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<![endif]-->Valerie Herzberg (Central Bank of Ireland) presented the case for a European defence union (based on joint work with Edouard Vidon, both in their personal capacity), provoking an impassioned discussion in her PEFM audience. <br />
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<b>Why a defence union? </b><br />
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<b><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0MNNkA-6k6fjaakpfuvjoGHJHXjvIpUKdQAcSr7DVy-VWjvcwlzmGd_8CreMNMCmuDDuR90tszVdwCyhDJm-8p5nFkrM4yKWKil5m7VWkAo9Jv8hEzUZraxQsRxyNzJYPww8peDCGLqBR/s1600/44296568_303.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="394" data-original-width="700" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0MNNkA-6k6fjaakpfuvjoGHJHXjvIpUKdQAcSr7DVy-VWjvcwlzmGd_8CreMNMCmuDDuR90tszVdwCyhDJm-8p5nFkrM4yKWKil5m7VWkAo9Jv8hEzUZraxQsRxyNzJYPww8peDCGLqBR/s320/44296568_303.jpg" width="320" /></a></b></div>
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The Arguments For are both security and economic. On the security side, the EU is facing considerable risks on its Eastern and southern flanks, while the Trump presidency and Brexit have cast new doubts on NATO solidarity. On the economic side, countries’ unilateral capacity to scale up their own national defence spending is limited by fiscal rules and in some cases high debt—the same constraints that restricted their capacity to stabilize in the face of the euro area crisis. <br />
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Hence—and this was the main point of the presentation—it makes sense to bring the two conversations together: a common defence policy is a needed public good which could contribute to EMU deepening. <br />
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<b>Defence spending as an economic stabilizer </b><br />
Valerie pointed out that the reforms pursued since the crisis to strengthen euro area architecture may not be enough to deliver the stability needed to preempt future crises. (i) Banking union will be an important new safeguard, but the large relative size of European banks and difficulties in closing them will limit how big a role banking union can ultimately play in smoothing shocks. (ii) And, while the European Stability Mechanism has shown itself to be an effective provider of liquidity, by its nature as a crisis response mechanism it comes into play only late in recession, rather than offering a permanent shock absorber. The implication is that fiscal stabilization will still be needed, and in Herzberg-Vidon’s view, defence spending could provide a more effective and acceptable stabilizer than other proposed schemes (for instance, common unemployment insurance or a stabilization fund); ‘military bases do not close down during a recession’. <br />
<a name='more'></a><b>Lessons from the U.S. </b><br />
Valerie used the US as a reference for the value of a common defence policy. The provision of a defence public good dominated the functions of the US government through the end of the 19th century, the period during which US federalism become entrenched. Today’s evidence (still under-explored) points to US states with higher defence spending enjoying lower output volatility. An EU study points to large potential efficiency gains if Europe were to reduce its weapons systems from the current 178 to the 30 employed by the US—with further efficiencies from shifting to a single procurement market. The savings, estimated to be as much as 100 billion euro, could free up resources significant enough to keep some states out of the Excessive Deficit Procedure and/or finance significant stabilization. Other lessons from the US are that defence spending can trigger innovation (boosting future growth prospects) and that a strong defence policy may go hand-in-hand with the global strength of a currency (consider, for example, why Saudi Arabia holds all its international reserves in dollars). <br />
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<b>Support for defence cooperation </b><br />
Valerie reminded the audience of several recent signs that elements of defence union are showing green shoots: the Commission’s launch of the European Defence Fund, the establishment of PESCO (permanent structured cooperation by 25 EU member states), and the emphasis on security in the June 2018 Mesenberg Declaration. Moreover, polls persistently favor a common defence policy (though not, for instance, a common army). Discussants’ skepticism about whether these ambitions remain realistic was dramatically countered by a breaking-news report from the audience on the Aachen Treaty (signed by President Macron and Chancellor Merkel the following day), which commits to enhanced Franco-German defence cooperation. <br />
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<b>Discussion </b><br />
The lively debate (under Chatham House rules) focused on what elements of a common defence policy could feasibly be pursued in the current climate. A broad definition—say, including border protection and immigration policy—was considered likely to earn more traction. Indeed, possibly the federalization of more public goods could ringfence the ‘external’ interference by Europe in national budgetary processes, the perception of which has been politically damaging to the European project. Some commentators saw a role for defence bonds in contributing to development of a ‘safe’ asset. There were also different views on how big a contribution defence could realistically make to economic stabilization. <br />
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<b>Reference:</b> Valerie Herzberg and Edouard Vidon, “The Sword and the Marketplace: Europe Needs a Defence Union to Support its Economic Integration”, Foundation Robert Schuman Policy Paper, European Issues no. 486, October 2, 2018SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-86622690294990717462019-01-25T06:28:00.000-08:002019-03-13T06:31:27.554-07:00The sword and the marketplace: Economic integration and the defence union<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/SoIH1m5kTWk" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-56432756659625766032019-01-02T09:22:00.003-08:002019-01-02T09:22:52.160-08:00Europe's Growth Champion: Insights from the Economic Rise of Poland<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/36eneuBoyDE" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-88813718476251541232019-01-02T09:22:00.001-08:002019-01-02T09:22:31.605-08:00The EU’s monetary and financial policies: The core and the periphery<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/h0U_OcXE4xA" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-36467236683917410352019-01-02T09:00:00.001-08:002019-01-02T09:00:59.224-08:00Progress and perils along the way to a Banking Union<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/DZ_g0HQ7H7c" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-76550286342785897452018-11-07T03:26:00.001-08:002018-11-07T03:26:27.922-08:00Navigating global challenges: An insurance viewpoint<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/_DAkSJhOoi4" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-78083427495409772102018-11-06T10:01:00.001-08:002018-11-06T10:01:37.693-08:00Political risks in Europe: Brexit and its impact on businesses<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/WsedZx5OG4k" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-66084616574082362042018-06-15T09:31:00.000-07:002018-10-06T09:31:37.924-07:00Demise of doctrine: Policy-making in the real worldCaroline Atkinson, 12 June 2018<br />
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In her talk, Caroline Atkinson discusses the development of the post-war doctrine of cooperation, the implications of shifting political and economic power, and policy-makers’ rigid response to the 2008 financial crisis. <br />
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After WW2, the world adopted a more rules-based system designed to foster cooperation and openness. Domestically, under the influence of John Maynard Keynes, economic doctrine began to play a significant role in political decisions. The Marshall Plan, IMF, and World Bank fostered global economic cooperation--with national governments ceding a degree of sovereignty to these institutions to ensure international cooperation. <br />
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Cross-border trade increased with both the establishment of economic institutions that ensured cooperation and central banks adoption of floating exchange rates. But this economic flexibility and interconnectedness required political cooperation among the world's most powerful countries to keep the system in balance. By the 1970s, the United States had the most power among the G6 (later G7) nations. The US saw itself as the steering system for the new global order.<br />
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Eventually, countries previously part of the Soviet Union joined the Western financial system; China experienced rapid economic growth. It then became clear that the G7 had left out out too many economic powers. There was a growing backlash against the "Washington Consensus"--the economic and political policies of the US and Europe. <br />
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Global policy became more inclusive and political. The G7 broadened to the G20. After the 1997 Asian financial crisis, financial ministers began demanding a larger role in shaping policy; they learned the political importance of financial policy. <br />
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The 2008 financial crisis led policy makers to reconsider several long-standing economic doctrines, such as tight fiscal policy. But the doctrine of caution in fiscal policy reasserted itself soon. Experts, particularly in Europe, were inflexible in their response to the financial crisis-- stressing tight fiscal policy even as economic growth sagged. Any deviation from fiscal constraint was seen as politically dangerous by both financial ministers and politicians. <br />
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Going forward, policy makers need to be mindful of too strict adherence to the economic doctrine of fiscal rectitude. In many recovering countries, there is still a large need for better education, a deeper social safety net, and greater access to financial markets. <br />
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Policy makers should also be aware of which countries perceive themselves as the "winners" and "losers" of trade. How can policy makers compensate disaffected countries? How can policy create more inclusive economic systems, upholding the rules-based and cooperative order that has allowed so many countries to flourish in the past?<br />
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by Josh Ashkinaze SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-35226510278577516852018-06-01T09:11:00.000-07:002018-10-06T09:32:59.371-07:00Fragmentation in banking markets: The crisis legacy and the Brexit challenge<div class="views-field views-field-title">
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<div class="views-field views-field-field-speaker">
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Andrea Enria (European Banking Authority) 28 May 2018</div>
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The post-crisis period has seen the disintegration of European finance. There has been a marked decrease in both cross-border banking and cross border mergers and acquisitions. This seems to be a problem particular to Europe, as, internationally, globalisation continues as usual. By comparing the American reaction to the crisis with that of Europe we are able to determine some causal factors of this disintegration. <br />
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The financial collapse can be taken as an indication that there was excessive financial infrastructure. This infrastructure would have grown during the boom phase of the boom-bust cycle, the bust then ought to result in the failure and therefore elimination of the excess infrastructure, allowing for a restructuring of the financial sector. In the US, many banks exited the market entirely, investment in these entities was highly spread across the states so the burden of these failures were able to be absorbed. In the EU there were many bailouts of institutions which, in the US, would have been allowed to fail. With all these government bailouts there is an expectation from the government that said bank will use its bailout to restructure its business model in order to support the local economy. Indeed, a UK study showed that banks which received government money reduced cross-border exposures by 15% on average. In addition to this vague nationalization of investment government support also came with a new set of macroprudential controls. As international investment is now often seen as a risk, it is common for governments to impose harsher regulations on banks investing internationally. This regulation all has the effect of creating a less connected EU economy, a trend which is intensified by the prospect of Brexit. <br />
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Brexit represents the most literal instance of disintegration of the EU possible, a literal split from the EU. What is arguably more concerning than the symbolism of Britain's exit, is Brexit’s implications for the financial market. The UK is a hub of finance with over 90% of European derivatives and interest swaps occuring in London. Additionally, the majority of US transactions with Europe are mediated through the London gateway. A more complex problem raised by Brexit is the question of whether pre-Brexit contracts, particularly insurance contracts, must be honored post-Brexit or whether it is even possible to honor them. Already we can see evidence of European companies reducing their exposure to London in anticipation of Brexit, the question remains whether this anticipation means the European economy will be able to handle the shock.SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-56956749449432730062018-05-11T09:34:00.000-07:002018-10-06T10:54:56.523-07:00Formalisation through taxation: Paraguay's approach and its implicationsJonas Richter, 7 May 2018 <br />
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The informal economy encompasses all transactions of legal goods which are not reported to the government. It is estimated that, globally, one third of the non-agricultural workforce makes their living from the informal economy. In Latin America, sub-Saharan Africa, and Central Asia, 40% of GDP is informal. <br />
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The benefits of formalizing the informal sectors of a given economy are clear. Most obviously the government would see an increase in revenue from taxes, and such economies would be given access to credit and the ability to legally enforce contracts. It has also been shown that there is correlation between a broad tax base and successful democracy. This is quite logical as citizens who pay tax will be much more likely to take interest in how the government spends their money. While it is obvious that it is desirable to formalize an economy, convincing a large segment of a given population to start paying taxes is a difficult proposition. <br />
<a name='more'></a>Jonas Richter focusses on Paraguay as an instance of successful formalization. In the period from 2002 to 2015 Paraguay increased the government's revenue with respect to GDP from 8% to 12.9%. Targeted tax reforms were able to create a larger, more compliant tax base. In 2004 Paraguay introduced a 10% VAT tax for most products and reduced its corporate income tax from 30% to 10%. In 2012 Paraguay introduced a 10% income tax on all citizens above a given income level and made all expenses fully deductible. This deductibility incentivized consumers to buy from formal vendors, thereby incentivizing vendors to formalize themselves. It also incentivized these now formal businesses to buy from formalized suppliers and in this way the incentive to formalize made its way up the chain of production. The period following the imposition of these taxes saw a 135% increase in active formal businesses in Paraguay. <br />
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by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-13513906390391335342018-05-11T09:30:00.000-07:002018-10-06T09:30:40.185-07:00A feminist analysis of women’s work experiences in finance<br />
Kristina Keampfer, 7 May 2018<br />
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Kristina Kaempfer began her talk with a description of an ad recently run by Commerzbank. In it a woman is shown travelling while the history of the bank is described; the ad has the twist ending of the woman entering Commerzbank showing that she is an employee there. This symbolic depiction of Commerzbank’s commitment to gender equality seems contradicted by the reality that only 1 in 7 of the bank’s executive board members are women. In the advisory board things are slightly more equal, with 6 women out of a total of 22, as it is required by German law that 30% of advisory board members must be women. <br />
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In the wake of the 2008 financial crisis many have lamented that, had the financial sector had a higher proportion of women, this crisis could have been avoided. These comments come from an assumption that women are naturally more thoughtful and less willing to take risks. While such statements about women may have been positively intentioned, Kaempfer suggests that depictions of women as saviours have the effect of disempowering women. <br />
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Kaempfer reported her initial research, what she discovered through speaking with female financiers in Frankfurt. Throughout her conversations it was clear that finance is a particularly gendered work environment. Women were all aware of gender-based assumptions placed on them, with some lamenting the situation and others describing how they were able to leverage their gender, as playing up their femininity made their superiors more sympathetic. Others do not see the bright side of the industry’s conservative gender-roles, complaining that it is difficult to feel like just another employee when men make a point to hold doors for them or wait for them to be the first to exit the elevator. While most women acknowledge that gender stereotypes and inequality of power is an issue, there is disagreement between junior and senior women as to how this should be handled. Senior women are in favor of women’s networks devoted to providing a woman-only space and advocating for the promotion of women. Junior women are skeptical of this: some of them believe that in order to make any real progress men need to be included to avoid the criticism that said networks are doing the same thing as the patriarchy which they claim to oppose, promoting one gender, thereby excluding the other.<br />
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by Soloman La Piana<br />
<br />SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-50393611408873389692018-04-27T11:28:00.000-07:002018-10-06T11:29:32.609-07:00Finance in Africa: Banks, debt and developmentConference, 25 April 2018 <br /><br />On 25 April PEFM hosted a conference on finance in Africa.Several strands of thinking led us to focus on Africa. First, having looked at the impact of the global financial crisis on developed country economies, particularly the UK and Europe more broadly, it was a natural step to look at the impact on other regions. The impact on Africa has been significant, through several channels, resulting on the banking side for instance in disintermediation from the global banking system as weakened banks from developed countries, including the United Kingdom, retrenched towards their homelands, and because the low interest rates that have prevailed have driven investors to “search for yield” and enabled more borrowing by governments and companies in the continent, with results good and bad: infrastructure investment on the one hand, but also the accumulation of debt on the other. <br /><br />And there are other strands that have led this conference to be particularly timely. Earlier this year a breakthrough agreement was signed in Addis Ababa in which 41 countries committed to establishing a regional free trade agreement amongst themselves. Meanwhile, finance in Africa has been highly innovative in recent years. In mobile banking, for instance, the countries of East Africa lead the world. <a name='more'></a>Development in Africa faces particular challenges: issues of the health of the population, of education, and being at the forefront in experiencing the effects of climate change. Demographic trends too cannot be ignored. Last autumn we had a presentation at PEFM on the forecast of the IMF’s World Economic Outlook. A special study attached to the report looked at population projections, and estimated that the population of Africa will grow by over 1 billion people over the next thirty years. This is both a challenge and an opportunity not just for the continent but for the world as a whole, potentially providing markets and skills to complement those elsewhere. As Charles Goodhart remarked in his recent book, which provides a fairly gloomy assessment of prospects for the European economies, given declining birth rates and ageing populations, perhaps it will be India and Africa that come to our rescue. <br /><br />The Oxford conference brought together speakers from academia, officials from Africa and the international financial institutions, and market practitioners. We began with a keynote address by the Governor of the Central Bank of Kenya, and then had three panels, with three or four speakers on each, followed by lively questions and answers. The three panels reflected the three identified in the sub-title of the conference: banking, debt and development. <br /><br />Governor Ngoroge’s keynote address was so wide-ranging that a summary could cover my entire presentation today. I will give a few snippets, but we are planning to produce a book of the conference that will reproduce his comments in full. <br /><br />Governor Ngoroge noted the challenges that African economies still have. 58% of the population do not have electricity, more than two thirds depend on agriculture; and 60% of the population is less than 25 years old. Half of all girls do not complete primary school. On the other side, he provided examples of the considerable economic progress a number of African countries have achieved over the past decade. There have been big improvements in policies. Rwanda, which 10 years ago was ranked 137th in the world on the “doing business” indicator is in 2018 ranked 4th. Kenya has increased access to financial services up to 75% of its population. Governor Ngoroge quoted Nelson Mandela: something always appears impossible until it is done. <br /><br />Nevertheless, Governor Ngoroge questioned the efficacy of the financial system in helping Africa develop. Infrastructure needs, for instance, are immense, and returns would be high, but it is hard to get finance into those sectors. More generally, spreads do not reflect real risks; investors do not differentiate across countries that are miles apart and have a quite different economic base. There is also little differentiation within a country: it is hard for instance to get finance to small and medium sized enterprises: the massive increase in data that are now available should enable very detailed assessments of creditworthiness, but so far this is apparently not happening. It is a big challenge, in Africa as well as worldwide, to balance the potential inherent in having large volumes of data with the challenges to privacy as such data are shared. <br /><br />Turing to the banking panel, as I have mentioned, one of the results of the global financial crisis was that European and North American banks were weakened and retrenched towards their homelands. This left a vacuum which has resulted in the rapid growth of cross-border banking by African banks. The most extensive network, that of Ecobank of Togo, now extends to over 30 countries. Three Moroccan banks dominate the banking sectors of much of west Africa. South African, Nigerian and Kenyan banks too have expanded across the continent. This is bringing substantial benefits—innovation and management expertise, as well lending capacity and regional integration that can stimulate growth--but also provides challenges for supervisors, who may have limited information on banks’ activities beyond their borders and limited experience in cross-border supervisory collaboration, thus risking financial stability both locally and, in an increasingly interconnected continent and world, much more widely. <br /><br />Our panel was chaired by Rupert Thorne, the Deputy Secretary General of the Financial Stability Board, the body tasked with making the world financial system safe after the shocks of the GFC, and who chairs its African regional group. Dr Florence Dafe from the LSE examined the cross-border trends and highlighted some of the achievements and the risks. She focused in particular on Nigeria, and noted that the expansion of cross-border banking by Nigerian banks began as a result of the 20 fold increase in minimum capital imposed by the Nigerian central bank in 2005. Professor Emily Jones of Oxford reported on her DFID-sponsored project that provides case studies of countries’ compliance with emerging international standards and codes, particularly Basel capital standards, questioning whether these should have the highest priority in all cases, and examining where the pressure for compliance is coming from: in general it comes from international banks, as well as local banks, wishing to give signals to the wider financial community, rather than the standard setters themselves, and is greatest in those countries interested in becoming financial hubs. Ethiopia, on the other hand, a rapidly-growing economy but with a different model, shows less interest in aiming to comply with international standards. Ibrahim Yusuf of Dahabshiil, gave a practitioner’s perspective on the importance of financial flows in facilitating remittances, even into the most financially remote parts of the continent such as Somaliland. With de-risking causing traditional banks to withdraw, there is an increasing need for cash-based, and mobile- based, transfers, but also increasing challenges for the sector to demonstrate that it is compliant in particular with security-based requirements. Finally, for this panel, Barend Jansen of the World Bank, summarized the FSB’s recently promulgated Key Attributes of bank resolution—an important element for managing a banking system—and explained its applicability in Africa. <br /><br />The panel on debt had the sub-title “this time is different?”—a largely rhetorical question, since the history of finance and financial crisis suggests that each time is different until it is not. The panel was chaired by Professor Christopher Adam of Oxford university, who observed that for several years there was widespread enthusiasm for Africa’s increasing access to finance, especially given its obvious infrastructure needs, but now the focus is on indebtedness and over-borrowing. Does this mean that the borrowing upsurge has failed? <br /><br />The speakers covered the three distinct sides of the issue. Maxwell Opoku-Afari, Deputy Governor of the Bank of Ghana, chronicled Ghana’s entry into the international bond markets in 2007, and its subsequent borrowings, and how this related to strong and improving economic performance. Last year Ghana’s economy grew by 8.5%. Anne-Marie Gulde of the IMF noted that easy money had enabled improvements in infrastructure, but also led some African countries to rapidly build up debt to fill the gap provided by the debt write-downs early in the century. In some countries debt levels are already beyond critical levels that considered sustainable. Differences across countries may be attributable to different levels of governance. In the Republic of Congo, for instance, public debt is now estimated at 117% of GDP, up from 70%, as a result of the uncovering of hidden debt. Five countries have debt in excess of 100% of GDP. Stuart Culverhouse of Exotix described his firm’s investments into Africa, explaining what was attractive and why finance is moving into the continent. Search for yield, coupled with the financial freedom generated by debt-write downs and policy improvements in many countries, have generated the supply; evident needs have provided the demand. There was still appetite for investment into the continent, with increasing recognition of the need for differentiation across countries. <br /><br />The last panel went beyond the narrowly financial elements, to examine some of the broader structural factors that will determine how successful African financial development is likely to be. It was chaired by Dr Simukai Chigudu of the University of Oxford, who quoted Zimbabwe’s handling of a cholera outbreak as an example of the interrelationship between health provision, politics and development. Dr David Johnson of the University of Oxford reported on his work in Sudan, relating state-by-state differences in educational achievement to differences in education strategies. Cyrus Rustomjee, now of the Centre for International Governance Innovation and formerly chief economist at the Commonwealth Secretariat, covered a number of innovative avenues for African development, including perhaps most interestingly the blue economy—i.e. the products in the seas, pointing out that 38 of Africa’s countries are coastal. Finally, Seth Terkper, former finance minister of Ghana, who had been directly involved in Ghana’s initial bond offering, stressed the rapid growth over the past decade of successful African countries, with the result that a number of these would no longer be eligible for concessional lending. <br /><br />Thus, financial markets become central to their future, and adaptation is necessary to ensure that they do not fall into the middle-income trap, whereby a country emerges up to a certain level but then is unable to complete the transition to developed economy. <br /><br />So I will summarize with five conclusions from the Oxford conference, and a five key issues. First, the conclusions: <br /><ul>
<li>First, the African economy is important, well beyond Africa. If it were ever the case that it could be ignored, this is not so today. Finance has a critical role in fostering African development: there is plenty of room on the upside, but also risks of contagion—through financial stress and indeed migration flows-- if there is mismanagement and crisis. Africa is changing too, integrating partly as a response to global financial disintegration: the growth of cross-border banking by African banks and the ambitious free trade agreement are but two of the signs.</li>
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<li>Second, African economies can gain from the so-called “benefits of the late start”—i.e. there is no need to repeat the mistakes of those who have gone before. There is understanding now for instance of the importance of consolidated and cross-border supervision, and of having powers and commitment to resolve failing institutions. </li>
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<li>Third, African financial systems are innovative, and in some regards world-leading. The use of mobile banking in East Africa for instance is advanced, and has lessons that are likely to be widely applicable. And the speed and efficiency of international transfers into Africa look impressive against the practices of more conventional banks. </li>
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<li>Fourth, development does not occur through finance alone, but through a whole range of ancillary factors and policies: demography, health, education, and the impact of climate change will all be important. </li>
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<li>Fifth, Africa is far from homogeneous. Governance factors will be critical in seeing which countries develop successfully and which do not. Some countries seem to be heading back into crisis, unless they change policies quickly; but others have been growing rapidly over a sustained period.</li>
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Finally, a short set of issues that emerged from the conference: <br />
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<li>First, is the financial system helping or failing Africa? Will the high premia and lack of differentiation persist, or are these legacy issues that will resolve as the good performance of the more successful economies is sustained? </li>
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<li>Second, are the international financial standards appropriate for African financial systems, or could countries do better by prioritizing differently from advanced economies? Does it matter that African countries are barely represented on most of the standard-setting bodies? </li>
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<li>Third, as Africa continues in the vanguard of moving into the digital age, how does one address the need to balance between data accessibility and data privacy? </li>
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<li>Fourth, how can one increase transparency between governments and their financiers, to avoid recurrence of hidden debt, and more generally use the financial system to improve governance where needed? And are these measures sufficient to hold off a financial crisis caused by unsustainable levels of borrowing in a number of countries? </li>
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<li>And finally, as the more successful economies emerge from dependence on traditional aid flows and concessional borrowing, how does the increasing presence of new players—both public and private--including from China and India--complicate or facilitate their further development?</li>
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by Charles Enoch, Director of PEFM SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com1tag:blogger.com,1999:blog-8211470370079699438.post-8396026686947155062018-03-02T09:19:00.000-08:002018-10-06T11:01:29.754-07:00The digital revolution and the State<br />
William Janeway, 26 February 2018 <br />
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William Janeway began his talk by claiming that the relationship between the US Government and technical innovation has reversed with the advent of digital technology. In the cold war days, and even before that, during World War II, the U.S. Department of Defense was the largest funder of scientific research and technological development. In fact it was the patronage of the US military which allowed the formation of what we would call “research universities.” In addition to funding R&D the Department of Defense was the “lead purchaser” of early computing equipment. Having the government as a customer is inherently different from producing for the wider population of consumers, as the government is interested in maximum effectiveness over the long term rather than short-term affordability. <br />
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Along with funding technological innovation, the government controlled the environment in which it would occur. Entities funded by The Department of Defense had to license any patents they produced to all competitors, and all technology being produced had to have at least two manufacturers to maintain competition and to ensure supply in case one producer went bankrupt. This weak intellectual property environment almost certainly allowed for accelerated innovation, however as digital technology progressed, it outgrew its fertile but limiting origins. <br />
<a name='more'></a>The period from 1980 to 1983 saw the shift of computing from a vertical to horizontal market, with the popularization of the personal computer. During this same period the Department of Defense launched VHSIC (very high speed integrated circuits) which was a program incentivizing companies to produce its namesake. IBM refused to participate in this program: the government’s objective of maximum speed by any means necessary did not align with IBM’s goal of making personal computers attractive and affordable for the average consumer. As we all know, the consumer appeal of digital technology has increased exponentially from the 80s onwards; innovation and mass production of digital technology happens today without any need for government support. The growth of the tech industry has been so great that, where it once relied on government support, with the advent of the internet, it now threatens government power. <br />
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The internet was created by the Department of Defense as a mode of connection between far-flung government-funded labs. Once it was built, the system was handed over to the National Science Foundation, which received much pressure from tech companies wishing to use it commercially. In the mid-90s a greater awareness of the potential economic implications of the internet emerged as people became aware of the wider array of technical expertise the internet would necessitate as well as the potential for openly sharing information and code, as well as the potential for economic transactions to occur over the internet. This expectation fueled the dotcom bubble of the 1990s. Though investors may have been overeager in the late 90s, their vision of a future awash in digital, internet-reliant technology was correct as can be seen from the post-2008 growth of Silicon Valley. Some claim that with the trend of transaction and communication becoming constantly easier even when the two concerned parties are on opposite sides of the planet, we are approaching a “frictionless” age. Janeway does not go so far, pointing out that in the real world friction will always exist. In support of this view he notes that even Uber drivers must live in the area where they work. He also points out that government regulation will inevitably also become a source of friction. <br />
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There has been much talk among regulators about the view that Google, Facebook, and others are monopolies. For Janeway, however, placing anti-monopoly regulations on these companies is not straightforward because they constitute an new type of monopoly. Janeway proposes that in addition to monopolies created by economies of scale, economies of scope, and network externality, there is a fourth source of monopoly: data. Search engines and social media platforms rely on algorithms which predict what information their users would most like to see based on the behavior of past users. This means that the platform with the most users, and therefore the most data on said users, will be more effective at predicting what its current users would most like to see. This feedback loop means that it is incredibly difficult to establish oneself in this market and once one is established there is a tendency for all consumers to converge on a single producer. Regulating a market which has such an inherent monopolistic tendency, and which also holds so much power over what information the average person is presented with, is a challenge which regulators have only just begun to tackle.<br />
by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-48823766097607274302018-02-16T09:28:00.000-08:002018-10-06T11:02:37.109-07:00Financial resilience and bank size – are we forgetting what is most important?Piroska Nagy-Mohasci, 12 Feb 2018 <br />
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Starting off with a bit of scolding of financial sector regulators and professionals, Piroska Nagy-Mohacsi asserted that, in the wake of the financial crisis, financial institutions and individuals who manage them have been prone to congratulate themselves on their success on returning the market to its pre-2008 levels, rather than taking responsibility for the crisis which they, in fact, caused. To be fair, there have been significant advances in regulation during the crisis and post-crisis period. A new layer of micro-prudential policies, affecting individual banks, was instituted, along with macro-prudential policies, and the identification of international and domestic banks whose central place in a given economy necessitated higher capital requirements. <br />
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Overall, studies show that post-crisis banks are both better capitalized and more liquid than before. The benefit of this achievement should not be underestimated. Domestically, macro-prudential policy has arguably avert crises in the cases of Iceland, Croatia, and Spain. Additionally, in 2013, with the economic shock created by the US’s “taper tantrum” it was the countries with the strongest macro-prudential policy which were least affected. Notwithstanding this success on the part of financial regulators, Nagy-Mohacsi points to several “elephants in the room” which are not being properly addressed by the financial community. <br />
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The first such “elephant” is, fittingly, excessively large banks. In the post-crisis period, the average bank is even larger than before. This raises the question: is it necessarily a negative to have larger banks? Some would argue that larger banks allow for more efficient financial transactions. To dispel this theory Nagy-Mohacsi looks at the history of the German <br />
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banking system. Following the end of World War II the three largest German banks were broken up into 30 units. In 1952, due to the modernization of Germany and the threat of communism, German banks were allowed to re-monopolize into three entities. Analyses of this period show that the reformation of the banks did not result in greater cost efficiency or volumes of lending. What was seen was an increase in these banks’ media output, and thereby in their political presence. <br />
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The second “elephant” is China. From 2000 to the present, China’s economy has quadrupled. As a result of this growth China has now the world’s largest banking sector, with deep connections to the international market. Additionally, China has a large domestic shadow banking sector. The underground nature of this sector makes it difficult to assess its stability or predict its behavior. The concern is that a domestic shock could spread from China’s shadow banking sector into the international market. <br />
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The third and final economic elephant is an even more shadowy financial market: cryptocurrency. Currently, the cryptocurrency market is valued at 0.5 trillion USD, although it is extremely volatile, having previously peaked at around 0.8 trillion USD. This unregulated economy has recently drawn the ire of many regulators, with Augustin Carstens of the BIS stating “Bitcoin is a combination of a bubble, a ponzi scheme, and an environmental disaster.” Nagy-Mohacsi did not fully accept such an alarmist outlook but addressed the main criticisms of cryptocurrency. The first criticism is that private money, not tied to a central bank, has been unsustainable historically. A clear argument against this is that, prior to the creation of central banks, all currency was private currency and so it is hard to claim that there is no precedent for its success. Furthermore, there are many examples of government action eroding trust in a currency, so the same argument could be applied to central banks. Another concern is that consumers don’t understand the risk of investment in cryptocurrencies, and it is the government's duty to protect its citizens from the volatility of such investments. Besides the obvious objection that this is an excessively paternalistic view of the role of government, Nagy-Mohacsi argues that it is important to allow some degree of risk, as unsuccessful investments are necessary to convince investors to be prudent in the future. Finally, many bankers are concerned that, blockchain, the technology behind cryptocurrencies, is not as robust as it looks, and could unleash a storm of instability if not properly shored up. In particular, it has the potential to take the place of banks in many transactions. This threat to banks should not be looked on by regulators as a threat to the economy but rather the opposite, as the fact the blockchain is taken so seriously by banks shows its potential to create innovation and economic growth.<br />
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by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-84596106747158482762018-02-09T09:21:00.000-08:002018-10-06T11:03:31.223-07:00A monetary history of the euro area<br />
Christopher Marsh, 5 Feb 2018 <br />
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Chris Marsh begins his talk by looking at the US Great Depression in order to draw parallels to the economic crisis in Europe. The Depression began with a massive movement of capital from independent, country banks, to large, central, city banks. This mass movement was sparked by the inability of banks to provide cash to all those who wished to withdraw. The panic of insufficient currency created an unfavorable balance of payments as loss of money supply in country areas encouraged debt holders to liquidate debt held and to cease to invest in these areas. It is not hard to see that this behavior is self-reinforcing; this is just the sort of economic behavior that monetary policy was created to prevent. <br />
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The EU saw a similar decrease in currency levels during 2010. Marsh focusses on Latvia and Greece to tell the story of the crisis. Prior to the crisis Latvian banks had borrowed heavily from abroad and lent domestically, so when the crisis hit it saw a great contraction in its currency supply. Domestic demand and real GDP fell sharply in 2009, prompting the IMF to step in. The IMF decreased reserve requirements in order to allow Latvia to begin to pay off debt. <br />
<a name='more'></a>This lowering of capital requirements meant that there were suddenly excess reserves of Latvian currency. The overflow in currency reserves then triggered implementation of a clause in the IMF’s program which meant it would have to reevaluate its handling of Latvia. This created uncertainty for the future of Latvian currency, prompting the Nordic banks to bet against it. Nordic expectations became reality, and the bets against the currency led to its severe devaluation. In retrospect, had Nordic banks been forced to keep credit lines open, the result would have been more favorable. This hindsight observation begs the question of what the IMF’s place is in today’s financial market: should it follow market trends or attempt to create them? <br />
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It is well known that Greece entered the economic crisis with large amounts of government debt. The vast majority of this debt was owned by non-residents, meaning that the Greek government was particularly powerless to determine how this debt was handled. It was clear to the IMF and the EU that in order to pay off this debt Greece could not simply adjust its domestic policy, but would need to generate flows of foreign exchange. This is a catch-22 as the more it became necessary for Greece to increase production, the less available capital there was to do so. <br />
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Furthermore, the European economy’s exposure to the Greek debt meant a decrease in demand from the very economies to which Greece ought to be exporting. Along with other factors, this exposure led many experts to believe that Greece had no chance of paying off its debt even if it followed the plan imposed by the IMF. Though there may be no clear solution to these problems, it is at the very least evident that the current view of the machinations of the European economy and the policies which this view produces are insufficient to manage the interdependent nature of the modern global economy. <br />
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by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-3918942432880045722018-02-02T09:27:00.000-08:002018-10-06T09:28:10.607-07:00Economic convergence in the Euro area: coming together or drifting apart?Jeff Franks, 29 January 2018<br />
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Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union. <br />
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For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states. <br />
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Unfortunately, the post-crisis EU has seen divergence both in economic growth and in productive output. It makes sense that these two types of divergence would be correlated, what is less obvious is the underlying cause of this divergence. The expectation had been that opening of borders and convergence of economic policy would allow for more inter-country trade and investment. This prediction was not incorrect but it fails to consider the type of investment which actually occurs. In Southern Europe, i.e. Greece, Spain, Portugal, the majority of investment from wealthier EU countries was real estate, while in Eastern Europe, i.e. Czech Republic, Estonia, Latvia, the investment was primarily in manufacturing infrastructure. The results of this difference are clear today, with these Southern countries being the most negatively divergent in today, with these Southern countries being the most negatively divergent in terms of productive capacity and income levels, while the Eastern Countries are quickly converging with the rest of Europe by both these measures. Through further analysis one finds many more instances of flawed economic prediction. <br />
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Another such mistake regards nominal convergence. The period preceding the formation of the EU saw great nominal convergence in Europe, with inflation and interest rates converging to Germany’s levels. What is easy to miss is that inflation was converging faster than interest rates, meaning that when interest rates were adjusted for inflation they were actually lower than Germany’s. A more general assumption which turned out to be wrong is that open borders would encourage large numbers of people to migrate to work in other countries. The hope had been that higher wages would attract workers from poorer countries, thereby both increasing the wages of those who stayed in poorer countries and lessening the cost of labor in rich countries, a win-win situation. In reality only 4-5% of the citizens of the EU work abroad, not a significant increase from pre-EU days. Although trade has increased within the EU, trade has grown greatly worldwide and to a greater degree than within the EU during the same period. <br />
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During the planning of the EU, the general consensus was that nominal and structural convergence should be prerequisites for inclusion in the Euro zone and that the happy outcome of this inclusion would be real convergence. Now that the EU has existed for almost three decades, and made it through its first major crisis, we can see that things are not so simple.<br />
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by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-62357675155613322712018-02-02T05:33:00.000-08:002018-10-06T09:37:37.463-07:00Economic convergence in the Euro Area: Coming together or drifting apart?<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/B-b8PU8ISsY" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-56731868593689117832018-01-26T09:29:00.000-08:002018-10-06T09:29:57.012-07:00Price and financial stability: rethinking financial markets<br />
David Harrison, 22 Jan 2018 <br />
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According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems. <br />
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The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.<br />
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<a name='more'></a>Essentially, the valuation of real market assets is falsifiable and the price cannot change drastically without an equally drastic change in material reality, while the financial market’s valuations are unfalsifiable and as such are untethered to reality. They can change drastically and rapidly, as has been seen in numerous economic crises. On top of this, the financial market does surprisingly little to stimulate the real market: experts estimate that only 1% of US stock trading represents new capital for the production of good and services.<br />
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David Harrison goes on to say that he believes that regulation must be passed to tether the valuations of the financial market to real, measurable output of goods and services. For instance, property values would be required to remain proportional to the current rents being collected in that area. The question Harrison leaves us with is whether such reforms could be done under the current Bretton-Woods system or if it would be wiser to devise an entirely new system. <br />
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by Solomon La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-17433486715772429222018-01-23T10:41:00.001-08:002018-01-23T10:41:56.274-08:00Price and financial stability: Rethinking financial markets<iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/babeRqsJ22E" width="480"></iframe>SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0tag:blogger.com,1999:blog-8211470370079699438.post-64983579104807241682017-11-24T09:03:00.000-08:002018-10-06T09:05:11.693-07:00Ireland: The case for an adaptive approach to macromanagementGillian Edgeworth, 20 Nov 2017 <br />
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Gillian Edgeworth of Wellington Management starts out with the story of how Ireland’s economy was able to converge with the rest of the EU in the period from the 1980s to the present. From 1990-2006 Ireland’s economy converged four times faster than did comparable emerging markets. It did this by taking advantage of the large increase in global trade which was seen during this period. With a corporate tax rate of only 12%, in this period Ireland became the base for many international corporations. Though this reliance on foreign cash flows allowed Ireland’s economy to grow, it also contributed greatly to Ireland’s vulnerability to the forces of the 2008 economic crisis. <br />
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The fact that Ireland had so much international economic involvement also meant that when it came time to handle its debt crisis, the Irish government had little say as the majority of the debt was owed to foreign creditors. Because Ireland is so heavily dependent on foreign cash flows experts worry that although it is currently successful it is particularly exposed to destabilizing changes in the international market. <br />
<a name='more'></a>Ireland has more to lose from Brexit than any other EU country. If Brexit is to proceed as planned it is estimated that Ireland’s GDP will decrease by 4%. Experts worry that Ireland’s economy shows signs of excessive populist spending -- equal to 28.8% of Ireland’s current GDP. These excesses would make Ireland especially defenseless to the shock of Brexit, and so policies should be instituted to curtail Ireland’s growth of credit and excessive government spending. <br />
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Another potential threat is changes in international tax laws. Firstly, the recent lowering of the US corporate tax rate, although Ireland’s is still considerably lower, is a blow to Ireland’s ability to attract companies. More threatening still is the prospect of standardizing tax laws for multinational corporations across EU countries. If such legislation is to be passed, depending on its specifics, it could prevent Ireland from offering the low tax rate which makes it attractive. The ten largest companies based in Ireland account for 35% of tax receipts; so it would only take a few companies deciding to relocate to leave Ireland seriously underfunded.<br />
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by Soloman La Piana SEESOXhttp://www.blogger.com/profile/10499776566187590020noreply@blogger.com0