The Great Debate UK

A two-speed economy for Europe’s youth

By Kathleen Brooks. The opinions expressed are her own.

A new dimension to the currency crisis is upon us. First there was the two-speed growth – with richer, predominantly Northern European economies performing well while the weak south was on the cusp of recession. But in recent months an even more worrying divide has started to emerge in youth unemployment.

In Spain the number of under 24-year-olds out of work is 50 percent, in Italy nearly a third of young people are without a job and in France the figure is a quarter.

However, in Germany youth unemployment is expected to sink to record lows over the coming months and is currently well below 8 percent.

If you are a young person in Germany your prospects for work and the future are brighter than they have been for generations. But for their peers in Spain things have never been worse.

So what is Germany doing right and can Spain learn a few lessons? In an article written for the Centre for European Reform, John Springford lays the problem out clearly. In EU countries where rates of unemployment are high levels of participation in higher education and vocational studies is approximately 40 percent. In Germany, Norway, the Netherlands, Denmark and Finland, where youth unemployment is fairly low, rates are closer to 60 percent in some cases.

Education and training is key to reducing youth unemployment. Not only does it help deal with young people when jobs are not plentiful, but it also boosts skill levels and could increase productivity in the long-term while also avoiding a “lost generation” of young adults who become reliant on benefits.

from John Lloyd:

No Union, please, we’re English

The opinions expressed are his own.

In France, it is les Anglais. In Germany, die Engländer. In Italy, gli Inglesi. In Russia, Anglichane.

The peoples of the United Kingdom, for most other peoples, are habitually “English.”

Not unnaturally. The English part of the UK accounts for close to 90 per cent of the country’s population; the language is English; the capital is London, long the English capital; the accents heard are overwhelmingly English; the long-held stereotype of the country is an upper-class English gent, snobbish, prudish and insular.

This suits at least some of the English, who often do the same as foreigners when referring to their nation state.  Frequently, without any malice, they have assumed that Britain is co-terminus with England (until recently, England supporters waved the Union Jack—which represents all of the British nations--at international football matches). Once, years ago, when speaking to a former senior Royal courtier, I mildly corrected his use of “England” to “Britain.” He wagged a humorous finger at me (a Scot) and said: “Now now, none of that Scots nationalism!” – which is, when you think of it as an answer to my objection, incomprehensible, except in terms of a certain English mindset. Yet, though illogical, it was also thoughtlessly generous: the English nation had dissolved itself into the state, and by waving the Union Jack, gave an implicit invitation to the other nations of the British state to do likewise – though only the Northern Irish did.

Ironically, had I held the views he ascribed to me, I would not have corrected him. From the point of view of  the nationalists of the UK – Scots and Welsh nationalists, Irish Republicans – the more that people at home and abroad think Britain is England and vice versa, the better they like it. It underscores their belief that the Union is an artificial thing--England with a few possessions historically acquired by conquest, trickery or both.

That view – that the United Kingdom really is England, and that any self-respecting people who would not call themselves English had best get out of it – is now acquiring deeper roots. The outgoing head of the Civil Service, Sir Gus O’Donnell, has expressed his worry about the possible breakup of the United Kingdom: he regards it as the most poisoned of the chalices he passes to his successor. What had been, for much of my life, the preserve of misty eccentrics (except in Ireland), has now entered the political arteries of the world’s oldest parliamentary democracy, and may cause a seizure.

Cohesive Europe

By Konrad Niklewicz, Spokesman for the Polish Presidency of the EU. The opinions expressed are on behalf of the organisation he represents.

How should the EU distribute €370 billion? The new cohesion policy rules proposed by the European Commission provide a good basis for further debate, but some of their components are clearly questionable.

The philosophy behind the application of European funds is known. Heads of state and governments of the EU, debating on 23 October in Brussels, confirmed it: in the context of the crisis, funds must be directed at accelerating economic growth, competitiveness and employment. The European Commission has respected this political message. In recent weeks, it presented specific pieces of the puzzle which together constitute the “new” cohesion policy for the years 2014-2020.

Changes

The Commission forecasts a total budget for cohesion policy of €336 billion, representing a theoretical reduction compared to the previous five-year framework’s €354.8 billion.  But the total amount will in fact increase if we take account of the newest idea from the Commission, the Connecting Europe Facility, representing a separate fund worth €50 billion, of which €10 billion would come from the Cohesion Fund. Under the new Cohesion Fund, 57 per cent of the funds would be spent in the least developed regions of the European Union, but if we also take into account the Connecting Europe Facility, it turns out that expenditure for the poorer regions is proportionally less advantageous than the previous budget.

The second key change proposed by the Commission includes a significant reduction of the maximum ceiling of the funds transferred to the Member States. This “absorption threshold”, as it is called in a binding terminology, is to fall to 2.5 per cent of the Gross National Income (GNI), from the current level of 3.15 per cent. Such an absorption threshold will have profound influence on calculating national cohesion policy envelopes. Let’s be frank: for some countries this will mean a reduction of their national envelope. Especially for those countries which suffered from recession in the years 2008-2011.

The Commission also wants to increase the share of cohesion expenditure allocated to the European Social Fund (ESF): the ESF would represent 25 per cent of allocations in the poorest regions, 40 percent in transitional regions and as much as 52 per cent in the richest regions. This is an enormous change: in Poland the ESF currently represents 14 percent. The Commission also proposes a hike in the share of loan and guarantee funds (at the cost of non-refundable grants).

Capitalism and democracy under threat from euro zone crisis

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

It takes quite a lot to make me feel sorry for politicians, especially the European variety, but I must say that Nicholas Sarkozy and particularly Angela Merkel have a right to be livid at the news that the Greek government now proposes to hold a referendum on whether they will agree to be given another gigantic dollop of aid. Having only reached agreement (of a very vague kind) at last week’s summit in the early hours of the morning, you can imagine how the French and German leaders must have felt when they discovered that their marathon negotiating sessions may all have been in vain. It seems the Greeks are now too wary of foreigners bearing gifts to accept their largesse without weeks or months of prior deliberation and debate.

The acceptance of the referendum proposal is apparently not a foregone conclusion, which is just as well, since it is plainly insane.

First, consider the wording of the referendum question. Opinion polls appear to show that Greeks remain keen on staying in the EU (and maybe even in the euro zone), so as things stand at the moment the outcome could be a majority in favour of rejecting the deal, but staying in the EU.  But is this option still open to Greece? If not, the Greek government could end up with a mandate to follow a road that is already clearly blocked.

To pre-empt this scenario would require some sort of clear statement from Brussels about whether they would be willing to allow Greece to stay in the euro zone and/or EU if it rejected the latest round of austerity measures.

Even supposing the details of the referendum are sorted out, what then? How long is all this supposed to take? The vote could hardly go ahead before mid-January at the earliest. What on earth does Mr Papandreou think will be happening in the markets in the meantime?  Does he think they will simply sit on their hands and wait patiently for Greek democracy to grind through the gears?

In reality, the momentum of this crisis is so inexorable that you can be quite sure that the deal currently on offer will have become totally irrelevant by the time any referendum is held, if the offer hasn’t anyway been withdrawn by the time you read this.

from Breakingviews:

Euro-recession, not rebellion, is what boxes UK in

By Ian Campbell. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

An E.U. protest vote by members of his own party has knocked the UK prime minister. For the moment, the Conservative party rebellion is largely symbolic.

But it could be the thin end of the wedge. David Cameron, just like Margaret Thatcher before him, risks being undermined by his party's euro-divisions.

But Cameron's more immediate European problem is that the euro crisis looks very likely to drag an already-weak UK into recession. Cameron, rightly dedicated to reducing public spending, could get caught in the crossfire. Fiscal policy revisions may be necessary.

Cameron's left-leaning political opponents blame too-tight fiscal policy for the UK's weakness. It's true that even before Europe took another turn for the worse, the UK was sliding towards recession. In August unemployment rose to a near 17-year high of 2.57 million. British households aren't spending. They fear losing their jobs and their finances are being doused by inflation of 5.2 percent while their incomes rise by less than 2 percent. Britain's recovery isn't going to begin at home. The trouble is, it won't begin in Europe either. And 47 percent of UK exports go to the euro zone.

Latest growth numbers for Europe are still worse than the UK's. Economic activity in the euro zone contracted in October at the fastest rate for 27 months. The risk of outright recession is high. Things are so bad the European Central Bank might even cut its interest rate.

So where does that leave UK policy-makers? The Bank of England has already acted, upping quantitative easing by 75 billion pounds at least in part because it sees euro zone troubles getting worse.

The euro zone marriage is over

By Laurence Copeland. The opinions expressed are his own.

Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.

The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.

The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.

It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.

This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.

How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.

Another week, another E.U. bailout agreement

By Mark Hillary. The opinions expressed are his own.

Once again German Chancellor Angela Merkel has had to dig deep to ensure that the euro zone can limp along for a little longer without any single nation defaulting.

And this story changes day by day. No sooner has Germany rescued the euro, Greece apologises and says they can’t meet the deficit targets – no more savings can possibly be achieved through austerity.

But as economists chart the course of this rollercoaster ride of expected default and the potential catastrophe of the entire European single currency project unwinding, is anyone paying attention to the social effect of all this uncertainty?

I don’t mean the pain of the middle classes ruing the days their house would increase in value week by week, I mean the potential for a completely different system of politics.

The political answer to the crisis in Europe is austerity. Public sector jobs are being slashed, taxes are being increased and more widely enforced, and state services normalised over decades are suddenly being cut.

Yet faith in centre-ground politicians is possibly at its lowest ebb since the end of the First World War. The general public has a very low tolerance for their elected leaders at present and non-economists generally view austerity packages as the wrong approach for repairing damaged economies.

Ben Bernanke could teach the EU a thing or two

By Kathleen Brooks. The opinions expressed are her own.

Markets thrive on certainty. Anything that smacks of uncertainty, fence-sitting or indecision will lead to market turbulence, as investors punish those who don’t tell them how it is.

This is exactly what we are seeing in Europe right now. The markets are losing patience with the EU’s inability to come up with a credible plan to fight the sovereign debt crisis and that is why it is escalating at an alarming rate.

In general, investors in credit markets are a canny bunch. Bond spreads between Germany and Greece, Ireland, Portugal, Spain and Italy have already blown out, but in recent days spreads between Germany and France, Belgium and even Austria have increased to their widest level for more than two years.

So what does this all mean? In short it suggests that bond investors are going off Europe, even those members who were previously considered safe are no longer out of harm’s way. The credit markets are turning against the political make-up of the currency bloc and until concrete changes are made to the structure of the euro zone the pressure on European credit markets is unlikely to abate.

The various branches of authority in the Eurozone seem to lurch from one crisis to another. Because there is no central voice or authority you end up with a cacophony of voices talking at odds to each other that confuses the markets.

For example, Germany and the ECB continue to play out their differences in public on whether private investors in Greek debt should take a loss. A new low was when the EU President confirmed an emergency summit would be held last Friday, which some member states didn’t even know about.

from MacroScope:

Banking on a Portuguese bailout?

Reuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

Take last week’s poll in which economists said Portugal would follow Ireland in applying for EU funds. Bank-based economists who expected a Portuguese bailout outnumbered those who didn’t almost three-to-one. For non-bank economists – those working at research houses, brokers and wealth management firms – the margin was only two-to-one.

This division was even more marked in the Irish bailout poll we ran three weeks ago. Bank-based economists expecting an Irish bailout outnumbered those who didn’t more than two-to-one. Our sample of non-bank economists were split almost evenly on the subject.

Interestingly, market makers and primary dealers – or banks mandated by government debt agencies to deal their new government bond issues – were staunchest in expecting Irish and Portuguese bailouts.

Of the seven economists polled by Reuters who work for primary dealers of Portuguese debt, six said Lisbon would need to apply for a bailout. For analysts representing primary dealers of Irish debt, four out of five said a bailout was imminent.

from Global News Journal:

Croatia must read European Union signals carefully

The European Commission told Croatia this week that its negotiations to join the European Union have reached their "final" stage. Sounds promising, considering how reluctant many EU governments are to admit any new members at a time when the bloc is coping with financial difficulties.

But there was another, more subtle message in the text of the Commission's annual progress report on EU hopefuls. And it read quite  differently.

In fact, the EU executive told Croatia it will have to be more convincing than the most recent countries allowed in -- Romania and Bulgaria -- that its democratic reforms are working.

Admitting Romania and Bulgaria, two poor Balkan states, to the EU in 2007 is seen by many EU diplomats as a mistake. Both had to  conduct deep-reaching judicial reforms to prove their ability to deal with pervasive corruption to qualify for entry. Because the last-minute reforms had shown little effect by the time the countries were admitted, Brussels introduced a "monitoring" mechanism to check up on judicial progress.

Specifically, it wanted to see that Romanian and Bulgarian prosecutors could pursue top-level politicians without encountering political pressure and that courts could mete out appropriate judgments.

Over the past three years, monitoring reports have shown scant results in curbing abuse by Romanian and Bulgarian authorities. Embarrassing as it was to the new entrants, the process also proved essentially worthless in bringing about change.

Croatia, which ranks only marginally better than Romania and Bulgaria on the annual Transparency International corruption index, has deep problems of its own with abuses.