Economics - Page 2

Pantelis Sklias & Georgios Maris: Greek, European or Global Crisis?

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Greece - crisis © The TelegraphIn 1991, when the Maastricht Treaty was signed an entirely new economic project was created. The Economic and Monetary Union (EMU) was unique not only because its area, magnitude and extension were unprecedented, but also because the European countries transferred important elements of their political and economic sovereignty to transnational and intergovernmental institutions. In fact, the EMU signalled a new epoch in the history of human economic cooperation and organization. However, nearly twenty years later the unique project is not as stable as its founders dreamed. The Greek crisis that started in 2009 revealed its endogenous and exogenous flaws both in political and economic areas.

In 2009, nobody in Greece could link the Greek domestic political and economic problems with the European Union (EU). Yes, in Greece there are huge and severe political and economic deficiencies and flaws. One could enumerate hundreds political and economic problems like the high inflation rates, unemployment, public deficits, public debts, bureaucracy, corruption and populism, the lack of institutional and structural reforms and so on. All the aforementioned factors are highly related to the Greek model of political, institutional and economic development, which is not only acknowledged as obsolete and unsustainable but also as unstable. This model changed everytime the Greeks had elections even if the government had remained the same. This is a very important observation because it is related to the absence of optimism in the markets.

Even though Greece is an extreme paradigm of deficiencies in political, institutional and economic development, it is not the only country in the European Union with these characteristics. In fact, there are many countries in the world that face the same problems as Greece does. Why is the crisis in Greece so severe and why the European Union’s political leaders seem unable to solve the crisis? The answer lies in the foundations of the Economic and Monetary Union. The EMU is a unique example of transnational economic and political cooperation, but it is full of flaws and problems. From its early beginnings the political leaders accepted in many countries that in fact couldn’t be competitive within the Eurozone. There are two important economic laws that affect their sustainability negatively. The first law is the transformation of comparative advantage to absolute advantage within the Eurozone. This means that within the Euroland only the most competitive enterprises can survive. Thus, the states stand unable to help the industries and the entrepreneurs. The second law argues that it is impossible to have a symmetric and balanced economic growth within the whole area of the Eurozone. In this way, we can explain the occurrence of two major different areas of economic growth within the EU, namely the core countries and the peripheral countries. Under these conditions, many countries of the European periphery that have been unable to remain competitive in the Eurozone joined the EU only because of political priorities and decisions. These actions are highly responsible for the today’s outcome.

Moreover, the system of European economic governance is not a well-rounded system that can help all its diverse countries in remaining competitive. The European Central Bank (ECB), although it is a highly credible institution, does not function as the American Federal Reserve. Thus, because the European economic integration is uneven, when the ECB takes a monetary decision, e.g. changing the interest rates or the money supply, the outcome of this decision does not have the same effect on all European countries. In this regard, the ECB cannot help Greece or countries similar to Greece. Furthermore, the Stability and Growth Pact (SGP) has also many omissions and we can’t forget that France and Germany were the first two countries that failed to comply with its targets. Furthermore, the EMU suffers from asymmetric and adverse economic shocks, inflexible labour markets, rigid wages, centralization of economic activity to specific areas, incomplete trade integration, and uncoordinated monetary and fiscal policies. Together with its major institutional weaknesses and the fact that a European political union is not regarded as feasible and the European sense of solidarity is inexistent, the result is ruinous both for the European project and for its member states. Accordingly, the European Economic Governance is also responsible for the Greek crisis. In fact, Greece and many other largely peripheral countries remain trapped within the Eurozone. They cannot use either their monetary or fiscal policies to regain their competitive advantage. This is also an important lesson that the New Member States (NMS) must learn. Living within the Eurozone is not as simple as it looks.

On the other hand, we need to investigate the crisis from a global perspective. In this regard, we can identify many important causes that negatively affect the European economies. First, the neoliberal paradigm, the so-called Washington Consensus, is not anymore viable and sustainable. Second, the United States have lost their hegemonic power mainly because of their economic problems, which are closely related to the rise of China and other developing countries. Consequently, one could argue that a new world order is emerging as the “unipolar” world is transformed to a “multipolar world”. Thus, the United States needs to come as close as they can to the European Union in order to overcome new global challenges. Under the aforementioned conditions it is clear that the Greek crisis is only a sign of something more important. Perhaps we face the first sign of the First Global Economic War and a great transformation will soon happen to the regional global political and economic affairs. The main question then remains ‘Is the Greek crisis a domestic, European , or global phenomenon?’. The answer is yours.

***

Pantelis Sklias is is an Associate Professor of International Political Economy (IPE) at the Department of Political Science and International Relations of the University of Peloponnese. He holds degrees in International Studies (Panteion University in Athens), MA in International Relations and Ph.D. in International Political Economy (University of Sussex, UK). He completed his post doctorate thesis at the Hellenic Center of Political Research of Panteion University with a fellowship from the State Fellowship Foundation. 

His research interests include: institutions, states and markets; global governance; global political and economic relations; international development; and civil society.

Georgios Maris is a PhD candidate at the Department of Political Science and International Relations of University of Peloponnese and currently writes his thesis entitled ‘The Political Economy of Global Governance: The Case of the EMU’. He holds a BSc in Public Administration (Panteion University in Athens), MSc in Political, Economic and International Relations in the Mediterranean (University of the Aegean), MA in European Studies (Kings College London, UK).

His research interests include global and European political economy, global governance, European integration, and international relations.

Rethinking the European Union’s Economic Relations with the Mediterranean

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Starting with the Jasmine Revolution of Tunisia and spreading onto Egypt, Libya and most recently Syria, the sudden wave of upheavals in the Mediterranean have created a whole new reality across the Arab world. By showing the limits of their tolerance for the corrupt and autocratic regimes that have governed their countries for decades, the Arab peoples have made it clear that a new era of governance is due in their region. This historical moment is as crucial for the European Union as it is for the Arabs of the Mediterranean. In some aspects, it may be regarded as a wakeup call for the EU after long years of neglect for its southern neighborhood.

Rethinking the European Union’s Economic Relations with the Mediterranean: A Historical Opportunity*

The “short-sightedness, self-satisfaction and feeling of safety with the status quo” have been, in the words of Polish MEP Jacek Saryusz-Wolski, EU’s the dominant attitude towards the Mediterranean, where the “status quo” was in fact mistaken for “stability” for long years.[1] It is perhaps a result of this realization that a new and ambitious European Neighborhood Policy was recently launched by the High Representative for Foreign Affairs and Security Policy Catherine Ashton. Unable to ignore the urgent need for reconstruction in the region, EU provided €140 million of humanitarian assistance to those most in need[2], and an extra €1.24 billion (totalling nearly €7 billion) was made available for the ENP following the political developments in EU’s southern neighborhood.[3] Indeed, given the failure of the Barcelona process and the inefficiency of the later the Union for the Mediterranean (UfM), the current political climate in southern Mediterranean gives the EU a historical opportunity to rethink its economic relations with the wider region, take advantage of a great potential to ensure sustainable security, prosperity and stability within the wider region, and to fix its past mistakes in the inefficient conduction of the Euro-Mediterranean Partnership.

Brief history: Barcelona Process and Union for the Mediterranean

The Euro-Mediterranean Partnership (EMP) was initiated by the Barcelona Process in 1995 by 15 Foreign Affairs Ministers from EU member states and 14 Mediterranean counterparts. The main goal of the partnership was to gradually establish a free trade area between the EU and Mediterranean countries. Its political aims were equally sophisticated and ambitious as they sought to create “a common area of peace and stability underpinned by sustainable development, rule of law, democracy and human rights”.[4] The EMP specifically aimed at strengthening the economic relations among the Mediterranean non-EU member countries while providing them the necessary financial and technical support to promote a balanced socio-economic development besides equipping them with the tools to build capacity for further development. With the Eastern enlargement phase of the early 2000s and the introduction of the European Neighborhood Policy (ENP) in 2004, the ambitious EMP entered a period of stagnation to gradually transform into an invisible component of the ENP.

Upon the suggestion of French President Nicolas Sarkozy, the EMP was eventually re-launched in 2008 as the Union for the Medierranean (UfM). The revised UfM was this time launched by 43 EU member and Mediterranean states. The establishment of this extended partnership received substantial criticism for serving as a political tool for Sarkozy’s presidential election campaign in France, and was moreover regarded as a sign of increased competition between France and Spain over their influence in the Mediterranean region. The new goals set forth by the extended partnership seemed promising in the beginning – the establishment of the Mediterranean Business Development Initiative providing assistance for small and medium sized enterprises, a Mediterranean University for high quality research on the region, extended focus on the environment and transportation, and finally a permanent general secretariat in Barcelona initially raised hopes for a serious improvement in the cooperation between the northern and southern ends of the region. The inadequacy of the bilateral partnerships within the countries of the region and the outbreak of the global credit crisis, however, acted as catalysts for the fast demise of the ambitious goals of the UfM and made way to its perceived failure.

The reasons for the failure of the EMP and UfM could loosely be identified under two main headings – political and economic. The lack of an EU membership prospect and the absence of any clear, concrete and short-term gains for the partner countries served as the most obvious political shortcoming of the EMP. Moreover, the politicization of certain sectors within the bilateral trade agreements (namely agirculture due to the protectionist contraints posed by the EU’s Common Agricultural Policy) further watered down the potential incentives for partner countries. Lastly, the shift of EU focus to its Eastern neighborhood during the enlargement process moreover marginalized the Mediterranean from the core of EU’s priorities. The most important economic reasons, on the other hand, have been a serious lack of business interest in southern Mediterranean, and consequently, very low levels of foreign direct investment in the wider region.

Reviving Euro-Mediterranean relations: Motivations

Although the Barcelona process has so far shown to be a failure, there are enough legitimate and pragmatic reasons why the original objectives of the EMP should be revived and given more emphasis by the EU. The strategic significance of the geographical location of the Mediterranean region, rising concerns on uncontrolled migration into the EU from its southern neighborhood and escalating fears of Islamic fundamentalism in the Arab countries could be named as the main (if not the only) reasons why the future of Europe lies in a secure, prosperous and stable Mediterranean region.

Perhaps the most visible reason why the original goals of the Barcelona declaration and UfM should be revived is the EU’s growing concern for uncontrolled immigration. The issue of immigration has been continuously ranking high in priority in the European agenda within the recent years. Catalyzed by the financial crisis, tighter border controls and stricter policies against immigration have become commonplace in member states. The efficiency of such measures, however, is yet to be proven, and therefore remain under scrutiny. This perceived threat of an “immigration wave from the South” has noticeably increased following the revolutionary upheavals in Europe’s southern neighborhood – hundreds of thousands have filled up refugee camps in North Africa, and over 20,000 are estimated to have reached Italian shores. What is certain is that Europe needs to rethink its “cure” for the problem of uncontrolled immigration. Addressing the symptoms of this problem so far has not produced any smooth answers to the issue – targeting the causes, however, have the potential to generate more sustainable solutions. Creating positive incentives and practical means to ensure that potential migrants stay home could therefore be an optimal recipe for controlling immigration. Taking into account the large volume of immigrants coming into the EU from the southern Mediterranean, working towards achieving the original goals of the Barcelona declaration would prove to be useful. Europe should address this problem by shifting its focus on creating jobs in the south of the Mediterranean, and seriously liberalizing its trade regimes to foster growth through trade with the region’s countries. [5]

The geo-strategic signifiance of the southern Mediterranean and Europe’s trade security together constitute another reason why the EU should rethink and reprioritize its Mediterranean policy. As the former EU High Representative for Foreign and Security Policy Javier Solana has justly observed in a recent article with Angel Saz, the container traffic between East Asia and Europe is crucially dependent on the EU’s southern Neighborhood.[6] Solana and Saz have drawn attention to two important issues related to this container traffic. Firstly, although the container flow from East Asia uses the Mediterranean route (i.e. passing through the Suez Canal), only 28% of the transported goods enter Europe via southern European ports such as Barcelona, Genoa or Marseille. The remaining 72% of the goods are unloaded at northern European ports such as Antwerp, Rotterdam and Hamburg, following a longer route through the English Channel. Even though this option involves extra financial and environmental costs, it is nevertheless preferred over unloading at southern European ports due to the superior efficiency of the northern European ports and their more advanced transport infrastructure.  Secondly, Solana and Saz emphasize that the Suez Canal must always stay as a “safe and reliable shipping route” in order to avoid the shifting of the route to the southern end of Africa, hence generating even higher costs for trade and the environment, and excluding the Mediterranean region altogether. In brief, the security of the opeations of the Suez Canal is of great strategic importance to Europe and therefore stable political regimes in and around the Mediterranean are of paramount importance for the secure and efficient operation of the economic activity between East Asia and Europe.

Lastly, there have recently been mentions of a possible Marshall Plan for the Arab World following the rapid regime changes and political reconstruction in the Middle East and North Africa (MENA) region. The transformation across the region will surely have serious consequences for Europe, as regional peace, prosperity and stability is indeed vital for Europe’s stability in the long term. It is with this motivation that Italian Minister of Foreign Affairs Franco Frattini has recently suggested that the revolutionary countries of the Arab world share the same needs with the post-war countries of Western Europe. Although a financial aid package by the EU for the democratizing MENA countries (similar to that of the post-war Marshall Plan) may indeed seem unrealistic given the current financial burden on the EU due to the alarming condition of southern European economies, additional measures could be taken to build on the existing financial and institutional structures.[7] Indeed, what is important in this stage is not how much of its financial resources the EU can allocate to support the democratic transition in the MENA, but how it can work to prioritize the Mediterranean within the existing financial and institutional resources. The ongoing financial crisis, therefore, should not any longer be an excuse for turning a blind eye on the developments in the southern Mediterranean.

Reviving the Euro-Mediterranean relations: Immediate remedies

Having reviewed why the EU should prioritize strenghthening its economic relations with the Mediterranean, it is also necessary to acknowledge the main limiting factors that are currently acting against a stronger Euro-Mediterranean economic dialogue, and outline the most immediate remedies for recovery. The first and most debated of these is undoubtedly the issue of the persisting protectionist measures in European trade, and most notably those in the agricultural sector. As discussed earlier, perhaps the most obvious technical obstacle that has played a role in the failure of the EMP has been the current state of the EU’s Common Agricultural Policy and the resultant illiberal tendency in Euro-Mediterranean trade. Europe seriously needs to liberalize its trade regime if it is to induce any form of economic development and promote democracy in its southern neighborhood. At this critical time when the political character of the entire MENA region is going through a historical change, the EU cannot afford to continue ignoring the need to liberalize the barriers in its trade activity with the newly democratizing Mediterranean.

Secondly, the weakness of the institutional setup of the former EMP has been a very important though less visible limiting factor for the advancement of Euro-Mediterranean relations. The Barcelona process originally promoted the creation of a free trade zone in the wider Mediterranean region, which would provide the basis for enhanced cultural dialogue, promotion of stability and security in the South, and flow of financial and technical aid. When compared with other successful regional free trade agreements, the EMP stands out for not having an advanced institutional framework. The North Atlantic Free Trade Agreement (NAFTA) between the United States, Mexico and Canada, for instance, could be taken as a good institutional example for the future of the Euro-Mediterranean trade relations. In comparison with the relatively looser Association Agreements between the EU and non-EU Mediterranean states, NAFTA provied a good institutional example with its side agreements and subsidiary organizations, most notably in the areas of labor rights and environmental protection. There is little doubt that the future of the UfM and Mediterranean trade could benefit substantially from such a move towards institutional development and capacity building.

Conclusion

The history of the world shows that the Mediterranean region has been the global center of trade and economic activity for many prominent civilizations like the Romans, Egyptians, Greeks, the Spanish, and Ottomans. The current lack of a healthy and sustainable economic dialogue between the northern and southern ends of the Mediterranean Sea may continue only for a given period of time as the security and prosperity of the wider region is possible only with economic cooperation and extended social and political relations among the region’s countries. The Arab Spring has provided a historical moment for the realization of this regional cooperation, though to achieve this long term goal, EU needs to shoulder the lion’s share of responsibilities. Removing non-tariff barriers to further liberalize its trade regime, and enhancing the backbone of the EMP with a serious instiutional reform are of vital importance for the EU to fulfill this immediate duty. Bearing in mind that the security of the Mediterranean is the security of Europe, EU can no longer afford not to invest in its economic relations with the Mediterranean if it is to pursure a healthy and stable presence.

* Originally published on Turkish Policy Quarterly Vol. 10, No. 2, pp. 65-71

[1] Jacek Saryusz-Wolski, “EU must fundamentally redesign its Mediterranean policy”, EurActiv, 10 March 2011 (http://www.euractiv.com/en/print/global-europe/eu-fundamentally-redesign-mediterranean-policy-analysis-502981)

[2] Catherine Ashton, “Speech on North Africa and the Arab world in the European Parliament”, 6 July 2011, (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/123479.pdf)

[3] “Barroso announces extra €1.2 billion for Europe’s neighbours”, ENPI Info Centre, 25 May 2011, (http://www.enpi-info.eu/main.php?id=25296&id_type=1)

[4] “Barcelona Declaration, adopted at the Euro-Mediterranean Conference”, Summaries of EU Legislation, 27-28 November 1995, (http://trade.ec.europa.eu/doclib/docs/2005/july/tradoc_124236.pdf)

[5] Peter Sutherland, “Europe’s Test in North Africa”, Project Syndicate, 27 April 2011 (http://www.project-syndicate.org/commentary/sutherland1/English)

[6] Javier Solana and Angel Paz, “The Mediterranean Reborn”, Project Syndicate, 11 July 2011 (http://www.project-syndicate.org/commentary/solana8/English)

[7] Franco Frattini, “A Marshall Plan for the Arab World”, Project Syndicate, 26 May 2011 (http://www.project-syndicate.org/commentary/frattini3/English)

Does hunger still rule?

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The Millennium Development Goals (MDGs) were set up by the United Nations in the year 1990 to blueprint the steps needed to eradicate poverty worldwide. The 8 goals, including universal primary education and halting the spread of HIV/AIDS, form a set of unprecedented efforts galvanising international action to help the world’s poorest. With the deadline approaching and the world in recession, some have started to question whether any of the aims will have be achieved by 2015. This article will concentrate on the first goal: “Halve, between 1990 and 2015, the number of people whose income is less that $1 per day. Achieve full and productive employment and decent work for all, including women and young people. Halve, between 1990 and 2015, the proportion of people who suffer from hunger”.

According to the UN, (www.un.org,) the global economic slowdown has made progress “suffer” but “the world is still on track to reach this target”. Yet according to World Bank figures an estimated 1.4 billion people still live on $1 per day or less and 2.5 billion exist on under $2 per day. Three quarters of the population of sub Saharan Africa are still included in the latter category. The meaning of living on $1 per day does not correspond with literal earnings but in Purchasing Power Parity; what $1 could buy per day in the United States.

Whilst these figures show that 20% of the population still live under the poverty line it is debatable whether their quality of life has improved in some areas. Whilst characteristics of such poverty still include the following: 50 to 80% of daily income is spent on food; poor health is common; there is high unemployment and employed adults have multiple occupations in unstable jobs, quality of life may have improved in several areas.

Through the work of development agencies and charities, good medical facilities have become more widespread and emphasis has been put on training local staff, thus building up a skill base in the population. However, many of these hospitals survive on charitable donation or outside funding so if funding should drop away, as is possible in times of world financial instability, the hospitals would fall to ruin. In government-run facilities, funding is often insufficient and money to buy medicines and basics such as anaesthetics often run out mid-way through the month leaving the staff powerless. In rural areas power supplies are also frequently faulty so hospitals are unable to use facilities such as operating theatres without a generator and funds for fuel.

A classic indicator of poverty is limited access to water, electricity, infrastructure and sanitation. Access to these utilities now seems to be a geographic variable. In some countries, such as Indonesia and the Philippines, access to electricity is almost universal however this is far from true regarding sanitation. On the other hand, in Tanzania almost every household has or has access to toilet facilities, but electricity and running water are rare in homes. This discrepancy may reflect the foci of campaigns, (for example water and sanitation charities tend to target Africa,) and also the priority of governments. As they are governing young, expanding economies based on modern technology such as computing or mobile phones, it makes sense that many Asian governments put such an emphasis on electricity access.

Following from this, despite little possession of productive assets such as farm tools, tractors or sewing machines, the number of people owning small electrical goods has risen dramatically in the last twenty years. According to studies by Abjhit Banjeree and Esther Duflo using data from 13 countries with widespread poverty, 70% of people living on under $1 per day in Peru and Nicaragua own radios. In Hyderabad, India, 57% of people on a comparable wage owned televisions, whilst mobile phone ownership in Africa has soared with small businesses running charging points from rare electrical connections.

Some argue, on the basis of evidence shown above, that whilst the number of people living on under $1 per day is still huge, these improvements in quality of life must be taken into account when we measure success; if the overall aim is to lift people from poverty thus improving their quality of life, substantial progress has been made, even if it is patchy.

As for decreasing unemployment and improving work opportunities, the financial crisis has somewhat impinged on progress. With the deterioration of the labour market, unemployment is rife worldwide and levels of extreme poverty have increased. The middle classes of a country are generally those with steady employment, which is now becoming a rare entity. The middle class is also educated and often the driving force behind stable democracy. Poverty has been very well connected to instability, violence and extremism throughout history, so not only would an increase in poverty be a humanitarian disaster but it may also hold consequences for regional and global security.

In 2008 the UN proudly announced that poverty had reduced in virtually all regions, however in parallel with the financial crisis, world hunger spiked in 2009. Since then, processes to slow hunger have slowed in all regions and, famines and unrest have seen the need for food aid rise. 42 million people have been uprooted by conflict in the last four years. 1 in 4 children in developing countries are still underweight and children from rural areas are twice as likely to be underweight as those from urban homes.

The map of Global Hunger Index (GHI)
A map of Global Hunger Index (GHI)

The map above displays, in terms of severity, the Global Hunger Index (GHI) for 122 countries. As an average figure, the GHI has decreased since 2000 with substantial reductions in huger in Asia. In Thailand the number of underweight children has been halved from 50 to 25% using nutrition intervention and a widespread programme of community volunteers to change people’s dietary behaviour and provide nutrition education.

Despite the MDGs being a worldwide aim, Europe currently provides over half the development aid making it a powerful force for progress. Europe summarises its three doctrines as follows: strengthen programmes in health, education and social sectors; put a great deal of effort into good governance and ensure policy coherence in trade, agriculture and environment (etc) as well as aid.

Yet despite worthy aims and a vast influx of funding, more action needs to be taken in order to reach the MDGs by 2015 and continue the process to eliminate poverty in the future. Sustainable development is the buzz word for 2011 and the concept certainly carries a great deal of weight. Reduction of cash crop production, sustainable environmental policies, education and evening out of barriers in trade are all steps that need to be taken in order to ensure a poverty-free world. Our monetary system means that there will always be winners and losers but, with some simple changes, the poverty gap could be narrowed and quality of life improved worldwide. The MDGs may not succeed by 2015 in the current economic climate, but they should not be viewed as a failure; their aim is just and should be continually strived for in the future.

Emily Judson

Emily Judson is a guest contributor of the European Strategist.

A modest proposal for saving the euro

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After the first European bail-out, which did not leave much of an impact on the tragic economy of Greece, the second package is already en route to the country that is helplessly balancing on the brink of collapse. But if one forgets about tiny troubled economies of the European Union, like Portugal, Ireland and Greece, nobody would / should really care about the euro or the future of the euro zone because the collapse of these countries would not make such a big difference, the EU could move on. However, new developments in Spain and especially in Italy, one of the biggest members in the Eurogroup, reinforce the belief that without leadership and strong commitment the euro will eventually sink and the whole idea of the EU will come under question.

2011 can easily be the decisive year not just for the Italians, the Greeks, the Irish, the Portuguese and the Spanish, but for the whole Europe. We now know that smaller and economically weaker states such as Greece, Ireland and Portugal may well fall into default. But we also know and hear that while their collapse would be a serious blow to the European Union, it would still not make the euro history. Leaders of the Eurogroup and the Union know this, and in my view, that is why they are completely reluctant to get their acts together and decide about the faiths of these countries. However, Spain and Italy are playing in a different league than the states mentioned beforehand. Should these two fail to  pay off their debts, European and international markets would simply plummet. Of course, this means that the EU cannot let Spain and Italy behind with their problems!

Nonetheless, I believe that the trouble of Southern Europe provides a one-in-a-lifetime opportunity to both more disciplined member states and the rest. Firstly, countries like Germany, the Netherlands, Austria or Finland that are frustrated about helping out weaker states with their own taxpayers money could force EU counterparts to act more responsibly and more seriously with public finances. It may sound populist, but the carrot-and-stick policy (i.e. we give you money if you change the system as we, the majority, advice you to) could may well work in case of South Europe. Secondly, politicians with clear programmes in Italy, Greece, Spain, etc., who were previously either sidelined or simply did not have the appetite to take part in the shady business of current political elites can now stepin and change the faith of their respective countries. Of course, it is always easier said than done, but there is absolutely no way that there would be no capable people to live up to popular expectations. And thirdly, it will finally turn out whether the euro area is a rich country club where only financially conscious and successful states can flourish with no room for others, especially troubled ones, or a common EU-project where everything rests on solidarity and trust. In theory, it should be the latter, but in real-life, I think the first applies!

I am pretty sure that many people do not, cannot and will not agree with me on this, but still, I feel that there is no room for countries like Portugal, Greece, Ireland, Spain and Italy in the Eurogroup. There should neither be any room for anybody else who cannot comply with EU rules and regulations (oops, in that case there probably would not remain a single country in the euro area) or who cannot function responsibly when it comes to public finances. Yes, of course, this means that there would be only a handful of members in the euro zone (Germany, Austria, the Netherlands, the Scandinavians and let’s say, Luxembourg), but who cares, at least it would not be obligatory for German taxpayers to help out Greeks and also, it would not be a must for George Papandreou to follow EU demands while saving his country. Do not get me wrong, all-in-all, I think the Euro is a great achievement and a solid currency that should be used across the Union, BUT, only with care and a sound understanding of what can happen when something goes wrong, because in the end, something always goes wrong!

The inconvenient truth

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Christine Lagarde, the French finance minister, was yesterday chosen as the new head of the International Monetary Fund after Dominique Strauss-Kahn, a fellow Frenchman, stepped down from the post earlier last month, due to sexual-assault charges. While many highlight the fact that Madame Lagarde is fluent in English and well-respected in the world of politics, some publications, like this magazine, think that this is not enough for the IMF’s top job and feels deep disappointment by the decision taken by mostly European countries, the US and China.

A good one and half month passed since the resignation of Dominique Strauss-Kahn, the former head of the International Monetary Fund, who is now facing a possible 20+ years in prison for alleged rape. Of course, mainly because of this no one can praise Mr Strauss-Kahn on the personal level, but on the professional side, the facts lie with the former boss. Firstly, because he was actually an economist (Université Paris X); and not a bad one either. Secondly, because under his leadership the IMF regained its long lost reputation as a credible international organisation. Thirdly, because world leaders listened to his arguments. And fourthly, because he had more than 30 years of political experience under his belt. So it should not come as a surprise that these achievements (and professional legacy) are hard to level, especially for Christine Lagarde, the current French finance minister, by far the least qualified alternative from the two managing director aspirants. Why?

First of all, almost all the other serious candidates (Agustín Carstens from Mexico and Stanley Fischer from Israel) were Central Bank chiefs in their respective countries; both men were former IMF employees (deputy heads of the organisation); and both were trusted economists, Carstens received his PhD from Booth School of Business (University of Chicago) and Fischer received his from MIT, that is, from two of the leading business schools in the world. In this regard, Madame Lagarde has no Central Bank experience, no IMF experience and no PhD (or any other degree) in economics. That is why I strongly assume that nine out of ten people would not recommend her for the top job at the organisation because she is simply not fit for it. In my view, the managing director of the IMF should have a genuine background that both Mr Carstens and Mr Fischer (as well as Mr Strauss-Kahn) possessed. So what exactly has Christine Lagarde compared to the above mentioned two credible contenders? 1) French passport; 2) EU citizenship; 2) Good connections. And that’s about it!

It would be, however, somewhat unfair on my side to totally sideline Madame Lagarde’s valuable skills and professional experience. Before becoming a politician the French finance minister studied law (specialising in anti-trust and labour) at Université Paris X (where Mr. Strauss-Kahn obtained his PhD in economics) and also political science at Science Po (Aix-en-Provence campus). She was head of Baker & McKenzie, an international law firm, for 5 years; she was the first woman to hold this position. And from 2005 onwards she was Minister of Commerce and Industry (2005-2007), Minister of Agriculture (2007) and Minister of Finance (2007-2011) in the UMP-lead French government. Needless to say, this is a very impressive career by any standards. However, I firmly believe that the appointment of Christine Lagarde as the next head of the International Monetary Fund was and will be, a grave mistake.

In support of my argument I now enlist four reasons on why Madame Lagarde is unfit for the job. Firstly, she is not an economist. Of course, it is not carved in stone that leading pre-eminent financial institutions in the globe requires a sound understanding of economics but I think, it would be better and more reassuring to know that the managing director of the IMF can decide important matters alone without the help of aides. Secondly, the argument of most European states that a European should manage the IMF because of the ongoing financial crisis is utterly flawed. Precisely because of her nationality and heritage Madame Lagarde will not be objective when dealing with the European continent; whereas an IMF head should focus on the global implications of a crisis and a decision without any positive or negative bias in either ways. Thirdly, the new head of the IMF might soon appear in court due to her alleged involvement (abusing office) in the Bernard Tapie case. And fourthly, we are living in 2011, not 1945, so it absolutely unacceptable that the IMF and both the World Bank and the UN resemble an almost ancient regime, in which the developing world does not have any say. Or as Martin Wolf, associate editor of the Financial Times, rightly noted in his article about a month ago: „Regimes that do not bow to the winds of change get blown away. The Europeans need to recognise that truth in time. They will not do so. But it will prove a big mistake.”

The country where growth stopped

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The country which by many experts was once regarded as the economic powerhouse of Central Europe has stopped growing. Newly published data by the European Union’s statistical body, Eurostat, clearly show that in the last 7 years Hungary’s GDP (when compared to the EU per capita average) has almost started to stagnate. This means that with an average growth rate of 0.8 percent, Hungary is now among the worst performers both in its region and within the EU27.

Slightly before the accession, in the early 2000s, Western European financial experts were praising Hungary, labelling it is as the economic front-runner of Central Europe, for its huge efforts to comply with EU regulations and difficult economic tasks. One cannot stress this enough, but it is still unbelievable, even after a good 20 years, that former communist countries of Central and Eastern Europe – all of which were centrally commanded economies – have managed to make it to the European Union and NATO. However, political mismanagement, low productivity and the lack of privatisation potential (since their independence, most CEE countries privatised everything they had to raise money for developments) marks the beginning of the end for these smaller economies. It is now obvious that without a clear vision, a well structured financial plan, and a strong political will to get things moving, the former communist countries of CEE face a Greece-style collapse. Of course, there are some notable exceptions in the region, like Slovenia, the Czech Republic and Slovakia, all of which are steadily heading towards reaching the EU’s average GDP per capita. In the case of the two former ones, this means that they are behind the EU average by an estimated 10 – 20 percent, in the latter this average is about 25 percent, and in the case of Hungary, the former front-runner, well, 35 – 50 percent. It is true, however, that the Czech Republic (previously) and Slovenia (nowadays) are experiencing some financial difficulties as well and yes, it is also true that most countries in the region are not as stable as, let’s say, the Netherlands or Germany, but still, the prospects of these countries are relatively positive, especially when compared to neighbouring Hungary.

Tempting as it may seem, blaming solely local politicians and prime ministers, such as Péter Medggyesy, Ferenc Gyurcsány or the acting Viktor Orbán, for the problems of the country, is a bit hypocritical. Firstly, because only we the citizens elect politicians to their office. Secondly, because only we the citizens can change governments. Thirdly, because only we the citizens can protest or formulate ideas and opinions that can destabilise governments that are taking the country on a wrong track. And fourthly, because only we the citizens can create new parties and new civic movements that can replace the old and static political parties of the past. Nevertheless, despite that politicians should be and are accountable to their voters, even then they can screw up a lot of things; which they usually do. And precisely because of this, Hungary is now at a place where her politicians took it. Certainly, in this, MSZP’s (socialist party leading Hungary between 2002-2010) role is critical. I would even dare to say that its role and political leadership is the main factor why Hungary is now lagging behind its neighbours.  Since according to these fresh statistics from Eurostat economic growth stopped during MSZP reign, notwithstanding whether its politicians like it or not.. But irrespectively of these facts, centre-right FIDESZ is also responsible for the state’s financial health. Mostly because their policies rely only on blaming the socialists for the country’s problems, without formulating a credible alternative or idea to change the currently horrendous economic situation.

Of course, most Hungarians are now laughing at Greeks, believing that despite visible growth and positive financial developments, the Hungarian government is firmly leading the way and because of this a southern style collapse in the middle of Europe is highly unlikely; especially since „we had shaken off the chains of the IMF.” But sadly, in my view, the ones who think in this way are wrong: the worst is yet to come for Hungary if we do not get our act together soon.

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