Is the Deauville Agreement half dead? Hopefully!

So our enlightened leaders have met in Brussels to discuss a number of issues, first among which, economic governance and I must say that the result is looking mighty good, and very much along the lines of what I had hoped for.

Everyone was reporting with various levels of detail on what seemsto have been a Council meeting dominated by discussions of the Deauville Agreement. This was a joint call by France and Germany to introduce two EU treaty changes.

First, one empowering a majority of the council to withdraw votes from member states not complying with the SGP3 (opinions the SGP3 here).

The second change was proposed to facilitate the establishment of an alternative mechanism to the EFSF in order to deal with sovereign debt crises. This is because Germany fears that its Constitutional Court may consider any permanent version of the EFSF to be unconstitutional in the absence of a EU treaty revision. It is also motivated by the fear of a German negative public opinion who bears a large part of the weight of the bail out fund.

However, the shape of this mechanism was not very clear. It could have involve d the creation of a permanent fund and the creation of a proces for orderly debt restructure; or only the latter. Fortunately, the comments to the press from the President of the Council of the EU confirm that it is both.

It seems that the main points of contention were the appropriateness of withdrawing voting rights and whether there is an actual need for treaty change.
To be quite fair the first proposal faced overwhelming opposition in the media(Der Spiegel, the FT. ) from the Commission (Barroso and Reding, but not Oli Rehn) the European liberal and leftist leaders

On this issue I must admit that I am impressed at the strength with which the Commission opposed those two countries. Barroso's words could not have been clearer. Moreover,centre-left governments are also in opposition, as are some liberals and most likely the UK's Cameron and Sweden's Reinfeldt.

This means that it was possible to focus more attention on the second issue, of appropriate mechanisms for dealing with sovereign debt crises. Apparently the Finns had a neat little idea, where

Thus the conclusion is that the biggest losers so far are France and Germany. They postured before and came out half empty. It was still better than the rest. At least they got to shape the agenda. France however seems like the biggest loser. It flip-flopped on an extremely unpopular measure only to see it being opposed by all of it's EU partners. Moreover, Sarkozy's reaction to Vivianne Reding's comment made him look even more petty. You don't hear this kind of comments from Merkel...
France has known better EU days.

Freedom and Corrution in the world

Very quickly:

Map of Freedom 2010

Corruption Perception Index 2010

3 Comments on the SGP3

I would like to contribute three comments regarding the recent Franco-German agreement arrived at recently. This post is a poor contribution to more enlightened commentators’ criticisms of the proposed SGP3.

The first, is a criticism to the article from Charlemagne, which completely fails to mention what I think is probably the most important part of the agreement. The last four paragraphs describe the issues both countries want to see changed that require treaty changes. It fascinates me how the Economist would fail to mention that apparently France has come on board with Germany in terms of cancelling council voting rights. This isn't the most intelligent proposal that's ever come out of a Franco-German agreement, and is offensive to the intellect of anyone reading it and makes a mockery of European solidarity and democracy. It's an insult to the intellect, because anyone who expects every single country in the Euro-zone (much less in the EU) to approve a treaty change denying any given Member state of the EU the right to representation is either disconnected from reality or seriously thinks the rulers of small countries are stupid and their citizens inert.

If we have learned anything since the creation of the Eurozone and the misfit application of the SGP, is that indeed we are not at all equal. Several countries have failed their SGP obligations. Portugal in 2002, Germany and France in 2003, Italy and the Netherlands in 2004 and finally Greece in 2005 all failed to live up to the SGP. The only country that ever came close to being punished was Greece. When the problem hurt France and Germany they decided to change the rules. That's why we are now talking of the SGP3 rather than SGP2. As Caballero, Cababllero and Losada 2006 and Chang 2005 describe, Germany and France are clearly more equal than the rest of the Member states. Call them primus inter pares. As Thornhallson 2006 explains this is understandable. However, it is morally highly objectionable. It should be clear to anyone dedicating even a minute of their time to the ongoing debate about the reform of the SGP, that although France is endorsing a German proposal to withdraw votes from countries not fulfilling their obligations under the SGP, neither France nor Germany will ever let other countries do that to themselves. This is a policy for others and shamefully so.

SGP3: Opinions from VoxEU

So the proposals of the European Commission for reforming the SGP have provoked s number of reactions from the good people at VoxEu.org. There seems to be an agreement as to the vagueness of the extra indicators, and their difficult enforcement. The SGP remains a legalistic punishment mechanism rather than a tool incentivising good counter-cyclical fiscal policy. Finally there seems to be dome disagreement about the appropriateness of the debt requiremen, while consensus is still that more can be done to increase ex post credibility of the pact. Wyplosz' "Not yet fiscal discipline, but a good start" : First, he identifies the two prevailing and competing opinions about the failures of the SGP. The "Germans" argue the penalties aren't tough enough, while the "institutionalists" argue that it is the objectives and the framework itself that isn't good enough. Apparently the EC focuses enough on the one but not enough on the second. This might be aided by the creation of a permanent EFSF. He does not consider the debt criterion appropriate but maintains that the way the commission found around the 60% limit is clever. Manasse's view, expressed in his contribution "SGP: Counterproductive Proposals" is much more negative. He criticises the SGP's continued obsession with ex-post punishments as an incentive for good behaviour in food times. He rightly argues that this fixation painfully continues to leave the cyclicality of fiscal positions out of any meaningful discussion. He also finds it difficult to formally impose new limits on debt, which would expose every country to penalties and on the loosely defined "macroeconomic imbalances" causing fragilities. Nonetheless, he praises the introduction of medium-term fiscal plans and the implementation of best practices for fiscal policy across the eurozone. Giavazzi and Spaventa, call the proposals for the SGP empty and useless. For them, the indicators added by the Commission's to help identify unsustainable policy courses are vague, and corrections to them are difficult to enforce. They also criticise the commission for focusing too much on ex post punitive actions against the states, rather than ex-ante preventive steps. Finally they maintain that the biggest problem has been private debt and as such praise the creation of the ESRB.

SGP 3 Update: The Franco-German Compromise

France and Germany seem to have reached a compromise over the SGP3. As Charlemagne describes it, the Germans seem to have dropped their "hawkish" demands about the semi-automaticity of fines at the preventive stage and in return got the French to accept supporting the German ideas of creating a debt restructuring mechanism for the Euro-zone and extending the EFSF forever. According to the communiqué, only the later of these proposals would require a treaty change. This was all agreed over the week end and came to light in the last day or so. The German press was not amused, and I am certainly not impressed. However, I leave more comments for later.

Access to improved water source in a developing country

Very recently, I had to write a policy essay as part of the application process to an American University. I chose to focus on a problem that is common to many Sub Saharan countries: water provision. Although it is relatively large, I guess it could be posted here (of course, I'm open to any comments and criticism of the opinions expressed). Goal number 7 of the United Nations Millennium Development Goals (MDG’s) is to Ensure Environmental Sustainability and one of its targets is to halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. While, overall, the world will be able to meet or even exceed this target if it maintains its current trend, progress in this area has been uneven, with Sub-Saharan Africa (SSA), for instance, clearly failing this target – according to the African Development Bank (Stampini et al. 2009), coverage of improved drinking water improved from 49% in 1990 to only 58% in 2006. Universal access to safe drinking water, besides satisfying basic needs, carries several positive externalities, such as health improvements, which in turn reduce illness rates and mortality, thus reducing medical costs and enhancing productivity (Dagdeviren and Robertson 2009). Having water access nearby also allows for reducing the time burden faced by women, who generally spend more time on domestic work (Costa et al. 2009), thus allowing them to spend more on remunerated activities, on leisure, or attending school (Costa et al. 2009; Hailu and Tsukada 2009) – in either case, contributing to gender empowerment. It comes as no surprise, then, that returns from water coverage are very large, ranging from US$3 to US$34 for each US$ invested (Hailu and Hunt 2008; Dagdeviren and Robertson 2009). Such large externalities (and returns) further stress the importance of extending water coverage. Zambia is a case in point. Although data on water access differs – World Bank (2006) estimates water supply coverage decreased from 73% in 1990 to 53% in 2005, while other sources point to a slow progress, from 50% in 1990, to 54% in 2000 (the year MDG’s were established) and 58% in 2006 – it is clear that, whichever data source is used, at the current rate, Zambia will fail to attain this particular goal of the MDG’s by 2015. Zambia opted for fully public water provision until 1989 when the central government, confronted with its budget problems, opted to initiate commercialization process, thereby beginning the process of creating 10 municipal utilities that were commercially run, though publicly owned (Chisala et al. 2006). With commercialization of water provision, full cost recovery became the main goal. However, this policy, while prioritizing cost recovery, produced results that can be portrayed, at best, as weak:

• Tariff hikes of between twofold and eightfold in real terms mean that water is unaffordable (considering a threshold of income spending on water of 3%) for 60% of the population (Dagdeviren and Robertson 2008);
• Despite tariff increases, cost recovery was not attained by any of the 10 utilities (Chisala et al. 2006);
• Persistent underinvestment in water and sanitation sector – between 1998 and 2002, investments were less than 3% of what was required just to maintain existing access rates (Dagdeviren and Hailu 2008);
• Also as a result of underinvestment, major inefficiencies persisted, with water losses representing about 50% of total supply (during the commercialization period) and 25% of the billed amount remaining uncollected (Dagdeviren and Hailu 2008).

Privatization and commercialization were also pushed by donors and International Financial Institutions, although some now recognize that they made a mistake, with the OECD recognizing privatization’s weak results in SSA, while the World Bank now accepts that private participation in infrastructure had been disappointing and that case specific solutions are required, as opposed to universal solutions (Bayliss and McKinley 2007; Hall and Lobina 2009). Privatization does not necessarily yield bad results. However, where it worked, it relied on some basic features:

• Current developed countries (e.g., USA or UK) did not develop their water systems through full cost recovery and only privatized water provision when access had already reached 100% (much higher than Zambia’s; Hailu 2008) and when their real GDP per capital was much larger than that of Zambia today;
• Even today, the EU continues to support investment on water improvements in its poorer members (Hall and Lobina 2009), any of which is still vastly richer than Zambia;
• Brazil has successfully opened up the water sector to private participation, with the positive outcome apparently coming from contract design (which included investment obligations, for example) and from the existence of staff capable of monitoring and enforcing such contracts (Rossi de Oliveira, 2009). Despite some progress, Zambia still suffers with poor contract design and lack of regulatory capacity (Dagdeviren and Robertson 2008).

It seems clear that, in a low income country with limited coverage, the emphasis should not necessarily be on privatization (or commercialization) and full cost recovery, since that will almost certainly keep the poorest sectors of the population excluded (by not extending coverage and/or by making tariffs so expensive that they become unaffordable). It appears to be what happened in Zambia, trapped in a vicious circle of unaffordable tariffs, low coverage, low investment and high system losses. Therefore, opting for public provision might be the best option available, but even if they should decide to continue with commercialization, some steps should be taken:

1. Contracts should set clear accountability systems, besides penalty and incentive schemes that are indexed to performance, while also setting the obligation to serve the poorest segments of the population, placing emphasis on extending affordable coverage (through the use of progressive tariffs, or income-based subsidies or cross-subsidy that specifically and efficiently target the poor), which would also allow to absorb network benefits (Brown 2009);
2. Institutional framework improvement, both through the clear establishment of laws and rights and through the human resource training that allows the regulator to actually enforce existing contracts;
3. At best, the measure set out in 1. would likely allow for covering variable costs. Therefore, the Zambian government would still need to find a way for financing the construction of infrastructure that would allow it to expand water access. Although its public debt level is low (under 25% of GDP in 2009), it is unclear whether it would be able to secure the required funds without compromising other crucial areas for its development. Therefore, infrastructure expansion would likely be dependent on external aid. Unfortunately, Zambia (and many other low income countries plagued by both very high poverty rates and inequality) seems to be highly dependent on that factor to be able to break the existing vicious circle that dooms the poorest segments of its population.

The myth of the American Dream

Several months ago, Filipe was kind enough to invite me to this blog. For a variety of reasons (mostly related to very little free time), I kept on delaying my 'effective entry' here. But I guess 'late is better than never'. Since I think I am clearly more leaned to the left of the political axis than Filipe, it's quite likely we'll often disagree (which, from my point of view is entirely positive). Getting on to the post itself (the graph was taken from here, by the way), the message is really quite simple: why is it that we keep talking of an "american dream" if, in reality, among developed countries, it shows such a low level of social mobility and such a high level of income inequality? Is there any way to reconcile these two basic facts with such a "dream" (I wasn't able to do so)? Isn't such a "dream" more likely to be fulfilled in Scandinavia than in the USA? From a leftist point of view (and for anyone aiming for anything close to "equality of opportunities"), I guess there are not really many doubts: if we must emulate another society we would be better served by looking north(east) rather than across the Atlantic. Update: very basic question, Filipe: I had broken down the post in three paragraphs, any idea why they vanished?

We need an EU Attorney General and a EBI rather than the Europol

The title of this post is fairly self-explanatory. By "EBI" I mean a European Bureau of Investigation, à la FBI. The EBI should investigate and the EU Attorney should investigate. He should be appointed by the European Commission upon confirmation by the Council and the European Parliament. Why? Well there are a lot of arguments in terms of more efficient cross border policing, particularly relevant for the struggle against organised crime. However my concern is obviously closer to my comfort zone. This institution also makes sense from the point of view of a more coordinated fiscal policy.

European Defence: "why?", past, present and future,

So it seems that as budgets get presented again, it is time for the USA to once more tell Europe that it needs to honour its defence commitments under NATO. Everyone will complain that they can't and leave it to the USA to pay. Given their own financial dire straits, one is left to wonder for how much longer we'll be able to do this... Why should we have a EU army? Because size matters Now if anyone's reading and if this isn't the first post you're going through, you've probably figured out that I'm pretty pro-European integration. So, it won't surprise anyone that I'm in favour of a single European Army. There are 3 main reasons for this:

The media industry and selection of information supply

The issue of the role of the media is a very interesting one, and one that keeps on creeping back in the back of my mind. The last time it did so was during this summer over the coverage of the so called "mosque" in what was referred to as "on ground-zero" in Manhattan. This is a stupid debate. First of all it's private property. Second of all, it's a building to be used for religious purposes in the first country to defend the right to freedom of religion. But even looking over that. If those were not reasonable reasons to shut up about it, one would be confronted by the fact that this is not a mosque, but an interfaith centre, albeit one headed by a Muslim foundation. Finally it is not going to be build on ground zero, but some neighbourhoods away from it. Apparently there's an mosque much closer anyway. It's just a ridiculous debate. I had talked about the media in the past, trying to figure out it's role in the middle of the whole health care debate ( which was a debacle), in the USA. This came in the middle of a fairly lengthy and technical discussion of the pros and cons of private and publicly financed and provided health care. For most of the next lines I reiterate what I said then, but I try to add the little contribution from the above mentioned article, about seasonality of news cycles and their target audiences.

Keeping inflation down in a Currency Union: A Policy for Germany but not for many more...

In this post I describe how monetary union without fiscal union creates a fertile ground for permanent exposure to the damage of asymmetric shocks. One side of this equation is that the economy not affected by the negative shock still benefits from the low interest. This in turn leads to high rates of inflation. This should be a concern for any country, as the cheap credit may stimulate a bubble. For a country like Germany, there's the added cost of loss of competitiveness. It hit me a while ago that there's a simple solution to this problem: Germany can unilaterally tax loans. By doing this it should increase the cost of borrowing back up, and it shouldn't be particularly hard to figure out what the tax rate would have to be, given the decrease in the interest rate, to leave the after tax interest rate of Germany untouched, in order to abort the bubble before it grew.

Signalling a restructuring of Greek debt?

I mentioned back on sunday, that there had been some chatter from a ECB executive about the IMF extending the deadline for Greek debt payments.
Apparently this was followed by similar comments by the IMF's director DSK as well as by comments from the Greek finance minister, to the same effect. Now the European Commission and Germany are denying or opposing this.
What's to be made of all this back and forth?
A Greek economist says that this public discussion is actually the subtle way that these institutions found to start talking about restructuring in veiled terms. This is because it is becoming an accepted fact that this will be inevitable.
But what would be the consequences if this happened? If depreciation is not necessary, the consequences shouldn't be very bad. Greece would be shut out of the Market for a while before it returned at high coupons at least for a while.
However it is likely that depreciation would have played an important role, at least as a motor of economic growth, and in consequence of increase government revenues, which should lead to lower interests on Greek sovereign debt. So, the most accurate thing is to say we don't really know what would happen. That's not a very reassuring place to start from, if you ask me...

The creation of the EFSF - such gripping drama

The FT has a fantastically well researched and sourced article on the events that led to the creation of the European Financial Stability Fund, "Dinner at the edge of the abyss", written by the great Tony Barber. Really good for anyone interested in the history of European integration and about what country stands for what in that debate.

Interesting Contributions: Daniel Gros

EU or Euro-zone seat at the IMF

How to avoid trade war: A reciprocity requirement

How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund

News and bond Markets: predicting the effects of ECB comments about IMF on Greece

So Bloomberg has an article where a member of the executive board of the ECB says the IMF may extend the duration of Greece's debt relief package. Now, assuming that bond markets use similar signals as the one forex and libor markets use (ie: the news broadcasted around them), this piece of information should have some effect on the bond markets tommorrow. What I'm going to try to do is to try to guess today and check what happened tomorrow at the end of the day. My idea is that bonds will be trading at fairly low prices at the beginning of the day and will remain so unless some new piece of information arises. The logic is that all that this piece of information says is that Greece is in worst shape than anyone has dared to admit. It doesn't say that the IMF will do it. It says that it is considering it and that it is feasible. Funnily enough this shock to the coupon (or nominal) yield will push them so high that it might in the end fulfil the prophecy that Greece does indeed need more time to deal with this situation, simply by making the short run more unbearable for Greek bonds. As the miserable state of the Greek economy is made clearer to investors, prices will decrease and the nominal (coupon) yields of its bonds will rise until Greece's medium term access to credit is made clear, at which point if there ate no other news of relevance, things should calm down. Let's see if that's what happens or if I'm just full of it...

The EMF - EFSF - has a website

A little note on the European Monetary Fund:

It is officially not called that. It's called the European Financial Safety Facility, or EFSF for short (created as a societé anonyme under Luxembourg's law), and there's a website that one can access here, with among many other things, a very interesting F.A.Q. PDF file.

Is saudade why all the Frenchmen fear English?

So I came across this post from the very liked (by me) Jean Quatremer of "Libération".

In that article he elaborates on the fact that the English language is all too pervasive in the EU institutions and how that's bad for everyone, particularly his country's elite. His argument, although I don't agree with it, should not be dismissed altogether. As the national of a small country with a beautiful and flexible language and a phenomenally imponent body of European, African and South American literature, I understand the "saudade" we may feel towards our own languages but to use it to argue what he argues seems insulting, sad and oh so cliché for a Frenchman to do.

His hypothesis runs something like this: "Language is an important channel of communication. Some ideas are inherently better articulated in one language than in another, if for no other reason that they might have developed in the context of the evolution of that (language's) society. So to favour one language to another (or many others), deprives us of the contributions (intellectual and, in this specific case, political) originating elsewhere (where another language is spoken)."

This is tantamount to arguing that some ideas are inherently French, or for that sake, English, Portuguese, Hungarian, Swedish, or whatever. And not in the sense that they belong to that culture, but that they can only be expressed in that language. So I don't agree.

Trade, Exchange rates and Democracy

So I've been thinking: Should trade policy be related with democracy? Are countries who are bigger, poorer and undemocratic more likely to be protectionist? If so should we create added trade barriers to these countries, is it irrelevant or does this hypothesis not imply the need for trade barriers?

EU-China: We push them, they push back...

Here's how the much touted EU-China summit ended. So not so well... Now what's next? Do we sanction them and risk alienating them? Or do we just wait it out and alienate our electorates further. It'll be interesting to see how things process from here, but clearly there's no clear cut answer to this problem. China is too big a risk...

Wofgang Munchau on the Chinese Renmimbi Manipulation

If you are interested in what happens in the world, please read this article by the FT's Wolfgang Munchau.It summarises the economic logics underlying the discussions about Chinese monetary intervention. More importantly it argues for a forceful approach to Chinese monetary manipulation. I'm a big fan of his blog, and even if I don't always agree with him, he is always insightful, clear and fair. He mentions an article from VoxEU contributor and Centre for European Policy Studies' Director Daniel Gros, which very intelligently argues for the use of reciprocity in arguing for capital controls, which would be legal, apparently, against the much touted trade wars.I agree with these means, as it seems nothing better exists. However, I believe his analysis may be slightly myopic.

International Cooperation: China-EU Relations

So there has been a lot of interaction between EU and China, as of recently. I'll start with the following article from the Chinese Embassador to the EU, where he praises the Lisbon treaty and it's ability to increase European integration, thus endowing the EU with a new authority and consequent ability in international relations, fundamental to the EU-China foreign strategic relationship (whatever it may be...).

Then we follow with the renewed calls for Beijing to allow the renmimbi to float, which is really to say that the EU and the USA want it to appreciate.

The Chinese on the other hand want to leave it be for fear it'll create chaos, which I'm assuming they fear would be large enough to topple the single party regime.

At the same time the Chinese seem to have requests of their own, involving European countries giving up some of their IMF seats.

What does all this chatter mean?

SGP3: The European Commission initial proposals

The news report from EUobserver The official description provided by the European Commission: In General terms, Strengthening the SGP, The preventive and Corrective measures and Chronology and overview of the new framework of surveillance and enforcement (where they fail to mention the chaos of 2002-2005 and the SGP2 reform of 2005). Finally, here and here are the highlights and the arguments in favour from the European Commission at VoxEU.

Chinese Economics and the USA

The FT had an interesting article about monetary policy in china and it's effects on the us economy.