [US] locals. The money is going back over.” There are also questions as to whether it fits the spirit of the programme. “We want local input. We want local developers,” says Mikki Canton, managing director of the City of Miami EB-5 Regional Center. “Our whole point is we want the money to come right back to Miami.” https://www.ft.com/content/c5c15778-75af-11e6-b60a-de4532d5ea35

136

Daily Morning Newsbriefing September 14, 2016 Tusk's confusing message The German media got their hands on a letter sent by Donald Tusk to the EU leaders ahead of the Bratislava summit this Friday, in which they are due to discuss the future of a post-Brexit EU. It is also the first summit in modern times, in which the UK does not take part. Tusk's letter contains a whole string of truisms so much so that one finds it hard to stop nodding in agreement. But what changes is he actually proposing? He says it would be a fatal mistake to interpret the Brexit vote as a typically British problem. He sees it as a desperate attempt to answer questions that millions of Europeans are asking themselves every day. Really? Either Tusk did not understand the nature of the UK's debate - which was about stopping EU migrants - or he confounds these issues on purpose. The British debate had nothing to do with fortifying the EU external borders. Tusks is right that the external borders have to be better protected, but this is an entirely unrelated issue. He then goes on to say the Europeans want to know whether their leaders are capable of regaining the control of events, which are confusing and frightening them. We suppose that he is expressing the problem of external migration. And, he continues, once people conclude that they are not protected, they will look for alternatives, and they will find them. Another platitude was his plea to be more inclusive of those who are opposed to the establishment view on economic and social policy, as the TTIP opponents do. He did, of course, not call for TTIP to be ditched, which is the one and only thing the TTIP opponents want. One gets the impression that this is about language, not about substance. The wider pre-Bratislava commentary is rather noisy. Jean Asselborn, the foreign minister of , caused a bit of a stir with his comment that the Hungarians should be kicked out of the EU. And the FT has a quote by Markus Ferber, a senior CSU MEP, who said that after Brexit the "Club Med" countries are a blocking minority in the EU "with which they will obstruct all the laws that don’t suit them". He is then quoted describing the countries as “a strong coalition of reform-resistant redistributors”. Nice alliteration. Our other stories We also have stories on the return of Spanish corruption cases; on Alstom as the hot topic in French primaries; on the ECB’s view of Greece’s primary surplus; on an attempt to change leadership of Fine Gael; on Enda Kenny’s clear no to single market after Brexit; on Manuel Barroso’s reply to the Commission; and counterproductive scaremongering in Italy.

137

Greece Debt Crisis Greek foot-dragging on reform hampers rise of EU’s ‘Club Med’ Mini-summit offers foretaste of how southern states might emerge as vocal lobby

Alexis Tsipras, Greece's prime minister, left, welcomes Matteo Renzi, Italy's primer minister, as he arrives for the summit in Athens © Bloomberg September 12, 2016 by: Tony Barber in London Just when his government’s indolent attitude to economic reform is again exasperating Greece’s eurozone partners, Alexis Tsipras presided over a mini-summit of southern European leaders that was the diplomatic equivalent of a poke in the eye to Germany and other creditors. Friday’s seven-nation meeting in Athens, to which the leftwing Greek premier invited representatives of Cyprus, France, Italy, Malta, Portugal and Spain, produced a familiar list of rather unfocused demands for EU economic policies, putting the accent on growth and employment instead of austerity. In the eyes of Germany, the Netherlands and other northern eurozone nations, the mini- summit was more significant for giving an unwelcome foretaste of how a caucus of southerners might emerge as a vocal lobby in the EU after Britain’s departure reduces the bloc to 27 members. Markus Ferber, a conservative Bavarian deputy in the European Parliament, voiced concern that “the ‘Club Med’ group, after Britain’s exit, will possess a blocking minority, with which they will obstruct all the laws that don’t suit them”. Mr Ferber described this group as “a strong coalition of reform-resistant redistributors”. Wolfgang Schäuble, Germany’s finance minister, used more pithy language to deride the Athens event. “When socialist party leaders meet, nothing intelligent comes out of it most of the time,” he said. For accuracy’s sake, it should be said that the mini-summit was not, strictly speaking, a “Club Med” gathering, since Portugal is on the Atlantic, and not a socialist event either, since Cyprus and Spain have centre-right governments. Moreover, Mariano Rajoy, Spain’s prime minister, who is thought to have a low opinion of Mr Tsipras, made a point of not attending the mini-summit in person.

138

As for François Hollande, France’s Socialist president, who did travel to Athens, it seems probable that he made the trip not to benefit from Mr Tsipras’s economic policy insights, but to earn credit with left-leaning voters at home and boost his prospects in his party’s presidential election primaries in January. The different motives and political complexions of the Athens mini-summiteers suggest that the southerners are still a long way from constituting a coherent caucus. Yet the tendency for regional blocs to take shape within the EU is no figment of the imagination. Europe’s refugee and migrant crisis has breathed fresh life into the Visegrad foursome of the Czech Republic, Hungary, Poland and Slovakia, each of which fiercely opposes EU-imposed refugee resettlement quotas. The EU’s Nordic and Baltic nations enjoy regular policy huddles and share a common apprehension about Russia’s intentions in their region. As for the EU’s southern states, however, the chief hindrance to a common front is Greece and its Syriza-led government. After seven months of inept radicalism that almost tipped Greece out of the eurozone, Mr Tsipras reversed course and signed up in August 2015 to a €86bn international rescue — Greece’s third bailout since May 2010. Under this deal Mr Tsipras’s government receives aid in return for carrying out precisely defined economic reforms. However, as eurozone finance ministers made clear on Friday at a session in Bratislava, Greece has fallen way behind schedule, having implemented only two of 15 reforms required to unlock the next €2.8bn of financial support. On paper, the incentives for Mr Tsipras to do the creditors’ bidding are strong. Greece would qualify for the European Central Bank’s quantitative easing programme, allowing the bank to buy Greek government bonds. Greece would also increase its chances of securing debt relief from its creditors. Instead Mr Tsipras is yet again testing his EU partners’ patience. He is not only dragging his heels on economic reform, but is letting a criminal prosecution go ahead in a blatantly politicised case against Andreas Georgiou, a former head of the national statistics agency. In the future 27-nation EU, such behaviour risks putting Greece not at the heart of a like-minded southern caucus, but in a very lonely league of its own. https://www.ft.com/content/18332c14-78f0-11e6-a0c6- 39e2633162d5#ixzz4KCcIkBBH

139

Daily Morning Newsbriefing September 13, 2016 Is defence going to be the next core of EU integration? Suddeutsche and the FT got their hands on a six-page joint document of France and Germany laying out a moderately ambitious plan of future defence co-operation in the EU. The plan was drafted by Ursula von der Leyen and Jean-Yves Le Drian, the respective defence ministers, and foresees joint headquarters to run joint EU military and civilian missions, such as the Sophia operation to stop the of migrants into the EU. The two sides also want to share reconnaissance satellites, and create new joint medical and logistics units. This constitutes the second joint security proposal this year, after an earlier joint paper on internal security, proposed by the two countries' interior ministers.The paper will be presented to the Bratislava summit this week. The Franco-German plan is to gain general agreement at the summit and then pass the proposal on to the defence council for speedy implementation; The two sides plan to use the Art 44 TEU as the legal basis for the new cooperation, which has so far not been used. Similar to enhanced co-operation, Art 44 allows a subgroup of countries to forge ahead with integration on common and foreign and security policy: "...the Council may entrust the implementation of a task to a group of Member States which are willing and have the necessary capability for such a task. Those Member States, in association with the High Representative of the Union for Foreign Affairs and Security Policy, shall agree among themselves on the management of the task. Member States participating in the task shall keep the Council regularly informed of its progress on their own initiative or at the request of another Member State. Those States shall inform the Council immediately should the completion of the task entail major consequences or require amendment of the objective, scope and conditions determined for the task in the decisions referred to in paragraph 1. In such cases, the Council shall adopt the necessary decisions." Suddeutsche notes that the member states have not used Art 44 before because of special consideration for the UK. The FT has the additional information that the joint initiative also includes joint training courses for military personnel to develop a European esprit de corps. Our other stories We also have stories on the ECB’s how-to manual on NPLs; on the impact of Brexit on Germany; on Greek debt relief talks before German elections being unlikely; on rumours about a second programme for Portugal; on postponed elections in Austria; and on Barroso being tagged as a lobbyist by the Commission.

140

Top earners: Why did the 1% get so rich? Brian KeeleyAuthor, OECD Insights*

Top earners are more likely to be salaried executives or company founders, like Facebook’s Mark Zuckerberg ©Justin Sullivan/Getty Images/AFP

Across much of the OECD, the share of national income taken by the top 1% of earners has risen, sometimes sharply, in recent decades. The rise has been particularly striking in the United States: in 1980, the top 1% of income recipients in the US earned 8% of all pre-tax income; by 2012, their share had risen to over 19%. Other OECD countries also saw big rises, including the UK and Australia. The rising income share of the 1% has become a hot issue, but some observers believe this focus actually misses much of the story of rising income inequality. As well as looking at the top 1% of earners, they argue, we should also look at an even smaller segment–the top 0.1% of earners (1 in 1,000), and even the top 0.01% of earners (1 in 10,000). As the Nobel laureate Paul Krugman has noted, data from the US Congressional Budget Office shows that between 1979 and 2005, the after-tax income of Americans in the middle of the income distribution rose by 21%; among the 0.1% it was up 400%. Understanding these figures is important if we want to develop a better picture of who’s benefiting from economic growth. For example, in the decade to 2007, real household income increased by an average of 1.2% a year in the US. But when the top 1% of earners is excluded, that figure falls to 0.6%. In effect, the 1% took 58% of the gain in real incomes. So, what looked to be an overall improvement in the population’s economic well-being actually benefited a much smaller group than the broad figures seem to suggest. And the winners are… Some of the top earners are household names –sports stars like Serena Williams and entertainers like Jackie Chan and Taylor Swift– but most are not. In the US in 2010, the largest group, about 41%, was made up of executives in nonfinancial businesses, like Apple and Walmart. Around 18% were employees –and not necessarily executives– in banks and finance houses. In the UK, the finance crowd accounted for about 21% of top earners and in France about 15%. The fact that so many of the top earners work for a living is striking. Back in the early 20th century, when income inequality last reached the levels we’re seeing today, much of the income of top earners came from rents on land and property as well as income from investments in government bonds. By contrast, today’s top earners are more likely to be either a salaried employee, for example an executive like Morgan Stanley chairman James Gorman, or a company founder, like Facebook’s Mark Zuckerberg.

141

Why do the 1% earn so much? There’s no single answer to why the 1% earn so much. Multiple factors have contributed to the rise of top incomes, and the significance of each of these is not the same in every country. “Superstars” in a global economy: The labour market for high-skilled workers has gone global, especially in sectors like finance, where firms in financial centres like London and Singapore may be competing to attract the same people. In this competitive labour market, employers seek to attract not just good employees but the very best. That helps explain why there can be a wide pay gap between those seen as being at the very top of their game and those just behind.[…] Changes in the way top earners are paid: The heavy presence of top executives and finance professionals among top earners is significant. In recent decades, and especially in English-speaking countries, a growing slice of their income has come not in the form of a monthly salary payment but as valuable stock options. The idea of paying managers in stock options arose as a response to “the agency problem” –when you hire someone to run your business, how can you ensure they act in your interests and not their own? Most shareholders have a tenuous relationship, at best, with the firms in which they hold shares, so it can be almost impossible for them to oversee management and ensure it’s working in their interest. Giving managers a stake in a rising share price, it’s argued, helps align their interests with those of shareholders. Since the financial crisis, this line of thinking has come under fire. […] “Financialisation”: […] The rapid expansion of finance has contributed to income inequality in a number of ways, the most obvious being that financial sector workers tend to be very highly paid. In Europe, they account for 1 in 5 of the top 1% of earners even though, overall, they account for only 1 in 25 of the total workforce. These high salaries might be justified if such workers had very high levels of productivity. However, comparisons with similarly skilled workers in other sectors suggest this is not the case. Financial workers – particularly the highest earners– thus seem to enjoy a wage premium over other comparable workers. “Too much finance” fuels income inequality in other ways, too. The wide availability of credit allows high earners to increase their borrowings, allowing them to gain more from investment opportunities than people on lower incomes. In addition, higher earners also benefit from the expansion of stock markets. That’s because they are always more likely to hold shares than lower earners. As markets expand, they benefit more from share dividends and capital market gains. Changing pay norms: Societies differ in the extent to which they accept large income differentials. Implicit in these social norms is a trade-off: Stick to society’s expectations and you preserve your reputation; breach the expectations and you’ll earn more but hurt your image. But these norms can change over time and their influence can vary markedly. In much of the post-war period, there was an expectation that income differentials would be –by today’s standards– relatively narrow. But in the 1980s these norms began fading, especially in Englishspeaking countries. By contrast, they still remain relatively strong in much of continental Europe, which has certainly played a role in limiting top incomes there.

142

Tax and pay: The past few decades have also seen substantial falls in top tax rates in many developed countries. Across OECD countries, the average top statutory fell from 66% in 1981 to 41% in 2008. High earners have benefited from other changes in tax regimes, too. Tax on property and on inheritances has tended to fall, allowing high earners to build up wealth. […] *Extract adapted from Chapter 3 of Income Inequality: The Gap between Rich and Poor, by Brian Keeley, 2015, OECD Insights series, OECD Publishing, http://dx.doi.org/10.1787/9789264246010-en See also Denk, Oliver (2016), “Are you in the 1%?” on OECD Insights blog, http://oe.cd/1eV Denk, Oliver (2015), “Who are the top 1% earners in Europe?”, OECD Economics Department Working Papers, No 1274, OECD Publishing, http://dx.doi.org/10.1787/5jrp1g39gkzw-en Visit www.oecd.org/inequality.htm ©OECD Observer No 306 Q2 2016 - See more at: http://www.oecdobserver.org/news/fullstory.php/aid/5612/Top_earners:_Why_did_the_ 1_25_get_so_rich_.html?utm_source=newsletter&utm_medium=email&utm_campaign =whatsnew#sthash.BWsUgrab.dpuf

143

ft.com/global economy September 13, 2016 5:31 am Globalisation ‘not to blame’ for income woes, study says Chris Giles in London and Shawn Donnan in Washington

©Bloomberg Trade and globalisation have been unfairly blamed for Brexit and the rise of Donald Trump, according to a study of incomes that debunks the popular view that a more connected world has led to stagnating fortunes for the lower middle class in rich countries. More ON THIS TOPIC// FT View Inclusive capitalism must begin at home/ Martin Wolf Tide of globalisation/ Stephen King Weak productivity/ Gavyn Davies Has the global economy (finally) achieved escape velocity? IN GLOBAL ECONOMY// Former BoJ member urges inflation rethink/ Fed should not rush to raise rates, says Brainard/ Fed does Obama’s bidding, says Trump/ Air pollution costs global economy $5tn The idea that ordinary people have been unfairly hit by the rise of emerging markets and China over the past 30 years and the income gains of the global super-rich was propagated by the so-called “elephant chart” devised by the economist Branko Milanovic, a former senior official at the World Bank. Development experts celebrated the graph as the “chart that explains the world”. But a new study by the Resolution Foundation, a British charity founded to support the interests of those on low to middle incomes, has overturned its findings. After a detailed replication of the global incomes data provided by Mr Milanovic, the Resolution Foundation analysis challenges the conclusion that globalisation and trade harms the middle classes of rich countries. A separate update by Mr Milanovic to the data from 2008 to 2011 also suggests greater income growth among precisely the groups hurt by stagnating incomes in the previous 30 years and much less gain for people with the top 1 per cent of global incomes, Mr Milanovic said in an interview. His update also demonstrated the world’s wealthy took a significant hit in the global financial crisis, which had actually served to narrow inequality.

144

“You can say the crisis was good for [reducing] inequality,” he told the Financial Times. The Resolution Foundation found that faster population growth in emerging markets made it difficult to compare the incomes of the lower middle classes over time because their position in global income rankings changed. The larger number of Chinese families made it appear that the US poor were further up the global income scale in 2008 than they were in 1988.

If incomes were unchanged in every country, this population effect alone would lead to apparent drops of 25 per cent in parts of the global income scale associated with poorer people in rich countries. That generated the characteristic “elephant” shape, according to the Resolution Foundation. These results were exacerbated by outlying factors, such as the former Soviet states of eastern Europe, which had incomes in the same zone and saw them collapse after the fall of communism.

145

Adjusting the chart for constant populations and removing China, ex-Soviet states and Japan shows a relatively even spread of income growth across the world. China is a clear outlier in performing very strongly. “Globalisation is not to blame for all the ills of the world,” Torsten Bell, director of the Resolution Foundation, said. “Although globalisation brings a range of challenges for lower income families, we need to be clear that weak income growth generally is rooted in domestic policy, and blaming globalisation takes the pressure off governments.” Global trade should be remade from the bottom up

The trouble is that people see integration as a project by elites for elites The Resolution Foundation’s analysis suggests that the fate of lower middle class incomes has differed greatly country by country, and even with a rise in inequality in many places the rich world’s lower middle classes have not fared badly. Mr Milanovic has pioneered research into income comparisons on a global scale and says “the great winners [of the globalisation process] have been the Asian poor and middle classes”. http://www.ft.com/cms/s/0/93f2d4ba-7901-11e6-97ae- 647294649b28.html?siteedition=intl#axzz4K7eozVYP

146

Brad Setser Follow the Money Cross border flows, with a bit of macroeconomics There Really Is No Reason for Germany Not to Do a Fiscal Stimulus Right Now by Brad Setser September 12, 2016 Back in May, Greg Ip of argued that Germany didn’t need to stimulate its economy through an increase in public investment as its economy was already growing at a decent clip, and unemployment was low. I wasn’t convinced then, and I am still not convinced. A stimulus is needed to reorient Germany’s economy away from exports, to keep private wage growth up and to open up space for Germany’s trade partners in the euro area to adjust without falling into a deflationary trap. Adjustment doesn’t happen magically. There is solid evidence that Germany’s level of public investment is a bit too low for its long-term health. And now there is also a growing cyclical case for a German stimulus. German growth is projected to slow significantly in 2017. Reuters reports: “DIW … lowered its 2017 growth forecast for Germany to 1.0 percent from 1.4 percent.” Other forecasts are a bit more optimistic, but all expect some slowdown in growth. And the 2016 surplus is on track to top a percentage point of German GDP. In nominal terms, the surplus should exceed last years’s €30 billion surplus. Germany is clearly not fiscally constrained. So rather than growing at 1% in 2017 and running a fiscal surplus of 1% of GDP, as now seems likely, Germany could choose to do a quick-hitting stimulus and likely pull growth up toward 2%. Some of those funds could support a rise in public investment that would likely raise future growth. And in the process of helping itself Germany would also help the world, as a fiscal expansion would help to bring down the world’s largest external surplus (China’s surplus has fallen a bit this year, Germany is poised to regain the top spot). This really shouldn’t be hard. It doesn’t require abandoning the schwarze Null (black zero), as Germany now needs to tax less or spend more if wants to be in fiscal balance. It does require a deal within Germany’s governing grand coalition on the right split between spending and tax cuts ahead of next year’s election. The actual fiscal loosening in the current 2017 budget seems very modest; Citi recently estimated that it might reduce the structural fiscal surplus by about 0.1% of GDP. Not much, in other words. Talk of tax cuts after the October German election isn’t enough; it doesn’t change the 2017 fiscal stance. http://blogs.cfr.org/setser/2016/09/12/there-really-is-no-reason-for-germany-not-to-do- a-fiscal-stimulus-right-now/

147

Daily Morning Newsbriefing September 12, 2016 The coming battle over tax harmonisation The common consolidated base (CCCTB) proposal is back on the EU's agenda this autumn, and the Apple state aid case should be seen in the context of the broader fight against tax arbitrage. Jyrky Katainen briefly spoke about this after the informal Ecofin this weekend, saying new rules are needed to eliminate loopholes created by national differences which firms can exploit. , in a preview of the Bratislava summit, wrote that Ireland is increasingly isolated in its opposition to tax harmonisation. According to the paper the document prepared by the Slovak presidency include "binding tax rulings and advance pricing agreements." This is code for cracking down on the creative use of (the price charged internally by subsidiaries of a single conglomerate) in cross-border transactions to adjust for tax liabilities. It is this transfer pricing that is at the heart of Apple's tax reduction schemes. The new buzzword, seen in the Times article and in Katainen's remarks, is offering "tax certainty" to transnational corporations. This story by Reuters indicates that the Commission will use the argument that national differences make it hard for companies to figure out their tax liability - tax uncertainty - to crack down on the exploitation of these differences to create loopholes on the part of those companies that understand the national differences all too well. We find the following post on Irish forum The Property Pin instrutive of the interplay between intellectual property, cross-border , and transfer pricing. In particular, "Without access to EU [Transfer Pricing] System, to re-charge 'bloated' IPs, Ireland is worthless to [Multi-National Corporations]. If EU TP rules are amended, then even if Ireland's tax rate is 0%, we are useless to MNCs. In fact we are worse then useless, we are toxic. Without EU TP rules, MNCs would re-locate their Irish jobs into Europe's highest tax countries, so as to maximize the tax relief on these costs (Theresa May take note). Under CCCTB, Ireland would go from being the "Celtic Tiger" to something between Scotland (worst), or the Isle of Man (at best)." Central to the the Apple scheme is to transfer IP cheaply to Ireland and then inflate its value when the final product is sold on internally to other countries. This brings us back to the Spanish ECJ case reported in this story from RTE two weeks ago, which included the following quotation from one of the Spanish law firms involved: "The implication of this approach is that virtually any tax ruling setting a transfer price would necessarily result in an apparent privilege to multinationals. However, that would contradict the premise underlying the Commission's reasoning that the general system of tax rulings is not objectionable." The ECJ advocate general's opinion was that tax rules distinguishing resident and nonresident entities can violate EU state aid rules by "distorting inter-state trade". Those familiar with US policy debates will recognise the controversial way the US federal government used the "regulation of interstate commerce" clause to expand its powers.

148

The EU seems to be about to realise that the "distortion of inter-state trade" definition of state aid in the hands of skilled lawyers gives the EU competition commissioner a say over areas of policy previously thought to be exclusively national, such as tax. As this note by Ashley Greenbank of law firm MacFarlanes remarks, opposition to the CCCTB has succeeded in large part due to the weight of the UK but, after Brexit, it is not clear that Ireland will be able to muster a coalition to stop tax harmonisation. Ireland will fight this tooth and nail, however, because rightly or wrongly they see as key to their economic model. Our other stories We also have stories on how Renzi wants to overcome the internal opposition to constitutional reform; on the nasty side of Brexit; on the return of water charges to the Irish debate; on Tsipras' feel-good speech and German suspicions of what it implies; on the Croatian general election; and on the prerequisites for a fiscal union.

Currency How Regulation Failed with Wells Fargo By Adam Davidson, September 12, 2016 More than five thousand Wells Fargo employees were fired in the recent scandal. Credit .

http://www.newyorker.com/business/currency/the-record-fine-against-wells-fargo-points-to-the- failure-of-regulation?mbid=rss

149

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists The tail that wags the economy: The origin of secular stagnation Julian Kozlowski, Laura Veldkamp, Venky Venkateswaran 11 September 2016 The Great Recession has had long-lasting effects on credit markets, employment, and output. This column combines a model with macroeconomic data to measure how the recession has changed beliefs about the possibility of future crises. According to the model, the estimated change in sentiment correlates with economic activity. A short- lived financial crisis can trigger long-lived shifts in expectations, which in turn can trigger secular stagnation. Related// Reinventing IS-LM to explain secular stagnation Roger Farmer, Konstantin Platonov/ How secular stagnation spreads and how it can be cured Gauti Eggertsson, Lawrence Summers / The role of demography in explaining secular stagnation Axel Gottfries, Coen Teulings/ Secular stagnation in the Eurozone Paul De Grauwe The typical post-WWII recession has a distinct trough, followed by a sharp rebound toward a stable trend line. Following the Great Recession, however, this rebound is missing. The missing recovery is what Summers (2016) and Eggertsson & Mehotra (2014) call ‘secular stagnation’ (see also Teulings and Baldwin 2014). Figure 1. Real GDP in the US and its trend

150

Notes: Dashed line is a linear trend that fits data from 1950-2007. By the start of 2015, real GDP was 12% below trend. Why did the dysfunction in credit markets impact the real economy for so long? Many explanations for the real effects have been advanced, and these are still being compared to data (e.g. Gertler and Kiyotaki 2010, Brunnermeier and Sannikov 2014, and Gourio 2012, 2013). Existing theories about why the crisis took place assume that the shocks that triggered it were persistent. Yet such shocks in previous business cycle episodes were not so persistent. This differential in persistence is just as puzzling as the origin of the crisis. What most explanations of the Great Recession miss is a mechanism that takes some large, transitory shocks and then transforms them into long-lived economic responses. Perhaps the fact that this recession has been more persistent than others is because, before it took place, it was perceived as an extremely unlikely event. Today, the question of whether the financial crisis might repeat itself arises frequently. Financial panic is a new reality that was never perceived as a possibility before. Our explanation for persistently low output hinges on people’s assessment of tail risk. Why focus on tail risk? All sorts of beliefs change over time in response to new events. We thought the volatility of shocks had diminished in the Great Moderation, estimated that productivity growth had slowed in the 1970s and 1980s, and have constantly updated collective wisdom on many other features of the modern economy, in light of new experiences. All of these changes in beliefs are quite persistent, far outliving the episodes that prompted them. Yet, tail risk is special for two reasons. First, it is prone to large, persistent belief revisions because data on tail events are scarce; second, tail risk incurs large real economic costs, particularly when firms finance investment with debt. In our research, we combined a model with macroeconomic data to measure how much tail risk rose, to explain why it remained elevated, and to explore its economic consequences (Kozlowski et al. 2015). The model describes a production economy with agents who form beliefs in the same way an econometrician forms estimates. They use standard econometric tools to estimate the distribution of aggregate shocks in a flexible, non-parametric way. When they observe a new shock, they add that new piece of data to their dataset and use a kernel density estimator to re-estimate the distribution from which it was drawn. Transitory shocks have persistent effects on beliefs because, once observed, the shocks remain forever in the agents' dataset. Tail events have a particularly large effect on beliefs because data on tail events are scarce. It takes many observations over a long period of time to gradually change beliefs about the mean or variance of economic processes. However, one or two outlier events can drastically alter our perception of extreme event risk. To gauge the magnitude of the real effects of this change in tail risk, we feed a time- series of actual macro data into our economic model. Specifically, we measure capital quality shocks using historical data on replacement and market value of the non- financial capital stock from the Flow of Funds reports. We then apply our kernel density estimator to construct beliefs, which are our agents’ best estimate of the distribution from which the capital quality data is drawn. Each period, when a new piece of data is observed, agents incorporate the new data point and re-estimate the distribution. Given the new distribution, agents invest, work, issue debt, and consume optimally. Our calibrated model predicts that capital, employment, and output drop 17%, 8%, and 12% after the financial crisis, with almost no rebound to trend. As Figure 2 illustrates, the 12% downward shift in trend output fits the data.

151

Figure 2. Output in the model falls and remains low, just as it does in the data

Source: National Income and Product Accounts (NIPA), 1950-2014. One important reason why tail risk has such large aggregate effects is the fact that firms finance investment, at least in part, by issuing debt. Debt inflicts bankruptcy costs in the event of default. The cost of issuing debt, the credit spread, depends on the probability of default. Default risk depends on the likelihood of large aggregate shocks, or tail events. Thus, when the probability of a left tail event rises, financing investment with debt becomes less attractive. As a result, when tail risk rises, an economy with more highly-leveraged (indebted) firms experiences a larger drop in long-run investment and output. We show that the extent to which debt amplifies bad shocks is greater for large tail shocks than it is for events closer to the mean. Thus, debt financing interacts with tail risk to accentuate the difference between extreme recessions and their milder counterparts. Changes in measured tail risk not only explain the observed patterns in macro aggregates, they are also consistent with options data and with popular narratives. In Figure 3, the SKEW index – an option-implied measure of tail risk in equity markets – shows a clear rise since the financial crisis, with no subsequent decline. Popular narratives about the stagnation emphasise a change in ‘attitudes’ or ‘confidence,’ that we capture with belief changes that have ‘permanently reset’ peoples’ attitudes towards risk (Condon 2013). Hall (2016) argues that credit market data are inconsistent with a beliefs-based explanation for stagnation. He notes that credit spreads rose only temporarily during the Global Crisis and argues that the subsequent recovery to historically normal levels by 2010 implies a restoration of confidence. This argument does not account for the decline

152 in investment and borrowing as beliefs become more pessimistic, which offsets the increase in spreads. Our model teaches us that a surge in tail risk is consistent with a modest change in the credit spread. When tail risk rises, borrowing is more expensive and firms borrow less. Since firms with less debt are less risky borrowers, their cost of borrowing goes back down. In our model, the net effect of these two opposing forces is only four basis points. In other words, observing tail events can suppress economic activity for a long time, even if credit spreads recover quickly. Figure 3. The SKEW Index

Notes: A measure of the market price of tail risk on the S&P 500, constructed using option prices, 1990:2014. Source: Chicago Board Options Exchange (CBOE). Our results question one of the traditional logics of debt. Debt is typically thought of as information-insensitive because its payoffs are constant across most states of a firm (DeMarzo et al. 2005). Yet, the value of debt is sensitive to tail risks because tail events trigger default. However, the estimated probability of tail events is sensitive to new data because data on tail events are scarce. Thus, we find the value of debt is very sensitive to exactly the type of beliefs that are themselves sensitive to new information. This combination makes the value of debt quite sensitive to information that triggers a reassessment of tail risk. Conclusion Our beliefs govern every choice we make. When large aggregate events are observed by all, these events change the beliefs of many people in a systematic way and have important consequences for the macroeconomy. Economic outcomes are particularly sensitive to beliefs about the probability of extreme events, or tail risks. A barrier to exploring such tail risks is that these risks are exceptionally difficult to gauge because we have so little data on extreme outcomes. We argue that economic actors have just as

153 hard a time estimating tail risks as economists do. Because data on tail risk are scarce, people who observe extreme events revise their beliefs substantially and persistently. A short-lived financial crisis can trigger long-lived shifts in expectations that in turn trigger secular stagnation. A run on the financial sector had not been seen in the post-war US economy. Because of this, people were complacent. The onset of the Great Recession caused beliefs to change drastically and that change in beliefs will likely persist. For decades to come, the knowledge that such an event is not so improbable will influence decisions, prices, and output. References Brunnermeier, M and Y Sannikov (2014) “A macroeconomic model with a financial sector”, American Economic Review, 104(2). Condon, B (2013) “AP IMPACT: Families hoard cash 5 yrs after crisis”, Huffington Post, 6 October. DeMarzo, P, I Kremer and A Skrzypacz (2005) “Bidding with securities: Auctions and security design”, American Economic Review, 95(4): 936–58. Eggertsson, G and N Mehrotra (2014) “A model of secular stagnation”, NBER, Working Paper No 20574. Gertler, M, N Kiyotaki et al (2010) “Financial intermediation and credit policy in business cycle analysis”, Handbook of monetary economics, 3(3): 547–599. Gourio, F (2012) “Disaster risk and business cycles”, American Economic Review, 102(6): 2734–66. Gourio, F (2013) “Credit risk and disaster risk”, American Economic Journal: Macroeconomics, 5(3): 1–34. Hall, R (2016) “Macroeconomics of persistent slumps”, in Handbook of Macroeconomics, J Taylor and H Uhlig (eds), Amsterdam: Elsevier, 2: 1-30. Kozlowski, J., L. Veldkamp and V. Venkateswaran (2015), “The Tail that Wags the Economy: Belief-Driven Business Cycles and Persistent Stagnation”, NBER working Paper No. 21719. Summers, L. H. "The Age of Secular Stagnation." Foreign Affairs. Mar/Apr 2016, 2-9. Teulings, C., and R. Baldwin (2014). “Secular Stagnation: Facts, Causes and Cures”, A VoxEU.org eBook. http://voxeu.org/article/origin-secular-stagnation

154

¿Algo a cambio de nada? La economía moderna se sustenta sobre la base de que todos debemos trabajar por un salario LOEK GROOT 11 SEP 2016 - 00:05 CEST

Ampliar fotoUno de los carteles extendidos en la plaza Plainpalais de Ginebra para la campaña del Sí a la renta básica. DENIS BALIBOUSE REUTERS Pasada la edad de oro del capitalismo que siguió a la II Guerra Mundial, caracterizada por el pleno empleo, los responsables de las políticas sociales en Europa intentan desde la década de los setenta solucionar de forma definitiva el problema del paro. Y, debido a una serie de novedades simultáneas, la renta básica vuelve a estar en la agenda. El elevado desempleo que se prolonga desde que empezó la crisis financiera en 2007, el aumento de la desigualdad y la distribución desproporcionada de los beneficios de la globalización son el contexto de este resurgir de la defensa de una renta garantizada como alternativa al sistema actual. ¿Por qué intentar empujar al paro retribuido a todas las personas en edad de trabajar cuando las tasas de desempleo están en dos dígitos? Hasta ahora se partía de la premisa de que todos debemos realizar algún trabajo remunerado, y que solo quedan exentos los que reciben unas ayudas sociales que, de una manera u otra, están relacionadas con ese trabajo remunerado (prestaciones por enfermedad, incapacidad, desempleo, ayudas sociales, pensiones o becas para estudiantes). Una renta básica sin condiciones que proporcionase unos ingresos mínimos a todo el mundo rompería el vínculo entre prestaciones sociales y trabajo remunerado. Por eso este planteamiento va en contra de la base ética del Estado de bienestar. Tal y como lo conocemos, este sistema otorga beneficios sociales de manera condicional, temporal y selectiva. Eslóganes como “quien no trabaja, no come”, “no se puede esperar algo a cambio de nada” y “la comida gratis no existe” expresan claramente ese principio ético en el que se sustenta el Estado de bienestar. MÁS INFORMACIÓN// Que los robots trabajen/ En vez de renta, capital básico/ Una idea que une a Friedman y Galbraith Pero la polarización de los empleos —caracterizada por el declive gradual de la proporción de puestos de trabajo propios de unos empleados de clase media—, el proceso de flexibilización del mercado laboral y la automatización del trabajo estimulan el movimiento a favor de la renta básica. Esta proporcionaría a los trabajadores con jornada flexible y a los autónomos una protección literalmente básica de los ingresos que necesitan para lidiar con su sumamente incierta situación en lo que respecta a los gastos elementales de subsistencia.

155

Una renta básica digna —digamos, equivalente al 25% del PIB por habitante— es redistributiva, y los trabajadores con salarios bajos son los más beneficiados: en el sistema actual, los trabajadores de este grupo son contribuyentes netos, ya que no reciben prestaciones sociales y sí pagan impuestos. En el sistema de renta básica los impuestos que pagarían serían inferiores a la renta que recibiesen. En el caso de los trabajadores con remuneraciones altas ocurriría lo contrario, de manera que uno de los probables efectos de la renta básica sería que reduciría la desigualdad entre los trabajadores. El elevado desempleo, el avance de la desigualdad y la robotización han hecho resurgir con fuerza la posibilidad de una renta básica como futuro del Estado de bienestar Otro ejemplo. Como sostiene Philippe van Parijs (filósofo belga, uno de los grandes defensores de la renta básica), unos ingresos garantizados en forma de eurodividendo (repartir una cantidad determinada de euros a cada ciudadano de la zona euro que podrá ser financiado, por ejemplo, con una parte del IVA) podrían contribuir a fortalecer el tambaleante euro como divisa, ya que se estructurarían las transferencias no tanto de ricos a pobres como de las regiones prósperas a las que están en bancarrota de la zona euro, lo cual, junto con la movilidad laboral, daría como resultado una mayor estabilidad de la divisa, de forma similar a lo que sucede con el mecanismo que hay detrás de la solidez del dólar. Desde esta perspectiva, ¿no sería beneficioso que todos los ciudadanos adultos pudiesen contar con un pago mensual regular sin condiciones que se ajustase al mínimo predominante en la sociedad en cuestión, independientemente de los ingresos, la riqueza, la situación familiar o la disposición a trabajar de la persona? Actualmente, la filosofía política debate si la renta básica es justa. El argumento ético de más peso en contra de dicha prestación es que consiente el parasitismo:permite que ciudadanos físicamente sanos vivan a costa de los esfuerzos productivos de los demás sin dar a cambio un servicio recíproco a la sociedad, por ejemplo, porque se entregan a actividades sin provecho. A mi modo de ver, en el sistema de la renta básica, no estar obligado a aceptar un empleo refuerza la posición de los trabajadores, aunque el precio a pagar sea el parasitismo. Es decir, precisamente por consentir el parasitismo, todo el mundo tendrá la capacidad de rechazar las malas ofertas de trabajo, lo cual, al final, resultará en mejores empleos y en salarios más altos para las tareas de menor cualificación. Es muy probable que esta fórmula requiera unos tipos impositivos más altos para financiar el sistema Es cierto que una renta básica digna parece mucho más costosa que el actual sistema de prestaciones para las personas con bajos ingresos, dirigido exclusivamente a los pobres y que precisa que se comprueben la situación laboral y los recursos. Por lo tanto, es muy probable que una renta básica digna requiera unos tipos impositivos más altos para financiar el sistema. Sin embargo, los efectos globales en la economía en su conjunto todavía son sumamente inciertos. Por una parte, una mayor carga impositiva puede reducir la oferta de mano de obra. Por ejemplo, la renta básica podría animar a mucha gente a elegir una profesión que no se centrase en el trabajo remunerado, o quizá resultaría más atractivo trabajar a tiempo parcial en vez de a jornada completa, ya que acortar la jornada laboral no haría que disminuyesen proporcionalmente los ingresos netos, puesto que la parte de estos últimos correspondiente a la renta básica sería independiente del tiempo que se dedicase a trabajar.

156

Por otro lado, una renta básica permitiría que el mercado de trabajo fuese más flexible, sin salarios mínimos reglamentados que limiten ciertas oportunidades laborales para los menos cualificados porque se descartan los empleos en los que la productividad es inferior al salario mínimo. Asimismo, una renta básica decente acabaría con la trampa de la pobreza, el fenómeno por el cual quienes reciben prestaciones sociales no ven aumentar sus ingresos netos si aceptan un empleo. Acabar con esta trampa puede hacer que se intensifiquen los esfuerzos por buscar un trabajo remunerado, aunque sea temporal o a tiempo parcial, por parte de los receptores de las prestaciones. El experimento más prometedor, realizado a escala nacional, se pondrá en marcha en Finlandia en 2017 Sería bueno que la ciencia económica pudiese generar respuestas inequívocas a qué clase de efectos produciría en la economía una renta básica, pero el hecho es que el margen de incertidumbre es demasiado amplio. Algunos estudios que intentan simular qué ocurriría en una economía con una renta básica se limitan a utilizar parámetros derivados del comportamiento observado en el sistema actual. También hay numerosos cálculos aproximados que muestran que, a determinado nivel, la renta básica puede ser viable o inviable, pero la limitación de este ejercicio es que no tiene en cuenta los comportamientos en respuesta a la renta básica. Por poner un ejemplo, es muy difícil decir qué efecto tendrá en los estudios superiores. Por un lado, recibir una renta básica en lugar de pedir un préstamo hace más atractivo ir a la universidad. Por otro, en cuanto alguien empiece a ganar dinero, el hecho de que para financiar la renta básica sean necesarios impuestos más altos hará que los ingresos netos de quienes tienen una educación superior sean menores. El efecto real no está claro. También es muy difícil predecir qué repercusiones tendrá la renta básica en la innovación, el autoempleo, la división del trabajo remunerado y no remunerado en el hogar, etcétera. El filósofo político británico Brain Barry expuso esta incertidumbre con gran concisión: “No hay una simulación de impuestos y prestaciones, por muy concienzudamente que se lleve a cabo, capaz de dar cuenta de los cambios de comportamiento que se producirían en un régimen alterado. Un ingreso básico de subsistencia situaría a la gente ante un conjunto de oportunidades e incentivos totalmente diferentes de los que tiene ante sí en la actualidad. Podemos suponer la forma en que la gente reaccionaría, pero sería irresponsable fingir que manipulando un montón de números con un ordenador podemos convertir algo de lo que hacemos en ciencia rigurosa”. Por esta razón, para reducir la incertidumbre que envuelve a la renta básica, soy partidario de los experimentos reales, preferiblemente en forma de los denominados experimentos de campo controlados y aleatorios. El experimento más prometedor, realizado a escala nacional y que incluirá tanto a receptores de prestaciones como a trabajadores, se pondrá en marcha en Finlandia en 2017. En otros países, como Holanda y Francia, hay iniciativas a escala local, la mayoría de las cuales solo afectan a perceptores de asistencia social. Los resultados de estas pruebas darán algunas pistas de las repercusiones económicas, y pueden contribuir a resolver parte del rompecabezas sobre la verdadera viabilidad económica de la renta básica.

Loek Groot, profesor de la Escuela de Economía de la Universidad de Utrecht, colabora con el Ayuntamiento de la ciudad holandesa en el desarrollo de un modelo de fórmulas alternativas para proporcionar ayudas de asistencia social/ Traducción de Newsclips http://economia.elpais.com/economia/2016/09/08/actualidad/1473343475_858784.html

157

Una idea que une a Friedman y Galbraith Economistas progresistas y conservadores apoyan la renta básica IGNACIO FARIZA 11 SEP 2016 - 00:05 CEST La renta básica empezó en forma de utopía defendida, en tres siglos diferentes, por pensadores como Thomas Paine, Bertrand Russell o . Hoy, sin embargo, ha calado en ámbitos académicos, se asoma a algunos programas políticos de ideologías diversas —en algunos casos opuestas— y se perfila, si no como una realidad a corto plazo, sí como una opción posible en un horizonte temporal más amplio. De idea de nicho, en muy pocos años ha pasado a ser ampliamente conocida por sectores crecientes de la población. Y, si la voluntad política acompaña, podríamos verla pronto como una realidad en países de nuestro entorno. Si es capaz de unir, aunque con motivaciones bien distintas, a economistas ideológicamente dispares como Milton Friedman y , ¿qué podría frenarla? Entre los intelectuales progresistas, tres razones empujan a la puesta en marcha de una asignación económica a cada ciudadano, por el mero hecho de serlo y sin distinción alguna, suficiente para cubrir sus necesidades básicas: la justicia social —“la riqueza de una sociedad es resultado del esfuerzo de las generaciones pasadas, no solo de la actual, y repartirla es una cuestión de justicia”, en palabras de Guy Standing, profesor de la Universidad de Londres—; la erradicación de la pobreza — John Kenneth Galbraith: “Un país rico como EE UU bien puede permitirse sacar a todos sus ciudadanos de la pobreza”— y la redistribución de las ganancias derivadas de la automatización —ya en 1995 Jeremy Rifkin se refería a la renta básica como la herramienta más efectiva para proteger a los trabajadores desplazados por las máquinas—. En el ámbito puramente político, el exministro griego de Finanzas Yanis Varoufakis se ha referido recientemente a la renta básica como una aproximación “absolutamente esencial” para el futuro de la socialdemocracia; los laboristas británicos estudian “de cerca” la idea como antídoto contra la robotización y, en España, pese a haber pasado de proponer una renta básica universal a una renta garantizada con menos fondos, Podemos sigue incluyéndola en sus programas electorales con una cuantía de 600 euros por persona hasta un máximo de 1.290 euros por unidad familiar. Como efectos colaterales positivos, sus defensores en la izquierda aseguran que presionaría al alza los salarios más bajos —ya que nadie se vería forzado a llevar a cabo los trabajos más duros y los empleadores se verían obligados a aumentar su retribución— y contribuiría al desarrollo del voluntariado y del trabajo comunitario. Se trata, dicen sus más fervientes valedores, de una reformulación de un Estado de Bienestar 2.0 acechado por los efectos de la globalización; de una suerte de “vacuna contra los problemas sociales del siglo XXI”, en palabras de Scott Santens, uno de sus más férreos defensores. Todo, claro está, sin tocar los dos pilares básicos de la socialdemocracia: la educación y la sanidad pública, universal y de calidad. Se trataría de unificar el sistema de ayudas sociales, simplificar la burocracia y eliminar ineficiencias

158

Aunque tradicionalmente la renta básica ha sido asociada a las ideologías progresistas y en los sectores conservadores ha gozado de mucho menos predicamento, dos de sus popes clásicos como Friederich Hayek o Milton Friedman no han dudado en respaldar la idea como parte de su ideal social. Hayek, nobel de Economía en 1974, se limitó a apoyar una suerte de “suelo del que nadie tenga que caer incluso cuando no es capaz de mantenerse a sí mismo” (Derecho, legislación y libertad, 1981). Friedman, en cambio, defendió la puesta en marcha de un impuesto negativo sobre la renta como un suelo “para todas aquellas personas en situación de necesidad, sin importar las razones, que dañe lo menos posible su independencia”. Más recientemente, intelectuales conservadores de cabecera en EE UU como Charles Murray han defendido el concepto como una alternativa a un Estado de Bienestar que detestan y que, a su juicio, está en pleno proceso de “autodestrucción”. Murray propone una asignación anual de 10.000 dólares (algo menos de 9.000 euros) al año a cada adulto mayor de 25 años que sustituya a todas las transferencias sociales y al programa de atención médica Medicare. “Bajo los criterios conservadores”, escribía recientemente el politólogo del think tank American Enterprise Institute, esta renta básica “es claramente superior al sistema actual para terminar con la pobreza involuntaria”. Se trata, argumentan, de unificar el complejo sistema de ayudas sociales vigente en muchos países, simplificar la burocracia, eliminar ineficiencias y reestablecer la libertad individual. Las reticencias en ambos lados del espectro ideológico también son notables, especialmente en el caso conservador. Si en la izquierda el sector crítico considera que la renta básica laminaría el poder de negociación de los sindicatos y daría alas a quienes piden mayor flexibilidad del mercado de trabajo, sus pares en la derecha elevan el tono por la inflación que generaría, la imposibilidad de ponerla en marcha con el esquema fiscal actual y, sobre todo, por su efecto desincentivador del trabajo. Sin embargo, la idea sigue abriéndose camino. Suiza la sometió en junio a referéndum (perdió, eso sí, por amplia mayoría); la cuarta ciudad más poblada de Países Bajos, Utrecht, probará desde enero una asignación 960 euros al mes durante dos años a 250 de sus ciudadanos para analizar los pros y los contras de la medida; en Finlandia, la coalición de Gobierno de centroderecha en la que están los populistas ultraconservadores de Verdaderos Finlandeses, también pondrá en marcha un proyecto piloto en 2017 de entre 500 y 700 euros mensuales para entre 5.000 y 10.000 mayores de edad. Quizá el caso más llamativo es el de la aceleradora de start-ups Y Combinator, que ensaya un pago de entre 1.000 y 2.000 dólares mensuales a 100 familias de Oakland (California):la principal cuna de emprendedores del planeta, de la que parte la llamada cuarta revolución industrial, empieza a vislumbrar en la renta básica la panacea para un mundo cada vez más rico y eficiente, pero también desigual. Esas dos ideas, una economía cada vez más digitalizada y desarrollada y una inequidad galopante, empujan a la renta básica. Nunca antes en la historia de la humanidad ha habido un momento mejor para nacer que el actual: según los cálculos más conservadores, el bienestar material global se ha triplicado en los últimos 65 años, tal y como destacaba recientemente en un artículo de Bradford Delong publicado por este diario. La irrupción de Internet ha abierto un abanico inédito de posibilidades. Pero la automatización y robotización que ha contribuido a abaratar un sinfín de procesos productivos también ha traído consigo crecientes bolsas de paro. La predicción, hace casi un siglo, de en su ensayoPosibilidades económicas para nuestros nietos (1930) es hoy más real que nunca: “Estamos siendo

159 afligidos por una nueva enfermedad (...): el desempleo tecnológico (...) ”. Contra esta realidad y a la luz de los últimos estudios que calculan que entre el 35% y el 50% de los puestos de trabajo están en riesgo de automatización, la renta básica merece, al menos, un estudio concienzudo de sus muchas ventajas y algunos inconvenientes. http://economia.elpais.com/economia/2016/09/08/actualidad/1473356997_251281.html

160

En vez de renta, capital básico Frente a las trampas de la prestaciones sociales, urge un modelo eficiente REINER EICHENBERGER ANNA MARIA KOUKAL 9 SEP 2016 - 00:05 CEST

Uno de los robots que trabajan para la factoria de juguetes K’nex. K. TRIPPLAAR CORDON PRESS La renta básica universal es una idea fascinante. Para sus partidarios es una especie de teología de la liberación. Sostienen que libera a las personas tanto de la dependencia de las rentas derivadas del trabajo como de la misma obligación de trabajar. Les permite emplear el tiempo que quieran en lo que quieran, y no hacer algo porque no les queda más remedio. Además, al menos a priori, la renta básica acaba con la trampa de los subsidios sociales: en el sistema tradicional de seguridad social europeo los beneficiarios de las ayudas sociales tienen pocos incentivos para trabajar. En cuanto encuentran un empleo, pierden la ayuda y pasan a generar unos ingresos por los que habrán de pagar impuestos. No es de extrañar que a mucha gente le cueste dejar las ayudas sociales. Desde esta perspectiva, la renta básica universal sería efectivamente algo bueno si funcionase. Pero ¿funciona? La crítica más frecuente es que, si la cobrase, mucha gente dejaría de trabajar. Se trata de un temor infundado. La renta básica no alcanza ni de lejos para vivir como un rey. Por eso, los ingresos complementarios siguen siendo muy convenientes, y la motivación para trabajar, importante. Actualmente, una muestra de lo poco que influyen los ingresos “regalados” en la motivación para trabajar es que las personas que tienen rentas procedentes de su patrimonio comparables a la renta básica, o que son propietarias de una vivienda, y que, en consecuencia, tienen menos gastos por ese concepto, no trabajan menos que las personas sin patrimonio o sin vivienda. El verdadero problema de la renta básica es otro: cuando es baja —por ejemplo, una décima parte de los ingresos medios—, ni da seguridad suficiente al receptor ni lo libra de la obligación de trabajar. Sin embargo, cuando es lo bastante alta, deja de ser financiable. Cuando no se financia mediante deuda y no es un simple ejercicio de redistribución desde los más ricos al resto de la población, para costearla, el ciudadano medio tiene que aportar más o menos la misma cantidad que recibe como renta básica. A primera vista esto no plantea ningún problema, ya que, aparentemente, para él no cambia nada. Sin embargo, las cosas no son así: al final, la renta básica se tiene que financiar a través de un impuesto sobre la renta o sobre el consumo.Para una renta básica equivalente más o menos al umbral de la pobreza, es decir, aproximadamente a la mitad de los ingresos medios actuales, se debería recaudar un impuesto complementario

161 del 50% sobre cada euro ganado con el propio trabajo. A esto se añadirían los impuestos para las demás prestaciones públicas. Así, no se tardaría en llegar a tipos impositivos medios sobre las rentas del trabajo del 80% o más. O sea, que a los defensores de la renta básica no les salen las cuentas. De esto se podría deducir que los que ganan más deberían soportar una cuota más alta. Pero tampoco esto funciona. Cuantas menos personas lleven la carga, más alto tendrá que ser su gravamen. Sin embargo, como es sabido, los aumentos de impuestos por encima de entre el 60% y el 70% no generan más ingresos. Los incentivos negativos contra el trabajo asalariado y a favor de la evasión fiscal legal e ilegal son demasiado fuertes. Un apoyo a los jóvenes en los años de formación es una alternativa a la renta básica Muchos partidarios de la renta básica reclaman que se financie mediante el IVA. Pero estas cuentas tampoco cuadran, ya que, entonces, las tasas del impuesto se disparan. Para tener suficiente financiación el IVA fácilmente tendría que llegar a un 50% o más solo para ese fin, así que la idea está muerta. Por eso, algunos defensores de la renta básica universal sostienen que no tendrían que percibirla todos los ciudadanos y, al mismo tiempo, cobrarles un impuesto complementario, sino que la renta se debería ajustar a los ingresos procedentes del trabajo. Es decir, quien disponga de ellos no debería percibirla, o bien tener una renta reducida. Pero esto no es más que una falacia, ya que, al final, el ajuste viene a ser un gravamen, camuflado pero muy elevado, sobre los ingresos obtenidos por el propio trabajo. Además, la idea se devora a sí misma: la renta básica deja de ser incondicional porque solo reciben el dinero quienes ganan menos de lo que cobran por la renta, así que en este supuesto la idea está más que muerta. Un experimento significativo no debería indagar si la gente quiere dinero gratis, sino si quiere financiarlo ella misma Si la renta básica es incondicional, surge otro problema: ¿qué se debe hacer con los recién llegados, o con los que emigran al país precisamente debido a la renta básica? La única manera de responder es introducir condiciones. De este modo, lo que era una renta básica incondicional se convierte en discriminatoria. A veces se alega que en países en desarrollo, e incluso en países de la UE, se han hecho experimentos con buenos resultados. No es verdad. Los experimentos solo ponen de relieve si los participantes quieren cobrar la renta básica y en qué medida siguen trabajando. El resultado es que los que colaboran están contentos de recibir el dinero, y que, en la mayoría de los casos, siguen trabajando como es debido. No resulta muy sorprendente. Sin embargo, se pasa por alto la cuestión fundamental: los participantes no tienen que asumir los costes de la renta básica, sino que los directores del experimento les pagan. Pero una renta básica realista la tienen que costear sus propios beneficiarios. Así pues, un experimento significativo no debería indagar si la gente quiere dinero gratis, sino si quiere financiarlo ella misma. Tras un intenso debate, cerca de un 68% de los suizos votó en contra de implementar este modelo en el referéndum de junio. En definitiva, la renta básica no funciona. A pesar de ello, hay que encontrar medios contra la trampa de la ayuda social que sean eficaces, pero también financieramente viables. Podemos aprender mirando a las familias y la relación que los progenitores establecen con su descendencia. Prácticamente a nadie se le ocurre la descabellada idea

162 de pagarles a sus hijos una renta vitalicia. En cambio, muchos padres les dan un capital inicial del que sus hijos pueden vivir si llegan malos tiempos, o con el que pueden pagar sus estudios. Esta fórmula se podría trasladar al Estado. Todos los jóvenes de 20 años, independientemente del tiempo que lleven en el país, deberían recibir del Estado un capital básico equivalente, por ejemplo, a dos veces el salario medio anual, que tendrían derecho a utilizar de acuerdo con una normativa estatal. Así, si fuese necesario, se podría cobrar durante cuatro años una renta básica equivalente a la mitad del salario medio para poder financiar así los estudios universitarios u otra clase de formación profesional, o independizarse. De este modo se generarían incentivos perfectos para quienes hasta entonces hubiesen recibido ayudas sociales, porque entonces podrían quedarse con todos los ingresos procedentes de su trabajo. Además, se podrían aumentar las tasas universitarias y fomentar la competencia entre universidades, puesto que la ciudadanía dispondría de dinero para dedicar realmente a los estudios. La inmigración tampoco pondría en peligro el capital básico, ya que la cuantía percibida se podría adecuar al tiempo que hubiese vivido en el país en cuestión durante la infancia. De este modo, el capital básico podría solventar en gran medida la trampa de los subsidios y otros problemas sociales. Al mismo tiempo, la educación daría como resultado una redistribución de los medios más justa, más eficaz, y todo esto proporcionaría más igualdad de oportunidades. Además, el capital básico solo supondría una quinta parte de los costes de la renta básica: un ciudadano no recibiría entre 60 y 80 pagos anuales, como ocurre con la renta básica, sino solo 4. Así, el capital básico se podría financiar sin problemas y liberaría verdaderamente a las personas. Reiner Eichenberger es profesor de Teoría Económica y de Finanzas de la Universidad de Friburgo y director de investigación de CREMA (Center for Research in Economics, Management and the Arts). Anna Maria Koukal es colaboradora científica de la cátedra de Ciencias Financieras de la Universidad de Friburgo. Traducción de News Clips. http://economia.elpais.com/economia/2016/09/08/actualidad/1473349360_904575.html

163

Que los robots trabajen

La creciente automatización que acompaña la economía digital abre la puerta al final del trabajo manual ROSA JIMÉNEZ CANO 9 SEP 2016 - 00:05 CEST

El restaurante robótico ya funciona en San Francisco. Para comer en Eatsa solo hay que esperar una cola de menos de 10 minutos, aunque haya más de 30 personas delante. Un atril con un iPad y un lector de tarjetas de crédito hacen de carta y comanda. Pocos minutos después, la orden aparece en un nicho con pantalla táctil. En todo el proceso no participa ningún humano. Solo, de vez en cuando, un operario pone orden en la fila, repone servilletas y cubiertos para después desaparecer cual fantasma. Esta es la visión que tiene Silicon Valley de la hostelería, uno de los sectores que ya quiere desintermediar usando máquinas en lugar de personas. O disrumpir, como les gusta decir en su argot. también utiliza robots en sus almacenes y, en España, de manera experimental y muy silenciosa, Inditex contempla incorporarlos a sus centros de logística. Las máquinas del gigante del comercio electrónico han demostrado ser más eficientes que los humanos. No solo porque no se quejan de tener que caminar más de 12 kilómetros al día entre los pasillos, no piden aumentos o no se ponen enfermos; sino también porque con los robots se puede cambiar el orden en la nave, hacer que los espacios sean más angostos, y producir más. El análisis del rendimiento y de los resultados decanta la balanza claramente hacia el lado de los robots, entre otras cosas, porque con ellos el tiempo de entrega se reduce en 30 minutos. En Japón el uso de robots no es algo nuevo. Actualmente ya realizan trabajos de cortesía en las empresas. Intel, el mítico fabricante de chips, también ha expresado su interés en este campo. No solo con la compra de Movidius esta misma semana, una empresa dedicada a reconocer la realidad y tomar decisiones al respecto. Hace un año ya realizaron una inversión de 15 millones de dólares en Savioke, especializada en robots

164 de protocolo, un término que se popularizó gracias a C3PO en La guerra de las galaxias. Un mundo sin operarios humanos se contempla como una posibilidad real. Y Combinator, la incubadora de startups de más éxito, tiene a Sam Altman, el visionario al frente del centro, experimentando con esta posibilidad, pensando cómo sería la vida en el primer mundo con ausencia de trabajo. ¿Qué harían los humanos con más tiempo para el ocio? ¿Cómo cambiarían sus aficiones y valores? De momento están llevando a cabo un experimento en Oakland en el que otorgan una renta básica mensual a 100 personas para que aprendan a vivir sin tener que trabajar. Paul Saffo, profesor de la Singularity University y de Stanford, cree que lo que está cerca, en el mundo desarrollado, no es el fin del trabajo, sino el fin de trabajo físico. Según su visión el empleo no se encontrará tanto en el uso de máquinas, como en la capacidad para programarlas de manera adecuada, de saber hacer que cumplan su cometido de manera efectiva, comprendiendo, también el mundo que las rodea. Es decir: interpretación de señales a partir de sensores, extrapolación de datos, creación de patrones y programación de algoritmos. Esos son los pilares básicos para el empleo humano en un mundo donde las máquinas se encarguen de la tarea física. http://tecnologia.elpais.com/tecnologia/2016/09/08/actualidad/1473344725_727702.html

165

Cómo la moneda común amenaza el futuro de Europa Adelanto del nuevo libro de Joseph e. Stiglitz, en el que el premio Nobel de Economía defiende la necesidad de abandonar el euro como condición para salvar el proyecto de construcción europea JOSEPH E. STIGLITZ - 09/09/2016 - Número 50

SR. GARCÍA El mundo se ha visto bombardeado con informaciones deprimentes sobre Europa. Grecia está en depresión, y la mitad de sus jóvenes, en el paro. La extrema derecha ha ganado enorme terreno en Francia. En Cataluña una mayoría de los diputados electos en el Parlamento regional apoyan independizarse de España. Grandes zonas de Europa afrontan una década perdida, con un PIB per cápita más bajo que el que tenían antes de la crisis financiera global. Incluso lo que los europeos consideran un éxito representa un fracaso: la tasa de desempleo en España ha caído del 26 por ciento en 2013 al 20 por ciento al comienzo de 2016, pero casi uno de cada dos jóvenes sigue en el paro, y el porcentaje sería aún mayor si muchos, sobre todo los más preparados, no se hubieran ido del país para buscar empleo en otros lugares. Los buenos acuerdos monetarios no garantizan prosperidad, pero los malos pueden causar recesiones ¿Qué ha sucedido? Con los avances que se han producido en la ciencia económica, ¿no deberíamos saber mejor cómo administrar la economía? De hecho, el economista y premio Nobel Robert Lucas declaró en 2003, en su discurso como presidente de la Asociación Americana de Economistas, que “el problema principal para prevenir la depresión está resuelto”. Y dadas las mejoras en los mercados, ¿no debería ser incluso más fácil? Las características fundamentales de una economía sana son el crecimiento rápido, con unos beneficios que recaen en todos los sectores, y una tasa de paro baja. En Europa ha ocurrido todo lo contrario. Este aparente enigma tiene una explicación sencilla: la decisión fatal, en 1992, de adoptar una moneda única sin dotarla de las instituciones necesarias para que funcionase. Los buenos acuerdos monetarios no garantizan la prosperidad, pero los malos convenios pueden desembocar en recesiones y depresiones. Y uno de los acuerdos monetarios que van unidos desde hace mucho tiempo a las recesiones y a las depresiones es la vinculación de divisas, por la que el valor de la moneda de un país se fija en función de otra o de una materia prima.

166

La depresión de Estados Unidos a finales del siglo XIX estuvo relacionada con el patrón oro, el sistema según el cual cada país fijaba el valor de su divisa en función del oro e implícitamente, por tanto, a las divisas de los demás; como no había habido nuevos hallazgos sustanciales del metal precioso, su escasez empezó a generar la caída de los precios de los bienes ordinarios con respecto a él, lo que hoy llamamos “deflación”. En la práctica, el dinero tenía cada vez más valor. Y eso empobrecía a los agricultores estadounidenses, que cada vez afrontaban más dificultades para pagar sus deudas. La campaña electoral de 1896 se centró en la cuestión de si, como dijo el candidato demócrata William Jennings Bryan, Estados Unidos iba a “sacrificar a la humanidad en una cruz de oro”. Al patrón oro se le achaca también haber contribuido a intensificar y prolongar la Gran Depresión. Los países que antes lo abandonaron se recuperaron con más rapidez. A pesar de esos antecedentes Europa decidió atarse a una moneda única, que creó en el continente el mismo tipo de rigidez que el patrón oro había impuesto al mundo. El patrón oro fracasó y, salvo unas cuantas personas, los llamados “escarabajos de oro”, nadie desea que se restablezca. Morir en la cruz Europa no tiene por qué morir sacrificada en la cruz del euro; la moneda puede funcionar. Las reformas fundamentales que se necesitan están en la estructura de la propia unión monetaria, no en las economías de los respectivos países. Lo que está por ver es si existe suficiente cohesión política, suficiente solidaridad, para adoptar esas reformas. Y a falta de reformas, sería preferible un divorcio amistoso en vez de la estrategia actual de limitarse a salir del paso. Mostraré cuál es la mejor forma de gestionar la separación. En 2015 la Unión Europea de 28 miembros era la segunda mayor economía del mundo, con aproximadamente 507,4 millones de ciudadanos y un PIB de 16,2 billones de dólares, ligeramente inferior al de Estados Unidos. (Dado que los tipos de cambio pueden variar mucho, el tamaño relativo de los distintos países varía también. En 2014 la Unión Europea fue la mayor economía). Dentro de la Unión Europea 19 países tienen una moneda común, el euro. El “experimento” de compartir divisa es relativamente reciente: los euros empezaron a circular en 2002, aunque Europa se había comprometido a poner en práctica la idea diez años antes, con el Tratado de Maastricht, y tres años antes los países de la eurozona habían vinculado sus divisas entre sí. En 2008 la región se vio arrastrada, junto con el resto del mundo, a la recesión. Hoy Estados Unidos se ha recobrado en gran parte —una recuperación débil y tardía, pero una recuperación—, mientras que Europa, y sobre todo la eurozona, permanece sumida en el estancamiento. Con el TLCAN quedó claro que la expresión “acuerdo de libre comercio” era publicidad engañosa Este fracaso es importante para el mundo entero, no solo para la denominada “eurozona”. Por supuesto, es especialmente grave para quienes viven en los países que han sufrido la crisis, muchos de los cuales continúan hundidos en la depresión. Esto se debe en buena medida a que, en nuestro mundo globalizado, cualquier cosa que provoca el estancamiento en una parte tan importante de la economía mundial perjudica a todos. A veces, como demostró con gran claridad Alexis de Tocqueville en La democracia en América, alguien de fuera puede hacer un análisis de la cultura y la política más exacto y desapasionado que quienes están involucrados en el desarrollo de los hechos. Lo

167 mismo ocurre, hasta cierto punto, en economía. He hecho viajes a Europa desde 1959 —en las últimas décadas, varias veces al año— y pasé seis años allí dando clases y estudiando. He colaborado estrechamente con muchos Gobiernos europeos (sobre todo de centro izquierda, aunque en no pocas ocasiones con otros de centro derecha).

Mientras se fraguaban la crisis financiera global y del euro de 2008, tuve mucha relación con varios países involucrados en ellas (como miembro de un consejo asesor del expresidente español José Luis Rodríguez Zapatero y como amigo y consejero, desde hace mucho tiempo, del ex primer ministro de Grecia Yorgos Papandréu). Conocí de primera mano lo que ocurría en los países en crisis y las políticas que estaban elaborando los Gobiernos de la eurozona como respuesta. El experimento Como economista, el experimento del euro es fascinante. Los economistas no tenemos acceso a laboratorios. Tenemos que poner a prueba nuestras ideas con los experimentos que la naturaleza —o la política— nos arroja. Creo que el euro nos ha enseñado mucho.

Se concibió con una mezcla de defectos económicos e ideológicos. Era un sistema que no podía funcionar mucho tiempo y, cuando llegó la Gran Recesión, esos errores quedaron a la vista de todos. En mi opinión esas deficiencias estaban claras desde el principio para cualquiera que quisiera verlas, y contribuyeron a una acumulación de desequilibrios que supusieron un factor crucial en las sucesivas crisis y que tardarán años en superarse. El experimento fue especialmente importante para mí porque llevaba años reflexionando y escribiendo sobre la integración económica, sobre todo desde que estuve al frente del Consejo de Asesores Económicos del presidente Clinton en los años noventa. Entonces trabajamos para abrir las fronteras al comercio entre Estados Unidos, Canadá y México con el Tratado de Libre Comercio de América del Norte (TLCAN). También trabajamos para crear la Organización Mundial de Comercio, que nació en 1995 y fue el comienzo de un orden legal internacional que rige esa actividad. El TLCAN, puesto en marcha en 1994, no era tan ambicioso como la Unión Europea, que permite también la libre circulación de trabajadores. Y era mucho menos ambicioso que la eurozona; los tres países no tienen una moneda común. Pero incluso esa mínima integración planteó numerosos problemas. Y por encima de todo, quedó claro que la expresión “acuerdo de libre comercio” era publicidad engañosa: en realidad, era un acuerdo de comercio gestionado, dirigido sobre todo en función de los intereses especiales de las empresas, en especial en Estados Unidos. Fue entonces cuando empezaron a preocuparme las consecuencias de la disparidad entre la integración económica y la política, así como las repercusiones de los acuerdos internacionales firmados por gobernantes —por buenas que fueran sus intenciones— en procesos escasamente democráticos. De trabajar con el presidente Clinton pasé a ser economista jefe del Banco Mundial. Allí me encontré con nuevos aspectos de una integración económica que no estaba en sintonía con la integración política. Vi que nuestra institución hermana, el Fondo Monetario Internacional (FMI), trataba de imponer lo que en su opinión (y la de otros donantes) eran buenas políticas económicas a los países que necesitaban su ayuda. Esas opiniones estaban equivocadas —a veces, muy equivocadas—, y las imposiciones del FMI desembocaban a menudo en recesiones y depresiones. Tenía que esforzarme para intentar entender aquellos fracasos y por qué el Fondo hacía eso.

168

Como indico en varios momentos del libro, existen estrechas semejanzas entre los programas que el FMI (a veces con el Banco Mundial) impuso a los países en vías de desarrollo, así como a los mercados emergentes, y los que se les han obligado a aceptar a Grecia y los demás países afectados por la Gran Recesión. También explico el hecho de que sean tan parecidos los motivos por los que estos programas siguen siendo decepcionantes, aparte de la inmensa oposición pública suscitada allí donde se han impuesto. Intereses contraproducentes Hoy el mundo está plagado de nuevas iniciativas pensadas para aprovechar la globalización en beneficio de unos pocos. Estos acuerdos comerciales entre las dos orillas del Atlántico y el Pacífico, el Acuerdo Transatlántico de Comercio e Inversiones y el Acuerdo Transpacífico de Cooperación Económica (TTIP y TPP, respectivamente), se forjan una vez más a puerta cerrada, en reuniones de dirigentes políticos que ponen los intereses del mundo empresarial sobre la mesa. Los acuerdos ponen de manifiesto un deseo persistente de integración económica que no está en sintonía con la integración política. Una de sus disposiciones más polémicas permitiría a las empresas amenazar con querellarse contra los Estados cuando los beneficios previstos resulten perjudicados por cualquier nueva normativa, algo que ningún Gobierno admitiría dentro de sus fronteras. El derecho a regular —y a actualizar las reglas en función de los cambios de circunstancias— es un aspecto fundamental del ejercicio del gobierno. Hoy el mundo está lleno de iniciativas pensadas para aprovechar la globalización en beneficio de unos pocos Sin embargo, el proyecto de la eurozona era diferente de estos otros ejemplos en un sentido crucial: se basaba en un intento serio de avanzar hacia la integración política. Los nuevos acuerdos comerciales no parten de ningún deseo de contar con unos criterios reguladores armonizados, establecidos por un Parlamento que represente a los ciudadanos de toda la zona comercial. Lo que buscan las empresas es sencillamente interrumpir la regulación o, mejor todavía, revocarla. Pero el diseño del “proyecto de moneda única” estaba tan influido por la ideología y los intereses que fracasó no solo en su aspiración económica —generar prosperidad—, sino también en su ambición de unir más a los países desde el punto de vista político.

Por eso, aunque este libro se ocupa de la importantísima cuestión del euro, su objetivo es más amplio: demostrar que incluso las mejores intenciones a la hora de avanzar hacia la integración económica pueden ser contraproducentes si lo que fija las prioridades es una serie de doctrinas económicas cuestionables, inspiradas más en la ideología y los intereses que en los hechos y la ciencia económica. […]

Con defectos de nacimiento La eurozona tuvo defectos desde su nacimiento. Su estructura —las normas, los reglamentos y las instituciones que la gobiernan— tiene la culpa del mal comportamiento de la región y de sus múltiples crisis. Su fortaleza estaba en la diversidad de Europa. Pero esa inmensa diversidad económica y política hace que no sea nada fácil que funcione una moneda única. Esta implica un tipo de cambio fijo entre unos países y otros, y un tipo de interés único.

169

Aunque se establezcan unos tipos que reflejen las circunstancias de la mayoría de los países miembros, debido precisamente a su diversidad económica son necesarias instituciones capaces de ayudar a los países donde las políticas no resulten completamente apropiadas. Y Europa no creó esas instituciones. Los fundadores del euro se regían por una serie de ideas que estaban de moda pero eran equivocadas Además, las normas deben tener la flexibilidad suficiente para adaptarse a las distintas circunstancias, creencias y valores. Europa ha consagrado esta idea en su principio de subsidiariedad, en función del cual la responsabilidad de las políticas públicas recae sobre las instancias nacionales, y no sobre las europeas, en el mayor número de decisiones posible. En realidad, dado que el presupuesto de la Unión Europea representa solo alrededor del 1 por ciento de su PIB (a diferencia de Estados Unidos, donde el gasto federal constituye más del 20 por ciento del PIB), el gasto de la Unión Europea como tal es escaso. Ahora bien, en un terreno crucial para el bienestar personal de los ciudadanos —las políticas monetarias, fundamentales para determinar el desempleo y las bases para la subsistencia—, el poder sí se centralizó en el BCE, creado en 1998. Y dadas las firmes limitaciones al gasto deficitario, a los países no se les dio la flexibilidad suficiente para llevar a cabo su política fiscal (impuestos y gastos), que habría permitido afrontar unas circunstancias adversas y evitar una recesión profunda. Peor aún, la estructura de la eurozona incorporó ciertas ideas sobre lo que era necesario para tener éxito económico: por ejemplo, que el BCE debía atender sobre todo a la inflación, en contraste con la misión de la Reserva Federal de Estados Unidos, que también se ocupa del desempleo, el crecimiento y la estabilidad. No fue solo que la eurozona no se estructurara teniendo en cuenta la diversidad económica de Europa; es que esa estructura, sus normas y sus reglamentos no se pensaron para fomentar el crecimiento, el empleo ni la estabilidad. A los problemas de la estructura de la eurozona se han sumado las políticas que ha llevado a cabo la región, especialmente tras la crisis y dentro de los países más afectados por ella. Incluso con los fallos estructurales, existían alternativas. Europa se equivocó. Impuso la austeridad, unos recortes excesivos del gasto público. Exigió determinadas “reformas estructurales”, cambios, por ejemplo, en la gestión de los mercados laborales y las pensiones por parte de los países en crisis. Y, sobre todo, no prestó suficiente atención a las reformas que más probabilidades tenían de acabar con las profundas recesiones que amenazaban a esos países. Estas políticas, aunque se hubieran aplicado a la perfección, no les podían devolver la salud. Por eso, donde se necesitan con más urgencia las reformas es en la propia estructura de la eurozona —no en cada país—, y se han tomado algunas tímidas medidas en esa dirección. Pero son medidas demasiado escasas y demasiado lentas. Alemania y otros han tratado de culpar a las víctimas, a los países que sufrieron como consecuencia de las políticas equivocadas y la estructura defectuosa de la eurozona. Sin embargo, sin unas reformas profundas de su propia estructura, Europa no podrá recuperar el crecimiento. Para profundizar ¿Por qué unos estadistas bienintencionados, que intentan construir una Europa más fuerte y más unida, crean algo que tiene el efecto contrario? Este libro no aborda solo el hecho central —la crisis del euro, que está transformando Europa— y su base económica. Trata de la relación entre la política y la economía, y del papel de las ideas y las creencias.

170

Cuando el euro era un proyecto político, la cohesión política —sobre todo en cuanto a la delegación de poderes de los Estados soberanos a la Unión Europea — no tenía la fuerza suficiente para crear las instituciones económicas que quizá habrían hecho posible el éxito de la moneda.

joseph E. Stiglitz. Premio Nobel de Economía (2001), vicepresidente del banco mundial (1997-2001), consejero económico de Bill Clinton (1993-1997) Además, los fundadores del euro se regían por una serie de ideas, de nociones sobre el funcionamiento de las economías, que estaban de moda entonces pero eran equivocadas. Tenían fe en los mercados y no comprendían sus limitaciones ni lo que hacía falta para que funcionaran. Esa fe inquebrantable se denomina a veces “fundamentalismo de mercado” y a veces “neoliberalismo”. Los fundamentalistas de mercado, por ejemplo, creían que si el Gobierno se aseguraba de que la inflación fuera baja y estable los mercados garantizarían el crecimiento y la prosperidad para todos. Aunque esta teoría ha sido desacreditada en la mayor parte del mundo, sobre todo tras la crisis financiera global de 2008, esas creencias sobreviven y florecen en la potencia dominante de la eurozona, Alemania. Sus defensores las mantienen con tanta convicción y tal certeza, inmunes a toda prueba en contra, que las consideran, con razón, una ideología. Unas ideas similares, impulsadas por el FMI y el Banco Mundial en todo el mundo, desembocaron en un cuarto de siglo perdido en África, un decenio perdido en América Latina y una transición del comunismo a la economía de mercado en la antigua Unión Soviética y el este de Europa que fue, cuando menos, decepcionante. Así pues, los fallos de la eurozona, tanto en su estructura como en sus políticas, pueden achacarse en gran parte a la combinación de una ideología económica equivocada, predominante en la época de la construcción del euro, y a una falta de solidaridad política profunda. Esta mezcla hizo que la creación del euro sembrara las semillas de su propia destrucción. Errores de concepto Otro factor fueron las ideas equivocadas sobre el proceso de reforma. Los líderes sabían que el proyecto de la eurozona estaba incompleto, pero lo veían como parte de un proceso a largo plazo. La dinámica desencadenada por el euro obligaría a crear cualquier institución necesaria que no existiese. Y ese éxito impulsaría la integración política y económica. En mi periodo como economista jefe del Banco Mundial aprendí que hay que tener mucha cautela con la oportunidad y el ritmo de las reformas. Un fracaso inicial aumenta la resistencia a las reformas posteriores. Y esa es la historia del euro.

171

La vía hacia delante Los defensores de las políticas actuales en la eurozona, encabezados por Alemania, han defendido en esencia que “no hay alternativa” a la estructura actual (aparte de las pequeñas modificaciones que han querido aceptar) ni a las políticas que han impuesto. Lo han sostenido con tanta frecuencia que la frase tiene su propio acrónimo: TINA (There is no alternative). En este libro se demuestra que sí existen alternativas a la estrategia actual: unas reformas que harían que el euro funcionase, un divorcio amistoso y una medida provisional, pero muy distinta a la actual, capaz de transformarse con facilidad en una moneda única si existiera la determinación suficiente para hacer que funcionara el sistema. La medida provisional actual —una moneda única sin las mínimas instituciones necesarias para una zona de moneda única— no ha funcionado ni parece que lo vaya a hacer. Tiene que haber o “más Europa” o “menos”. ¿Peor que una década perdida? De vez en cuando, cuando golpean las crisis, las economías tardan años en regresar a los niveles anteriores de crecimiento y paro. Lo que afronta Europa es peor: en la mayoría de sus países, casi con toda seguridad, el nivel de vida no subirá nunca hasta donde habría podido si no se hubiera producido la crisis del euro, o si la crisis se hubiera gestionado mejor. Pero el fracaso del euro va mucho más allá. Los defensores del euro alegan, con razón, que la moneda única no era solo un proyecto económico que pretendía mejorar los niveles de vida a base de asignar los recursos con más eficacia, poner en práctica los principios de ventaja competitiva, mejorar la competencia, aprovechar las economías de escala y reforzar la estabilidad económica. Era, sobre todo, un proyecto político, que debía impulsar la integración política de Europa, unir más a los pueblos y países del continente, y garantizar la coexistencia pacífica.

El euro no ha logrado ninguno de sus dos objetivos principales, la prosperidad y la integración política, que están ahora más lejos que antes de la creación de la eurozona. En vez de paz y armonía, los países europeos se miran hoy con desconfianza e indignación. Reaparecen los viejos estereotipos, el norte de Europa acusa al sur de ser vago y poco de fiar, y se invocan los recuerdos del comportamiento de Alemania en las guerras mundiales. Comportamiento lamentable El comportamiento económico de los países de la eurozona ha sido decepcionante. La eurozona está básicamente estancada, y su rendimiento ha sido especialmente penoso desde la crisis financiera mundial. Los detractores del euro siempre sostuvieron que la prueba llegaría cuando los países de la eurozona se enfrentaran a una conmoción asimétrica, un cambio que afectara a unos de forma distinta que a otros. Las consecuencias de la crisis financiera global de 2008 han demostrado que esos temores se materializaron con creces: las economías de la eurozona se han conducido peor de lo que habían predicho incluso sus mayores críticos. La crisis comenzó en Estados Unidos, pero estos se han recuperado —aunque débilmente—, con un PIB real que en 2015 fue un 10 por ciento superior al de 2007, mientras que el PIB de la eurozona casi no ha variado desde 2007, e incluso, como ya hemos dicho, la renta per cápita ajustada a la inflación ha disminuido. La eurozona vivió una doble recesión, al tiempo que a algunos países fuera de ella, como Suecia y Noruega, les ha ido bastante bien. Existe un factor fundamental que contribuye a este mal rendimiento: el euro.

172

Hasta Alemania ha fracasado Alemania presume de sus éxitos y de que es un ejemplo de lo que deben hacer otros países. Su economía ha crecido un 6,8 por ciento desde 2007, pero con una tasa media de crecimiento de solo el 0,8 por ciento anual, una cifra que en circunstancias normales se consideraría casi un fracaso. También hay que destacar que la evolución de Alemania antes de la crisis, al comienzo de este siglo —cuando aprobó unas reformas que recortaron drásticamente la red de protección social—, se produjo a expensas de los trabajadores corrientes, en especial los de la franja inferior. Mientras los salarios reales se estancaban (según algunos cálculos, disminuían), la brecha entre los de abajo y los de la franja intermedia aumentó un 9 por ciento en un breve periodo, menos de 10 años. Y en los primeros años del siglo, la pobreza y las desigualdades también aumentaron. Se dice que Alemania es un “éxito” solo en comparación con otros países de la eurozona. El euro generó la crisis del euro Los defensores del euro afirman que la moneda sí funcionó, aunque solo fuera durante un breve periodo. Entre 1999 y 2007 reinó la convergencia, con un rápido crecimiento de los países más débiles a medida que bajaban los tipos de interés que tenían que pagar los Gobiernos y las empresas sobre sus préstamos. El euro consiguió fomentar la integración económica, y el capital fluyó hacia los países más pobres. Según estos observadores, la moneda común fue víctima de una tormenta desgraciada que se originó al otro lado del Atlántico, un huracán de los que suceden una vez cada cien años. El hecho de que el huracán lo destruyera todo no es culpa del euro: los buenos sistemas económicos se construyen para soportar tormentas normales, pero ni el mejor diseñado puede resistir unos sucesos tan extraordinarios. Eso es lo que dicen los defensores de la moneda única. El euro no ha logrado ninguno de sus dos objetivos principales, la prosperidad y la integración política La crisis financiera mundial, sin duda, dejó al descubierto el punto más débil del euro: la manera en que impedía adaptarse a los golpes que afectaban de manera distinta a unas y otras partes de la eurozona. Pero el euro no fue la víctima inocente de una crisis creada en otro lugar. Los mercados, siempre propensos a una exuberancia y un pesimismo irracionales, supusieron, de forma equivocada e irracional, que la eliminación del riesgo cambiario (con la moneda única desaparecía el riesgo relacionado con los cambios de valor de, por ejemplo, la lira —la antigua moneda de Italia— respecto a la peseta) significaba la eliminación del riesgo soberano, el peligro de que un Gobierno no pudiera devolver lo que debía. Los mercados se sumaron a la euforia de la creación del euro y, como los políticos que habían ayudado a crearlo, no pensaron con demasiado detalle en sus fundamentos económicos. No se dieron cuenta de que la forma en que lo habían creado, en la práctica, había incrementado el riesgo soberano.

Con la creación del euro en 1999, el dinero fluyó a los países de la periferia (los más pequeños, como Grecia, España, Portugal e Irlanda, alrededor del “núcleo duro” europeo, formado por Francia, Alemania y el Reino Unido), y los tipos de interés bajaron. En una repetición de la pauta observada en cualquier lugar del mundo donde los mercados estuvieran liberalizados, la llegada de dinero a un país iba seguida de su salida, en cuanto los mercados comprendían que se habían mostrado demasiado eufóricos. En este caso, la crisis financiera mundial fue el detonante: de pronto, Grecia, España, Portugal e Irlanda se encontraron sin acceso al crédito y en una crisis para la

173 que los fundadores de la eurozona no se habían preparado. En la crisis del Este asiático, diez años antes, cuando los cambios repentinos de confianza de los inversores dieron la vuelta a los flujos de capitales, los tipos de cambio se desmoronaron en los países afectados y eso les permitió hacer los ajustes necesarios. En los países de la periferia del euro, eso no era posible. Los responsables de la eurozona no habían previsto un hecho así y, por consiguiente, no tenían ningún plan. La creación de una eurozona divergente Existe abundante literatura económica que pregunta lo siguiente: ¿qué es necesario para que un grupo de países comparta una moneda común y alcance la prosperidad? Existía entre los economistas el consenso de que, para que la moneda única funcionara, era necesario que hubiera suficientes similitudes entre los países. Puede discutirse qué tipo de similitud se necesita, pero baste decir que lo que muchos europeos (sobre todo alemanes) consideraban imprescindible —la tendencia a la llamada prudencia fiscal, bajos déficits y bajo endeudamiento— no era suficiente para garantizar el funcionamiento del euro, y quizá ni siquiera necesario. Un fracaso inicial aumenta la resistencia a las reformas posteriores. Y esa es la historia de la moneda única Se daba tanta importancia a estas preocupaciones fiscales que se les dio el nombre de “criterios de convergencia”. Pero el diseño del euro fomentaba la divergencia: cuando un país sufría una “conmoción” adversa, los países más fuertes salían ganando a costa de los más débiles. Y las propias limitaciones fiscales impuestas como parte de esos criterios de convergencia —límites al déficit y la deuda en relación con el PIB— también alimentaron la divergencia. En concreto, la estructura de la eurozona hizo que la gente —sobre todo las personas de más talento y más formación— y el capital fluyeran de los países pobres y con mal comportamiento económico a los países ricos y en buena situación. Estos últimos podían invertir en mejores escuelas e infraestructuras. Sus bancos podían prestar más dinero, por lo que los emprendedores tenían más facilidades para poner en marcha nuevos negocios. Peor aún, las restricciones de la Unión Europea impedían que los países que estaban quedándose atrás emprendieran determinadas políticas que habrían podido ayudarlos a alcanzar a los más avanzados. Dejando al margen la retórica sobre la solidaridad, la realidad es una Europa más dividida, con menos posibilidades de emprender las políticas capaces de devolver la prosperidad a la región. Este texto es un extracto del último libro de Joseph e. Stiglitz, El Euro. Cómo la moneda común amenaza el futuro de Europa (Taurus, 2016). https://www.ahorasemanal.es/como-la-moneda-comun-amenaza-el-futuro-de-europa

174

09/09/2016 06:10 PM Clinging to Power Is The Merkel Era Coming To an End? Chancellor Merkel's refugee policies have divided the country and the right-wing populist AfD party is rapidly gaining support. Conservatives are calling on Merkel to change course, but she is refusing to admit fallibility. Could this be the end? By SPIEGEL Staff There are days in the life of a chancellor when the chasm between the glamour of the geopolitical stage and the political squalor back home is despairingly vast. Last Sunday was such a day for Angela Merkel. Shortly before 10 a.m. local time, the German chancellor's Airbus touched down gently at Hangzhou airport, a red-carpet rolling up as the plane slowed to a stop. Just 200 meters away, Air Force One was parked and behind it stood French President François Hollande's aircraft. With engines roaring, the jumbo carrying Japanese Prime Minister Shinzo Abe taxied past. On this September morning, the Hangzhou airport had become the parking lot of . The leaders had come to the Chinese city for the two-day G-20 summit. As Merkel strode past soldiers with fixed bayonets to her waiting sedan, she was facing a busy couple of days. Even before the summit officially began, she held a meeting with Turkish President Recep Tayyip Erdogan to discuss the same issues as ever: Syria, refugees and Islamic State. Then she quickly headed over to the Expo Center for a meeting with the other world leaders. This time, the focus was on possible stimulus measures for the global economy. Dinner was served at 7 p.m. at the Chinese government's guest house before the group took a boat ride on Yue Lake -- which Merkel followed with a one-on-one with Russian President Vladimir Putin. The German leader would like to see the Kremlin chief put a stop to his ongoing meddling in Ukraine. Finally, at 11 p.m., she grabbed for her phone. This time, though, it was not for a discussion with the likes of Obama, Erdogan or Hollande and the topic was not Syria, the war in Ukraine or the global economy. Rather, it was the state election in Mecklenburg-Western Pomerania being held that day. And the number she dialed was that belonging to Horst Seehofer, head of the Christian Social Union (CSU), the Bavarian sister party to Merkel's own Christian Democrats (CDU). 'Speechless' Back in Germany, it was only just after 5 p.m. and the polls hadn't even closed yet, but all forecasts were trending in the same, depressing direction -- toward a strong result for the right-wing populist party Alternative for Germany (AfD). Despite their nominal political alliance, Seehofer has been one of the most vociferous critics of Merkel's refugee policies, widely considered to be one of the triggers for the rise of the AfD. On the phone, Merkel tried to mollify Seehofer, but he said merely: "I really can't say anything at the moment. I'm just speechless." Merkel ended the conversation knowing that the CSU head wasn't going to give her any peace. It is an unparalleled drama. Just one year ago, Merkel was more popular than almost any chancellor who had come before, with her prudent foreign policy being a significant

175 reason why. But then came the refugee crisis, and with it the accusation that Merkel was pursuing a kind of moral imperialism in Europe. Her partners in the EU abandoned her while back home, the AfD -- a party she thought she had already defeated -- began gaining support. In Mecklenburg-Western Pomerania, the AfD on Sunday even won more votes than the CDU -- the first time in German postwar history that a right-wing populist party attracted more votes than the center-right. Are we witnessing the end of the Merkel era? Merkel appears to be determined to run once again for re-election, but among German conservatives, doubts are growing as to whether that is really a good idea. There hasn't as yet been an open revolt, but within the Chancellery, a combination of defiance and paranoia is spreading -- a development that is reminiscent of the final days of former Chancellor Helmut Kohl's 16-year reign. Last Friday, for example, SPIEGEL reported on the government's plans to distance itself from a bill to be passed in the Bundestag, Germany's parliament, a resolution classifying the slaughter of the Armenians at the beginning of the 20th century as genocide. The government was wary of exacerbating Berlin's tense relationship with Turkey, but many saw the gesture as Merkel kowtowing to Erdogan and the story made immediate waves. Merkel was furious. The plan had been for Merkel's spokesman Steffen Seibert to announce the government's position in a press conference. She immediately called Foreign Minister Frank-Walter Steinmeier, a senior member of the Social Democrats (SPD), her center-left coalition partner, and accused his party, or even Steinmeier himself, of having been responsible for the leak in an effort to make her look bad. Unstoppable Momentum? Is it even still possible for Merkel to stop the erosion of her power? Many of her predecessors in the Chancellery were prepared to risk their office to defend their convictions. Helmut Schmidt pushed through the stationing of mid-range nuclear missiles in West Germany against significant opposition from his SPD party. Gerhard Schröder, likewise of the SPD, did the same with his deep welfare cuts. In that regard, there was an element of heroism in Merkel's decision on the night of Sept. 4, 2015 to open Germany's borders to refugees trapped in Hungary. Notorious for her hesitancy, Merkel finally seemed prepared to spend the political capital she had amassed over the years to stand up for her convictions. It was a courageous move and one that garnered her respect the world over. But in the ensuing weeks and months, she was unable to find a way to impose order on the flood of refugees coming into the country, which resulted not only in significant hostility in Europe, but also among the German population. And the right-wing populist AfD has grown accordingly. It now has delegates in nine state parliaments and its shrill slogans have made it almost impossible to have a rational debate about immigration -- a debate that Germany badly needs to have. The country seems paralyzed. In Merkel's eyes, her refugee policy has become core to her term in the Chancellery. It marks a moment when she didn't allow herself to be guided by tactical, political considerations. That, though, implies limits to her current room for maneuver -- because if she were to admit that she made mistakes, it would be akin to self-betrayal. That, at least, is how she sees it. And that's what makes the current impasse so hopeless. Once the results from Mecklenburg-Western Pomerania were in, Merkel felt it necessary to make a statement, even though she was still at the G-20 summit in China.

176

She prefers not to comment on domestic party politics from abroad since she makes such comments in her capacity as head of the CDU and not as head of the country. So, following her official G-20 press conference in the Hyatt, her staff prepared for her remarks by removing all symbols reminiscent of her role as chancellor: The backdrop with the G-20 logo and the flags of China, Germany and Europe. Even spokesman Seibert had to help. 'Very Displeased' Of course she isn't pleased with the result of the state vote, Merkel said, even allowing that she was "very displeased." But when a reporter asked if she would now change course, she couldn't resist a brief, derisive smirk. "I am happy to repeat once again that I consider the fundamental decisions we made in past months to have been correct," she intoned. The late phases of a chancellor's term tend to be tortuous. Konrad Adenauer didn't want to go because he thought he was the only one capable of leading the country, only stepping aside for Ludwig Erhard after 14 long years in office. Helmut Kohl resisted retirement because he thought only he could push through the common currency in Europe. He was, in fact, so convinced that history needed him that he ignored all warnings of his impending defeat. In the end, the CDU fell in behind Kohl and sank with him in the 1998 elections. Will history now repeat itself? Merkel has always been formidably agile. In her first campaign for the Chancellery, she promised to fundamentally reform Germany, but when she lost by a hair in the September 2005 vote, her ambitious plan disappeared into the party archives. Her promise to extend the lifetimes of Germany's nuclear reactors was likewise thrown overboard following the tsunami in Japan and ensuing meltdown in Fukushima. Such about-faces, of course, left her open to accusations of opportunism, but no chancellor can remain in office long without a certain amount of malleability. And de facto, Merkel's refugee policies have long since been revised: Eastern Europe closed the Balkan route and Merkel herself ensured that Turkish border guards now stop refugees intent on making their way to Europe. Although her actions tell a different story, she continues to insist that she did everything right. Her party allies watched with growing despair as Merkel decided to use the week before the state elections in Mecklenburg-Western Pomerania to defend her decision to welcome the refugees -- in the form of an op-ed in the influential daily Süddeutsche Zeitung, television appearances on major broadcasters and, finally, in a two-page spread in the mass-circulation tabloid Bild. It was clear that helping her party in the upcoming vote was the last thing on her mind. More pressing was her need to be right -- just like Kohl in the latter phases of his tenure. And just like then, it is only the backbenchers who have had the courage to voice vehement dissent. After all, they have the least to lose. Internal Criticism Last Monday at 9 a.m., Merkel joined a conference call with other CDU leaders. Because of the poor connection from China, she was difficult to understand, but the core of her message got through just fine: The results of the election in Mecklenburg- Western Pomerania may be regrettable, but she did not intend to make adjustments to

177 her refugee policies as a result. After all, she said, the SPD had lost more votes than the CDU. It was not an analysis that everyone agreed with. "We all lost to the AfD because when it comes to refugee policy, we are perceived as a block, to which AfD voters want to say: No thanks," says CDU member Jens Spahn, parliamentary state secretary in the Finance Ministry. Instead of just saying "we can do it," the CDU should think about "how we can get to a point where the people really believe that we can do it. And to a point where we know what is going on out there." Once he gets going, Spahn can hardly be stopped. People were right, he says, to apprehensively ask why integration will work better this time around than it has in the past. You have to connect with voters on an emotional level, and not just with the facts, he adds. "If our answer is then a half-hearted burqa ban, our message just won't get through." No one else criticizes the chancellor's policies as radically as Spahn, but even within the Merkel camp, there are those willing to admit that mistakes were made. Interior Minister Thomas de Maizière finds fault with the fact that conservatives talk too much about refugees and not enough about other issues. Annegret Kramp-Karrenbauer, the CDU governor of the state of Saarland, says that voters have lost "a bit of fundamental trust" in the party. It's not that Merkel isn't trying to find a way out of the crisis. Indeed, she remains open to all ideas. On the flight back from the G-20 summit, Merkel was asked if she was concerned that politics have reached a post-fact era -- that parties like the AfD or politicians like Donald Trump have found success with slogans that are completely disconnected from reality. With an inquiring gaze, Merkel said that she first had to integrate "post-fact" into her vocabulary. But it was clear that the expression sparked her imagination. In a speech to parliament two days later, she said: "When we begin participating in a situation where facts can be shoved aside, responsible and constructive answers on the issue are no longer possible. When we begin aligning ourselves, both linguistically and literally, with those who are not interested in a solution, we will ultimately lose our orientation." The Question Dividing Germany It wasn't entirely clear who the target of her critique was: The AfD, Seehofer or Sigmar Gabriel, the head of the SPD who has recently begun distancing himself from the chancellor. Perhaps she meant all of them together. But Merkel was visibly pleased that she had found a new argument to defend herself. Still, though, it is an argument that fits well with the strategy Merkel has long used to justify her policies. The chancellor sees herself as being synonymous with rationality, and those who don't follow her are considered to be insufficiently committed to democracy. She has often pushed through policies by claiming there is no alternative, but it is an argument that has done great damage to Germany's political culture. One reason the debate over refugee policy is so poisonous is that it has been framed so simplistically. Are you for or against Merkel? The question has divided the country, German conservatives and the media. It would have been helpful to many in the CDU if Merkel had allowed at least a bit of differentiation. But it is now too late to change course, says CDU parliamentarian

178

Veronika Bellmann from Saxony. "Now, people wouldn't even accept a 180-degree reversal anymore," she says. Like other members of parliament, Bellmann speaks of a 50-50 division in the party base. One half is behind Merkel, the other is not. "Respect for the chancellor is the only thing preventing a revolt." Merkel's inflexibility is exasperating conservative politicians in many state chapters. Wolfgang Reinhart, CDU floor leader in the Baden-Württemberg state parliament, demands that Merkel take the concerns of Horst Seehofer and the CSU more seriously. "It's not as if the warnings were all completely unjustified. When a partner demands more restrictive policies, you can't just ignore it. You have to engage in dialogue," Reinhart says. "The success of the right-wing populists is partially the result of Berlin policies." Such sentiments sound like they could have come straight from Seehofer. But how much criticism finds its way to Merkel? She has always been distrustful and over the course of her tenure, her inner circle has only grown tighter. That is another parallel with Kohl. Critics among conservative parliamentarians have taken to calling the Chancellery "the bunker." It is run by Chief of Staff Peter Altmaier, who is responsible for managing government business and for negotiating both within the governing coalition and with Germany's states. Many within the CSU, though, believe he is the real author of Merkel's decision to open the country up to the refugees. When Altmaier was first elected to parliament in 1994, he took positions that only found much support at the time within the Green Party. He supported ending Germany's ban on dual citizenship, for example, and wanted to introduce penalties for marital rape. The CSU saw him as a leftist nutcase and Helmut Kohl penalized him by completely ignoring him. Making matters even more difficult, he only had the support of the tiny, Saarland chapter, which meant that he didn't have high hopes for much of a career. By the early 2000s, Altmaier had come to terms with the fact that his path to the top would remain blocked and he even thought about returning to EU politics, where he had worked for a time after he completed his legal studies. But then Merkel arrived, a godsend for his career. She appointed him parliamentary state secretary, then handed him a senior post in the CDU fraction and then made him a government minister. Powerful Opponents His office in the Chancellery has an enormous window providing a view of the Reichstag, the seat of Germany's parliament. With Merkel, he has come further than he ever dared dream. And with her, he can now implement policies that were widely considered to be leftist blather just a few years ago. Altmaier, though, has powerful opponents. One of them is Finance Minister Wolfgang Schäuble, who thinks the congenial man from Saarland isn't sufficiently ruthless. Another is Interior Minister de Maizière, who believes that a chief of staff should spend more time studying policy details and less time on the talk shows. But as long as Merkel remains loyal, nothing can happen to Altmaier -- and the chancellor values that loyalty. His ability to reframe even the largest of disasters as being nothing more than minor setbacks makes life easier for her. When he spoke on the Monday following the Mecklenburg-Western Pomerania election at a festival in the Bavarian town of Gillamoos, he couldn't praise the chancellor highly enough: "Germany is a great country because in Germany, we don't have just one Angela Merkel, we have tens of thousands, hundreds of thousands of Angela Merkels. In every village, in every city."

179

Merkel has enough detractors, so she values having Altmaier's sunny disposition in the Chancellery. When he celebrated his 58th birthday in mid-June, he found a handwritten letter on his desk. It began with the words: "Dear Peter." The letterhead read: "The Chancellor of the Federal Republic of Germany." Like every successful politician, Altmaier keeps close tabs on power shifts that could become detrimental to his position. If Merkel remains in the Chancellery, he will likely become conservative floor leader in the next legislative period. If she falls, there is a risk that he will have to take a seat on the back bench in the Bundestag. The chief of staff of the Chancellery is the last of a line of liberal, young CDU politicians that Merkel brought into her circle when she became chair of the party in 2000 to help her prevail over her conservative adversaries. Two others who have survived politically from this era are Merkel's secretary, Beate Baumann, and her former spokeswoman, Eva Christiansen, who is responsible for political communication at the Chancellery. Like Altmaier, they've been shaped by the long battle that Merkel has waged against the establishment. Modernizing the Party That's one of the most significant parallels between Merkel and Kohl: Both modernized their party against resistance from the old guard. Back in the 1960s, Kohl sparked outrage at a state party conference in Rhineland-Palatinate because he spoke out in favor of public condom vending machines. "You don't seriously believe that my grandmother would have had 13 children if she had taken the pill, do you?" he once said in an interview with his ghostwriter Heribert Schwan. In 1969, Kohl was elected governor of Rhineland-Palatinate and immediately set out to modernize the state. He eliminated state-run parochial schools that his predecessors had insisted on keeping and he demanded that his young social minister create the country's first kindergarten law stipulating government-subsidized day care for young children. As governor, Kohl pulled the backward state into modern times, building not only highways but also establishing social-welfare centers. He quickly gained a reputation as the leader of the more liberal wing of the party. Like Merkel, Kohl also fostered a group of young, independent thinking party colleagues, who he then elevated into high office. The group included future German President Richard von Weizsäcker, who helped draft an influential 1965 Protestant Church memorandum calling for the recognition of the Oder-Neiss border between East Germany and Poland set after World War II, a step that helped to improve tense relations between West Germany and its eastern neighbors. It was a breaking of taboos with conservative CDU circles. During the first phase of his tenure as chancellor, Kohl introduced both child-raising allowances and parental leave. It was a modernization push in the party that would first be seen again when Merkel became chancellor. When she took over as party chair from Wolfgang Schäuble in 2000, Merkel was at first more cautious than Kohl had been. In contrast to Kohl, she wasn't as deeply rooted in the party. In fact, the reason that the eastern German politician even had the fortune of rising to the top was that the CDU's leadership had been embroiled in a donations and slush fund scandal. Once in the position, she found herself surrounded by enemies. The party's parliamentary group was headed by Friedrich Merz and Roland Koch, who had run successfully to become governor of Hesse on a campaign against dual citizenship

180 for Turks, was on the party's national board. Both were very powerful Merkel adversaries. Merkel didn't really start modernizing the party until 2005, when she became chancellor. She appointed Ursula von der Leyen as her family minister and, through the expansion of government-subsidized daycare facilities, ensured that women would have an easier time balancing work and family life. Like Kohl, Merkel had to go up against heavy resistance, but over time, she sidelined those who stood in her way. Over the years, they all fell from power -- Merz, Koch and others. 'I Don't Want To Be a Half-Dead Wreck' Merkel's plan was never to step down the way Kohl did. During the final phase of his leadership, Kohl had been grumpy in his cabinet meetings, which Merkel experienced firsthand as his environment minister. At the end of the 1990s, in a conversation she had with German photographer Herlinde Koelbl, Merkel said, "I want at some point to find the right time to leave politics. That is much harder than I imagined it would be earlier. But I do not want to be a half-dead wreck when I leave politics." Kohl also wanted to leave politics at a time of his own choosing. He would later state that he had wanted to step down in 1996. "I thought 14 years were enough," he said. "I had also achieved enough." But then, a feeling of irreplaceability crept over the chancellor. Internally, he harbored doubts that his handpicked successor, Schäuble, would have the support of the FDP, the CDU's junior coalition partner. He also feared the introduction of the European common currency would fall through without his leadership. "I have to push it through," he said. For Merkel, refugee policy has become what the euro was for Kohl. For a long time, Merkel had little more than a derisive smile for Kohl's tendency to always see himself in historical terms. But at a national CDU party conference last December, she did the same in justifying her refugee policies. Referencing Chancellor Konrad Adenauer, Merkel said he hadn't said, "We're choosing a little bit of freedom," but rather, "We're choosing freedom." And Chancellor Ludwig Erhard hadn't said, "Prosperity for almost everyone." He said "Prosperity for everyone." And Kohl didn't say that he wanted to create flourishing economies in some regions in eastern Germany, he wanted it for all of them. As a consequence, she continued, she wouldn't be stepping back from her statement: "We can do it." The party conference proved a major success for Merkel, with delegates praising her with standing ovations. But the subsequent consequences have been disastrous. Merkel had placed her refugee policies in the holy shrine of Christian Democracy. And that which is sacred is untouchable. Searching for a Legacy Unlike the presidential democracies in France and the United States, Germany does not have term limits. Along with that comes the inherent danger that chancellors who achieve great things early in office can squander their legacy at the end of their tenure. Adenauer, postwar West Germany's first chancellor, was at the height of his power in the mid-1950s. He had firmly anchored the Federal Republic of Germany as a part of the West, advanced efforts toward reconciliation with Israel and promoted the European Community. The country experienced fast-paced growth. Voters thanked him for it in the 1957 election, bestowing his party with an absolute majority in parliament. But afterward, Adenauer appeared to lose his touch and began

181 fighting with his own handpicked successor Ludwig Erhard. After initially announcing he wanted to become president and pave the way for an appropriate successor in the Chancellery, Adenauer backpedaled. He considered himself to be irreplaceable, particularly in foreign policy. He had also recognized that the role of president, as glamorous as it may be, was largely a symbolic office with little power. Adenauer began badmouthing Erhard, saying he was unfit and lacked the dignity to represent Germany. Increasingly, voters saw him as aloof. When the Berlin Wall was built in 1961, he waited a long time before visiting the city and he only retained the Chancellery that year by a narrow margin and only with the support of an FDP party that had actually done what it could to distance itself from the chancellor. Adenauer had to promise that he would step down before the end of his term in exchange for FDP backing. Is Merkel now suffering the same fate as Kohl and Adenauer? Her problem is that she hasn't achieved anything lasting. That's also one reason she will likely seek another term. Adenauer's legacy included the alignment with the West, Kohl's was German reunification, Schröder's was the structural reforms that provided the basis of today's economic growth. But what will be the lasting legacy of Merkel's refugee policies? Merkel has offered a home to people in a desperate situation. Germany took in over 300,000 Syrians last year, a humanitarian act that would not have happened without Merkel. But with the opening of the borders, tens of thousands of people entered the country who weren't fleeing wars, but instead the precarious economic situation in their home countries. It is estimated that 70,000 Albanians, 30,000 Kosovars and 10,000 Moroccans also came. There is currently no mechanism in place to allow people who are truly in need of protection to travel legally to Europe. The Anti-Merkel Party One of the major factors that drove voters to the AfD was a feeling the country has lost control. The latest survey conducted by German pollster TNS Forschung shows that 21 percent of Germans could imagine voting for the AfD in the next general election. At the AfD's election night party last Sunday in Schwerin, the head of the party's Thuringia state chapter disparagingly thanked Merkel. "Every one of us knows, of course, that the people here in Mecklenburg-Western Pomerania voted on the disastrous policies of the dictator chancellor in Berlin." It was followed by chants of "Merkel must go, Merkel must go." For AfD head Frauke Petry, Merkel is a hated figure against whom the entire party has closed ranks. No other person evokes so much anger in the party. Even the party's name, Alternative for Germany, is a reaction to Merkel, who once said there was "no alternative" to her European policies. At this point, AfD could rename itself the AMP, for Anti-Merkel Party. Right now, Merkel is doing more to mobilize voters for other parties than for her own. Shrinking Influence -- In Germany and Europe Merkel's influence has also shrunk in Europe -- and this despite the fact that the German economy is doing well and the British will soon be leaving the EU. The chancellor's refugee policies have diminished Germany's role in Europe to that of an outsider. Next Friday, this new state of affairs will be palpable when she travels to Bratislava, Slovakia for a special EU summit. Europe urgently needs a functioning system for taking in refugees, but Merkel affronted most of her partners with her uncontrolled

182 opening of the border and it is now highly unlikely that any reasonable compromise can be found. The German chancellor overestimated the willingness of neighboring countries to show solidarity by sharing the burdens that came with her open border policy. At the same time, that policy also put her counterparts in other European capitals under considerable domestic pressure. The images of long lines of refugees and camps blew fresh wind into the sails of populist currents and parties all across the Continent. French President Hollande is terrified of the national election in his country coming up next spring, which could see the rise of Marine Le Pen and her Front National party. In Britain, many view the refugee crisis as a self-inflicted problem that the German chancellor brought to the Continent. In a study for the University of Sheffield, Cologne- based sociologist Wolfgang Streeck attributed the Brexit vote in large part to the refugee crisis. Merkel was long the most powerful woman in Europe. Now, though, Germany's EU allies are looking for her weaknesses and exploiting them. In finance and economic policy, they are now seeking compensation from Merkel for the burdens her refugee policy has allegedly placed on their shoulders. The stability pact, once pushed through by Germany so that the euro crisis wouldn't end in a debt disaster, stands in ruins. At a meeting three weeks ago on the Italian aircraft carrier Garibaldi with Matteo Renzi and François Hollande, the Italian prime minister and the French president were apparently successful in softening her rejection of the southern countries' desire to take on more debt. It is no coincidence that Merkel is now searching for common ground with Renzi. Along with Greece, Italy bears the greatest burden of the refugee crisis. Whereas the number of refugees coming to Greece has sunk as a result of Merkel's deal with Ankara, thousands of Libyans are still attempting to cross the Mediterranean to Europe. If Italy were to begin sending them northwards as it did last year, the debate over the closure of the Brenner Pass would immediately be rekindled and borders would be closed across Europe. The survival of the border-free Schengen zone would again be under at risk. That is the same threat that emanates from Turkish President Erdogan: He can open and close his borders at will. The Turks insist that they are strictly monitoring the route across the Aegean to the Greek islands, but the attentiveness of the Turkish coast guard would appear to waver significantly. 'Stimulus for the AfD' Merkel's most dangerous opponent, however, is not the Turkish president. It is Seehofer, who staff members in the Chancellery refer to as "our Erdogan." The conflict between Merkel and Seehofer's CSU is becoming more intense by the day and this weekend, he has invited party leaders to a meeting at which he intends to gain approval for a paper full of demands that Merkel rejects: burqa ban, migration limits and the elimination of dual citizenship. Almost daily, Seehofer receives party allies in his office who push him to distance the CSU from the CDU. "The CSU has to enter the parliamentary election campaign with the most independence possible -- from both a personnel and content perspective," says former Transport Minister Peter Ramsauer, who is a senior member of the CSU. "That means: No joint campaign platform and Horst Seehofer, with his importance and authority as head of the party, must head up the CSU state parliamentary list as its lead

183

candidate." Ramsauer wants to see Seehofer join the cabinet to ensure that the CSU is able to have sufficient influence. Seehofer, for his part, would like to prevent an open break with the CSU's sister party. By the end of October, the CSU head hopes to find agreement with the CDU. But without a sign that Merkel is willing to revise her approach to refugee policy, it seems unlikely that agreement will be reached. "It doesn't help when we just keep telling people: We did everything right, you just don't understand it. Doing so is a stimulus program for the AfD," says Seehofer. Will CSU Run against Merkel? Merkel, though, doesn't want to give in to Seehofer -- not this time. And now, the enmity between the two threatens to destroy the partnership between the CDU and CSU. Of course Seehofer is aware that a conclusive break with Merkel would only help the political competition. It would be a unique spectacle were Seehofer, as lead candidate for the CSU, to run against Merkel for the Chancellery. Yet exactly that scenario is being seriously considered in the Bavarian state capital building in Munich. If the sister parties aren't able to reach an agreement prior to the CDU party convention in Essen in December, Seehofer plans to skip it. "Without consensus, my appearance would be nothing more than a media spectacle," he says. Staying away, though, would be a significant affront: For over 60 years, it has been tradition that the CSU speaks at the CDU party convention. Still, it would be just one more step in the ongoing escalation of hostilities. Another idea currently circulating among CSU leaders is for the party to pull out of the government shortly before next year's parliamentary elections as a way of distancing itself from the CDU and its waning support. Can Merkel still prevent the break? She hopes that the refugee issue will finally cede into the background by next year at the latest if the number of newcomers remains low. Merkel hopes to be able to defuse the political problem by playing down its importance. That, though, can only work if the CSU plays along, which is far from a sure thing. There, though, she can agree with Helmut Kohl. In the late stages of his time in office, as his popularity continued to wane, he would often ask his visitors: "Who else could do this job?" Reported by Jan Friedmann, Gunther Latsch, Ann-Katrin Müller, Peter Müller, Alexander Neubacher, Ralf Neukirch, René Pfister, Jan Puhl, Christoph Scheuermann, Christoph Schult, Wolf Wiedmann-Schmid and Steffen Winter URL:http://www.spiegel.de/international/germany/refugee-policy-sees-waning-of- power-for-merkel-a-1111668.html Related SPIEGEL ONLINE links: • Did We Do It? Taking Stock One Year After Refugees' Arrival (09/02/2016) http://www.spiegel.de/international/europe/taking-stock-one-year-after-the-arrival-of-refugees-in- germany-a-1110654.html • Two Weeks in September: The Makings of Merkel's Decision to Accept Refugees (08/24/2016) http://www.spiegel.de/international/germany/a-look-back-at-the-refugee-crisis-one-year-later-a- 1107986.html • Refugee Deal at Risk: Europe Takes a Soft Approach on Erdogan (08/05/2016) http://www.spiegel.de/international/europe/angela-merkel-takes-soft-approach-on-erdogan-after-coup- a-1106345.html

184

• Europe Is Dead: Long Live Europe? (06/24/2016) http://www.spiegel.de/international/europe/black-thursday-for-uk-and-europe-as-britain-votes-to- leave-eu-a-1099726.html • The AfD Wedge: Bavarian Conservatives Weigh Split from Merkel's CDU (05/10/2016) http://www.spiegel.de/international/germany/merkel-conservatives-divided-by-right-wing-afd-a- 1091491.html • Fury and the AfD: Inside the Revolt against Angela Merkel (03/21/2016) http://www.spiegel.de/international/germany/success-of-afd-populists-akin-to-revolt-against-merkel-a- 1083147.html • Center-Right Dispute: Merkel to Delay Announcement of Chancellery Candidacy (08/27/2016) http://www.spiegel.de/international/germany/merkel-to-delay-announcement-of-chancellery- candidacy-a-1109693.html • The Rise of the Populists: A Problem for Merkel and Germany (09/05/2016) http://www.spiegel.de/international/germany/rise-of-populist-afd-a-problem-for-merkel-and-germany- a-1110954.html • Mother Angela: Merkel's Refugee Policy Divides Europe (09/21/2015) http://www.spiegel.de/international/germany/refugee-policy-of-chancellor-merkel-divides-europe-a- 1053603.html

185

TRIBUNA Pensiones y gestión social de la edad La creciente longevidad demanda una radical y profunda reforma del Pacto de Toledo para los próximos 20 años. Se acaba la hucha de la Seguridad Social y el mercado de trabajo sigue postergando las soluciones estructurales José A. Herce 9 SEP 2016 - 00:00 CEST

EULOGIA MERLE Va a ser muy complicado que nuestro país reinvente sus instituciones de bienestar social para situarlas a la altura del siglo XXI si no entendemos (y no actuamos en consonancia) el reto enorme que representa la creciente longevidad. Puede visualizarse la potencia de este fenómeno (simplificando algo) al afirmar que los nacidos en un año cualquiera viven dos meses y medio más que los nacidos en el año precedente. Ese efecto de la longevidad, en España, equivale a 100.000 niños adicionales cada año. Y seguimos suspirando por tener un baby boom que nos resuelva el problema financiero de las pensiones. Pues bien, ahí lo tenemos, cada año, y lo tiramos por la ventana. Estamos viviendo un greyny boom permanente y no nos enteramos. Viene este preámbulo a cuenta porque ante su enorme contundencia, como me parece que la tiene, solo se nos ocurre tirarnos de los pelos porque las cuentas de las pensiones no salen. Aducimos todo tipo de causas coyunturales para explicarnos un problema estructural, o achacamos todo tipo de responsabilidades a los actuales responsables del sistema porque eso es lo que nuestra práctica política corriente exige. Pero no damos con la vía correcta de reforma. Es verdad que ha transcurrido poco tiempo desde que las reformas adoptadas en 2011 y 2013 entraron en vigor prometiendo la corrección de los incipientes déficits de las pensiones, que habían resistido muy bien la dura recesión de 2009. Recuérdese que las

186 principales medidas adoptadas por estas reformas fueron, respectivamente, el retraso de la edad de jubilación y la nueva fórmula de actualización anual de las pensiones: el Índice de Revalorización. Y, a pesar de ello, ya estamos otra vez a vueltas con la reforma de la Seguridad Social. ¿Por qué? Para ordenar algo esta pesquisa conviene aceptar con humildad que la realidad nos sorprende muy a menudo, en esta materia y en muchas otras. De no haber sido por la sorpresa que ha causado la significativa merma de las cotizaciones en un marco de gran creación de empleo, las cuentas de la Seguridad Social estarían más cerca del equilibrio. Lo mismo habría sucedido si la inflación hubiese sido del 2% desde 2014 (y no digamos si hubiese sido del 3%). Bajo esta suma de circunstancias, las reformas de los años precedentes habrían contribuido tal y como se descontaba a la estabilización de las cuentas de las pensiones. Suspiramos por un ‘baby boom’ para resolver el problema financiero de las pensiones Esta era la senda que se esperaba y, a partir de ahí, había tiempo para plantear una nueva reforma del sistema de pensiones. Porque todos los analistas y expertos descontábamos un curso más enderezado de las cuentas de las pensiones, eso sí, dentro de un marco de creciente longevidad que, más tarde que temprano, demandaría una nueva y radical iniciativa de reforma de las pensiones. Vuelvo más adelante sobre este tema. Pero ni la inflación (ese maravilloso y letal impuesto silencioso) ni el empleo han surtido los efectos esperados y hétenos aquí alarmadísimos porque se acaba la hucha de las pensiones y no tenemos recambio. Ítem más, la culpa de que se acabe la hucha de las pensiones la tiene… naturalmente el Gobierno. Como les decía antes, todos, hasta los que, si gobernaran, dicen que retrotraerían la edad de jubilación a los 60 años y volverían a indiciar las pensiones con el IPC (con “escala móvil” incluida), aceptábamos que una “gran reforma” de las pensiones era cuestión de tiempo. Pues bien, los acontecimientos que nos han llevado precipitadamente a la situación actual solo han acelerado la necesidad de ese planteamiento. El Pacto de Toledo cumplió 20 años en 2015. Ese era el momento de haberla agradecido los servicios prestados y haber iniciado una profunda renovación del mismo. Pero ahí está, aletargado y secuestrado por una dinámica política en la que no hay suficiente material genético para crear un nuevo Pacto de Toledo para los próximos 20 años. En los que, por cierto, sucederá de todo en materia de pensiones. ¿Cómo mantener a los trabajadores más años en la actividad laboral con un 19% de paro? Vuelvo al enfoque holístico del inicio: la gestión social de la edad. Es decir, no basta con usar los desarrollos en la longevidad solo para adaptar el curso financiero del sistema de pensiones. Por ejemplo, decidiendo que esas ganancias de personas-años se asignen tanto a carreras de cotización más largas como a periodos más largos en jubilación, en vez de solamente a esto último. Una pregunta que surge inmediatamente es: ¿cómo mantener a los trabajadores más años en la actividad laboral con un 19% de paro? Es natural, pero hay que repetir una vez más que los mecanismos existentes para expulsar a los trabajadores maduros del mercado son indecentes, especialmente las mal llamadas prejubilaciones engrasadas con los recursos del SEPE y los convenios especiales con la Seguridad Social. Lo que saben hacer la mayoría de los trabajadores viejos no lo saben hacer los trabajadores jóvenes. Y

187 viceversa. La “falacia de la tarta fija del empleo” es justamente eso, una enorme impostura social que no hay forma de desmontar por mucho que se denuncie como tal falacia. Es verdad. Nuestro mercado de trabajo está poblado de momios (empresas, instituciones, puestos de trabajo, trabajadores y empresarios) que ya se tambaleaban a finales del siglo pasado y que, inexplicablemente, siguen vivos y coleando en el presente siglo, lastrando la productividad de nuestra economía y sobreviviendo gracias a la devaluación real interna que nos está sumiendo a todos en la miseria y que está postergando las soluciones estructurales, además de frustrar y enfadar a todo el mundo. Porque, y de nuevo la holística, la sociedad española y sus agentes más cualificados (Gobiernos e interlocutores sociales por igual) siguen practicando una descomunal discriminación por edad, especialmente en el mercado de trabajo, pero también en muchos otros ámbitos. Pongo un solo ejemplo, insignificante pero ilustrativo: las bonificaciones en el transporte público para mayores de 60 años. Muchos de los cuales tenemos bastantes menos problemas económicos que muchos trabajadores y parados de menos de esa edad. No lo entenderé jamás. Por eso me niego a acogerme a esa bonificación. José A. Herce es profesor de Economía en la Universidad Complutense de Madrid y director asociado de Afi. http://elpais.com/elpais/2016/09/02/opinion/1472836069_558743.html

188

Council on Foreign Relations Follow the Money

Cross border flows, with a bit of macroeconomics Large Scale Central Bank Asset Purchases, With A Twist (Includes Bonds Bought by Reserve Managers) by Brad Setser September 8, 2016 I got my start, so to speak, tracking global reserve growth and then trying to map global reserve flows to the TIC data. So I have long thought that large scale central bank purchases of U.S. Treasuries and Agencies, and German bunds, and JGBs didn’t start with large scale asset purchase programs (the academic name for “QE”) by the Fed, the ECB and the BoJ. Before the crisis, back in the days when China’s true intervention (counting the growth in its shadow reserves) topped $500 billion a year, many in the market (and Ben Bernanke, judging from this paper) believed that Chinese purchases were holding down U.S. yields, even if not all academics agreed. The argument was that Chinese purchases of Treasuries and Agencies reduced the supply of these assets in private hands, and in the process reduced the term/risk premia on these bonds. Bernanke, Bertaut, Pounder DeMarco, and Kamin wrote: “…observers have come to attribute at least part of the weakness of long-term bond yields to heavy purchases of securities by emerging market economies running current account surpluses, particularly emerging Asia and the oil exporters …. acquisitions of U.S. Treasuries and Agencies took these assets off the market, creating a notional scarcity that boosted their price and reduced their yield. Because [such] investments were for purposes of reserve accumulation and guided by considerations of safety and liquidity, those countries continued to concentrate their holdings in Treasuries and Agencies even as the yields on those securities declined. However, other investors were now induced to demand more of assets considered substitutable with Treasuries and Agencies, putting downward pressure on interest rates on these private assets as well.” I always thought the mechanics for how the Fed’s QE impacts the U.S. economy— setting aside the signaling aspect*—should be fairly similar. Both reserve purchases and QE salt “safe assets” away on central banks’ balance sheets.** There are now a number of charts illustrating how the ECB and BoJ have kept central bank bond purchases high globally even after the Fed finished tapering. Emma Smith of the Council’s Geoeconomics Center and I thought it would be interesting to add reserve purchases to these charts and to look at total purchases of U.S., European, Japanese and British assets by the world’s central banks over the last fifteen years—adding the

189 emerging market (and Japanese and Swiss) purchases of G-4 bonds for their reserves to the bonds that the Fed, the ECB, the Bank of Japan and the Bank of England bought. Obviously there are important differences between balance sheet expansion done through the purchase of foreign assets (reserve buildup) and balance sheet expansion done though the purchase of domestic assets (quantitative easing). One is aimed at the exchange rate, the other at the domestic economy. But if portfolio balance theories are right, the direct impact on bond prices from foreign central bank purchases of bonds and from domestic central bank purchases of bonds should I think be at least somewhat similar.

As the chart above makes clear, large-scale central bank asset purchases in some sense preceded the global crisis. Pre-crisis, the purchases came from emerging market central banks. China, counting its shadow intervention, bought about 15% of its GDP in reserve assets from mid 2007 to mid 2008; as a share of GDP, that is a pace of asset purchases equal to the BoJ’s current pace. More recently, reserve managers have quite obviously been selling. The reserves the PBOC bought from 2012 to 2014 were sold in 2015 and 2016. Yet with three trillion plus in reserves, and more in its shadow reserves, the PBOC hasn’t yet sold anything it bought prior to the global crisis. And more importantly, recent reserve sales have come at a time when the BoJ and ECB have been ramping up their purchases. Aggregate central bank demand for safe assets has remained elevated. There has been a significant shift in the currency composition of large scale central bank assets purchases in the past couple of years. In fact, adding reserve purchases to QE purchases magnifies the recent global shift in central bank demand away from dollars. EM reserves managers have been selling dollar assets. At the same time the Fed isn’t buying assets anymore. And the G-7 currency agreement has limited the ECB and

190

(especially) the BoJ to the purchase of their own assets, so there has been a surge in central bank purchases of euro and yen denominated bonds. Prior to the crisis, I was never completely convinced by arguments that the currency composition of the reserves held by central banks didn’t matter. Partially that was self- interest of course; I had spent a lot of time developing my reserve tracking technology. But I also didn’t think private investors were completely indifferent to the currency composition of their portfolio of safe assets. If the central banks accumulating reserves wanted euros rather than dollars, the euro would need to rise relative to the dollar to make “safe” dollar assets cheaper and thus more appealing to private investors. Treasuries and German bunds were not perfect substitutes. Nor for that matter are Agencies and French government bonds.

I still think that is the case. It matters that the ECB conducts its asset purchases by buying euro assets, not by buying Treasuries. At the same time, with ECB purchases exceeding euro area government net issuance and with BoJ purchases far exceeding net new issuance of JGBs, it is hard to argue that some investors in European and Japanese debt haven’t been pushed into U.S. Treasuries and Agencies. (This Banque de France working paper found that foreign holders of euro-denominated bonds were the most likely to sell to the ECB.) And thus there should be some impact on the U.S. yield curve from the actions of other central banks even when those central banks aren’t buying dollars. All this said, the indirect impact on Treasuries from the purchase of JGBs and Bunds is likely to be smaller than the direct impact of central bank purchases of Treasuries.** Krishnamurthy and Vissing-Jorgensen’s 2013 Jackson Hole paper argued that Treasuries and Agencies weren’t perfect substitutes, which is why the Fed’s purchases of Agency MBS had an impact. I have long thought the QE-Agency MBS-lower mortgage payments channel provided an important offset to the fiscal tightening the

191

U.S. did in 2013, as mortgage refinancing put cash directly in the pockets of many households. And the current, relatively low level of direct central bank demand for U.S. Treasuries reinforces Larry Summers’ argument that low Treasury rates now aren’t just a reflections of central banks purchases… In subsequent posts, Emma and I plan to look into these points in a bit more detail, by disaggregating central bank flows by currency and comparing central bank demand (the sum of “foreign” reserve demand and “home” monetary policy demand) to government issuance. A note on methodology. Asset purchases by the Fed, ECB, BoJ and BoE are easy to track directly. Reserve purchases come from summing the foreign exchange reserves of around 60 countries—a broad sample that replicates the IMF COFER data. China’s other foreign assets are added to the total (it doesn’t matter much, but it is a point of pride for me—these are assets on the PBOC’s balance sheet that walk, talk and quack like reserves). The dollar share of reporting economies is assumed to be replicated across the full sample (broadly speaking this produces the same result as assuming a constant 60 or 65% dollar share over time). * Signalling here means signalling a credible commitment to hold policy rates low for a long time, i.e. enhancing the credibility of forward guidance. Michael Woodford, for example argued back in 2013 that this was the transmission channel that mattered. ** Technically, a central bank buying bonds creates bank reserves when it credits the account of the seller of the bonds with cash. QE reduces the supply of safe longer-dated bonds in the market (raising their price, and reducing their yield in theory) while adding to the supply of safe short-term assets (claims on the central bank). http://blogs.cfr.org/setser/2016/09/08/large-scale-central-bank-asset-purchases-with-a- twist-includes-bonds-bought-by-reserve-managers/

192

09/09/2016 06:10 PM Clinging to Power Is The Merkel Era Coming To an End? Chancellor Merkel's refugee policies have divided the country and the right- wing populist AfD party is rapidly gaining support. Conservatives are calling on Merkel to change course, but she is refusing to admit fallibility. Could this be the end? By SPIEGEL Staff There are days in the life of a chancellor when the chasm between the glamour of the geopolitical stage and the political squalor back home is despairingly vast. Last Sunday was such a day for Angela Merkel. Shortly before 10 a.m. local time, the German chancellor's Airbus touched down gently at Hangzhou airport, a red-carpet rolling up as the plane slowed to a stop. Just 200 meters away, Air Force One was parked and behind it stood French President François Hollande's aircraft. With engines roaring, the jumbo carrying Japanese Prime Minister Shinzo Abe taxied past. On this September morning, the Hangzhou airport had become the parking lot of global politics. The leaders had come to the Chinese city for the two-day G-20 summit. As Merkel strode past soldiers with fixed bayonets to her waiting sedan, she was facing a busy couple of days. Even before the summit officially began, she held a meeting with Turkish President Recep Tayyip Erdogan to discuss the same issues as ever: Syria, refugees and Islamic State. Then she quickly headed over to the Expo Center for a meeting with the other world leaders. This time, the focus was on possible stimulus measures for the global economy. Dinner was served at 7 p.m. at the Chinese government's guest house before the group took a boat ride on Yue Lake -- which Merkel followed with a one-on-one with Russian President Vladimir Putin. The German leader would like to see the Kremlin chief put a stop to his ongoing meddling in Ukraine. Finally, at 11 p.m., she grabbed for her phone. This time, though, it was not for a discussion with the likes of Obama, Erdogan or Hollande and the topic was not Syria, the war in Ukraine or the global economy. Rather, it was the state election in Mecklenburg-Western Pomerania being held that day. And the number she dialed was that belonging to Horst Seehofer, head of the Christian Social Union (CSU), the Bavarian sister party to Merkel's own Christian Democrats (CDU). 'Speechless' Back in Germany, it was only just after 5 p.m. and the polls hadn't even closed yet, but all forecasts were trending in the same, depressing direction -- toward a strong result for the right-wing populist party Alternative for Germany (AfD). Despite their nominal political alliance, Seehofer has been one of the most vociferous critics of Merkel's refugee policies, widely considered to be one of the triggers for the rise of the AfD. On the phone, Merkel tried to mollify Seehofer, but he said merely: "I really can't say anything at the moment. I'm just speechless." Merkel ended the conversation knowing that the CSU head wasn't going to give her any peace.

193

It is an unparalleled drama. Just one year ago, Merkel was more popular than almost any chancellor who had come before, with her prudent foreign policy being a significant reason why. But then came the refugee crisis, and with it the accusation that Merkel was pursuing a kind of moral imperialism in Europe. Her partners in the EU abandoned her while back home, the AfD -- a party she thought she had already defeated -- began gaining support. In Mecklenburg-Western Pomerania, the AfD on Sunday even won more votes than the CDU -- the first time in German postwar history that a right-wing populist party attracted more votes than the center-right. Are we witnessing the end of the Merkel era? Merkel appears to be determined to run once again for re-election, but among German conservatives, doubts are growing as to whether that is really a good idea. There hasn't as yet been an open revolt, but within the Chancellery, a combination of defiance and paranoia is spreading -- a development that is reminiscent of the final days of former Chancellor Helmut Kohl's 16-year reign. Last Friday, for example, SPIEGEL reported on the government's plans to distance itself from a bill to be passed in the Bundestag, Germany's parliament, a resolution classifying the slaughter of the Armenians at the beginning of the 20th century as genocide. The government was wary of exacerbating Berlin's tense relationship with Turkey, but many saw the gesture as Merkel kowtowing to Erdogan and the story made immediate waves. Merkel was furious. The plan had been for Merkel's spokesman Steffen Seibert to announce the government's position in a press conference. She immediately called Foreign Minister Frank-Walter Steinmeier, a senior member of the Social Democrats (SPD), her center-left coalition partner, and accused his party, or even Steinmeier himself, of having been responsible for the leak in an effort to make her look bad. Unstoppable Momentum? Is it even still possible for Merkel to stop the erosion of her power? Many of her predecessors in the Chancellery were prepared to risk their office to defend their convictions. Helmut Schmidt pushed through the stationing of mid-range nuclear missiles in West Germany against significant opposition from his SPD party. Gerhard Schröder, likewise of the SPD, did the same with his deep welfare cuts. In that regard, there was an element of heroism in Merkel's decision on the night of Sept. 4, 2015 to open Germany's borders to refugees trapped in Hungary. Notorious for her hesitancy, Merkel finally seemed prepared to spend the political capital she had amassed over the years to stand up for her convictions. It was a courageous move and one that garnered her respect the world over. But in the ensuing weeks and months, she was unable to find a way to impose order on the flood of refugees coming into the country, which resulted not only in significant hostility in Europe, but also among the German population. And the right-wing populist AfD has grown accordingly. It now has delegates in nine state parliaments and its shrill slogans have made it almost impossible to have a rational debate about immigration -- a debate that Germany badly needs to have. The country seems paralyzed. In Merkel's eyes, her refugee policy has become core to her term in the Chancellery. It marks a moment when she didn't allow herself to be guided by tactical, political considerations. That, though, implies limits to her current room for maneuver -- because if she were to admit that she made mistakes, it

194 would be akin to self-betrayal. That, at least, is how she sees it. And that's what makes the current impasse so hopeless. Once the results from Mecklenburg-Western Pomerania were in, Merkel felt it necessary to make a statement, even though she was still at the G-20 summit in China. She prefers not to comment on domestic party politics from abroad since she makes such comments in her capacity as head of the CDU and not as head of the country. So, following her official G-20 press conference in the Hyatt, her staff prepared for her remarks by removing all symbols reminiscent of her role as chancellor: The backdrop with the G-20 logo and the flags of China, Germany and Europe. Even spokesman Seibert had to help. 'Very Displeased' Of course she isn't pleased with the result of the state vote, Merkel said, even allowing that she was "very displeased." But when a reporter asked if she would now change course, she couldn't resist a brief, derisive smirk. "I am happy to repeat once again that I consider the fundamental decisions we made in past months to have been correct," she intoned. The late phases of a chancellor's term tend to be tortuous. Konrad Adenauer didn't want to go because he thought he was the only one capable of leading the country, only stepping aside for Ludwig Erhard after 14 long years in office. Helmut Kohl resisted retirement because he thought only he could push through the common currency in Europe. He was, in fact, so convinced that history needed him that he ignored all warnings of his impending defeat. In the end, the CDU fell in behind Kohl and sank with him in the 1998 elections. Will history now repeat itself? Merkel has always been formidably agile. In her first campaign for the Chancellery, she promised to fundamentally reform Germany, but when she lost by a hair in the September 2005 vote, her ambitious plan disappeared into the party archives. Her promise to extend the lifetimes of Germany's nuclear reactors was likewise thrown overboard following the tsunami in Japan and ensuing meltdown in Fukushima. Such about-faces, of course, left her open to accusations of opportunism, but no chancellor can remain in office long without a certain amount of malleability. And de facto, Merkel's refugee policies have long since been revised: Eastern Europe closed the Balkan route and Merkel herself ensured that Turkish border guards now stop refugees intent on making their way to Europe. Although her actions tell a different story, she continues to insist that she did everything right. Her party allies watched with growing despair as Merkel decided to use the week before the state elections in Mecklenburg-Western Pomerania to defend her decision to welcome the refugees -- in the form of an op-ed in the influential daily Süddeutsche Zeitung, television appearances on major broadcasters and, finally, in a two-page spread in the mass-circulation tabloid Bild. It was clear that helping her party in the upcoming vote was the last thing on her mind. More pressing was her need to be right -- just like Kohl in the latter phases of his tenure. And just like then, it is only the backbenchers who have had the courage to voice vehement dissent. After all, they have the least to lose.

195

Internal Criticism Last Monday at 9 a.m., Merkel joined a conference call with other CDU leaders. Because of the poor connection from China, she was difficult to understand, but the core of her message got through just fine: The results of the election in Mecklenburg-Western Pomerania may be regrettable, but she did not intend to make adjustments to her refugee policies as a result. After all, she said, the SPD had lost more votes than the CDU. It was not an analysis that everyone agreed with. "We all lost to the AfD because when it comes to refugee policy, we are perceived as a block, to which AfD voters want to say: No thanks," says CDU member Jens Spahn, parliamentary state secretary in the Finance Ministry. Instead of just saying "we can do it," the CDU should think about "how we can get to a point where the people really believe that we can do it. And to a point where we know what is going on out there." Once he gets going, Spahn can hardly be stopped. People were right, he says, to apprehensively ask why integration will work better this time around than it has in the past. You have to connect with voters on an emotional level, and not just with the facts, he adds. "If our answer is then a half-hearted burqa ban, our message just won't get through." No one else criticizes the chancellor's policies as radically as Spahn, but even within the Merkel camp, there are those willing to admit that mistakes were made. Interior Minister Thomas de Maizière finds fault with the fact that conservatives talk too much about refugees and not enough about other issues. Annegret Kramp- Karrenbauer, the CDU governor of the state of Saarland, says that voters have lost "a bit of fundamental trust" in the party. It's not that Merkel isn't trying to find a way out of the crisis. Indeed, she remains open to all ideas. On the flight back from the G-20 summit, Merkel was asked if she was concerned that politics have reached a post-fact era -- that parties like the AfD or politicians like Donald Trump have found success with slogans that are completely disconnected from reality. With an inquiring gaze, Merkel said that she first had to integrate "post-fact" into her vocabulary. But it was clear that the expression sparked her imagination. In a speech to parliament two days later, she said: "When we begin participating in a situation where facts can be shoved aside, responsible and constructive answers on the issue are no longer possible. When we begin aligning ourselves, both linguistically and literally, with those who are not interested in a solution, we will ultimately lose our orientation." The Question Dividing Germany It wasn't entirely clear who the target of her critique was: The AfD, Seehofer or Sigmar Gabriel, the head of the SPD who has recently begun distancing himself from the chancellor. Perhaps she meant all of them together. But Merkel was visibly pleased that she had found a new argument to defend herself. Still, though, it is an argument that fits well with the strategy Merkel has long used to justify her policies. The chancellor sees herself as being synonymous with rationality, and those who don't follow her are considered to be insufficiently

196 committed to democracy. She has often pushed through policies by claiming there is no alternative, but it is an argument that has done great damage to Germany's political culture. One reason the debate over refugee policy is so poisonous is that it has been framed so simplistically. Are you for or against Merkel? The question has divided the country, German conservatives and the media. It would have been helpful to many in the CDU if Merkel had allowed at least a bit of differentiation. But it is now too late to change course, says CDU parliamentarian Veronika Bellmann from Saxony. "Now, people wouldn't even accept a 180-degree reversal anymore," she says. Like other members of parliament, Bellmann speaks of a 50-50 division in the party base. One half is behind Merkel, the other is not. "Respect for the chancellor is the only thing preventing a revolt." Merkel's inflexibility is exasperating conservative politicians in many state chapters. Wolfgang Reinhart, CDU floor leader in the Baden-Württemberg state parliament, demands that Merkel take the concerns of Horst Seehofer and the CSU more seriously. "It's not as if the warnings were all completely unjustified. When a partner demands more restrictive policies, you can't just ignore it. You have to engage in dialogue," Reinhart says. "The success of the right-wing populists is partially the result of Berlin policies." Such sentiments sound like they could have come straight from Seehofer. But how much criticism finds its way to Merkel? She has always been distrustful and over the course of her tenure, her inner circle has only grown tighter. That is another parallel with Kohl. Critics among conservative parliamentarians have taken to calling the Chancellery "the bunker." It is run by Chief of Staff Peter Altmaier, who is responsible for managing government business and for negotiating both within the governing coalition and with Germany's states. Many within the CSU, though, believe he is the real author of Merkel's decision to open the country up to the refugees. When Altmaier was first elected to parliament in 1994, he took positions that only found much support at the time within the Green Party. He supported ending Germany's ban on dual citizenship, for example, and wanted to introduce penalties for marital rape. The CSU saw him as a leftist nutcase and Helmut Kohl penalized him by completely ignoring him. Making matters even more difficult, he only had the support of the tiny, Saarland chapter, which meant that he didn't have high hopes for much of a career. By the early 2000s, Altmaier had come to terms with the fact that his path to the top would remain blocked and he even thought about returning to EU politics, where he had worked for a time after he completed his legal studies. But then Merkel arrived, a godsend for his career. She appointed him parliamentary state secretary, then handed him a senior post in the CDU fraction and then made him a government minister. Powerful Opponents His office in the Chancellery has an enormous window providing a view of the Reichstag, the seat of Germany's parliament. With Merkel, he has come further than he ever dared dream. And with her, he can now implement policies that were widely considered to be leftist blather just a few years ago.

197

Altmaier, though, has powerful opponents. One of them is Finance Minister Wolfgang Schäuble, who thinks the congenial man from Saarland isn't sufficiently ruthless. Another is Interior Minister de Maizière, who believes that a chief of staff should spend more time studying policy details and less time on the talk shows. But as long as Merkel remains loyal, nothing can happen to Altmaier -- and the chancellor values that loyalty. His ability to reframe even the largest of disasters as being nothing more than minor setbacks makes life easier for her. When he spoke on the Monday following the Mecklenburg-Western Pomerania election at a festival in the Bavarian town of Gillamoos, he couldn't praise the chancellor highly enough: "Germany is a great country because in Germany, we don't have just one Angela Merkel, we have tens of thousands, hundreds of thousands of Angela Merkels. In every village, in every city." Merkel has enough detractors, so she values having Altmaier's sunny disposition in the Chancellery. When he celebrated his 58th birthday in mid-June, he found a handwritten letter on his desk. It began with the words: "Dear Peter." The letterhead read: "The Chancellor of the Federal Republic of Germany." Like every successful politician, Altmaier keeps close tabs on power shifts that could become detrimental to his position. If Merkel remains in the Chancellery, he will likely become conservative floor leader in the next legislative period. If she falls, there is a risk that he will have to take a seat on the back bench in the Bundestag. The chief of staff of the Chancellery is the last of a line of liberal, young CDU politicians that Merkel brought into her circle when she became chair of the party in 2000 to help her prevail over her conservative adversaries. Two others who have survived politically from this era are Merkel's secretary, Beate Baumann, and her former spokeswoman, Eva Christiansen, who is responsible for political communication at the Chancellery. Like Altmaier, they've been shaped by the long battle that Merkel has waged against the establishment. Modernizing the Party That's one of the most significant parallels between Merkel and Kohl: Both modernized their party against resistance from the old guard. Back in the 1960s, Kohl sparked outrage at a state party conference in Rhineland-Palatinate because he spoke out in favor of public condom vending machines. "You don't seriously believe that my grandmother would have had 13 children if she had taken the pill, do you?" he once said in an interview with his ghostwriter Heribert Schwan. In 1969, Kohl was elected governor of Rhineland-Palatinate and immediately set out to modernize the state. He eliminated state-run parochial schools that his predecessors had insisted on keeping and he demanded that his young social minister create the country's first kindergarten law stipulating government- subsidized day care for young children. As governor, Kohl pulled the backward state into modern times, building not only highways but also establishing social-welfare centers. He quickly gained a reputation as the leader of the more liberal wing of the party. Like Merkel, Kohl also fostered a group of young, independent thinking party colleagues, who he then elevated into high office. The group included future

198

German President Richard von Weizsäcker, who helped draft an influential 1965 Protestant Church memorandum calling for the recognition of the Oder-Neiss border between East Germany and Poland set after World War II, a step that helped to improve tense relations between West Germany and its eastern neighbors. It was a breaking of taboos with conservative CDU circles. During the first phase of his tenure as chancellor, Kohl introduced both child-raising allowances and parental leave. It was a modernization push in the party that would first be seen again when Merkel became chancellor. When she took over as party chair from Wolfgang Schäuble in 2000, Merkel was at first more cautious than Kohl had been. In contrast to Kohl, she wasn't as deeply rooted in the party. In fact, the reason that the eastern German politician even had the fortune of rising to the top was that the CDU's leadership had been embroiled in a donations and slush fund scandal. Once in the position, she found herself surrounded by enemies. The party's parliamentary group was headed by Friedrich Merz and Roland Koch, who had run successfully to become governor of Hesse on a campaign against dual citizenship for Turks, was on the party's national board. Both were very powerful Merkel adversaries. Merkel didn't really start modernizing the party until 2005, when she became chancellor. She appointed Ursula von der Leyen as her family minister and, through the expansion of government-subsidized daycare facilities, ensured that women would have an easier time balancing work and family life. Like Kohl, Merkel had to go up against heavy resistance, but over time, she sidelined those who stood in her way. Over the years, they all fell from power -- Merz, Koch and others. 'I Don't Want To Be a Half-Dead Wreck' Merkel's plan was never to step down the way Kohl did. During the final phase of his leadership, Kohl had been grumpy in his cabinet meetings, which Merkel experienced firsthand as his environment minister. At the end of the 1990s, in a conversation she had with German photographer Herlinde Koelbl, Merkel said, "I want at some point to find the right time to leave politics. That is much harder than I imagined it would be earlier. But I do not want to be a half-dead wreck when I leave politics." Kohl also wanted to leave politics at a time of his own choosing. He would later state that he had wanted to step down in 1996. "I thought 14 years were enough," he said. "I had also achieved enough." But then, a feeling of irreplaceability crept over the chancellor. Internally, he harbored doubts that his handpicked successor, Schäuble, would have the support of the FDP, the CDU's junior coalition partner. He also feared the introduction of the European common currency would fall through without his leadership. "I have to push it through," he said. For Merkel, refugee policy has become what the euro was for Kohl. For a long time, Merkel had little more than a derisive smile for Kohl's tendency to always see himself in historical terms. But at a national CDU party conference last December, she did the same in justifying her refugee policies. Referencing Chancellor Konrad Adenauer, Merkel said he hadn't said, "We're choosing a little bit of freedom," but rather, "We're choosing freedom." And Chancellor Ludwig Erhard hadn't said, "Prosperity for almost everyone." He said "Prosperity for everyone."

199

And Kohl didn't say that he wanted to create flourishing economies in some regions in eastern Germany, he wanted it for all of them. As a consequence, she continued, she wouldn't be stepping back from her statement: "We can do it." The party conference proved a major success for Merkel, with delegates praising her with standing ovations. But the subsequent consequences have been disastrous. Merkel had placed her refugee policies in the holy shrine of Christian Democracy. And that which is sacred is untouchable. Searching for a Legacy Unlike the presidential democracies in France and the United States, Germany does not have term limits. Along with that comes the inherent danger that chancellors who achieve great things early in office can squander their legacy at the end of their tenure. Adenauer, postwar West Germany's first chancellor, was at the height of his power in the mid-1950s. He had firmly anchored the Federal Republic of Germany as a part of the West, advanced efforts toward reconciliation with Israel and promoted the European Community. The country experienced fast-paced growth. Voters thanked him for it in the 1957 election, bestowing his party with an absolute majority in parliament. But afterward, Adenauer appeared to lose his touch and began fighting with his own handpicked successor Ludwig Erhard. After initially announcing he wanted to become president and pave the way for an appropriate successor in the Chancellery, Adenauer backpedaled. He considered himself to be irreplaceable, particularly in foreign policy. He had also recognized that the role of president, as glamorous as it may be, was largely a symbolic office with little power. Adenauer began badmouthing Erhard, saying he was unfit and lacked the dignity to represent Germany. Increasingly, voters saw him as aloof. When the Berlin Wall was built in 1961, he waited a long time before visiting the city and he only retained the Chancellery that year by a narrow margin and only with the support of an FDP party that had actually done what it could to distance itself from the chancellor. Adenauer had to promise that he would step down before the end of his term in exchange for FDP backing. Is Merkel now suffering the same fate as Kohl and Adenauer? Her problem is that she hasn't achieved anything lasting. That's also one reason she will likely seek another term. Adenauer's legacy included the alignment with the West, Kohl's was German reunification, Schröder's was the structural reforms that provided the basis of today's economic growth. But what will be the lasting legacy of Merkel's refugee policies? Merkel has offered a home to people in a desperate situation. Germany took in over 300,000 Syrians last year, a humanitarian act that would not have happened without Merkel. But with the opening of the borders, tens of thousands of people entered the country who weren't fleeing wars, but instead the precarious economic situation in their home countries. It is estimated that 70,000 Albanians, 30,000 Kosovars and 10,000 Moroccans also came. There is currently no mechanism in place to allow people who are truly in need of protection to travel legally to Europe. The Anti-Merkel Party

200

One of the major factors that drove voters to the AfD was a feeling the country has lost control. The latest survey conducted by German pollster TNS Forschung shows that 21 percent of Germans could imagine voting for the AfD in the next general election. At the AfD's election night party last Sunday in Schwerin, the head of the party's Thuringia state chapter disparagingly thanked Merkel. "Every one of us knows, of course, that the people here in Mecklenburg-Western Pomerania voted on the disastrous policies of the dictator chancellor in Berlin." It was followed by chants of "Merkel must go, Merkel must go." For AfD head Frauke Petry, Merkel is a hated figure against whom the entire party has closed ranks. No other person evokes so much anger in the party. Even the party's name, Alternative for Germany, is a reaction to Merkel, who once said there was "no alternative" to her European policies. At this point, AfD could rename itself the AMP, for Anti-Merkel Party. Right now, Merkel is doing more to mobilize voters for other parties than for her own. Shrinking Influence -- In Germany and Europe Merkel's influence has also shrunk in Europe -- and this despite the fact that the German economy is doing well and the British will soon be leaving the EU. The chancellor's refugee policies have diminished Germany's role in Europe to that of an outsider. Next Friday, this new state of affairs will be palpable when she travels to Bratislava, Slovakia for a special EU summit. Europe urgently needs a functioning system for taking in refugees, but Merkel affronted most of her partners with her uncontrolled opening of the border and it is now highly unlikely that any reasonable compromise can be found. The German chancellor overestimated the willingness of neighboring countries to show solidarity by sharing the burdens that came with her open border policy. At the same time, that policy also put her counterparts in other European capitals under considerable domestic pressure. The images of long lines of refugees and camps blew fresh wind into the sails of populist currents and parties all across the Continent. French President Hollande is terrified of the national election in his country coming up next spring, which could see the rise of Marine Le Pen and her Front National party. In Britain, many view the refugee crisis as a self-inflicted problem that the German chancellor brought to the Continent. In a study for the University of Sheffield, Cologne-based sociologist Wolfgang Streeck attributed the Brexit vote in large part to the refugee crisis. Merkel was long the most powerful woman in Europe. Now, though, Germany's EU allies are looking for her weaknesses and exploiting them. In finance and economic policy, they are now seeking compensation from Merkel for the burdens her refugee policy has allegedly placed on their shoulders. The stability pact, once pushed through by Germany so that the euro crisis wouldn't end in a debt disaster, stands in ruins.

201

At a meeting three weeks ago on the Italian aircraft carrier Garibaldi with Matteo Renzi and François Hollande, the Italian prime minister and the French president were apparently successful in softening her rejection of the southern countries' desire to take on more debt. It is no coincidence that Merkel is now searching for common ground with Renzi. Along with Greece, Italy bears the greatest burden of the refugee crisis. Whereas the number of refugees coming to Greece has sunk as a result of Merkel's deal with Ankara, thousands of Libyans are still attempting to cross the Mediterranean to Europe. If Italy were to begin sending them northwards as it did last year, the debate over the closure of the Brenner Pass would immediately be rekindled and borders would be closed across Europe. The survival of the border-free Schengen zone would again be under at risk. That is the same threat that emanates from Turkish President Erdogan: He can open and close his borders at will. The Turks insist that they are strictly monitoring the route across the Aegean to the Greek islands, but the attentiveness of the Turkish coast guard would appear to waver significantly. 'Stimulus for the AfD' Merkel's most dangerous opponent, however, is not the Turkish president. It is Seehofer, who staff members in the Chancellery refer to as "our Erdogan." The conflict between Merkel and Seehofer's CSU is becoming more intense by the day and this weekend, he has invited party leaders to a meeting at which he intends to gain approval for a paper full of demands that Merkel rejects: burqa ban, migration limits and the elimination of dual citizenship. Almost daily, Seehofer receives party allies in his office who push him to distance the CSU from the CDU. "The CSU has to enter the parliamentary election campaign with the most independence possible -- from both a personnel and content perspective," says former Transport Minister Peter Ramsauer, who is a senior member of the CSU. "That means: No joint campaign platform and Horst Seehofer, with his importance and authority as head of the party, must head up the CSU state parliamentary list as its lead candidate." Ramsauer wants to see Seehofer join the cabinet to ensure that the CSU is able to have sufficient influence. Seehofer, for his part, would like to prevent an open break with the CSU's sister party. By the end of October, the CSU head hopes to find agreement with the CDU. But without a sign that Merkel is willing to revise her approach to refugee policy, it seems unlikely that agreement will be reached. "It doesn't help when we just keep telling people: We did everything right, you just don't understand it. Doing so is a stimulus program for the AfD," says Seehofer. Will CSU Run against Merkel? Merkel, though, doesn't want to give in to Seehofer -- not this time. And now, the enmity between the two threatens to destroy the partnership between the CDU and CSU. Of course Seehofer is aware that a conclusive break with Merkel would only help the political competition. It would be a unique spectacle were Seehofer, as lead candidate for the CSU, to run against Merkel for the Chancellery.

202

Yet exactly that scenario is being seriously considered in the Bavarian state capital building in Munich. If the sister parties aren't able to reach an agreement prior to the CDU party convention in Essen in December, Seehofer plans to skip it. "Without consensus, my appearance would be nothing more than a media spectacle," he says. Staying away, though, would be a significant affront: For over 60 years, it has been tradition that the CSU speaks at the CDU party convention. Still, it would be just one more step in the ongoing escalation of hostilities. Another idea currently circulating among CSU leaders is for the party to pull out of the government shortly before next year's parliamentary elections as a way of distancing itself from the CDU and its waning support. Can Merkel still prevent the break? She hopes that the refugee issue will finally cede into the background by next year at the latest if the number of newcomers remains low. Merkel hopes to be able to defuse the political problem by playing down its importance. That, though, can only work if the CSU plays along, which is far from a sure thing. There, though, she can agree with Helmut Kohl. In the late stages of his time in office, as his popularity continued to wane, he would often ask his visitors: "Who else could do this job?" Reported by Jan Friedmann, Gunther Latsch, Ann-Katrin Müller, Peter Müller, Alexander Neubacher, Ralf Neukirch, René Pfister, Jan Puhl, Christoph Scheuermann, Christoph Schult, Wolf Wiedmann-Schmid and Steffen Winter URL: • http://www.spiegel.de/international/germany/refugee-policy-sees-waning-of- power-for-merkel-a-1111668.html Related SPIEGEL ONLINE links: • Did We Do It? Taking Stock One Year After Refugees' Arrival (09/02/2016) http://www.spiegel.de/international/europe/taking-stock-one-year-after-the- arrival-of-refugees-in-germany-a-1110654.html • Two Weeks in September: The Makings of Merkel's Decision to Accept Refugees (08/24/2016) http://www.spiegel.de/international/germany/a-look-back-at-the-refugee-crisis- one-year-later-a-1107986.html • Refugee Deal at Risk: Europe Takes a Soft Approach on Erdogan (08/05/2016) http://www.spiegel.de/international/europe/angela-merkel-takes-soft-approach-on- erdogan-after-coup-a-1106345.html • Europe Is Dead: Long Live Europe? (06/24/2016) http://www.spiegel.de/international/europe/black-thursday-for-uk-and-europe-as- britain-votes-to-leave-eu-a-1099726.html • The AfD Wedge: Bavarian Conservatives Weigh Split from Merkel's CDU (05/10/2016) http://www.spiegel.de/international/germany/merkel-conservatives-divided-by- right-wing-afd-a-1091491.html

203

• Fury and the AfD: Inside the Revolt against Angela Merkel (03/21/2016) http://www.spiegel.de/international/germany/success-of-afd-populists-akin-to- revolt-against-merkel-a-1083147.html • Center-Right Dispute: Merkel to Delay Announcement of Chancellery Candidacy (08/27/2016) http://www.spiegel.de/international/germany/merkel-to-delay-announcement-of- chancellery-candidacy-a-1109693.html • The Rise of the Populists: A Problem for Merkel and Germany (09/05/2016) http://www.spiegel.de/international/germany/rise-of-populist-afd-a-problem-for- merkel-and-germany-a-1110954.html • Mother Angela: Merkel's Refugee Policy Divides Europe (09/21/2015) http://www.spiegel.de/international/germany/refugee-policy-of-chancellor- merkel-divides-europe-a-1053603.html

204

These brief essays delve into the economic issues of the day for a generally informed readership. 2016, No. 16 (Posted 2016-08-12) Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend by B. Ravikumar and Lin Shao The widening gap between labor productivity and compensation is not unique to the current recovery. Labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. Real labor compensation per hour in the nonfarm business sector was 0.5 percent lower 20 quarters after the start of the recovery.1 The sluggish growth in labor compensation was one of the biggest concerns for monetary policymakers (Yellen, 2015). As recently as June 2016, Fed Chair Janet Yellen (2016) remarked that signs that labor compensation growth might be picking up are tentative.

Economic theory suggests that firms pay workers according to their productivity. That is, workers’ compensation reflects the value of the goods and services they produce.

205

One might then wonder whether the slow growth in labor compensation is simply due to slow growth in labor productivity.2 In this essay, we compare labor compensation and labor productivity during the recovery from the 2007-09 recession with that from the previous recession and the long-term trend. We measure labor productivity as real total output divided by total hours worked and labor compensation as real total labor compensation divided by total hours worked. Figure 1 plots labor productivity and compensation for the nonfarm business sector for 20 quarters after 2009:Q2 (the start of the recovery from the 2007-09 recession according to the National Bureau of Economic Research [NBER]). As the figure shows, labor compensation decreased by 0.5 percent during this period but labor productivity increased by 6 percent.

Is the disparity between labor productivity and labor compensation unique to the recovery from the recent recession? As Figure 2 shows, it is not: The growth in labor compensation was also consistently lower than that in labor productivity during the recovery from the 2001 recession. Twenty quarters after 2001:Q4 (the start of the recovery according to the NBER), labor productivity was 13 percent higher, while labor compensation was only 5 percent higher. In fact, labor productivity has been growing at a higher rate than labor compensation for more than 40 years. As Figure 3 shows, labor productivity in 2016:Q1 is 3.8 times as high as that in 1950:Q1; labor compensation, on the other hand, is only 2.7 times as high. In other words, the gap between labor productivity and compensation has been widening for the past four decades (see Domenech, 2015, and Fleck, Glaser, and Sprague, 2011, for discussions of the widening gap). The slower growth in labor compensation relative to labor productivity during the recovery from the two most recent recessions is part of this long-term trend.

206

The data in Figure 3 show that the productivity-compensation gap—defined as labor productivity divided by labor compensation—has been increasing on average by approximately 0.9 percent per year since 1970:Q1. Based on this long-term trend, the gap would have been 51 percent higher in 2016:Q1 compared with 1970:Q1; in the data, the gap is actually 47 percent higher. In conclusion, labor compensation failed to catch up with labor productivity after the 2007-09 recession. However, the driving force behind it is not unique to the recent recession but is part of a long-term trend of a widening productivity-compensation gap. Notes 1 According to the Bureau of Labor Statistics (BLS), the nonfarm business sector is a subset of the domestic economy, excluding government, private households, and nonprofit organizations. Labor compensation includes wages and salaries, employer contributions for social insurance, and employer payments to employee-benefit plans (including health and life insurance). See the BLS glossary (http://www.bls.gov/bls/glossary.htm) for details. 2 See Economist (2014) for a discussion about wage stagnation and labor productivity. References Domenech, Benjamin. “The Truth about ‘Wage Stagnation.’” Commentary, March 1, 2015; https://www.commentarymagazine.com/article/the-truth-about-wage-stagnation. Economist. “The Big Freeze.” September 6, 2014; http://www.economist.com/news/finance-and-economics/21615589-throughout-rich- world-wages-are-stuck-big-freeze. Fleck, Susan; Glaser, John and Sprague, Shawn. “The Compensation-Productivity Gap: A Visual Essay.” Bureau of Labor Statistics Monthly Labor Review, January 2011, pp. 57-69; http://www.bls.gov/opub/mlr/2011/01/art3full.pdf.

207

Yellen, Janet. “Semiannual Monetary Policy Report to the Congress.” February 24, 2015; http://www.federalreserve.gov/newsevents/testimony/yellen20150224a.htm. Yellen, Janet. “Semiannual Monetary Policy Report to the Congress.” June 21, 2016; http://www.federalreserve.gov/newsevents/testimony/yellen20160621a.htm. https://research.stlouisfed.org/publications/economic-synopses/2016/08/12/labor- compensation-and-labor-productivity-recent-recoveries-and-the-long-term-trend/

208

Daily Morning Newsbriefing September 09, 2016 Apple and the Irish GDP revision The sheer size of the Apple tax fine handed down by the Commission suggests that Apple changing its tax status may account for the 26% increase in GDP recorded by Ireland in 2015. While there is no definitive proof and the Irish authorities have not admitted as much, the Irish Examiner cites economist Karl Whelan's argument that Apple bringing a large amount of intellectual property onshore in 2015 may well be responsible for the "" episode. We wonder whether this means that Ireland has understated its GDP in the years before. The paper notes a report by the Irish fiscal advisory council showing IFAC a nearly 50% yoy increase (up €23bn to just over €75bn) in the corporate tax base in 2015, and a €300bn increase in the estimated capital stock of the country. We know corporate tax revenue grew by an unexpected 50% yoy in 2015, or more than €2bn. The issue then is whether the tax increase can be considered a one-off, or permanent. The IFAC, in its pre-budget statement, cautions against relying on higher corporate tax revenues to fund a fiscal expansion beyond the €1bn Michael Noonan is planning. The Examiner sees the IFAC report as confirming suspicions that most of the €2bn increase in corporate tax revenue is down to a single firm, Apple, and insinuates that this is driving the Irish government's decision to appeal the Commission's ruling, which essentially tells Ireland to claw back the lost tax revenue due to the double-Irish tax loophole prior to its abolition at the end of 2014. There have been a number of explanations advanced for the large changes in Ireland's macroeconomic aggregates. One has been the use of "" by US multinationals, who have relocated their headquarters to Ireland after merging with Irish firms; US tax authorities cracked down on inversions in the autumn of 2014. Another is the end of the double-Irish tax loophole which allowed Irish firms to be 'stateless' (non- resident in any country for tax purposes). That loophole was closed by Ireland also at the end of 2014, with effect from 2015 for newly incorporated firms but giving a transition period until 2020 for existing firms such as Apple or . Apple's Irish subsidiary in particular is said to have become resident in Ireland in 2015. The capital base has increased as a result of the relocation of patents, and is not a phenomenon that would have been seen in a manufacturing economy as one does not just relocate physical plants across borders. Clearly, tax inversions should show up in the data up to 2014, whereas the end of the double Irish should be visible after 2015. So it should be possible to tell them apart. Also, the two processes have different effects on the macroeconomic aggregates. Tax inversions increase the foreign capital and operations of the Irish resident sectors, and thus Ireland's income from abroad. This should increase the , but not the GDP as that reflects production in Ireland only. The end of the double-Irish causes a nonresident entity operating in Ireland to become resident and transfer its intellectual property to Ireland. This increases GDP because the IP transfer counts as investment of the domestic sector.

209

Looking at Ireland's detailed national income and product accounts we find the following items had level jumps in 2015Q1 which after four quarters result in large yoy changes from 2014 to 2015: gross operating surplus, up 45% from €101bn to €158bn; property income, up 18% from €106bn to €127bn; and GDP, up 28% (nominal) from €193bn to €256bn. Interestingly, the gross national income, which also increases by 22% in 2015, does so gradually without a single quarter being responsible for the change. This is further evidence that the tax inversions are not responsible for the GDP increase, but that the end of the double-Irish is. To us, the observed jumps in macroeconomic aggregates raise the question of whether Ireland has actually been understating its GDP, tax revenue, and tax base, during all these years that the double- Irish was in operation. At the time the 2015 GDP tax increase was published, the argument was made that this brought into question the credibility of Ireland's national statistics, and of the system of national accounts itself. For instance, opposition leader Michéal Martin said in a Dáil debate "it is shocking that the Department of Finance and the Taoiseach’s Department did not work years ago to create a proper model to calculate the size of the economy" while The Journal quoted analyst David MacNamara saying that "the standard European national accounting methodology is not fit for purpose as an indicator of economic growth in an economy like Ireland." Eurostat, in fact, intends to audit the incident and the Irish government has pledged full cooperation. Our other stories We also have stories on the ECB's forward guidance; on the growing likelihood of a hard Brexit; on the budget limits of the Spanish caretaker government; on Portugal's plan to finance the CGD capital injection; on the low expectations for the EU-Med mini-summit; on Mitsotakis' promise to cut taxes; on disagreement on how to proceed at the Bratisplava summit; and on Finnish discussions on joining Nato. Irish Examiner

Apple tax affairs changes triggered surge in Irish economy

Thursday, September 08, 2016 Eamon Quinn, Juno McEnroe, and Fiachra Ó Cionnaith Huge revisions to Irish GDP levels that led to “leprechaun economics” claims earlier this year were almost completely caused by Apple re-arranging its tax affairs after the Government closed off tax loopholes. Economic analysts revealed the situation last night saying the move led to the multinational giant shifting more of its intellectual property into Ireland, resulting in the firm paying out substantially more in taxes to this country. The Government has yet to admit that the enormous disruption to Irish GDP figures and the surge in corporate tax revenues was due to the actions of a single multi-national. However, the independent conclusion throws new light on the Coalition’s renewed commitment to appeal the European Commission’s ruling that Apple repay the State €13bn in back taxes.

210

Karl Whelan, professor of economics at UCD, said a large part of the surge in corporate tax receipts and the huge GDP revisions can be attributed to the rearrangement of Apple’s tax affairs. He said this is because Apple brought onshore more of high-value intellectual property to Ireland, while continuing its massive contracts with overseas’ manufacturers to make its iPhones and iPads. The summer revisions which saw the CSO enormously upgrade 2015 Irish GDP growth to 26.3% drew the jibe of “leprechaun economics” from a top economist. The revisions also meant Ireland paid more into the EU budget. Further evidence of the huge effects are identified in a report published today by the Irish Fiscal Advisory Council. The watchdog shows that Ireland’s corporate tax base — the level of company trading profits before tax — unexpectedly surged last year by €23bn to almost €75.4bn, as the country’s capital stock surged €300bn. In its pre-budget statement, the IFAC warns the Government cannot rely on corporate taxes to fund future spending and tax cuts. It said Finance Minister Michael Noonan has enough money for modest tax cuts and spending increases, and should not be tempted to splurge any more new money above the €1bn budget package he said he favours. The expert opinion emerged as Government TDs roundly rejected suggestions Ireland is a tax haven and that they were passing up on a €13bn windfall by not recouping Apple taxes promptly. As expected, a Government motion to appeal the Brussels ruling was passed by 93 votes to 36 after an 11-hour Dáil debate. Taoiseach Enda Kenny warned the claim Ireland provided illegal state aid to Apple would not only damage Ireland but other countries by scaring off investors. Public Expenditure Minister said there was “no pot of gold” as Apple would have appealed it, adding: “Ireland cannot be a global tax collector for a single company.” The €13bn will be effectively frozen, Finance Minister Michael Noonan said, saying NTMA chiefs would advise how it could be invested without risk. The costs of the appeal would be sizeable, he said, adding that Revenue would not reveal tax affairs or whether there were similar cases to the Apple one. The comment was seized upon by opposition parties, which claimed an unknown number of major multi-national firms have side-stepped potentially more than €130bn in unpaid taxes over the past decade because of tax loopholes. The figure is based on a 2014 Department of Finance briefing document given to a previous finance sub-committee examination of multi-nationals’ tax rates, which was referred to by People before Profit TD Richard Boyd Barrett under Dáil privilege. Meanwhile, Taoiseach Enda Kenny will rule out the possibility of a giveaway budget this evening. Mr Kenny will also announce plans for a cabinet sub-committee on Brexit, which will be chaired by the Taoiseach and ministers.

211

Ministers will also meet with their British counterparts about Brexit in Dublin today. http://www.irishexaminer.com/ireland/apple-tax-affairs-changes-triggered-surge-in- irish-economy-419912.html

212

Daily Morning Newsbriefing September 08, 2016 Le Pen leads and Macron comes third in polls The latest poll confirms what columnists in France expected. If Emmanuel Macron were to run in the first round of the presidential elections on his own platform En Marche! he would surpass François Hollande, perform better against Nicolas Sarkozy than against Alan Juppé, and lose some percentage points if Francois Bayrou decided to run. But, under all circumstances, he would only come third in the first round of the presidential elections regardless of the other candidates. So, he will not have enough support to get into the second round no matter what. Hollande has even less support. The second round looks likely to be between Le Pen and the Republican candidate, and Juppé is more likely than Sarkozy to get the centre-left to back him. The question is what will the candidates in the centre and on left will do. The TFS Sofres poll for Le Figaro, taken three days after Macron quit the government, assumes that Macron will not run in the Socialist primaries but as a candidate of his own movement. After the traitor comments from Francois Hollande, this assumption seems reasonable. The poll suggests that. in case Sarkozy runs, Macron would get 16% against 9% for Bayrou, Hollande 11%, Sarkozy 20% and Le Pen 26%. Without Bayrou, Macron gets 18% against 12% for Hollande, 22% for Sarkozy, and 27% for Le Pen. If Juppé is the Republican candidate and Bayrou is not running, Juppé would perform better than Sarkozy with 25% against 28.5% for Le Pen; Macron would remain at 15%, and Hollande at 11%. Without Macron, Hollande would fare better but still come in only third. Marine Le Pen is leading the polls. There is only one scenario where this is not the case: when Juppé runs against Hollande, without Macron or Bayrou, he would be in the lead with 33% against Le Pen with 28%. Macron would perform best if neither Hollande nor Bayrou were to run and Arnaud Montebourg were the Socialist candidate instead, but with 20% he still would trail behind Sarkozy (22%) or Juppé (27%) and Marine Le Pen (27%/27.5%). Another poll shows that 9 out of 10 oppose François Hollande's candidacy, according to this article. With 88% this is 4pp higher than in July. Fully 72% of left voters do not want Hollande in the game. Analysts say that, barring a miracle, Hollande is finished politically. In this case, Macron is the favourite candidate of the left (26%). Our other stories We also have stories on Corbyn's endorsement of single-market exit; on Rajoy's botched World Bank appointment; on the risks to Spain's deficit target; on Renzi's Italian referendum strategy; on Merkel's speech in the Bundestag; on the Irish parliament supporting an appeal against the Apple ruling; and on the dwindling chances of a merger between Pasok and Potami in Greece.

213

Primaire à droite : les propositions économiques d'Alain Juppé plébiscitées Les Echos 08/09/2016 Selon un sondage, 42 % des personnes interrogées estiment que le maire de Bordeaux fait les meilleures propositions économiques, loin devant Nicolas Sarkozy (20 %). L'économie, un point fort pour Alain Juppé ? C'est ce qui ressort d'un sondage* Odoxa pour BFM Business et Challenges publié jeudi 8 septembre. Pour la plus grande proportion de Français,... http://www.odoxa.fr/baro-eco-primaire-de-droite-juppe-candidat-aux-meilleures- propositions-economiques-selon-les-francais/

214

Michael Spence Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Academic Board Chairman of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World. AUG 30, 2016 32 How to Fight Secular Stagnation MILAN – Much of the world, especially the advanced economies, has been mired in a pattern of slow and declining GDP growth in recent years, causing many to wonder whether this is becoming a semi-permanent condition – so-called “secular stagnation.” The answer is probably yes, but the question lacks precision, and thus has limited utility. There are, after all, different types of forces that could be suppressing growth, not all of which are beyond our control. To be sure, there is a strong case to be made that many of the growth-destroying headwinds that we currently face would be difficult, if not impossible, to counter in the near term without endangering future growth and stability. The result of these persistent conditions can be called “secular stagnation one” (SS1).

The first indication that we are experiencing SS1 relates to technology. If we are, as the economist Robert Gordon argues, experiencing a slowdown in productivity-enhancing technological innovation, long-term potential growth would be constrained. But even if innovation has not dropped off too much, or picks up again soon, the structural adaptation and behavioral changes needed to take advantage of the concomitant productivity gains will take time.

215

A second condition supporting SS1 is rooted in the impact of heightened uncertainty – about growth, job security, policies and regulations, and the many developments that could affect any of those factors – on investment and consumption. People simply don’t know whether their governments are going to start making progress in combating deflationary pressure, countering rising inequality, addressing social and political fragmentation, and restoring economic growth and employment. With future demand far from guaranteed, private investment has been declining in many countries, including, most recently, China. The same goes for household consumption, particularly in the advanced economies, where a larger share of consumption is optional (for example, replacing consumer durables, traveling, and eating out at restaurants). Given how long it took the US economy, for example, to recover fully from the Great Depression – until World War II, when the government took over much of the demand side of the economy – it seems that a reversal in these trends will not arrive anytime soon. The third indication that we are stuck in SS1 is debt. Households, corporations, financial institutions, and governments are all facing balance-sheet constraints, which it seems plausible to assume, are holding back expenditure and investment, elevating savings, and contributing to a broadly deflationary environment. Actions aimed at supporting deleveraging and balance-sheet repair – such as recognizing losses, writing down assets, and recapitalizing banks – carry longer-term benefits but short-term costs. Indeed, balance-sheet repair takes time, especially in the household sector, and produces an unavoidable drag on growth. The picture is somewhat bleak. But there is more to the story, revealed by another, more precise, question: is there a set of policy responses that could, over time, increase the level and quality of growth? Here, the answer also seems to be yes, suggesting that we are also facing another type of secular stagnation – call it “secular stagnation two” (SS2) – that is dictated by our unwillingness or inability to implement the right policy mix. A key element of that policy mix would focus on tackling rising inequality. While the forces fueling this trend – in particular, globalization and progress in digital technology – will be difficult to counter fully, their adverse effects can be mitigated through redistribution via the tax and social-security systems. As economies undergo prolonged structural transformations, individuals and families need the resources to invest in new skills. Moreover, monetary policy, which has been shouldering much of the burden of recovery since the 2008 economic crisis, must be rethought. The fact is that years of ultra-low interest rates and massive quantitative easing have not increased aggregate demand sufficiently, much less reduced deflationary forces adequately. But raising interest rates unilaterally carries serious risks, because in a demand- constrained environment, higher interest rates attract capital inflows, thereby driving up the exchange rate and undermining growth in the tradable part of the economy. Given this, advanced-country policymakers should consider imposing some controls on their capital accounts (much as successful emerging economies do) – a move that would facilitate more independent and tailored approaches to exiting financial repression. A third priority should be to strengthen fiscal responses, especially with respect to public-sector investment. Europe, in particular, is paying a heavy price for underusing

216 its fiscal capacity – a decision that has been driven by the political unpopularity of debt and fiscal transfers. Under the right conditions, the balance sheets of pension and sovereign-wealth funds could also be tapped to fund investment. There are many more areas where countries may need to consider reforms. These include tax policy, the inefficient or improper use of public funds, impediments to structural change in product and factor markets, and mismatches between the reach of global financial institutions and the capacity of sovereign balance sheets to intervene in case of financial distress. SS1 will make addressing SS2 much more difficult. In fact, it seems that not even robust domestic and international policy responses would be sufficient to eliminate the risk that demand and growth will remain subdued for an extended period. But that is no reason to delay action in the areas where policy can make a difference. Just as our past policy choices helped to generate the SS1 we face today, failure to implement policies aimed at tackling SS2 could create a much more intractable and potentially unstable situation tomorrow. https://www.project-syndicate.org/commentary/how-to-fight-secular-stagnation-by- michael-spence-2016-08

217

Daily Morning Newsbriefing September 07, 2016 Will the CSU rise up against Merkel? There have always been moments when the CSU would stand up like a bear but in the end they never attacked their big sister, the CDU. We recall a study of its former leader Franz-Josef Strauss commission in the 1970s, which concluded that Bavarian independence was impractical because of the costs of creating a new railway system. Several times the CSU threatened to separate, but it came to nothing. We may be heading for another such moment. In any case, the row between the two parties has flared up again, and raises serious questions about the future of Angela Merkel but, more importantly, about what kind of political majority Germany will have from 2017 onwards. Sueddeutsche is reporting comments from CSU-chief Horst Seehofer, who said the grand coalition had a good first half, but this changed with Merkel's open invitation to the refugees in the summer last year. He is calling for fundamental changes in a whole series of policies: taxes, domestic security, pensions and immigration. And he wants all of this by October at the latest. Die Welt reports that Bavaria's interior minister, Joachim Herrman, is demanding a limit of 200,000 refugees per year, a demand Merkel has resolutely rejected. We noted a comment by Wolfgang Wittl at Suedeutsche, who tries to explain the Bavarian mindset to the rest of Germany. What people have to understand, he writes, is that the CSU feels existentially threatened. It is a regional party with the ambition to influence policy both in Germany and in Europe at large. If the party cannot deliver this, it becomes superfluous. This is why the party reacts like the needle of the seismograph to changes in public opinion. We would, however, not underplay the political significance of the CDU's recent political disappointments. Another bad show at the Berlin elections in ten days may broaden internal opposition to Merkel and her policies. So far reactions are muted, but we are not sure how long this peace will hold. Spiegel Online, meanwhile, reports on a survey by the Allensbach Institute for the SPD's executive on wider attitudes in Germany. It shows that, while Germans feel economically more secure than they have for a long time, they are paranoid about immigration, terrorism, international crises, internal security, and broader social changes. While 54% consider their economic situation as good, or very good, only 34% say they are looking forward to 2017. The article says that some SPD chiefs were surprised by the results. Our other stories We also have stories on Germany’s continuation of primary surpluses; on Bosch’s implication in the VW scandal; on the Ecofin to discuss a European equivalent of the IMF; on the latest EU estimates on VAT losses; on the Greek government battered by polls, protests, and the refugee crisis; on what happens if the Irish appeal against the Apple ruling fails; on the failures of globalisation; and on the insincerity of the Visegard Four's call for a European army.

218

Article sélectionné dans la matinale du 06/09/2016 Présidentielle : un sondage donne la gauche éliminée au premier tour dans tous les cas Le Monde.fr avec AFP | 07.09.2016 à 04h34 • Mis à jour le 07.09.2016 à 08h03

François Hollande et Emmanuel Macron en mars 2016. PHILIPPE WOJAZER / REUTERS François Hollande (Parti socialiste, PS) serait éliminé dans tous les cas de figure au premier tour de la présidentielle d’après un sondage TNS Sofres-OnePoint pour Le Figaro et LCI, diffusé dans la soirée du mardi 6 septembre. Alain Juppé ou Nicolas Sarkozy (Les Républicains, LR) et Marine Le Pen (Front national, FN) seraient, eux, qualifiés pour le second tour. L’enquête d’opinion teste neuf hypothèses différentes de candidats à gauche et à droite avec à chaque fois Nathalie Arthaud (Lutte ouvrière, LO), Philippe Poutou (Nouveau Parti anticapitaliste, NPA), Jean-Luc Mélenchon (Parti de gauche, PG) Cécile Duflot (Europe écologie-Les Verts, EELV), Nicolas Dupont-Aignan (Debout la France, DLF), Jacques Cheminade (Solidarité et progrès, SP) et Marine Le Pen (FN). Lire aussi : Jean-Luc Mélenchon ne veut pas se faire étouffer par les primaires Dans l’éventualité où Emmanuel Macron (En Marche !), François Bayrou (Mouvement démocrate, MoDem) et Nicolas Sarkozy seraient candidats face à lui ou dans celle où il serait opposé à M. Macron et Alain Juppé, François Hollande obtiendrait 11 points au premier tour. Il en récolterait 15 points s’il est uniquement opposé à M. Sarkozy, outre les sept personnalités testées dans tous les cas de figures. Lire aussi : Macron est surtout prisé par les sympathisants de droite et les plus de 65 ans Macron en tête à « gauche » Le sondage teste trois configurations avec Arnaud Montebourg comme représentant du PS. Quel que soit le candidat du parti majoritaire, il est largement devancé par Emmanuel Macron, qui obtiendrait de 15 % à 20 %, selon les cas. L’ancien ministre du redressement productif recueillerait de 5 % à 7 %, tandis que M. Hollande serait battu à chaque fois par son ancien ministre. Lire aussi : Emmanuel Macron : « ll y a aujourd’hui une gauche du réel et une gauche statutaire »

219

Jean-Luc Mélenchon obtient quant à lui de 10 % à 13 % des intentions de vote, Nicolas Dupont-Aignan de 3 % à 7 %, Cécile Duflot de 2 % à 4,5 %. Philippe Poutou ne dépasse pas les 2,5 %, Nathalie Arthaud 2 % et Jacques Cheminade 1 %. Dans toutes les cas de figure testés, ce sont les candidats LR (Alain Juppé ou Nicolas Sarkozy) et Marine Le Pen pour le Front national qui se qualifieraient pour le second tour. 26 % à 29 % pour Le Pen Le maire de Bordeaux réaliserait son meilleur score (33 %) face à la candidate d’extrême droite (29 %) et François Hollande (14 %). C’est la seule hypothèse parmi les neufs où Mme Le Pen ne serait pas en tête au premier tour. Lire aussi : Primaire de la droite : qui sera vraiment candidat ? Dans la même configuration, mais avec Nicolas Sarkozy vainqueur de la primaire de la droite plutôt que M. Juppé, le candidat LR obtiendrait 27 % des voix, contre 29 % pour la dirigeante frontiste. Celle-ci oscille entre 26 % et 29 % des voix selon les hypothèses. Pour les sympathisants de gauche, c’est Jean-Luc Mélenchon (23 %) qui serait « le meilleur candidat de gauche pour la présidentielle de 2017 », devant François Hollande (20 %), Emmanuel Macron (18 %), Manuel Valls (9 %) et Arnaud Montebourg (8 %). M. Hollande (33 %) devance M. Macron (26 %) chez les seuls sympathisants PS. Enquête réalisée en ligne du 2 au 5 septembre auprès d’un « échantillon de 1 006 personnes représentatif de la population française âgée de 18 ans et plus » selon la méthode des quotas.

En savoir plus sur http://www.lemonde.fr/election-presidentielle- 2017/article/2016/09/07/un-sondage-donne-macron-devant-hollande-au-premier- tour_4993619_4854003.html#FFrfK5MzPlYrHeSW.99

220

Daily Morning Newsbriefing September 06, 2016 Eliminating the impossible In the Brexit debates we are slowly, very slowly, inching towards more clarity the Sherlock Holmes way: "...when you have eliminated the impossible, whatever remains, however improbable, must be the truth." We still don't know what Brexit means, but we are in a gradual process of elimination. Theresa May ruled out the EEA as a model and, over the last few days, made two further important qualifications about the future relationship. The first is her rejection of a point-based immigration system. This does not mean that she is going soft on immigration, let alone abandon the idea of controls. From the EU's perspective, this makes little difference in any case. She wants a system that is not based on qualifications, but on the needs for British industry and the economy at large. It is the ability to control the inflows that she favours, not a semi-automatic framework. In doing so, she is rejecting a system that has the support of some of her cabinet ministers, including Boris Johnson and Liam Fox. We broadly agree with Robert Peston's analysis that Brexit probably means a Canada- plus style trade agreement - one with specific components for the UK services sector. They won't call it that, he notes. They are still talking about a bespoke agreement. But that's just words. It is going to be Canada-plus simply because May concluded that, politically, membership in the single market would be too costly. The second important statement is that May also has not ruled out contributions to the EU budget, but in the form of voluntary payments that yield specific benefits. It is very much an association-type agreement she is looking at, short of membership. The Wall Street Journal reports that Francois Hollande is putting pressure on May to get all the preparations done by the end of the year, which he called "a reasonable deadline". Further delays would weaken the British and European economies. We think he is right on this. May needs time to formulate a coherent Art 50 strategy, but we doubt that the marginal benefits of an extra year of pondering will outweigh the marginal costs from the economic impact of a delay. What is also not clear is whether the UK will have another general election. The fixed- term parliaments act, which remains in force for the currently legislative term, prescribes elections in May 2020. UK commentators seem to agree that this can easily by circumvented. We are less sure about this - for political reasons - but the now likely re-election of Jeremy Corbyn as Labour leader will give Theresa May a good opportunity to trigger a new election to give her a firm Brexit negotiating mandate. Janan Ganesh reminds us in the FT that, while political careers usually end in failure, premierships always start in success. But May's honeymoon will not last forever. If she repeats Gordon Brown's mistake and does not seek her own mandate, she will make things unnecessarily difficult for herself.

221

And finally, we noted a forecast by Goldman Sachs according to which the UK will still weaken, but not nearly as much as the Project Fear campaigners had forecast. The cumulative effect will be about 2% of GDP. Just why Remain campaigners thought that this would have been the killer argument, still eludes us.

Our other stories We also have stories on the Apple ruling, and on Ireland's appeal against it; on the end of the Merkel era; on Italian growth stalling; on the history of Portugal's banking crisis; on the promise of tax cuts in France; on the latest spike in Greek tax liabilities; and on the importance of not mincing one's words.

Robert Peston ha compartido su publicación. 4 de septiembre a las 22:24 · Facebook Mentions What have I learned from the PM about the detail of what Brexit means, on this her first big summit? Well, she told us it means British control over immigration into the UK - but not via the points-based system advocated by her foreign secretary Boris Johnson and his colleagues in the campaign to take us out of the EU (this is a system that almost automatically allows foreigners to live and work here if they have certain skills; she slapped it down in a chat with hacks with all the calculated brusqueness of a migration- weary ex Home Sec).

222

She also refused to sign up to Johnson's and Vote Leave's assertion that Brexit would mean we would never again pay a penny or euro to Brussels. So in case you were still in any doubt, Vote Leave's pledge that Brexit would lead to an extra £350m a week for the NHS is for the birds (as all serious analysts - the detested "experts" - said it was). So that is what Brexit won't be. Any hint of what it might be? Well my sources tell me immigration flows will - as far as possible - be determined by two factors: the needs of businesses, public services and the economy; and an assessment of the vacancies that cannot be filled by indigenous Brits. What the mechanism to deliver this labour-market nirvana might be I can't say - because I don't know, and nor (I fear) do ministers yet. But what is clear is that for May the priority is to deliver British control over who comes to Britain, and NOT to limit migration flows to some specific numerical target. What about our vital future trading arrangements with the EU and the rest of the world? Well I refer you back to something I wrote a few weeks ago, which says we're aspiring to a goods and services free-trade deal that builds on the arrangements agreed (but not officially ratified) between Canada and the EU (see https://www.facebook.com/pestonitv/posts/1675210406137031). Now I don't think you'll hear May or the Brexit minister David Davis (who is talking about this in the Commons today) actually say we want "Canada with a services add- on" - because what they'll insist is that the size and shape of our economy and our long history of EU membership mean our deal will be sui generis, unique. But it's useful shorthand to think of our likely future trading pact with the EU as "Canada-plus", simply because May has concluded that being more integrated into the EU single market, as Norway and Switzerland are, is likely to be proscribed. How so? Well that's because of how she wants to manage immigration, and how she aims to eliminate "compulsory" financial contributions to Brussels (note ministers haven't ruled out voluntary payments that yield a clear specified benefit). So what will Brexit actually mean? Well anything T May chooses it to mean in the next five or six months - and then (of course) what the 27 EU members then choose to endorse or reject in her wish list, during negotiations followed by interpretation and implementation that will drag on for many many years.

Robert Peston 16 de agosto a las 8:37 · Facebook Mentions It is seven weeks since the UK voted to leave the EU. What have we learned since then about the choice we made? Well not a great deal, other than Theresa May's gloriously resonant and opaque "Brexit means Brexit" – which is why I have been digging around to get some sense of what the second "Brexit" in that aphorism of this new age represents. I am reliably told that Brexit, for May (and therefore for us), equals:

223

1. discretionary control over immigration policy; 2. discretionary control over lawmaking; 3. no compulsory contributions to the EU budget. Why those three pillars of our new relationship with the EU? "It's what the people voted for", a senior government member tells me – with a certainty that suggests it would be pointless to raise doubts. The point is that those pillars will determine our future relationship with the EU, especially our economic and trading relationship. So they really matter. And, my goodness, they carry a weighty consequence. They imply that we cannot possibly be a full member of the European Union's single market, or of the European Economic Area, like Norway. Nor could we have a Swiss- style status of quasi single-market membership. Why not? Well in those three instances of de facto single-market membership we would not have full discretion over who could live and work here, we would be subject to some EU lawmaking and we would probably have to make some billions of pounds of contributions to the EU’s budget. At this point, if you are a British exporter you may well be profoundly anxious that the prospect of retaining relatively frictionless and costless access to the EU's consumers and business customers is looking remote. That would be painful for all of us, because it would mean that a significant portion of the 40% of our trade that goes to the EU would be at risk of withering away, at the cost of making it even harder for us to repay our big debts. So is it time to blame Brexit and the Brexiteers for not just the short-term economic slowdown that is upon us, but a longer-lasting brake on our growth (which, as it happens, was built into the Bank of England’s latest forecast)? Well it depends on the quantum of additional cost we would bear when trading the EU – and the magnitude of that cost can yet be limited. It is not yet inevitable that our access to the EU will be on the basis of the World Trade Organisation’s tariff structure – which would add, for example, a 10% tax on car trade. There is an alternative model for our new economic arrangement with the EU – which, I am told, has a 75% chance of being negotiated successfully (that is a wholly spurious probability by the way, and should be interpreted as a statistical version of cabinet ministers crossing their fingers and toes). This model is being developed by the newly created Department for Exiting the European Union, under David Davis, and it consists of a British reworking of Canada's EU free-trade deal, with - and this is the trickiest part - a bespoke add-on for our service sector. The service sector addendum would be, for us, the dog not the tail – since services constitute a full 80% of all our economic output, and we would be rather closer to bust if our banks, lawyers and architects, inter alia, are more constrained in taking money from EU clients.

224

What are the core elements of this trade deal? Well the big thing the Brexit Dept is doing now is research into what parts of our current access to the EU are most valuable. Its sensible initial presumption is that what matters most are the non-tariff barriers that can discriminate against non-members of the single market – or rules and regulations about how things are made, what kind of checks they undergo when they cross borders, how services are sold and who is allowed to sell what. The famous passport for banks wanting to operate across the EU is one example, of vital importance to the City of London. Now what on earth could go wrong with trying to turn us Canadian in our European connection? Almost everything. Apart from anything else, Canada’s own deal is not yet in effect – because it is bogged down in wrangling not on the terms of the deal, but on the procedure in the EU for formally approving it. One huge challenge for Davis and his team therefore is to persuade Brussels and EU government leaders to allow any UK trade deal to be ratified by majority voting of government heads, and not the unanimous approval of EU national and regional parliaments. If the deal requires that kind of parliamentary ratification, it can be kissed goodbye. And finally, when on earth will there be a transition from this kind of fairly dry assessment of what we may reasonably be expected to win from our estranged EU partners, to a triggering of so-called Article 50 and the two year process of actually negotiating the departure. Well the preparations will take months. There is, I reckon, only a modest prospect of the Article 50 two-year countdown being initiated by the end of the year, but a fair probability it’ll start by March. If that deadline isn’t hit, then we may not give formal notice of departure till the closing days of 2017, because in the spring and summer EU government leaders will be distracted by important national elections, in France and Germany. Or to put it another way, deciding to divorce from the EU was the relatively quick and easy bit. Actually working out what our new life will be, and then embarking on that life will take us years (and I haven’t even touched on the complexities of future security arrangements, the grandfathering of important EU law into British law, and the need for Liam Fox as international trade secretary to replicate the EU’s trade deals with the likes of South Africa, Singapore, Switzerland and South Korea, among a raft of other challenges). https://www.facebook.com/pestonitv/posts/1687094161615322

225

09/05/2016 02:46 PM The Rise of the Populists A Problem for Merkel and Germany A Commentary By Sebastian Fischer The state election in Mecklenburg-Western Pomerania gave the right-wing populist party Alternative for Germany a significant boost. It is a challenge for Chancellor Merkel and the entire country. State Elections in Mecklenburg-Western Pomerania Preliminary results from Sept. 4, 2016 (%)

From a national political perspective, the eastern German state of Mecklenburg-Western Pomerania, with its sparse population of 1.6 million, is a lightweight and largely meaningless. Usually. But this time around, following state parliament elections held there on Sunday, the situation is different. This vote, after all, was essentially a referendum on Chancellor Angela Merkel and her policies, which makes it quite meaningful indeed. The results of that referendum don't look good for Merkel. Her center-right Christian Democratic Union (CDU) lost four percentage points relative to the last time the state's voters went to the polls in 2011 for a result of just 19 percent -- while the right-wing populist party Alternative for Germany (AfD) brought in fully 20.8 percent of the vote. The party didn't even exist five years ago. To be sure, the CDU hasn't done particularly well in the state for 20 years, but it is home to the chancellor's own parliamentary constituency, which means that the AfD has essentially staged a revolution in Merkel's backyard. And it did so by turning the elections into a single-issue vote: Merkel's refugee policies. The strategy was so successful that the CDU has been relegated to being just the third- strongest party in the state, behind the center-left Social Democrats (SPD) and the AfD. It marks the first time in Germany that the anti-Merkel party has come out ahead of Merkel's party -- and in some parts of the German leader's electoral district, AfD was the strongest party of all. For the chancellor, it is a political debacle. Merkel must now come to terms with a challenge at least as monumental as the one which faced her predecessor Gerhard

226

Schröder back in the mid-2000s. Back then, the SPD chancellor found himself trapped between, on the one hand, having to explain his cuts to social welfare benefits and, on the other, the rise of the Left Party, a political movement to the left of the SPD that was fueled by exactly those cuts. In the end, he failed on both counts. The parallels to Merkel's situation -- a CDU that has been divided by her approach to the refugee crisis combined with the rise of a right-wing protest party -- are significant. But the end doesn't have to be the same. The Mecklenburg-Western Pomerania vote, after all, is only symbolically a debacle for Merkel. Her position as chancellor isn't (yet) at stake. Emotions over Reason But the returns on Sunday made clear that an increasing number of voters, at least in Germany's east, are turning their backs on the established, democratic party system. Furthermore, it doesn't seem to matter much if the economy is improving, cities are being renewed and the tourist sector is doing well, all of which are the case in Mecklenburg-Western Pomerania, which has been structurally weak since German reunification in 1990. And it is possible for a party to campaign on fears of refugees even in a state that very few foreigners call home. In short, emotions would seem to have triumphed over reason. Facts took a back seat. It is precisely here that the challenge lies for Merkel, a politician who has always staked her political success on clear arguments based on facts and figures. She will have to do more explaining and more communicating -- and she will have to embed her policies within an approachable, meaningful framework in order to keep her party behind her. She may also have to take a few rhetorical steps toward the CDU's Bavarian sister party, the Christian Social Union (CSU), which has been sharply critical of her stance on the refugee issue. That could include admitting that she has made some missteps. The CSU made it clear on Sunday evening that it wasn't interested in taking the pressure off Merkel. Senior party member Markus Söder spoke of the Mecklenburg-Western Pomerania vote as being a "wake-up call" for German conservatives. But his true meaning was clear: It was a wake-up call for the chancellor first and foremost. A Problem for Germany Indeed, the renewed success of the AfD is likely to intensify the CSU's anger with Merkel. Suddenly, German conservatives must now deal with a rising force to their right, a phenomenon similar to the one from which the SPD still hasn't found a way to recover. And like the Left Party, the AfD doesn't look as though it will be disappearing as a political force any time soon. The right-wing populists are on the rise in both Germany's east and west, and have proven adept at motivating non-voters as well as poaching voters from the CDU in addition to the SPD and even the Left Party. One of the primary emotions uniting this diverse mixture is outrage with the chancellor. Furthermore, in contrast to the Left Party, which has taken steps to leave its origins as a neo-communist protest party behind it, the AfD's strength lies in its complete rejection of the party system as currently constituted. It isn't interested in playing by the rules; it seeks to agitate and subvert. Indeed, it is a party that represents a danger to democracy. The problem represented by it isn't just one for Merkel. Nor is it only an issue for her conservatives. It is a problem for all of Germany.

227

URL: http://www.spiegel.de/international/germany/rise-of-populist-afd-a-problem-for-merkel-and- germany-a-1110954.html Related SPIEGEL ONLINE links: • Two Weeks in September: The Makings of Merkel's Decision to Accept Refugees (08/24/2016) http://www.spiegel.de/international/germany/a-look-back-at-the-refugee-crisis-one- year-later-a-1107986.html • Rise of the Populists: Austria a Step Ahead in Europe's Race to the Right (05/18/2016) http://www.spiegel.de/international/austrian-right-wing-has-lessons-for-europe-a- 1092653.html • Wrong Majorities: What Extremist Success Means for Democracy (05/18/2016) http://www.spiegel.de/international/world/editorial-what-extremist-successes-mean- for-democracy-a-1092573.html • Moscow's Fifth Column: German Populists Forge Ties with Russia (04/27/2016) http://www.spiegel.de/international/germany/german-populists-forge-deeper-ties- with-russia-a-1089562.html • AfD Head Frauke Petry: 'The Immigration of Muslims Will Change Our Culture' (03/30/2016) http://www.spiegel.de/international/germany/interview-with-frauke-petry-of-the- alternative-for-germany-a-1084493.html • Fury and the AfD: Inside the Revolt against Angela Merkel (03/21/2016) http://www.spiegel.de/international/germany/success-of-afd-populists-akin-to-revolt- against-merkel-a-1083147.html

228

Nouveau visage de l’immigration au Royaume- Uni, le Polonais a remplacé l’Indien LE MONDE | 05.09.2016 à 17h20 • Mis à jour le 05.09.2016 à 17h47

Rassemblement d’hommage à Arek Jozwik, un jeune Polonais tué a Harlow, à l’est de Londres, samedi 3 septembre. JUSTIN TALLIS / AFP Nombre de personnes nées en Pologne ou en Inde et habitant au Royaume-Uni, depuis 2004

Source : National Office of Statistics Les attaques et propos xénophobes se multiplient contre les Polonais au Royaume- Uni, renforcés par le succès du référendum sur le Brexit. Deux Polonais ont été agressés dans la nuit de samedi 3 à dimanche 4 septembre à Harlow, dans le sud- est de l’Angleterre, quelques heures après une veillée en hommage à un de leurs compatriotes, un ouvrier polonais tué en août. La Pologne a annoncé l’envoi en urgence de trois ministres à Londres. Lire aussi : Varsovie appelle Londres à lutter contre la xénophobie après le meurtre d’un Polonais Si les xénophobes s’attaquent désormais aux Polonais, c’est parce qu’ils sont devenus, en quelques années, la première communauté d’immigrés au Royaume-Uni, passant de 81 000 en 2004, année de leur adhésion à l’Union européenne, à 831 000 personnes

229 en 2015 (en comptant le pays de naissance). Depuis 2015, les Polonais supplantent même les Indiens (795 000 personnes). Au Royaume-Uni, les Polonais ont dépassé les Indiens L’Inde a pourtant très longtemps formé la première communauté immigrée du Royaume-Uni, suivie d’autres anciens territoires appartenant à la Couronne, comme le Pakistan, l’Irlande, le Bangladesh, l’Afrique du Sud ou le Nigeria. Davantage de Roumains que de Bangladais Ces pays d’origine sont désormais rejoints par certains pays d’Europe de l’Est, notamment la Roumanie ou la Lituanie. En 2015, pour la première fois, les 220 000 Roumains sur le sol britannique ont dépassé le nombre de Bangladais (217 000). Polonais et Indiens en tête de la population immigrée au Royaume-Uni Les pays de naissance les plus représentés sur le territoire (hors Britanniques) en 2015

Source : Office for National Statistics Ces nouveaux arrivants sont plus dispersés sur l’ensemble du territoire britannique : alors que 36 % des Indiens et 42 % des Bangladais vivent à Londres, seuls 20 % des Polonais résident dans la capitale britannique. Une forte immigration intra-européenne Les ressortissants de l’Union européenne (y compris d’Europe de l’Ouest, comme les Allemands, Espagnols ou Français) sont toujours plus nombreux à s’installer outre- Manche. Alors qu’ils ne représentaient qu’un quart de l’immigration nette en 2004, les Européens sont désormais presque autant que l’ensemble des non-Européens, selon l’Office national des statistiques britanniques. L'immigration européenne en hausse au Royaume-Uni

230

Migrations nettes vers le Royaume-Uni par nationalité d'origine (européens et non- européens) depuis 2004.

2009 ● Membres de l'UE: 58 000 personnes ● Autres pays: 184 000 personnes

Source : Office for National Statistics La maîtrise des flux migratoires et l’octroi d’aides sociales aux étrangers ont été des ressorts du vote pour la sortie de l’Union européenne (Brexit) en juin. Lire aussi : « Brexit » : l’immigration au cœur de la campagne En savoir plus sur http://www.lemonde.fr/les-decodeurs/article/2016/09/05/nouveau- visage-de-l-immigration-au-royaume-uni-le-polonais-a-remplace-l- indien_4992853_4355770.html#skcCl1ReTBUY9oAt.99

Accueil Et si l'Italie redevenait le problème de l'Europe ? Olivier Tosseri 05/09/2016 Matteo Renzi a sans doute commis une erreur en liant son sort personnel au résultat du référendum sur la réforme institutionnelle, prévu cet automne. Ses adversaires y voient une chance inespérée de le renverser. Au risque de replonger l'Italie dans la tourmente. Si la rentrée de Matteo Renzi est entièrement dédiée au séisme qui a endeuillé l'Italie, le président du Conseil n'oublie pas les échéances politiques et économiques qui se profilent....

231

Accueil Le Parlement britannique examine une pétition pour revoter sur le Brexit Les Echos 05/09/2016 Les parlementaires se penchent sur une pétition demandant un nouveau référendum sur le maintien ou la sortie du Royaume-Uni de l'Union européenne. Celle-ci a recueilli 4,1 millions de signatures. Les parlementaires britanniques ont examiné lundi une pétition signée par plus de 4,1 millions de personnes sur l'appartenance du Royaume-Uni à l'Union européenne. Toutefois, L'idée... Déficit : la bonne surprise de l’Insee Le déficit public 2015 de la France est révisé à la baisse de près de 1 milliard d’euros, et revient à 3,5% de PIB, grâce aux comptes sociaux. • Budget : vers une ristourne d’impôt sur le revenu • Comment les hausses d'impôts ont plombé le quinquennat Hollande • Valls veut "poursuivre la baisse de l'impôt sur le revenu"

Ingenico plonge en Bourse Le spécialiste français des terminaux de paiement a revu à la baisse ses objectifs concernant l’année 2016.

Bygmalion : Valls juge "insupportables" les accusations de "manoeuvre politique" La droite accuse l'exécutif de mener une "manoeuvre politique" contre Sarkozy.

232

Procès Cahuzac : le premier compte en Suisse ouvert pour "financer" Rocard L’ex-ministre du Budget a déclaré que son premier compte ouvert en Suisse en 1992 était destiné "au financement d’activités politiques".

i Plus d’un Français sur deux se sent menacé par la pauvreté La pauvreté et la peur d'y tomber se répandent de plus en plus, selon le dernier baromètre du Secours populaire. En savoir plus sur http://www.lesechos.fr/?UayvVhLHRcJJiiHM.99

L'ACTUALITÉ DU JOUR PAR Daniel Fortin @dafortin A NE PAS MANQUER Paradis fiscaux : le G20 durcit le ton En pleine affaire Apple, à qui l'Union européenne réclame 13 milliards d'euros d'arriérés d'impôts non payés en Irlande, les dirigeants du G20 réunis en Chine en ont remis une louche sur les paradis fiscaux, en menaçant d'établir une nouvelle liste noire des pays qui n'appliqueraient pas la règle des échanges automatiques de renseignements entre juridictions. C'est l'OCDE qui sera chargé de vérifier le respect des nouvelles normes internationales en matière de transparence. Les pays encore en faute après juillet 2017 seraient couchés sur la fameuse liste, avec le risque d'un impact très négatif sur leurs économies

233

Global Economy Global activity now led by the emerging economies by: Gavyn Davies In last month’s report on the Fulcrum nowcasts for global economic activity, we documented a marked pick-up in growth rates in many big economies, ending a prolonged period in the doldrums. At that time, global growth was running slightly above its trend rate, and the widespread nature of this improvement led us to ask whether the world economy might be approaching escape velocity for the first time since 2010. Although our answer to this question was “probably not”, the mere fact that we posed the question at all was seen as ridiculously optimistic by some commentators. The general view among economists seemed to rule out even a short term, cyclical upswing in activity in present deflationary conditions. The financial markets, however, have been more hopeful that a phase of moderate cyclical growth may be taking hold, after the powerful contractionary forces of the previous 18 months have started to abate. Global equities have risen by about 6 per cent since the upswing in world activity became apparent in June, and bond returns have been slightly negative. In August, we have received no confirmation that a cyclical upswing is gaining momentum. But nor has there been a significant decline in activity: the jury is still out Full details of the latest nowcasts are shown here.

Global activity close to trend… According to the latest nowcasts, global activity growth has dropped fractionally in August to reach 3.4 per cent, which is very close to the trend rate. Although this growth rate is not exactly exciting, it is better than anything seen since the oil shocks hit the world economy in mid-2014.

234

The main bright spot in the past month has been a bounce in the estimated growth rate in the UK, where the nowcast models have revised their view of the severity of the post- Brexit downturn. Another encouraging factor has been generally firmer growth in the main emerging economies, including emerging Asia and emerging Europe. Finally, the recessions in Brazil and Russia may at last be over.

Bleaker news has, however, been recorded in the US, where the economy once again seems to have failed to achieve a clear break above the recent 2 per cent growth “ceiling”. Meanwhile, Japan and the eurozone have been growing steadily this month, with little signs of a big change in either direction. Global activity buoyed by emerging economies…

235

The recent recovery has been especially pronounced in the emerging economies, where growth is now exactly at its 5.5 per cent trend rate. Fears of a hard landing in China have declined markedly, and the nowcast suggests that growth has been maintained at the firm rate of 7.8 per cent during August. The policy easing in China has clearly stabilised the economy for now, though the monetary stimulus is likely to abate in the rest of 2016. Meanwhile, the big global drag from very deep recessions in Brazil and Russia (that together subtracted 0.6 per cent from the global growth rate early in 2016) has now almost disappeared. The advanced economies may have dipped again…

In the advanced economies, growth has been running at about 1.5 per cent since mid- summer, though there has been a sharp dip in recent days that needs to be watched carefully. This could become worrying if it persists for a while longer. However, several factors suggest that the general improvement in the condition of the global economy since the low points were reached in 2016 Q1 should be maintained in the rest of 2016. Lower oil prices have finally resulted in much faster growth in real consumption in the AEs, notably in the US. From a policy perspective, monetary conditions have eased in response to the combined efforts of all the main central banks to counteract the loss of confidence that followed the Fed tightening last December. The tightening in global fiscal policy has now ended. The structural budget stance in the advanced economies will be slightly expansionary in 2016 and 2017, with Japan and the UK leading the way. In addition, many economies have reported a bounce back in manufacturing activity in response to a stabilisation in inventory levels. For example, in the US the net change in inventories subtracted 1.3 per cent from the annualised growth rate in in 2016 Q2, while the Q3 contribution from inventories is likely to be close to zero. The recovery in manufacturing has been picked up by many business surveys since mid year. The JPMorgan global manufacturing survey has risen by several points since mid- year, with consumer sectors leading the way. The Fulcrum nowcasts for the global

236 manufacturing sector also indicate that growth has rebounded to about 3 per cent, from 1-2 per cent earlier in the year. Asian growth has been particularly robust. Sharp rally in UK nowcast… The nowcast models place a lot of weight on business surveys, which provide early and generally accurate readings on big changes in global activity. However, there are occasions when changes in business and consumer sentiment can exaggerate the impact of an economic shock (eg the Mers outbreak in Korea in 2015), and it is possible that this has just happened in the UK. In the immediate aftermath of the Brexit referendum on June 23, business and consumer surveys collapsed, and the UK nowcast dipped sharply to -2 per cent for a short period. This was enough to persuade the Bank of England to ease monetary policy markedly in August, even though there had been little “hard” economic data confirming the downturn. This, and the sharp drop in sterling that followed the referendum, seems to have resulted in an improvement in economic sentiment, and recent surveys have rebounded. The nowcast has therefore risen to about 1.2 per cent, not far below the readings seen before the referendum. This does not necessarily mean that a post-Brexit recession in the UK can be ruled out. Although retail sales seem to have held up well, consumer activity in bigger ticket items, such as housing and autos, has clearly slowed, and business surveys still point to a significant decline in corporate investment in the coming quarters. Furthermore, the problems that could arise during the Brexit negotiations with the EU could damage sentiment further. A prolonged period of very low growth now seems the most likely outcome, but uncertainty surrounding this forecast is very large. Nowcasts differ for the US… The US nowcast recovered recovered markedly in June and July, touching 2.5 per cent for the first time since 2014. Since then, however, the upward momentum in the economy does not seem to have been maintained. According to the Fulcrum models, the growth rate has fallen back to 1.5 per cent, with much weaker business survey data damaging the estimate considerably.

We are not sure whether to pay much attention to this recent setback in the nowcast. Consumers’ expenditure growth, and consumer confidence, remains robust, and the labour market is firmer than it was earlier in 2016, despite the slight disappointment in

237 the September jobs data. Furthermore, the Fed’s own nowcasts (shown in the graph) are more optimistic about GDP growth in the 2016 Q3 calendar quarter, showing growth of 3.5 per cent (Atlanta) and 2.8 per cent (New York). At present, we would give the US economy the benefit of the doubt, but will be watching data particularly carefully in the run-up to the Federal Open Market Committee meeting on September 21.

https://www.ft.com/content/30b50798-dce3-30de-a931-91a1b2d4e141

238

G20 leaders urged to ‘civilise capitalism’ Summit warned of need to address voters’ concerns on globalisation

G20: nation leaders shaping tomorrow's global political landscape © AP by: Tom Mitchell, George Parker and Gabriel Wildau in Hangzhou Leaders of the world’s 20 largest economies have been warned that they must “civilise capitalism” as they seek to revive economic growth and address growing public scepticism about the benefits of free trade and globalisation. This year’s G20 leaders summit, which concluded on Monday in the eastern Chinese city of Hangzhou, was held in the wake of British voters’ decision to leave the EU and the rise of populist political candidates on both sides of the Atlantic. Officials present during closed-door sessions said US president Barack Obama, UK prime minister Theresa May and her Australian and Canadian counterparts emphasised the need to placate public discontent. According to the officials, Australian prime minister Malcolm Turnbull, a former Goldman Sachs banker, warned his peers of the need to “civilise capitalism”. “Growth has been too low for too long for too few,” Christine Lagarde, managing director of the International Monetary Fund, said at the conclusion of the summit. “There was also a determination around the room to better identify the benefits of trade in order to respond to the populist backlash against globalisation.” One G20 official said there was a high “degree of awareness” among heads of government that globalisation could be thrown into reverse. “It has taken the rise of populists across the world for them to realise this,” he said. “If we do not address the issue of fairness, [it] could endanger the global economy.” Another person involved in the discussions said that “it was a summit where leaders have been talking a lot more about people and less about economics”. Chinese president Xi Jinping helped set the tone of this year’s G20 meeting in a weekend address to business executives. “Development is for the people, it should be pursued by the people and its outcomes should be shared by the people,” Mr Xi said.

239

Jack Lew says leading economies are embracing fiscal stimulus “This is not just a moral responsibility of the international community,” he added. “It also helps unleash immeasurable effective demand.” The global economy is projected to expand just 3 per cent this year as its traditional engines of trade and investment sputter. Before the two-day meeting, the US government argued that a “public bandwagon” was growing to ditch austerity in favour of fiscal policy support. “Maybe the Germans are not absolutely cheering for it but there is a growing awareness that ‘fiscal space’ has to be used to a much greater extent,” agreed Ángel Gurría, secretary-general of the Organisation for Economic Cooperation and Development. China’s economy, the world’s second largest, is growing at its slowest rate in a quarter century. Chinese officials say they have room to boost fiscal spending given relatively low public sector indebtedness, but are putting more emphasis on structural “supply side reforms”. “Following the old road of relying purely on fiscal and monetary policy leads to a dead end,” Mr Xi said on Monday, adding that his government remained committed to cut domestic steel capacity by up to 150m tonnes by 2020 while eliminating a billion tonnes of coal production. https://www.ft.com/content/70732cf4-7368-11e6-b60a-de4532d5ea35

240

Indemnités prud'hommes: le nouveau barème indicatif va-t-il éviter la loterie? M.R. avec AFP, publié le 02/09/2016 à 17:03 , mis à jour le 05/09/2016 à 12:17 Il n'y aura pas de plafonnement des indemnités prud'hommes, ni de barème obligatoire instauré sous ce quinquennat. Maigre consolation pour les patrons: un référentiel indicatif, dont les montants sont désormais connus.

Le projet de décret prévoyant un référentiel indicatif (issu de la loi Macron) est finalisé. Il a été présenté au patronat et aux syndicats. istock

"Une aide pour les juges prud'homaux, mais pas un carcan". C'est ainsi que Manuel Valls justifiait il y a quelques mois le retrait du projet de loi Travail du plafonnement des indemnités prud'hommes dues en cas de licenciement abusif, pour lui préférer un référentiel indicatif. LIRE AUSSI >> Indemnités "exorbitantes" aux prud'hommes: un patron, ex-conseiller, raconte La loi Macron du 6 août 2015 prévoyait un tel référentiel optionnel et on était en attente du décret d'application. Il est enfin sur les rails et l'on connaît les montants retenus. Il est prévu un plancher d'un mois de salaire pour les nouveaux embauchés et jusqu'à 21,5 mois de salaires pour 43 ans d'ancienneté. Les montants de référence sont majorés d'un mois si le demandeur d'emploi est âgé d'au moins 50 ans à la date de rupture du contrat, ou en cas de difficultés particulières de retour à l'emploi du demandeur. Une application incertaine "Si les parties au litige en font conjointement la demande, l'indemnité est fixée par la seule application de ce référentiel", est-il indiqué dans le projet. LIRE AUSSI >> Conseil des prud'hommes: mode d'emploi Parallèlement, dans un second décret, le "barème de l'indemnité forfaitaire de conciliation" actuellement en vigueur est revu et corrigé. Lui aussi est indicatif et sert à calculer une "indemnité forfaitaire" lorsque les parties veulent mettre un terme au litige, en phase de conciliation. Il fixe deux mois de salaire pour une ancienneté inférieure à un an, et jusqu'à 24 mois de salaire pour au moins 30 ans d'ancienneté. Une seule vraie contrainte aujourd'hui

241

Le référentiel indicatif sera-t-il appliqué? Il en existait déjà un, mais les juges n'en tenaient pas compte, fixant librement les indemnités en fonction du préjudice subi. La pratique veut qu'un an d'ancienneté soit équivalent à un mois de salaire, en prenant en compte l'âge et l'ancienneté du salarié, la taille de l'entreprise et les difficultés à retrouver un emploi. Il n'y a qu'une seule obligation légale actuellement: un salarié de plus de deux ans d'expérience dans une société de plus de dix salariés doit percevoir une indemnité d'au moins six mois de salaire. Sur ce point, le nouveau référentiel indicatif propose trois mois de salaire pour deux ans d'ancienneté. Le barème, lui, fixe trois mois de salaire si le salarié justifie d'au moins un an d'ancienneté, "auxquels s'ajoute un mois par année supplémentaire jusqu'à huit ans d'ancienneté". Rappelons que la loi Macron instaurait un barème obligatoire basé sur l'ancienneté et la taille de l'entreprise, avec un plafond (27 mois) et un plancher (3 mois), mais que le Conseil constitutionnel l'avait censuré, jugeant qu'il y avait rupture d'égalité entre les salariés: pour un même préjudice, ils n'auraient pas été indemnisés pareillement selon l'effectif de leur société. + Plus d'actualité sur : Les prud'hommes: pour régler les litiges entre salariés et employeurs • Les prud'hommes après la loi Macron, ça donne quoi? • Indemnités "exorbitantes" aux prud'hommes: un patron, ex-conseiller, raconte • Conseil des prud'hommes: mode d'emploi, façon loi Macron http://lentreprise.lexpress.fr/rh-management/droit-travail/indemnites-prud-hommes-le- nouveau-bareme-indicatif-va-t-il-eviter-la-loterie_1826752.html

Indemnités "exorbitantes" aux prud'hommes: un patron, ex-conseiller, raconte Par Marianne Rey, publié le 01/09/2016 à 13:18 , mis à jour le 02/09/2016 à 10:01 Comment sont jugées les affaires aux prud'hommes? Qui décide du niveau des dommages et intérêts? Bruno Cahuzac, qui a siégé pendant quatre ans dans un conseil, livre un témoignage éclairant. Au cours de sa vie, Bruno Cahuzac a été tour à tour chef de rayon dans une librairie, gérant d'un bureau de tabac, guichetier puis directeur d'une agence bancaire, franchisé dans un réseau de ménage à domicile, et enfin, créateur d'un réseau de lavage de vitres chez les particuliers. Cette entreprise s'appelle Opali et elle se développe aujourd'hui en franchise et en succursale. Elle compte 35 salariés. Pendant quatre ans, de 2008 à 2011, Bruno Cahuzac a aussi mené de front une activité de conseiller prud'hommes, au sein du collège employeurs. Ayant pris du recul, l'homme livre sa vision de cette expérience. Pourquoi être devenu conseiller prud'hommes?

242

En débutant mon activité de franchisé, j'avais subi un prud'hommes qui m'avait coûté beaucoup d'argent. J'avais été condamné à 38 000 euros en première instance, 6000 euros en appel. Cela avait failli mettre mon entreprise naissante au tapis. J'ai eu envie de m'investir pour éviter des déconvenues à d'autres employeurs. LIRE AUSSI >> "Embarqué aux prud'hommes, condamné en appel: ne comptez plus sur moi pour embaucher" Et puis, je me suis rapidement compte que maîtriser le droit du travail était primordial pour développer mon activité. En devenant conseiller, j'allais en quelque sorte pouvoir me former. Une affaire vous a marqué? Une des premières affaires que j'ai eu à juger concernait un licenciement économique dans une agence immobilière. L'employeur s'était fait avoir sur une problématique de reclassement, un classique. L'erreur venait très clairement d'une méconnaissance de la loi, et non d'une volonté de nuire. Il a été condamné à 10000 euros de dommages et intérêts, s'ajoutant aux 10 000 euros d'indemnités légales. On m'a dit "10 000, ça va". Moi, je trouvais que pour quelqu'un qui avait trois salariés et qui était en phase de licenciement économique, c'était déjà beaucoup trop, il n'allait pas s'en sortir. Au fil des années, je suis devenu très critique sur le fonctionnement des prud'hommes. Les salariés ont besoin qu'on les défende, c'est certain. Mais le montant des indemnités accordées est parfois exorbitant. Vous dites être critique sur le fonctionnement des prud'hommes, c'est-à-dire? Au fil des années, les employeurs ont perdu le pouvoir. Il s'est instauré des pratiques tacites. Par exemple, le fait de ne jamais aller en départage pour des histoires d'argent, mais seulement pour trancher au fond. Ou encore le fait d'allouer systématiquement des dommages et intérêts pour le préjudice subi par le salarié, sans que ce dernier ne soit vraiment démontré. Il suffit par exemple que l'avocat dise que le salarié licencié n'a pas retrouvé d'emploi. Mais on ne lui demande jamais de le prouver par une attestation Pôle emploi! Voici un point crucial très peu étayé, alors qu'il va servir de base à la négociation entre le collège salariés et le collège employeurs. Justement, comment est décidé le niveau des dommages et intérêts? Conseillers du collège salariés et employeurs ne sont pas dans le même état d'esprit. Les salariés ont beaucoup de temps pour étudier les dossiers, puisqu'ils bénéficient d'heures de délégation. Ils sont rodés à la lutte syndicale. Bref, ils sont complètement investis et ne lâchent rien. Ce n'est pas le cas des patrons. Je considère qu'ils sont en partie responsables de la démesure des dommages et intérêts alloués parce qu'ils ne se battent pas à fond, comme ils le devraient. Ils ont de bonnes raisons. Pour certains, c'est le manque de temps. Mais on trouve aussi beaucoup d'entrepreneurs à la retraite et, dans ce cas, je me dis que c'est parce qu'ils n'ont pas la même perspective que quelqu'un en exercice. Ils relativisent un peu les choses, du fait de ne plus avoir de salariés à manager, et de ne plus avoir eux-mêmes l'épée de Damoclès des prud'hommes sur la tête. Du coup, ils sont moins virulents. Inutile de vous demander si vous auriez été favorable au barème obligatoire qui figurait dans la loi Macron avant d'être censuré par le conseil constitutionnel, puis dans le projet de loi Travail avant d'être retiré sous la pression des syndicats...

243

Un barème obligatoire aurait été une bonne chose. Mais je pense aussi que les organisations patronales pourraient agir de l'intérieur, en édictant leur propre barème et en donnant des consignes aux conseillers employeurs. LIRE AUSSI >> Loi Travail: les sept concessions de Valls pour faire passer la pilule Face à un collège salarié qui ne voudrait pas faire d'effort, ça serait direction départage, sans hésiter. Mais évidemment, le bureau de départage est déjà encombré, et aucune organisation ne veut être accusée de bloquer le système. Les employeurs accusent souvent les prud'hommes de partialité: ils ne condamneraient jamais les salariés. Qu'en pensez-vous ? C'est faux. Cette année, je viens personnellement de gagner un prud'hommes. Un ancien salarié contestait son licenciement alors qu'il y avait eu abandon de poste. Pourquoi il n'y a aucune partialité? Tout simplement parce que les conseillers n'ont d'autre solution que de suivre le code du travail et surtout, la jurisprudence, devenue, au fil du temps, délirante et hyper punitive pour les patrons. LIRE NOS CHRONIQUES >> Une journée aux prud'hommes Si on ne suit pas la jurisprudence, on est sûr de se faire retoquer en appel, alors à quoi bon? Et puis cela ne ferait que renforcer le discours assez violent sur le manque de professionnalisme des conseillers. Donc, la plupart du temps, on ne peut faire autrement que de condamner l'employeur. Surtout que, s'agissant du licenciement sans cause et sérieuse, le doute profite au salarié. L'accent mis sur la formation des conseillers prud'hommes, avec la loi Macron, vous semble-il pertinent? L'intention est louable, mais concrètement, ça ne sert pas à grand-chose. Vous passerez bien quelques jours à l'Ecole nationale de la magistrature, ce n'est pas cela qui remplacera un master en droit. LIRE AUSSI>> Infographie. Prud'hommes: comment ça marche (depuis la loi Macron) Ce que j'aurais trouvé idéal, c'est un vrai système d'échevinage aux prud'hommes, avec en permanence un magistrat professionnel pour épauler les conseillers. Ce n'est pas le système qui a été choisi. Tant pis.

+ Plus d'actualité sur : Carnets de prud'hommes • "L'entreprise n'y est pour rien si elle a eu un enfant" • Conseil des prud'hommes: mode d'emploi, façon loi Macron • Affaire "Merci patron!": les prud'hommes confirment le licenciement du salarié + Et aussi : • Les prud'hommes: pour régler les litiges entre salariés et employeurs • Indemnités aux prud'hommes http://lentreprise.lexpress.fr/rh-management/droit-travail/les-prud-hommes-vus-de-l- interieur-un-patron-ex-conseiller-raconte_1826036.html

244

ft.com/world August 31, 2016 6:12 pm US declares victory in G20 growth versus austerity debate Shawn Donnan in Washington

©Bloomberg Jack Lew, the US Treasury Secretary, has claimed victory in Washington’s campaign for the world’s leading economies to embrace fiscal stimulus, saying they had come round to longstanding US arguments to put growth before austerity. Speaking ahead of President Barack Obama’s final Group of 20 summit, which takes place in China later this week, Mr Lew said a “consensus” had formed around the US position on the need for countries to “use all policy tools” including monetary, fiscal and structural reforms. That, he said, was being reflected in new policy measures unveiled this year in Canada, China, South Korea, Japan and parts of Europe where governments were either boosting spending or delaying tax increases. More ON THIS TOPIC// G20 leaders urged to ‘civilise capitalism’/ G20 takes up global inequality challenge/ EM Squared Report calls G20 trade record ‘miserable’/ Ed Balls Finance ministers must focus IN WORLD// May, Merkel, Africa/ Climate fund on wrong track, says ex-chief/ Week Ahead Political Diary G20 faces globalisation backlash/ Apple cash, BP’s China deal, the City/ Get your essential guide to the impact of the UK-EU split every day by email. “The G20 is no longer debating growth versus austerity but rather how to best employ fiscal policy to support our economies, and increasingly how to make sure the benefits of growth are more widely shared, while continuing to focus on sustainable long-term fiscal policies,” he said on Wednesday. But at the G20 summit in Hangzhou, Mr Obama would also be pressing his counterparts to do more and to follow through on commitments made earlier this summer by finance chiefs. “More needs to be done, but we have made real progress,” Mr Lew said. The tussle over fiscal policy has been a regular feature of G20 summits in recent years with Germany in particular resisting pressure from the US and the International Monetary Fund to spend more to boost growth. An IMF clarion call earlier this year for co-ordinated action from the G20 to inject more life into a lagging global economy was quickly quashed by Wolfgang Schäuble, the German finance minister, who argued that the “debt-financed growth model has reached its limits”.

245

Mr Lew conceded that many G20 members were still not willing to join the “public bandwagon” on the need for fiscal action to boost growth. But their actions pointed to a change, he said, citing the UK’s decision to abandon fiscal constraints after the June Brexit referendum as one example. The G20 is no longer debating growth versus austerity but rather how to best employ fiscal policy to support our economies - Jack Lew The G20, he said, had proved its worth in the wake of that referendum with its co- ordinated response helping to calm financial markets. The US, he also said, remained confident that China was living up to its commitment to allow market forces to play a large role in determining the value of its currency, therenminbi. The tense US economic relationship with China and allegations that Beijing has over time manipulated its currency to gain economic advantage have again been a feature of this year’s presidential campaign. But Mr Lew said Washington was satisfied for the time being that China was living up to its commitments to give the market a greater role in setting its exchange rate. Market pressures were now pushing down the value of the renminbi, Mr Lew said, and the US needed to accept that. The real test of the leadership in Beijing’s commitment still lay ahead, however, and would come only when markets were pushing the other way and causing an appreciation of the Chinese currency, he said. https://www.ft.com/content/70732cf4-7368-11e6-b60a-de4532d5ea35

246

Necesitamos políticas contundentes para evitar la trampa de bajo crecimiento Publicado en September 1, 2016

Por Christine Lagarde El bajo crecimiento, el elevado nivel de desigualdad y el lento avance de las reformas estructurales son algunos de los temas principales que los líderes del G-20 debatirán en la reunión que celebrarán en Hangzhou, China, este fin de semana. Esta reunión tiene lugar en un momento importante para la economía mundial. El péndulo de las políticas podría inclinarse en contra de la apertura económica, y si no se adoptan medidas de política contundentes, el mundo podría registrar tasas de crecimiento decepcionantes por mucho tiempo. El año 2016 será el quinto año consecutivo con un crecimiento del PIB mundial por debajo de su promedio a largo plazo del 3,7% (1990-2007), y 2017 podría ser el sexto (gráfico 1). Desde principios de los años noventa, cuando los efectos de contagio derivados de la transición económica provocaron una desaceleración del crecimiento, no se ha visto un debilitamiento de la economía mundial por tanto tiempo. ¿Qué ha ocurrido?

En las economías avanzadas, el crecimiento real se mantiene casi un punto porcentual completo por debajo del promedio de 1990-2007. • Muchas siguen viéndose afectadas por los legados de la crisis, como el sobreendeudamiento público y privado, y el deterioro de los balances de las instituciones financieras. El resultado ha sido una demanda persistentemente débil.

247

• Cuanto más se prolongue el debilitamiento de la demanda, mayores serán las repercusiones sobre el crecimiento a largo plazo, dado que las empresas reducen su capacidad de producción y los trabajadores desempleados abandonan la fuerza laboral y sus aptitudes críticas se deterioran. La débil demanda también provoca una caída del comercio, lo que se suma al crecimiento decepcionante de la productividad. • Del lado de la oferta, la desaceleración de la productividad y las tendencias demográficas adversas están frenando el crecimiento potencial, una tendencia iniciada antes de la crisis financiera mundial. Y dado que las expectativas de que el crecimiento sea más vigoroso en el futuro próximo son mínimas, las empresas tienen aún menos incentivos para invertir, lo cual daña la productividad y las perspectivas de crecimiento a corto plazo.

Las economías emergentes también han experimentado una desaceleración, aunque con respecto a un nivel de crecimiento excepcionalmente rápido en la última década. Por lo tanto, esta desaceleración es más bien una vuelta a la norma histórica. La evolución dentro de las economías emergentes es bastante diversa. En 2015, por ejemplo, el PIB en dos de las cuatro economías más grandes de la región — China e India— creció entre 7%-7½%, mientras que se contrajo cerca del 4% en las otras dos, Rusia y Brasil. Sin embargo, existen factores comunes importantes: • Uno de ellos es el reequilibramiento de la economía china desde la inversión hacia el consumo, y desde la demanda externa hacia la demanda interna. Si bien una economía china estable que crezca a tasas sostenibles es, en definitiva, favorable para la economía mundial, la transición es costosa para los socios comerciales que dependen de la demanda china para sus exportaciones. También puede con el tiempo provocar brotes de volatilidad financiera. • El segundo factor, vinculado al anterior, es el fuerte descenso de los precios de las materias primas, que ha afectado negativamente al ingreso disponible de muchos países exportadores de materias primas. El ajuste de los países exportadores de materias primas a esta nueva realidad será difícil y prolongado. En ciertos casos, requerirá un cambio de modelo de crecimiento. El débil crecimiento mundial que interactúa con un aumento de la desigualdad está generando un clima político en el cual las reformas se estancan y los países recurren a políticas proteccionistas. En una amplia muestra representativa de

248 economías avanzadas, el ingreso del 10% superior aumentó en alrededor del 40% en los últimos 20 años, mientras que creció de manera muy moderada en los grupos de ingreso más bajo (gráfico 2). La desigualdad también ha aumentado en muchas economías emergentes, aunque el impacto en los pobres a veces ha quedado neutralizado por un sólido crecimiento general del ingreso. Es necesario aplicar medidas de política contundentes para evitar lo que podría convertirse en una trampa de bajo crecimiento. Estos son para mí los principales elementos de la agenda para reforzar el crecimiento mundial: • Primer elemento: El apoyo a la demanda en las economías que operan por debajo de su capacidad. En los últimos años, esta tarea se ha delegado principalmente en los bancos centrales. Pero la política monetaria está sometida a una presión cada vez mayor, dado que varios bancos centrales están operando con tasas de política monetaria que ya se encuentran en su límite inferior efectivo o cercanas a este límite. Esto significa que la política fiscal debe desempeñar un papel más importante. Donde exista margen de maniobra fiscal, las tasas de interés históricamente bajas brindan la excelente oportunidad de impulsar la inversión pública y actualizar la infraestructura. • Segundo elemento: Las reformas estructurales. Los países podrían hacer mucho más en este ámbito. Hace dos años, los miembros del G-20 se comprometieron a aplicar reformas que elevarían su PIB colectivo en un 2% adicional en 5 años. Sin embargo, en la evaluación más reciente, las medidas implementadas hasta la fecha equivalen como máximo a la mitad de esta cifra. Por lo tanto, es urgente aplicar más reformas. Los estudios del FMI muestran que las reformas son más eficaces cuando se focalizan en los ámbitos donde las brechas son más patentes y tienen en cuenta el nivel de desarrollo y la posición en el ciclo económico. • Tercer elemento: La revitalización del comercio mediante la reducción de los costos comerciales y la disminución de las barreras comerciales temporales. Es fácil culpar al comercio de todos los males que afectan a un país, pero frenar el libre comercio supondría paralizar un motor que ha permitido conseguir mejoras sin precedentes del bienestar en todo el mundo a lo largo de muchas décadas. Sin embargo, para que el comercio beneficie a todos, las autoridades económicas deberían ayudar a aquellos que se vean negativamente afectados a través de la recapacitación, el fortalecimiento de las capacidades, la asistencia profesional y la movilidad geográfica. • Por último, las políticas deben garantizar una distribución más amplia de los beneficios del crecimiento. Los impuestos y las prestaciones deberían reforzar los ingresos en los tramos inferiores y recompensar el trabajo. En muchas economías emergentes, es preciso fortalecer las redes de protección social. La inversión en educación puede mejorar la productividad y las perspectivas de los trabajadores de salarios bajos. • Hace falta valentía política para implementar esta agenda. Sin embargo, si no se toman medidas se corre el riesgo de revertir la integración económica mundial, y por lo tanto paralizar un motor que, durante décadas, ha creado y distribuido riqueza en todo el mundo. Este riesgo es, en mi opinión, demasiado grande. http://blog-dialogoafondo.org/?p=6739

249

Daily Morning Newsbriefing September 05, 2016 The beginning of the end It was a catastrophic day for Angela Merkel and her CDU. The party was relegated to third place by the AfD in the state elections of Mecklenburg-Vorpommern, Germany's most northeastern state, and everybody is blaming the chancellor and her immigration policies for the defeat. There are a number of similarities, but also differences, between Gerhard Schroder's agenda of economic reforms and Merkel's refugee policy. What they both have in common is that they were politically disastrous for their parties. We agree with the general interpretation of yesterday's defeat as a harbinger of Merkel's political demise. But don't hold your breath. We still think she is going to run in 2017, and end up forming a coalition government. But that outcome is a touch less certain today and, if it were to happen, the high point of the Merkel chancellorship is long past. Of that there can be no doubt. The big news yesterday was the AfD's second place in the state elections, after the SPD. The AfD even managed to surpass the CDU in parts of Merkel's own constituency of Rugen - not that this has any direct significance given the proportional nature of German elections. Here are the preliminary results. Note the zero seats for the three small parties are the result of a five percent voting threshold. % Seats

SPD 30.6 26 CDU 19.0 16 AfD 20.8 18 Left 13.2 11 Greens 4.8 0 FDP 3.0 0 NPD 3.0 0 The knives are already out for Merkel. The Bavarian finance minister Markus Soder - a man to watch in German politics - called the result a wake-up call for CDU/CSU, and demanded a reversal of Merkel's immigration policies. The CDU's result was weaker than in any of the polls, which is something that will make the party leadership nervous. The rebound of the SPD is interesting. The SPD is currently running a coalition government in the state together with the CDU, and was down and out in the polls six months ago. What seems to be working for the party is a combination of perceived competence at the regional level - the local PM is quite popular - and Sigmar Gabriel's parallel turn against TTIP and Merkel's immigration policies. Sebastian Fischer writes in Der Spiegel that this is not yet about Merkel's 2017 candidacy. But that moment is getting closer. The mantra for the CSU has always been never to be surpassed by a right-wing party. This has now happened for the first time. The row over Merkel's immigration policy is now certain to flare up again,

250 with only a year to go until the elections. Mecklenburg-Vorpommern has had a fairly robust economic performance, but that seems to count for nothing at a time when people are afraid of immigrants. His conclusion is pessimistic. The AfD is not going to disappear, and the party is not only a danger for Merkel herself, but also for the country at large. The CDU still has no obvious successor in place. What complicates matters now is Gabriel's U-turn on immigration policy, as he notes that SPD voters in particular are in danger of drifting to the AfD. While the government has toughened its immigration policy over the last year, the political effects of Merkel's decision to open the borders a year ago are only now beginning to come through. What is dangerous for her is the fact that the CDU may conclude that it can score a better result with a broadly similar leader, but less personally committed to her immigration policies. The next big event to watch out for are the regional elections in Lower Saxony next week, the state elections in Berlin the following week, and the CDU party congress on December 14-15. Merkel said she would only consider running again if she is re- elected CDU chair. This will be the big test. Our other stories We also have stories on Japan’s demands for Brexit; on the importance of MPS' recapitalisation; on the chances of having a Spanish government before Christmas; on the latest outburst over corruption in Spain; on fresh public safety concerns in Greece; on the latest round in supplementary pension cuts there; on Portugal’s tricky budget talks; and on Irish MPs debating the Apple ruling without knowing its content.

251

L'ACTUALITÉ DU JOUR PAR Henri Gibier @Hgibier A NE PAS MANQUER Irlande: une amende trop belle pour moi Trop beau pour moi. C'est la conclusion à laquelle est donc arrivé le gouvernement irlandais ce vendredi, après bien des tiraillements, face à la décision de la Commission Européenne d'obliger Apple à lui verser une amende de 13 milliards d'euros (14,5 avec les intérêts) - sanction de ses pratiques d'évasion fiscale. Une manne pour la petite Irlande puisque, comme n'ont pas manqué de le souligner certains experts, cela équivaut au budget annuel du service de santé national, justement en très mauvais état. Dublin fera appel conjointement avec la firme de Cupertino. Le PDG de cette dernière, , a aimablement qualifié de "foutaise politique" la position de Bruxelles. L'emploi en Irlande dépend trop des multinationales pour que le pays prenne le risque d'essuyer les conséquences de leur fureur. Il a fait de son taux d'impôt sur les sociétés, le plus bas d'Europe à 12,5%, un repère identitaire désormais aussi solidement ancré que la Guinness dans ses pubs.

Les vendredis qui contrarient Janet Janet Yellen, la présidente de la Réserve fédérale américaine, a quelques raisons d'attendre avec appréhension le premier vendredi de chaque mois où est publié le chiffre des créations d'emplois du mois précédent. Depuis qu'elle a affiché sa détermination à remonter ses taux, la femme la plus puissante des Etats-Unis doit sans arrêt repousser l'échéance du fait de chiffres décevants sur le front de l'emploi. Ce vendredi 2 septembre sacrifie à la tradition: 151 000 créations d'emplois en août au lieu des 180 000 attendues, et à nouveau les investisseurs doutent qu'une deuxième hausse des taux de la Fed interviendra dès septembre.

252

Pour Emmanuel Macron, François Hollande a fait « les choses à moitié » Le Monde.fr avec Reuters | 04.09.2016 à 06h09 • Mis à jour le 04.09.2016 à 14h15

« J’ai fait le choix de partir sans artifice et de manière apaisée », déclare Emmanuel Macron en parlant de sa démission du gouvernement le mardi 30 août. PHILIPPE LOPEZ / AFP « Je n’ai pas arrêté d’essayer, de proposer, de pousser, dit-il, mais si l’on veut réussir, on ne peut pas faire les choses à moitié, et malheureusement on a fait beaucoup de choses à moitié ! », affirme Emmanuel Macron pour justifier son départ du gouvernement dans Le Journal du dimanche de dimanche 4 septembre. L’ancien ministre de l’économie mentionne notamment son projet de loi sur les nouvelles opportunités économiques parmi ses points de désaccords avec le président de la République, François Hollande. « Le choix a été fait de ne pas engager une deuxième étape des réformes économiques comme je le proposais avec la loi Noé. Nous avons eu une autre divergence après les attentats et un dissensus sur la déchéance », ajoute-t-il. « J’aurais souhaité qu’on aille plus loin sur la politique européenne », poursuit M. Macron. Lire aussi : Hollande : « Emmanuel Macron m’a trahi avec méthode » Une candidature souhaitée par 45 % de Français Le fondateur du mouvement En marche ! ne dit pas s’il se lancera dans la course à l’Elysée tout en évoquant son objectif : « Que les idées progressistes soient présentes au second tour de l’élection présidentielle et gagnent. » Il ferait, en tout cas, un « bon » président pour 45 % des Français interrogés, selon un sondage Odoxa pour Le Parisien- Aujourd’hui en France. « Je dénonce le cynisme du système politique qui compte faire de la présence du Front national au second tour le marchepied de l’accession au pouvoir de tel ou tel camp, déclare également M. Macron. Je désapprouve ceux qui préfèrent préserver leurs appareils et leurs intérêts plutôt que de faire gagner leurs idées et la France. » Il fait, en particulier, référence à l’ancien président de la République Nicolas Sarkozy. « Sa vision de l’identité française est une forme de rabougrissement de la France. Il exprime la brutalité sociale, le cynisme, l’irresponsabilité dans sa politique européenne. Il dit défendre la laïcité au nom de l’unité du pays, mais ce qu’il propose fracture au contraire le pays et nourrit les communautarismes : c’est incohérent », juge M. Macron. Lire aussi : Macron démarre en trombe sa vraie-fausse campagne En savoir plus sur http://www.lemonde.fr/politique/article/2016/09/04/pour-emmanuel-macron-francois- hollande-a-fait-les-choses-a-moitie_4992192_823448.html#23a5srC7up2XeAfl.99

253

VOX CEPR's Policy Portal Research-based policy analysis and commentary from leading economists Reinventing IS-LM: The IS-LM-NAC model and how to use it Roger Farmer, Konstantin Platonov 02 September 2016 The concept of 'secular stagnation' asserts that unemployment remains high and output below potential because investors are pessimistic. This column presents a way to rethink the IS-LM model to include investor expectations. This 'IS-LM-NAC' model explains the slow recovery from the Great Recession, provides a theory-consistent explanation for secular stagnation, and suggests policy options to escape it. Larry Summers has argued that market economies may get stuck in permanently inefficient equilibria. He calls this 'secular stagnation' (Summers 2014). In this equilibrium, unemployment may be permanently ‘too high’ and output may remain permanently below potential, because private investors are pessimistic about the prospects for future growth. Our most recent research attempts to explain why secular stagnation occurs and how economic policy may be used to escape it (Farmer and Platonov 2016). In the wake of the Great Recession, macroeconomic orthodoxy is under attack. Paul Krugman (2011) has called for a return to the IS-LM model, an approach that was developed by Sir (1937). We are sympathetic to that call but we believe that the IS-LM model needs to be redesigned. We suggest a different way of thinking about the effect of monetary policy that we call the 'IS-LM-NAC' model. It is part of a broader research agenda (Farmer 2010, 2012a, 2012b, 2016a, 2016, 2016c) that studies models in which beliefs independently influence outcomes. In the IS-LM model high unemployment is a temporary phenomenon caused by sticky wages and prices. In contrast, in the IS-LM-NAC model, high unemployment is a permanent phenomenon caused by pessimistic beliefs. The IS-LM-NAC model The steady state of our model can be described by three curves: the IS curve, the LM curve and the 'no arbitrage condition' (NAC) curve (Figure 1). Figure 1 The IS-LM-NAC model

254

As in the conventional model, the IS curve shows all the combinations of output and the interest rate for which the goods market clears, and investment (I) equals savings (S). The LM curve shows all the combinations of liquidity (L) preference and the supply of money (M) for which the quantity of money demanded equals the quantity of money supplied. The NAC curve, positively sloped in output-interest rate space, is new. It reflects the 'no arbitrage condition' between physical capital and financial assets. It introduces a channel through which changes in beliefs about the stock market influence the current interest rate. When output is high, dividends are also high, and households receive a higher return for holding claims to physical capital. Competition between equity and government bonds causes the interest rate on treasury bills to also increase. Hence, the NAC curve slopes upward. Related// Rethinking macroeconomic policy, Olivier Blanchard/ Does fiscal policy matter? Is there a better way to reduce unemployment?, Roger Farmer, Dmitry Plotnikov/ Farewell to the natural rate: Why unemployment persists, Roger Farmer Animal spirits and the belief function New Keynesian macroeconomic policy is based on the assumption that prices and wages are ‘sticky’. We assume instead that expectations are ‘sticky’ as a way to explain the real effect of monetary shocks. Following Farmer (1999, 2013), we model this idea by introducing a 'belief function' as a new fundamental. The belief function is a forecasting rule used by households to predict the future. It need not, in general, implement a rational-expectations equilibrium but, in models where there are multiple equilibria, beliefs may be fundamental and rational at the same time. We impose the assumption that beliefs are rational, in the sense that the people in our model are not consistently fooled. In our model people form beliefs about the future value of their stock portfolio. We assume that this belief is sustained and self-fulfilling and we identify it with what Keynes called ‘animal spirits’. A permanent shock that raises animal spirits lowers the unemployment rate forever. A permanent drop in the unemployment rate is possible, because, using the Keynesian search model developed in Farmer (2012b), the labour market of our model contains many possible equilibrium outcomes. We call this property 'steady-state indeterminacy' and we resolve the indeterminacy with our assumption that beliefs are fundamental. Sticky prices and adaptive beliefs Even when the belief function is specified as a new fundamental, there are many feasible values for the price level, all of which are consistent with market clearing. We assume that the price level is set one period in advance, which is in line with empirical evidence. This assumption has nothing to do with menu costs or other barriers to price movements; as in Farmer (1991), it is one of many possible outcomes when the steady state equilibrium of our model is indeterminate. In the IS-LM-NAC model, the long-run effect of monetary policy depends on the way people form beliefs. We study a case we call 'persistent adaptive beliefs' in which people believe, correctly, that shocks to asset values are permanent. When people have persistent adaptive beliefs, monetary policy may have permanent effects on the unemployment rate. An unanticipated shock to the money supply increases the current value of equity capital. Participants in the financial markets believe

255 that this shock is permanent and they incorporate it into their belief of the future value of the stock market. The belief function translates a temporary monetary shock into a permanent belief shock that lowers the unemployment rate forever. In both European data (Blanchard and Summers 1986) and US data (King et al 1991) the unemployment rate is indistinguishable from a random walk. Beyer and Farmer (2007) find evidence that the money interest rate is cointegrated with the unemployment rate and (Farmer 2012, 2015) shows that the stock market is cointegrated with, and Granger causes, the unemployment rate. Our model provides a way to explain these observations. The IS-LM-NAC model can be used to understand how monetary policy influences employment and prices and it explains the failure of existing theory to understand the slow recovery from the Great Recession. It provides a theory-consistent explanation for the phenomenon of secular stagnation and a framework for understanding policies that may be used to escape it. References • Beyer, Andreas and Roger E. A. Farmer (2007) “Natural Rate Doubts”, Journal of Economic Dynamics & Control 31: 797–825. • Blanchard, Olivier J. and Lawrence H. Summers (1986) “Hysteresis and the European Unemployment Problem”, NBER Macroeconomics Annual, Vol 1. MIT Press, Cambridge MA: pp. 15-90. • Farmer, Roger E. A. (1991) “Sticky Prices”, Economic Journal 101: pp. 1369-1379. • Farmer, Roger E. A. (1999) The Macroeconomics of Self-Fulfilling Prophecies, MIT Press, Cambridge MA, 2nd edition. • Farmer, Roger E. A. (2010) Expectations Employment and Prices, Oxford, Oxford University Press. • Farmer, Roger E. A. (2012a) “The effect of conventional and unconventional monetary policy rules on inflation expectations: theory and evidence”, Oxford Review of Economic Policy, 28(4): pp. 622–639. • Farmer, Roger E. A. (2012b) “Confidence Crashes and Animal Spirits”, Economic Journal, 122: pp. 155-172. • Farmer, Roger E. A. (2013) “Animal Spirits, Persistent Unemployment and the Belief Function”, in, Rethinking Expectations: The Way Forward for Macroeconomics, Roman Frydman and , eds. Princeton New Jersey, Princeton University Press. • Farmer, Roger E. A. (2016a) “The Evolution of Endogenous Business Cycles”, Macroeconomic Dynamics, 20: pp. 554-557. • Farmer, Roger E. A. (2016b) Prosperity for All: How to Prevent Financial Crises Oxford, Oxford University Press. • Farmer, Roger E. A. (2016c) “Pricing Assets in an Economy with Two Types of People”, CEPR Discussion Paper 11253. • Farmer, Roger E. A. and Konstantin Platonov (2016) “Animal Spirits in a Monetary Economy”, CEPR Discussion Paper 11197. • Hicks, John (1937) “Mr. Keynes and the ‘Classics’: a Suggested Interpretation”, Econometrica, 5(2): pp. 147-159. • King, Robert G, Charles I. Plosser, James H. Stock and Mark W. Watson, (1991) “Stochastic Trends and Economic Fluctuations”, American Economic Review, 81(4): pp 819-840. • Krugman, Paul (2011) “IS-LMentary”, Conscience of a Liberal, New-York Times. • Summers, Lawrence H. (2014) “Reflections on the new 'Secular Stagnation hypothesis” Vox 30, October. http://voxeu.org/article/reinventing-lm-explain-secular-stagnation

256

Daily Morning Newsbriefing September 02, 2016 Is Vestager overreaching? We normally stay away from European competition cases, but the Commission's ruling against Apple is a hugely significant case that will not only strain relations with the US but also implicate all other EU member states directly in the dispute. The original press release contains the following important information (hat-tip to El País): If other countries were to require Apple to pay more tax on profits of the two companies [Apple Sales International and Apple Operations Europe] over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland. Let that sink in for a minute. If other member states decide to go after Apple for unpaid taxes, the amounts would be deduced from the €13bn due to Ireland in this week's ruling. So, does that mean that Ireland won't know how much money to demand from Apple until the other 27 member states have done their thing? Or that the other member states will have to go after Ireland to reclaim lost tax revenue? It's not hard to see the potential of a nasty dog fight ahead. Simon Coveney, Ireland's minister for local planning, seems to think Ireland does not have the right to the money until the dust settles. “This is money that is going to be going into a suspense account; we can’t access it until their is legal clarity around this judgment, which I think is flawed. Until this is resolved there’ll be no spending of this money.” One problem with EU competition rulings is that they involve confidential business information. But El País writes that the Commission fully intends to publish a non- confidential version as soon as possible - this could take months - and then encourage member states to use that public report to reassess Apple's past tax liabilities. The point is that the Commission is questioning the legality of Apple's practices to book all EU sales in Ireland regardless of where they took place, and the competition report details the sales in each of the countries. While the Commission recognises that "this structure is outside the remit of EU state aid control," it is clearly suggesting to member states that the information is there if they want to use it. Neelie Kroes, who was Competition commissioner until 2009, criticised 's attempt to rewrite EU tax laws raising questions of legal certainty and the rule of law. Kroes argued that state aid rules are designed to prevent member states from breaking their own rules and discriminating in favour of a company, rather than to question a state's sovereign right to determine its own tax laws. Our other stories We also have stories on the impact of the Apple ruling on Irish politics; on Austria as the next country to reject TTIP; on Sunday's state elections in Germany; on the merger of two German Landesbanken; on the economic programmes of the Republican candidates in France; on Greece trying once more to cancel self-employed pension arrears; and on the IMF eating its Brexit forecasts.

257

Corporate taxation Bruised Apple The European Commission’s assault on the technology giant is wrong Sep 3rd 2016 | From the print edition

FOR many, there is no question who is the hero and who the villain in this week’s tax confrontation between Brussels and Apple (see article). Gaming of cross-border tax rules has risen inexorably. Apple, with its abundance of intangible assets, which are easier to play around with, has been one of the cleverest at exploiting the gaps. A bill of €13 billion ($14.5 billion) plus interest, the amount that the European Commission says Ireland must recover from the firm for , would pay for all the country’s health-care budget this year and barely dent Apple’s $230 billion cash mountain. But in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant, at a time when big economies are meant to be co- ordinating their anti-avoidance rules. Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago. Back then, there was no reason for Apple to think it might one day fall foul of the state-aid rules. The firm shook hands with a sovereign government, which continues to defend the arrangement to this day. Even if the plan had been legally suspect at the time, it makes as much sense for subsequent penalties to fall on the country that offered it as on the company that took it. Either way, firms that invest in Europe will be entitled to wonder what other deals reached with governments can be unwound retroactively. Ireland itself is bridling at interference in affairs that are typically the province of EU member states. It is considering whether to appeal; Apple has said it will.

258

Better together By using new arguments to fire broadsides at deals done long ago, the commission is not helping the fight against egregious tax-dodging. Ireland and other obliging European states, such as Luxembourg and the Netherlands, have already succumbed to pressure to close several of the loopholes of the past. Last year the OECD, a group of rich countries, led the way on a set of guidelines designed to crack down on avoidance. By going it alone the commission risks stoking conflict, not co-operation. American politicians quickly branded the judgment a naked tax raid; in a white paper released before the commission’s verdict, America’s Treasury hinted ominously at retaliation. Some see a bright side. Money paid by Apple and other American firms to European governments will not go into tax coffers back home; the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely. The commission has lobbed a grenade; a tax war may result. http://www.economist.com/news/leaders/21706267-european-commissions-assault- technology-giant-wrong-bruised- apple?cid1=cust/ednew/n/bl/n/2016091n/owned/n/n/nwl/n/n/EU/n

259

Brad Setser Follow the Money Cross border flows, with a bit of macroeconomics What To Do When Countries With Fiscal Space Won’t Use It? by Brad Setser September 1, 2016 This isn’t another post about Germany. Rather it is about Korea, in many ways the Germany of East Asia. Korea has a current account surplus roughly equal to Germany’s—just below 8 percent in 2015, versus just over 8 percent for Germany. Like Germany, Korea has a tight fiscal policy. Korea retained a structural fiscal surplus throughout the global crisis (it relied on exports to drive its initial recovery, thanks to the won’s large depreciation in the crisis).* After sliding just a bit between 2012 and 2015, Korea’s fiscal surplus is now heading up again. Korea’s public debt is below that of Germany. And as I noted on Monday, Korea’s real exchange rate is well below its pre-crisis levels. So for that matter is Germany’s real exchange ate. According to the BIS, Korea’s real exchange rate so far this year is about 15 percent below its 2005-2007 average; Germany’s real effective exchange rate is about 10 percent below its 2005- 2007 average. The IMF—in its newly published staff report on Korea—recognizes that Korea has fiscal space, and encourages the Koreans to do a bit of stimulus. The IMF also, smartly, recommends beefing up Korea’s rather stingy social safety net. The Koreans though do not seem all that interested in spending more. Yes, there is officially a stimulus. But as the Fund notes it will be funded by “revenue over-performance”* rather than any new borrowing.** I think (based on footnote 26, on p. 18 of the staff report) that the “no new borrowing” stimulus is built into the IMF’s fiscal baseline. And that baseline, to my mind, should be characterized as an ongoing fiscal contraction. The central government’s surplus (using net lending and borrowing from table 2 of the staff report; other measures of the general government’s balance will show the same trend) rises from 0.3 percent of GDP in 2015 to 0.8 percent of GDP in 2016 and 1.0 percent of GDP in 2017. Korea’s external surplus is fairly clearly a function of policies that could be changed. Especially as Korea continues to intervene in the . Counting the rise in its forward book, Korea looks to have bought over $3 billion in the market in July. And by all accounts it also intervened in August. The IMF is pushing in the right direction. But, for now, with no real impact.

260

And that brings up another issue—sort of a pet peeve of mine. The IMF forecasts that Korea’s central government fiscal surplus will go up by about 2 percentage points between 2015 and 2020 (from 0.3 to 2.3 percent of GDP, using a measure that counts the surplus in the social security funds). The IMF generally believes that fiscal consolidation should raise a country’s external surplus (table 2, on p. 28). A 2 percent of GDP consolidation should—as a general rule, using the IMF’s standard coefficients—raise the current account surplus by about a percent of GDP. Yet the IMF is forecasting Korea’s current account surplus will fall by about 2 percent of GDP (from 7.7 percent of GDP to 5.6 percent of GDP) over this period. The issue is more general. The IMF is forecasting China’s (augmented) fiscal deficit will fall over the next five years. That directionally would tend to push up China’s external surplus. Yet the IMF is forecasting a significant fall in China’s current account surplus over the next several years (see table 2 and table 5). Japan is projected to do about two percentage points of GDP in fiscal consolidation in the IMF’s baseline forecast.*** Japan’s current account surplus is expected to be flat (it actually is forecast to fall a bit; see table 3). All this could happen. Fiscal policy alone doesn’t determine the current account (even if tends to be the biggest factor in the IMF’s own model). A boom in domestic demand, for example, would improve the fiscal balance and lower the current account surplus, just as a fall in private demand improves the current account balance while raising the fiscal deficit. And, well, a significant share of many countries’ current account is now coming from investment income earned abroad, and that can fluctuate in strange ways. But there is a potential adding up issue if all the large surplus economies in East Asia deliver on their planned fiscal consolidations. The first order impact of fiscal consolidation in all three should be a bigger external surplus in all three. By forecasting that away, the IMF runs the risk of understating the drag fiscal consolidation in East Asia might pose to global demand. * The data comes from the IMF’s WEO data tool, using either the series on general government net borrowing or the general government’s structural balance.

** The revenue over-performance smells a bit fishy to me. Revenues are basically where the IMF estimated they would be in 2015 (compare table 4 here to table 3.a here). The economy has if anything disappointed a bit. The Bank of Korea has eased. So it is hard to see why revenues over-performed unless they were initially under-estimated to build a bit of fiscal consolidation into the budget.

*** Although it isn’t clear that the Fund actually expects Japan do deliver on the planned consolidation, now that Japan has pushed back the hike — hence the Fund’s desire for a series of small consumption tax hikes. http://blogs.cfr.org/setser/2016/09/01/what-to-do-when-countries-with-fiscal-space- wont-use-it/

261

262

The IMF’s performance on financial sector aspects

of the euro area crisis The recently published in-depth evaluation of the International Monetary Fund (IMF)’s role in the euro area crisis highlights important contrasts in the area of financial services. The IMF provided highly valuable analysis and recommendations to the EU on its banking sector and related policies. In individual countries (leaving aside Cyprus and the second Greek programme, not covered by this evaluation), the financial-sector aspects of the IMF’s interventions were highly successful in Ireland and Spain, ambiguous in Greece, and a missed opportunity in Portugal. By: Nicolas VéronTopic: Finance & Financial RegulationDate: August 29, 2016 http://bruegel.org/2016/08/the-imfs-performance-on-financial-sector-aspects-of-the- euro-area-crisis/ The IMF’s role in the euro-area crisis: financial sector aspects Nicolas Véron reviews in-depth the role played by the IMF in understanding the financial-sector dynamics of the euro-area crisis. The IMF was the first public authority to acknowledge the role of the bank-sovereign vicious circle and to articulate a clear vision of banking union as an essential policy response. At national level, the IMF’s approach to the financial sector was appropriate and successful in Ireland and Spain, more limited in the Greek Stand-By Arrangement, and less compelling in Portugal. By: Nicolas VéronTopic: Finance & Financial RegulationDate: August 29, 2016 / http://bruegel.org/2016/08/the-imfs-performance-on-financial-sector-aspects-of-the- euro-area-crisis/ Does the euro area need a sovereign insolvency mechanism? The sovereign debt crisis shook the Euro to its foundations. It soon became clear that there was no mechanism to allow a tidy insolvency of a state wishing to remain inside the euro area. To face future crises, does the EU need a sovereign insolvency mechanism? Speakers: Jochen Andritzky, Lars Feld, Zsolt Darvas and Guntram B. WolffTopic: European Macroeconomics & GovernanceLocation: Bruegel, Rue de la Charité 33, 1210 BrusselsDate: July 12, 2016 Is Greek public debt unsustainable? Greek public debt does not look sustainable if the country has to return to market borrowing at the end of the third bail-out programme, but could be sustainable if preferential ESM funding continues in the long-term. Our advice is to offer hope for Greece in the form of delayed fiscal adjustment toward a target of 2.5% of GDP primary balance and adopt various measures to ease the debt burden, for the benefit of both Greece and its official lenders. By: Zsolt Darvas and Pia HüttlTopic: European Macroeconomics & GovernanceDate: May 7, 2016

263

Making the EU-Turkey refugee deal work The EU deal with Turkey reached on 18 March is problematic, but without a deal the EU’s external borders would have collapsed completely. Now the EU needs to support Greece and increase the number of refugees taken directly from Turkey. By: Guntram B. WolffTopic: European Macroeconomics & GovernanceDate: April 11, 2016 Greek bank recap The ECB published the comprehensive assessment of the four major Greek banks (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) yesterday, in line with what was agreed in the third bailout programme for Greece. This exercise will form the basis for the recapitalisation operation foreseen as part of the programme, which will need to be carried out soon. By: Silvia MerlerTopic: European Macroeconomics & GovernanceDate: November 2, 2015 Greece budget update - October The Finance Ministry of Greece has published the preliminary budget execution bulletin for September, covering the first 9 months of the year. It reveals a decline in the primary surplus, compared to the over performance recorded in recent months. By: Silvia MerlerTopic: European Macroeconomics & GovernanceDate: October 19, 2015 No lessons learned With the drag from austerity, the debt-deflation spiral, and a weak international economy, where does the projected Greek rebound come from? By: Ashoka ModyTopic: European Macroeconomics & GovernanceDate: September 23, 2015by this author Greece budget update - August The Greek finance ministry published last week the latest budget execution bulletin. The state budget primary balance increased significantly during July. Greece recorded a primary surplus of 1.6 billion euros in July, which takes the cumulated primary surplus for the first six months of the year at 3.5 billion euros, against a primary surplus target of 2.99 billion euros. This is the highest monthly value for the primary surplus since August 2014. By: Silvia MerlerTopic: European Macroeconomics & GovernanceDate: August 17, 2015 Greece: Lessons for Europe It was inevitable that Greece would have to make cuts. Yet, if it is ever to pay back its debts, what the country needs most of all is a growth strategy. By: Guntram B. WolffTopic: European Macroeconomics & GovernanceDate: August 13, 2015 http://bruegel.org/2016/01/greece-a-european-tragedy/

264

La Finlande va tester le revenu universel Les Echos 26/08/2016 560 euros. C'est le montant du revenu universel qui sera versé à 2.000 Finlandais choisis au hasard afin de mettre à l'épreuve le concept, si le projet de loi est accepté. Un revenu universel versé indifféremment à tous les citoyens. C'est l'idée que la Finlande mûrit depuis plusieurs mois, après la promesse électorale du premier ministre Juha Sipilä....

265

How Occupational Licensing Undermines Labor Fluidity Author: Ed Dolan · August 31st, 2016 A healthy economy requires a fluid labor market. Even when total employment and output are stable, the labor market is in constant motion. Jobs disappear when firms close or downsize. Other jobs appear when new firms open or old ones expand. People move freely from one job to another in search of career advancement or better fit between their work and their personal lives. Unfortunately, the US labor market is becoming less fluid. We can trace part of the decrease in fluidity to outside factors like an aging labor force and changing business practices, but much of it stems from ill-considered labor market policies. Of these, one of the most damaging is the spread of occupational licensing over recent decades. As we will see, Democrats and Republicans share the blame. How can we measure labor fluidity and why do we care? A paper by Stephen J. Davis of the University of Chicago and John Haltiwanger of the University of Maryland charts the decline in US labor market fluidity. Using data on quits, layoffs, and job openings from the Bureau of Labor Statistics, supplemented by other data sources, the authors construct three fluidity indicators: • The job reallocation rate is the sum of the number of jobs created at new and expanding firms each calendar quarter and jobs destroyed at firms that close or downsize. Newly created jobs include both those that are immediately filled and job openings that become newly available but not yet filled. • The worker reallocation rate is the sum of the number of hires, quits, and layoffs. It includes people who move directly from one job to another; those who move from a job into unemployment or out of unemployment into a job; those who leave a job and, at the same time, leave the labor force; and those who enter the labor force and immediately take a job. • Churning is the amount by which the worker reallocation rate exceeds the job reallocation rate. If people changed jobs only when their current job disappeared and took only newly created jobs, the rate of churning would be zero. The rate of churning, then, represents job changes that are motivated by career advancement opportunities or personal choices, rather than forced by job creation or destruction. The following chart from Davis and Haltiwanger shows that all three measures of fluidity have been decreasing in the United States. Their paper includes many more charts showing decreases in other measures of fluidity, decreases in underlying indicators like quits and hires, and decreases by state and demographic group. The decreases in fluidity have been widespread, but they appear to have affected men more than women and less educated workers more than those with college educations. Key

266 aspects of the decline in labor fluidity appear to be unique to the United States, or at least more pronounced here than in other advanced economies.

Other research is consistent with these findings of lower labor fluidity. For example, a study from the Federal Reserve, by Raven Molloy and colleagues, shows decreasing rates of interstate migration, summarized in the following chart:

In some respects, the decline in labor fluidity is a benign result of structural changes in the US economy. One such factor is the aging US labor force. Younger workers have much higher rates of churn and interstate migration as they move from job to job seeking a better match of their skills with employer needs. Another trend that is partly,

267 but not entirely, benign is a gradual shift toward larger and older firms, which have lower rates of employee turnover. In other regards, however, a more rigid labor market is a cause for concern. A decrease in opportunities to switch jobs makes it harder to match skills to the needs of employers. Longer spells of job search raise the unemployment rate. If workers who lose jobs encounter barriers to moving to new ones, they are more likely to withdraw from the labor force altogether, so labor force participation falls. Occupational licensing as a barrier to fluidity As recently as the 1950s, fewer than five percent of all jobs required an occupational license. Licensing, mostly administered at the state level, was largely limited to professions like law and medicine where the ability of consumers to judge the qualification of practitioners was low and the risk of harm from incompetent providers was high. Even at that time, occupational licensing had its critics. Milton Friedman was one. In a chapter on licensing in his book Capitalism and Freedom, based on a set of lectures that he delivered in 1956, Friedman wrote The overthrow of the medieval guild system was an indispensable early step in the rise of freedom in the Western world. It was a sign of the triumph of liberal ideas, and widely recognized as such, that by the mid-nineteenth century, in Britain, the United States, and to a lesser extent on the continent of Europe, men could pursue whatever trade of occupation they wished without the by-you-leave of any governmental or quasi- governmental authority. Friedman went on to argue that the supposed benefits of licensing are largely illusory while its costs, arising largely from the suppression of competition and innovation, are great. He explained why that was true even for the profession of medicine, where that case of licensing is superficially the strongest. More recent research, summarized in a 2015 White House report, agrees that the relation of costs to benefits is unfavorable for most occupational licensing. Unimpressive cost-benefit ratios are not solely the result of the high costs of licensing. The White House report notes that licensing frequently fails to deliver promised benefits because licensing boards are often lax about monitoring quality of incumbent practitioners or imposing disciplinary measures when consumers complain. That would be consistent with the hypothesis that boards are more interested in protecting practitioners from competition than protecting consumers. Today, despite critics’ warnings, licensing has spread to many relatively mundane professions like interior decorators, hair braiders, and florists, where the risk of harm to consumers is low and the remedy of refusing repeat patronage (supplemented by negative online reviews) would seem sufficient to weed out incompetent practitioners. One of the most outspoken contemporary critics, economist Lawrence Kleiner of the University of Minnesota, concurs with Friedman in comparing occupational licensing to medieval guilds in that the main purpose of both institutions is to drive up incomes of incumbent practitioners by limiting competition from new entrants. The following figure from the White House report shows that the share of the labor force requiring a state occupational license had grown to a quarter by 2008. Some researchers estimate that when federal and local occupational licensing is included, coverage rises to a third of all workers.

268

The fact that most licensing occurs at the state level creates strong barriers to interstate mobility for licensed workers. The next chart, from the same White House report, shows the difference in migration rates among professions. Qualifying for a license can take months, if not years, and require many thousands of dollars. In Minnesota, Kleiner notes, it takes more hours of classroom instruction to become a cosmetologist than to become a lawyer. Furthermore, requirements vary widely from state to state. For example, according to a study from the Institute for Justice, obtaining a license to braid hair requires 2,100 hours of coursework in South Dakota but just six hours in South Carolina, while 20 states do not license braiders at all.

Some categories of workers are more likely to be adversely affected by licensing than others. For example, the White House report notes that the burden is especially onerous for spouses of members of the military, whose requires more frequent relocation. As I noted in an earlier post, trade-displaced workers are another category especially likely to feel an adverse impact from licensing. Even those who did not previously work

269 in a licensed occupation can be affected. For example, the family of a displaced worker may become dependent on the income of a spouse who is a licensed manicurist or pest control worker. If the trade-displaced worker moves to a new state to get a factory job, the spouse may face requalification costs and a significant period out of work. Workers displaced by technological change, rather than trade, are in a similar position. Ex-offenders are still another group who are especially hard hit by licensing. Ex- offenders have difficulties finding jobs of any kind, but the fact that they are barred outright from many licensed professions further limits the number of jobs open to them. Best practices The White House report and independent researchers like Kleiner agree that certain best practices could reduce the impact of licensing on labor market fluidity without endangering consumers. Among those practices are limiting licensing to cases where there is a high risk of consumer harm from unlicensed practitioners, balancing the costs of licensing against its benefits in order to eliminate unduly burdensome requirements, and harmonizing licensing standards among states. As a small step in the right direction, the White House recently announced that it would provide $7.5 million in grants to organizations interested in working with states to reduce overly burdensome licensing and make it easier for licensed practitioners to work across state lines. Advocates of a best-practices approach to reform maintain that for many professions, certification rather than licensing could adequately protect consumers against shoddy work and outright fraud. Certification, like licensing, sets standards and informs consumers, but unlike licensing, it does not bar uncertified practitioners from entering the market. Certification is especially appropriate where consumers can easily change providers if they are not satisfied, and where the likelihood of severe harm from a single unsatisfactory experience is small. Suppose, for example, that you are looking for a yoga teacher. Some people might be content to rely on word of mouth or a penciled notice on a community bulletin board, but others might want some advance assurance that the person they hire really knows what they are doing. With that in mind, a national organization, the Yoga Alliance, maintains a register of yoga teachers and yoga schools that meet the organization’s standards. In the case of individual teachers, that means completing a 200-hour course of study at an approved school for an “RYT 200” designation or 500 hours for an “RYT 500” designation. The process, however, is entirely voluntary. The organization makes no effort to keep teachers or schools that do not meet its standards from competing with those who do. In fact, the Yoga Alliance actively opposes the efforts of some states to introduce mandatory licensing of yoga schools and teachers. First, the Alliance points out that yoga is an inherently safe activity—safer than many popular sports that face no licensing requirements. Second, it argues that yoga is so diverse that licensing would inevitably reduce consumer choice. Third, it maintains that government officials are not qualified to develop appropriate standards for a practice that has deep historical and spiritual roots. Who is to blame? Policy experts across the political spectrum support reform of occupational licensing. Who is to blame, then, for the fact that state legislatures regularly ignore calls for best practices? Can we point the finger at Democratic-controlled legislatures, wedded to an assumption that bureaucrats can make better decisions than consumers and markets?

270

Can we instead blame Republicans, quick to pander to lobbyists for protected professions? Neither party, it turns out, holds a monopoly on blame. Excessive licensing is endemic in red states and blue states alike—a case of bipartisanship gone bad. Since most licensing occurs at the state level, we can classify states as red or blue according to the makeup of their state legislatures. Here is what we get when we chart the percentage of the labor force subject to licensing (vertical axis) against the percentage of Republicans in state Senates and Houses of Representatives:

The slight positive relationship between licensing and Republican representation is not statistically significant. Interestingly, if we look at the two legislative branches together, licensing is slightly more widespread (23.6 percent of the labor force) in states with split legislatures than it is either in states where both houses are controlled by Republicans (21.3 percent licensed) or both by Democrats (20.7 percent licensed). At the extremes, the most licensed state is Iowa, where the legislature is split, whereas the two least licensed states are strongly Republican South Carolina and strongly Democratic Rhode Island.

271

The bottom line Occupational licensing, as currently practiced in the US, has few friends in the economics profession. Its most enthusiastic advocates would like to see it limited to occupations where the risk of substantial harm to consumers is great and the ability of consumers to make an informed choice among providers is limited. Its most persistent critics would like to replace it with simple certification or eliminate it entirely. Among economists, both advocates and critics agree that excessive licensing reduces labor market fluidity to the detriment of efficient resource allocation. State legislatures, however, are decidedly more license-friendly. Too often, incumbent practitioners of licensed professions, who benefit from the reduction in competition, have been better organized and more effective in their lobbying than consumers. However, there appears to be a growing awareness of the need for reform at the national level. Recent White House efforts to encourage research into best practices are a positive step. Prominent think tanks from across the political spectrum have also spoken out against the spread of licensing. Can a policy that is unanimously opposed by the conservative Heritage Foundation, the liberal Progressive Policy Institute, and the libertarian Reason Foundation last forever? http://www.economonitor.com/dolanecon/2016/08/31/how-occupational-licensing- undermines-labor- fluidity/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+eco nomonitor%2FOUen+%28EconoMonitor%29

Chris and the Ricardianoids (Wonkish) August 30, 2016 7:17 pm August 30, 2016 7:17 pm 81 I’ve been trying to parse the Jackson Hole paper from Chris Sims, on fiscal dominance of monetary policy, and am having something of a hard time. Sims suggests that it’s really a simple issue, obscured by the complexities of formal models; but I fear that he’s inadvertently given us a demonstration that formal models can actually be helpful as a check on verbal arguments that seem plausible but don’t actually hold up. This is, by the way, a problem I’ve encountered a fair bit when trying to talk with advocates of helicopter money, which is kind of where Sims is going. Just to be clear, I’m all for fiscal expansion under whatever excuse. I’m even reluctant to question arguments for helicopter money, lest my intellectual skepticism give ammunition to those still possessed by austerian instincts. But I do think I need to weigh in here regardless. Here’s Sims on fiscal policy: Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as fi- nanced by future inflation, not future taxes or spending cuts. I think he’s saying that fiscal expansion works only if it leads to a rise in expected inflation. Or maybe not – the truth is that I’m not sure, which is one problem with too purely verbal an argument. But it’s certainly something I’ve heard from helicopter money types, who warn that something like Ricardian equivalence will undermine fiscal expansion unless it’s money-financed. But this is a misunderstanding of Ricardian equivalence, on two levels. First, as I’ve tried repeatedly to explain, a TEMPORARY increase in government purchases of goods and services will NOT be offset by expectations of future taxes even if full Ricardian equivalence holds. The kind of argument people like Robert Lucas made sounded Ricardian, but wasn’t – it was Ricardianoid.

272

Second, less relevant to Sims but very relevant to other helicopter people, a deficit ultimately financed by inflation is just as much of a burden on households as one ultimately financed by ordinary taxes, because inflation is a kind of tax on money holders. From a Ricardian point of view, there’s no difference. So I’m trying to figure out exactly what Sims is saying. What, ahem, is his model? The little liquidity-trap model I devised way back in 1998 is forward-looking, does implicitly incorporate the government budget constraint, but doesn’t tell anything like Sims’s story. What is he doing differently, exactly? I’m confused – and I hope it’s not because I’m stupid. http://krugman.blogs.nytimes.com/2016/08/30/chris-and-the-ricardianoids- wonkish/?_r=0

BPEA Article: It's Baaack: Japan's Slump and the Return of the Liquidity Trap (Brookings Papers on Economic Activity, 1998, No. 2)

It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap Kathryn M. Dominguez, Kenneth S. Rogoff and Paul R. Krugman1998, No. 2 https://www.brookings.edu/bpea-articles/its-baaack-japans-slump-and-the-return-of-the- liquidity-trap/

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists

Macroeconomics and household heterogeneity Kurt Mitman, Dirk Krueger, Fabrizio Perri 30 August 2016 Previous research found that income and wealth inequality had little impact on the aggregate dynamics of consumption, investment and output. This reinforced the idea that we can study downturns in the economy using representative agents. This column argues that household inequality affects both the depth of a recession and the welfare losses of those affected by it. Therefore we should explicitly measure and model household heterogeneity when we consider the impact of business cycle fluctuations and the welfare consequences of economic crises. Related// The Great Recession was not so Great Jan van Ours/ during recessions //Jonathan Heathcote, Gianluca Violante, Fabrizio Perri The Great Recession of 2007-2009 was the major macroeconomic downturn of the postwar period. It happened when several measures of household inequality were at a postwar high. Is there a connection between these two observations? Did the high level of household inequality amplify and propagate the Great Recession? How are the welfare losses in an economic downturn, such as the 2007-09 crisis, distributed across households, and can social insurance policies mitigate these losses? In a well-known paper published in 1998, Krusell and Smith concluded that household income and wealth inequality had little impact on the aggregate dynamics of consumption, investment, and output. Their model economy had heterogeneous agents

273 and incomplete markets, and it behaved much like a model that used a representative household. This result has reinforced the continued use of representative agents when studying the macroeconomy. In a recent study, we revisited the importance of household heterogeneity for aggregate consumption and output dynamics (Krueger et al. 2016a). Unlike Krusell and Smith, we found that inequality has a significant impact on business cycle fluctuations. In other words, we find that micro heterogeneity is important for macro outcomes We also explored (Krueger et al. 2016b) how large downturns differentially impact household welfare depending on wealth, employment, and how social insurance affects those welfare losses. We find that the macro shocks can have a sizeable impact on household welfare and one that is different across the wealth distribution, in other words, macro dynamics are important for micro outcomes. Wealth inequality and consumption rate Table 1 shows some key facts about the US income, wealth and consumption distribution in 2006, just before the great recession. It is taken from the Panel Study of Income Dynamics (PSID), a household survey that has been running since 1968. It collects information about household wages, labour market outcomes, wealth, and comprehensive measures of household consumption expenditures. To construct the table, we sorted households by wealth measured as net worth (the value of all households assets, financial and real, including the value of a household’s home, subtracting all household liabilities such as mortgage debt). We report the share of economy-wide net worth owned by households in each of the five quintiles of the wealth distribution. The third and fourth columns summarise the share of disposable income and consumption for households at different points of the wealth distribution. The last column calculates the expenditure rate by wealth quintile, measured as the ratio of total consumption expenditure to total disposable income for each quintile. Table 1 Distribution of wealth, income and consumption by wealth quintile

Source: PSID. Clearly, wealth is extremely unequally distributed in the US. The bottom 40% of households hold no net worth at all, while the upper 20% hold 83% of total net worth. The highest wealth quintile holds a disproportionate share of aggregate income and consumption too. But despite holding virtually no wealth, the bottom 40% of households still account for close to 25% of aggregate consumption. As the last column of Table 1 shows, households at the lower end of the wealth distribution consume a larger share of their

274 disposable income. Therefore, we would expect their expenditures would to respond more strongly to a large and prolonged economic downturn. Did household inequality amplify and propagate the Great Recession? To investigate this, we constructed a standard macroeconomic model with aggregate shocks and household heterogeneity in incomes and preferences, using Krusell and Smith's method. But we ensured that our model had cross-sectional wealth and consumption distributions that replicate the PSID data. In our model, highly persistent income shocks, coupled with unemployment insurance, mean the bottom 40% in the model held no wealth, but made up a significant share of consumption. A group of especially patient households made up the top of the wealth distribution, and accounted for approximately 80% of all wealth in the economy. We then subjected our model economy, as well as an economy with much greater wealth equality, to the same large negative shock. This was a drop of total factor productivity of 4% relative to trend, expected to last 22 quarters. For the model with 2006-like wealth inequality, compared to an economy with little or no wealth inequality, the consumption expenditure recession on impact is half a percentage point larger, representing about $200 per capita,. Figure 1 illustrates this. Figure 1

This figure displays the consumption functions and wealth distributions from two models. 'KS' is based on the model economy studied by Krusell and Smith. It allows

275 only limited wealth inequality. On the other hand, our model's cross-sectional wealth distribution in 2006 is consistent with that in the data. The left-hand panel shows the KS economy, with consumption functions (plotted against individual wealth on the horizontal axis) for three combinations of idiosyncratic employment and aggregate productivity states. For a given wealth level, the vertical difference between the consumption functions for the employed in aggregate state Z = Zh (the blue dashed line) and the employed in aggregate state Z = Zl (the red dot-dashed line) gives the consumption drop in the Great Recession, conditional on not losing a job. In the same way, the vertical distance between the blue-dashed consumption function and the orange solid consumption function (for the unemployed in the recession) gives the consumption decline for those households that lose their jobs. The figure also shows the pre-recession wealth distribution, displayed as a histogram. The right-hand panel displays the same information, but for an economy that uses 2006 data. For a given level of wealth we can see that the drop in individual consumption in the KS economy in the Great Recession would actually have been larger than in the benchmark economy. This is mainly because the benchmark economy has a more generous unemployment insurance system that stabilises individual consumption. This is especially true for households with little wealth that lose their jobs at the onset of the recession. These larger individual consumption declines in the KS economy might suggest that the aggregate consumption recession is also larger for the KS economy than for the 2006 benchmark economy. This is not so. In the KS economy, the cross-sectional wealth distribution places almost no mass on households with very little net worth. In contrast, the benchmark model with realistic wealth inequality has many households at zero or close to zero wealth. For these households, the individual consumption losses are significant. This is especially true for newly unemployed households. Therefore the aggregate consumption recession is significantly larger when the bottom 40% of the population has close to zero wealth than in a more equal distribution. We would like to stress that the reason why the aggregate drop in expenditures is much larger in the economy with many low wealth consumers is not driven by the fact that low wealth households are ‘hand-to-mouth’ consumers, who cut their expenditure one- for-one as their income falls. It is instead explained by the fact that low-wealth consumers have a lesser ability to self-insure against idiosyncratic risk, so when the recession hits and unemployment risk increases, they drastically reduce their expenditure rates, even if their income has not dropped yet. Interestingly this is a prediction of the model, but is also observed in the PSID data. For example, in our work we document that over the course of the Great Recession, households in the bottom quintile of the wealth distribution reduced their expenditure rates by roughly 4 percentage points, while those in the top quintile only cut their expenditure rates by 2 percentage points. How are the welfare losses in an economic downturn distributed? The size of a public unemployment insurance (UI) programme affects the wealth distribution, but also the size of the individual consumption decline in a recession for a given wealth level. Holding the wealth distribution constant, a less generous system of UI (a reduction of the UI replacement rate from 50% to 10% in this case) amplifies the aggregate consumption recession by two percentage points. When the wealth

276 distribution responds to the policy change, three quarters of this amplification disappears. Figure 1 showed that the decline in individual consumption in the Great Recession would have differed strongly among households depending on their wealth levels and whether they lost their job. It therefore is likely that the welfare losses were unevenly distributed across the US population, and shaped by the size of social insurance programs such as UI. In the second part of our research, we showed that this is indeed the case (Krueger et al. 2016b). Using the same set-up described above, we tried a thought experiment: what share of lifetime consumption would a household be willing to give up to avoid seeing the macroeconomy slip into a 2006-style 'great recession'? Figure 2 summarises the results. The three panels differ according to the size of the UI system: a replacement rate of 50% in the left-hand panel, a replacement rate of 10% in the middle panel, and a surprise reduction of the UI replacement rate at the time of a great recession from 50% to 10% (think of UI benefits unexpectedly running out) in the right-hand panel. Each panel plots welfare losses from the economy falling into a great recession (red dashed line), losing one’s job (orange solid line) and the combination of both events, against wealth. Figure 2

We observe that these welfare losses are large (up to 8% of lifetime consumption), substantially larger if the UI system is small, and significantly larger for households with little wealth. If UI benefits are generous (see the left-hand panel) the aggregate component of the welfare losses is larger than the idiosyncratic component of losing

277 one’s job. Primarily this is because future unemployment risk goes up in aggregate downturns – even for households that have not yet lost their jobs, and we attribute this added unemployment risk to the aggregate welfare loss component. In the benchmark economy with realistic wealth inequality, aggregating across households, the welfare losses from the great recession were 2.2% of lifetime consumption; in the economy with limited wealth dispersion the losses were only 1.6%. This was mainly because the KS economy has few people with little wealth, and it is these households that suffer the most from experiencing a great recession. Taking both of our papers together, we conclude that measuring and modeling household heterogeneity explicitly is of crucial importance in macroeconomic research for two reasons. • The first is that macroeconomic dynamics are affected by the degree of underlying heterogeneity. In particular, an economy with a large fraction of low- wealth households will experience a sharper reduction in aggregate consumption expenditures in response to a given macroeconomic shock. • The second reason is that, in terms of welfare, the impact of a given macroeconomic shock is felt very differently in different segments of the wealth distribution. In particular, low-wealth households have limited capacity to insure themselves against idiosyncratic risk, and thus the welfare impact of a recession is significantly larger for them. As a consequence, ignoring wealth heterogeneity can severely underestimate the welfare cost of a large recession. References Krueger, D., Kurt Mitman and F. Perri (2016a), "Macroeconomics and Household Heterogeneity", CEPR Discussion Paper No. 11038. Krueger, D., Kurt Mitman and F. Perri (2016b), "On the Distribution of the Welfare Losses of Large Recessions", CEPR Discussion paper 11413. Krusell, P. and A. Smith (1998), Income and Wealth Heterogeneity in the Macroeconomy, Journal of Political Economy, 106, 867-896. http://voxeu.org/article/inequality-made-great-recession-worse-especially-poor

278

La malédiction du TGV David Barroux / Rédacteur en chef Le 28/08 à 21:43

Fabien Clairefond pour Les Echos - Fabien Clairefond pour Les Echos Habitués à voir les innovations majeures conquérir de plus en plus rapidement le monde, les Français n'ont jamais véritablement compris pourquoi leur superbe TGV n'avait jamais réussi à devenir un succès sur la scène mondiale. La commande à 2 milliards de dollars que viennent de signer les Etats-Unis auprès d'Alstom n'y changera sans doute pas grand- chose : trente-cinq ans après avoir séduit l'Hexagone, le train à grande vitesse reste bien plus une exception que la règle et la tendance tarde à s'inverser. À LIRE AUSSI • ANALYSE Pourquoi Alstom aligne les succès à l'export A peine quinze pays dans le monde (à commencer par le Japon, qui inaugura son Shinkansen dès les années 1960) ont fait le choix du rail à 300 km/h. Cet échec commercial est à première vue très surprenant. Pourquoi un produit efficace, sûr, utile et plébiscité par le public n'a guère connu de succès. La réponse est bien évidemment économique. Un problème de coûts Face au transport routier ou aérien, le train à grande vitesse reste une innovation particulièrement coûteuse. Plus que le matériel, ce sont les coûts en termes de génie civil et d'accès au foncier qui font grimper la facture. Le pire étant qu'à l'image de l'énergie nucléaire, dont les coûts montent avec le temps, la facture du TGV a elle aussi tendance à flamber avec les années. La Cour des comptes relevait ainsi l'an dernier que les coûts de construction des lignes à grande vitesse étaient passés de 4,8 millions d'euros le kilomètre sur l'historique axe Paris-Lyon à 26 millions aujourd'hui. Une multiplication par cinq en trente ans. Or, pour qu'une innovation se démocratise, il faut que les prix baissent. Il faut que les économies d'échelle générées par la hausse des volumes permettent d'attirer chaque jour plus de clients dans un cercle vertueux. Dopée à la loi de Moore, l'électronique conquiert de nouveaux marchés en étant de plus en plus performante pour un prix compétitif. Et dans des industries matures comme l'automobile, la croissance de la

279 demande et des volumes permet de faire baisser les prix et de démocratiser ainsi à la fois la voiture et des innovations comme l'airbag, la climatisation ou, demain, l'assistance électronique. Quand les politiques s'en mêlent Le TGV, lui, n'a jamais réussi à résoudre cette équation économique. Il est resté de ce fait un produit qui, à part sur quelques axes très fréquentés, ne peut guère se passer de subventions. Il est du coup plus souvent soumis aux règles des considérations politiques qu'à la loi du marché. En France, par exemple, les collectivités locales qui sont appelées à l'aide pour financer de nouvelles lignes exigent toutes leur gare ou une liaison directe par un TGV, même s'il roule 40 % du temps sur des tronçons à basse vitesse. Résultat, le TGV coûte cher et avance bien souvent à petite vitesse ou multiplie les arrêts qui le ralentissent. La vente de trains rapides aux Américains est donc une belle victoire pour Alstom, mais il y a peu de chances qu'elle change le cours de l'histoire et qu'elle soit le signe d'un véritable décollage de la très grande vitesse à la française. Il faut se réjouir de ce contrat. Pas en tirer des conclusions trop hâtives.

En savoir plus sur http://www.lesechos.fr/idees-debats/editos-analyses/0211235548395- la-malediction-du-tgv-2023211.php?Dhi4UU5eP4xXWIli.99

Salaires des cadres : le meilleur cru depuis 2012 Les Echos Le 29/08 à 07:08Mis à jour à 08:38

La progression du salaire des cadres est la plus forte depuis 2012 - Shutterstock + VIDEO Les salaires des cadres ont augmenté de 1,7% en 2016, hausse supérieure aux trois années précédentes mais « modérée », selon un baromètre publié lundi par Expectra, filiale du groupe Randstad. Modéré, mais mieux que ces dernières années. C'est en substance l'analyse à tirer des chiffres des salaires des cadres en 2016. La hausse est ainsi de 1,7% en 2016, une hausse supérieure aux trois années précédentes mais qui reste « modérée », selon un baromètre publié lundi par Expectra, filiale du groupe Randstad. D'après cette enquête basée sur plus de 74.500 fiches de paie de cadres, en CDI, CDD ou intérim, il s'agit de la sixième année consécutive de hausse et la plus forte progression enregistrée depuis 2012 par l'entreprise d'intérim et de recrutement.

280

Ce baromètre, dont c'est la 14e édition, analyse les rémunérations des cadres dans cinq grandes filières: informatique-télécommunications, ingénierie-industrie, comptabilité- finance, ressources humaines-juridique et commercial-marketing. Informatique et télécoms en pointe En 2013, 2014 et 2015, elles avaient légèrement augmenté: +0,5%, +0,9% et +1,2%, après un fort rebond en 2011 (+2,9%) et 2012 (+2,4%) qui faisait suite à deux années noires (-1,6% en 2009, -1,9% en 2010). Pour le directeur général d'Expectra, Christophe Bougeard, 2016 marque « une accélération en douceur » mais « même orientée à la hausse, la conjoncture manque cette année encore de vigueur pour avoir un effet d'entraînement significatif sur les rémunérations ». À LIRE AUSSI • Emploi des cadres : l'embellie se confirme et devrait durer jusqu'en 2018 au moins En 2016, le salaire médian annuel brut des cadres (la moitié gagne plus, l'autre moins) se situe à 42.816 euros pour l'échantillon étudié. Les plus fortes progressions sont enregistrées dans le secteur de l'Informatique et des télécoms (+1,9%). Trois métiers y affichent des hausses supérieures à 6%: chef de projet infrastructure (+6,8% à 41.710 euros brut), consultant maitrise d'ouvrage (+6,5% à 42.630 euros) et ingénieur développement (+6% à 38.300 euros). Les hausses les plus faibles concernent les métiers de la filière juridique et RH (+1%), où les salaires progressent légèrement moins qu'en 2015.

En savoir plus sur http://www.lesechos.fr/economie-france/social/0211236212497- salaires-des-cadres-le-meilleur-cru-depuis-2012-2023341.php?PXQvu6T35tPvQGy0.99

281

ft.com Comment Blogs FT Alphaville Monetary policy: it’s mostly fiscal Matthew C Klein | Aug 30 08:30 | Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation. –Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original) Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes. So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials: The reason standard economic models imply that interest rate increases reduce inflation is that they assume, usually implicitly, that an increase in the interest expense component of the budget calls forth, at least eventually, an increased primary surplus — revenues minus non-interest expenditures…This point remains valid if we reverse all the signs, and this is not so widely recognized. If in the face of low inflation the central bank lowers interest rates, demand increases and inflation rises only if the reduced interest expense component of the budget is expected eventually to flow through to a reduced primary surplus. A fiscal authority that, in the name of “fiscal responsibility”, maintains its primary surplus as the central bank cuts interest rates, undermines the effectiveness of monetary policy…Reductions in interest rates can stimulate demand only if they are accompanied by effective fiscal expansion. For example, if interest rates are pushed into negative territory, and the resources extracted from the banking system and savers by the negative rates are simply allowed to feed through the budget into reduced nominal deficits, with no anticipated tax cuts or expenditure increases, the negative rates create deflationary, not inflationary, pressure. The conceit is government budgets are set by people who don’t distinguish between spending on debt service and everything else. So when central banks make it more expensive for governments to cover their interest costs, the tendency is to cut back on other forms of spending and raise taxes. The result, according to Sims, is a slowdown in inflation. Focusing on the central bank action, rather than the change in the budget outlook, completely misunderstands the process. It also explains why central banks sometimes fail to achieve their objectives, or even make things worse, when they do what standard theory says they “should” do.

282

Sims cites the work of Eduardo Loyo, who argued Brazil’s hyperinflation in the 1980s was caused by the central bank’s decision to raise nominal interest rates significantly above inflation. As Loyo put it, “faster growth of nominal financial wealth, as implied by higher nominal interest rates, or higher expected fiscal transfers, both require higher inflation”. The budget deficit exploded because interest payments soared, which boosted the (nominal) spending power of households and businesses, which led to more inflation, which led to higher nominal interest rates, which boosted (nominal) purchasing power even further. (Sims blames the “dysfunctional” Brazilian budget process for this outcome, although it’s not clear why they should be blamed for what appears to have been an unforced error by the central bank. Incidentally, this story suggests Erdogan may have had a point when he said “the relationship between inflation and interest is cause and effect: the interest rate is the cause, inflation is the result”.) The Brazilian case also reveals why monetary stimulus in the rich countries has largely proven insufficient: central banks sent a clear signal to governments to live large, but governments failed to take the hint. As long as central bankers keep blathering on about “fiscal sustainability”, they will stay stuck in a world of too-slow inflation. Sims: In countries with near-zero interest rates and sluggish economies, central banks need to explain that fiscal, as well as monetary, policy should be aimed at meeting inflation targets. This means, specifically, stating that inflation will intentionally be at least part of the means for financing current debt and deficits…There is no automatic stabilizing mechanism to bring the economy back to target inflation and stay there, unless the commitment to true fiscal expansion at very low interest rates is widely understood. The euro area has done exceptionally badly because of its obsession with austerity and the repayment of debts by cutting spending and raising taxes — thanks Trichet! — while America’s “relative success” is attributed to the lack of commitment by officials to balance the budget. There are a few wrinkles to this story. For one thing, the Japanese government practiced exceptionally loose fiscal policy for some time, and has long been the subject of doom-mongers warning of imminent default or hyperinflation. Yet they have experienced slow and steady declines in prices for decades. (Sims attributes this to the recent unwise increase in the consumption tax, but ignores the longer history of Japanese fiscal policy in the 1990s.) And for another, we wonder how this story fits with the fact US inflation has exceeded the Fed staff’s forecast as of the end of 2010:

Did the longer-term outlook for deficits get “worse”?

283

Still, we can’t help but agree with the recommendation to “make clear that future fiscal contraction is conditional on reaching and maintaining inflation targets”. Related links: “I’m not in this world to live up to your [inflation] expections and you’re not in this one to live up to mine” — FT Alphaville The Fed wonders where inflation comes from — 2009 transcripts edition — FT Alphaville Economists agree: deflation is either good, or bad, or irrelevant — FT Alphaville What is the relationship between inflation and investment? — FT Alphaville This entry was posted by Matthew C Klein on Tuesday August 30th, 2016 08:30. Tagged with Brazil, Fiscal Dominance, Interest Rates, Monetary Policy, Turkey. http://ftalphaville.ft.com/2016/08/30/2173529/monetary-policy-its-mostly-fiscal/

284

Loi Travail : l'article dont personne ne parle Gael Chatelain / consultant en management/organisation et auteur Le 31/08 à 10:28

Loi Travail : l'article dont personne ne parle LE CERCLE/HUMEUR - Non, la loi Travail ne se résume pas au très contesté article 2 portant sur « la hiérarchie des normes ». Un autre article, moins connu, s'intéresse quant à lui au droit à la déconnexion. Oui, Myriam El Khomri pense à notre bien-être au travail. 123 articles et 100 pages d’un texte indigeste au possible. L’ennui et le sommeil m’assaillaient gravement lorsque, page 73 de la version de la loi publiée dans le journal officiel du 9 août 2016, mon intérêt est (enfin) titillé. La loi Travail parle du droit à la déconnexion numérique. Grande nouvelle, la loi de Myriam El Khomri, la ministre du Travail, ne se résume pas uniquement à l'article 2 sur la « la hiérarchie des normes » ! L’article L. 2242-8 du Code du travail est ainsi modifié. Attention, prenez votre respiration : « Les modalités du plein exercice par le salarié de son droit à la déconnexion et la mise en place par l’entreprise de dispositifs de régulation de l’utilisation des outils numériques, en vue d’assurer le respect des temps de repos et de congé ainsi que de la vie personnelle et familiale. À défaut d’accord, l’employeur élabore une charte, après avis du comité d’entreprise ou à défaut, des délégués du personnel. Cette charte définit ces modalités de l’exercice du droit à la déconnexion et prévoit en outre la mise en oeuvre, à destination des salariés et du personnel d’encadrement et de direction, d’actions de formation et de sensibilisation à un usage raisonnable des outils numériques. II. – Le I du présent article entre en vigueur le 1er janvier 2017. » Des sujets mis sur la table Dit autrement, toutes les entreprises vont devoir mettre sur la table le sujet du droit à la déconnexion avant janvier prochain ! Certes, il n’y a rien de coercitif dans cette loi puisque si aucun accord n’est trouvé, une simple charte pourra être mise en place. Mais, a minima, admettons que le fait d’obliger les entreprises à parler de ce sujet est déjà un progrès. En effet, les sujets suivants devront être abordés : 1) Quid des courriels après 19.00 ? Faudra-t-il, comme Volkswagen en Allemagne, fermer les serveurs entre 18.00 et 8.00 du matin ? 2) Quid des courriels pendant les vacances ? Faudra-t-il comme Daimler (encore en Allemagne) les supprimer totalement ? 3- Quid des ordinateurs portables qui peuvent, au final, être un fil à la patte du collaborateur ?

285

Lire aussi : > 5 bonnes raisons d'oublier ses mails pendant les vacances 4- Quid des téléphones portables professionnels qui finissent par se transformer en bureau mobile permettant de gérer courriels, SMS et appels pro quasiment H24/365 jours par an ? 5- Quid des vidéoconférences qui transforment son chez-soi en annexe du bureau ? Parler à son boss en sortant de la douche… pas toujours plaisant. 6- Quid des GPS sur les voitures de fonction ? Un droit bientôt reconnu, même s'il reste des progrès à faire Tous ces sujets deviennent critiques en entreprise. Les générations Y et Z ne peuvent pas s’en souvenir. Je vous parle d’un temps que les moins de 20 ans ne peuvent pas connaitre... un temps où ni le web, ni les ordinateurs portables, ni les smartphones n’étaient présents. Les ultra-connectés diront que tous ces outils ont grandement amélioré la productivité des collaborateurs. La réalité est toute différente. En supprimant la coupure quotidienne avec le travail, sans parler des vacances, le niveau de stress augmente et, in fine, l’implication et l’efficacité au quotidien s’en trouvent réduites. En France, on parle de 3,2 millions de personnes au bord ou en train de faire un « burn-out » ! Ne soyons pas naïfs, la loi Travail portée par Myriam El Khomri ne changera pas grand- chose à court terme. Cependant, même si dans la plus grande partie des entreprises, il n’y aura qu’une simple charte en lieu et place d’un règlement du type Volkswagen ou Daimler, a minima, le sujet sera mis sur la table et gageons que certaines d’entre elles saisiront cette occasion pour mettre en place une véritable politique du bien-être en entreprise, incluant le droit à la déconnexion, politique qui sera l’occasion pour elles de communiquer vers l’extérieur de façon positive en travaillant son image recruteur. De façon cynique, ce seront les entreprises en avant sur ces sujets qui attireront les meilleurs éléments. Un certain nombre d’entreprises ont déjà des chartes, mais, trop souvent, il ne s’agit que de déclaration d’intentions. Désormais, il s’agit de mettre la technologie au service du bien-être des collaborateurs. Trop de managers se disent « si mes collaborateurs répondent à mes mails la nuit, ce n’est pas de ma faute, je ne les force pas à le faire ». L’entreprise doit prendre le relai et couper les serveurs mails… faire en sorte que la technologie soit une opportunité, pas une menace. Gaël Chatelain est consultant en management/organisation et auteur

En savoir plus sur http://www.lesechos.fr/idees-debats/cercle/cercle-159978-ce-dont- personne-ne-parle-pas-sur-la-loi-el-khomeri- 2023852.php?cJLRe27vuiUfyYjX.99#xtor=EPR-3038-%5Bnl_ideesdebats%5D- 20160831-%5BProv_%5D-1998886%402

286

Nicolas Sarkozy : «Les entreprises seront le cœur de ma politique économique» Isabelle FicekNicolas BarréDominique Seux Le 31/08 à 19:10Mis à jour à 19:23

Nicolas Sarkozy. - Sebastien Valente / E-PRESS PHOTO INTERVIEW + VIDEO - L’ancien chef de l’Etat, candidat à la primaire de la droite, précise aux « Echos » ce qui le différencie du programme d’Alain Juppé sur l’économie. « Rien ne changera si l’alternance se limite à un exercice de retouche », estime-t-il. La démission d'Emmanuel Macron et son entrée dans la campagne ne risquent-elles pas de bousculer la droite ? Emmanuel Macron est le concepteur, l'auteur et l'exécutant des 50 milliards de hausses d'impôts intervenues depuis quatre ans. Durant ces quatre années, il fut le plus proche collaborateur de François Hollande, puis son ministre de l'Economie. Quand il vient dire qu'il faut baisser les impôts, chaque Français est en droit de le renvoyer à son bilan. Emmanuel Macron n'est ni de gauche, ni de droite. La vérité, c'est qu'il ne sait pas où il est. En 2007, vous aviez axé votre programme sur le pouvoir d'achat des ménages. Quelle sera la priorité économique pour la primaire, puis pour la présidentielle si vous l'emportez? Les entreprises seront le coeur de ma politique économique. L'objectif est de leur permettre d'être compétitives vis-à-vis de leurs concurrentes européennes. Pourquoi ? Parce que ce sont elles et elles seules qui créent des emplois. On ne peut pas sortir du chômage de masse si on ignore leurs besoins et leurs contraintes. Or, par rapport aux élections précédentes, non seulement le chômage est beaucoup plus élevé, mais ces contraintes n'ont cessé d'être alourdies, notamment sous l'effet des 50 milliards de hausses d'impôts et de taxes depuis 2012.RE AUSSI • Primaire de la droite : les projets passés au crible Les augmentations d'impôts ont été si massives sous le quinquennat actuel que dans mon esprit, les diminuer est la première des exigences. J'ajoute : de les diminuer immédiatement. La baisse massive des charges sociales doit intervenir dès juillet 2017 avec une enveloppe de 34 milliards d'euros. De quoi s'agit-il ? De remplacer les 17 milliards du crédit impôt compétitivité emploi (CICE) - une usine à gaz - par une baisse permanente des cotisations patronales et nous doublerons le montant sur les bas salaires. Les entreprises ne créent pas assez d'emplois

287

peu qualifiés. Or ce sont ceux-là qu'il faut soutenir, car ils représentent l'essentiel du chômage de masse. Alain Juppé propose des baisses de charges mais il y rajoute une baisse de l'impôt sur les sociétés... Tout mon projet économique est construit autour d'un ensemble de mesures qui seront immédiatement mises en oeuvre à l'été 2017 parce que toutes les entreprises, quelle que soit leur taille, les jugent urgentes et impératives pour relancer l'activité et l'emploi.SSI • INTERVIEW Alain Juppé : «Mon projet pour atteindre le plein-emploi» L'impôt sur les sociétés ne les concernent pas toutes, car par exemple une PME sur deux ne fait pas de bénéfice. Sa baisse sera engagée, dans le cadre de la convergence fiscale avec l'Allemagne, mais elle n'a pas le caractère d'urgence qu'ont, à mes yeux, les mesures que demandent absolument toutes les entreprises : baisse massive des charges pesant sur le travail, véritable réforme du marché du travail, liberté de sortie des 35 heures si elles le souhaitent, faire de l'entreprise le véritable niveau du dialogue social et de la négociation, fin du compte pénibilité, fusion des instances de représentation du personnel. Autre exemple d'un besoin exprimé par tous les entrepreneurs : que les règles de transmission d'entreprise ne soient plus un carcan. Je propose une exonération d'au minimum 85 %, à condition que l'activité soit pérennisée pendant au moins cinq ans. Ce qui vous différencie de votre principal concurrent à la primaire, ce sont des propositions de baisses d'impôts importantes en faveur des ménages. Je m'engage sur quatre points. Un : Je propose une diminution immédiate de 10% de l'impôt sur le revenu. Deux : la suppression totale des charges sociales sur les emplois familiaux à domicile. Trois : la fiscalité sur les revenus du patrimoine sera fixée à 26%, tout compris c'est-à-dire fiscalité et cotisations sociales confondues. Les revenus fonciers seront quant à eux soumis à un prélèvement forfaitaire libératoire sur option de 33,3 %, là aussi prélèvements sociaux inclus.À LIRE AUSSI • Sarkozy crée la surprise en prônant une refonte de la fiscalité de l'épargne Quatre : il y aura une exonération totale des droits de succession entre parents et enfants à hauteur de 400.000 euros par enfant. Ce chiffre n'est pas choisi par hasard, c'est le niveau allemand de la taxation sur l'héritage. Le patrimoine est le fruit d'une vie de travail qui doit pouvoir être transmis aux générations suivantes. Les Français sont-ils prêts à la suppression de l'ISF que vous préconisez ? Assumer la suppression immédiate de l'ISF correspond à mon exigence de vérité. Si on ne le dit pas avant, on ne le fera pas après. Et si on ne le fait pas immédiatement une fois élu, il y a peu de chance qu'on le fasse plus tard dans le quinquennat. On ne peut pas être les seuls en Europe, avec l'Espagne, à avoir l'ISF et à avoir une telle fuite d'entrepreneurs et de capitaux. On peut le garder, mais alors il faut sortir de l'Europe. Ceux qui veulent le conserver ou promettent une suppression, mais pour plus tard, vont continuer d'enrichir la Belgique, le Luxembourg ou le Royaume-Uni. Quel est le coût total de ces mesures ? Une trentaine de milliards d'euros. Que faites-vous du prélèvement à la source de l'impôt sur le revenu qu'installe en ce moment le gouvernement ?

288

Je ne serai pas celui qui augmente les tâches administratives des entreprises. Comment peut-on leur promettre un allégement des charges et commencer par accroître leurs contraintes en leur demandant de faire le travail de l'administration fiscale? Il n'en est pas question.LIRE AUSSI • DOSSIER L'impôt à la source, mode d'emploi Ensuite, c'est une atteinte à la vie privée, l'employeur n'ayant pas à connaître la vie personnelle de ses salariés. Tout cela pour une simplification qui n'en sera pas une : de très nombreux contribuables devront quand même continuer à faire une déclaration chaque année, ne serait-ce que pour tenir compte des pensions alimentaires ou des crédits et des réductions d'impôts. Quelles économies mettez-vous en face pour financer ces priorités fiscales et avec quel calendrier d'application ? Tout sera voté dès l'été 2017. L'objectif, c'est 100 milliards d'économies. Ce sera la première fois qu'un gouvernement votera dès l'été suivant l'élection présidentielle, et dans le même temps, les mesures de baisse des dépenses publiques, de baisse des prélèvements obligatoires et une véritable réforme du marché du travail. Où les trouvez-vous ? Déjà, dans la suppression de 300.000 emplois publics : 150.000 dans la fonction publique d'Etat - et l'Education nationale sera naturellement concernée - et 150.000 dans les collectivités territoriales. La masse salariale est de loin le premier budget des administrations. Ce sont 7 milliards d'économies sur la durée du quinquennat. Tous les fonctionnaires devront travailler 35 heures, ce qui n'est pas le cas aujourd'hui, sans hausse de salaire. Mais nous allons aussi passer de 35 heures à 37 heures, payées 37. Il faut par ailleurs que les retraites dans le public soient désormais calculées comme dans le privé, et que s'y appliquent également les jours de carence. Le supplément familial de traitement, qui consiste au fond à bénéficier de deux dispositifs d'allocations familiales quand on est fonctionnaire, sera supprimé. Vos concurrents vont plus loin sur les retraites... En matière de retraite, ce qui compte c'est d'aller très vite, pas de promettre une borne d'âge qui est très ambitieuse sur le papier, mais qu'on ne ferait voter qu'au prix de concessions tant sur le calendrier que sur les contreparties qui annuleront une grande partie du rendement de la réforme. Je préfère aller très vite à 63 ans en 2020, puis 64 ans en 2025, car cela rapportera 17 milliards d'euros, plutôt que 65 ans avec un calendrier et un rendement inconnus. Par ailleurs, en matière d'assurance-chômage, nous engagerons des paliers de dégressivité des allocations chômage de 20% au bout de 12 mois et encore 20% au bout de 18 mois. Je reconnais que la mesure est sévère mais elle est indispensable pour inciter à la reprise rapide d'un emploi. Nous créerons aussi une allocation sociale unique, qui sera moins coûteuse que le RSA, la prime d'activité et les allocations logement réunies. Toute personne qui refusera deux fois un emploi ou une formation s'en verra privée. Nous supprimerons aussi l'aide médicale d'Etat et toute aide sociale non contributive pour les étrangers avant 5 ans de résidence en France. Le taux de remboursement de l'assurance-maladie baissera de 75% à 73%, ce qui restera le meilleur taux de

289 remboursement en Europe. L'autonomie des hôpitaux nous permettra par ailleurs de sécuriser une progression de l'Ondam à 1,75 % par an, soit 22 milliards d'économies cumulés sur le quinquennat. Choisirez-vous, comme vous l'avez fait voter en 2012, d'augmenter la TVA pour financer la baisse des charges ? J'y suis opposé. Lors de mon quinquennat, notre taux de TVA était inférieur au taux allemand. Or il est aujourd'hui supérieur. Si l'alternance doit se traduire par une hausse des impôts, notamment par rapport à nos partenaires européens, quelle sincérité y avait- il à critiquer le matraquage fiscal de François Hollande ? L'alternance doit être claire : les impôts devront baisser, et ces baisses d'impôts et de charges devront être financées par des économies de dépenses publiques. Faudra-t-il rester dans l'épure des 3% ? Pour Bruxelles comme pour nos partenaires européens et pour les porteurs de dette française, ce qui compte, c'est que l'on s'attaque à la cause structurelle des déficits, donc que l'on réduise massivement les dépenses publiques, et qu'on le fasse immédiatement dès l'été 2017. Ils attendent de nous que l'on vote les mesures difficiles dès le départ. C'est ce que je propose. J'ai une grande habitude des discussions avec nos partenaires. Je sais que ce qui compte pour eux, ce sont les actes et leur mise en oeuvre. Que voulez-vous réformer en matière sociale ? Nous voulons limiter le pouvoir du juge en matière de licenciement économique, de sorte qu'il ne se prononce pas en opportunité mais uniquement sur la légalité du processus. Les indemnités seront plafonnées, et la durée de la procédure limitée dans le temps. Je veux par ailleurs que l'entreprise soit le coeur du dialogue social. Toute entreprise aura la liberté à partir du 1er janvier 2018 de fixer librement la durée hebdomadaire de travail et donc le moment où commencent les heures supplémentaires : à 35 heures chez les uns, 37 chez d'autres etc. Je pose deux conditions. Premièrement, que ces décisions soient prises soit par un accord avec les syndicats soit par un référendum d'entreprise. Deuxièmement, que les salariés soient payés plus : si l'entreprise décide que la durée est de 37 heures, ce sera 37 heures payées 37 et au-delà, on passera au régime des heures supplémentaires, qui seront à nouveau défiscalisées. Il n'y aura par ailleurs plus qu'une seule instance de représentation du personnel, au lieu des trois actuelles, et elle ne sera obligatoire qu'à partir de 50 salariés. Enfin, il sera immédiatement mis fin au compte pénibilité, qui est une charge considérable pour les entreprises. La France peut-elle renouer avec une croissance forte ? Nous l'avions fait en 2011 avec 2,1% de croissance, ce qui prouve que c'est possible. La vérité, c'est que la France renouera avec la croissance forte lorsqu'elle cessera d'être le pays qui a les impôts et les dépenses publiques les plus élevés des grands pays d'Europe, le droit du travail le plus rigide, et tout un carcan de normes qui étouffent les entrepreneurs. Qu'est-ce qui vous différencie du programme d'Alain Juppé sur l'économie ? Trois choses. Je veux une baisse immédiate des impôts, Alain Juppé veut une augmentation de la TVA. Je veux baisser l'impôt sur le revenu car les classes moyennes n'en peuvent plus, Alain Juppé n'en veut pas. Troisièmement, je considère qu'il faut une

290

réforme profonde du dialogue social. Je veux mettre fin au monopole de présentation au premier tour des organisations syndicales. Sur la réforme, Alain Juppé préfère lui le statu quo. A mes yeux, rien ne changera véritablement en France si l'on limite l'alternance à un exercice de retouche, car la France a besoin d'une véritable transformation en matière économique. Sur d'autres sujets, il pense qu'il faut continuer comme cela. Dans le jeu stop ou encore, il est pour le encore, je suis pour le stop. Pierre Gattaz dit que l'on peut créer 2 millions d'emplois... Les Français ne croient plus dans ce genre de pronostics. Mais je suis convaincu que le plein emploi est possible, avec une politique économique focalisée sur les besoins des entreprises.IRE AUSSI • INTERVIEW Pierre Gattaz : «On peut créer 2 millions d'emplois en France» Que dites-vous aux Français qui s'inquiètent du monde économique qui vient ? Le monde d'aujourd'hui obéit à des règles simples : compétition, innovation, comparaison permanente entre les différents systèmes. C'est un monde d'arbitrages constants. La France est le pays des 34 Prix Nobel, des médailles Field, un pays qui compte près d'un million d'ingénieurs, un pays de tradition scientifique. La France est taillée pour ce monde ! A condition qu'on y applique la politique économique qui prévaut ailleurs et non pas que l'on s'entête avec des règles qui n'existent que chez nous. Cela passe par la suppression du principe de précaution remplacé par un principe de responsabilité, une loi qui débloque complètement l'université ou encore un changement des pratiques de l'administration vis-à-vis des entreprises. Trop de grands groupes ont quitté la France parce que les Pays-Bas ou le Royaume-Uni sont bien moins rigides. Le Brexit est par ailleurs une chance. Je trouve invraisemblable que l'ancien ministre de l'Economie, depuis le Brexit, n'ait pas pris de mesures pour attirer les start-up et la finance. Je propose par exemple que, comme à Londres, les sommes investies par les business angels dans les start-up soit défiscalisées à hauteur de 50 %. Vous parlez peu de climat... Si, mais en mettant en avant l'importance de la démographie dans cette question. Nous sommes 7 milliards, nous serons sans doute 10 milliards dans 30 ans et plus de 11milliards en 2100. Comment la planète doit-elle s'adapter ? Il y a urgence à réfléchir à cette croissance démographique. Que pensez-vous du début de campagne de la primaire, avec François Fillon qui cible vos mises en examen et veut lancer un débat sur la probité du monde politique ? Je ne répondrai à aucune attaque, car l'unité est la première condition pour réussir l'alternance. Et c'est d'ailleurs ce que me disent les Français sur le terrain. En savoir plus sur http://www.lesechos.fr/elections/primaire-a-droite/0211244766306- nicolas-sarkozy-les-entreprises-seront-le-coeur-de-ma-politique-economique- 2023948.php?M3CeJUIwYu5vmAOr.99#xtor=EPR-3034-%5Bnl_thematique%5D- 20160831-%5BProv_%5D-1998886%402

291

08/31/2016 06:40 PM China Heads West Beijing's New Silk Road to Europe By Erich Follath China is building new roads, railroads and pipelines from Central Asia to Europe in an effort to build new connections to the rest of the world. The results may be good for the Chinese -- but less so for the other countries involved.

Getty Images A street scene in Kashgar, on the western edge of China. Recently the city has become the starting point of an ambitious new trade-route project by the Chinese government. Ultimately, the Chinese hope to extend the trade route into Europe, a parallel of the historical Silk Road. In Kashgar, on the western edge of the Peoples' Republic of China, the view is reminiscent of the Bible and the days when the ancient Silk Road began to take shape here in the 1st century B.C. Today, the government plans to use Kashgar as the starting point for a new, global trade route -- but at this point, there is still little evidence of it. "Posh, Posh," the men shout on their horse-drawn carts, as they make their way to the meadow where drivers are selling camels. Potential buyers expertly reach into the animals' mouths to examine their health. The air is dusty and filed with the sounds of animals neighing, braying and bleating, as if the horses, donkeys and goats know that they won't stay tied up for long. Women, only a few of them wearing veils, walk through the chaos carrying sacks of apricots and raisins. The Sunday market in Kashgar, one of the world's largest, attracts several thousand livestock owners and traders to the oasis city on the edge of the Taklamakan Desert, near the high mountains of the Pamir and the Hindu Kush. It is a fascinating mix of ethnicities. Uighurs, wiry men with knives in their belts, are in the majority. There are Nomadic Kyrgyz wearing felt hats, and occasional light-skinned, green-eyed boys who

292 look like descendants of Alexander the Great. The market is policed by the region's true rulers, the Han Chinese.

REUTERS Bullet trains at a high-speed train maintenance base in Wuhan, China. China is spending billions on infrastructure, including on high-speed rail. There are plans for ambitious new lines from China to Kyrgyzstan and Kazakhstan that present enormous technical challenges for the builders. Here, people can still taste and feel the myth of the old Silk Road. On the edge of the market, an artist captures the past on old silk paper. He paints images of the ancient caravans that struggled through deserts and across high mountains beyond the Jade Gate Pass, passing through the Kashgar oasis on their way to cities like Samarkand, Bukhara, Tehran and Baghdad, or transferring their precious goods, in a relay race of sorts, to other caravans that continued to the Mediterranean and the Roman Empire. The caravans introduced silk and jade, ceramics, paper and tea to the Western world, and brought garlic and castor oil to the Far East. The Silk Road was a meeting place of world cultures and a missionary route for religions, first for Buddhism and later for Islam. When Mongolian dominance collapsed in the 14th century, the trade routes petered out. Massive New Project Xi Jinping, 63, the president of China and general secretary of the Communist Party, wants to revive the myth and build a New Silk Road, in large parts along the old trade route. It would mark the return of a legend. For some time now, many of his speeches have included references to "yi dai yi lu," or "a belt, a road." It is a gigantic project, and China envisions about 60 countries being involved, or about half of humanity. China wants to expand trade along the route and develop infrastructure. Beijing has earmarked $40 billion (€36 billion euros) for the project, to be invested in building new roads, and in railroads, pipelines and ports from Lithuanian to the Horn of Africa, Sri Lanka to Israel, and Pakistan to Iran. Two railroad lines lead to Germany, one from Zhengzhou to Hamburg and the other from Chongqing to Duisburg. In order to finance the massive project, the Peoples' Republic initiated the establishment of a financial institution: The Asian Infrastructure Investment Bank (AIIB). For years, Xi Jinping was displeased by the fact that Washington provided his country with little

293 say in organizations like the World Bank and the International Monetary Fund (IMF). In June 2015, 57 countries signed the charter of the AIIB, against the will of the United States. They included France, Great Britain and Germany. Everyone wants to be involved when the Chinese are planning big things. But what is Beijing trying to achieve with its Silk Road plan? Does the Chinese leadership want to promote economic development in nearby and faraway countries and "bring together" the world, as it insists in its government propaganda? Is it because Chinese companies need globalization to bolster their stuttering economy and create new export routes for surplus production of goods, as well as routes for importing oil? Or is the real goal to break the West's political dominance -- a plan, in a sense, to conquer the world? Beijing has deployed officials to work on the major project in Kashgar, where it is developing a new economic corridor. The high mountain road to Pakistan is being expanded, and when it is finished it will lead across the Khunjerab Pass to Gwadar, a port the Chinese are building from scratch on the Arabian Sea. Feasibility studies for ambitious new railroad lines to Kyrgyzstan and Kazakhstan are stacked on the engineers' desks. And although the proposed lines present enormous technical challenges, everything seems possible since the Chinese built a railroad line to Tibet, at altitudes above 5,000 meters (16,400 feet). It's clear that China's Communist Party is investing enormous amounts of money in its transit routes toward Central Asia and in new economic zones. The standard of living among Kashgar residents is rising, and tax-advantaged high-tech parks have created new jobs in the provincial capital of Ürümqi. The economy is growing at 9 percent in the Xinjiang Autonomous Region, outpacing growth in many other parts of the country. In return, Beijing expects gratitude and compliance -- mistakenly. For most Uighurs, there is something far more important than having a better choice of goods to buy: respect for their people and their religion, Islam. Instead, they often experience the opposite. Mosques are placed under video surveillance, Muslim men are no longer permitted to wear long beards, and Chinese officials force their children to break the fast during Ramadan. Economic and political elites welcome the opportunities brought by Beijing's financial injections, but the local population in Xinjiang view the new Silk Road, and the domination by Han Chinese that comes with it, with considerable skepticism. This is a recurring pattern, with concerns becoming even greater immediately beyond China's borders. Almaty, Kazakhstan Almaty, Kazakhstan Two airlines now serve the route from Ürümqi to Almaty, the biggest city in Kazakhstan. New roads and railroad lines now bridge the 1,500-kilometer (930-mile) distance between the two large cities. A is being established in the Chinese border town of Khorgas. China's neighbor plays a key role in the Silk Road strategy. It is no accident that Chinese leader Xi Jinping first mentioned the new project in Kazakhstan, in September 2013, during a meeting with Kazakh President Nursultan Nazarbayev. On the surface, at least, his host seemed enthusiastic about the project. He had his railroad minister

294 announce that the country would invest several billion US dollars in new trains and lines in the next five years. Nazarbayev, 76, the son of a shepherd and head of the regional Communist Party during the Soviet era, has been president of the independent Republic of Kazakhstan for a quarter century. He's an authoritarian ruler and ever since he built Astana, a new capital of glass-walled skyscrapers in the middle of the desert, the West sees him as a megalomaniac. Nazarbayev rules a country that is almost eight times the size of Germany but has a population of less than 20 million. He can afford extravagant projects because he controls massive natural resources, including oil, natural gas and uranium. So far, he has managed to sedate the population with revenues from these mineral reserves, but now Kazakhstan is also suffering from falling commodity prices. The per capita income, measured in dollars, has declined by half since 2013, and the economy is stagnating. Nazarbayev skillfully cooperates with the various major powers, allowing the Americans to exploit Kazakhstan's natural resources, making the European Union the country's biggest trading partner and cooperating with the Russians in the Eurasian Economic Union and in security groups. But he pays special attention to his country's "strategic partnership" with China. In recent years, pipelines have been completed to bring crude oil and natural gas from the Caspian Sea directly to the Peoples' Republic. The Chinese now control almost a third of Kazakh natural resources and are in the process of buying their way into the agricultural sector on a large scale. At the beginning of this year, Nazarbayev signed a law that granted foreign investors 25-year leases on real estate, triggering a storm of protest that shook the foundations of his power. "Down with the Chinese, Kazakhstan for the Kazakhs!" an agitated crowd chanted in a demonstration near the National Museum in late May -- despite the fact that Nazarbayev had already withdrawn the law by then and dismissed his economics minister. The public anger was directed against the alleged "selling out" of the country. A short time later, armed men attacked members of the national guard in the industrial city of Aktobe. Twenty-five people died in the ensuing firefight in early June. And the protests continue. For many Kazakhs, the new Silk Road is not a promise but a threat. This suspicion is especially palpable in the Korgas special economic zone on the border. On the Chinese side, new businesses sprang up, apartment buildings were built and luxurious shopping developed. On the Kazakh side of the border, only a few gas stations and kiosks are complete, and gaping empty lots alternate with giant garbage dumps. Kazakhs come to Korgas with the new fast train from Almaty, buy cheap Chinese goods "over there" and take the evening train home. But this minor border traffic is of little importance to Beijing. It is more interested in the big picture, and Korgas' important role as a hub through which trains roll on their way to Central Asia, Iran and, ultimately, Europe. The turnover of goods has reportedly doubled in Korgas since 2014. Bishkek, Kyrgyzstan Bishkek, Kyrgyzstan If there is anyone who is equally at home in China and Russia, the European Union and the United States, and who can evaluate the Silk Road project from a Central Asian

295 perspective, it is Djoomart Otorbaev, the former prime minister of Kyrgyzstan. After a year in office, he became an independent political consultant in the spring of 2015. Since then, he has spent his time as an intermediary between different worlds, regularly jetting back and forth between Beijing and Moscow, Astana and Brussels.

DPA Members of a Kyrgyz family pray for victims of the 2010 revolt in Bishkek, Kyrgyzstan. Anti- government protests at the time left dozens dead and hundreds wounded. Today, the country is more cosmopolitan, democratic and liberal than its neighbors. It is also a member of the Shanghai Cooperation Organization and the Moscow-dominated Eurasian Economic Union and is to play a key role in the new Silk Road project. Bishkek, a four-hour drive from Almaty on an upgraded highway, was a caravan station in the days of the classic Silk Road. Today the sleepy city, with its Stalinist architecture, feels like a vestige of the Soviet era. The image is misleading, because Kyrgyzstan is more cosmopolitan, democratic and liberal than its neighbors. The small country of nomads, with a population of 6 million, maintains good relations with the West, as well as with China and Russia. Kyrgyzstan is both a member of the Shanghai Cooperation Organization and the Moscow-dominated Eurasian Economic Union. "We are a poor country, wedged between the high mountains of the Tian Shan and the Pamir, without access to the sea," says Otorbaev. He praises his country's free election as "exemplary" but is critical of rampant corruption among the Kyrgyz elite. "For trade and tourism, we need every conceivable connection to the outside world, including open borders and transport routes. That's why we can only benefit from China's Silk Road project." He admires China for having lifted so many people from total poverty in the last few decades, more than any other country in the past. "But China should grant its citizens more freedom at home. And it shouldn't behave like an elephant in a china shop abroad." Otorbaev, trained as a physician, likes to dissect the situation in his native region. Whenever the Chinese overrun a place, he says, it goes like this: "They bring their own people, and they start by building what they want. And then if someone demands a

296 permit, they bribe the relevant officials." But Beijing cannot succeed in the long run if it continues to exploit its status as the economically stronger country. "The Chinese lack soft power. They don't understand that if you want to succeed in the long term, you need to win over people's hearts." Still, he adds, senior Communist Party officials are at least listening to his criticism now, and this is progress, but it hasn't led to any consequences yet. A New Marshall Plan In an ideal scenario, the new Silk Road could become the biggest economic stimulus program since the Marshall Plan, with which the United States helped Germany get back on its feet after World War II. Russia should also benefit from the initiative. And Moscow, which needs investment during its current recession, is fundamentally interested in closer cooperation with the Peoples' Republic. Nevertheless, the Kremlin is deeply suspicious of an increasingly self-confident China. Russian President Vladimir Putin believes that Beijing aims to solidify its dominant political position with the Silk Road initiative. Iran and Turkey strongly support the Silk Road project. The first direct train from China arrived in Tehran in February to unanimous applause. The Peoples' Republic has long been the Islamic Republic's biggest export partner, and the Iranians are grateful to the political leadership in Beijing for supplying them with high-tech goods and allowing Iran to continue exporting its raw materials during the sanctions. Even today, after most economic restrictions have been lifted, Tehran is unwilling to place all its bets on the West and reportedly intends to remain loyal to Beijing when it comes to lucrative deals. Turkey takes a similar view of the situation. The normally self-confident Turkish president, Recep Tayyip Erdogan, is very accommodating to the Chinese. This may be because Turkey has few friends in international politics at the moment. And with an economy in crisis, billions from China come at just the right time. But the new Silk Road is experiencing the greatest and most surprising success in a region that its "classic" precursor never touched: Eastern Europe. Minsk, Belarus Minsk, Belarus The most exclusive five-star hotel in the capital of Belarus is called the Beijing, an ostentatious building with 180 rooms and a conference center that holds 500 guests. The hotel was a joint project by companies from both countries. The most popular restaurant in Minsk is also named after the Chinese city, and one of the items on the menu is baozi, dumplings filled with pork or bean paste. Cantonese pop rules in the karaoke bars along the city's ring road. More than 10,000 immigrant workers have come to Belarus from China in the last two years alone. Next to Ukrainians, they are the largest group of foreign workers. Air China recently introduced four nonstop flights a week from Beijing to Minsk -- an astonishing development, considering that the two cities are 6,500 kilometers (4,040 miles) apart, and Belarus has much closer historic and cultural ties to Russia. The Union State of Russia and Belarus is a defense and economic community, and in better times political leaders in Moscow and Minsk even considered merging the two countries.

297

But now the Chinese are gaining ground in Belarus, where they spare neither prestige nor effort, nor cost, to outdo their trade rivals from Russia and the EU. When Chinese President Xi Jinping paid a state visit to Minsk in May 2015, his Belarussian counterpart Alexander Lukashenko, 61, rushed to the airport to pick up his guest in person and greet him with bread and salt. Xi had joint ventures established in which the Chinese held at least one more decisive vote than the rest.

DPA The National Library of Belarus in Minsk. More than 10,000 guest workers have come to Belarus from China in the last two years alone. Next to Ukrainians, they are the largest group of foreign workers. The country has become an important bridgehead into Europe for Beijing. The most significant of these major projects is called "Great Stone." The site near the Minsk airport measuring roughly 80 square kilometers (30 square miles) is currently being developed into a giant industrial park. In phase 1 of the Great Stone project, forests are being cut down and bulldozers are digging deep into the ground. Large propaganda signs proclaim, in Russian, Chinese and English: "Time is Money, Organization is Life." Almost all the guest workers from the Far East work at the site, which will include company buildings, as well as schools, hospitals and housing for 170,000 people. The E30, the highway that connects Berlin with Moscow, passes nearby. It is quite possible that this route will eventually become an appendage of the new Silk Road, which will then lead to Beijing. Widespread Eastern European Interest As important as Belarus is as a new bridgehead in the region for Xi Jinping, he isn't putting all of his eggs in one basket. Last November, the Chinese president invited 16 Eastern European leaders to his hometown of Suzhou. It was the fourth summit meeting of its kind, and it took place largely without the participation of Western media. In China, however, the newspapers were filled with stories about the two-day meeting, which was celebrated as a milestone along the new Silk Road. And just as their hosts probably expected, all of the Eastern Europeans tried to secure a piece of the big pie -- irrespective of whether this could jeopardize their own strategic interests. In contrast to Central Asia, where some projects currently exist only on paper, many programs are already underway in Eastern Europe. Beijing reached an agreement with

298

Serbia and Hungary in which it is paying for a new high-speed train from Belgrade to Budapest. Chinese firms are involved in the development of hydroelectric dams in Croatia and Poland. In Lithuania, funds from Beijing are being used to expand the Klaipeda port. And in the wake of President Xi Jinping's visit in late March 2016, the Czech Republic is also entertaining dreams of a privileged strategic partnership. "I would like to see the Czech Republic become China's gateway to the European Union," Czech President Miloš Zeman said during the visit. Or will it become a gateway for something else? Aside from the Silk Road investments, China's state-owned companies are on an aggressive shopping spree, especially in the field of high technology. At the same time, the Communist Party uses protectionism to seal off Chinese companies in the Peoples' Republic from Western competition and harasses companies from the West. There is no sign of a unified EU strategy to combat this unequal treatment, or of a unified position on Beijing's Silk Road project. The Eastern European countries' rapprochement with the economic power from the Far East is viewed with suspicion in the EU. "It's our own fault if we in Europe do not speak with one voice," Chancellor Merkel said during a trip to Beijing last fall. Translated from the German by Christopher Sultan

DER SPIEGEL Completed and planned projects of China's New Silk Road initiative

URL: • http://www.spiegel.de/international/business/china-is-building-new-silk-road-to-central-asia-and- europe-a-1110148.html Related SPIEGEL ONLINE links: • Pacific War Games: Why China is Taking Part in US Military Exercises (08/17/2016) http://www.spiegel.de/international/world/china-takes-part-in-rimpac-military-exercises-with-rival-us- a-1106629.html • New Fences on the Old Continent: Refugee Crisis Pushes Europe to the Brink (03/04/2016) http://www.spiegel.de/international/europe/border-closures-spell-refugee-back-up-in-greece-a- 1080643.html • Interview with Chinese Artist Ai Weiwei: 'The State Is Scared' (05/20/2015) http://www.spiegel.de/international/world/spiegel-interview-with-chinese-artist-ai-weiwei-a- 1034661.html • Fahrenheit 1989: China Erases Memories of Tiananmen (06/06/2014) http://www.spiegel.de/international/world/how-china-is-erasing-memories-of-tianenmen-a- 973885.html

299

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Spain in the wake of the crisis: Reforms versus adjustment Ramon Xifré 29 August 2016 Spain implemented a host of structural reforms following the Global Crisis. But questions remain about whether the current economic condition is due to the reforms or to ‘automatic’ adjustment in public and private sectors. This column sheds light on these questions by examining changes in a set of economic indicators following the introduction of the reforms. Five stylised facts are presented that suggest limitations of the reforms. Much of the current climate appears to reflect inherent limitations of the Spanish economy. Related// Debt seniority and the Spanish bailout, Piero Ghezzi/ Why an ESM programme could be a kiss of death: Recovery values and subordination, Daniel Gros/ Can Spain and Italy export their way out of trouble?, Uri Dadush, Zaahira Wyne/ What's wrong with Spain?, Cinzia Alcidi, Daniel Gros/ Jobless in Spain: What can be done about the insider-outsider divide, Samuel Bentolila, Juan Dolado, Juan Jimeno Have the recent structural reforms implemented in Spain delivered? Can the country’s current economic condition be attributed to the effects of these reforms, or is it more the outcome of ‘automatic’ adjustments in the public and private sectors? By examining the stylised facts of Spain’s recovery, I seek to answer these questions and to contribute to the wider debate concerning the validity of existing economic models for predicting the impact of structural reforms. The goal is not to formally evaluate the impact of the reforms adopted in Spain since 2012, nor is it to establish claims of causality. More modestly, the goal is to examine the changes that have occurred in a set of economic indicators following the introduction of this set of reforms. Background The standard approach when evaluating the impact of structural reforms is to ‘translate’ them into shocks or parameter changes that can then be plugged into a model. Bouis and Duval (2011) is the classic reference in this regard. The European Commission (2016) – admittedly following a discussion of some of the method’s limitations – applies it when measuring the impact of actual reform measures in Italy, France, Spain, and Portugal. Similarly, the IMF (2016) examines the distinction between the short- and medium/long-term impacts of the two main reforms implemented in advanced economies — namely, labour and product market reforms. The literature typically understands structural reforms to be policy measures that increase competition, productivity, and labour force participation, while reducing unemployment, addressing market imperfections, and boosting all types of capital stock. Adhering to this definition, structural reforms are generally found to have a positive impact on GDP. In the case of Spain, the European Commission estimates that the main reforms included in its National Reform Programmes of 2013 and 2014 (as well as actually being adopted) could add around 0.2 percentage points a year to GDP growth. In the long run, this would mean additional increases in GDP of 1.3% by 2020 and 3.6% by 2035. As healthy as these estimates might appear, they are not as optimistic as those

300 reported in an earlier Commission study (Varga and in‘t Veld 2014), which adopted a different methodology in its attempt to identify the potential gains of structural reform. In this instance, it was assumed that Spain could halve the gap on the best performing countries and so add 6 percentage points to GDP growth in ten years. However, as the IMF (2016) acknowledges, structural reform policies need to be held up to closer scrutiny. First, Eggertsson et al. (2014) argue that in setups like the present one with the nominal interest rate at its lower bound, “reforms do not support economic activity in the short run” and, in the absence of an appropriate monetary policy, they “fuel expectations of prolonged deflation, increase the real interest rate and depress aggregate demand”. Second, Rodrik (2015) warns that, although the theory underpinning structural reforms looks simple (that is, opening up an economy to competition increases efficiency), real progress (i.e. moving from potential to actual GDP gains) usually requires targeting an economy’s specific ‘binding constraints’ rather than adopting incremental reforms. The case of Spain Given the wave of reforms introduced, Spain should be well on the road to recovery by now. Yet, this is not fully borne out if we consider the following stylised facts (Xifré 2016). Stylised fact 1 The falling trend in the Spanish current account balance was stemmed in 2009, before any significant structural reforms had yet been adopted. The same is true of most of the country’s price/cost competitiveness indicators (real exchange rates adjusted in a variety of ways). A case can be made for the fact that Spain’s subsequent recovery has been supported by domestic reforms and by the ECB’s change in monetary policy; yet, what remains beyond doubt is that the initial shift in trends was not a response to any policy action (Figures 1 and 2). Figure 1. Current account balance (percentage of GDP)

Source: IMF.

301

Figure 2. Real effective exchange rate vs Eurozone countries (EZ19) deflated by unit labour costs for the total economy (index 2000 = 100)

Source: European Commission. Stylised fact 2 The Spanish economy has certainly corrected some of its more acute imbalances, both external and internal. The financial sector is quite clearly in better shape now than before the crisis and public debt has abandoned the disastrous trajectory it initiated in 2009. The construction and real estate sectors have been significantly downsized and much of the loss in value added is being offset by exports. However, net exports of non- energy products represented just 0.5% of Spanish GDP in 2014. This figure has risen in recent years but it is still much lower than the corresponding figures for Germany and the Netherlands (both above 10% of GDP) and even that of Italy (5.3%). These gaps are a measure of the challenges Spanish firms face as they seek to internationalise. The size of the challenge is further highlighted if we break GDP growth down between domestic and external demand — as soon as domestic conditions improve, virtually all GDP growth is attributable to the growth in domestic demand. Stylised fact 3 It is in the labour market where reforms have been most actively and controversially implemented. Employment and unemployment in 2015 appear to be quite different conditions from what they were in 2008. Long-term unemployment has increased by a factor of four during the period, reaching 44% of total unemployment (Figure 3), while the percentage of the unemployed at risk of poverty or social exclusion has risen from 40 to 60% in the period. There has been net job creation in the three years following the 2012 reform, but for every two new temporary contracts created, one existing permanent contract is lost (Table 1, shaded column). The percentage of employed workers at risk of poverty or social exclusion, which remained stable between 2008 and 2013, has also increased in the last couple of years. Figure 3. Number of unemployed in Spain by length of job search (millions)

302

Source: INE. Table 1. Unemployment variation in Spain by type of contract (thousands)

Source: INE. Stylised fact 4 There is evidence that the boundaries of firms and the organisation of labour in the Spanish economy have been redefined. In 2015, for the first time since the crisis, net creation of business (including sole traders and all other company types) was recorded. However, it is the first time in recent records that the type of business contributing most to net growth is sole proprietorship. The number of joint-stock companies continues on a steady decline, while that of limited liability companies increases very slowly. It is too early to consider this the beginning of a trend, but it may well reflect a change in strategy, with some firms opting for smaller structures and an increasing reliance on outsourcing. Stylised fact 5 The number of companies performing innovation activities in 2014 is roughly half that in 2008 (43% in the case of technological and 60% in the case of non-technological innovation). This adds to the worrying behaviour presented by R&D spending, down

303 four years in a row in the public sector and six years in a row in the private sector. Spain is once again ‘different’ — the convergence of Spain towards EU and the Eurozone in terms of R&D intensity ceased in 2009. Conclusions Spain’s economy is recovering and some of the reforms implemented have contributed to this; yet, there are clear signs of the limitations of the reform agenda adopted to date. Indeed, initial improvements in competitiveness started ‘automatically’, before any major reform measures had been taken. Furthermore, there are no real signs that critical elements of the Spanish economy have changed significantly as a result of policy — as in pre-crisis Spain, GDP growth is basically sustained by domestic demand, net export levels are still well below what they should be, and the labour market looks, if anything, even more dual and precarious. Finally, there are a number of new trends that are giving cause for concern, not least the sustained reduction in the number of companies undertaking innovation. The causes of many of these problems run deep and a number of recent studies have examined how to remove the structural bottlenecks or ‘binding constraints’ (Rodrik 2015) that have come to typify the Spanish economy (see Andrés and Doménech 2015). More generally, the Spanish experience suggests that the models we use for estimating the impact of reforms, and for judging policies, need to be carefully checked against reality. References Andrés, J and J Doménech (2015) En busca de la prosperidad, Ed, Deusto. Bouis, R and R Duval (2011) “Raising potential growth after the crisis: A quantitative assessment of the potential gains from various structural reforms in the OECD area and beyond”, OECD Economics Department Working Paper 835. European Commission (2016) “The economic impact of selected structural reform measures in Italy, France, Spain and Portugal”, Institutional Paper 023. Eggertsson, G, A Ferrero, A Raffo (2014) “Can structural reforms help Europe?” Journal of Monetary Economics, 61: 2-22. IMF (2016) World Economic Outlook, April 2016: Too Slow for Too Long. Rodrik, D (2015) “The mirage of structural reform”, Project Syndicate. Varga, J, and J in 't Veld (2014) “The potential growth impact of structural reforms in the EU: A benchmarking exercise”, European Economy Economic Papers no 541. Xifré, R (2016) “Spain in the wake of the crisis: Reforms or adjustment?” IESE Working Paper 1141-E. http://voxeu.org/article/spain-wake-crisis-reforms-versus-adjustment

304

TRIBUNA Europa: reforma o divorcio Si los líderes europeos no toman decisiones los votantes lo harán por ellos; y puede que no les guste Joseph E. Stiglitz 28 AGO 2016 - 00:00 CEST Decir que la eurozona no ha tenido una buena actuación desde la crisis del año 2008 es una expresión eufemística que se queda corta. Los países miembros de la eurozona han tenido una mala actuación en comparación con los que, dentro de la Unión, no han adoptado la moneda única, y aún peor que el de EE UU, el epicentro de la crisis. Los países de la eurozona que peor lo han hecho se encuentran sumidos en una depresión o en una recesión profunda. En muchos sentidos, la economía en dichos países —piensen, por ejemplo, en lo que ocurre en Grecia— se encuentra en peor situación que la que sufrieron las economías durante la Gran Depresión de la década de 1930. Mientras los miembros de la eurozona con los mejores resultados, por ejemplo, Alemania, parecen estar en una buena situación, pero sólo cuando se los compara con los demás; por si fuera poco, el modelo de crecimiento de estos países se fundamenta parcialmente en políticas que empobrecen al vecino, mediante las cuales el éxito llega a expensas de los países que otrora se consideraron como "socios". Se han propuesto cuatro tipos de explicaciones para comprender este estado de las cosas. A Alemania le gusta culpar a la víctima, y apunta con el dedo en dirección del despilfarro de Grecia, así como hacia la deuda y los déficits del resto de los países. Sin embargo, estas acusaciones ponen el carro delante de los bueyes: España e Irlanda tenían excedentes y bajos ratios de deuda sobre PIB antes de la crisis del euro. Por lo tanto, fue la crisis la que causó los déficit y las deudas, y no al revés. El fetichismo relativo a los déficit es, sin lugar a dudas, causante de parte de los problemas que enfrenta Europa. También Finlandia ha estado atravesando problemas para adaptarse a múltiples shocks. Su PIB en 2015 fue un 5,5% menor que su máximo en 2008. Otros críticos pertenecientes al grupo de los que "culpabilizan a la víctima" citan al Estado de bienestar y a la excesiva protección del mercado laboral como causas del malestar de la eurozona. Sin embargo, algunos de los países con mejores resultados de Europa, como son Suecia y Noruega, tienen robustos sistemas públicos y cuentan con fuertes medidas de protección de sus mercados de trabajo. A muchos de los países que ahora tienen economías debilitadas les iba muy bien antes de la introducción del euro; iban creciendo por encima de la media europea. Su descenso no se produjo a consecuencia de un cambio repentino en sus leyes laborales, o debido a que les sobrevino una epidemia de pereza. Lo que sí cambió fue la moneda. El segundo tipo de explicación se resume en el deseo de que Europa tenga mejores líderes: hombres y mujeres que comprendan mejor la economía y con capacidad para implementar mejores políticas. Sin lugar a dudas, las políticas erróneas han empeorado las cosas —sin embargo, no sólo se debe echar la culpa a las políticas de austeridad,

305 sino también a las denominadas reformas estructurales que ensancharon la desigualdad y, por lo tanto, debilitaron aún más la demanda total y el crecimiento potencial. No obstante, la eurozona se constituyó por un acuerdo político, y era inevitable que la voz de Alemania resonase con mayor fuerza. Cualquier persona que hubiese negociado con los que decidieron las políticas alemanas los 30 años anteriores a la adopción del euro deberían haber sabido de antemano el resultado. Lo más importante que se debe puntualizar es que, dadas las herramientas disponibles hoy en día, ni el más brillante zar de la economía podría haber logrado que la eurozona prosperase. El tercer conjunto de razones causantes de los malos resultados de la eurozona llevan a una crítica más amplia procedente de la derecha, que se centra en reprochar la propensión que tienen los eurócratas por favorecer normativas que inhiben la innovación. Esta crítica tampoco da en el blanco. Los eurócratas, de la misma forma que las leyes laborales o el Estado de Bienestar, no cambiaron repentinamente en 1999, año en el que se creó el sistema de tipos de cambio fijos, o en 2008, el año en el que se inició la crisis. En un plano más fundamental, hay que considerar los niveles de calidad de vida. Cualquiera que niegue cuán mejor estamos todos en Occidente con nuestro aire y nuestra agua (que son sofocantemente limpios), debería visitar Pekín. Esto nos lleva a considerar la cuarta explicación: el euro tiene un mayor nivel de culpabilidad del que se puede atribuir a las políticas y a las estructuras de cada país de manera individual. El euro venía viciado de errores desde su génesis. Ni siquiera los mejores políticos podrían haber logrado que el euro funcionase. La estructura de la eurozona impuso la clase de rigidez que se asocia con el patrón oro. La moneda única despojó a los miembros de la eurozona del más importante mecanismo de ajuste —el tipo de cambio— y fue la eurozona la que circunscribió la política monetaria y la política fiscal. En respuesta a los shocks asimétricos y a las divergencias en la productividad, tendrían que haberse constituido ajustes en el tipo de cambio real (ajustado por la inflación), lo que significa que los precios en la periferia de la eurozona tendrían que haber caído con relación a los de Alemania y del norte de Europa. Pero, ya que Alemania tiene una posición inflexible con relación a la inflación —y sus precios se han estancado— el ajuste sólo podía lograrse a través de una desgarradora deflación en otros lugares. Típicamente, esto se traduce en un nivel doloroso de desempleo y en el debilitamiento de los sindicatos; los países más pobres de la eurozona, y especialmente los trabajadores dentro de ellos, se llevaron la peor parte de la carga del ajuste. Por lo tanto, esta fue la razón por la que el plan para estimular la convergencia entre los países de la eurozona fracasó rotundamente, haciendo que crezcan las disparidades entre y dentro de los Estados. Este sistema no puede y no va a funcionar a largo plazo: las políticas democráticas garantizan su fracaso. El euro sólo puede funcionar si se cambian las reglas e instituciones de la eurozona. Esto requerirá siete modificaciones: 1. Abandonar los criterios de convergencia, que exigen que los déficit sean inferiores al 3% del PIB; 2. Sustituir la austeridad con una estrategia de crecimiento, que deberá estar apoyada por un fondo de solidaridad para la estabilización;

306

3. Desmantelar un sistema propenso a atravesar crisis mediante el cual los países se ven obligados a tomar préstamos en una moneda que no está bajo su control, y fundamentarse, en cambio, en los eurobonos o en algún otro mecanismo similar; 4. Compartir de mejor manera la carga durante el ajuste, haciendo que los países que en la actualidad tienen excedentes de cuenta corriente se comprometan a elevar los salarios y aumentar el gasto fiscal, garantizando de dicha manera que sus precios aumenten más rápido que los precios en los países con déficit de cuenta corriente; 5. Cambiar el mandato del Banco Central Europeo, que en la actualidad se centra sólo en la inflación, a diferencia del mandato que tiene la Reserva Federal estadounidense, entidad que tiene también en cuenta el empleo, el crecimiento y la estabilidad; 6. Establecer un seguro de depósitos común, que evitaría la fuga de dinero desde los países que tienen resultados deficientes, así como otros elementos constituyentes de una "unión bancaria"; 7. Alentar, en lugar de prohibir, las políticas industriales diseñadas para garantizar que los países rezagados de la eurozona puedan ponerse al día y alcanzar a los países líderes de dicha zona. Desde una perspectiva económica, estos cambios son pequeños; sin embargo, los actuales líderes de la eurozona puede que carezcan de la voluntad política necesaria para llevarlos a cabo. Eso no cambia el hecho fundamental de que la actual situación de medias tintas sea insostenible. Un sistema destinado a promover la prosperidad y el progreso de la integración ha tenido el efecto contrario. Un divorcio amistoso sería una mejor solución que el actual estancamiento. Por supuesto, todo divorcio es costoso; pero, enmarañarse más sería aún más costoso. Como ya hemos visto este verano en el Reino Unido, si los líderes europeos no pueden o no toman las decisiones difíciles, los votantes europeos serán quienes las tomen en su lugar, y puede que no les satisfaga el resultado. Joseph E. Stiglitz es premio Nobel de economía, profesor universitario de la Universidad de Columbia y economista jefe de la Institución Roosevelt. Su libro más reciente es The Euro: How a Common Currency Threatens the Future of Europe. Traducido del inglés por Rocío Barrientos. © Project Syndicate, 2016. http://economia.elpais.com/economia/2016/08/25/actualidad/1472139345_956140.html

307

Milken Institute Review • ARTICLES THE END OF ALCHEMY The End of Alchemy book excerpt by mervyn king

Mervyn king's credentials don't generate much expectation that his new book would provide an insightful read. After all, retired senior civil servants rarely bite the hands that fed them well. Besides, King, who until 2013 was the governor of the Bank of England (the U.K.'s Federal Reserve), has been widely criticized for doing too little to prevent Britain's financial meltdown in 2008 and, after the fact, for moving too slowly to repair the damage. Thus, one might have expected The End of Alchemy* to be a tell- little defense of his role – one that added modestly to what we already knew. ¶ In fact, the book is full of surprises. It's a take-no-prisoners analysis of the failure of the global banking system and a call for radical change. And did I mention that King is a master at explaining complex economics to non-experts without the slightest hint of condescension? ¶ Here, we've reprinted the chapter in which Baron King of Lothbury (in the U.K., the fate of retired government technocrats seems to be life peerages rather than seven-figure consultant gigs) explains the depths of the mess created by the rigidity of monetary union in Europe and the desperate need for debt relief on the part of the union's creditor nations. — Peter Passell July 15, 2016 Illustrations by Peter Horvath *The End of Alchemy: Money, Banking, and the Future of the Global Economy (W.W. Norton 2016). All Rights Reserved.

What experience and history teach us is that people and governments have never learned anything from history, or acted on principles deduced from it. —Georg Wilhelm Friedrich Hegel, Lectures on the Philosophy of History (1832) In earlier chapters I dwelled on past crises. But what about the next crisis? Without reform of the financial system, another crisis is certain, and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than

308 later. Rather than give in to pessimism, however, we have the opportunity to do something about it. The most obvious symptom of the current disequilibrium is the extraordinarily low level of interest rates that, since the crisis, have fallen further. The consequences have been further rises in asset prices and a desperate search for yield as investors, from individuals to insurance companies, realize that the current return on their investments is inadequate to support their spending needs. Central banks are trapped into a policy of low interest rates because of the continuing belief that the solution to weak demand is further monetary stimulus. They are in a prisoner's dilemma: if any one of them were to raise interest rates, they would risk a slowing of growth and possibly another downturn. When interest rates were cut almost to zero at the height of the crisis, no one expected that they would still be at those emergency levels more than six years later. A long period of zero interest rates is unprecedented. For much of the post-war period the worry was that interest rates might be too high. Now the concern is that low rates are eroding savings. It is reminiscent of Walter Bagehot's maxim about the archetypal Englishman: "John Bull can stand many things, but he cannot stand 2 percent." For more than six years now, he has had to stand rates well below that. From its foundation in 1694 until 315 years later in 2009, the Bank of England never set the bank rate below 2 percent. By 2015, the major central banks had all lowered official policy rates to as close to zero it made no difference; a number of European economies, including the euro area, Denmark, Sweden and Switzerland, had embraced negative interest rates. Some mortgage borrowers on floating rates were actually being paid to borrow. Over the long sweep of history, the long-term annual real rate of interest has averaged between 3 and 4 percent. The world real interest rate on 10-year inflation- protected government bonds has been close to zero for several years, and by 2015 was little more than 0.5 percent. In part that reflects the belief that short-term official interest rates will remain low for a few years more.

What Does the Market Think Will Happen? Suppose it takes 10 years to get back to somewhere close to normal, a pessimistic view according to most central banks. What is the market expectation today of where the 10- year real interest rate will be 10 years from now? An estimate of that can be made by noting that the interest rate today on a 20-year security is the average of the rate over the first 10 years (the rate today on a 10-year security) and the rate over the second 10 years

309

(the 10-year rate that is expected today to prevail 10 years from now). So we can infer the latter from observations on market interest rates on 10- and 20-year index-linked government bonds. Such a calculation reveals that the 10-year real rate expected in 10 years' time has averaged little more than 1 percent in recent years and by late 2015 was still below 1.5 percent, well below any level that could be considered remotely "normal." Markets do not expect interest rates to return to normal for many years. If real interest rates remain close to zero, the disequilibrium in spending and saving will continue and the ultimate adjustment to a new equilibrium will be all the more painful. If real interest rates start to move back to more normal levels, markets will reassess their view of the future and asset prices could fall sharply. Neither prospect suggests a smooth and gradual return to a stable path for the economy. Further turbulence in the world economy, and quite possibly another crisis, are to be expected. The epicenter of the next financial earthquake is as hard to predict as a geological earthquake. It is unlikely to be among banks in New York or London, where the aftershocks of 2008 have led to efforts to improve the resilience of the financial system. But there are many places where the underlying forces of the disequilibrium in their economies could lead to cracks in the surface – emerging markets that have increased indebtedness, the euro area with its fault lines, China with a financial sector facing large losses, and the Middle and Near East with a rise in political tensions. Since the end of the immediate banking crisis in 2009, recovery has been anemic at best. By late 2015, the world recovery had been slower than predicted by policymakers, and central banks had postponed the inevitable rise in interest rates for longer than had seemed either possible or likely. There was a continuing shortfall of demand and output from their pre-crisis trend path of close to 15 percent. Stagnation – in the sense of output remaining persistently below its previously anticipated path – had once again become synonymous with the word capitalism. Lost output and employment of such magnitude has revealed the true cost of the crisis and shaken confidence in our understanding of how economies behave. How might we restore growth, and what could happen if we don't?

Lost output and employment of such magnitude have revealed the true cost of the crisis and shaken confidence in our understanding of how economies behave.

Sovereign Debt Forgiveness Maintaining interest rates at extraordinarily low levels for years on end has contributed to the rise in asset prices and the increase in debt. Debt has now reached a level where it is a drag on the willingness to spend and likely to be the trigger for a future crisis. The main risks come from the prospect of a fall in asset prices as interest rates return to normal levels, and the writing down of the value of investments as banks and companies start to reflect economic reality in their balance sheets. In both cases, a wave of defaults might lead to corporate failures and household bankruptcies. By 2015, corporate debt defaults in the industrial and emerging market economies were rising. Disruptive though a wave of defaults would be in the short run, it might enable a "reboot" of the economy so that it could grow in a more sustainable and balanced way. External debt – debt owed by residents of one country to residents of another country – is more difficult, especially when that debt is denominated in a foreign currency.

310

When exchange rates are free to move, they reflect the underlying circumstances of different economies. Some governments, such as China in relation to the U.S. dollar and Germany in relation to its European neighbors, have limited that freedom so that economies have had to adapt to exchange rates rather than the other way round. As a result, trade surpluses and deficits have also contributed to the build-up of debts and credits that now threaten countries' abilities to maintain full employment at current exchange rates. Nowhere is this more evident than in the euro area, although emerging market economies could also run into trouble. Sovereign debts are likely to be a major headache for the world in the years to come, both in emerging markets and in the euro area. Should these debts be forgiven? The situation in Greece encapsulates the problems of external indebtedness in a monetary union. GDP in Greece has collapsed by more than the percentage drop in the United States during the Great Depression. Despite an enormous fiscal contraction bringing the budget deficit down from around 12 percent of GDP in 2010 to below 3 percent in 2014, the ratio of government debt to GDP has continued to rise, and is now almost 200 percent. All of this debt is denominated in a currency that is likely to rise in value relative to Greek incomes. Market interest rates are extremely high and Greece has little access to international capital markets. When debt was restructured in 2012, private sector creditors were bailed out. Most Greek debt is now owed to public-sector institutions, such as the European Central Bank, other member countries of the euro area and the IMF. Fiscal austerity has proved self-defeating because the exchange rate could not fall to stimulate trade. In their 1980s debt crisis, Latin American countries found a route to economic growth only when they were able to move out from under the shadow of an extraordinary burden of debt owed to foreigners. To put it another way, there is very little chance now that Greece will be able to repay its sovereign debt. And the longer the austerity program continues, the worse becomes the ability of Greece to repay. Much of what happened in Greece is reminiscent of an earlier episode: in 1991, Argentina fixed the exchange rate of its currency, the peso, to the U.S. dollar. It had implemented a raft of reforms in the 1990s, and was often cited as a model economy. At the end of the 1990s, there was a sharp drop in commodity prices and Argentina went into recession.

The lack of trust between Greece and its creditors means that public recognition of the underlying reality is some way off.

311

Locked into a fixed-rate regime, the real exchange rate had become too high, and the only way to improve competitiveness was through a depression that reduced domestic wages and prices. Argentina's debt position was akin to that of Greece, and it had a similarly high unemployment rate. So in the face of a deep depression, the exchange rate regime was abandoned and capital controls were introduced. Bank accounts were redenominated in new pesos, imposing substantial losses on account holders. Initially, the chaos led to a 10 percent drop in GDP during 2002. But after the initial turmoil, Argentina was able to return to a period of economic growth. Commodity prices rose steadily for a decade and Argentina was able to enjoy rapid growth of GDP – almost 10 percent a year for five years. It is evident, as it has been for a very long while, that the only way forward for Greece is to default on (or be forgiven) a substantial proportion of its debt and to devalue its currency so that exports and the substitution of domestic products for imports can compensate for the depressing effects of the fiscal contraction imposed to date. Structural reforms would help ease the transition, but such reforms will be effective only if they are adopted by decisions of the Greek people rather than being imposed as external conditions by the IMF or the European Commission. The lack of trust between Greece and its creditors means that public recognition of the underlying reality is some way off. The inevitability of restructuring Greek debt means that taxpayers in Germany and elsewhere will have to absorb substantial losses. It was more than a little depressing to see the countries of the euro area haggling over how much to lend to Greece so that it would be able to pay them back some of the earlier loans. Such a circular flow of payments made little difference to the health, or lack of it, of the Greek economy. It is particularly unfortunate that Germany seemed to have forgotten its own history. At the end of the World War I, the Treaty of Versailles imposed reparations on the defeated nations – primarily Germany, but also Austria, Hungary, Bulgaria and Turkey. Some of the required payments were made in kind (for example, coal and livestock), but in the case of Germany most payments were to be in the form of gold or foreign currency. The Reparations Commission set an initial figure of 132 billion gold marks. Frustrated by Germany's foot-dragging in making payments, France and Belgium occupied the Ruhr in January 1923, allegedly to enforce payment. That led to an agreement among the Allies – the Dawes Plan of 1924 – that restructured and reduced the burden of reparations. But even those payments were being financed by borrowing from overseas, an unsustainable position. So a new conference met in the spring of 1929 and after four months of wrangling produced the Young Plan, signed in Paris in June at the Hotel George V, which further lowered the total payment to 112 billion marks and extended the period of repayment to expire in 1988. But the economic reality was that, unless Germany could obtain an export surplus, its only method of financing payments of reparations was borrowing from overseas. In May 1931, the failure of the Austrian bank Creditanstalt led to a crisis of the Austrian and German banking systems, and a month later the Hoover Moratorium suspended reparations. They were largely cancelled altogether at the Lausanne conference in 1932. In all, Germany paid less than 21 billion marks, much of which was financed by overseas borrowing on which Germany subsequently defaulted. After the Versailles Treaty was signed, Keynes and others argued that to demand substantial reparations from Germany would be counterproductive, leading to a collapse

312 of the mark and of the German economy, damaging the wider European economy in the process. But the most compelling statement of Germany's predicament came from its central bank governor, Hjalmar Schacht. In 1934, writing in that most respectable and most American of publications, Foreign Affairs, Schacht explained that "a debtor country can pay only when it has earned a surplus on its balance of trade, and … the attack on German exports by means of tariffs, quotas, boycotts, etc., achieves the opposite result." Not a man to question his own judgments (the English version of his autobiography was titled My First Seventy-six Years, although sadly a second volume never appeared), on this occasion Schacht was unquestionably correct. As he wrote in his memoirs about a visit to Paris in January 1924: It took another eight years before the Allied politicians realized that the whole policy of reparations was an economic evil which was bound to inflict the utmost injury not only upon Germany but upon the Allied nations as well. Of the 120 milliards [billions] which Germany was supposed to pay, between 10 and 12 milliards were actually paid during the years 1924 to 1932. And they were not paid out of surplus exports as they should have been. During those eight years Germany never achieved any surplus exports. Rather they were paid out of the proceeds of loans which other countries, acting under a complete misapprehension as to Germany's resources, pressed upon her to such an extent that in 1931 it transpired that she could no longer meet even the interest on them. Finally, in 1932, there followed the Lausanne Conference at which the reparations commitments were practically written off.

After World War II, and with Germany divided, the problem of German debt reared its ugly head again. In 1953, the London Agreement on German External Debts rescheduled and restructured the debts of the new Federal Republic of Germany. Repayment of some of the debts incurred by the whole of Germany was made conditional on the country's reunification. In 1990 the condition was triggered and on 3 October 2010 a final payment of German war debts of €69.9 million was made. More interesting from today's perspective is the statement in the agreement that West Germany would have to make repayments only when it was running a trade surplus, and the repayments were limited to 3 percent of export earnings. The euro area could learn from this experience. One way of easing the financing problems of the periphery countries would be to postpone repayment of external debts to other member countries

313 of the euro area until the debtor country had achieved an export surplus, creating an incentive for creditors and debtors to work together to reduce trade imbalances. It is deeply ironic that today it is Germany that is insisting on repayments of debt from countries that are unable to earn an export surplus, out of which their external debts could be serviced, because of the constraints of monetary union. Schacht must be turning in his grave. As the periphery countries of southern Europe embark on the long and slow journey back to full employment, their external deficits will start to widen again, and it is far from clear how existing external debt, let alone any new borrowing from abroad, can be repaid. Inflows of private-sector capital helped the euro area survive after 2012, but they are most unlikely to continue forever. It is instructive to quote Keynes' analysis in the interwar period, replacing Germany in 1922 with Greece in 2015, and France then with Germany today: The idea that the rest of the world is going to lend to Greece, for her to hand over to Germany, about 100 percent of their liquid savings – for that is what it amounts to – is utterly preposterous. And the sooner we get that into our heads the better. Much of the euro area has either created or gone along with the illusion that creditor countries will always be repaid. When a debtor country has difficulties in repaying, the answer is to "extend and pretend" by lengthening the repayment period and valuing the assets represented by the loans at face value. It is a familiar tactic of banks unwilling to face up to losses on bad loans, and it has crept into sovereign lending. To misquote Samuel Taylor Coleridge (in his poem The Rime of the Ancient Mariner), "Debtors, debtors everywhere, and not a loss in sight." Debt forgiveness is more natural within a political union. But with different political histories and traditions, a move to political union is unlikely to be achieved quickly through popular support. Put bluntly, monetary union has created a conflict between a centralized elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous. In 2015, the presidents of the European Commission, the Euro Summit, the Eurogroup, the European Central Bank and the European Parliament (the existence of five presidents is testimony to the bureaucratic skills of the elite) published a report arguing for fiscal union in which "decisions will increasingly need to be made collectively," and implicitly supporting the idea of a single finance minister for the euro area. This approach of creeping transfer of sovereignty to an unelected center is deeply flawed and will meet popular resistance. As Otmar Issing, the first chief economist of the European Central Bank and the intellectual force behind the ECB in its early years, argued: Political union … cannot be achieved through the back door, by eroding members' fiscal-policy sovereignty. Attempting to compel transfer payments would generate moral hazard on the part of the recipients and resistance from the donors.

314

It is deeply ironic that today it is Germany that is insisting on repayments of debt from countries that are unable to earn an export surplus, out of which their external debts could be serviced, because of the constraints of monetary union. Schacht must be turning in his grave.

In pursuit of peace, the elites in Europe, the United States and international organizations such as the IMF have, by pushing bailouts and a move to a transfer union as the solution to crises, simply sowed the seeds of divisions in Europe and created support for what were previously seen as extreme political parties and candidates. It will lead to not only an economic but a political crisis. In 2012, when concern about sovereign debt in several periphery countries was at its height, it would have been possible to divide the euro area into two divisions, some members being temporarily relegated to a second division with the clear expectation that after a period – perhaps 10 or 15 years – of real convergence, those members would be promoted back to the first division. It may be too late for that now. The underlying differences among countries and the political costs of accepting defeat have become too great. That is unfortunate both for the countries concerned – because sometimes premature promotion can be a misfortune and relegation the opportunity for a new start – and for the world as a whole because the euro area today is a drag on world growth. Germany faces a terrible choice. Should it support the weaker brethren in the euro area at great and unending cost to its taxpayers, or should it call a halt to the project of monetary union across the whole of Europe? The attempt to find a middle course is not working. One day German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit. But the more likely cause of a breakup of the euro area is that voters in the south will tire of the grinding and relentless burden of mass unemployment and the emigration of talented young people. The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight. But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs. Outsiders cannot make that choice, but they can encourage Germany, and the rest of the euro area, to face up to it. If the members of the euro decide to hang together, the burden of servicing external debts may become too great to remain consistent with political stability. As John Maynard Keynes wrote in 1922: It is foolish … to suppose that any means exist by which one modern nation can exact from another an annual tribute continuing over many years. It would be desirable, therefore, to create a mechanism by which international sovereign debts could be restructured within a framework supported by the expertise and neutrality of the IMF, so avoiding, at least in part, the animosity and humiliation that

315 accompanied the latest agreement on debt between Greece and the rest of the euro area in 2015. It was, I regret to say, an Englishman, First Lord of the Admiralty Sir Eric Campbell-Geddes, who set the tone for the harsh treatment of debtors when he said in a speech before the Versailles Peace Conference that "we shall squeeze the German lemon until the pips squeak!" As early as 2003, the IMF debated the creation of a "sovereign debt restructuring mechanism." The idea was to ensure a timely resolution of debt problems to help both debtors and creditors, and to recognize the prisoner's dilemma in which an individual creditor had an incentive to hold out for full repayment, even though, collectively, creditors would be better off by negotiating with the debtor. Progress on the creation of such a mechanism was defeated by opposition from the United States, which favored bailouts over defaults, and Germany, which did not want to encourage the belief that sovereigns might be allowed to default. Neither objection made sense. By failing to impose losses on the private-sector creditors of periphery countries in the euro area in 2012, the IMF and the European institutions took on obligations on which they were subsequently forced to accept losses. It is all too easy to pretend that throwing yet more money at a highly indebted country will solve the immediate crisis. It is only too likely that a sovereign debt restructuring mechanism will be needed in the foreseeable future. Without one, an ad hoc international debt conference to sort out the external sovereign debts that have built up may be needed. But debt forgiveness, inevitable though it may be, is not a sufficient answer to all our problems. In the short run, it could even have the perverse effect of slowing growth. Sovereign borrowers have already had their repayment periods extended, easing the pressure on their finances. There would be little change in their immediate position following explicit debt forgiveness. Creditors, by contrast, may be under a misapprehension that they will be repaid in full, and when reality dawns they could reduce their spending. The underlying challenge is to move to a new equilibrium in which new debts are no longer being created on the same scale as before.

The wider problem in the world economy is the mutual incompatibility of democracy, national sovereignty and economic integration. Which one do we surrender?

Escaping the Prisoner's Dilemma A major impediment to the resolution of the disequilibrium facing so many economies is the prisoner's dilemma they face – if they and they alone take action, they could be worse off. The problem now is how to reconcile the prisoner's dilemma with people's overwhelming desire to control their own destiny. The prisoner's dilemma prevented countries from rebalancing their economies. A coordinated move to a new equilibrium would be the best outcome for all. By this I do not mean attempts to coordinate monetary and fiscal policy. Such efforts have a poor track record, ranging from the policies of the Federal Reserve in the 1920s, which held down interest rates in order to help other countries rejoin the gold standard, so creating a boom that led to the stock market crash in 1929 and the Great Depression, to the attempts in the mid-1980s to stabilize exchange rates among the major economies, which led to the stock market crash in 1987. Moreover, monetary and fiscal policies are not the route to a new equilibrium.

316

Many countries can now see that they have taken monetary policy as far as it can go. The weakness of demand across the world means that many, if not most, countries can credibly say that if only the rest of the world were growing normally then they would be in reasonable shape. But since it isn't, they aren't. So with interest rates close to zero, and fiscal policy constrained by high government debt, the objective of economic policy in a growing number of countries is to lower the exchange rate. In countries as far apart as New Zealand, Australia, Japan, France and Italy, central banks and governments are becoming more and more strident in their determination to talk the exchange rate down. Competitive depreciation is a zero-sum game as countries try to "steal" demand from each other. In the 1930s, the abandonment of the gold standard, and hence of fixed exchange rates between countries, allowed central banks across the globe to adopt easier monetary policies. Although the benefits of the reduction in exchange rates cancelled each other out, the easier monetary policies helped to bring about a recovery from the Great Depression. Today, however, monetary policy is already about as loose as it could be. There is a real risk of an implicit or explicit "currency war." These questions are symptomatic of a wider problem in the world economy – a problem that Dani Rodrik of Harvard University has christened the "political trilemma of the global economy." It is the mutual incompatibility of democracy, national sovereignty and economic integration. Which one do we surrender? If national sovereignty is eroded without clear public support, democracy will come under strain – as we are seeing in Europe, where democracy and national sovereignty are closely intertwined. Political union, in the sense of a genuinely federal Europe, has stalled. To reconcile democracy and monetary union would require clearly defined procedures for exit from monetary union. There are none. The degree of political integration necessary for survival of monetary union is vastly greater than, and wholly different from, the political cooperation necessary to create a path toward a sustainable economic recovery in Europe. Even if the former could be imposed by the central authorities on countries in the euro area – and there are few signs that this would be a popular development – to extend the same degree of integration to countries outside the euro area would surely shatter the wider union. For the foreseeable future, the European Union will comprise two categories of member: those in and those not in the euro area. Arrangements for the evolution of the European Union need to reflect that fact. Such issues are a microcosm of broader challenges to the global order. The Asian financial crisis of the 1990s, when Thailand, South Korea and Indonesia borrowed tens of billions of dollars from Western countries through the IMF to support their banks and , showed how difficult it is to cope with sudden capital reversals resulting from a change in sentiment about the degree of currency or maturity mismatch in a nation's balance sheet, and especially in that of its banking system. The IMF cannot easily act as a lender of last resort because it does not own or manage a currency. In the Asian crisis, therefore, it was almost inevitable that conditionality was set by the United States because the need of those countries was for dollars. The result was the adoption by a number of Asian countries of do-it-yourself lender-of-last-resort policies, which involved their building up huge reserves of U.S. dollars out of large trade surpluses. That, together with their export-led growth strategy, led directly to the fall in real interest rates across the globe after the fall of the Berlin Wall.

317

Resentment toward the conditions imposed by the IMF (or the U.S.) in return for financial support has also led to the creation of new institutions in Asia, ranging from the Chiang Mai Initiative, a network of bilateral swap arrangements between China, Japan, Korea and the ASEAN countries to serve as a regional safety net mechanism now amounting to $240 billion, to the new Chinese-led Asian Infrastructure Investment Bank that was created in 2015. It is likely that Asia will develop its own informal arrangements that will, in essence, create an Asian IMF, an idea that was floated in 1997 at the IMF Annual Meetings in Hong Kong and killed off by the United States. Twenty years on, the power of the U.S. to prevent a mutual insurance arrangement among Asian countries is limited.

The two main threats to the world economy today are the continuing disequilibrium between spending and saving, and a return to a multipolar world with similarities to the unstable position before World War I.

The governance of the global monetary order is in danger of fragmentation. In the evolving multipolar world, there are few remnants of the idealism of Bretton Woods. The combination of free trade and American power was a stabilizing force. As the financier and historian James MacDonald puts it in his book When Globalization Fails: The unspoken bargain was that the United States would exercise a near monopoly of military force. However, it would use its force not to gain exclusive economic advantages, but as an impartial protector of Western interests. Under the American umbrella, the non-Communist world flourished. The world of Bretton Woods passed away a long while ago, and with it the effectiveness of the post-war institutions that defined it – the International Monetary Fund, the World Bank and the Organization for Economic Cooperation and Development (OECD). The veto power of the United States in the IMF, and the distribution of voting rights more generally, undermines the legitimacy of the Bretton Woods institutions in a world where economic and political power is moving in new directions.

318

It is not easy for any multilateral institution to adapt to major changes in the assumptions that underlay its creation. The continuing refusal of the U.S. Congress to agree to relatively minor changes to the governance of the IMF threatens to condemn the latter to a declining role. The stance of the IMF in the Asian crisis, its role as part of the so-called troika in the European crisis, and its reputation in Latin America mean that it is in danger of becoming ineffective. A key role of the IMF is to speak truth to power, not the other way round as it came close to doing in Asia in the 1990s and in Europe more recently. The United States is still the largest player in the world economy, and the dollar the dominant currency. But little else has remained the same. In Asia and in Europe, new players have emerged. China is now, with output measured in comparable prices, the largest economy in the world, returning to the position it occupied by virtue of its population size in the 19th century. China and the United States will have an uneasy coexistence as the two major powers in Asia and, until a new, more-equal relationship emerges, uncertainty about the most vibrant region of the world will cast a shadow over economic prospects for the continent. A multi-polar world is inherently more unstable than the post-war stability provided by the umbrella of the Pax Americana. Misguided attempts to suppress national sovereignty in the management of an integrated world economy will threaten democracy and the legitimacy of the world order. Yet, acting alone, countries may not be able to achieve a desirable return to full employment. There are too many countries in the world today for an attempt to renew the visionary ideals of the Bretton Woods conference to be feasible. For a short time in 2008-09 countries did work together, culminating in the G20 summit in London in the spring of 2009. But since then, leadership from major countries, the international financial institutions and bodies such as the G7 and G20 has been sorely lacking. They provide more employment for security staff and journalists than they add value to our understanding of the world economy, as a glance at their regular communiqués reveals. Talking shop can be useful, but only if the talk is good. As time goes by, parallels between the interwar period and the present become disturbingly more apparent. The decade before 2007, when the financial crisis began, seems in retrospect to have more in common with the 1920s than we realized. Both were periods when growth was satisfactory, but not exceptional, when the financial sector expanded, and when commentators were beginning to talk about "a new paradigm." After 2008, the parallels with the 1930s also began to grow. The collapse of the gold standard mirrors more recent problems with fixed exchange rates. The attempt to keep the euro together produced austerity on a scale not seen since the Great Depression, and led to the rise of extreme political parties across Europe. A prisoner's dilemma is still holding back the speed of recovery. A sensible coping strategy to deal with this problem is not to artificially coordinate policies that naturally belong to national governments, but to seek agreement on an orderly recovery and rebalancing of the global economy. The way in which each country will choose to rebalance is a matter for itself, but it is in the interests of all countries to find a common timetable for that rebalancing. The natural broker for an agreement is the IMF. Our best chance of solving the prisoner's dilemma while retaining national sovereignty is to use the price mechanism, not suppress it. Arrangements to fix or limit movements of exchange rates tend to backfire as unexpected events require changes in rates to avoid economic suffering. At the heart of the problem is the question that so troubled the

319

negotiators at Bretton Woods. How can one create symmetric obligations on countries with trade surpluses and trade deficits? The international monetary order set up after World War II failed to do so, and the result is that fixed exchange rates have proved deflationary. For a long time the conventional wisdom among central banks has been that if each country pursues a stable domestic monetary and fiscal policy then they will come close to achieving a cooperative outcome. There is certainly much truth in this view. But when the world becomes stuck in a disequilibrium, the prisoner's dilemma bites. Cooperation then becomes essential. Placing obligations on surplus countries has not and will not work. There is no credible means of enforcing any such obligations. Enlightened self-interest to find a way back to the path of strong growth is the only hope. The aim should be fourfold: • to reinvigorate the IMF and reinforce its legitimacy by reforms to its voting system, including an end to a veto by any one country; • to put in place a permanent system of swap agreements among central banks, under which they can quickly lend to each other in whichever currencies are needed to meet short-term shortages of liquidity; • to accept floating exchange rates; • to agree on a timetable for rebalancing of major economies, and a return to normal real interest rates, with the IMF as the custodian of the process. The leadership of the IMF must raise its game. The two main threats to the world economy today are the continuing disequilibrium between spending and saving, both within and between major economies, and a return to a multipolar world with similarities to the unstable position before World War I. Whether the next crisis will be another collapse of our economic and financial system, or whether it will take the form of political or even military conflict, is impossible to say. Neither is inevitable. But only a new world order could prevent such an outcome. We must hope that the pressure of events will drive statesmen, even those of "inconceivable stupidity," to act.

Short-term stimulus reinforces the misallocation of investment between sectors of the economy. Its impact on spending peters out when households and businesses come to realize that the pattern of spending is unsustainable.

The Audacity of Pessimism The experience of stubbornly weak growth around the world since the crisis has led to a new pessimism about the ability of market economies today to generate prosperity. One increasingly common view is that the long-term potential rate of economic growth has fallen. In the United States, there is no shortage of plausible explanations for such a change – the marked fall since the crisis in the proportion of the population who are available to work, slower growth of the population itself and heavier regulatory burdens on employers. It is important not to be carried away by changes over short periods of time. The U.S. Bureau of Labor Statistics (BLS) estimates the contribution to growth of increases in labor supply (hours worked), the amount of capital with which people work, and the efficiency of the labor and capital employed.

320

Ultimately, the benefits of economic growth stem from this last factor, which reflects scientific and technical progress – "multifactor productivity," in the phrase of the BLS statisticians. From the mid-1980s until the onset of the crisis in 2007, multifactor productivity rose at about 1 percent a year. Between 2007 and 2014, it rose by 0.5 percent a year. As a result, the annual rate of growth of output per hour worked – reflecting both technical progress and the amount of capital with which each person works – fell from just over 2 percent between the mid-1980s and 2007 to around 1.5 percent between 2007 and 2014. If that reduction persisted it would affect living standards in the long run. But growth rates of productivity are quite volatile over short periods of time and it is far from clear that they represent a significant change to the future potential of the economy. Is there good cause for pessimism about the rate at which economies can grow in future? There are three reasons for caution about adopting this new-found pessimism. First, the proposition that the era of great discoveries has come to an end because the major inventions, such as electricity and airplanes, have been made and humankind has plucked the low-hanging fruit is not convincing. In areas such as information technology and biological research on genetics and stem cells we are living in a golden age of scientific discovery. By definition, ideas that provide breakthroughs are impossible to predict, so it is too easy to fall into the trap of thinking that the future will generate fewer innovations than those we saw emerge in the past.

Since traditional macroeconomic policies will not lead us to a new equilibrium, and there are no easy alternatives, policymakers have little choice but to be audacious.

When proposed the idea of "secular stagnation" in the 1930s, he fell into just this trap. In fact, the 1930s witnessed significant innovation, which was obscured by the dramatic macroeconomic consequences of the Great Depression. Alexander Field, an American economist, has documented large technological improvements in industries such as chemicals, transport and power generation. By 1950, real GDP in the U.S. had regained its pre-Depression trend path, and rose by 90 percent in a decade after the end of the Great Depression. Second, although the recovery from the downturn of 2008-09 has been unusually slow in most countries, the factors contributing to the growth of labor supply have behaved quite differently across countries. For example, in contrast to the U.S., the U.K. has experienced buoyant population growth and rising participation in the labor force. And even some of the periphery countries in the euro area, such as Spain, have recently seen rises in measured average productivity growth. The factors determining long-term growth seem to be more varied across countries than the shared experience of a slow recovery since the crisis, suggesting that the cause of the latter is rooted in macroeconomic behavior rather than a deterioration in the pace of innovation. Third, economists have a poor track record in predicting demographic changes. Books on the theme of the economic consequences of a declining population were common in the 1930s. A decade and a world war later, there was a baby boom. Agnosticism about future potential growth is a reasonable position; pessimism is not. History suggests that changes to underlying productivity growth occur only slowly. Many economists in the past have mistakenly called jumps in trend growth on the basis of short-term movements that proved short-lived.

321

The case for pessimism concerns prospective demand growth. In the wake of a powerful shock to confidence, monetary and fiscal stimulus in 2008 and 2009 was the right answer. But it exhibits diminishing returns. In recent years, extraordinary monetary stimulus has brought forward consumption from the future, digging a hole in future demand. With a prospect of weak demand in the future, the expected return on investment becomes depressed. Even with unprecedentedly low interest rates and the printing of money, it becomes harder and harder to stimulate domestic consumption and investment. What began as an imbalance between countries has over time become a major internal disequilibrium between saving and spending within economies. Spending is weak today, not because of irrational caution on the part of households and businesses following the shock of the crisis, but because of a rational narrative that in countries like the U.S. and U.K., consumer spending was unsustainably high before the crisis and must now follow a path below the pre-crisis trend. In countries like China and Germany, exports were unsustainably high, and they, too, are now experiencing weak growth as demand in overseas markets slows. Those countries have not been able to move to a new equilibrium either individually or collectively, and until they do, recovery will be held back. In circumstances characterized by a paradox of policy – in which short-term stimulus to spending takes us further away from the long-term equilibrium – Keynesian stimulus can boost demand in the short run, but its effects fade as the paradox of policy kicks in. Only a move to a new equilibrium consistent with the revised narrative will end stagnation. Low growth in the global economy reflects less a lack of "animal spirits" and more the inability of the market, constrained by governments, to move to a new set of real interest rates and real exchange rates in order to find a new equilibrium. The challenge we now face is plotting a route to a new equilibrium. The paradox of policy applies to all countries, both those that previously consumed and borrowed too much, and those that spent too little. Short-term stimulus reinforces the misallocation of investment between sectors of the economy, and its impact on spending peters out when households and businesses come to realize that the pattern of spending is unsustainable. China and Germany need investment to produce goods and services to meet domestic consumer demand rather than to support the export sector. The opposite is the case in the United States, United Kingdom and parts of Europe. Most discussion of this demand pessimism fall into one of two camps. On the one hand, there are those who argue that our economies are facing unusually strong but temporary "headwinds" that will die down in due course, allowing central banks to raise interest rates to more normal levels without undermining growth. We simply need to be patient, and a natural recovery will then follow. This view is in my judgment an incomplete and misleading interpretation of the factors that have produced persistently weak growth. A change in the narrative used by households to judge future incomes is not a "headwind" that will gradually abate, but a permanent change in the desired level of spending. We cannot expect the United States to continue as the "consumer of last resort" and China to maintain its growth rate by investing in unprofitable construction projects. Central banks, like the cyclist climbing an ever-steeper hill, will become exhausted. And if recovery does not come, they will be seen to have failed, eroding the support for the independence of central banks that was vital to the earlier achievement in conquering inflation.

322

On the other hand, there are those who advocate even more monetary and fiscal stimulus to trigger a recovery. To be sure, it is hard to argue against a well-designed program of public infrastructure spending financed by government borrowing, especially when you are traveling through New York's airports. But the difficulty of quickly organizing a coherent plan for expanding public investment while maintaining confidence in long-term fiscal sustainability makes this option one for the future rather than today, albeit one worthy of careful preparation. Further monetary stimulus, however, is likely to achieve little more than taking us further down the dead-end road of the paradox of policy. More extreme versions of monetary and fiscal expansion include proposals for an increase in government spending that would be financed by printing money, and "helicopter drops" of money into the pockets of all citizens. Radical though they sound, neither is in fact different in essence from the policies that have so far failed to generate a return to pre-crisis paths of output. Financing more government spending by printing money is equivalent, in economic terms, to a combination of (a) additional government spending financed by issuing more government debt and (b) the creation of money by the central bank to buy government debt (the process known as quantitative easing). Equally, helicopter drops of money are equivalent to a combination of debt-financed tax cuts and quantitative easing – the only difference being that the size of spending or tax cuts is decided by government and the amount of money created is decided by the central bank. Since both elements of the combination have been tried on a large scale and have run into diminishing returns, it is hard to see how even more of both, producing a short-run boost to demand that will soon peter out, will resolve the paradox of policy. Dealing with the underlying disequilibrium is paramount. The narrative revision downturn, triggered by the crisis, has left a hole in total spending. Central banks have, largely successfully, filled that hole by cutting interest rates and printing electronic money to encourage households and businesses to bring forward spending from the future. But because the underlying disequilibrium pattern of demand has not been corrected, it is rational to be pessimistic about future demand. That is a significant deterrent to investment today, reinforced by uncertainty about the composition of future spending. Since traditional macroeconomic policies will not lead us to a new equilibrium, and there are no easy alternatives, policymakers have little choice but to be audacious. What should they do to escape the trap of rational pessimism? In broad terms, the aim must be twofold – to boost expected incomes through a bold program to raise future productivity, and to encourage relative prices, especially exchange rates, to move in a direction that will support a more sustainable pattern of demand and production. Those aims are easy to state and hard to achieve, but there is little alternative, other than waiting for a crash in asset values and the resulting defaults to reset the economy. With the audacity of pessimism, we can do better. A reform program might comprise three elements. First, the implementation of measures to boost productivity. Since the crisis, productivity growth has been barely noticeable, and well below pre-crisis rates. A major reason for this disappointing performance is that there has been a sharp fall in the growth rate, and perhaps even in the level, of the effective capital stock in the economy. Part of this reflects the fact that past investment was in some cases a mistake, directed to sectors in which there was little prospect of future growth, and is now much less

323

productive than had been hoped. Some of the capital stock is worth less than is estimated in either company accounts or official statistics, or even in economists' models. Another part reflects pessimism about future demand and uncertainty about its composition, which has led to a fall in business investment around the world. Current demand is being met by expanding employment. Companies do not wish to repeat the mistake of investing in capital for which there is little future profitable use. If future demand turns out to be weak then it will be cheaper to adjust production by laying off employees. A higher ratio of labor to effective capital explains weaker productivity growth. Reforms to improve the efficiency of the economy, and so the rate of return on new investment, would stimulate investment and allow real interest rates to return to a level consistent with a new equilibrium. Over time, as investment rebuilt the effective capital stock, productivity growth would return to rates reflecting the underlying innovation in a dynamic capitalist economy. Reforms to boost productivity are not a "get out of jail free" card – they are easier to conceive than implement, and hit political obstacles from potential losers who express their concerns more vocally than the potential winners. But the only alternative to large and costly shifts in relative prices is changing the narrative about expected future incomes. And there certainly exist opportunities to boost productivity: • in the product market to reduce monopolies and increase competition; • in the tax system to reduce distortions between saving and spending, eliminate complex deductions and lower marginal tax rates; • in the public sector to reduce the cost of providing public services; • in the field of regulation to lower the burden imposed on the private sector; • more generally, to improve public infrastructure to support the rest of the economy. Continued from Print Edition The specific nature of the microeconomic policies required will vary from country to country. In the past, when economies were already close to full employment, politicians were reluctant to use up political capital to make structural reforms when the benefits were to be seen only in the distant future. Today, however, the attraction of reform is that the anticipation of higher productivity will boost current spending, helping economies to emerge from the present relative stagnation. Second, the promotion of trade. Throughout the post-war period, the expansion of trade has been one of the most successful routes to faster productivity growth, allowing countries to specialize and exchange ideas about new products and processes. In the latest attempt to reach an agreement on further reductions in tariffs and other trade barriers, the so-called Doha Round (which started in 2001) of the World Trade Organization has run into the sand. One of the impediments was the attempt by the larger emerging market economies to protect their domestic sectors. The best way forward now would be for the advanced economies to push further liberalization in trade of services – the dominant part of our economies and a growing proportion of overall trade – not only to benefit from increased trade and its effects on productivity, but also to demonstrate to the emerging markets that they cannot block all progress in this area.

324

The U.S. government, if not Congress, has been supportive of such initiatives, both among the Pacific region and with Europe. In October 2015, the U.S., Japan and 10 other Pacific Rim countries signed the Trans-Pacific Partnership (TPP) which lowered trade barriers. It is now up to legislators to implement the agreement. A companion agreement between the United States and Europe – the Transatlantic Trade and Investment Partnership (TTIP) – is being negotiated. Those two agreements are an important part of any attempt to raise real incomes. Third, the restoration of floating exchange rates. The experiment with fixing exchange rates has not been successful and it is important that exchange rates are free to play their stabilizing role in order to correct the current disequilibrium. The principle behind such a program is to raise expected future incomes, not by recreating the false beliefs held before the crisis, but by boosting productivity. Consider first those countries that have become reliant on exports to maintain full employment. Export-led growth is no longer a viable strategy for a large emerging market because Europe and North America cannot sustain the domestic demand required to so much. China is committed to a gradual transition to domestic demand-led growth, as revealed by the Third Plenum in Beijing in November 2013. For this to occur, the high saving ratio in China must fall, despite a rapidly aging population. Steps to provide more social insurance against future loss of income would raise current consumption, consistent with the required rebalancing of the Chinese economy. Its growth rate has fallen markedly from a peak of around 12 percent in 2010 to below 7 percent today by the official figures, and the likelihood is that actual growth is much lower. China ceased to be self-sufficient in energy after 1993, and is now the largest oil importer in the world. Similarly, it imports massive quantities of iron ore, copper and, indeed, food. After the crisis, demand for Chinese exports fell away, especially from Europe, and so the Chinese authorities allowed credit to expand in order to boost construction spending. But before the crisis there was already excessive investment in commercial property. As a result, empty blocks of apartments and offices are a commonplace sight in new Chinese cities. House prices have now fallen. Rates of return on new investment in many parts of the economy are low. A major challenge to Chinese policymakers is to lower the high savings of state-owned enterprises. Falling profitability will reduce their surpluses, and so China's saving rate, but the reallocation of investment from exports and construction to enterprises geared to meet consumer demand will not be an easy transition. After substantial overinvestment in property, the necessary slowdown in Chinese construction activity will threaten not only demand and output, but also the health of the financial sector, which financed most of its expansion. Regional governments in China set up wholly owned financing vehicles to borrow from state banks in order to overcome restrictions on their spending imposed by the center. Many of these are in poor health. China now faces serious risks from its financial sector. A policy of investing one-half of its national income at low rates of return financed by debt is leading to an upward spiral of debt in relation to national income. Sharp falls in stock prices in 2015 and a further slowing in growth showed how difficult it will be to achieve a smooth rebalancing, which is as important for China as for Western economies. Even China, long associated with a policy of limiting upward market pressure on its currency, will find that its exchange rate comes under downward pressure.

325

Japan, too, has long exhibited "excess" saving. After gradually restructuring its financial sector following a crash in the late 1980s, Japan has been recovering slowly but steadily from its "lost decade." Then in 2012, Prime Minister Abe launched his "three arrows" of monetary easing, fiscal expansion and structural reforms to boost economic growth. Unfortunately, only one arrow seemed to hit the target – monetary easing – and Japan is now engaging in large amounts of money creation to purchase increasing quantities of government debt. In the absence of any serious structural reforms, Japan is on a path to inflation as the only means of reducing the burden of its growing national debt. The change in policy required in Germany is rather different. By dint of wage restraint and the reform of labor markets, Germany has become extremely competitive within the euro area. It has an undervalued real exchange rate and a large trade surplus. Conversely, periphery countries such as Cyprus, Greece, Portugal and Spain – and to a lesser extent also France and Italy – have overvalued real exchange rates. If Germany were outside the euro area, its exchange rate would appreciate markedly, helping to rebalance its economy and boost consumption. Unless it finds a way to allow its real exchange rate to appreciate – by leaving the euro area or somehow engineering a much higher rate of wage inflation than in other parts of the euro area – Germany will find that continuing trade surpluses mean that it is accumulating more and more claims on other countries, with the risk that those claims turn out to be little more than worthless paper. That is already true of some of the claims of the euro area as a whole on Greece. Both China and Germany are discovering that being a country in surplus is a mixed blessing in a world that is on an unsustainable trajectory. In those countries where the composition of demand needs to be rebalanced in favor of exports, finding a solution has been made more complicated by the weakness of the world economy. Following the crisis, households in those countries revised their beliefs about future lifetime incomes downward. Consumer spending has moved to a lower trajectory. To compensate, exchange rates should fall to stimulate exports and encourage a switch to domestic substitutes for imports. But a slow recovery in the rest of the world, especially the euro area, has led to movements in exchange rates that are perverse in light of the need for rebalancing. In 2015, the U.S. dollar and British pound sterling both rose. So policies to raise productivity will be even more important if the United States and the United Kingdom are to find a new equilibrium path on which it is possible to grow as real interest rates return to more normal levels. Over time and with sufficient investment to support it, a move to a new equilibrium will enable economies to regain their pre-crisis path of productivity. Given the magnitude of the shock to the world economy after the financial crisis in 2007-09, that would be a significant achievement. In the 19th century, Karl Marx and Friedrich Engels saw the collapse of capitalism as inevitable – "what the bourgeoisie produces, above all, are its own gravediggers." In their view, either the rate of return on capital would continually fall, leading to the end of and economic growth, or the share of capital in national income would continually increase, provoking the workers to revolution. There was no possibility of an equilibrium in which capitalists and workers would receive stable shares of national income. Such a pessimistic analysis fell into disrepute not only because its predictions were not borne out by reality, but also because after World War II economists devised theories to explain how stable growth was indeed compatible with a rate of return on capital

326 sufficient to bring forth new investment and steadily rising real wages. Moreover, those theories did conform to experience. The key to squaring the circle was technical progress – ideas for new products or new ways of improving existing processes. It remains key to our economic future because capitalism is about growth and change. It is a dynamic system. It is not a timeless board game in which, as in the textbooks, all we have to do is throw the dice and discover our economic fate. Equally, there is nothing predetermined about the triumph of capitalism. Improbable as it seemed after the fall of the Berlin Wall, faith in capitalism has been badly shaken by subsequent events. To restore that belief is both necessary and possible. Capitalism is far from perfect – it is not an answer to problems that require collective solutions, nor does it lead to an equal distribution of income or wealth. But it is the best way to create wealth. It provides incentives for the innovation that drives productivity growth. Only when people are free to pursue, develop and market new ideas will they translate those ideas into increased output. Restoring faith in capitalism will require bold action – to raise productivity, rebalance our economies, and reform our system of money and banking. At present, the world's finance ministers and central bank governors, well-intentioned and hard-working, meet regularly and issue communiqués rededicating themselves to achieving the objective of "strong, sustainable and balanced growth." Whatever can be said about the world recovery since the crisis, it has been neither strong, nor sustainable, nor balanced. There seems little political willingness to be bold, and so perhaps we should fear that the size of the ultimate adjustment will just go on getting bigger. But as Winston Churchill remarked in 1932, "there is still time… to bring back again the sunshine, which has been darkened by clouds of human folly." We can roll back the black cloud of uncertainty and allow the rays of supply-side sunshine to peer through in order to return to a more balanced and sustainable path of economic growth. Few of the above solutions to the current disequilibrium of the world economy are new, but the ideas that lie behind them are. Over the past half-century, mainstream macroeconomics has developed an impressive toolkit to analyze swings in aggregate demand and output. But by embracing the idea of optimizing behavior so closely, and by deeming any other form of analysis as illegitimate, it has failed to illuminate key parts of the economic landscape. Optimizing behavior is a special case of a more general theory of behavior under uncertainty. And in situations of radical uncertainty, where it is impossible to optimize, a new approach is required. I have suggested a possible starting point with the idea of coping strategies; others will be able to take forward the study of macroeconomics under radical uncertainty – the economics of "stuff happens" rather than the economics of "stuff." Four concepts have run through this book in order to explain the nature of financial alchemy and the reasons for the present condition of the world economy: disequilibrium, radical uncertainty, the prisoner's dilemma and trust. It is hard to think about money and banking, and their role in the economy, except in those terms. In a capitalist economy, money and banks play a critical role because they are the link between the present and the future. Nevertheless, they are man-made institutions that reflect the technology of their time. Although they have provided the wherewithal to accumulate capital – vital to economic growth – they have done so through financial alchemy by turning illiquid real assets into liquid financial assets. Over time, the

327 alchemy has been exposed. Unlike airplane crashes, financial crises have become more, not less, frequent. Precisely because money and banks are man-made institutions, they can be reshaped and redesigned to support a successful and more stable form of capitalism. Dealing with the immediate symptoms of crises by taking short-term measures to maintain market confidence – usually by throwing large amounts of money at them – will only perpetuate the underlying disequilibrium. Almost every financial crisis starts with the belief that the provision of more liquidity is the answer, only for time to reveal that beneath the surface are genuine problems of solvency. A reluctance to admit that the issue is solvency rather than liquidity – even if the provision of liquidity is part of a bridge to the right solution – lay at the heart of Japan's slow response to its problems after the asset price bubble burst in the late 1980s, different countries' responses to the banking collapse in 2008, and the continuing woes of the euro area. Over the past two decades, successive American administrations dealt with the many financial crises around the world by acting on the assumption that the best way to restore market confidence was to provide liquidity – and lots of it. In appreciating the speed and violence of the market response to a collapse of confidence, they were following in the footsteps of earlier leaders. As Lloyd George wrote in his memoirs about the financial crisis at the outset of World War I: I saw Money before the war, I saw it immediately after the outbreak of war. I lived with it for days and days and did my best to steady its nerve, for I knew how much depended on restoring its confidence and I can say that Money was a frightened and trembling thing. Political pressures will always favor the provision of liquidity; lasting solutions require a willingness to tackle the solvency issues. The same holds true when contemplating the lessons of the crisis for reform of money and banking. Banks need to finance themselves with more equity so that they can absorb likely losses without the prospect of default and taxpayer support. And I have suggested that to prevent runs on banks we should replace the traditional lender of last resort by a pawnbroker for all seasons. It is time to end the alchemy. The prisoner's dilemma means that it will not be easy for any one country to solve the economic problem or reform its system of money and banking on its own. Changes in the way the world is governed take place more often after periods of war than in times of peace. Only in the former are the fissures that lie dormant in peacetime exposed as the economic and political tectonic plates shift. The experience of designing the postwar settlement was described in his memoirs by one of its progenitors, U.S. Secretary of State Dean Acheson, as being "present at the creation." To those of us involved in handling the financial crisis of 2007-09, it was more a case of being "present at the destruction," as the financial system collapsed. After the longest period of steady economic expansion in living memory, the crisis destroyed the credibility of economic policy and the reputation of the banking system of the advanced economies. The economic and financial crisis of the past decade has cast a long shadow. As the 18th century man of letters, Horace Walpole, said, "the world is a comedy to those that think, a tragedy to those that feel." The triumph of capitalism is that it has raised the pleasure of the here and now immeasurably for most of us, and we have a responsibility

328 to share that around. Inequality is one of the most important challenges to our economic system, but it was a symptom not a cause of the crisis. Fifty years from now, will our grandchildren ask why we lacked the courage to put in place reforms to stop a crisis happening again? I hope not. Events drive ideas, and the experience of crisis is driving economists to develop new ideas about how our economies work. They will be needed to overcome the power of vested interests and lobby groups. Only a recognition of the severity of the disequilibrium into which so many of the biggest economies of the world have fallen, and of the nature of the alchemy of our system of money and banking, will provide the courage to undertake bold reforms – the audacity of pessimism. Why has almost every industrialized country found it difficult to overcome the challenges of the stagnation that followed the financial crisis in 2007-09? Is this a failure of individuals, institutions or ideas? That is the fundamental question posed in this book. As a society, we rely on all three to drive prosperity. But the greatest of these is ideas. In the preface I referred to the wisdom of my Chinese friend who remarked about the Western world's management of money and banking that "I don't think you've quite got the hang of it yet." I have tried to explain how we can get the hang of it. For many centuries, money and banking were financial alchemy, seen as a source of strength when, in fact, they were the weak link of a capitalist economy. A long-term program for the reform of money and banking and the institutions of the global economy will be driven only by an intellectual revolution. Much of that will have to be the task of the next generation. But we must not use that as an excuse to postpone reform. It is the young of today who will suffer from the next crisis – and without reform the economic and human costs of that crisis will be bigger than last time. That is why, more than ever, we need the audacity of pessimism. It is our best hope. http://www.milkenreview.org/articles/the-end-of-alchemy

329

August 31, 2016 France to demand end to TTIP negotiations Europe's Social Democrats are lining up against TTIP - which effectively kills the trade agreement. After Sigmar Gabriel, François Hollande yesterday came up with a similarly negative assessment of the TTIP agreement. In an address to French ambassadors, he said that France preferred to face reality, which is that the talks cannot conceivably result in a treaty by the end of the year. We don't often agree with Hollande and Gabriel, but on this point they are right. TTIP is dead. The idea was to ratify a deal before a new president and Congress take over in the US. Regardless of the outcome of the US elections, the new administration is unlikely to continue in the same spirit as the current one. Frankfurter Allgemeine reports that Matthias Fekl, the French trade minister, said that France will officially demand an end to the TTIP negotiations at the forthcoming informal EU summit in Bratislava. He said he does not seek a delay but a firm end to the talks. He said the Americans were not offering anything - only a few crumbs, as he put it. French opinion also underlines the widespread scepticism of TTIP - with more than two thirds of the people against. The official position of both Michael Froman, the US trade representative, and Cecilia Malmström is that the talks are making progress. Malmström said she was surprised by Fekl's comments, considering that she had not even briefed him on the last round of negotiations. The FT notes that two factors have undermined TTIP. One is the electoral cycle in the US and Europe. Both France and Germany are already in campaign mode. The second factor is Brexit. With the departure of Britain, the rest of the EU is going to be unsupportive of free trade agreements. Our other stories We also have stories on Emmanuel Macron's resignation and his big plans for France; on the deflating hopes of the Brexit deniers; on eurozone inflation going nowhere; on Rajoy's lacklustre performance in the Spanish parliament, and alternative constellations; on whether the Irish government could fall over the Commission's Apple ruling; and on the end of Schauble's global financial transactions tax.

330

Milken Institute Review Rethinking Capital Controls by barry eichengreen ©Rubberball/Alamy Barry eichengreen is the George and Helen Pardee professor of economics and political science at the University of California, Berkeley. His most recent book is Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History. July 15, 2016

Economists are taught – and taught and taught – to appreciate the virtues of free markets. But they are also trained to be alert to circumstances in which markets, left to their own devices, produce less-than-optimal results. Sorting out the cases in which markets fail to generate efficient use of productive resources and justify government intervention can be tricky, though. And, as China's ongoing financial convulsions should remind us, few examples can be trickier to assess than international markets for capital. First things first. If you took Economics 101, you can probably dredge up cases of market failure in which government intervention is justified. For example, governments tax the emission of pollutants (or regulate them directly) because the cost of pollution would otherwise be borne by third parties and thus not taken into account in the balance of supply and demand. By the same token, governments regulate pharmaceuticals because buyers would otherwise lack enough information about their safety and efficacy to judge their value. The rationales for regulating both pollution emissions and drugs have also been applied to financial markets – for example, regulating the complex mortgage contracts that millions of poorly informed borrowers signed in the housing bubble of the early 2000s, which generated vast collateral damage when the bubble collapsed in 2008. Parallel arguments apply to international transactions. Most economists support the prohibition of imports made with slave labor, at least in part because consumers lack adequate information about the conditions under which those imports are produced. And they generally support safety regulation of imported food on the grounds that imperfectly informed purchasers would not otherwise know what they're ingesting. With all that in mind, consider the issue of taxing or regulating international capital flows – capital controls, for short. It's fair to say that the vast majority of economists are deeply skeptical about (if not downright hostile toward) their imposition. Yet it is not hard to find evidence in international financial markets of the kind of distortions that are likely to lead to imperfect information and, as a result, to economically inefficient and socially undesirable outcomes. Consider, for example, the phenomenon of "adverse selection." Just as sick people have more incentive to buy health insurance, the least creditworthy firms and governments are more inclined to borrow. Or, for that matter, the phenomenon of moral hazard, in

331 which borrowers who have no difficulty gaining access to foreign money are more likely to take on additional risk in the expectation that additional funds will always be available to bail them out. Moreover, international capital flows can be a source of negative externalities. When capital flows out of a country that is in financial difficulty, fire sales of domestic assets by foreign investors will cause the currency's exchange rate to plummet. This decline will reduce the value of the collateral of other residents who have borrowed in foreign currency, heightening their own – and their country's – financial difficulties. Still more investors will then flee in a self-reinforcing spiral, worsening the crisis. Hence, the classic rationales for regulation – imperfect information and externalities – are arguably present in the context of international capital flows. Economists' traditional hostility toward capital controls thus stands out as an anomaly worth a closer look. INGRAM MICRO

Sold to China's Tianjin Tianhai, 2016, for $6 billion. Controls in Theory and Practice We'll use the shorthand of "capital controls" for all policy measures influencing international capital flows based on the residence of the investor. And the global economy offers plenty of contemporary examples. In 2009 the government of Brazil imposed a tax on foreigners' purchases of Brazilian stocks and bonds equal to 2 percent of their value. (The rate was eventually raised to 6 percent.) Since the same tax was not imposed on domestic residents, it was a form of capital control. In 2010 Thailand imposed a 15 percent withholding tax on interest and capital gains on Thai government bonds held by foreign investors, but not on interest and capital gains on those same bonds accruing to domestic investors. In 2012, Uruguay required foreign investors purchasing government debt to maintain non-interest-bearing deposits equal to 40 percent of the value of the purchase for a fixed period. Since the reserve requirement was not imposed on domestic investors, it too constituted a capital control. Today, by far the largest economy imposing major capital controls is China. As it has throughout its history, the Peoples' Republic limits purchases of Chinese assets by foreigners to certain types of securities and only provides authorization to undertake even those purchases to specified categories of foreign investors.

332

These examples flag an important distinction between market-based and administrative capital controls. Market-based controls – taxes and measures like non-interest-bearing reserve requirements that are the equivalent of a tax – do affect market prices and reduce capital flows, but still allow the market to operate. They leave foreign investors free to decide whether to invest, provided they are willing to pay a premium. Administrative controls, by contrast, limit foreign investment to specific assets or specific investors or specific sums rather than using price to inhibit asset purchases. Economists generally view market-based or price-based controls as the lesser evil, on the grounds that they are relatively transparent (and thus less likely to be catnip for corruption) and still allow some scope for the market to allocate productive assets to those who value them most. But there's a catch: price- or tax-based measures presuppose the existence of a tax system that is difficult to evade, leading not just China, but also many less-developed economies, to rely mainly on administrative controls.

In the absence of capital controls, banks and corporations with foreign subsidiaries may still be able to borrow offshore, evading domestic regulation.

AMC ENTERTAINMENT

Acquired by China’s Dalian Wanda Group, 2012. Valued at $2.69 billion. Governments applying both market-based and administrative controls have invoked a number of different rationales for their actions. Brazil, in 2009, Thailand, in 2010, and Uruguay, in 2012, were all concerned about the potential externalities linked to massive inflows from foreigners seeking higher yields when the central banks of high-income countries cut interest rates to zero in response to the Great Recession. They worried that capital inflows would raise security prices to unsustainable heights, inflating financial bubbles that would cause collateral damage when they burst. They worried that ill- informed foreign investors scrambling for yield were blindly following the herd, and would just as blindly retreat with the herd when asset prices stopped going up. They worried that their own private banks, able to borrow abroad at bargain rates, were making excessively risky investments and levering up their bets – and would thus be hung out to dry when foreign finance dried up. Consider another (quite different) reason for concern. Policymakers in emerging-market countries saw that capital inflows were causing their own currencies' exchange rates to appreciate, damaging the competitiveness of their export industries and deterring export-driven startups. This latter phenomenon can be a very serious drag on long-term growth. Development economists argue that firms learn to export by observing other

333 exporters. Hence the diminution of exports from existing industries constitutes a negative externality along the lines discussed above. The existence of this externality would appear to be one motive for China's longstanding maintenance of capital controls. Chinese enterprises learn from exporting and from observing one another's success at exporting. Controls on capital inflows have therefore been used to limit the appreciation of the renminbi's exchange rate to promote learning by doing as well as to generate profits for existing exporters. The list goes on. Starting in 2009, policymakers in many emerging-market economies worried that capital inflows were fueling a domestic consumption and investment boom, thereby creating the danger of inflation and overheating. They were also worried that domestic monetary policy would not be able to turn down the thermostat. To understand why, bear with me for a brief refresher on macroeconomic theory. In an open economy, policymakers can achieve any two of three objectives : free capital mobility, stable exchange rates, and control of the domestic money supply. The standard treatment for inflation and overheating is, of course, to tighten monetary policy. But with free capital mobility, exercising monetary autonomy means that the third objective, control of the exchange rate, must be sacrificed. And that puts policymakers in a bind. Tightening monetary policy in an environment in which capital can freely cross borders would cause the exchange rate to appreciate as capital flowed in to take advantage of higher interest rates, making exports less competitive in foreign markets – something that policymakers in export-led economies like China view as especially costly in both economic and political terms. Hence policymakers are under considerable pressure to control capital inflows. The examples cited earlier suggest that even where controls are, on balance, helpful, there may be more efficient ways of addressing the problems to which capital flows give rise. For example, if the availability of cheap foreign finance allows domestic banks to make excessively risky investments and to dangerously leverage their bets, then the best response is to address their risk-taking behavior directly, by strengthening supervision and regulation of the domestic banking – not to discriminate between domestic and foreign funding with capital controls. To be sure, this is often easier said than done. In the absence of capital controls, banks and corporations with foreign subsidiaries may still be able to borrow offshore, evading domestic regulation. By the same token, branches of foreign banks operating in the country will typically be subject to regulation by the government of their home country and may thus be free to continue to extend risky loans to local customers. Effective prudential supervision and regulation require experienced, well-trained bank inspectors and well-developed administrative capacity – skills not available in abundance in developing countries. These practical constraints on addressing the source of the problem directly create an argument for capital controls as a second-best way to preserve the stability of the domestic financial system. Indeed, this is the currently fashionable argument for capital controls as "macroprudential" policy But the design of the controls matters if efficiency is the goal. Rather than applying controls across the board, policymakers should target their taxes and administrative measures at the specific types of capital flows most likely to create problems. If volatility is the problem and if short-term capital flows are especially volatile, then capital controls should be targeted at short-term flows. Thailand and Uruguay required

334 foreign investors to set aside a percentage of the value of the money they brought into the country without earning interest for a relatively brief period. This presumably deterred investors buying liquid financial assets who intended to hold them only briefly. But it would have little impact on the incentives of investors in for the long haul. Note, too, that the stringency of restrictions on capital flows intended to compensate for imperfect knowledge or to offset externalities should vary with the financial cycle. If over-borrowing is the problem, then controls should be especially strict when over- borrowing is prevalent – that is, when global credit is accommodating and large amounts of foreign capital are flowing into a country. Brazil, Thailand, and Uruguay all adjusted capital controls in this way. GE APPLIANCES

Acquired by China’s Haier, 2016, for 5.4 billion. Then Why the Skepticism? If the rationales for (and circumstances under which) capital controls are useful are clear, why are economists still so skeptical? One answer is that historical experience with capital controls suggests they are blunt instruments and often subject to abuse. Before 1914, regulation of international capital flows was relatively limited, just as financial regulation in general was relatively limited. Comprehensive controls were only put in place by the major belligerents during World War I, when it was deemed essential to husband resources for the war effort. But freeing capital from controls proved a lot harder than imposing them. Controls remained in place in the 1920s in countries experiencing problems of postwar readjustment – in particular, those finding it hard to restore their prewar currency- exchange rates. The British government, for example, continued to restrict the ability of banks in London to underwrite long-term foreign loans as part of an effort to offset the weakness of the British balance of payments and thereby restore the pound sterling to its prewar parity against gold and the dollar. Controls proliferated after the financial crash and the onset of the Great Depression. Countries experiencing banking runs and seeing panicked withdrawals by foreign depositors embargoed the repatriation of funds. With the gold-standard crisis in 1931, one set of countries led by Great Britain devalued their currencies, leaving the others – members of the so-called Gold Bloc – with overvalued exchange rates and weak balances of payments. This second group responded by tightening both import restrictions and capital controls.

335

Most notoriously, Germany imposed comprehensive restrictions on its international financial transactions as part of the plan to bring the German economy under the control of Nazi planners. It used that comprehensive system to regulate its trade and financial relations with its Central and Eastern European neighbors, which had been badly battered by the global depression. This allowed the Reich to extract resources from them to build the German war machine on terms favorable to the government. World War II brought on even stricter controls on capital flows as part of the larger set of wartime restrictions that involved controlling goods, prices, wages, production and foreign trade. Governments emerged from the Second World War with even larger financial imbalances than those following the First. The British government's debt, for example, was on the order of 250 percent of national income, with much of it owed to foreigners. Britain was thus forced to limit the ability of foreign investors to liquidate their British government securities and to repatriate their funds for many years. Moreover, these controls remained in place for a remarkably long time – into the 1970s. Other governments maintained similar restrictions. Given the banking crises of the 1930s and the still-weak condition of banking systems after World War II, they tightly regulated domestic financial transactions – something that was feasible only if they also maintained tight restrictions on cross-border lending and borrowing. Note, moreover, that capital controls similarly created room for governments and central banks to maneuver to pursue domestic demand-management policies (as increasingly expected by their electorates) while also holding exchange rates stable. Administrative controls on capital movements were even tighter in the third world. In the 1950s and 1960s, many newly independent developing countries were impressed by the breakneck growth achieved by the centrally planned Soviet Union and sought to follow a similar path. Again, tight regulation of the financial system and the economy by planners was only possible with tight controls over capital flows. The gradual movement away from capital controls in the final quarter of the 20th century was part and parcel of the move away from central planning and the widening belief that a market-oriented, or at least mixed, economy model was more conducive to growth. Critics contended that the efforts of bureaucrats to control capital outflows as a way of subsidizing domestic investment – and their selective control of capital inflows as a way of channeling domestic investment toward particular industries – were ultimately counterproductive for the broader economy. Since planners had no special talent for picking winners, controls resulted in a misallocation of resources, ultimately hindering growth. Exacerbating the resulting mess, control of foreign lending and borrowing (like control of other activities) encouraged corruption. To tap foreign funding, banks and firms needed to obtain government approval, which usually came at a price. India's notorious license raj, the elaborate system of regulation, red tape and under-the-table payments affecting all manner of economic transactions, prominently included restrictions on inward and outward foreign investment. In more-advanced countries, controls appeared to lose much of their effectiveness as governments relaxed draconian regulation of domestic financial institutions and markets, opening additional avenues for evasion and making effective enforcement difficult. More generally, advanced-country experience suggested that economic and

336 financial development and the liberalization of international capital flows went hand in hand. The United States, the country with the most liquid financial markets and the strongest international financial position, quickly removed its wartime controls. Other members of the Organization for Economic Cooperation and Development (the club of advanced economies) moved in the same direction, the OECD having adopted a Code of Liberalization obliging its members to do so. Japan liberalized its international financial transactions relatively late since the removal of controls would have undermined the government's system of top-down planning, administered by the Ministry of Trade and Industry – to which it was still wedded in the 1970s and 1980s. Western European nations, for their part, removed remaining capital controls in the 1980s. The countries that would become the European Union all moved away from pegged exchange rates. Abandoning currency pegs allowed them to increase cross- border capital mobility while retaining their ability to control the domestic money supply, providing an alternative solution to the open-economy trilemma discussed above. Correlation, here between relatively high levels of income and the absence of capital controls, is not, of course, proof of causation. High-income status, and the well- functioning markets and well-developed regulatory capacity associated with it, may well be what minimize domestic market imperfections and permit the removal of capital controls. It could be that those well-functioning markets and well-developed regulatory capacity, not the absence of controls, are what in fact limit the prevalence of corruption, favoritism by government officials and domestic allocative distortions. LEGENDARY ENTERTAINMENT

Acquired by China’s Dalian Wanda Group in 2016 for $3.5 billion. What To Do Still, worries persist that capital controls create a breeding ground for both corruption and distortions in resource allocation. Their critics warn that controls are inertial: once put in place for reasons good or bad, they are often almost impossible to remove. That's because the benefits of controls are concentrated, giving the favored groups (exporters, in the case of China) a strong incentive to lobby for their retention, while the costs are diffuse, making opponents (think of consumers) difficult to mobilize. Controls may also provide an excuse not to undertake painful but necessary reforms. When they are put in place as bandages to cover banking problems, the pressure to fix the banking system will be less. When they are put in place in response to budget and inflation problems, the pressure to adjust macroeconomic policies will be correspondingly reduced. Thus, even when the case for capital controls is supported by

337 the information asymmetries and externalities outlined earlier, they come with risks whose costs, in the eyes of some, are prohibitive. What can be done to limit those risks? One possibility is to develop standards for the use – and for avoiding the misuse – of capital controls and to construct enforcement mechanisms designed to hold countries to those standards. Five years ago, the G20 countries endorsed a position paper outlining how countries should manage capital flows. The paper argued that controls (which governments euphemistically labeled "capital-flow management measures") should be targeted at specific risks rather than used indiscriminately. They should be reviewed regularly with an eye toward phasing out redundant measures. They should be relaxed or reversed when destabilizing pressures abate. They should be transparent, preferably price-based, in order to limit opportunities for corruption and favoritism. They should not be used as an excuse to avoid painful but vital domestic-policy reforms. Wishing won't make it come true, though. One possible way to ensure that governments adhere to these standards would be to make compliance an obligation for members of the International Monetary Fund and to authorize the fund to name and shame countries that fail to comply. More ambitiously, countries that fail to comply could be denied access to the fund's financing facilities. In 2011, the fund attempted to develop a code of conduct for the use of capital controls. In the end, however, this initiative was torpedoed by emerging-market countries, led by Brazil and India. They feared that the fund, which had long been ideologically opposed to the use of controls, would constrain the options available to governments facing surges in capital flows. But since then, the International Monetary Fund has displayed greater open-mindedness about capital controls, articulating a "new institutional view" acknowledging that their use may be warranted in some circumstances. And given this new open-mindedness, there may be a way to create the long-elusive consensus. Stay tuned. http://www.milkenreview.org/articles/rethin king-capital-controls

338

Milken Institute Review

The Elusive Promise of Structural Reform By dani rodrik Dani rodrik is the Ford Foundation professor of international political economy at the Kennedy School at Harvard. This article is an expanded version of a column written for Project Syndicate. Published May 2, 2016 dani rodrik on Structural reform – or more accurately talk of structural reform – is everywhere nowadays. Every country struggling for economic growth, it seems, is getting the same message from the chattering classes as well as the deep-pocketed multilateral finance agencies like the IMF and the European Central Bank: half measures are not enough. In practice, structural reform has come to represent a grab bag of policies meant to enhance productivity and improve the functioning of the supply side of the economy. These measures aim to sweep away impediments to the functioning of labor, goods and services markets – to make it easier for firms to fire unwanted employees, to break business and union monopoly power, to privatize state assets, to reduce regulation and red tape, to remove licensing fees and other costs that deter market entry, to improve the efficiency of the courts, to enforce property rights, to enhance contract enforcement and so on. Indeed, the grab bag is even bigger. Often, for example, structural reform includes changes in taxes and social security programs with an eye toward fiscal sustainability. The overarching goal is to increase the efficiency with which labor and capital are allocated in the economy, ensuring that these resources go where their contribution to national income is largest. Success comes in the form of increased productivity, more private investment and, of course, more rapid economic growth. Perhaps nowhere in recent years has the gospel of structural reform been promoted with greater vehemence than in Greece. Indeed, Greece's creditors have made it crystal clear that structural reform, boldly conceived and implemented without slippage, is critical to economic recovery and growth – and most persuasively to Greeks, that bailout funds will not be forthcoming without it. The International Monetary Fund and European public lenders understood that the fiscal austerity they prescribed would be costly to incomes and employment (though a retrospective IMF study later showed they significantly underestimated by how much). But there would be a compensatory boost to the economy, they argued, that would come from the long-delayed and much-needed opening of the Greek economy to competitive market forces. The specifics demanded from Greece ranged from gut-wrenching to mundane. They included (in no particular order) lower barriers to entry in service businesses such as notaries, pharmacies and taxis; reduced scope of collective bargaining; privatization of state assets; a rollback of pensions and the cleanup of Greece's notoriously inefficient and arguably corrupt tax administration. The IMF's then-chief economist, Olivier

339

Blanchard, (among others) argued that such reforms were critical in light of the "dismal productivity growth rec-ord of Greece before the program." Less ambitious reforms wouldn't do because they would have less impact on growth potential and necessitate greater debt relief. Partial Amnesia But the policy prescribers, it seems, suffered from selective memory. Structural reform as a remedy for slow (or no) growth has been around at least since the early 1980s. At that time, the World Bank began to insist on economywide liberalizing reforms as the quid pro quo for developing countries in Asia, Africa and the Middle East in return for "structural-adjustment" loans. These policies were then extended and codified in Latin America during the 1990s under the umbrella of the Washington Consensus. Many of the former socialist economies adopted similar policies (in some cases, voluntarily) when they opened up their economies during the 1990s. Oddly, though, debate over the reforms pressed on Greece and other crisis-battered countries on the periphery of Europe did not benefit from lessons learned in these other settings. A serious look at the vast experience with privatization, deregulation and liberalization since the 1980s – in Latin America, post-socialist economies and Asia in particular – would have produced much less optimism about the benefits of the kinds of reforms Athens was asked to impose. That experience suggests that structural reform yields growth only over the longer term, at best; more often than not, the short-run effects are negative. One meta- study of 46 different research papers on post-socialist economies found that the impact of structural reform varied across the board. The modal estimate of the impact was statistically insignificant, meaning that it was impossible to conclude with any confidence whether the effects were positive or negative. In Latin America, for example, some economies have flourished in the wake of reform (think Chile) and some have lagged (as in Mexico). These results may seem surprising at first glance but are, in fact, consistent with what economic theory teaches. The standard convergence framework that economists use to analyze growth across countries gives us little reason to expect strong short-term growth-promoting effects. Reform works by raising the potential income of the economy in the long run. Take Greece. Opening the regulated professions will eventually lead more productive firms to drive out inefficient suppliers. The privatization of state enterprises will lead to the rationalization of production (and dismissal of all the excess workers employed through political patronage). But these changes will require years to work themselves through the economy. And in the short run, they may yield perverse effects. For example, the loss of the (however disappointing) output of workers laid off by privatized enterprises will subtract from, rather than add to, national income. Economists have spent significant effort at estimating the speed with which economies tend to converge to their long-run levels of income. The near-consensus of academic studies is that convergence is pretty slow, at a rate of about 2 percent per year. That is, an economy tends to close 2 percent of the gap each year between its actual and potential income levels. This estimate helps us gauge the magnitude of growth we can expect from structural reform. Let's be wildly optimistic and suppose that structural reforms enable Greece to

340 double its potential income over three years, which would push Greece's potential per- capita GDP significantly beyond the European Union average. Applying convergence math, this would produce an annual growth boost of only about 1.3 percent per year on average over the next three years. To place this number in perspective, remember that Greek GDP has shrunk by 25 percent since 2009. So if structural reforms have so far not paid off in Greece, it is not necessarily because the country's governments have slacked off. Indeed, it is easy – but also largely erroneous – to blame successive Greek governments for unenthusiastic implementation of structural reform and significant slippages. Certainly, Greece has not delivered on every measure it agreed to adopt. Given the magnitude of effort needed, which government could? Yet, remarkably, Greece moved up by nearly 40 positions between 2010 and 2015 in the World Bank's Ease of Doing Business rankings. The country's labor markets are more "flexible" – meaning liberalized – today than those of most other eurozone countries. Greece's "failure" arises instead from the very logic of structural reform: the bulk of the benefits comes much later, not when their creditors (and unemployed Greeks) need them most.

© Pacific Press/Corbis Greece and its creditors need to recognize the importance of improving the profitability of sectors that produce tradable goods and services, and to reorganize reforms around that task. What Triggers Takeoffs? This leaves us with an apparent puzzle. If structural reforms deliver their growth payoffs so slowly, how are we to explain the numerous instances of abrupt takeoffs in East Asia and elsewhere? If such takeoffs are not the product of conventional structural reform, what does drive them? A few words first on growth takeoffs. A decade ago, Ricardo Hausmann, Lant Pritchett and I published an article that documented the basic stylized facts about what we called "growth accelerations." We defined a growth acceleration as an increase in per-capita growth of two percentage points or more (with most of the episodes we identified exceeding this threshold by a wide margin). To qualify as acceleration, the increase in the growth rate had to be sustained for at least eight years, and the post-acceleration rate had to be at least 3.5 percent annually (per capita). In addition, to rule out cases of acceleration purely attributable to recovery from recession, we required that post- acceleration output exceed the pre-episode peak level of income. We were surprised to discover how frequent these episodes of growth acceleration are. We identified more than 80 cases over the 35-year period from 1957 to 1992. This meant the probability that any given country would experience a growth acceleration

341 sometime during a decade was as high as 25 percent. Of the 110 countries included in the sample, 60 had at least one acceleration in the 1957-92 period. More important, we found that standard factors economists think play a role in growth do not do a good job of predicting acceleration. In particular, structural reforms were only loosely correlated with turning points in economic performance. Fewer than 15 percent of significant economic liberalizations produced growth accelerations, and only 16 percent of growth accelerations were preceded by economic liberalization. Some growth accelerations were obviously the result of fortuitous external conditions (such as a rise in the world prices of a country's major exports) or other changes not directly attributable to economic policy (such as changes in political regime). But in most cases, there was no smoking gun. That got us thinking about what might lie behind these instances when economic prospects suddenly brightened. India's growth acceleration in the early 1980s is perhaps a paradigmatic case. The country's growth rate more than doubled, from 1.7 percent in 1950-80 to 3.8 percent in 1980-2000, with a clear turning point in 1981-82. Yet serious liberalizing reforms in India did not arrive until 1991, when Manmohan Singh slashed trade barriers, welcomed foreign investment and began both privatization and the dismantling of what is derisively called the license raj. In other words, the pickup in India's growth preceded the 1991 liberalization by a full decade. Arvind Subramanian and I concluded that the trigger to India's economic growth was an attitudinal shift on the part of the national government in 1980. Until that time, the rhetoric of the reigning Congress Party had been all about socialism and pro-poor policies. When Indira Gandhi returned to power in 1980, she realigned herself politically with the organized private sector and dropped her previous rhetoric. The national government's attitude toward business went from being outright hostile to supportive. Note that this was a pro-business shift rather than a pro-market shift. It was not supported by liberalizing reforms, which would only come a decade down the road. Indira Gandhi's switch was further reinforced, in a more explicit manner, by Rajiv Gandhi after his rise to power in 1984. This seems to have been the key change that unleashed what Keynes called the "animal spirits" of the Indian private sector. The moral of the Indian story is that small changes can make a big difference in economies that suffer from multiple distortions. The Chinese growth acceleration after 1978 very much bears this out. The Chinese economic takeoff wasn't the product of economy-wide reforms or a major liberalization. It was the consequence of specific reforms that loosened collective farming rules and allowed farmers to sell excess production – after state quotas were fulfilled – at un-controlled market prices. The same type of selective, targeted reforms in urban industrial development, trade, foreign investment and finance would unfold over the next three decades, keeping the Chinese miracle going and going and going. Or consider Mauritius, one of Africa's few growth successes in the 20th century, which experienced its growth acceleration in 1971. The trigger seems to have been the establishment of a largely unregulated export processing zone that led to a boom in garment exports, even as the rest of the economy remained heavily controlled and protected. What is common to these cases is that the takeoffs were associated with a targeted removal of key obstacles to growth, rather than broad liberalization and

342 economywide reforms. India, China and Mauritius all benefited from growth strategies that specifically focused on removing binding constraints on growth. Targeting reforms on areas where the growth returns are the greatest maximizes early benefits. It also ensures that scarce political capital and administrative resources are spent on the battles that really matter.

Louisa Gouliamaki/AFP/Getty Images

Maximum Gain For Minimum Pain Along with my Harvard colleagues Ricardo Hausmann and Andres Velasco, I undertook to identify the binding constraints to growth in specific settings in a 2005 article. For example, an economy in which the main constraint on growth was poor access to finance should exhibit different symptoms (high interest rates, strong responsiveness of domestic investment to foreign capital inflows, etc.) than an economy whose main problem was low profitability of private investment (low interest rates, ample liquidity in the banking system, etc.). When entrepreneurship is hampered primarily by market failures rather than government failures, the country may rank high on standard creditworthiness measures like transparency or institutional quality, but private investment will remain low. A focus on binding constraints helps us see why remedies that are not well targeted – broad structural reforms – are ineffective, at best, and sometimes counterproductive. Cutting red tape and reducing regulation does little to spur private economic activity when the constraint lies on the finance side. Improving financial intermediation does not raise private investment when entrepreneurs expect low profits. Successful policy design must rely more on domestic experimentation and local institutional innovations – and much less on "best practices" and blueprints adopted from international experience. Going back to Greece, where is the binding constraint on that economy today? With a quarter of the labor force out of work, I would argue that the quickest way to get the economy back on its feet would be to increase the private sector's demand for workers. Supply-side measures, such as conventional structural reforms, can't be particularly effective at present because the binding constraint is on demand rather than supply. Deregulating professions does not boost entry when aggregate demand is depressed. Making it easier to fire workers does not induce firms to invest and produce more; it just facilitates laying off workers. As helpful as these measures may be in promoting long-term growth, they don't do much for the economy in the short run and may even make things worse. However, conventional demand-side remedies like government spending, tax cuts or devaluation are ruled out by both the burden of public debt and Greece's membership in the eurozone. In principle, wage deflation should have been a substitute for currency depreciation, making Greek goods and services cheaper in foreign markets. And Greek wages have come down substantially. But here, too, the absence of a single-minded focus on the binding constraints has proved costly. Different elements in the structural reforms have had conflicting effects on export competitiveness. In manufacturing, for example, the competitiveness benefits of wage cuts were offset by the cost of increases in energy prices resulting from fiscal austerity

343 measures and state enterprise price adjustments. A better prioritized reform strategy could have protected export activities from this adverse effect. The absence of the ability to devalue or depreciate the currency remains a serious impediment. But the experience of other countries provides a rich menu of alternative tools for export promotion ranging from tax incentives to special zones to targeted infrastructure projects. Greece and its creditors need to recognize the importance (and priority) of improving the profitability of sectors that produce tradable goods and services, and to reorganize reforms around that task. Most urgently, the government needs to set up an institution close to the prime minister tasked with fostering a dialogue with potential investors – both domestic and foreign – in export-oriented projects. This institution needs to have the ability to remove obstacles identified in the process, to avoid having its proposals languish in ministries with other priorities. These obstacles are typically highly specific to the investment – a zoning regulation here, the lack of a labor-training program there – and are unlikely to be targeted by broad structural reforms. Some observers of the Greek economy deride the value of export promotion, arguing that the country is hindered by a lack of diversity in tradable goods and services, and is thus unlikely to respond to incentives. But the experience of other countries makes clear that low export and diversification levels are not destiny. Sizable – and credible – changes in export incentives typically produce robust responses, even where exports are confined to a few traditional crops. It is now forgotten that Taiwan exported sugar, rice and little else before its trade took off in the early 1960s. Closer by, export pessimism was the dominant mood among Turkey's elites before the reforms in the early 1980s, which mainly consisted of export subsidies, produced a rapid rise in the export-GDP ratio. In Taiwan, Turkey and elsewhere, new exports rather than traditional products have led the way. There's no straightforward means to predict what these new exports will be before the incentives are put in place. But this opacity should not be grounds for pessimism about their likelihood of emerging.

Dominik Bindl/Getty Images Pay Now, Pay Later

344

Ultimately, the choice of reform boils down to one of two approaches. The conventional structural reform agenda relies on a "big bang" – as many changes as possible, as quickly as feasible. Politically, this approach typically exploits a window of opportunity created by economic crisis that reformers fear will close when normal times return. The costs of big-bang reform – higher unemployment, slower recovery – are tolerated in order to reap what is hoped will be sizable benefits down the line. This kind of reform perhaps works best when there are external anchors that prevent backsliding as short- term costs mount. Poland in the early 1990s is arguably the model. The prospect of European Union membership – and the promise of becoming a "normal European country" after a half century of isolation from the West – held the reforms together despite high unemployment and serious economic dislocation early on. Elsewhere, in the absence of external anchors there is always a real threat that the backlash will dominate. Bolivia and Venezuela in Latin America fit this latter mold. The second approach is less ambitious, consisting of sequential targeting of binding constraints. The political strategy underpinning this style of reform is the expectation that early wins will create political support for reforms (and reformers) over time. When binding constraints are successfully targeted, the early growth payoffs can be quite spectacular. This is the quintessential model perfected in China, but versions have been at play in South Korea, Taiwan and India at different times. Because the reforms are partial, they never quite do away with the insiders (and their ability to extract gains through market power and political connections), who are typically less than enthusiastic about continuing reforms. So there is always the risk that such reforms will get stuck midway and the early growth benefits will dissipate. Greece has taken the first route – likely less because this was the country's choice than because its creditors left it with little alternative. If the results have been disappointing to date, it is for reasons that should have been expected at the outset. It remains to be seen whether Greeks' evident desire to remain in the eurozone (or at least their fears of the alternative) will prove sufficient counterweight to the pain that the country has yet to endure. main topic: Economic Growth related topics: Fiscal Policy, Monetary Policy, Income Distribution, Europe, European Union http://www.milkenreview.org/articles/the-elusive-promise-of-structural-reform

Milken Institute Review The Narrowing Generation Gap by william h. frey bill frey is a senior fellow at both the Milken Institute and the Brookings Institution and author of Diversity Explosion: How New Racial Demographics Are Remaking America. Published May 2, 2016

345

Just when they slipped your mind, Baby Boomers are about to make history again. This year, the first members of the generation that once never trusted anyone over 30 will begin celebrating their 70th birthdays – leading a train of more than 65 million others who will pass that threshold over the next two decades. While eclipsed by the Millennials in media visibility, the Boomers will continue to make their mark, this time around by bringing a new demographic sensibility to what it means to be 70. In part, this is a matter of sheer numbers. But it's also true that Boomers have a striking propensity to generate socioeconomic change. Early Boomers are not only more racially diverse than previous generations at this age, but also more diverse than they themselves were in the younger years, thanks to immigration by Latinos and Asians. By the same token, the women's movement (along with frustration with stagnant wages) has narrowed gender inequity in the workplace to a far greater degree for Boomers than for prior seniors. Fully 30 percent of early Boomer women are now college graduates, a far larger figure than for similarly aged women in the World War II-era and Depression-era generations. And even though they are past peak labor force participation age, they remain far ahead of women of the same age from previous generations. As young adults, early Boomers were notorious for resisting the traditional family structure of the 1950s, delaying marriage, bearing fewer children and, for women especially, placing greater emphasis on careers. And they remain less likely to be married and more likely to be divorced than the two prior generations. Finances are also brighter – though hardly coming up roses – for Boomers. Poverty rates are relatively low (at 10 percent) compared to the national poverty rate (15 percent in 2014). And a study by the Pew Charitable Trusts predicts that early Boomer retirees will be able to replace a solid 70 to 80 percent of their preretirement income. Along with economic power, the large number of Boomers (and their inclination to vote) promises growing political strength. If they turn out at 2012 rates in 2016 (a pretty big if), the Boomers will generate 35 percent of all votes cast, compared with 24 percent from lower turnout Millennials. Republican candidates may see Boomers as their best hope for success because they are whiter and more conservative than younger Americans. But Pew Research Center polls in 2014 in fact show that 49 percent of early Boomers identify or lean Democratic, while only 41 percent identify or lean Republican. Indeed, while their lifestyles may differ sharply from those of today's youth, the generation gap is likely narrower than in the past. And (I hope) this presages an opportunity for building a majority with common political goals and an inclination to compromise.

http://www.milkenreview.org/articles/charticle-2

346

Milken Institute Review Human Capital in the 21st Century By alan b. krueger Alan Krueger, who teaches economics at Princeton, served as chairman of the President's Council of Economic Advisers from 2011 to 2013. Previously he served as assistant secretary for economic policy and chief economist at the U.S. Department of Treasury (2009-10) and chief economist at the Department of Labor (1994-95). Illustrations by JT Morrow Published January 20, 2015

I think it is fair to say that no French writer save Alexis de Tocqueville has been more influential in the United States than Thomas Piketty, director of studies at the elite Écoles des Hautes Études en Sciences Sociales in Paris and, most important here, author of Capital in the Twenty-First Century (Harvard University Press). Piketty's magnum opus has succeeded in achieving its goal of provoking a serious public discussion about a shadow hanging over capitalism, the rise in economic inequality.

The 700-page tome soared to the top of The New York Times' bestseller list, was praised by leading lights in the economics profession, venerated by op-ed columnists and assorted talking heads, and critiqued by serious social scientists and political partisans alike. Even if Capital… holds the record for the fewest pages read by the most purchasers (beating out Stephen Hawking's A Brief History of Time), it has provided an immense service by engaging the public in the economic theory of income distribution and by stimulating a sometimes-thoughtful discussion of the future course of inequality. By this time, the book's strengths are widely known. It assembles and reviews centuries of data on capital's share of income in several countries. It gathers evidence on both the rate of return to capital and economic growth. It provides a provocative and intuitive theoretical argument predicting that income will become increasingly concentrated in the hands of capital owners and their heirs in the future if, as has been the case throughout much of history, the return on capital exceeds the growth rate of the economy. And it provides a sweeping perspective on economic history and the history of economic thought. Larry Summers, the former Treasury Secretary and president- emeritus of Harvard – and not one to suffer fools – called the book "a Nobel Prize– worthy contribution."

347

The U.S. may be headed for an inequality trap, where rising inequality in one generation reduces opportunities for economic advancement for disadvantaged children in the next generation, and so on into the future.

On the Other Hand… Scholars have also raised some serious shortcomings with the analysis. No, I don't refer to the Financial Times' Chris Giles's overwrought and insignificant allegations of data errors (What is the world coming to when journalists can levy allegations at serious research without vetting, and yet command instant global attention?). Far more important issues have been raised by Per Krusell of Stockholm University and Tony Smith of Yale, for example, as to whether it is appropriate to assume (as Piketty does in what he calls the "second fundamental rule of capitalism") that capital's share of national income will tend toward the ratio of the savings rate to the growth rate in the long run. The two economists note that the "fundamental rule" is untenable at one extreme (if growth falls to zero, savings would consume all of GDP) and that it is inconsistent with U.S. experience. They also point to alternative models of economic growth that are more consistent with U.S. experience. Serious related questions have been raised by Summers and others as to whether Piketty is sufficiently sensitive to the role of capital depreciation. Still others have pointed to the reality that inherited wealth is spread over multiple heirs, that heirs do not always invest wisely, and that many wealthy individuals choose to donate the bulk of their wealth to charitable causes rather than leave it to their offspring (thank you, Bill Gates and Warren Buffett). I would yet raise another concern about Capital…, one that suggests that the evolution of inequality might be even more alarming than Piketty predicts. The focus of the book is on physical capital and financial capital. Human capital is given short shrift. Yet the

348 importance of human capital – the investments that people make in their own productive capacities, just as capitalists invest in plant and equipment – is quite old in economics. In The Wealth of Nations, for example, Adam Smith wrote: A man educated at the expence of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expence of his education, with at least the ordinary profits of an equally valuable capital. In modern economies, the returns to human capital account for the lion's share of national income, and investment in human capital drives economic growth. (See, for example, my May 1999 paper in the American Economic Review: Papers and Proceedings for evidence on the outsized role played by human capital in the U.S. economy, and Paul Romer's 1990 Carnegie-Rochester Conference Series paper on human capital and growth.) Indeed, the categories referred to as labor's share of income and capital's share of income appear crude and antiquated when one can compare the share of income accruing to diverse groups ranging from managers to college graduates to high school dropouts. A more troubling aspect of the Piketty phenomenon is not about what he might get wrong, but what he sweeps under the rug. While the increased concentration of income among the top 1 percent of Americans has attracted enormous attention in the wake of the American publication of Capital… and the earlier Occupy movement, the rise in income inequality among the bottom 99 percent is arguably a far more important feature of the economic landscape, and one at least as worrisome. Moreover, changes in earnings associated with different levels of education – that is, human capital – have played an outsized role in raising inequality among the bottom 99 percent of Americans. Consider the following hypothetical calculation. If the top 1 percent's share of income had remained constant at its 1979 level, and all of the increase in share that actually went to the top 1 percent were redistributed to the bottom 99 percent – a feat that might or might not have been achievable without shrinking the total size of the pie – then each family in the bottom 99 percent would have gained about $7,000 in annual income (in today's dollars). That is not an insignificant sum. But contrast it with the magnitude of the income premium associated with educational achievement: The earnings gap between the median household headed by a college graduate and the median household headed by a high school graduate rose by $20,400 between 1979 and 2013 according to my calculations based on the Bureau of Labor Statistics' Current Population Survey. This shift – which took place entirely within the bottom 99 percent – is three times as great as the shift that has taken place from the bottom 99 percent to the top 1 percent in the same time frame.

The global would not directly address rising inequality among the bottom 99 percent or do anything to provide more opportunities for those who are falling behind.

349

What's worse, there are reasons to believe that the enormous rise in inequality that we have experienced will reduce intergenerational economic mobility and cause inequality to rise further in the future. In 2012, I popularized a relationship that I called the Great Gatsby Curve (opposite page), based on earlier research by Miles Corak, Anders Björklund, Markus Jäntti and others. The Great Gatsby Curve shows that countries experiencing high inequality in one generation tend to have lower intergenerational mobility in the next. Raj Chetty and coauthors have shown that this relationship holds across labor markets within the United States as well and that higher inequality in the bottom half of the distribution is particularly predictive of lower intergenerational mobility. The phenomenon of the Great Gatsby Curve is predicted by standard human capital theory. If the return to education increases over time, and higher-income parents are more prone to invest in the education of their children than lower-income parents – or if talents are inherited from one generation to the next – then the gap between children of higher- and lower-income families would be expected to grow with time. Furthermore, if social networking and family connections also have an important impact on outcomes in the job market, and those connections are transmitted across generations, one would expect the Great Gatsby effect to be even stronger. There are, indeed, signs that the rise in income inequality in the United States since the late 1970s has been undermining equality of opportunity. For example, the gap in participation in extracurricular activities between children of advantaged and disadvantaged parents has grown since the 1980s, as has the gap in parental spending on educational enrichment activities. Furthermore, the gap in educational attainment between children born to high- and low-income parents has widened. The rising gap in opportunities between children of low- and high-income families does not bode well for the future. Based on the rise in inequality that the United States has seen from 1985 to 2010 and the empirical evidence of a Great Gatsby Curve relationship, I calculated that intergenerational mobility will slow by about a quarter for the next generation of children. My concern – one entirely independent of Piketty's focus – is that the United States may be headed for an inequality trap, where rising inequality in one generation reduces opportunities for economic advancement for disadvantaged children in the next generation, and so on into the future. What could prevent such an inequality trap from taking hold? The most obvious solution is to provide greater educational opportunities for children from less-privileged backgrounds. Universal preschool, for example, is a good place to start. It would also make sense to pay teachers in inner-city public schools who work with less-prepared and more-disruptive students substantially more than we pay those who work in fancy

350 suburbs. By the same token, there's a good case to be made for funding smaller classes in poorer areas, especially in the early grades. Consider, too, making better use of the summers for disadvantaged children. Much research establishes that kids from poor families fall further behind when school is out of session. Why not lengthen the school year, as Asia and Europe have done? Or provide vouchers that low-income families can use to enroll their children in educational activities in the summer? These proposals contrast with Piketty's call for a global wealth tax to offset the forces driving rising inequality. Imposing and coordinating a wealth tax across nations is a political nonstarter. More important to my concerns, the tax would not directly address rising inequality among the bottom 99 percent or do anything to provide more opportunities for those who are falling behind. Now, before I get carried away, I should also inject a word of caution. Capital… notes that deterministic predictions of rising or falling inequality – from Karl Marx to Nobel Prize–winner Simon Kuznets – have been wrong in the past. For example, the Kuznets Curve, which predicts that economic development will first increase income inequality and then decrease it, was long ago shown to be a relic of history by the careful research of Gary Fields of Cornell (which, curiously, is not cited by Piketty). As Fields wrote in 1999: "The Kuznets Curve is neither a law nor even a central tendency. The pattern is that there is no pattern." It is possible that the Great Gatsby Curve will go the way of the Kuznets Curve. Correlation, after all, is not causality. To that point, it is possible that rapid developments in online education will greatly increase access to education and improve the quality of education. Moreover, the fact that inequality has increased at dramatically different rates in advanced countries over the past three decades suggests that country-specific institutions and policies have considerable ability to blunt or even prevent income inequality from rising. In this regard, one area where much evidence suggests that public policy can narrow the gap is worker bargaining power, such as by raising the minimum wage and tying it to the cost of living or by improving labor's leverage in collective bargaining. But even if the Great Gatsby Curve does not hold over time, a large body of evidence suggests that the societal benefits of investing more in the education of children from disadvantaged backgrounds exceeds the costs. A global wealth tax, by contrast, is an untested idea without a chance of being adopted – and, if it were, would not adequately address the intergenerational mobility issue. Piketty's Capital… may vanish from the public's consciousness as abruptly as it arrived. But generations of economists will continue to monitor income distribution for signs of whether his prediction of rising inequality, based on a seductively simple model of why income distribution changes, comes to pass. Piketty's forecast could well prove accurate for the wrong reasons, however – and, as a result, distract us from the core problem. A vast body of research aimed at explaining rising inequality among the bottom 99 percent implicates the critical role of human capital – not to mention the significance of institutional changes including the fall in the real value of the minimum wage and the decline in union membership. If we lack the determination to address it in the context of the Great Gatsby Curve, the American Dream may turn into a distant memory. main topic: Income Distribution related topics: Human Capital, Labor, U.S. Economy

351 http://www.milkenreview.org/articles/human-capital-in-the-21st-century?IssueID=11

Pierre Gattaz : «On peut créer 2 millions d’emplois en France» Etienne LefebvreClaire BauchartAlain Ruello Le 29/08 à 18:34

Pierre Gattaz, président du Medef. - Eric TSCHAEN/REA INTERVIEW - Le président du Medef, dont l’université d’été débute ce mardi, demande des « engagements forts » aux candidats à la présidentielle. Il salue le pacte de responsabilité, mais juge que la loi sur la pénibilité restera le « point noir » du quinquennat. « Y croire et agir ! », telle est la thématique de la 18e Université d'été du Medef, qui s'ouvre ce mardi - pour deux jours - sur le campus d'HEC à Jouy-en-Josas, dans les Yvelines. A huit mois de la présidentielle , les politiques se bousculent : à droite surtout avec Alain Juppé, Nicolas Sarkozy, François Fillon et Bruno Le Maire, mais aussi Rama Yade et Jean Lassalle côté centristes, Jean-Marie Le Guen, Olivier Faure et Marie-Noëlle Lienemann pour le PS. Pierre Gattaz les appelle à se recentrer sur « l'essentiel » : « Retrouver une croissance forte et le plein-emploi. » L'université d'été sera très politique cette année. Qu'attendez-vous des candidats à la présidentielle ? C'est en effet une année cruciale, à huit mois d'une échéance électorale majeure. L'université d'été sera moins orientée sur l'actualité récente, les réformes qui se font ou qui ne se font pas, pour se concentrer sur la pédagogie des grands enjeux que l'on souhaite voir aborder lors de la campagne présidentielle : comment tirer parti des mutations économiques et technologiques, de la révolution climatique ; comment profiter de la numérisation et de la mondialisation, etc. Le débat part-il sur de bonnes bases ? On entend surtout parler du burkini... Il faut absolument que le débat se recentre sur l'essentiel. Alors que la France est en train de se faire dépasser par d'autres nations, les candidats à la présidentielle devraient avoir un objectif et un seul : retrouver une croissance forte et le plein-emploi. Quand je dis forte, c'est une croissance durablement au-delà des 2 %, idéalement à 3 %, et un taux de chômage ramené à 6 %. Il n'y a aucune raison que la France fasse moins bien que l'Allemagne ou le Royaume-Uni. Mais cette croissance, il faut aller la chercher, pas

352

l'attendre comme la pluie. J'attends des engagements forts des candidats à la présidentielle.

A droite, les candidats mettent sur la table des mesures économiques et sociales radicales. Etes-vous séduit ? Ils convergent vers un certain pragmatisme et font tomber une série de tabous, comme avec la suppression de l'ISF pour laquelle j'étais un peu seul à me battre il y a quatre ans. Baisse massive des charges, restauration des marges des entreprises, réduction des dépenses publiques, déverrouillage du marché du travail : ces postulats de départ sont assumés par tous et ça me rassure.E AUSSI • DOSSIER Primaire de la droite : les projets passés au crible Mais après, la question fondamentale, c'est la mise en oeuvre. Il faut donner du sens et des perspectives aux réformes pour entraîner le pays tout entier, en ayant une vision à 10 ans. Si au lieu de subir les mutations, on les anticipe, alors la France dispose d'énormément d'atouts. Prenez l'exemple de la loi El Khomri : la réforme allait dans le bon sens au départ, mais elle n'a pas été bien expliquée et les Français en ont retenu, à tort, que les licenciements allaient se multiplier. Et tout est parti de travers... Emmanuel Macron tient ce type de discours sur l'économie. Peut-il être celui qui porte les grandes réformes que vous préconisez en 2017 ? Il vient à l'université d'été en tant que ministre de l'Economie et j'attends de lui, qui connaît bien l'entreprise, qu'il tienne un discours de vérité. Mais à ce jour, je ne sais pas s'il sera candidat à la présidentielle, je connais encore moins son programme... Et j'observe qu'il aurait pu aller plus loin dans les réformes depuis deux ans. Est-ce un quinquennat pour rien qui s'achève ? Non, cela n'aura pas été un quinquennat pour rien. Il aura permis de révéler le rôle fondamental de l'entreprise, d'assumer l'importance d'une politique de l'offre. C'est une mue idéologique majeure pour la gauche et, là encore, des totems sont tombés. Je pense que tout cela semble désormais compris. Le pacte de responsabilité, le début de l'inversion de la hiérarchie des normes avec le primat donné à la négociation d'entreprise, la volonté de simplification... tout cela est allé dans le bon sens. Malheureusement, le gouvernement n'a pas été au bout de ses intentions et ces réformes ont été rattrapées par la patrouille politique ! Elles ont surtout été « polluées » par des décisions absurdes, comme sur la pénibilité. Il y a eu trop de zig et de zag, c'est dommage. Il faut désormais aller de l'avant. Et beaucoup plus loin et plus vite ! La courbe du chômage est-elle durablement inversée ? Ce qui est sûr, c'est que les baisses de charges du pacte de responsabilité commencent à payer. Les marges des entreprises sont repassées de 28 % en moyenne en 2013 à près de 32 % aujourd'hui, contre 39 % en Europe. Il n'y a pas de miracle : une entreprise a besoin de marges pour investir, embaucher, exporter et prendre des risques.RE AUSSI • Le chômage repart à la baisse en juillet On a toujours dit que le pacte de responsabilité mettrait du temps à porter ses fruits. En 2015, 150.000 emplois ont été créés, même si cela ne suffit pas pour résorber le chômage. En Allemagne, l'inversion de la courbe du chômage est intervenue trois ans

353

après les mesures Schröder-Hartz. Ce qui est très important, c'est d'aller au bout du pacte. Et c'est pour cela que nous avons été très déçus par la non-suppression de la C3S. François Hollande n'a pas tenu ses engagements ? Sur la dernière étape du pacte, il est clair qu'il n'a pas tenu ses engagements.

Les entreprises ont-elles tenu leurs engagements ? Vous aviez évoqué la création de 1 million d'emplois... Ceux qui disent que je me suis engagé sur ce chiffre sont des menteurs ! C'était un objectif collectif que l'on pouvait viser en mettant en oeuvre les réformes adéquates. Et c'est d'ailleurs toujours le cas. J'irais même plus loin : pour passer de 10 % à 6 % de chômeurs, ce sont 2 millions d'emplois qu'il faut créer. C'est possible, en alignant le niveau des charges de nos entreprises sur celui de l'Allemagne, en déverrouillant le marché du travail, en passant à une fiscalité lisible et motivante, etc.RE AUSSI • Compte pénibilité : ce qui change pour les salariés au 1er juillet Et en arrêtant des mesures antiéconomiques comme sur la pénibilité. Cela restera comme le point noir de ce mandat, les « 35 heures de François Hollande » ! La loi a été un peu simplifiée, heureusement, mais on nous a imposé des facteurs de pénibilité que l'on ne sait toujours pas mesurer. Des candidats à droite promettent d'abroger cette loi... J'espère bien ! Attendez-vous encore quelque chose de la fin de mandat de François Hollande ? J'aimerais surtout qu'on évite les grosses bêtises fiscales de fin de mandat, lors du dernier budget. Voyez la « taxe Richert » inventée par les régions et le gouvernement : on va encore prélever sur les entreprises pour financer... des aides aux entreprises ! Cela n'a aucun sens.E AUSSI • Les régions n'assument plus la nouvelle taxe négociée avec Valls Nous sommes aussi très vigilants concernant la loi Sapin 2, qui introduit des obligations dangereuses pour les entreprises. Chaque fois que l'on taxe ou que l'on complexifie, c'est du chômage en plus. Nous espérons d'ailleurs que le gouvernement se montrera plus ambitieux sur la baisse de l'impôt sur les sociétés. La récente annonce de baisse est louable, mais c'est une mesurette qui est proposée, très loin de la nécessaire convergence fiscale européenne. Et puis, quand on propose trois taux d'IS pour les PME, je dis stop à la technocratie ! La réforme du prélèvement à la source devrait être votée, et les candidats à la primaire de droite, cette fois, ne parlent guère d'une abrogation... Je le regrette. Si on met en place une telle réforme à la hussarde, on court à la catastrophe. La philosophie est bonne, mais il faut davantage de préparation avec les acteurs, des expérimentations. LIRE AUSSI • DOSSIER L'impôt à la source, mode d'emploi Arrêtons de prétendre que le prélèvement à la source sera aisé à mettre en place. La fiscalité française est incroyablement compliquée, truffée de niches et de dérogations... Les entrepreneurs vont être les victimes de cette complexité. Je propose un plan B au

354

gouvernement : qu'il impose les particuliers sur la base des revenus de l'année en cours, mais grâce au prélèvement mensuel actuel, sans que cela passe par l'entreprise.

Le gouvernement est censé reprendre des contacts à la rentrée avec les partenaires sociaux sur la convention Unédic. Etes-vous prêt à rediscuter ou vous en remettez-vous définitivement à l'Etat ? Je n'ai pas eu de nouvelles de Myriam El Khomri. Nous sommes prêts à nous remettre autour de la table, mais avec deux lignes rouges : il est hors de question d'augmenter les charges, y compris sur les CDD, et nous refusons toute complexité supplémentaire. AUI • DOSSIER Assurance-chômage : échec de la négociation Il risque de ne plus y avoir de négociation interprofessionnelle d'ici à la fin de votre mandat au Medef... Je ne vais pas m'en plaindre ! Les négociations interprofessionnelles, il y en aura de toute façon de moins en moins à l'avenir, parce que le coeur de la négociation se situera au niveau de l'entreprise. C'est le sens de l'inversion progressive de la hiérarchie des normes. Il restera des réunions interprofessionnelles basées sur des problématiques précises - assurance-chômage, formation, retraites complémentaires - et des conventions de branche pour fixer quelques règles intangibles, mais, pour le reste, il faudra privilégier des discussions directes dans les entreprises.

En savoir plus sur http://www.lesechos.fr/economie-france/social/0211237838993- pierre-gattaz-on-peut-creer-2-millions-demplois-en-france- 2023431.php?bPDkDwdXp8oPjUsf.99#xtor=EPR-7-%5Bmatinale%5D-20160830- %5BProv_%5D-1998886%402

355

Macron démissionne avec l’Elysée en ligne de mire Gregoire Poussielgue Le 30/08 à 12:19Mis à jour à 19:32

Emmanuel Macron, ce mardi. - AFP + VIDEOS - Le ministre de l’Economie veut se consacrer à son mouvement En Marche. Il n’a pas franchi le cap d’une candidature en 2017 mais s’en approche. Emmanuel Macron a franchi le pas et fait, en même temps, un grand saut dans l'inconnu. Le ministre de l'Economie a présenté ce mardi sa démission à François Hollande, une démission annoncée comme imminente dès ce mardi matin par « Les Echos » . A 38 ans, après deux ans passés à l'Elysée comme secrétaire général adjoint et deux autres années à Bercy, il souhaite se consacrer à son mouvement, En Marche, créé en avril. « Le moment est venu pour moi d'amplifier la dynamique lancée ces derniers mois. En Marche portera les convictions, les positions et l'énergie de tous les progressistes », a-t- il expliqué à ses proches. Emmanuel Macron pensait à sa démission depuis plusieurs mois. Depuis le lancement de son mouvement, mais aussi depuis que son espace, au sein du gouvernement, se rétrécissait au fur et à mesure qu'il se sentait pousser des ailes. • DIAPORAMA Emmanuel Macron, son parcours en photos • DOSSIER Macron et son mouvement « En Marche » Les petites phrases , les divergences de fond avec certains socialistes et les tensions récurrentes avec Manuel Valls l'ont convaincu qu'il devait partir. « Valls l'empêchait d'exister », constate un de ses soutiens. Emmanuel Macron comptait démissionner plus tôt dans l'été, après son premier grand meeting du 12 juillet , conforté dans cette idée par le nouveau recadrage opéré à cette occasion par François Hollande et Manuel Valls. « Il a fait le constat qu'il ne pouvait en même temps donner une suite politique à son mouvement et achever son action au sein du gouvernement », confirme un ministre. Il ne restait qu'à trouver le bon créneau. Les attentats de l'été l'en ont empêché, mais ce n'était que partie remise. Le discours d'un candidat en puissance Sa décision de démissionner ce mardi a été arrêtée la semaine dernière. « La rentrée était calme pour lui. C'est un bon créneau », veut croire un député qui lui est proche. Surtout, il maîtrise son calendrier. L'Elysée a pris acte. « Hollande avait fixé les règles, Macron a pris sa décision. C'est un choix personnel », relativise l'entourage présidentiel. À LIRE AUSSI

356

• EDITORIAL Le pari fou • Un départ qui affaiblit encore Hollande L'ancien locataire de Bercy n'a pas encore franchi la ligne d'une candidature à l'Elysée l'année prochaine. S'exprimant en fin d'après-midi, il n'en a pas moins tenu un discours d'un candidat en puissance. « C'est un choix libre et responsable, c'est une nouvelle étape qui commence », a-t-il dit. Tout laisse penser que cet objectif lui trotte dans la tête. Il est encore trop tôt pour se lancer mais Emmanuel Macron se prépare. Le maire de Lyon, Gérard Collomb, un de ses plus grands supporters, est chargé de récolter les 500 parrainages nécessaires pour se présenter. Son équipe comprend déjà un trésorier de campagne. Ses soutiens au Parlement se mobilisent. Emmanuel Macron entend faire des propositions en octobre après la restitution des résultats de sa grande marche auprès des Français. La question de la candidature se posera dans la foulée. Trouver son espace Emmanuel Macron veut être prêt. Au cas où François Hollande, empêtré par une cote de popularité en berne et une majorité qui peine à se mobiliser, ne puisse prétendre à un second mandat. A ses proches, Emmanuel Macron ne dit pas s'il est prêt à se présenter contre lui, à tuer le père en politique, doublant celui qui l'a propulsé sur le devant de la scène en moins d'un quinquennat. Sur le plan politique, Emmanuel Macron doit aussi trouver son espace pour une éventuelle candidature. Celui qui s'est d'abord proclamé « ni droite ni gauche » avant de renier cette formule doit réussir à aller au-delà de clivages qu'il trouve dépassés. Il doit surtout parvenir à transformer sa forte popularité en intentions de vote. « Il aura du mal à être le candidat de la gauche, il aura du mal à être le candidat de la droite », a ironisé le député LR Edouard Philippe, porte-parole d'Alain Juppé.IRE AUSSI • Jean-Daniel Lévy : «Emmanuel Macron doit vite présenter son programme» • Emmanuel Macron : deux ans à Bercy et un bilan en demi-teinte Pour l'instant, Emmanuel Macron arrive surtout à s'attirer les critiques de plus en plus fortes des deux côtés de l'échiquier politique. L'ampleur des réactions politiques suite à son départ, de l'extrême-gauche au FN, n'en montre pas moins qu'il intrigue autant qu'il fascine. Son départ cache aussi une démarche inédite sous la Ve République : jamais un ministre en exercice n'a démissionné dans l'optique d'une présidentielle, huit mois avant l'échéance . Mais la route sera encore longue jusqu'au printemps 2017. Certains jugent même son départ trop tardif. « Il faut des réseaux, des moyens, être vraiment identifié. Est-ce le cas ? », se demande un entrepreneur qui le connaît bien. Emmanuel Macron a franchi une étape ce 30 août, mais la route vers l'Elysée sera encore longue. Et parsemée d'embûches. En savoir plus sur http://www.lesechos.fr/politique-societe/politique/0211240059317- macron-annonce-sa-demission-cet-apres-midi-pour-se-consacrer-a-son-mouvement-en- marche-2023616.php?rt2gcvl30CVRQl0b.99#xtor=EPR-6-%5Bbreaking_news%5D- 20160830-%5BProv_%5D-1998886%402

357

Emmanuel Macron, le pari fou Cecile Cornudet Le 30/08 à 19:05

Emmanuel Macron, le pari fou - Cayonné réalisé par Fabien Clairefond pour Les Echos EDITORIAL + VIDEO - Génial ou ridicule ? Emmanuel Macron se met en marche pour la présidentielle avec pour seule boussole la certitude que les Français aspirent à du neuf. Il l'a fait ! Pas encore trente-neuf ans, novice en politique, pas d'implantation locale, des réseaux faiblards, pas d'idées connues hors l'économie, pas de place définie sur l'échiquier - « ni gauche ni droite » -, et une affection qui semblait réelle pour François Hollande. Emmanuel Macron a fait ce que personne d'autre n'avait fait avant lui. Quitter son ministère , tuer le père et se mettre en mesure de le défier pour l'élection présidentielle. Le tout, huit mois avant le scrutin. Sur le papier, l'ambition est pure folie. Ses chances de l'emporter sont infinitésimales. Emmanuel Macron est un visage neuf qui sait prendre la lumière. Un ministre au bilan mitigé . Un « enfant » politique tout ébaudi de l'électricité qu'il provoque. Autre chose ? Justement oui, veut-il montrer : il est tout autre chose que la politique telle qu'elle est menée aujourd'hui. Lui qui a popularisé le mot « disrupter » en économie veut faire de même en politique. Penser autrement, communiquer autrement, construire différemment les réponses aux préoccupations des Français. Ses proches sont venus de l'entreprise, des start-up, de la finance, ses équipes ont 25 ans, il fait du porte- à-porte pour écouter les Français, il visite le sulfureux Philippe de Villiers, il refuse les médias training. Tout sauf entrer dans le moule. Avoir su créer du son Emmanuel Macron a l'audace démesurée de ceux qui croient en leur destin, mais il a aussi mieux que quiconque compris le rejet des Français pour la politique. Sa vraie victoire en deux ans à Bercy est d'avoir su créer du son, d'avoir été une voix qui porte (un peu), quand les Français n'écoutent plus. D'avoir créé un dialogue (modeste) avec des électeurs que l'on croyait perdus, ceux des banlieues en l'occurrence. D'avoir incarné un mince espoir quand la politique n'en offre plus. Cet espoir est aujourd'hui virtuel. Il se lit dans les ventes record de « Paris Match » ou dans ses audiences TV. Peut-il être réel ? C'est toute la question. Peut-on être un candidat crédible à la présidentielle sans entrer dans le moule ? Comment bâtit-on un projet, suscite-t-on des soutiens, collecte-t-on des fonds et obtient-on 500 signatures « autrement » ? Et quasi seul ? Le défi est herculéen. Même si, en une seule journée, Emmanuel Macron a montré qu'il avait vu juste sur un point. L'attente pour « autre chose » est immense. A LIRE AUSSI : DIAPORAMA Emmanuel Macron : son parcours en photos // DOSSIER Macron et son mouvement « En Marche » // INTERVIEW Jean-Daniel Lévy : «Emmanuel Macron doit vite présenter son programme» // ANALYSE Un départ qui affaiblit encore Hollande En savoir plus sur http://www.lesechos.fr/elections/presidentielle-2017/0211241635017-emmanuel-macron-le-pari-fou- 2023665.php?y6poARSPB6CZWqcx.99#xtor=EPR-3034-%5Bnl_thematique%5D-20160831-%5BProv_%5D-1998886%402

358

Daily Morning Newsbriefing July 29, 2016 Rajoy has the PM mandate but no date for a vote This is our last briefing before our annual summer holiday. We will be back on Monday, August 15. Here is an important technical note. During the holiday season, we will be changing the email server for our newsbriefing to speed up the distribution in the morning. Some of you will notice much faster delivery times. For group subscribers, we have written a separate email to administrators. If you or your organisation use a whitelist, please make sure to update the list of IP numbers. The new list is: 199.255.192.0/22 199.127.232.0/22 54.240.0.0/18 Please ignore this if you don't use whitelists, or if you don't know what a whitelist is. If you don't receive the briefing on Monday, August 15, please check our website www.eurointelligence.com first from 9am CET onwards. The website should not be affected by the changeover. ______Our main story today is last night's acceptance by Mariano Rajoy of King Felipe's designation as PM candidate. However, in his later press conference Rajoy refused to commit to submitting to an investiture vote in the parliament. The speaker of the parliament, Ana Pastor, also refused to commit to a definite time frame for calling an investiture debate and vote. This has kicked up a controversy over whether Rajoy intends to delay indefinitely in case he fails to assemble a majority, and whether this would be unconstitutional. Spain is clearly in the silly season. One thing Rajoy did say is that Spain needs to have a government well before October 15 in order to present to the European Commission next year's budget and a plan to meet the fiscal path set out yesterday as part of the excessive deficit procedure. Rajoy's last resort is to appeal to the "responsibility" of the opposition parties to shame them into allowing at least a minority PP government that can address the challenges facing the country, among which he highlighted reducing unemployment and confronting the newly assertive Catalan separatists. If Rajoy does not get an absolute majority in a first investiture vote, there would be a second one in which he would need only more votes for than against. Ciudadanos has indicated that they might vote against in the first vote but abstain in the second. However, this would not be enough if the PSOE voted against, and the liberal party has been encouraging PP and PSOE to negotiate the socialists' abstention. But Albert Rivera, leader of Ciudadanos, also said yesterday that Mariano Rajoy should submit to a parliament vote as early as next week. He also proposed to King Felipe a government

359 supported by PP, PSOE and Ciudadanos, but led by someone other than Mariano Rajoy. The PSOE insists that Rajoy must submit to the investiture vote as soon as possible, while at the same time saying that they will vote against. This can really only be explained by Pedro Sánchez, the PSOE leader, not wanting to be alone in failing to win the parliament's backing as PM candidate in an investiture vote. Could it be that once Mariano Rajoy has a black eye just like Sánchez the PSOE might consider abstaining to allow a PP minority government? They might do so if Ciudadanos voted for Rajoy. At his press conference yesterday, Pedro Sánchez also refused to rule out trying to form a government again in case Mariano Rajoy fails in his own investiture vote. But the PSOE's regional leaders are known to be divided on the issue and nearly half of them prefer that the PSOE abstain to allow a PP government than that Sánchez form a government with the support of Podemos and the Basque and Catalan nationalists. What will happen in the next two weeks is anybody's guess. Mariano Rajoy could pile some more spurious pressure on the opposition by agreeing with Ana Pastor to set up a first investitute vote for August 23. If the parliament then failed to appoint a PM by October 23, it would be dissolved for elections on Christmas day. Trying to avoid such an outcome just might be a strong enough inducement for the parties to form a government. Our other stories In our last briefing before the summer holidays, we also have stories on the defiant Catalan parliament; on the MPS recapitalisation; on the IMF and Europe; on how Brexit might happen; and on the economics profession doubling down after Brexit.

360

Free exchange Economics That voodoo that you do The bitter, political fight to create a new macroeconomics Aug 19th 2016, 16:52 BY R.A. | WASHINGTON

THE big debates in macroeconomics have never been polite. I suppose it's understandable that this is the case; after all, the stakes are high. Tyler Cowen excerpts a new blog post by Scott Sumner, which reads: …what’s happened since 2009 involves not just one, but at least five new types of voodoo: 1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD. 2. The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD. 3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible. 4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity. 5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ? In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007. Mr Cowen then makes a few points before closing: We do in fact need a good aggregate demand-based macroeconomics; the topic is far too important to allow it to become so politicized.

361

I initially read that final jab as a poke at economists like Paul Krugman and Brad DeLong: the ones arguing in favour of deficit-financed fiscal stimulus even as the American economy (in Mr Cowen's view) approaches full capacity. Thinking it over, I'm not sure it isn't meant for Mr Sumner as well. Why? Well, I understand why Mr Sumner objects to the views in his numbered list. They are at odds with his macroeconomic worldview, which is fine. But he doesn't simply say they're wrong. He labels them voodoo; a highly politicised term of criticism, and one of the nastier things one academic can say about another. (I should be clear that Mr Sumner has lots of company in wielding the term.) If one were trying to bring neutral, academic sobriety to an overly politicised argument, this is not the way one would typically begin. And then, Mr Sumner claims that there is "almost no theoretical or empirical support" for the views he doesn't like. But that's simply false. Mr Sumner may not care for the Summers-Delong model showing that for certain values of the hysteresis and multiplier parameters stimulus is self-financing, but it does exist. And as far as I can tell, most empirical studies of fiscal policy find a multiplier of greater than zero, if not always greater than one. His list of counterexamples in the paragraph above is just one example of not considering the counterfactual after another. Again, if one were trying to take a highly political debate and pin the thing to the wall with the best available academic work, well, this is not what one would do. Having said all that, I think I disagree with Mr Cowen that the topic is too important to become politicised. On the one hand, politics is how we resolve lots of really important, really difficult issues. One could indeed argue that the problems we face are the worse because there has been too little politicisation. To a remarkable extent, rich-world politicians of all political stripes have been aligned in their view that deficits should be reduced as quickly as possible, while the technocrats at the central banks have been relied upon to take decisions that go wildly beyond their narrow monetary remit. And on the other: Mr Cowen's view of dispassionate progress in macroeconomics is just not how things usually work. In the 1970s it was not the case, for example, that rival macroeconomic camps settled their differences, then alerted the world of the new consensus so it could be acted upon. Instead you had bitterly divided academics; you had a political ideology which saw some things it liked in one of the camps, which made those things a part of a successful political programme, and which took a policy gamble; and that gamble created new evidence which informed (though by no means settled) the debate over how inflation and monetary policy and expectations all work. The same thing happened in the 1930s. And in the 1980s, when the original voodoo economics had its day in the sun. Economists might not like it, but this is how the world will find its way out of the current mess. Not by the calm resolution of disagreements between Larry Summers and John Cochrane, but by the increasing politicisation of a set of radical economic ideas, of one sort or another, which eventually find their way into the practical political programme of a party with a mandate to govern. And then they'll do what they do and we will learn something about who was right and who was wrong, and a few economists will change their minds, but most will find a way to tweak their old models so that the new evidence looks like an affirmation of what they believed all along. So what does that tell us about how macroeconomists ought to behave? Well, as scientists, they have an obligation to state their hypotheses as clearly as possible, to

362 make testable predictions whenever possible, and to be rigorous and transparent in gathering evidence to support or falsify those predictions. But macroeconomics is also inherently political, and the practitioners who seek to "politicise" their ideas and make them a political reality play as vital a role in the advancement of the field as the scrupulously apolitical academics who never write a public word outside a peer- reviewed journal. http://www.economist.com/blogs/freeexchange/2016/08/voodoo-you-do

363

Medicaid Works: 10 Key Facts July 27, 2016 at 10:45 AM BY Edwin Park This is the next in our “Medicaid Works” blog series, which aims to inform the debate over Medicaid’s future by providing the latest facts and figures on this essential and popular part of the nation’s health care system. Medicaid provides health coverage to low-income families and individuals, including children, parents, pregnant women, seniors, and people with disabilities. Here are ten key facts about how Medicaid helps millions of Americans live healthier, more secure lives: 1. Medicaid provided quality health coverage for 97 million low-income Americans over the course of 2015. In any given month, Medicaid served 33 million children, 27 million adults (mostly in low-income working families), 6 million seniors, and 10 million persons with disabilities, according to Congressional Budget Office (CBO) estimates. 2. Medicaid has cut dramatically the number of Americans without health insurance. Since the implementation of health reform’s major coverage expansions in 2014, Medicaid and the new health marketplaces have helped cut the number of uninsured Americans from 45 million to 29 million, the Centers for Disease Control and Prevention estimates. States that expanded Medicaid have had significantly greater reductions in the share of residents who were uninsured than non-expansion states (see chart). By 2020, an estimated 13 million more adults will have enrolled in Medicaid and gained access to affordable health coverage due to health reform.

3. Medicaid participation is high. Some 65.6 percent of low-income adults with children who are eligible for Medicaid are enrolled, according to the Urban Institute, a relatively strong participation rate compared to some other programs. And evidence so far among states adopting health reform’s Medicaid expansion

364

shows substantial increases in overall Medicaid enrollment, which indicates robust participation among expansion-eligible individuals. In addition, 88.3 percent of eligible children participate in Medicaid or the Children’s Health Insurance Program (CHIP), according to the Urban Institute. 4. Medicaid has improved access to care for millions, including those with chronic conditions. A landmark study of Oregon’s Medicaid program found that beneficiaries were 40 percent less likely to have suffered a decline in their health in the last six months than similar people without health insurance coverage. They were also likelier to use preventive care (such as cholesterol screenings), to have a regular clinic where they could receive primary care, and to receive a diagnosis of and treatment for depression and diabetes. 5. Medicaid provides significant financial support to low-income beneficiaries. Medicaid lifted 2.6 million people out of poverty in 2010, equating to a 0.7 percentage-point drop in the poverty rate. The program cut poverty most among adults with disabilities, children, seniors, African Americans, and Hispanics. Research from Oregon’s Medicaid program also shows that beneficiaries were 40 percent less likely to go into medical debt or leave other bills unpaid in order to cover medical expenses, and that Medicaid coverage nearly eliminated catastrophic out-of-pocket medical costs. 6. Medicaid produces long-term educational benefits for kids. Children who are eligible for Medicaid do better in school and miss fewer school days due to illness or injury. They‘re also likelier to finish high school, attend college, and graduate from college. Kids who are eligible for Medicaid earn more as adults and experience fewer emergency room visits and hospitalizations, research shows. 7. Medicaid is cost-effective. Medicaid’s costs per beneficiary are substantially lower (see chart) and have been growing more slowly than for private insurance. Medicaid provides more comprehensive benefits than private insurance at significantly lower out-of-pocket cost to beneficiaries, but its lower payment rates to health care providers and lower administrative costs make the program very efficient.

8. Medicaid gives states flexibility to design their own programs. The federal government sets minimum standards, including the categories of people that all states must cover. Beyond that, states set their own rules, including whom they cover, what benefits they provide, and how they deliver health care services. As a result, Medicaid eligibility varies substantially from state to state. Moreover, states have

365

taken advantage of Medicaid’s existing flexibility to improve beneficiary health outcomes while lowering costs by changing how health care is delivered. 9. Health reform’s Medicaid expansion is saving states money. The federal government will pay the entire cost of health care for newly eligible beneficiaries through 2016, and many states that have expanded Medicaid have found that it has produced net savings for their budgets. States will spend just 1.6 percent more on Medicaid and CHIP with the expansion than they would have without health reform, CBO estimates. Hospitals in expansion states are treating fewer uninsured patients, and the amount of uncompensated care they are providing is declining steeply. Meanwhile, hospitals in the states that haven’t expanded Medicaid continue to provide large amounts of uncompensated care, and the states are missing the opportunity to leverage billions of dollars in new federal funding through the expansion. 10. Medicaid expansion supports work. Charges that health reform discourages poor families from working more don’t match reality. In states that have adopted health reform’s Medicaid expansion, poor parents can earn substantially more and retain their Medicaid coverage. In addition, some states have used their program flexibility to further encourage work overall among Medicaid beneficiaries by offering a set of supportive employment services. Learn more about how Medicaid improves access to health care, its long-term benefits, and why states should expand Medicaid: www.cbpp.org/medicaid-works

< Previous House Republican Health Plan Would Radically Restructure Medicare http://www.cbpp.org/blog/medicaid-works-10-key-facts

366

Daily Morning Newsbriefing July 28, 2016 Schäuble prevents Spain's deficit fine The European Commission yesterday decided against fining Spain and Portugal for their sustained excessive deficits, contrary to expectations that the hawks in the Commission would prevail this time around. However, the zero fine is compensated by tighter deficit targets than expected. And finally, a formal decision on suspending structural funds has not been taken, pending consultation with the European Parliament, but Valdis Dombrovskis said the Commission's proposal will be "rigorous" and the countries will have to make the necessary fiscal adjustments before the suspension can be lifted. And, if Spain does not meet the new targets there will be an automatic fine of 0.5% of GDP. Dombrovskis justified the decision on the difficult social situation in both countries, where unemployment remains very high. also said the public in Spain and Portugal would not have understood even a symbolic fine, and the EU can ill afford that at a time when citizens are doubting Europe. The Council has to approve the Commission's decision, and Moscovici also said finance ministers would not have supported a fine. Handelsblatt writes that Wolfgang Schäuble was decisive in changing the vote making a series of phone calls to commissioners. According to the paper Schäuble's intention is ostensibly to strengthen Mariano Rajoy, who is presently trying to gather support behind him as prime minister. The paper quotes Clement Fuest of IFO and Volker Wissing of the FDP bemoaning that Schäuble is undermining the stability and growth pact, and that the monetary union is no longer a stability union. The Commission's proposed fiscal path for Spain and Portugal is as follows: Spain must be below the 3% deficit threshold by 2018. The nominal deficit targets will be 4.6% of GDP in 2016, 3.1% in 2017 and 2.2% in 2018. The Commission estimates these are consistent with a structural adjustment of +0.4% in 2016, and -0.5% in each of 2017 and 2018. Spain is also required to use any windfall gains to reduce the deficit, and to take further measures if there is a risk that the budget trajectory will deviate. Portugal must be below the 3% deficit threshold this year. The nominal deficit should be 2.5% of GDP not counting bank support measures. The target is consistent with a Commission estimate of an unchanged structural budget balance, but Portugal should also be ready to implement further measures if there is a risk of deviations. The Portuguese government maintains that the Commission does not ask for additional measures, just the implementation of the budget with a consolidation effort of 0.25% of GDP, around €465m. In its recommendations, though, the Commission suggested to increase the VAT for the lower rate (6%), something the Socialists might find difficult to agree with its left allies: A rise from 6% to 13% will be out of the question, though an increase from 6% to 7% could well be discussed, according to Jornal de Negocios. And even if the Commission lets Portugal off the hook for this year, it increases the pressure on Portugal for 2017, confirming Mario Centeno’s pledge to reduce the structural deficit by 0.6% of GDP.

367

The two governments have until September 12 to take a position about the new fiscal path. Our other stories We also have stories on the leak of some stress test results; on the appointment of Michel Barnier as the Commission's Brexit negotiator; on Tsipras' return to Syriza's social pledges; and on Orban's Europe.

368

Dépassement budgétaire : Madrid et Lisbonne échappent aux sanctions européennes LE MONDE | 27.07.2016 à 15h09 • Mis à jour le 28.07.2016 à 08h13 | Par Sandrine Morel (Madrid, correspondance) et Jean-Pierre Stroobants (Bruxelles, bureau européen)

Le chef du gouvernement espagnol, Mariano Rajoy (à gauche), et le président de la Commission européenne, Jean-Claude Juncker (au centre), lors d’un sommet européen à Bruxelles, le 29 juin. PHIL NOBLE / REUTERS La décision est tombée à l’issue d’une longue discussion qualifiée de « très politique » au sein de la Commission européenne, mercredi 27 juillet : l’Espagne et le Portugal échappent à des sanctions financières, même si leur déficit public dépasse largement les critères du pacte de stabilité. Celui-ci fixe une limite de 3 %, que Madrid et Lisbonne franchissent largement (5,1 % et 4,4 %). Les partisans de la flexibilité au sein du collège européen l’ont donc emporté et devraient convaincre le Conseil (les Etats). A l’instar du Français Pierre Moscovici, chargé des affaires économiques, ils estimaient que l’on ne pouvait pénaliser davantage des pays en difficulté. Le président de la Commission, Jean-Claude Juncker a finalement rallié leur camp. Le 12 juillet, les ministres des finances de la zone euro avaient estimé que Madrid et Lisbonne n’avaient pas pris « les mesures nécessaires » pour corriger leur déficit public. D’où le déclenchement, inédit, d’un processus qui pouvait conduire à des pénalités. Lire aussi : Déficits excessifs : l’UE enclenche le processus de sanctions contre Madrid et Lisbonne Selon les règles de l’Union, après un constat de dérapage budgétaire, la Commission doit proposer une suspension d’une partie des fonds structurels, censés encourager les réformes et réduire les inégalités de développement des régions. Le montant de la sanction peut atteindre 0,5 % du produit intérieur brut (PIB) du pays concerné, ou jusqu’à 50 % des engagements financiers liés aux fonds structurels. Cette question sera examinée à la rentrée. Mercredi, le menu de la Commission comportait la question des sanctions : le collège avait vingt jours pour proposer d’éventuelles amendes, dont le montant peut, dans un tel cas, atteindre 0,2 % du PIB du pays visé.

369

Lire aussi : Dérapage budgétaire : Madrid et Lisbonne sanctionnés ? M. Moscovici avait prôné des sanctions zéro « dès lors que l’Espagne et le Portugal nous donnent de bonnes garanties ». Les partisans de la stricte austérité budgétaire étaient peu convaincus et, dans une lettre au président du Parlement européen, le vice- président finlandais de la Commission, Jyrki Katainen, avait estimé que les deux pays n’avaient pas adopté les mesures nécessaires. La lettre était accompagnée d’une liste de 60 fonds bénéficiant à l’Espagne – 1,2 milliard d’euros au total – et 12 au Portugal – 0,5 milliard d’euros –, susceptibles d’être visés par une suspension totale ou partielle. M. Katainen réclamait, selon certaines sources, une amende de 0,1 % du PIB, tout en indiquant que la Commission prendrait en compte les difficultés socio-économiques des deux Etats concernés. C’est ce qu’elle a fait mercredi mais sans recourir aux sanctions, ont indiqué M. Moscovici et le vice-président de la Commission Valdis Dombrovskis, chargé de l’euro et de la stabilité financière. M. Dombrovskis a évoqué les « ajustements budgétaires majeurs » accomplis par l’Espagne et le Portugal, « dont les efforts ne doivent pas être sous-estimés ». « Des sanctions même symboliques n’auraient pas permis de corriger le passé et auraient été contre-productives à un moment où les peuples doutent de l’Europe », a ajouté le commissaire français. Car, en filigrane, c’est un nouveau débat sur l’équilibre entre rigueur et la relance qui se profilait, et auquel le Parlement européen comptait bien prendre part. Il est, en partie, désamorcé par la décision qui a réjoui les dirigeants de Madrid et Lisbonne. Un délai supplémentaire Le gouvernement espagnol a accueilli avec soulagement l’octroi d’un délai supplémentaire de deux ans dont il bénéficiera pour rentrer dans les clous du pacte de stabilité. Pour 2016, Bruxelles autorisera un déficit public de 4,6 % du PIB, alors que le chef du gouvernement par intérim, Mariano Rajoy, avait fixé un objectif de 3,9 %. Pour 2017, la Commission fixe un seuil de 3,1 %, et 2,2 % pour 2018. Cette mansuétude s’adapte en fait à la réalité des finances publiques espagnoles. L’Autorité indépendante de responsabilité fiscale (AIREF) a en effet constaté, le 20 juillet, une « détérioration progressive » des comptes publics en raison du dérapage attendu des finances de la sécurité sociale, des baisses d’impôts approuvées en 2015 par le Parti populaire (PP, droite), de la faible inflation et du relâchement des efforts des régions autonomes espagnoles. Malgré les derniers engagements de Madrid, – une réforme de l’impôt sur les sociétés, un renforcement de la lutte contre la fraude fiscale, et le bouclage anticipé du budget des ministères – l’AIREF avait calculé que le déficit public espagnol risquait de se situer entre 4,1 % à 4,7 % du PIB en 2016. Pour Madrid, il est d’autant plus difficile de réaliser les économies nécessaires que le royaume n’a toujours pas de gouvernement. Mais avec la croissance attendue cette année à 2,9 % et à 2,5 % en 2017, le ministre de l’économie Luis de Guindos se veut confiant. Tout comme il l’est en ce qui concerne les fonds structurels, « qui ne seront pas gelés », a-t-il assuré. Le gouvernement de Lisbonne a, lui aussi, salué « une très bonne nouvelle pour le Portugal et l’Europe ». Il se voit accorder un délai supplémentaire d’un an pour ramener son déficit à 2,5 % à la fin de 2016. Dans un argumentaire envoyé à Bruxelles, il a promis un gel des dépenses et diverses mesures d’économie. Le gouvernement de gauche, arguant qu’il devait assumer le poids d’un passé dont il n’est pas responsable, avait obtenu le soutien du président François Hollande. En visite à Lisbonne, ce dernier

370 avait plaidé récemment pour le respect des règles communes dans la zone euro mais surtout pour « la solidarité et l’espérance ». • image: http://s1.lemde.fr/image/2013/03/29/24x24/1100508283_4_b427_13645757160 506-avatar-morel_d2c491d6970a0c56ce7b38c48b4de5cc.jpg

Sandrine Morel (Madrid, correspondance) Journaliste au Monde Suivre Aller sur la page de ce journaliste • image: http://s2.lemde.fr/image/2013/03/29/24x24/1100508287_4_e2d3_13645759294 031-avatar-stroobants_9e5c46c873cde5e9ef7fda56f0cf77d7.jpg

Jean-Pierre Stroobants (Bruxelles, bureau européen) Journaliste au Monde

En savoir plus sur http://www.lemonde.fr/economie/article/2016/07/27/madrid-et- lisbonne-echappent-aux-sanctions- europeennes_4975434_3234.html#C62Q7er7HqjJlBpX.99

371

Daily Morning Newsbriefing July 27, 2016 Symbolic but stinging deficit fine for Spain and Portugal The European Commission will today announce its decision on Spain's and Portugal's deficit fines. El País has seen a draft for discussion by the Commissioners, according to which Spain will receive a symbolic - but non-zero - fine and get an extra year to meet the deficit targets in exchange for stiff demands for structural adjustment in 2017 and 2018 and a withdrawal of structural funds unless a credible budget is presented for 2017. The Commission takes the present year as lost to deficit reduction given Spain's inability to move beyond a caretaker government. The country will also be subjected to enhanced budget monitoring. Spain's fines will set the tone for Portugal's, though the Commission recognises the situation there is different. Portugal is closer than Spain to meeting the deficit targets, so it will get only one extra year to meet the target, but the Commission believes even Spain has made more structural reforms. The size of the fine is almost the only detail still under discussion. It can, according to the rules, be up to 0.2% of GDP. The extreme options of no fine at all - preferred by Pierre Moscovici according to El País - or a maximum fine have both been discarded. Valdis Dombrovkis reportedly proposed a 0.1% GDP fine, but has been asked to prepare a new proposal with a fine below 0.05% as Jean-Claude Juncker favours a symbolic fine of 0.01% to 0.02% of GDP. Given the Spanish government's continued insistence that there would be no fines, lately claiming that Germany sides with France and Italy in opposing them, any fine would be perceived as a political humiliation. The structural budget adjustment the Commission will demand from Spain is 0.5% of GDP in 2017 and 2018. The Commission does not appear to be impressed by the latest increase in advance corporate tax payments and will demand real permanent budget changes not linked to the business cycle or to accounting. If the 2017 budget does not include "effective measures" Spain faces a hike in the possible fines to 0.5% of GDP. The Commission has noted a recent report by Spain's independent fiscal authority Airef forecasting a deficit of 4.7% this year without further measures. The deficit targets for 2017 and 2018 are likely to be tightened to 3.5% and 2.5% of GDP respectively. Coincidentally, just yesterday dismal figures for Spain's budget were released for the year until May. The public sector deficit grew 13% from last year to this year, and already exceeds the target for the whole year, reports El País. It is already over €26bn. The main reason for this is that revenues fell over 6% to May, which is not compensated by a 2.9% spending reduction. Another reason, which is a one-off but surely to be controversial, is a €1bn recapitalisation of the Sareb bad bank, previously unreported. Meanwhile, regional governments have reduced their deficit by a quarter, in part because of increased transfers from the central government but also because they are increasing their revenue faster than their expenses. Local authorities will continue to report a surplus.

372

Portugal's budget execution looks much better, but this is due mostly to a reduction in public investment. Total expenditure is up while tax revenues are growing below expectations, reports Observador. The first semester deficit dropped by €971bn, or more than one quarter the comparable figure last year. Economic recovery has led to tax revenues increasing by 2.7% yoy for the six-month period, but this is below the 3.5% increase budgeted by the government. Our other stories We also have stories on the hard versus soft Brexit divide inside Theresa May’s cabinet; how France and Germany are responding to an unprecedented wave of terror; on how a state guarantee can be counterproductive; on ND’s failed attempt to get an inquiry into the third Greek bailout; and some thoughts on the future the EU.

Le retour de la tentation protectionniste Etienne Lefebvre 26/07/2016 Le Brexit réveille évidemment ce spectre et jette un voile d'incertitudes sur les conditions de l'échange entre le Royaume-Uni et l'Europe. Au-delà, la tonalité de la campagne électorale américaine inquiète.

Les dernières statistiques de l'Organisation mondiale du commerce confirment une tendance lourde : le commerce mondial progresse mollement depuis le début de l'année, à un rythme proche...

373

Daily Morning Newsbriefing July 26, 2016 Bailing out of a bail-in As we reported last week the Italian government wants to have a rescue plan for Monte dei Paschi di Siena ready before Friday, when the EBA will publish the results of a stress test widely expected to find a capital shortfall in MPS. However, while last week the reporting was of the Italian government's willingness to entertain bail-in at MPS after months of resistance, what we're seeing now is yet another attempt at a rescue without direct government involvement. Yesterday the successor fund to Atlante, the private Italian bank rescue fund, was authorised and constituted under the name of Atlante 2 and with the sole purpose of participating in the market for nonperforming loans. The old Atlante is expected to contribute some €1.2bn or about two thirds of its remaining capital, according to Corriere della Sera. Atlante was originally billed as a fund for the NPL market but it ended up spending about 60% of its funds for the recapitalisation of Popolare di Vicenza and Veneto Banca thus bailing out their underwriters Unicredit and Intesa San Paolo. The first promise of a roughly €500m capital contribution to Atlante 2 comes from Adepp, an association of quasi-public social insurance funds, reports La Repubblica. Another €500m are expected from the Sga (the remains of a public bad bank created in the late 1990s to restructure Banco di Napoli) and somewhat less - on account of its earlier contribution to Atlante - from the public bank Cassa Depositi e Prestiti. Unicredit and Intesa will contribute some €300m together, bringing their total contribution to Atlante and Atlante 2 to €1bn euros each. Other banks and insurance companies are also expected to contribute too, bringing the total fresh capital to between €2.5-3bn. With €4bn at its disposal Atlante 2 might be in the position to buy the junior tranche of a securitisation of €10bn of MPS' gross NPLs. Roughly this has a book value of 40% and might be securitised at 30%. This would leave Atlante 2 with €3bn to spare for future interventions. The other problem to solve is the expected recapitalisation of MPS. La Repubblica writes that MPS' capital shortfall might be as large as €5-6bn depending on how the SSM values the NPLs compared to banks' internal model. Nevertheless, we should point out that there is a generalised misunderstanding that the stress test on Friday will include a recapitalisation requirement. In its latest communication on the stress test at the start of this month the EBA clarified: the 2016 EU-wide stress test does not contain a pass fail threshold and is instead designed to be used as a crucial input into the SREP process in 2016; ... capital guidance does not constitute any form of binding capital requirements and is not expected to trigger the automatic restriction of the distribution and calculation of the maximum distributable amount (MDA); To wit, the supervisory review and evaluation process (SREP) is the pillar 2 of the Basel accords and not part of the pillar 1 minimal regulatory capital requirements. And the stress test will inform the SREP later this year, but it is not the SREP.

374

That said, on the recapitalisation of MPS La Repubblica writes that Italy will guarantee a €3bn recapitalisation of MPS. Recall that the Commission's competition authority already authorised Italy to guarantee up to €150bn in newly issued bank liabilities, under the BRRD's exceptions to state aid triggering bail-in. This would require that MPS recapitalise itself by issuing €3bn of hybrid instruments that count towards regulatory capital requirements but are not common equity. Nothing is said of who is expected to buy these €3bn, even with an Italian state guarantee. In case the recapitalisation is not sufficient - either because less than the planned €3bn is successfully placed in the markets, or because the eventual capital requirements rise to up to €6bn, then the Italian government would bail in subordinated liabilities and - already with the Commission's blessing - compensate retail savers. One can expect lots of moral suasion on institutional investors, who would have an interest in avoiding a bail-in. Also on other Italian banks who could face contagion to the market for their own subordinated liabilities in case it all comes to bailing in MPS' creditors. Our other stories We also have stories on Erdogan's threats against the EU; on the alliance of Pasok and To Potami; on Theresa May's red lines; on the impact of the terror attacks on the French government; and on why we don't trust the eerie silence in Germany after the terror attacks.

375

07/25/2016 07:40 PM Apocalypse Now A Year of Crises, Shocks and Fears of Terror By Mathieu von Rohr Ansbach, Munich, Würzburg, Nice, Brussels -- in light of the many horrific news stories, many are asking: What's the matter with 2016? Has the world gone mad? This question is occupying the minds of many people these days. It feels like the world is out of step, that multiple crises are encroaching upon us and that the distant world of international politics is about to get dangerously personal. How are we supposed to deal with the feeling of living in an era that we no longer seem to understand? "I'm tired of living in interesting times," a Twitter user wrote several days ago. His words were retweeted more than 1,000 times. Everyday, people on social media ask: What is wrong with 2016? When will it be over? What more does it have in store for us? This year, international political events have overlapped in an unsettling way. Something seems to be coalescing and brewing, though it's not yet clear what. Each new development seems to come a bit faster than the last. It may have begun with the Arab Spring in 2011, but it also continued with the wars in Libya and Syria and was further exacerbated by the conflict between Ukraine and Russia and the latest terrorist attacks. We are witnessing the destabilization of the world as we've known it since 1989. When our phones began vibrating a week ago Friday with breaking news alerts about the military coup in Turkey, we were still processing our shock over the terrorist attack in Nice, France. Each shock fades quickly in light of the next one. On Sunday, a Syrian refugee detonated a bomb outside an outdoor concert in Ansbach, Germany. Last Friday, an 18-year-old student shot and killed nine people in Munich, most of them teenagers. And only days before that, a 17-year-old asylum-seeker in Würzburg attacked a group of Chinese tourists with an ax. It was only a month ago that a majority of British voters decided to leave the European Union. The United States is shaken by racial unrest, the massacre in Orlando -- and the rise of the Republican presidential nominee Donald Trump. With that, 2016 was really only the worst year since 2015, the year of the great refugee crisis. And 2015 was only the worst year since 2014, the year of the war in Ukraine. We are living in an age of shocks and crises that could well be traumatizing in their rapid succession and concentration, since it's not yet clear whether they're only a temporary jolt or the beginning of a trend with no end in sight. Of course, the sheer number of conflicts has remained constant in recent years. But there is much indication that we find ourselves in a new era of global instability. The biggest geopolitical stories of our time are the destabilization in the Middle East, the European security order and the European Union. In addition, there has been a societal shift in many Western countries: Many citizens are angry at the elites, because they see

376 themselves as victims of globalization, free trade and migration. This anger has enabled the rise of political movements from the fringe to the mainstream in only a few years: Donald Trump, the Brexit movement, Front National and the Alternative for Germany, or AfD. The classic political camps are dissolving as the battle between the political left and the right is replaced by one between Isolationists and Internationalists. Every now and then, there are phases in international politics during which more happens in the span of a few weeks than would otherwise happen in decades. Do 2014 and 2016 fall into that category? They're not comparable to the most dramatic phases of the past century, when both World Wars broke out; nor are they anything like 1989, when the Cold War ended and the world order was rearranged. It's also unclear whether this year will end with the same chaotic violence it started with. But it is rather likely that global insecurity will become the new status quo. The old, more stable world of the 1990s is not coming back. We have to accept the fact that we live in trying times. Many things are being thrown off-kilter: the balance of power between the United States and China, the future of the EU, NATO's eastern flank, the global economic order, the relationship between modernity and political Islam, not to mention democracy and in the West. Finding the thread that ties all this together is tough. There are causal and random effects, clear connections and we're often dependent on speculation. Does the ease with which attackers commit murder in the West have anything to do with the horrific images of Syria that we're seeing? Do military officials like those in Turkey find it easier to encourage a coup if they find themselves surrounded by violent conflicts and the region is gripped by chaos? And is Erdogan taking a page out of Putin's book when he suspends the European Human Rights Convention? Instability begets instability -- that's something we are now seeing on a daily basis. It's hard to say when the world began to grow more instable. It's a truism to say 1989 didn't usher in the end of history, as the political scientist Francis Fukuyama predicted at the time. The end of the Cold War also meant the disappearance of the rivalry between two superpowers that kept the rest of the world in icy suspense. After a short phase of sole American dominance and the relative calm of the 1990s, history once again reared its head with the 9/11 attacks and the Iraq War, which bears responsibility for much of what is afflicting the world today. The Iraq War had two consequences. It ushered in the collapse of the Iraqi state and the rise of terrorism in the region, as the self-styled Islamic State was born out of the rubble of Saddam Hussein's tyrannical rule. George W. Bush's war marked the overextension of American military might and the beginning of a new isolationism in US foreign policy. Barack Obama began the withdrawal of US forces from the Middle East and Europe. He wanted to concentrate more heavily on the Pacific region, where China was reclaiming its historical sphere of influence. He wanted to leave interventionism behind him, opting not to invade Syria even though he admitted the situation in the region had spiralled out of control. If neither the US nor the Europeans or some other major power wants to maintain order, a geopolitical vacuum forms -- and that's what we're dealing with now. So far China hasn't been interested in taking on a global role militarily either. If Donald Trump becomes president, America would withdraw from the world even further. It

377 would be the end of NATO as we know it. The Europeans filling the gap left behind by the US is rather unlikely in light of their own weaknesses. Western foreign policy now seems impotent. The second cause of the geopolitical uncertainty in the Middle East is the Arab Spring. It arose from a dissatisfaction with the economic conditions in Arab countries and it has only been exacerbated by rapid population growth. Enraged young people overthrew their post-colonial rulers, whose power had become brittle. But rather than democracy and prosperity, what followed in many cities was chaos, sectarian clashes and destabilization in the entire region. Old state structures in Syria, Libya and Iraq have collapsed. Borders once imposed by colonial rulers have disintegrated. Some political scientists feel reminded of the Thirty Years War given the unrest throughout the region. By now, the destabilization of the Middle East has also enveloped Turkey, where old state structures are being called into question. The country is on the brink of civil war as political Islam faces off with secular tradition, tearing the country apart. The further Turkey distances itself from Europe, the more the unrest in the region will have an impact on Europe, for the Continent will have lost an important buffer between East and West. The geopolitical turmoil wouldn't have the same effect on us if the West wasn't already feeling insecure. The shock hits us so hard because we are no longer sure of ourselves. External instability reinforces internal instability. Terrorism threatens our daily lives, while nationalist populism threatens the political culture. Since the financial crisis of 2007, there has been uncertainty about whether capitalism is still working. Many European countries are languishing amid low growth, high unemployment and growing inequality. A new class of angry citizens has emerged, one in which voters feel left behind, threatened and unrepresented. The beneficiaries of the crisis are the nationalist populists. They sympathize with the authoritarianism of Putin, fan the flames of anti-Muslim rhetoric and dream of bringing an end to the EU. They are fighting the West from within. Another worrisome tendency in the West is the tendency to believe the kinds of conspiracy theories that circulated on Facebook and Twitter in some countries after the Arab Spring and poisoned the atmosphere there. Even in Europe, some citizens have completely lost their certainty that a reality based in proven facts even exists. The credibility of classic media and politicians is called into doubt -- instead, lies and rumors are preferred. At the beginning of the Arab Spring, there was a debate about whether the uprisings in Tunisia, Egypt or Syria would have happened had it not been for Facebook and Twitter. They probably would have still happened, but the protesters wouldn't have been able to mobilize as quickly as they did online. The same holds true today. Social media platforms bring the world closer to us than ever before and help us understand it. But they at the same time intensify and spread a new permanent sense of insecurity. They disseminate word of every single shock, attack and cruelty across the globe, and they give everyone a forum where they can further incense themselves. Furthermore, they make it more difficult to maintain perspective in this chaotic world. Many of us simply don't understand the world anymore. It will probably be up to the historians of future generations to accurately categorize what exactly it is that we're experiencing in these times of transition. This is, however, not the time to give in to

378

panic -- it is time to have confidence in one's own values and keep fighting for the society one believes in. Geopolitical turmoil is best overcome when one is grounded in clear convictions, which holds true for both citizens and countries as a whole. First of all, a clear compass is needed in order to take responsibility for foreign policy, confront dictators and manage the crises that we're witnessing. Mathieu von Rohr is DER SPIEGEL's deputy foreign editor. URL: • http://www.spiegel.de/international/world/have-fears-of-terrorism-in-2016-made-the- world-crazy-a-1104650.html Related SPIEGEL ONLINE links: • The Fractures: How To Counter the Attack on Democracy (07/25/2016) http://www.spiegel.de/international/world/spiegel-editorial-how-to-counter-the- attack-on-democracy-a-1104567.html • German Interior Minister: 'No Constitutional State Can Prevent Every Crime' (07/22/2016) http://www.spiegel.de/international/germany/german-interior-minister-de-maiziere- on-terror-more-security-a-1104289.html • Erdogan's Putsch: Turkey's Post-Coup Slide into Dictatorship (07/22/2016) http://www.spiegel.de/international/world/coup-in-turkey-leads-to-erdogan-power- grab-a-1104261.html • Terrorist Bookkeepers: New Documents Help Identify Islamic State Returnees (07/18/2016) http://www.spiegel.de/international/world/new-islamic-state-data-trove-a-help-for- german-prosecutors-a-1103194.html • Trouble in Paradise: Tourism in the Age of Terrorism (07/13/2016) http://www.spiegel.de/international/world/tourism-changing-as-fears-of-terrorism- broaden-a-1102467.html • The Olympian and the Terrorist: A Story of Two Belgian Brothers (07/20/2016) http://www.spiegel.de/international/europe/brother-of-belgian-terrorist-heading-for- the-olympics-a-1103743.html • Electorate Tremors: The Era of the Angry Voter Is Upon Us (07/06/2016) http://www.spiegel.de/international/europe/brexit-the-era-of-the-angry-voter-is-upon- us-a-1101438.html • Europe Is Dead: Long Live Europe? (06/24/2016) http://www.spiegel.de/international/europe/black-thursday-for-uk-and-europe-as- britain-votes-to-leave-eu-a-1099726.html

379

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Europe's incompatible political trinities Marco Buti, Muriel Lacoue-Labarthe 07 September 2016 The Eurozone Crisis has taken a significant toll – both economic and political – on EU member states as well as the Union as a whole. This column identifies three elements that are key to a working solution for continued union: overcoming the intergovernmental method that has dominated EU decision-making since the crisis, avoiding the seemingly easy route of blaming all evils on ‘Brussels’, and a more unified external representation in global economic governance. Related// Unity in diversity: The way forward for Europe Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland/ Completing Maastricht 2.0 to safeguard the future of the Eurozone Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland/ A consistent trinity for the Eurozone Marco Buti The economic and financial crisis that started eight years ago has taken a taxing toll on European economies. The cost has not only been economic, but also political. In the wake of this crisis, political scepticism has grown, as shown by the number of ruling parties and coalitions that lost elections during the heat of the crisis. Meanwhile, populist parties with an anti-European, anti-euro stance have emerged and turned out stronger in recent elections. The discontent with the present state of the EU culminated with the outcome of the Brexit referendum (O’Rourke 2016). A previous column stressed that a number of inconsistent economic and financial trinities emerged since the outset of the crisis (Buti 2014). We build on this here by looking at current challenges from a political economy point of view, and identify three elements that are key to adapting our vision of subsidiarity to the current times: overcoming the intergovernmental method that has dominated EU decision-making since the crisis (an EU task); refusing the seemingly easy solution to blame all evils on Brussels, including for the costs of tough but inevitable reforms (a domestic task); and moving towards a more unified external representation in global economic governance (a global task). EU economic policy coordination: Where we come from At the core of the concept of monetary union created by the Maastricht Treaty in 1992 was the “impossible trinity” proposition by Mundell – a group of countries cannot pursue simultaneously a fixed exchange rate, complete capital mobility, and autonomous monetary policies. This was even truer in the context of free trade, as emphasised by Tommaso Padoa-Schioppa in his “inconsistent quartet” (Padoa-Schioppa 1987). His report on the consequences of the Single European Act hence called for the evolution of the Community's responsibilities for the three branches of public policy defined as allocation, stabilisation, and redistribution (Musgrave 1959). As the Single Market would have major consequences for allocation efficiency, monetary policy centralisation was key for stabilisation, and an evolution of the EU budget towards

380 economic convergence and social cohesion would contribute to addressing distribution issues across EU countries. In institutional terms, the principle of subsidiarity at the core of the Maastricht Treaty of 1992 led to centralisation of monetary policy, but left budgetary and economic policies as a “matter of common concern" in the competence of member states, within a macroeconomic policy coordination framework including a specific set of minimum rules against fiscal profligacy. While the adoption of framework rules remains grounded in the traditional Community method, which implies majority voting and co-decision between the Council and European Parliament on the Commission proposals and recommendations, their implementation and the adoption of Council recommendations to member states belong to the Council alone. The EU after the crisis: Policy challenges and their political consequences The institutional setting laid out in the Maastricht Treaty has been put to a trying test from 2008 onwards. In the wake of the crisis, key policy challenges have emerged in terms of Eurozone internal rebalancing, structural reform efforts to increase growth, and financial stability and integration, all of which still need to be fully addressed (Buti 2014). Besides Eurozone economic issues, protecting public goods such as security, defence or asylum requires joint policy responses from the EU, rather than at the level of each member state. In the meantime, institutional and political challenges have arisen, raising the question not only of what should be done in policy terms, but also how it can best be delivered. This requires addressing legitimacy issues that have arisen over the crisis years and considering their consequences for how the EU’s and its member states' competences should be articulated at the current juncture. Politically inconsistent trinity A first inconsistent trinity appears when decisions to be taken at the European level rely on democratic checks and balances based only on national institutions. The response to the crisis was dominated by the shift to an intergovernmental process in decision-making, based on unanimity. The European Council, often in its EA formation and based on pre-agreement between some member states, defined not only broad policy orientations – which is the role entrusted to the European Council by the Treaties – but also detailed arrangements. Examples of this include the negotiation of financial assistance programmes to vulnerable member states, or the details of the reform of economic and budgetary surveillance procedures set out in the Van Rompuy Task Force. The intergovernmental method also played a major role in the creation of financial assistance mechanisms. Both the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) rely on a mutual consent procedure. The Banking Union, launched in 2012 to address the incompatibility of national financial supervision with the objective of financial stability in a context of integrated financial markets (Schoenmaker 2011), was in key respects based on intergovernmental agreements, although most of its founding texts and new institutions are anchored in the Community method. Unanimity, which entails the possibility of a veto, still has the same drawbacks that led to its replacement by a majority voting rule in the Single European Act of 1985. Participants are accountable to their domestic constituencies in the way they have upheld domestically defined priorities in decisions that will also apply to other constituencies. While a majority voting rule helps define a joint narrative and common interest beyond the mere average of individual objectives, unanimity leads to

381 compromises based on a minimum common denominator or, as in the heat of the crisis, the relative bargaining powers of creditors and debtors. What ensues is the ‘ultima ratio’ logic where a consensus is eventually achieved, but often too late and at much higher costs. Not being based on genuine ownership, consensus proves difficult to sustain as soon as the market pressure abates. In political science terms, this means that not only was the output legitimacy of the Eurozone in question, but also the ability of its decision-making to reach a balanced solution (‘throughput legitimacy’) and its responsiveness to the public debate, which was mostly held at domestic level (input legitimacy), as stressed by Schmidt (2015, 2016). Similar to the ‘globalisation trilemma’ developed by Rodrik (2000), this complex process can be summarised in a first inconsistent political trinity, whereby democratic checks and balances over deeply integrated political decisions cannot be achieved by institutions based solely on national sovereignty. Democratic institutions at the national level are adapted to decision-making regarding domestic public goods. But combining democratic requirements with decision-making at the level of the EU or the Eurozone, to ensure public goods such as its integrity and stability, must also involve institutions that are representative and accountable to this wider constituency. In institutional terms, this calls for overcoming ‘intergovernmentalism’ and returning to the Community method as an adequate setting for multilevel governance. It does not suppress national sovereignty but complements and shares it, with accountability commensurate to the level where decisions are made, based on a renewed subsidiarity assessment. This was recognised by the Five Presidents’ Report in June 2015, which, among other elements, calls for the creation of a Eurozone Treasury accountable at the European level, and the integration of the ESM into the Community framework, as parts of the second step of completion of the EMU (Juncker 2015). Figure 1. First inconsistent trinity: Political integration

Institutionally inconsistent trinity At the national level, blaming ‘Brussels’ is inconsistent with the relevant degree of subsidiarity, but also fuels domestic political instability. One of the impacts of the crisis has been to deepen divergences between Eurozone economies, with deeply ambitious reform efforts still to be endeavoured, while revealing a larger extent of interdependence and spillovers from economic and fiscal policies.

382

In the current context of slow recovery, one of the key challenges is to ensure more symmetry in rebalancing efforts, in order to support the ECB's inflation objective of price stability while vulnerable economies are restoring their competitiveness and reducing their high debt burdens. This requires member states that have the necessary margin to manoeuvre to support domestic demand and investment more than they are doing so now, and more vulnerable economies to run prudent fiscal policies and implement deeply ambitious reforms at the national level to recreate conditions protective of their social model, while restoring their public finances. In other words, this requires reorganising domestic priorities in recognition of deep economic interdependence. Political parties have two choices in this respect. They can either create a narrative explaining why certain decisions are better taken at the central level and set out a European policy agenda, or blame an abstract Brussels that is unable to cater for domestic priorities and reluctantly implement the outcome of decision-making in which, however, ruling coalitions have participated. The negative option has appeared more frequently in recent years, not just in populist forces but also mainstream parties. The length of the crisis, ensuing rising inequalities between and within member states, and the prospect of difficult reforms make political choices more difficult to accept and defend. However, blaming Brussels for the implications of difficult but inevitable choices entails negative consequences in public opinion, for which the result of the UK referendum on the EU should serve as a cautionary tale. First, it weakens the ability to effectively achieve the adequate level of subsidiarity-based devolutions at the European level, thus hindering the definition of mutually stabilising solutions. Second, it lends credibility to the anti-European, anti- euro stance of populist parties, even though none of their alleged solutions addresses the question of how isolated states would resolve the larger challenges of globalisation better than a union that shares core values of a European social and political model. This eventually creates instability in the domestic political landscape, making stable ruling coalitions more difficult to achieve, and eventually making the prospect of populist parties in governing positions more likely. Hence, the institutional relations setting needs to overcome an inconsistent trinity, where taking the EU as a general scapegoat for the consequences of the crisis prevents the achievement of both domestic political stability and the adequate level of subsidiarity required to deliver EU-based solutions to EU-relevant problems. Figure 2. Second inconsistent trinity: Institutional relations

383

Global governance inconsistent trinity While European integration should help address economic challenges linked to globalisation, poor coordination weakens Europe's voice in global debates. A logical consequence of deeper EU integration, namely the creation of the EMU, was the ability to increase its influence on the functioning of the international economic system. The Union must be able to speak with one voice to make full use of its position, not just to adapt to growing globalisation but also contribute to shaping it. Again, this requires a balancing act between integrated and national policies and institutions for their representation in multilateral forums (Buti 2016). While an important degree of integration has been reached in the field of trade policy, EU representation remains dispersed in multilateral forums – such as the IMF, the G20 and the Financial Stability Board – on issues of key importance for global economic governance, such as the stability of the international economic system and the need to rebalance economies. Again, there is a choice to be made within an inconsistent trinity, whereby it is not possible to achieve an important role in global governance if representation in multilateral forums remains that of member states alone. In other words, fragmented external representation leads to a lesser weight for the European message to the world, or it weakens the effectiveness of the multilateral global governance framework via a tangle of state-to-state bilateral agreements. Only a single external voice, at least at the Eurozone level – along the lines of the proposition of the Five Presidents’ Report and the proposal by the Commission (European Commission 2015) – can be conducive to a greater influence in global decision-making. Figure 3. Third inconsistent trinity: Global governance

Overcoming inconsistent trinities to achieve a new political synthesis Lessons learnt over the crisis, and the need to respond faster and more effectively to secure the recovery, shed light on the importance of taking a fresh look at the degree of subsidiarity that is relevant today. Solving the three political trilemmas discussed here is instrumental to achieving better policy outcomes. The solution lies in a new trinity based on three elements – at the domestic, European, and global level – that would be mutually reinforcing, this time in a consistent manner. At the domestic level, it is up to civil society, and chiefly mainstream parties, to develop a positive narrative on European integration, explaining why certain decisions are better taken at the central level and developing a vision for its integration.

384

At the European level, intergovernmental decision-making must be overcome in order to reach faster and more transparent solutions grounded in the common interest, by returning to and adapting the Community method to the requirements of the post crisis environment. At the global level, the EU should be enabled to make full use of its position as one of the largest economies in the world, and, via a more unified representation in multilateral forums, bear more weight in promoting the core values of a European social and economic model that is unique in the world. Figure 4. A new political synthesis

Gathering these three elements would, in turn, strengthen the conditions necessary for policy reform, both at the domestic and European level. While pundits and media commentators often emphasise the growing euroscepticism in several EU countries, one should not underestimate the profound understanding of and attachment to the European project that European citizens have, and their own readiness to take further steps for the EMU, even in the aftermath of this taxing crisis. Results from a recent poll in Germany, Italy, France, Spain, Belgium, and Poland showed, for instance, that 59-89% of respondents considered belonging to the EU as a good thing, and 57-75% were opposed to returning to domestic currencies. Moreover, 58-67% were in favour of the creation of the position of Finance Minister for the Eurozone, and 63-71% would be favourable to the direct election of a president of the EU by citizens (IFOP 2016). While polls are obviously different from an actual vote, this only shows that there is solid ground to provide a rigorous and unbiased narrative of the implications of European integration, and to propose a renewed subsidiarity model whereby the respective responsibilities at each level are identified more clearly, and decisions are taken at the relevant level with commensurate democratic checks and balances. Authors’ note: The views expressed in this column represent those of the authors and not necessarily those of the institutions to which they are affiliated. References Buti, M (2014), “A Consistent Trinity for the Eurozone”, VoxEU.org, 8 January. Buti, M (2016), “Europe in the New Global Economic Governance: Can We Still Make a Difference?”, Economia Politica, 33 (2),119-127.

385

European Commission (2015), “A roadmap for moving towards a more consistent external representation of the euro area in international fora", Communication from the Commission to the European Parliament, the Council and the European Central Bank, Brussels, 21 October. IFOP (2016), "Les Européens et le Brexit", 15 July. Juncker, J-C (2015), "Completing Europe's Economic and Monetary Union", Report in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, Brussels, 22 June. Musgrave, R A (1959), The Theory of Public Finance: A Study in Public Economy, New York, McGraw-Hill. O’Rourke, K (2016), “Brexit: This backlash has been a long time coming”, VoxEU.org, 7 August. Padoa-Schioppa, T (1987), “Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community”, Brussels, European Commission, II/49/87. Rodrik, D (2000), "How Far Will International Economic Integration Go?", Journal of Economic Perspectives, 14 (1), 177-186. Schmidt, V A (2015), “Forgotten Democratic Legitimacy: ‘Governing by the Rules’ and ‘Ruling by the Numbers’”, in M Matthijs and M Blyth (eds.), The Future of the Euro, New York, Oxford University Press. Schmidt, V A (2016), "The New EU Governance: New Intergovernmentalism, New Supranationalism, and New Parliamentarianism", IAI working papers No.16/08, 11 May. Schoenmaker, D (2011), “The Financial Trilemma”, Economics Letters, 111 (1), 57-59. http://voxeu.org/article/europes-incompatible-political-trinities 07/22/2016 06:31 PM Erdogan's Putsch Turkey's Post-Coup Slide into Dictatorship Turkish President Recep Tayyip Erdogan is taking advantage of last week's failed coup to consolidate his power. As the country slides into a dictatorship, there is a lot at stake for the West. But the effects in Turkey itself promise to be far greater. By SPIEGEL Staff The sun is setting over Ankara and people are pouring out of the subway onto Kizilay Square in the heart of the Turkish capital. They are waving flags and chanting: "God is great!" and "Death to the traitors!" In a café located 100 meters (328 feet) away, Esra Can is quickly cramming her cigarettes and smartphone into her purse, rushing to make it back to her apartment before the demonstration in support of Turkish President Recep Tayyip Erdogan gets going. "The mob on the street is unpredictable," she says.

386

Can, a petite 30-year-old with brown curly hair and red nails, works as a graphic designer in Ankara. She smokes and occasionally enjoys a glass of wine -- and when it comes time to vote, she casts her ballot for the Social Democrats or for left-wing splinter parties. Can says she has always believed in democracy and the rule of law in Turkey despite Erdogan's despotic tendencies. Now, though, she is afraid that her country is sliding down the slippery slope to a dictatorship. For the first time in almost 36 years, members of the Turkish military sought to topple the government last Friday. They occupied parts of Istanbul and Ankara and bombed the parliament building. Up to 300 people lost their lives and at least 1,400 were injured, including a number of civilians. Like many people in Turkey, Can was relieved that the government was able to beat back the attempted coup and hoped that the horror of July 15 would unite people. Now, though, she is watching in dismay as Erdogan takes advantage of the conflict to grab for absolute power. On Wednesday, Erdogan declared emergency rule and partially suspended the European Convention on Human Rights for three months. During that time, the president can rule by decree: He can ignore fundamental rights, such as the right to freedom of assembly and press freedoms, government authorities can impose curfews and media coverage can be outlawed. A 'Holiday of Democracy' Erdogan has also announced his intention to "cleanse the state." He wants to have parliament vote on the reintroduction of the death penalty to provide him with the ultimate punishment as he goes after those involved in the coup and he has called on Turkish citizens to occupy streets and squares across the country. They have listened. Mostly in the evenings, thousands of demonstrators gather in prominent places, such as Ankara's Kizilay Square or Taksim Square in Istanbul. The carry mock gallows and pay homage to their leader Erdogan: "Say the word, and we'll die. Say the word, and we'll kill." Men shoot blanks and speakers incite the mob. Erdogan's loyal prime minister, Binali Yildirim, has spoken of a "holiday of democracy." But for those in the opposition, for secularists, leftists and liberals -- for people like Can -- the pro-government demonstrations don't seem like a democratic groundswell. Rather, they seem like an Islamist counter-revolution. Turkey fended off a military takeover, which likely prevented a bloodbath, but the country is now facing weeks and months of agony and havoc. The state apparatus has been brought to a standstill by the wave of purges Erdogan has launched since last Friday and the economy is reeling. The military, too, is in upheaval, with neither a second coup attempt nor a civil war seemingly out of the question. Western politicians are now looking to Ankara with bewilderment. Turkey has long been a cornerstone of global security architecture and has the second largest military of any NATO member. It is also a bulwark against both Russia and Iran and provides a base of operations for the fight against Islamic State (IS), with American jets taking off from Turkish military bases to launch airstrikes on extremist positions. 'Gift from God'

387

European Union politicians must also take stock. Until last week, EU leaders -- German Chancellor Angela Merkel in particular -- had depended on Turkey to help keep refugees away from Europe. Might the controversial refugee deal now collapse? One of the promises made by Europe as part of that deal was to accelerate EU accession negotiations, but can it fulfill that promise with Erdogan pursuing autocracy? Erdogan called the failed uprising a "gift from God," a gift that now gives him the latitude to silence his opponents and critics. His government has claimed that a minority within the Turkish military was responsible for the putsch attempt, but the president has also accused Fethullah Gülen of instigating the coup -- the Turkish cleric who used to be a close ally of Erdogan's but has been living in American exile since the late 1990s. The president and his entourage have left no doubt about how they intend to react to the revolt: With merciless severity. Erdogan has had over 2,000 soldiers arrested and several tens of thousands of civil servants have been fired. Among them are 36,200 teachers and officials in the Education Ministry, 8,000 police officers and almost 3,000 judges, many of them alleged followers of Gülen. Forty-seven provincial governors were forced to resign as were the deans of all of Turkey's universities. Academics and scientists are no longer allowed to leave the country. In recent years, it had become increasingly difficult for Turks to criticize Erdogan, with intellectuals and journalists having been arrested and opposition newspapers shut down. Investigative journalism is unlikely to come from the country's large media organizations, says Erol Onderoglu, the Turkish representative of the organization Reporters without Borders. State repression has become too great and the economic interests between the media and the government have become too interwoven, he says. Now, though, in the wake of the failed coup, what remains of public opposition is likely to disappear entirely. In the last few days, the government has blocked dozens of websites of small, independent media organizations while critical radio and television broadcasters have been taken off the air. "Those who thought Erdogan could be a partner for freedom and reconciliation must now abandon that hope once and for all," Onderoglu says. A Parliamentarian Preparing to Die It is likely that the government will soon launch a further effort to abolish democracy. After three terms as prime minister, Erdogan was elected president in 2014. Since then, he has been pursuing the introduction of a presidential system of government, which would formally grant him almost unlimited powers. Thus far, his efforts to do so have failed because his Justice and Development Party (AKP) has not had the necessary two-thirds majority in parliament. But in the wake of his triumph over the military, he may be tempted to hold a referendum over a constitutional amendment or to call new elections -- perhaps as early as this year. His team is already busy writing the legend of July 15. Pro-government newspapers are full of stories of fearless citizens who stood in the way of putschist tanks and sacrificed their lives for Turkish democracy. But several details of what happened on the night of the putsch still remain unclear, such as who really stood behind the rebellion and what their motives were. An Erdogan advisor told SPIEGEL that the government had been planning to dismiss several generals and admirals who allegedly belonged to the Gülen movement in August. It could be that these preparations triggered the coup attempt.

388

The order to launch the uprising was allegedly given by General Mehmet Dili, the brother of an AKP parliamentarian. The conspirators had planned to strike at 3 a.m. on Saturday morning, July 16, says the Erdogan confidant. But the Turkish secret service got wind of the plot at 4 p.m. on Friday afternoon, he says, meaning that the coup had to be launched prematurely. At 10 p.m., the first tanks rolled onto the streets of Ankara, with fighter jets flying low over the city. Soldiers then blocked off the bridge over the Bosporus in Istanbul. At that moment, Mustafa Yeneroglu, an AKP member of parliament, was sitting together with several dozen politicians from multiple political parties in the parliament building's plenary hall. Yeneroglu grew up in Cologne as the child of guest worker parents from Anatolia. He studied law and up until two years ago, he acted as a lobbyist for Erdogan in Germany as head of the Islamic organization Milli Görüs, before becoming an AKP parliamentarian in 2015. Taking to the Streets When the insurgents began firing at the parliament building, Yeneroglu and his colleagues were in the process of formulating a joint statement condemning the coup. Security personnel led the lawmakers through the dust and smoke to a shelter in the basement. Yeneroglu stayed there for several hours, using his smartphone to try to find out what was going on outside. In Ankara, the rebels attacked the headquarters of both the military and secret service in addition to detaining military Chief of Staff Hulusi Akar. Soldiers also stormed the editorial offices of state broadcaster TRT. In the basement of parliament, Yeneroglu prepared to die. He wrote a text message to his wife, who was in Cologne with their three children: "Stay strong, take care of the children." But the presumed leaders of the uprising -- Muharrem Köse, a recently dismissed colonel, and Akin Oztürk, a four-star general and former supreme air force commander -- only had a part of the military on their side. The coup quickly fell apart when leading generals and officers threw their support behind the government. More than anything, though, it was the Turkish population that declined to support the rebels. All political parties condemned the uprising and Erdogan's supporters and opponents alike took to the streets. By early Saturday morning, the uprising had largely come to an end. But the solidarity that prevailed in the initial hours after the coup quickly disintegrated and mistrust took over. The country's society has rarely been so divided, with one half of the population seeing July 15 as the beginning of an era of strength and the other seeing the failed coup attempt as the end of Turkish democracy. Rumeysa Kalin, 22, essentially grew up with Erdogan. Her father, Ibrahim Kalin, is the president's spokesman and she can't remember a time when Erdogan didn't determine the day-to-day life of her family. "He is a strong leader, a man who gives people direction," she says. One year ago, Kalin completed her legal studies at a Turkish elite university and now works as a clerk in a law firm in addition to being active in the AKP's youth organization. She speaks perfect English, but refuses to shake men's hands. Kalin belongs to a generation of young, devout Turks who venerate Erdogan. When the first news of the possible coup reached her last Friday via Twitter and Facebook, she was doing laundry in her parents' house in Ankara. She immediately went to the local mosque to pray for a rapid end to the uprising. Her fiancée, meanwhile, a student of

389 molecular biology, made his way to the city center to offer resistance against the putschists. He tried to reassure Kalin on the phone, saying: "Don't be afraid. We have God on our side." A Mood of Vengeance A few days later, the couple joined a pro-government demonstration on Kizilay Square, which people are now referring to as the "center of the national uprising against the traitors to the fatherland." Kalin says the failed coup is a "wake-up call" for her generation. "July 15th has brought Erdogan and the people of Turkey closer together," she says. For those who harbor doubts about Erdogan, such statements sound threatening. In fact, Esra Can, the graphic designer from Ankara, is even thinking about leaving the country. In the last week, bearded men carrying baseball bats have been patrolling her neighborhood at night -- to intimidate dissenters, she says. "I no longer feel safe in this country." Human rights activists have warned that a "lynch-mob sentiment" is spreading in Turkey. At the funeral of a victim of the coup, guests chanted: "We want the death penalty!" In Istanbul, Islamists assaulted people who were drinking beer in public while in several cities and towns in Anatolia, Muslim extremists have attacked churches and Alawi settlements. The deputy head of a large Turkish basketball club said of those involved in the coup: "The property and women of these sons of bitches are now the nation's spoils of war." According to the wife of a military captain, people waving Turkish flags and showing their middle fingers now regularly pass through residential neighborhoods for soldiers and their families in Istanbul. The baker where another officer's wife regularly shops has suddenly begun refusing to sell her bread. The worst, says one woman, who asked to remain anonymous, is the uncertainty about the future. One of her husband's comrades, she says, was arrested and his family still didn't know why, even days later. Allegedly, weapons had been found in his car, the woman says, and he is now suspected of having participated in the attempted coup. She says that last weekend, police appeared in their neighborhood with lists of names and arrested several soldiers. "What if they suddenly come to arrest my husband?" the woman asks. It is now up to the president to pacify the conflict and calm Turkish citizens. But Erdogan is anything but a mediator, preferring instead to divide and polarize. He calls the opposition a "cancerous growth" and promises a "bright future free of traitors." A leading advisor is in favor of loosening the country's gun-control laws so that the nation can "arm itself." Erdogan's Archenemy Erdogan wants revenge. More than that, though, he wants to use revenge to tighten his grip on Turkey. The autocrat Erdogan could now turn into a full-fledged dictator. He appears to have the necessary ambition and he has definitely always been a fighter. It was, in fact, ambition and a lack of scruples that propelled him to the top in the first place. His worldview has always been "us against them," and along the way, he has crushed several adversaries, including the secular elite, who disdain him as a devout outsider, and military generals, who threatened way back in 2007 to oust him with a

390 putsch. When Erdogan had his police force brutally crushed the peaceful protests of environmentalists in Gezi Park in 2013, many observers thought that his career would not last much longer. But he survived the crisis, just as he did the corruption scandal one month later, in which his son was implicated. But with every battle Erdogan has won, the ranks of his enemies have grown. Until their dispute two years ago stemming from the Gezi protests, he still considered Fethullah Gülen, who he now accuses of having orchestrated the July 15 uprising, a friend. He has now become his archenemy, and he isn't easy to find. Gülen lives in Saylorsburg, Pennsylvania, a small two located two hours west of New York by car. Visitors to his complex are checked by a security guard dressed in black who wears a revolver in plain sight on his belt. Behind the gate lies an idyllic and expansive property. The grounds are well cared for and the buildings are modern. Like Erdogan, Gülen is an Islamist and he poses as a reticent cleric who lives humbly before God in American exile. This modesty, however, is nothing but a façade: His movement is rich and powerful. His followers have founded newspapers, hospitals, insurance companies, universities and schools in 140 countries, including Germany. Gülen claims that he seeks to spread a modern version of Islam. But critics say his community is a sect, just as secretive and difficult to penetrate as Scientology or the Catholic movement Opus Dei. When Erdogan's Islamic-conservative AKP party rose to power in 2002, the Gülen community initially seemed a logical ally. Erdogan, who was prime minister at the time, appointed Gülen followers to key positions in the judiciary and administration. With the help of show trials, the Islamists aided the premier in sidelining his critics in the military and civil society. Poisoned by Power Hanefi Avci, once a leading official in the Turkish police force's intelligence service, watched closely as Gülen's men then proceeded to infiltrate state institutions. He warned Erdogan's government of the movement's secret power grab -- in vain. It was only in 2013, when Erdogan and Gülen had their falling out, that the prime minister began to take an interest in Avci's findings and started speaking of Gülen's "parallel state." The cleric's followers in the police and judiciary opened a corruption investigation into Erdogan's son Bilal and officials close to the prime minister. Erdogan responded by closing down schools operated by the Gülen movement. Gülen is nestled in a beige-colored armchair in his home's reception room and he talks about the political situation in Turkey for a good two hours. "It is absurd, irresponsible and erroneous to claim that I had anything to do with this appalling coup attempt," he says. Gülen describes Erdogan as a tyrant seeking to brutally sideline his opponents and says his political style has pathological elements. "Erdogan comes from a poor background and now he lives in many palaces. Success and power have poisoned him," he says. Few in Turkey doubt that the Gülen movement has managed to infiltrate the military. But thus far, the government has produced no strong evidence that Gülen's people were responsible for the July 15 coup attempt. Close observers of Turkey tend instead toward the belief that a coalition of various power centers within the military prepared the uprising.

391

But Erdogan is now using the coup to try and crush Gülen and his movement -- in addition to his critics in the military high command and his political adversaries -- and he is demanding that the US extradite Gülen to Turkey. US Secretary of State John Kerry has said his government will examine the request, but added that Ankara must present solid proof of Gülen's involvement in the putsch. Erdogan, it has become clear, wants to avoid showing any weakness. He prefers, it seems, to risk a worsening of relations with the United States. Indeed, his followers have spent the last several days stoking anti-American sentiment and his labor minister even suggested that Washington was behind the attempted coup -- a crude provocation. Prime Minister Yildirim said that every country that supports Gülen is at war with Turkey. EU Accession Unlikely Erdogan's open aggression, though, is creating problems with the West far beyond the Gülen issue. The refugee deal with the European Union is also now in danger. The deal calls for Turkey to both prevent refugees from traveling onward to Europe and to readmit those who make it to EU territory in exchange for money. But the EU also promised to introduce visa-free travel for Turks heading to Europe and to speed up European Union accession negotiations. In the wake of the coup attempt, however, visa- free travel isn't likely to happen. One important criteria laid out by Brussels was that Turkish parliament change a law allowing Erdogan the ability to take rigorous measures against his opponents. Even before the coup, Erdogan was unhappy about the demand. Furthermore, accession negotiations -- already protracted -- aren't likely to speed up again soon. And they might be stopped altogether. The introduction of the death penalty would mean an end to Turkey's EU aspirations, said Johannes Hahn, the commissioner in charge of enlargement, during a special session of the Foreign Affairs Committee in European Parliament on Tuesday. Germany's European commissioner, Günther Oettinger, says he is opposed to stopping Turkey's accession negotiations because the talks allow the EU to exert pressure on Ankara. "In this decade and under the leadership of Erdogan, there won't be an accession anyway," he told SPIEGEL. But doubts are growing inside the European Commission. Formally, the refugee deal is still valid, but why should Erdogan stick to it if all the promises made by Europe, aside from the money, are reneged? Criticism of the deal was already intense in the months before the coup. Europe, it was said, had sold out its values so that Erdogan would stop the stream of refugees coming to the continent. Now, many are having an "I told you so" moment. "Erdogan is now doing exactly what many had warned of when the refugee deal was made," says one high-ranking EU diplomat. "He is cashing in the blank check he got from the EU." NATO Fears and Nukes The German government is viewing developments in Turkey with great concern. The biggest question is the direction in which Turkey will develop. Chancellor Angela Merkel telephoned with Erdogan over the weekend and Foreign Minister Frank-Walter Steinmeier spoke with his counterpart Mevlut Cavusoglu. Even if there have so far been no signals from Ankara that the government there might revoke the refugee deal, most assume that will happen sooner or later. Similar fears are plaguing NATO at the moment. Last Friday night, NATO Secretary General Jens Stoltenberg spoke with the Turkish foreign minister and then on Monday with Erdogan.

392

In those conversations, Stoltenberg made clear how important it is that Turkey respect democratic principles -- as he did in a SPIEGEL interview a few weeks back. "NATO is based on shared values," he said in June. "Democracy, individual civil liberties and the rule of law." But Turkey is too important to the alliance, both strategically and geopolitically, for Western politicians to be able to do all that much to counter Erdogan. In addition, Article 13 of the NATO Treaty states that a member of the alliance can leave voluntarily. "NATO has no mechanism with which to impose sanctions against its members," says one NATO official. NATO partner Turkey had already become alarmingly unstable even before July 15. In the southeast of the country, the military has rekindled fighting in a hopeless war against Kurdish guerrillas. And the putsch attempt has now further weakened the state and the army. In recent days, Erdogan has had around 100 generals and admirals arrested, about one- third of the military leadership. Many of those suspected to be behind the putsch held important positions within the armed forces, including Adem Huduti, the commander of the Second Army, who coordinated the deployment against the Kurds in southeast Turkey, and Bekir Ercan Van, chief of the Incirlik Air Base, which is used by the US and Europe in the fight against Islamic State. That is not welcome news for the Pentagon: The US holds NATO's largest stockpile of nuclear weapons at Incirlik. Indeed, the putsch attempt in Turkey underscores the risk of storing weapons of mass destruction in an unstable country. In the US, too, more and more people are demanding that the US withdraw from Incirlik. "America's Nukes Aren't Safe in Turkey Anymore," the magazine Foreign Policy declared in a recent headline. 'Broadly Defined, Well-Planned Operation' In early April, the Americans demonstrated just how uncertain they consider the situation in Turkey to be. Washington flew out family members of US soldiers for security reasons and at the same time reinforced its own units by deploying hundreds of additional Marines there. To tighten his control over the army, Erdogan can now swap out the military leadership, but he cannot replace all of the soldiers. He doesn't even know how many conspirators still remain among the ranks of the armed forces. In contrast to Russian President Vladimir Putin, Erdogan is not a man of the apparatus. He's an outsider who has never been entirely recognized by the military. The army has always viewed itself as the protector of the country's secular tradition, as the heir to the political legacy of modern Turkey's founder, Kemal Atatürk. They're suspicious of Erdogan's Islamic fervor. Istanbul-based political scientist Sinan Birdal, who has worked for the Turkish military for many years, contradicts the theory that the putsch was staged by a small group of people with connections to the Gülen movement. He says the group was composed of soldiers from a variety of different units and bases. "This was a broadly defined, well- planned operation," he says. Birdal believes there was and still is a lot of pent up frustration over Erdogan within the military. He considers a second putsch to be an "entirely realistic scenario."

393

But as much as Erdogan distrusts his soldiers, he is also just as reliant upon them -- at least for as long as he continues to refuse to find a peaceful solution to the conflict with the Kurds. Diyarbakir, the most important Kurdish city in southeast Turkey, is severely damaged. The military and special police units have engaged in bitter street fighting there with YPS, a PKK-aligned youth organization. In many parts of the historic city center, entire streets are blocked off. Gray plastic tarps block views of the areas where the fighting is taking place and police monitor the entrances to the town. It has been reported that there are still corpses lying inside, and residents are unable to return to their homes. Business used to flourish here and tourists also visited, but residents now say that Diyarbakir is a "dead city." Fierce Fighting No one embodies the dashed hopes of Kurds as much as Selahattin Demirtas, a chairman of the pro-Kurdish HDP party. One year ago, his party landed seats in the national parliament for the first time, leading many in Turkey to hope for an end to the confrontation between the Turkish state and the Kurdish minority. But Erdogan, who had once pursued the peace process with the Kurds, felt that HDP's success was a threat to his power and reverted to the 1990s policy of confrontation. He began fomenting hatred against the Kurds in order to profit politically. On Erdogan's orders, more than 10,000 soldiers attacked cities in the country's southeast, imposed curfews and engaged in fierce urban combat with the PKK youth. They erected trenches and barricades and declared "liberated zones." The youth reacted with brutality, killing around 500 police and soldiers, most of whom were shot by snipers. More than 1,000 people were killed and several hundred thousand were forced to flee. Demirtas sits inside his party headquarters in Ankara. He is besieged by friends and looks pale, but he still takes time to talk. Demirtas believes the war against the PKK fueled the July 15 insurrection. He says it was Erdogan who equipped the military and gave the generals free rein in the country's south. "The armed forces no longer felt bound by any laws," Demirtas says. He warns that, following the military coup, there could now be an Erdogan coup -- and possibly even a civil war in its wake. Some observers fear that the crisis in Turkey could prompt Kurdish separatists to push for the secession of the Kurdish southeast, an idea that appears to be gaining popularity among Kurds. Ibrahim Halil Baran, a prominent Kurdish intellectual, says he thinks the putsch wasn't necessarily a bad thing for Kurds. "The Turkish side is now occupied with itself," he says. "We Kurds should take advantage of Turkey's weakness in order to achieve our aims." Dictatorship? Putsch? Civil war? The Turks appear to be cursed by violence, and only a few appear to have the strength to look ahead to the future. 'Not as Simple as That' Lawyer Osman Can agrees to meet at the Divan Pub on Baghdad Street, one of the best- known shopping streets on the Asian side of Istanbul. "When the first tanks rolled into the neighborhood, people in the restaurants applauded," Can reports. "They said, this is a rescue. But it wasn't as simple as that."

394

A 48-year-old Kurd, Can grew up in eastern Turkey and would later write his graduate thesis on freedom of opinion at the University of Cologne in Germany. From 2002 to 2010, he served as a judge on the Turkish Constitutional Court in Ankara. He describes himself as being secular and liberal -- and yet he nevertheless allowed himself to be persuaded by Erdogan in September 2012 to join his conservative-Islamic AKP. Only five days later, Can was elected to join the party's 50-member executive committee. Can says he had never intended to go into politics, but at the time he felt AKP was pursuing a liberal brand of politics. Erdogan's government had reformed the constitution in 2010 and strengthened the rights of women. "Those reforms of course didn't go far enough," Can says, "but they were an important step." Erdogan also seemed prepared to accept advice from a person like him. "I told him that I would be critical of him," Can says, "and he said that was OK." At the time, an AKP constitutional commission was considering the question of what a presidential system might look like. Can studied the proposals and became alarmed. The president, for example, "was to be given the right to dissolve parliament," he says. Few listened to Can's objections until he complained directly to Erdogan. "Afterwards, we created a new commission and worked for six months on proposals -- for a parliamentary, but also for a presidential system that assured democratic structures." In April 2014, Can's commission presented its work. Erdogan reacted positively. Unacceptable Disgrace But then he was elected president and Can's proposals for greater democracy weren't released, Erdogan apparently preferring to avoid a public debate. A short time later, Can's AKP career came to an end: When the next parliamentary elections came around, his name no longer appeared on the party's list of candidates. "Erdogan didn't call me, nor did I go to him, he says. "I had seen that I could no longer be effective." Does Can's story affirm the interpretation that Erdogan has let his power go to his head and that he is now unscrupulously clearing away any form of opposition on his path to autocratic rule? Can shakes his head. "I can understand this European view," he says. But if the West sees only Erdogan as the bogeyman and disregards the Gülen movement, it won't be seeing the whole truth, he adds. "The more powerful Gülen got, the tougher Erdogan became," he says, and this conflict triggered a wave of irrational political actions. And the putsch attempt? "I have no proof," Can says, "but I am convinced it was initiated by the Gülen movement." He says he didn't applaud when the tanks rolled in on Friday. "My reaction was: Even if democracy in Turkey is in a sorry state, such a disgrace is unacceptable." According to Can, the only way out of the crisis for Turkey is through deeper democracy. "Without a democratic constitution, our system will remain vulnerable to further putsch attempts -- and to populism." By Nicola Abé, Dieter Bednarz, Onur Burçak Belli, Eren Caylan, Konstantin von Hammerstein, Veit Medick, Peter Müller, Maximilian Popp, Roland Nelles, Christoph Schult and Samiha Shafy URL: http://www.spiegel.de/international/world/coup-in-turkey-leads-to-erdogan-power-grab- a-1104261.html

395

Related SPIEGEL ONLINE links: • Photo Gallery: Twilight for Turkish Democracy? http://www.spiegel.de/fotostrecke/photo-gallery-twilight-for-turkish-democracy- fotostrecke-139553.html • Public Enemy No. 1: A Visit with Fethullah Gülen, Erdogan's Chief Adversary (07/18/2016) http://www.spiegel.de/international/world/a-visit-with-fethullah-guelen-a- 1103529.html • The Story of Ahmed and Alin: Syrian Orphans Trapped in Turkey (07/14/2016) http://www.spiegel.de/international/world/refugees-syrian-orphans-toil-away-in- factories-in-turkey-a-1102610.html • NATO Chief Jens Stoltenberg: 'We Don't Want a New Cold War' (06/08/2016) http://www.spiegel.de/international/world/interview-with-nato-secretary-general-jens- stoltenberg-a-1095799.html • 'Disaster in the Making': The Many Failures of the EU-Turkey Refugee Deal (05/26/2016) http://www.spiegel.de/international/europe/the-refugee-deal-between-the-eu-and- turkey-is-failing-a-1094339.html • Erdogan's Big Prize: Europe At Odds over Visa Freedom for Turks (04/29/2016) http://www.spiegel.de/international/europe/europe-at-pains-over-visa-free-travel-for- turks-a-1090040.html • Erdogan and the Satirist: Inside Merkel's Comedy Conundrum (04/15/2016) http://www.spiegel.de/international/germany/germany-green-lights-legal-case- against-erdogan-critical-comic-a-1087445.html • With Friends Like These...: Erdogan's Assault on Freedom and Democracy (04/07/2016) http://www.spiegel.de/international/europe/merkel-ally-erdogan-moves-closer-to- autocracy-in-turkey-a-1085497.html

396

Daily Morning Newsbriefing July 22, 2016 Severe security weaknesses in France and Germany How could Mohamed Lahouaiej-Bouhlel get through the security barrier with his 19-ton truck at the Promenade des Anglais in Nice? Contrary to official versions that the truck driver forced his way through, Libération reveals that eye-witnesses and photos tell another story. According to those, there was only one municipal police car to secure the entrance to the pedestrian zone. Also, the makeshift barriers did not cover the full stretch of the seaside promenade, allowing Bouhlel to drive on the sidewalk which had been left unguarded. The leading investigative newspaper Le Canard Enchaîné found that records of police meetings showed officials had initially planned to introduce systematic body searches around the pedestrian area, before abandoning the plan "due to a shortage of personnel". Another astonishing fact is that there were two bans in place, one for trucks above 7.5 tons during the festivities of Bastille day, and the second for trucks above 3.5 tons in the city centre. Despite both bans, Bouhlel was allowed to pass with a 19-ton truck, France 24 reports. No one seems to have noticed either that this was not a refrigerated truck, which should have raised suspicion after Bouhlel told police officers he had ice-cream to deliver in the back of his vehicle. Also, people on local radio wonder why there had not been concrete barriers blocking access to areas with large crowds, as had been the case for the Euro 2016 football tournament. The blame game is on since day 1 after the attacks. Christian Estrosi, former mayor of Nice and president of the local region, accuses the government of "lying" about the number of national police officers deployed along the seafront. Manuel Valls sent a strong rebuttal refusing categorically any failures of the national police service. Over the coming weeks the French government will be under pressure for explanations. The same goes for the German government after a FAZ exclusive on the the Afghan refugee who committed a brutal axe attack on a German train earlier this week. The paper reveals that he had not been checked upon entry into Germany. The German government, too, is now coming under increasing pressure. Our other stories We also have stories on what Brexit compromise we think is most likely; on the EU's lacklustre reaction to the Turkish state of emergency; on Sigmar Gabriel's incompetent handling of a competition case, and the consequences; on Draghi calling for action on NPLs; on Greek electoral reform; and on the continued prospect of no Spanish government.

397

Information asymmetry Secrets and agents ’s 1970 paper, “The Market for Lemons”, is a foundation stone of information economics. The first in our series on seminal economic ideas Jul 23rd 2016 | From the print edition IN 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more. Before 1970, economists would not have found much in their discipline to help them mull this puzzle. Indeed, they did not think very hard about the role of information at all. In the labour market, for example, the textbooks mostly assumed that employers know the productivity of their workers—or potential workers—and, thanks to competition, pay them for exactly the value of what they produce. You might think that research upending that conclusion would immediately be celebrated as an important breakthrough. Yet when, in the late 1960s, George Akerlof wrote “The Market for Lemons”, which did just that, and later won its author a Nobel prize, the paper was rejected by three leading journals. At the time, Mr Akerlof was an assistant professor at the University of California, Berkeley; he had only completed his PhD, at MIT, in 1966. Perhaps as a result, the American Economic Review thought his paper’s insights trivial. The Review of Economic Studies agreed. The Journal of Political Economy had almost the opposite concern: it could not stomach the paper’s implications. Mr Akerlof, now an emeritus professor at Berkeley and married to Janet Yellen, the chairman of the Federal Reserve, recalls the editor’s complaint: “If this is correct, economics would be different.” In a way, the editors were all right. Mr Akerlof’s idea, eventually published in the Quarterly Journal of Economics in 1970, was at once simple and revolutionary. Suppose buyers in the used-car market value good cars—“peaches”—at $1,000, and sellers at slightly less. A malfunctioning used car—a “lemon”—is worth only $500 to buyers (and, again, slightly less to sellers). If buyers can tell lemons and peaches apart, trade in both will flourish. In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with. To account for the risk that a car is a lemon, buyers cut their offers. They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But dealers who know for sure they have a peach will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon. Smart buyers can foresee this problem. Knowing they will only ever be sold a lemon, they offer only $500. Sellers of lemons end up with the same price as they would have

398 done were there no ambiguity. But peaches stay in the garage. This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car’s quality. This “information asymmetry” between buyers and sellers kills the market. Is it really true that you can win a Nobel prize just for observing that some people in markets know more than others? That was the question one journalist asked of Michael Spence, who, along with Mr Akerlof and , was a joint recipient of the 2001 Nobel award for their work on information asymmetry. His incredulity was understandable. The lemons paper was not even an accurate description of the used-car market: clearly not every used car sold is a dud. And insurers had long recognised that their customers might be the best judges of what risks they faced, and that those keenest to buy insurance were probably the riskiest bets. Yet the idea was new to mainstream economists, who quickly realised that it made many of their models redundant. Further breakthroughs soon followed, as researchers examined how the asymmetry problem could be solved. Mr Spence’s flagship contribution was a 1973 paper called “Job Market Signalling” that looked at the labour market. Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types. This idea turns conventional wisdom on its head. Education is usually thought to benefit society by making workers more productive. If it is merely a signal of talent, the returns to investment in education flow to the students, who earn a higher wage at the expense of the less able, and perhaps to universities, but not to society at large. One disciple of the idea, Bryan Caplan of George Mason University, is currently penning a book entitled “The Case Against Education”. (Mr Spence himself regrets that others took his theory as a literal description of the world.) Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants’ credit scores. Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts. Messrs Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth. Signalling explains all kinds of behaviour. Firms pay dividends to their shareholders, who must pay on the payouts. Surely it would be better if they retained their earnings, boosting their share prices, and thus delivering their shareholders lightly taxed capital gains? Signalling solves the mystery: paying a dividend is a sign of strength, showing that a firm feels no need to hoard cash. By the same token, why might a restaurant deliberately locate in an area with high rents? It signals to potential customers that it believes its good food will bring it success. Signalling is not the only way to overcome the lemons problem. In a 1976 paper Mr Stiglitz and Michael Rothschild, another economist, showed how insurers might “screen” their customers. The essence of screening is to offer deals which would only ever attract one type of punter.

399

Suppose a car insurer faces two different types of customer, high-risk and low-risk. They cannot tell these groups apart; only the customer knows whether he is a safe driver. Messrs Rothschild and Stiglitz showed that, in a competitive market, insurers cannot profitably offer the same deal to both groups. If they did, the premiums of safe drivers would subsidise payouts to reckless ones. A rival could offer a deal with slightly lower premiums, and slightly less coverage, which would peel away only safe drivers because risky ones prefer to stay fully insured. The firm, left only with bad risks, would make a loss. (Some worried a related problem would afflict Obamacare, which forbids American health insurers from discriminating against customers who are already unwell: if the resulting high premiums were to deter healthy, young customers from signing up, firms might have to raise premiums further, driving more healthy customers away in a so-called “death spiral”.) The car insurer must offer two deals, making sure that each attracts only the customers it is designed for. The trick is to offer one pricey full-insurance deal, and an alternative cheap option with a sizeable deductible. Risky drivers will balk at the deductible, knowing that there is a good chance they will end up paying it when they claim. They will fork out for expensive coverage instead. Safe drivers will tolerate the high deductible and pay a lower price for what coverage they do get. This is not a particularly happy resolution of the problem. Good drivers are stuck with high deductibles—just as in Spence’s model of education, highly productive workers must fork out for an education in order to prove their worth. Yet screening is in play almost every time a firm offers its customers a menu of options. Airlines, for instance, want to milk rich customers with higher prices, without driving away poorer ones. If they knew the depth of each customer’s pockets in advance, they could offer only first-class tickets to the wealthy, and better-value tickets to everyone else. But because they must offer everyone the same options, they must nudge those who can afford it towards the pricier ticket. That means deliberately making the standard cabin uncomfortable, to ensure that the only people who slum it are those with slimmer wallets. Hazard undercuts Eden Adverse selection has a cousin. Insurers have long known that people who buy insurance are more likely to take risks. Someone with home insurance will check their smoke alarms less often; health insurance encourages unhealthy eating and drinking. Economists first cottoned on to this phenomenon of “moral hazard” when Kenneth Arrow wrote about it in 1963. Moral hazard occurs when incentives go haywire. The old economics, noted Mr Stiglitz in his Nobel-prize lecture, paid considerable lip-service to incentives, but had remarkably little to say about them. In a completely transparent world, you need not worry about incentivising someone, because you can use a contract to specify their behaviour precisely. It is when information is asymmetric and you cannot observe what they are doing (is your tradesman using cheap parts? Is your employee slacking?) that you must worry about ensuring that interests are aligned. Such scenarios pose what are known as “principal-agent” problems. How can a principal (like a manager) get an agent (like an employee) to behave how he wants, when he cannot monitor them all the time? The simplest way to make sure that an employee works hard is to give him some or all of the profit. Hairdressers, for instance, will often rent a spot in a salon and keep their takings for themselves.

400

But hard work does not always guarantee success: a star analyst at a consulting firm, for example, might do stellar work pitching for a project that nonetheless goes to a rival. So, another option is to pay “efficiency wages”. Mr Stiglitz and Carl Shapiro, another economist, showed that firms might pay premium wages to make employees value their jobs more highly. This, in turn, would make them less likely to shirk their responsibilities, because they would lose more if they were caught and got fired. That insight helps to explain a fundamental puzzle in economics: when workers are unemployed but want jobs, why don’t wages fall until someone is willing to hire them? An answer is that above-market wages act as a carrot, the resulting unemployment, a stick. And this reveals an even deeper point. Before Mr Akerlof and the other pioneers of information economics came along, the discipline assumed that in competitive markets, prices reflect marginal costs: charge above cost, and a competitor will undercut you. But in a world of information asymmetry, “good behaviour is driven by earning a surplus over what one could get elsewhere,” according to Mr Stiglitz. The wage must be higher than what a worker can get in another job, for them to want to avoid the sack; and firms must find it painful to lose customers when their product is shoddy, if they are to invest in quality. In markets with imperfect information, price cannot equal marginal cost. The concept of information asymmetry, then, truly changed the discipline. Nearly 50 years after the lemons paper was rejected three times, its insights remain of crucial relevance to economists, and to economic policy. Just ask any young, black Washingtonian with a good credit score who wants to find a job. LATER IN THIS SERIES: • Minsky's financial cycle • The Stolper-Samuelson theorem • The Keynesian multiplier • The Nash equilibrium • The Mundell-Fleming trilemma http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970- paper-market-lemons-foundation-stone- information?cid1=cust/ednew/n/bl/n/20160721n/owned/n/n/nwl/n/n/EU/n

Milken Institute Review Searching for Growth in an Unstable Global Economy A conversation with Mikhail Fridman and Anatole Kaletsky

Mikhail FridmanCourtesy of Letterone

401

Mikhail fridman was a principal investor in TNK-BP, which was the third largest oil producer in Russia before the company was acquired by the Russian oil company Rosneft in 2013. Now, he is the chairman of LetterOne, a diversified investment group, headquartered in Luxembourg with offices in London, that has substantial holdings in energy and technology companies. Anatole kaletsky, the former economics editor of The Times (UK), is the chairman of the Institute for New Economic Thinking, a non-profit New York-based think tank established after the 2008 financial crisis to challenge mainstream assumptions in contemporary economic research. July 15, 2016

Editor's note: The transcript of the conversation has been edited for clarity and readability. Mikhail Fridman: Last year I wrote an article in the – "Tricks of the mind turned oil into gold" – in which I said that the oil price had remained high because people perceived there was a shortage. I said that we were probably facing a new phase in which people would not fear the end of oil. Today, it's more or less clear that this is so. Anatole Kaletsky: I was very struck by that article. I have a similar view about the oil price. If you look back over many years, there have been periods when people believed Malthus – that the world's population was running out of oil or food or whatever – and that natural resources were the basis for all human wealth. These have alternated with periods when the world rediscovered Schumpeter – that there is always capacity for innovation, and that innovation is the main source of economic progress and of wealth. There is a related point about competition that I think you also made: monopolies can be preserved for a long time, but not forever. It is widely believed that oil is different from other commodities because the oil price has always been set by a monopoly. But actually, you can break up the past 40 years into distinct periods. Half the time the oil market really was a monopoly. But between 1985 and 2005, oil traded like any other commodity, with prices determined by supply and demand, and production costs. MF: So, as we agree on the causes of the falling price of oil, we should discuss the broader consequences. In my view, the impact of the lower oil price, coupled with other economic factors, is leading to volatility in politics and markets – there are signals of a major tectonic shift happening before our eyes. The economic outlook is unstable. Extreme volatility in the markets has become the norm. This instability is usually attributed to two main factors: the sharp decline in the price of natural resources, and the slowing of China's growth. Yet these factors are seemingly contradictory. Cheaper resources should, in theory, benefit China, the largest importer of natural resources. Western economies, which are the main consumers of Chinese exports, should also be helped by cheap energy – but there is no sign of that, either. What unites these factors is that, while we are living in an era of globalization, it's not progressing in the way that was expected a few years ago. People get access to information almost immediately, and the world believed that this access would allow more backward countries to join the club of more successful countries more quickly than before. So the emerging markets would develop faster than developed countries because the base was much lower. It's now clear that globalization is not a linear, progressive process, but a circular one – and I think this is very alarming in some respects.

402

AK: What do you mean by a "circular" process, and what consequences does it imply? MF: If you look at the broader picture, and not portions of the picture like U.S. market performance or the China slowdown or the migration crisis, one can see that a whole series of seemingly unconnected events are actually connected. Fragility and instability are spreading like a virus, infecting countries and continents. Those who only yesterday were on the margins of European politics are bursting onto center stage. Some are left-leaning political movements, like Syriza in Greece and Podemos in Spain. Some are right-leaning, such as the National Front in France, Fidesz in Hungary and AFD in Germany. But all are populist and anti- establishment. And it is not just Europe that is being shaken up. The United States, which was built on the principles of free markets and openness, is rallying to presidential candidates who are either propagating socialist views or arguing for isolationism. This populist advance reflects an obvious and sad fact: old and tested truths no longer satisfy modern societies, and need to be reviewed and redefined. AK: Why do you think this is happening, and how is it connected with globalization and natural resources? I wrote during the banking crisis that turmoil was a predictable response to the breakdown of one specific model of global capitalism. Judging by past experience, a likely outcome could be a decade or more of soul-searching and instability, leading eventually to a new settlement in both politics and economics. I argued in my book, Capitalism 4.0, that the breakdown of deregulated financial capitalism would trigger a fourth seismic change in both politics and economic thinking – that global capitalism is entering a new phase of its evolution. Are you suggesting something along these lines? MF: I think that the crash of the oil price symbolized to a certain extent the end of the era of economic development based on natural resources. Land, minerals, oil and gas, water and other resources were seen as the main components of national treasure. This seems to me to be changing, although, of course, not overnight. AK: And what in your view could replace national resources as the main form of what you call national treasure? MF: I believe that the main source is no longer natural resource rents, but the social infrastructure that allows every person to realize their intellectual and creative potential. This represents a paradigm shift in economic development, to a new era in which ideas can be turned into new scalable services in a short space of time. And the consequences are far-reaching. I think that has happened in the developed countries. Silicon Valley is not the only example, but it's probably the brightest one if you look at a company like Google. In 1991, there were two young guys in a garage who created a search engine that has formed the basis of the world's first or second largest company. I think the West now has the best conditions for making breakthroughs in various spheres of human activity, be it in biotechnology, robotics, logistics or transportation. It is also clear that countries lacking what I call sociopolitical ecosystems, in which these businesses are created, are disadvantaged. The establishment of a balanced social system and a competitive, rule- based environment requires big shifts in values and thinking, as well as the breaking of stereotypes. AK: That's a point you make very clearly. But where do we go from this diagnosis? What is the prescription that follows?

403

MF: To understand this shift, and therefore what a country needs to do to replicate it, you need to look at how the change occurred. There are three pillars to this new competitive advantage. First, you need talented people who are very well educated, like those two guys at Google – one of whom was born in Russia. (His family immigrated to the United States when he was young.) This combination of exceptional talent and education is more crucial than ever because we are entering a disruptive era driven by extraordinary levels of human creativity. The term "indigo" has been used to refer to children with special or unusual abilities. Today we are in a new era in which especially talented individuals and the organizations they create are able to realize new levels of human potential and economic achievement. So I refer to an "indigo" generation that is shaping tomorrow's economy and creating national wealth. We know from biology that human intelligence, talent and creativity exist everywhere and are equally distributed among nations and races. Good education may not be available everywhere, but all large developing countries have serious universities. Moreover, people from these countries have a chance to study abroad or to take online courses provided by the best universities in the developed world. AK: So talent and education are available everywhere. What, then, is missing? MF: The second of my three pillars is probably the most important. It is really an ecosystem, with legal infrastructure that can protect property rights; competition policies to ensure that a small company cannot be oppressed by a big one; hundreds of suppliers of different business services, starting from venture capital, to banks ready to finance, to suppliers of services like web design, IT support – whatever. This kind of collateral enables ideas to arise and businesses to be created quickly and to expand within a very short time. Third, this indigo economy needs a digital world that allows the innovators to distribute their products widely almost immediately and to collect data to understand the behavior of their potential customers. AK: So how can developing markets take advantage of these new conditions? MF: Well, the most problematic area for the functioning of a new-era economy is the creation of a social and institutional environment congenial to innovative companies. What might be called the politico-economic "cloud," which is even more important than the technological cloud that everyone now talks about. This institutional cloud cannot be created overnight. It has evolved as a result of a profound social and political development that Western societies have experienced over centuries. A firm legal system, competition rules and a system of checks and balances do not automatically result in the creation of a Silicon Valley – but they are necessary preconditions. AK: That's very persuasive. But why should it be so much more difficult for emerging economies to create this social infrastructure if the understanding already exists? If you look at Singapore or Taiwan or Korea (and their achievements), why are you convinced that other developing countries will find it more difficult to create this infrastructure? After all, there is a contrary argument: a few years ago, people believed that globalization and technological progress would allow emerging economies to catch up faster than ever before. It takes 15 or 20 years and hundreds of billions of dollars to

404 build a railway network, an electricity grid or a road system. But, in principle, it doesn't take that long or cost that much to create a properly functioning legal system or accounting system.

Today we are in a new era in which especially talented individuals and the organizations they create are able to realize new levels of human potential and economic achievement.

MF: This is the nub of the problem. Everything depends on whether there is the political will to do what's required to create and sustain a modern business system. It doesn't need financial investment; it needs a social consensus. By the way, the former Soviet Union was a great counterexample that shows what I mean. When the USSR collapsed at the end of the 80s and beginning of the 90s, I remember I started to meet foreign investors. All were totally certain that the Soviet Union would overcome its problems because of a very convincing argument. They said "you have a very well educated population; you have a huge amount of natural resources; you have technological achievements in areas like rockets and atomic energy, military techniques and all these kinds of things. So, therefore, you will very quickly reach the level of developed countries." It didn't happen in Russia because the mind-set of people is not based on a piece of paper that is called the law; it's based on history, tradition, beliefs and religion, going back hundreds and hundreds of years. The culture of any society is probably the most nurtured parameter of any society. You and I, as cosmopolitan people who travel internationally, know that it's impossible to change culture quickly. It's possible to make new leaders. But if their culture is not respectful of the society, all their changes will be very temporary, very superficial. Let's continue with the example of Russia. All these "new" concepts of , freedom of speech, of democracy and elections, privatization, everything is very vulnerable. Why? Not because President Putin is imposing a new form of law, which is believed here in the West, but because the reforms that were done by former President Yeltsin never penetrated to the bottom of the soul of Russian people. Never. AK: So this is the cultural infrastructure that you describe as key to global economic development? You cannot just sign a piece of paper, which is what Yeltsin thought was enough to create a new kind of society. You'll recall when Yeltsin rescued Gorbachev after the coup in 1991. He turns up, signs a piece of paper – and the Communist Party is abolished. Communism is finished; we are now in the new world. I think you are saying that creating a modern economy and business system is actually more difficult, more time consuming, more costly than building the railway or electricity system. So what does this mean for developing economies like China and India that are more important than Russia as engines of growth for the world economy?

It's impossible to change culture quickly. It's possible to make new leaders. But if their culture is not respectful of the society, all their changes will be very temporary, very superficial.

MF: Emerging-market governments have typically favored fast physical infrastructure projects at the expense of building institutions and independent legal systems, and

405 encouraging competition. These latter goals seemed like long and difficult tasks that did not match traditional values and often contradicted the interests of the ruling elite. The most obvious example is China. There, the development of institutions was sacrificed for the sake of building new cities. Having realized the scale of problems related to the weakness of its institutions, the government has responded in its usual way, employing tactics of further centralization and repression. Another great example is Brazil. It seemed like it had been completely fixed with Lula. He had set up a proper system of laws and everything. But the moment you begin to peel away the surface, it turns out that nothing has changed and it's worse than ever before. Turkey is another unfortunate example. In short, with the possible exception of India, a repeat of China's economic miracle or a boom in any of the other big emerging markets is unlikely. AK: Isn't there a contrary argument based on Eastern Europe? Look at the Eastern European countries that have relatively quickly joined the European collaboration, like the Czech Republic, or even Poland. Why? Because there was unity of purpose? Because they were mentally ready? MF: Well, look at Poland and Hungary. Even there it turns out that perhaps these Western values are not as deeply rooted as we imagined two years ago. But this brings me to another important point. I believe that religious rules and traditions are crucially important, even though in the modern world religion is not so visible anymore. AK: Is this because cultures are built on religion? That seems to be one lesson of history. MF: Yes, religion is a part of culture, a seed that is so deep. Look at the Baltic states. You know when they broke free of the Soviet Union they just immediately switched. Look at Estonia. It's a normal country. Of course, you could not completely avoid the effects of 40-50 years of Soviet rule. There is still a generation there of ex-Soviet people. But nevertheless it is much easier to change Estonia than Romania or Hungary. AK: So if you are living in Brazil or Turkey do you just give up and say, if I'm an intelligent person I have to emigrate to the United States or to Western Europe? Or is there something else, some kind of hope that we could hold out? MF: This is very difficult challenge. To cure problems you should have clarity about what kind of bitter pill you need to take. It seems to me that the support these countries expect from all their natural resources or cheap labor will diminish quickly, and they should focus on building institutional ecosystems. It's sad news. But the cloud has a silver lining: in the end, success or failure does not depend on abundant fertile land, deposits of oil or ore, or whatever. AK: I think there's a contradiction here. You're saying that they need to change their societies. But actually, you've established that they really can't do this quickly – it takes a very long time. Even if they're trying, even if the people at the top understand your diagnosis, do you think they can implement the necessary reforms before their people lose patience and turn against the reform process? MF: I think most governments in emerging markets have never addressed this very clearly. They have to create more-just societies in places where the sense of justice and the rule of law are lacking. What's important is to create an open society. And a

406 functional open society depends on the social infrastructure on which voting is built. Just having a vote doesn't give you that social infrastructure. AK: I think that is an important conclusion. Democracy may be a necessary condition, but it is not a sufficient condition. So some parts of the developing world will move in the right direction, but many will not. MF: Yes. The demands of the indigo economy mean that the rate of economic growth in many emerging markets will lag behind that of the developed world, further widening the gap in incomes and standards of living. The resentment driven this inability to catch up with the developed world will increase. Emerging countries are likely to feel increasingly jealous and hostile toward rich countries, while rich countries will try to isolate themselves from their poorer and embittered neighbors. On the other hand, there will be some successes. Among developing nations, India is a good example of a country on the rise because it doesn't have the legacy of an authoritarian past. Let's not call India a democracy; let's call it a country with a system of checks and balances. AK: With a proper legal system based on English law? MF: Of course it's not perfect. But still, it's working somehow; somehow the infrastructure required for business there does work. That's why I see the chance of a breakthrough in India. AK: So in your view India has a good chance because of its legal and political infrastructure. This relates, by the way, to one of the points that I have been making for the past few years about China. One of the biggest contributions to China's remarkable development in the past 10-15 years was actually made by Margaret Thatcher. Why? Because Thatcher gave China something that they could not have created for themselves in 10, 15 or 20 years by handing over Hong Kong. Hong Kong was a functioning financial center that had developed over 99 years precisely because it had the legal and social infrastructure that you have been talking about. The Chinese were able to import this for nothing and rely on it to a very significant extent to help the development of Chinese business and finance. Without that gift, a lot of China's business development might not have happened. On the other hand, Taiwan, Korea and Japan have managed to create their own successful business and financial cultures. But to some extent, they were forced to create this infrastructure under American occupation or influence. Another way of expressing the phenomenon you're describing is that emerging economies are facing resource traps or so-called middle-income traps. Many of them have reached per capita incomes of, say, $7,000 to $10,000 a year. But only three or four of them have managed the leap beyond. MF: That's the point. You can't go further unless you reshuffle the whole system. I think globalization is becoming circular. A few years ago it contributed to the narrowing of the gap between emerging markets and the Western world. But it could come to serve as a channel for selling the goods and services of the indigo economies to the countries that cannot compete in quality or price. Rising resentment could further empower political populists to fan hatred toward the more prosperous and successful. Populist politicians are already among us, promising simple solutions to complex problems. It is a dangerous recipe.

407

But in this new economic era, one cannot build an economy based on the creative energy, free spirit and self-fulfillment of millions of individuals if they are cut off from influencing the most important decisions about their own society. I hope that the indigo era toward which we are heading will finally end these dangerous misconceptions. The successful economy is an economy of free people. And this means that the world must become more and more free. http://www.milkenreview.org/articles/searching-for-growth-in-an-unstable-global- economy

VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists The Spanish labour market: A very costly insider-outsider divide Samuel Bentolila, Juan Dolado, Juan Jimeno 20 January 2012 Spain has a lower public debt-to-GDP ratio than not only Italy, but also France, Germany, and the UK. So why is it threatened with another downgrade? This column points to the fundamental problem with Spain’s economy – the insider-outsider divide that has led to the highest unemployment rate in the Eurozone. It proposes a single open-ended contract for all workers – a difficult solution whose time has come. Despite having a public debt-to-GDP ratio that is lower not only than Italy’s but also than that of France, Germany, and the UK, and despite having a new government committed to fiscal consolidation, Spain is still in trouble. It faces difficulties obtaining credit in international financial markets. Aside from the unresolved restructuring of its banking sector, this situation has arisen mainly as a result of a lack of competitiveness and low expected economic growth. Indeed, in response to Standard and Poor’s recent threat to further downgrade Spain’s sovereign rating if the country doesn't move quickly on implementing its labour-reform plans, Prime Minister Mariano Rajoy declared earlier this week that his government “knows perfectly well what it needs to do to improve Spain's reputation, stimulate growth and create jobs". At the root of these problems lies an extremely dysfunctional labour market that has performed very poorly in every slump since the 1980s. Moreover, during the Great Recession, Spain has suffered the highest employment losses per point of GDP in the OECD, while its unemployment rate has rocketed from 8% to 21.5%, and is still on the rise. Why so costly? Spanish labour-market institutions appear to be those of a typical continental European country, but there are important differences. First, Spain has the most extreme case of what economists call a ‘dual labour market’ – in which temporary workers have few rights and are easy to fire, while incumbent workers are on permanent contracts and the cost of dismissal is prohibitively high. In

408

Spain, temporary jobs represent on average one third of employees. The use of temporary contracts with low firing costs was eased in 1984, while the very high firing costs of permanent contracts were kept unchanged. Since then, there has been a long sequence of ineffectual attempts at reform. Second, collective bargaining – stemming from the industrial relations system under the Franco regime – mostly takes place at the industry or province level and collective agreements have the status of a law, affecting all workers and firms in the relevant area. This leaves little scope for firms, especially small- and medium-sized ones, to adjust wages and labour conditions to their productivity levels or accommodate adverse shocks. Wages and other working conditions of employees under permanent contracts are covered by collective bargaining agreements that protect them against inflation and adverse negative shocks. By contrast, workers with temporary contracts – a group in which young people, women, and low-skilled workers are overrepresented – suffer the burden of adjustment. Out of the 1.6 million employees to have lost their jobs since mid-2007, 1.4 million had temporary contracts. Also, large and high-productivity firms are less constrained by these regulations, since firm-level bargaining is easier for them and their wage levels are often above the minimums set at the industry level. At the same time, they can use the latter to reduce competition from smaller and low- productivity firms, which find those minimums much more binding. Why so hard to eliminate? In standard insider-outsider models (eg Blanchard and Summers 1988), the outsiders are the unemployed. In two-tier labour markets, temporary workers are outsiders too. They have little employment protection and therefore suffer very high turnover (in Spain, on average fewer than 6% of these contracts are converted to permanent). As a result, temporary workers usually have a weak attachment to the firm and so their interests are often neglected by worker representatives. The interaction between collective- bargaining regulations and employment-protection legislation thus affords labour unions and employer associations powerful instruments to reinforce the insider-outsider divide. Indeed, insiders were able to raise their wages in the 1990s recession without jeopardising their jobs, since temporary workers were a buffer against shocks (Bentolila and Dolado 1994). The same has happened during the Great Recession: massive employment loses, having fallen mostly on temporary workers, have not triggered significant wage moderation. In other words, insiders have been little exposed to the risk of job loss. Figure 1. Indicators of political viability of labour reform (share of employees plus unemployed)

409

Labour reforms are more likely to happen the higher that exposure is (Saint-Paul 1996) and the larger the share of outsiders in the labour force is. Figure 1, from a recent paper of ours (Bentolila et al 2011), plots two indices of the share of outsiders in the Spanish labour force. It shows that the most important reforms, in 1994 and 1997, took place at a time when outsiders, measured as the sum of temporary and unemployed workers, outnumbered insiders. Subsequently, as unemployment fell and permanent contracts increased – due to the lengthy 1997–2007 expansion – the share of outsiders fell clearly below 50%, which is consistent with the absence of major reforms over that period. Among employees with permanent contracts, most have the old ordinary contract –with severance pay of 45 days' wages per year of service – while others have the employment-promotion contract introduced in 1997 – with 33 days. Since the latter have much higher turnover rates than the former, it is unclear whether they really view themselves as insiders. If not, Figure 1 shows that in the recession outsiders get close to being the majority, while strictly speaking remaining below it. So why did the previous Socialist government undertake labour reforms over 2010–11? After the Greek bailout and the creation of the European Financial Stability Facility, the risk premium on Spanish ten-year bonds escalated sharply, reaching 217 basis points in mid-June 2010. Forced by financial markets, the government reluctantly approved a reform that followed the traditional piecemeal strategy (Bertola 2010 argues that high public debt can trigger labour reform). The core of the two key institutions sustaining the insider-outsider divide, namely dual employment protection legislation and the regulation of collective bargaining, was nevertheless left in place. Also, part of the reform, like subsidies for reduced hours (as opposed to dismissals), was meant to benefit insiders. Moreover, the outgoing government took measures undoing limitations on the chaining of temporary contracts and raising the probability that workers will challenge dismissals in court. Unsurprisingly, the reforms were ineffectual. What next? The new, right-of-centre government has announced that labour reform is high on its agenda. Will it succeed? Academics generally agree that it is high time to abandon the marginal-reform strategy. On the one hand, small reductions in severance pay for some permanent contracts still leave a too-high firing-cost gap with temporary contracts. On the other, severely penalising the use of temporary contracts while keeping the current employment protection legislation for permanent contracts would simply prevent job creation in the subsequent recovery and make the labour-market uniformly much more rigid. A more radical approach is therefore needed to reduce the firing-cost gap and achieve a better balance between flexibility and social protection. Its main goal should be to eliminate the detrimental effects of the excessive churning of temporary workers on job stability, training, and future career prospects. A sound policy proposal is to introduce a single open-ended contract for new hires, while abolishing temporary contracts – except for the replacement of workers on maternity or sickness leave. The single open-ended contract has no pre-set duration and its severance pay smoothly increases with seniority. This is justified because the longer a worker stays in a given firm, the larger his or her loss of specific human capital and psychological costs from dismissal. By contrast with the dual employment protection legislation, the open-ended contract removes the discontinuity in marginal expected severance pay faced by employers when

410 deciding whether to upgrade expiring temporary contracts to permanent. A gradual increase in severance pay dramatically reduces incentives for excess turnover and encourages job creation and longer tenures. Moreover, it need not harm employers, since the cost of uncertainty about the quality of job matches is reduced. Similar proposals have been made for France and Italy (Bentolila et al 2010). The single open-ended contract would not be the cure-all for Spanish unemployment, however. Reform of collective bargaining regulations should aim at bringing wage changes more in line with productivity changes. This requires giving more scope for firm-level bargaining and limiting wage indexation. The 2010–11 reforms eased the opting-out from industry agreements and established firm-level agreements as the default. But, by giving labour unions and employers' associations effective veto power over these changes, which has indeed been used in the new agreements signed since June 2011, it is unlikely that it will significantly reduce the negative consequences of sector level collective bargaining. Introducing the single open-ended contract and making opting out of industry-wide agreements truly operational would sharply reduce the insider-outsider divide, which would bring about higher job creation, much-needed productivity gains and lower earnings inequality. These measures should be complemented by others aimed at reducing long-term unemployment, such as improving active labour-market policies, through a proper evaluation of their effects with financial consequences for the agents undertaking them, mostly absent so far. The Spanish economy is in a dire situation. External financial conditions are very unfavourable, making reductions in private and public indebtedness urgent and tying fiscal policy. Since a domestic monetary policy is not available, supply policies should dominate the policy agenda. Two further ideas should guide labour-market reform. The first is that reducing the insider-outsider divide and lowering barriers to product-market competition would raise job creation and productivity growth, thereby increasing fiscal revenues and easing the fiscal constraint. The second is the need to be aware of reform fatigue. There have been far too many unsuccessful labour-market reforms. The new reform will be implemented in the midst of an intense fiscal retrenchment and with public opinion being highly critical of the management of the crisis so far. The reform should therefore have clear goals, be properly communicated to the public, and be perceived as equitable. The task is not easy but its time has come. References Bentolila, Samuel and Juan J Dolado (1994), "Labour Flexibility and Wages: Lessons from Spain", Economic Policy 18:53-99. Bentolila, Samuel, Juan J Dolado, and Juan F Jimeno (2011), "Reforming an Insider- Outsider Labor Market: The Spanish Experience", CEPR Discussion Paper No. 8691. Bentolila, Samuel, Tito Boeri, and Pierre Cahuc (2010), "Ending the scourge of dual labour markets in Europe", VoxEU.org, 12 July. Bertola (2010), "Europe Fiscal Policy and Labor Markets at Times of Public Debt", Nordic Economic Policy Review, 1/2010:111-147. Blanchard, O and L Summers (1986), “Hysteresis and the European Unemployment Problem”, NBER Macroeconomics Annual, vol. 1, Cambridge, MA: MIT Press, , 15- 77.

411

Saint-Paul, Gilles (1996), "Exploring the Political Economy of Labour Market Institutions", Economic Policy,11:265-300. http://voxeu.org/article/jobless-spain-what-can-be-done-about-insider-outsider-divide

Opinion Greece: a European tragedy Wrapped up in the details of pension reforms and home foreclosure—matters that, no doubt, have important consequences for many— the big picture has faded into the background. It is easy to forget how we got here, and where we are going. By: Ashoka Mody Date: January 14, 2016 euro crisisFocus on GreeceGreeceEuropean Macroeconomics & Governance Tags & Topics This op-ed was originally published in Kathimerini.

From 2009 to 2015, the Greek government’s primary deficit (deficit not counting interest payments) declined from 10 percent of GDP to nearly zero. Greece ran a 10 percent of GDP current account deficit with the rest of the world; now the balance shows a surplus. Compare the numbers with Ireland, Portugal, and Spain, or compare them with the historical record of reducing deficits: Greece has delivered as much, or more. But the austerity was much harsher for Greece. Public spending was pushed down by about 25 percent, an order of magnitude more than in the other countries. This caused GDP and tax revenues to collapse. The perverse consequence was a soaring public debt ratio, which rose from 145 percent of GDP in 2009 to 200 percent of GDP. Simply put, Greece was pushed to run much harder and fell further behind. Greece’s creditors now want more austerity. Because, once again, growth projections are absurdly optimistic, the debt burden could escalate uncontrollably, leading to calls for more austerity in a never-ending cycle. Twice in the last year—when they voted Syriza to power in December 2014 and in July 2015 when they rejected the creditors’ deal—the Greek people pleaded that this calamity be stopped. But with the threat of blowing Greece up, the creditors powered on. From 1981, when it joined the European Union, the Greek economy grew by expanding the Greek state. Europe was supposed to anchor democracy and foster prosperity. Instead, corruption and entitlement became entrenched. With the incentives so deeply embedded, each change in government only reshuffled the individuals enjoying state patronage. Both Europe and Greece failed.

412

The creditors now wish to convey that they are pushing to redeem themselves and Greece. But real change—to create a new growth model for Greece and unravel the corrupt networks—will take years. In the meanwhile, asking Greece for further fiscal consolidation of 3½ percent of GDP over the next three years is stunning economic illiteracy, more so because one of the creditors—the International Monetary Fund—has intellectually discredited this policy. By itself, such austerity could cause GDP to contract by 7 percent. Plus, prices will decline, making household and business debt harder to repay, further undermining growth and public finances. The creditors’ projections show a miraculous resumption of growth. Miracles do happen, but are not customarily invoked for economic projections. The creditors’ obsession with Greek pensions as too high—even if true—is somewhat beside the point. Pensions are important in sustaining the livelihoods of vulnerable families. And it is not just a warm and fuzzy regard for social equity and justice that is at stake. The scale of reduction proposed, along with all the other austerity measures, will have immediate macroeconomic consequences. As consumption declines, so will growth and prices. Greece’s debt-deflation cycle will continue. Higher private and public debt burdens will further undermine the banking system. Make no mistake, deeper economic distress cannot cure long-term economic pathologies, just as heavy-lifting is not recommended to revive a patient from cardiac arrest. The long-term damage will be far-reaching. For a start, the most talented are leaving in droves. Greece’s weak growth prospects will only become worse. We can look down the passage of time and see a Greece that is older, where the scientists and doctors and entrepreneurs have left and many of those left behind have no place else to go. With unending economic struggle, Greece will likely be more nationalistic, marginalized from the international community except when its borders become meaningful. Greece has a nearly balanced primary budget. A three-year freeze on austerity will allow resumption of growth. An agenda to lower and rationalize pensions then would make more sense. But Greece also needs deep debt relief. The coy promises of driblets of relief are intended as a clever tactic for dragging Greek authorities down the road of needed reform. But if such reform undermines growth, the needed debt relief will increase with time. Greece will become a permanent ward of the creditors. The Greeks will suffer more pain and the creditors will see less of their money. The great danger now is that a Europe confronted by much larger challenges relegates Greece to a side-show. The creditors, knowing they cannot push too hard, nevertheless stick to their unworkable strategy. Greek authorities, with nowhere else to look, engage on those terms. A slow-motion war of attrition between the two sides leads to a little noticed, but deepening tragedy—for Greece and for Europe.

413