Tag Archives: europe

Ukraine: The Economic Benefit to EU Integration

Since November 12th of 2013, Ukrainians have been taking to the streets in droves to protest the authoritarian government led by President Yanukovych. As with other similar episodes of civil unrest, such as the Arab Spring, Ukranian protesters have utilized social media, hash tagging “Euromaidan”, which has become the unofficial name of the movement. As the AP explains in “Ukraine’s Euromaiden: What’s in a name?” the name refers both to the physical location of the protests, which have centered around Maidan Nezalezhnosti or Independence Square in Kiev, the capital of Ukraine, and also to the demonstrators’ demand for the country to integrate more closely with Europe.

Euromaiden has become even more relevant over the last week as protesters have clashed violently with police and at least two deaths have occurred according to the Wall Street Journal. While the protests still remain relatively small, the escalation to violence does bring about the potential for Ukraine to collapse into all out revolt. As the Economist points out, “Opponents of the government believe the new laws introduce Russian-style authoritarianism, and see them as part of a plan by Vladimir Putin, Russia’s president, to lock Ukraine into Russia’s orbit.” Essentially the conflict has been framed on two sides: the pro-European demonstrators and the pro-Russian institution. Many believe that a pivot towards Europe is the only way to bring democracy and rule of law to Ukraine, and indeed there is likely a great deal of truth to this. From purely a civil rights perspective, there is much to be gained from European integration.

From an economic perspective, however, the case for European integration is slightly more ambiguous. Ukraine is a former Soviet state and has retained very close ties with Russia after gaining independence. The country has been faced with a dilemma in modern times – whether to retain ties with the Russian Customs Union – an economic alliance between former Soviet states, led by Russia – or join with the EU in a free trade agreement. According to the Kyiv Post, maintaining ties with Russia over the EU, have several significant negative impacts on the Ukranian economy:

  1. The Customs Union is seen by many as a way for Russia to exert an inordinate amount of control over former Soviet states and the agreements typically force members countries to become reliant on Russia.
  2. Corruption and bribery is wide-spread across the Customs Union states and this limits the attractiveness of foreign direct investment in Ukraine.
  3. Ukraine’s trade with Russia has been steadily decreasing, while trade with the EU has been rising.

Europe provides both economic and political benefits to Ukraine and the spread of the pro-European protests shows that citizens want these benefits. While the conflict has been framed as a civil rights fight up to this point, the economic impact could be huge if Ukraine were to ultimately enter an agreement with the EU. This could modernize their domestic industry as they would have a huge trading partner next door and help boost national income, which according to the World Bank is relatively poor compared to Europe and Central Asia as shown in the chart below.

Ukraine GNI

It remains to be seen whether the protestors will see their demands met, if the country will be thrown into an all out revolution, or if the current regime will stamp out the revolt but it is something to see people, in our modern time, fighting for their liberty.

Lost in (Health Care) Legislation

I don’t get it. I’m really, truly at a loss. And I’m hoping that someone here will be able to help me make sense of things.

What I’m referring to is the ACA/Obamacare/US Health Care System/pick your favorite acronym, nickname or other designation. And by “I don’t get it”, I mean all of it. Its design, the overly complicated way of implementing it, and the strange enrollment complications going along with it.

Don’t get me wrong here: I’m convinced that a public health care system is the way to go. There are plenty of reasons to have one: mandatory insurance will lead to a lower average premium than private insurers can provide. That means that even if some people have to pay a higher premium under a public system, you could compensate them (say through income tax credits). Another way to go is to simply have the system paid for by taxes (think the NHS in Britain). Sure, those systems are run by governments. And yes, there are plenty of opportunities there for people to do a poor job and be inefficient. But there’s no reason why a good system of checks and balances (something the US prides itself on having) wouldn’t be able to do away with those. And remember, you’re going to be cutting total health care spending by cutting the average premium.

Is there any empirical foundation for these claims, anything beyond economic reasoning that supports a public system? Why yes, for one thing, the US has the third highest health expenditures as a percentage of GDP in the world! Now some have argued that this is in fact all because in the US, medical personnel are paid more than in other places. This attracts the most highly skilled people (provided that they can get into the country and are allowed to work) and thus gives US citizens the best health care that money can buy. In theory, this argument has some merit to it. However, PwC finds that 30% – 50% of the States’ total health care expenditure is, in fact, ‘wasteful’ spending (and this is before the ACA with all its bureaucratic, clumsy government interference – i.e. there were massive inefficiencies in the system as it was before the ACA). I don’t expect a public provider to be able to do much worse, unless they try really, really hard to do an exceptionally bad job (and whatever you think of the competence of state bureaucrats, I don’t think it’s fair to assume that they’re actively working to the people’s detriment).

So the ACA is a public system, right? So things will change for the better; why the rant, you might ask. Well, apparently the ACA has a problem with getting young people to enroll. And with getting the uninsured to enroll (especially the young ones). And that’s what I don’t get. Why does it have to have these troubles? It would have been extremely easy to simply create one single, state-run (so no monopoly issues) provider. Everyone’s enrolled automatically. Payments are deducted together with your income tax. That also makes it easy to give people tax breaks dependent on income (or age, or whatever you deem necessary).

Sure, getting the unemployed to enroll would be a little harder in the US than, say, in most Europeans countries, where you can get indefinite unemployment insurance. But you would’ve saved yourself the trouble with the working population. Perhaps you think that’s all crazy socialist nonsense, and you need private providers. And you can’t force people to enroll in health care either, because that infringes upon their personal liberties. So you make them pay a fine in order to get them to enroll anyways, although in theory they could just cop the fine and never enroll. But why would you make the fine lower than the premiums these people have to pay? Of course that’s an easy way to opt out!

Note here that I’m not saying you need to crank up the fine and force people to enroll. Lowering their premium and letting them enroll would be just as easy. Now if the government provided health insurance, guess what, they could simply lower the amount people pay. But of course under the ACA, that’s out of the question.

And yes, I know that the subsidies are supposed to make health care affordable for everybody. They also provide an easy way for health care providers to charge those with the lowest incomes a lot more than they could without the subsidies, because the government basically provides a baseline reference income for everybody for the purposes of buying health insurance (and then some people don’t get subsidies and still can’t afford the insurance, so there’s that).

So all told, I’m confused here. There was an easy way to do this. Several, in fact. Europe and Japan have public health care. There were plenty of blueprints to choose from. Why all the trailblazing?

Europeans – at the verge of extinction?

So MLK Day is drawing to a close, and in keeping with Prof. Kimball’s suggestion I’ll take some time off from economics and write about civil rights (kind of). However, I won’t talk about Dr. King, or race relations, or indeed about the US at all. I’m European, and I doubt that I’d be able to make as informed or eloquent a statement about those things as probably most others in this class could. Instead, I’ll focus on the EU. I’ll simply spell out some thoughts of mine on what it means to be European, on nationalism in Europe, and on the future of that particular part of the world. If this ends up seeming somewhat incoherent, bear with me; Europe has always been an incoherent place, and not something that’s easy to understand for those who didn’t grow up right in the middle of it all (whether for better or for worse).

For most of my live, being a European was terribly easy. Two politicians shook hands a few years earlier, the Euro removed the whole hassle of having to exchange currency whenever you crossed of of the virtually non-existent borders, and things weren’t going so bad in general either:

Germans were especially happy due to the whole issue of national reunification (and whaddaya know, there’s even a little known fact about MLK connected to the Berlin Wall; this is all tying together very nicely so far). Sure, there were minor complaints about the EU’s capabilities and certain laws it passed (such as those concerned with the legally acceptable curvature of cucumbers and bananas). But in general, Europe was made out to be this inclusive, nice, sensible place, where people could overcome their arbitrary notions of divisions along nation-state lines. Sort of a humanist utopia in the eyes of those who dared to dream big.

Then came 2008, and things started looking a little less impressive; the global financial crisis obviously hit Europe as much as it hit anyone else (hence ‘global’ crisis). However, things didn’t really go down the drain until the beginning of the Eurozone crisis in 2009 (here’s all the NY Times ever published on the issue, in case you find yourself in need of a read). And if it’s true that when the going gets tough, the tough get going, then the EU failed its toughness test gloriously back then, and hasn’t made an effort to improve the result until now.

The crisis really forced people to put their cards on the table. I have firsthand experience with the German media and public opinion at the time, and it wasn’t pretty. There was talk of “lazy Greeks” (which was and is nonsense). A populist (and, sadly, the most popular) newspaper in Germany called on the Greeks to “sell their islands” (which, in desperation, they actually did). And that was just the beginning of course. Soon, there was talk of a Northern and Southern Euro. To me, this crisis brought out one thing, and it brought it out in full force. All the talk of Europe as this humanist utopia – much of it had been a front to promote something else, be it economic interests, national power or simply appealing to potential voters.

And suddenly, a lot of people acted as if they’d known that all along. And not only that – I get not trusting that the reasons a politician gives you for doing something are the same as the ones that actually move him. People also acted as if it was okay to suddenly go back to this idea that if Europe wasn’t working out economically, we might as well call it quits. Call me idealistic, but having grown up in this utopian, Care Bear Europe that I’d known all my life, that came as somewhat of a shock.

I saw an economics professor from the University of Chicago talk about the Eurozone crisis. He said that he couldn’t see why the Germans should pay money to save the Greeks or the Spanish (never mind that all the austerity they were forced to impose isn’t doing too awesome a job at ‘saving’ them). I find that notion ridiculous, but I know that at this point many Europeans feel the same way. To me, it seems that whatever it is that makes someone from Michigan pay taxes to support someone from California should be sufficient to make Europeans help each other out. They’re all Europeans – isn’t that enough (actually, simply knowing that they’re fellow human beings should be enough, but then I guess not everybody can be a cosmopolitanist)?

That, I think, is what bothers me most about this ‘new’ Europe. The possibility to create a place that finally acknowledged the arbitrary nature and moral blindness of national identities was there. This crisis, awful as it was, could have been the final, cathartic coming together of the peoples of Europe as the European people. But instead, it was squandered on cheap, nationalistic power struggles (via horrible economic policies) for dominance in what’s left of Europe these days.

Revised: Germany’s diminishing role in the Euro-crisis is a good thing

Portugal, Ireland, Greece, and Spain are the biggest countries currently in trouble in Europe and Greece’s economic woes has thrown the entire European Union into turmoil back in 2010 when it was revealed that Greece was unable to repay its debt.  There have been further fears that larger countries who have run high budget deficits (Portugal, Ireland, and Spain) might also be at risk of defaulting later on.

Germany has tried to alleviate the burden of the crisis by pushing forward plans of austerity for bailout money in order to promote fiscal responsibility as these countries settle their debts.  Predictably, there has been a large negative response from the Greek public as a lot of public programs and services have been cut in order to help the government settle its debts.  There hasn’t been as much sympathy for Greece, because their crisis stems from fiscal responsibility, but there has been more for countries like Ireland, Spain, and Portugal who’s fiscal imbalances were mainly due to a banking/financial system collapse compounded to an already depressed housing market.  Germany’s proposed austerity measures do nothing but hurt these three countries even more so than the economic woe they already face.  Default is a potential risk for these three countries, but nothing about their budgets before made it necessary to impose such a fiscal restriction.

Of course passing these fiscal restrictions isn’t exactly fair, but given Germany’s economic size and political influence on the EU Commission, the executive arm of European government, they have found it rather easy to push forward plans that maintain the strength of the Eurozone.  Germany has been the main beneficiary of the Euro’s introduction back in the late 1990s and has hoped that it could maintain its position as Europe’s premier exporter.  However, The Economist notes that  with the addition of a few countries (such as Latvia) into the European Union,  the whole voting scheme will change in the near future much to the dismay of pro-austerity politicians.  The reason why this becomes problematic is that now smaller countries have a better chance at participating in critical votes and do not need to be present for as many as the biggest member-states in the EU are required to. So if they wanted to limit Germany’s pro-austerity agenda, they could and there appears to be plenty of support among even the larger member states such as France, Italy, and Spain.

Of course, Germany can point to Spain’s recent positive growth as a sign that austerity didn’t really hurt Spain economically.  The Wall Street journal does say that traders believe Spain experienced positive growth due to the slump in Asian markets; however, I still don’t believe that this validates Germany’s European-wide Austerity push because Spain’s growth appears to be circumstantial with an unexpected slowdown in China and India.  Since India recently got a new central bank chairman in August 2013, and this is the first full year with China’s new premier, economic reform seems quite likely in both of these countries as a mechanism to restore promising growth.  This in turn means that trade will shift away from the troubled Eurozone back to East Asia and Spain could end up experiencing another dip.  The same applies to Ireland and Portugal who have also been struggling under a blanket-austerity policy. Therefore, It makes more sense for Germany to evaluate each country’s economic situation case-by-case along with the monetary union and IMF to determine if each country is truly spending without boundaries or if there is a justifiable reason.

Or alternatively, there would need to be a banking union or fiscal union to go along with the current monetary union to ensure that there are safeguards and measures put in place to coordinate EU monetary policy as a whole.  However, this must reflect the realistic interests of smaller nations as opposed to bigger ones.  But this is a separate issue.

Don’t Fear the Reaper (of Unemployment Benefits)

Our classmate gaochen has an interesting post on unemployment benefits. I feel the need to engage with this in a more detailed way than a comment, so consider this post a reply, of sorts, but also just part of my own personal musings on the matter. We’ve actually had quite a few posts on the latest jobs report, minimum wages and macro policy in general (I especially enjoyed this one but can’t comment on it, so if anyone knows what’s going on there, feel free to let me know); this might make for a good ongoing discussion throughout the semester.

Anyway, turning to unemployment benefits and the US job market situation. While I see the appeal that the “paying people to be unemployed won’t help the economy“-argument (by the way, how horrible was that article?) has to some people, it’s quite frankly wrong. Let’s take a look at labor force participation rates around the (developed) world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%; now there’s some role-model labor market policies). The US makes its appearance in the lower middle of that pack, with a solid 63% participation rate. Sure, you scroll past places such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than not receiving anything and dropping out of the statistics. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse. But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt though and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European countries then. Now I won’t compare to the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those countries that were fortunate enough – like the US – to not have to undergo crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

And even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the most pressing concerns facing the CBO and the Treasury.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.

The Fighting Irish

I came across this piece on Ireland’s economic “recovery” in the Wall Street Journal today. Apparently, the head of Ireland’s central bank is convinced that things are finally taking a turn for the better. While it’s nice to hear that parts of Europe are slowly overcoming the crisis, I really can’t help but wonder why the WSJ doesn’t add any context to these statements. That seems like a rather blunt piece of economic journalism. Not because the remarks made aren’t news in and of themselves (although perhaps not terribly interesting news). Rather, I’d argue, because the article takes them at face value. And because it creates the impression that Ireland is actually doing pretty well right about now.

Ireland has long been hailed as a sort of poster boy for the success of austerity policies. It’s build up to be proof that prudence and “tightening the belt” can get you out of a recession just as well (or perhaps even better) as all those wasteful Keynesian-style stimulus packages. And it’s still being invoked by those justifying the widespread implementation of austerity measures across Europe today.

Paul Krugman has some comments on the issue (he was actually referring to Fintan O’Toole’s piece on the matter, if you really find yourself with too much free time on your hands). I’m not sure as to Americans’ opinion on the matter, but back home in Germany the idea of the Irish success story is a real thing. And apparently, so it is at the Wall Street Journal, which neglects to mention just how stark the contrast is between the optimistic remarks and the actual state of the Irish economy.

Krugman of course has the obligatory real GDP per capita graph (surprise: it’s still well below pre-crisis levels):

(source: http://graphics8.nytimes.com/images/2014/01/13/opinion/011314krugman3/011314krugman3-blog480.png)

However, it’s worth noting that Ireland isn’t doing well (arguably much worse, actually), on another front. Unemployment is still in the double digits:

(source: http://alfred.stlouisfed.org/alfredgraph.png?g=qVZ)

At the same time, employment is still down, down, down:

(source: http://alfred.stlouisfed.org/alfredgraph.png?g=qVY)

That’s more than 12.5% unemployment! And the US are complaining about a disappointing job market. Sure, there’s a decline in unemployment showing up in the recent data (note though that these will be revised, so we won’t know the true extent of this upturn – if indeed it is one – for a while). But even with that in mind, look at the employment to population ratio. That still leaves about 30% of the prime-age working population – those aged 25-54 – out of the labor force! That’s 8 percentage points below the pre-crisis level, so about 10% shy of where Ireland was before the financial crisis struck.

So looking at fundamentals, Ireland really isn’t doing that well at all, despite a small upturn. Government debt and deficits as a percentage of GDP were also not looking at all like what austerity advocates would have predicted throughout this crisis. And all this despite Ireland’s best efforts to save, save, save!

We may have to wait for revised data to render a final judgement on this chapter of misguided economic policy. But hailing Ireland as some sort of example for how to save yourself from a recession by, well, saving more is certainly missing the point by a mile. And it’s quite telling that after all their efforts to reduce debt in order to restore investor’s confidence/save themselves from the deadly 90%/whatever other mechanism was supposed to make this flawed policy work, this is what the head of Ireland’s central bank has to say about the legacy of the crisis and its impact on the country’s future:

The accumulation of debt, public and private, will continue to weigh on growth prospects in a variety of ways.