The problem, it is Chinese. They cheat on everything. On the currency, on research. The difficulty is that many large companies have Chinese contracts. That’s what is stopping us taking a stronger stance with respect to that country’s products. But it’s necessary to open the conflict, with the support of a number of other European countries.
François Hollande, French president, speaking to a journalist in March this year on his views about dealing with China.
In news that should shock very few people, France’s new president has something of a protectionist streak. Not content to simply bash bankers, François Hollande has also taken to criticising trade with China. After all, this is a country that is able to produce things cheaply and sell them to the world. By contrast, French industry is hamstrung by high costs, including regulatory barriers and rigid labour laws. Rather than reform French policy to make domestic production more attractive, many — such as Hollande — would be happier simply to slap trade restrictions on Chinese goods and other cheap imports.
Trade is not a matter of domestic policy, however. The European Union is a single trade zone, with pan-regional rules in place. The safe assumption has typically been that the relatively pro-market (or at least not anti-capitalist) Germans would block any moves to impose trade barriers. But as Karen Maley writes for Business Spectator, there is some speculation that world view might be less principled and more malleable than in the past. Specifically, while German trade with China has been substantial, there are signs that cheap production in eastern Europe is displacing Asian business. And with a need to find some common ground with her new French counterpart, Germany’s Angela Merkel might just find China — and with it, the pursuit of trade liberalisation — too attractive a sacrificial lamb. Here’s hoping not.
Finding Europe
Fears about Greece dropping out of the Eurozone have rattled stock markets worldwide, including in the United States. So, what does the US have to fear from events across the Atlantic. Quite a bit, as it happens. After all, this too is a country with a massive budget deficit that needs taming. Just don’t mention the word austerity.
In fact, as Amity Shlaes argues for Bloomberg View, there is much to commend in austerity — though perhaps not how it is practised in Europe. She sees spending cuts as beinf necessary to build trust with those holding government debt — a credible commitment, if you will, of a government’s willingness (and capacity) to pay back what it owes. Keep in mind that a large part of Greece’s troubles stems from the fact that it lied for so long about the true state of its finances, and since then has demonstrated an alarming propensity to squib on tough reforms.
But Shlaes also suggests a quid pro quo for curtailing spending: ‘austerity’ governments should cut taxes too, or at least outline a plan for doing so within the short to medium term. This may be a harder sell. On the face of it, if you cut both spending and taxes, the two cancel each other out — you still have a deficit. However, Shlaes argues that tax cuts provide greater economic stimulus than government spending, meaning you get better a bang for the buck. This ‘supply-side’ story suggests that tax cuts can in turn yield more, not less, tax revenue — a politically popular notion, even if the empirical evidence to justify this is contentious.
The bigger issue from Europe’s perspective is that, for some troubled economies, tax cuts may have a relatively smaller effect than you might expect. Tax evasion is rife in Greece. Lowering taxes on people who aren’t paying tax in the first place is not going to stimulate anything at all.
Ditch the Euro, ditch the EU?
As expected, Greek voters will be forced back to the polls next month to try again at electing a parliament. And by all accounts, the main beneficiary of this second-round vote will be a party that came from virtually nowhere to become the second largest party in this month’s election: the radical-left Syriza. Some now predict that Syriza will emerge as the largest party in the new parliament, giving it a strong mandate to pursue its plans to renounce the conditions of its bailout from the European Union and International Monetary Fund.
Syriza’s leader, Alexis Tsipras, reckons that Europe will be prepared to renegotiate — despite the fact that European leaders, particularly Germany’s Angela Merkel and her finance minister Wolfgang Schäuble, have insisted that there is no prospect of a better offer on the table. So, what happens? Well, Greece loses its bailout funds and will be forced to default. But that’s not all.
As Monash University’s Remy Davison (who, incidentally, once lectured yours truly) writes, without external funding sources (not just from foreign governments, but financial institutions as well), it would be untenable for Greece to remain in the Eurozone. But there is no provision for abandoning the single currency. Davison suggests the only ‘out’ clause is for Greece to withdraw from the European Union entirely. Consequently, other transfer payments to Greece — such as subsidies under the Common Agricultural Policy — would cease. Moreover, it would lose the trade benefits it enjoys within the EU, resulting in the remaining EU members slapping tariffs and other trade barriers on Greek exports. The EU’s customs union would no longer cover Greece either.
Of course, it’s also possible that some elegant fudge could be devised that would allow Greece to ditch the euro, but remain an EU member. But Davison’s point is that, as the rules currently stand, there is currently no provision for such a scenario. The only hope Greece might have is that it leaves the EU, and ditch the euro, only to be automatically readmitted to the club (but outside the Eurozone). However, how many would be willing to completely ignore the fact that Greece has become an economic basketcase when it comes to assessing it against the EU’s membership criteria?
All of the major European economies are spending more now on government than they did before the global financial crisis began.
Chris Berg, Institute of Public Affairs
‘Austerity’ has become something of a dirty word in Europe. In countries like Greece, public sector jobs have been slashed, retirement benefits have been curtailed, and entitlement spending has been reduced. Or so goes the conventional wisdom.
Citing data from the European Union’s statistics agency, Eurostat, Chris Berg observes that — as a proportion of economic output (Gross Domestic Product, GDP) — government spending has increased since the onset of the global financial crisis throughout Europe. A key driver of this is rising unemployment, which has meant more people drawing on the public purse. This is what economists refer to as an ‘automatic stabiliser’: without any change in policy settings, a recession will put a balanced budget into deficit as tax receipts dry up and people draw on government handouts. And in Europe’s case, despite cuts in some areas of spending (and some tax rises as well), these have been more than offset by the growth in welfare expenditure. Moreover, even if spending had held perfectly constant in nominal terms, the deterioration in European economies would by definition have seen spending as a proportion of (falling) GDP rise.
Berg concludes that ‘austerity’ is a myth — that what critics are railing against is the lack of additional discretionary spending to jolt Europe out of its malaise. Of course, the data don’t establish either way whether such stimulus would be helpful or warranted. What is does demonstrate though is that Europe’s present woes are not evidence of the perils of ‘small government’, which has become something of a bogeyman in the debate about the future of the European social model. Rather, it is the usual clamour of ‘losers’ from policy changes complaining about the adverse effects imposed on them.
Europe is far away, and unless you watch the SBS news it has an unfamiliar cast of characters and issues. But this year it will become more and more important in our lives, so it’s worth watching - and its scene is changing rapidly.
Tim Colebatch, The Age
For the most part, Australia is a spectator to global economic events. In some ways — such as the rapid rise of China — we’re beneficiaries. But in other areas, we can be knocked for six by events out of our control. The calamity presently befalling Europe is one such event. Already, fears about Greek default have seen the Australian dollar ‘slump’ — now hovering around parity with the US dollar, with expectations it could fall further. Just months ago, it was buying 1.10 US dollars.
In a primer for Australian audiences, Tim Colebatch (economics editor for The Age) summarises the current drama in Europe. Readers of this blog would be well aware of the key issues at play. The question is, what does it mean for Australia? For one thing, Treasurer Wayne Swan must be nervously watching how Greece’s politicians act. If Greece defaults on its debts, and leaves the Eurozone, there could be wide reaching ramifications for financial markets — on a par, some say, with the collapse of the US bank Lehman Brothers in 2008 that precipitated a rapid deterioration in economic conditions around the world. (Others, it must be said, believe the Greek situation has been sufficiently managed to limit any fallout.)
In the worst case scenario, a new global financial crisis would — unsurprisingly — unleash a new wave of turmoil on stock markets. Australian banks, reliant on access to overseas funding sources, would be exposed if borrowing costs surged amid investor skittishness. What Colebatch doesn’t mention is that, unlike during the GFC, China’s economy is also easing off. In short, the conditions aren’t as favourable for Australia this time around.
