EU economic benefit questioned

By DeJphine Strauss in London

The economic benefits of European integration may have been more modest than claimed by its more fervent proponents, according to an eminent economist who questions how far liberalisa­tion depended on the politi­cal process.

European incomes would have been about 5 per cent lower if the European Union did not exist, Barry Eichengreen, professor at the Uni­versity of California, Berke­ley concludes in a paper co-authored by Andrea Boltho at Oxford University.

That suggests European union has led to significant gain in living standards but it is considerably less than one recent estimate that per capita output would be a fifth lower if there had been no union since 1950.

"Integration has clearly not been a pariacea for the continent's economic ills, as claimed by some if its propo­nents. But it has bestowed some benefits," the research­ers argue.

The findings are based on the hypothesis that "eco­nomic forces would almost certainly have pushed for freer trade, stable exchange rates and less regulation in Europe" even without creat­ing the institutions that led to today's EU.

For example, Prof Eichengreen argues that the surge in intra-European trade in the 1960s was helped by rapid economic growth, as well a&,jfe common market dismantpig trade barriers.

Likewise, reforms in the US and UK could have prompted European govern­ments to pursue the liberali­sations they made in the 1980s even without the EU single market programme.

Yet the paper argues the commitment to integration required by the common market and then EU helped politicians override fears about reform and allow fur­ther liberalisation.

"Often 'Europe' was used as a shield against domestic opposition to deregulation," the research notes, adding that it would have been diffi­cult to imagine governments opening public procurement to foreign businesses, or recognising other members' domestic standards and reg­ulations, in the absence of the single market.

The authors judge that the dismantling of trade barriers under the common market gave the greatest gains, add­ing about 5 per cent to the gross domestic product of the six original member states - offset by losses due to the protectionist common agricultural policy.

However, the paper finds the overall impact of mone­tary union, Europe's most ambitious project, to be only "mildly positive" so far and notes that it. may have allowect Italy to postpone much-needed reforms.

P.S. de Pancho "El Villan":

5%? That number seems to Pancho a little bit too low...he preferes to stick to the more realistic number once given by Richard Baldwin in one of his papers...

Paulson sees faint light at end of financial tunnel

The US Treasury chief warns of some unpleasant shocks ahead, but he remains cautiously optimistic, writes Krishna Guha

The credit crisis is entering its later stages, but the proc­ess of deleveraging in the financial system still has further to (go, according to Hank Paulson, the US Treas­ury secretary.

"I am encouraged. I am feeling better about the mar­kets," he told the Financial Times, adding: "In terms of the capital markets, I believe we are closer to the end than the beginning."

Mr Paulson said he took "some comfort and satisfac­tion" from the amount of capital that was coming into the banking system, both in the form of equity infusions into banks and private capi­tal deployed to purchase assets such as leveraged loans.

"There have been plenty of examples through history of where astute investors have come in and taken advan­tage of distress in the mar­ket to make good profits," he said.

But he said the process was taking a long time, partly because of the com­plexity of some of the credit instruments involved, but also "because of the increase of'leverage in the system".

Before last summer's credit squeeze, many finan­cial institutions took on extra leverage in the form of debt to maximise profits at a time of cheap borrowing. But that has left them vul­nerable to losses, and a proc­ess of increasing the amount of equity, relative to debt, is seen as essential to recovery from the crisis.

The deleveraging process, he said, was an important part of the repricing of risk, "I would say that this has still got further to go," he said, calling on US financial institutions to continue to raise more capital.

Mr Paulson said markets "feel much better than they did in March". But he said a number of markets were still not functioning as normal and there would be "some unpleasant surprises" along the way to recovery.

"These things do not move in straight lines. This is partly about the underlying economy. It is also partly about sentiment, and senti­ment can swing dramati­cally."

The US economy had had a couple of tough quarters, and "we are in a tough quar­ter now". Rising energy prices, along with health and food costs, presented "an additional headwind" to growth.

There was, he said, no quick fix.

"Energy, first and fore­most, is [about] the supply and demand situation," he said. "In addition, there have been a number of financial investors that have decided to increase their investment allocations to commodities in general."

The former investment banker said there was "obvi­ously speculation in all of these things". But he believed that investors were also making "longer-term asset allocations" to com­modities.

He was focused on getting tax rebates into the hands of consumers as quickly as pos­sible to support spending.

Mr Paulson acknowledged that housing remained "the biggest risk to the econ­omy". The administration was going to "great lengths in working with the private sector to avoid preventable foreclosures". But the US government did not want to impede a "necessary correc­tion" in house prices.

The Treasury was working with lenders and loan servic-ers to deal with the complex­ity created by what he called the "Gordian knot of securitisation" - the fact that loans are co-owned by many different investors, making it difficult to reach agree­ment on restructuring them.

Mr Paulson said the indus­try had "made a lot of progress". But it was now "a matter of executing better and executing quicker, and working on additional issues such as principal write-downs and second mort­gages."

Mr Paulson said the Treas­ury would unveil a series of new initiatives in the com­ing weeks. None would be "major breakthroughs", but each would be "productive".

This week the White House threatened to veto a bill that proposed allowing the Federal Housing Admin­istration to provide $300bn to $400bn (€194bn-€258bn, £152bn-£203bn) in credit guarantees to refinance restructured mortgages.

Asked about this, Mr Paul­son said: "We have got the same objectives. We are already doing a lot adminis­tratively at the FHA." But he added: "We believe that this bill is too prescriptive and goes too far in terms of shifting risk from lenders to taxpayers."

However, he would "look carefully" at a separate pro­posal from Sheila Bair, the banking regulator, to pro­vide low-interest govern­ment loans to help borrow­ers partly pay down un-affordable mortgages.

ROMA - «La notizia che ha fatto sensazione la settimana scorsa, è stata: l'America è cresciuta dello 0,6% nel primo trimestre. Quindi non sarebbe in recessione. Ma non è vero per niente. L'America è in re­cessione, eccome». Nouriel Roubi­ni, formazione intemazionale dal­la Bocconi ad Harvard, già consulente della Casa Bianca e dell' Fmi e oggi economista della New York University, nel ristretto campo dei guru di certificato prestigio detiene la palma del più pessimista. Ha lanciato l'allarme sul suo blog, e l'ab­biamo raggiunto al telefono per far­ci spiegare perché vede nero quan­do i mercati hanno ritrovato un mi­racoloso slancio proprio dopo la confortante notizia dall'America. «Basta andare a guardare i dettagli, che sono tutti molto negativi e avrete la conferma che la recessione è in corso».

Quali sono questi dettagli?

«Il più importante risiede nel metodo di calcolo, che è fuorvian­te. E' stata sommta nel calcolare il Pil una gran quantità di beni sì pro­dotti ma non venduti. Invece, so­prattutto per un'economia come quella americana che si basa sui consumi domestici, si doveva ve­dere quanti beni fossero stati dav­vero venduti nel primo trimestre. Sì a formato un colossale inventario pari ad uno 0,8% di crescita: se si fosse calcolato correttamente l'e­conomia si sarebbe contratta dello 0,2%, altro che crescere dello 0,6».

Ma questo pasticcio succede ognì volta che si va a calcolare il Pil?

«Ogni tanto ci sono degli scosta­menti, anche vistosi, e così si tra­sforma una situazione che nella realtà è negativa in una che sembra positiva. Non dico che i numeri  vengano artefatti volontariamen te, però ci sono delle imperfezioni nella rilevazione trimestre per tri­mestre. Una società privata, la Macro Advisers, calcola mensilmente il Pii, e questo è negativo da feb­braio»

E ora cosa succederà?

«Non sì può andare avanti all'in­finito con questo giochetto. Nel se­condo trimestre ci sarà una caduta del Pil, stavolta ufficiale. E sarà un crollo pesante perché non solo i consumi restano fermi, ma i capan­noni sono pieni di beni invenduti, dalle auto agli elettrodomestici, e le aziende dovranno ridurre la produzione e licenziare dipendenti. Pagheremo il conto tutto insieme».    

Proprio sull'occupazione ve­nerdì è arrivato un dato positivo: 20 mila posti persi in aprile anziché gli 81 mila previsti...

«Non ci prendiamo in giro. Sono quattro mesi che l'occupazione scende. Cosa c'è di positivo? Lo stato di salute del economia non è dato solo dal Pil, ci sono tanti altri dati a partire appunto dall'occupa­zione per finire con gli indici sui beni durevoli, sugli investimenti delle imprese,  sulle  componenti  dei consumi. Di tutti questi dati, i due terzi sono pesantemente negativi, a partire ovviamente dalla situazio­ne del mercato immobiliare».

Che poi sarebbe dove tutto que­sto è partito. Nessun segno di recu­pero?

«La situazione continua a peg­giorare. Qui almeno, pur con qual­che ulteriore imperfezione metolodogica che porta a rilevare una realtà meno drammatica, i numeri del governo sono negativi. Gli inve­stimenti nel settore, dalla costru­zione di nuove case alla vendita di abitazioni, sono in caduta libera, con un -26,7% nel primo trimestre che si aggiunge al - 20 del quarto trimestre 2007 (quando il Pil invece cresceva solidamente) e al -15 del secondo».

Bisogna dire che il presidente Bush nel commentare i dati della settimana scorsa ha parlato di «si­tuazione molto dura».

«Sì certo, l'amministrazione ri­conosce che gli elementi di debo­lezza sono tanti. Non potrebbe fare diversamente. A questo punto il di­battito in questo paese è su quale sarà la "lettera" della recessione».

Lettera?

E lei è per l'ipotesi peggiore?

«No, però mentre la maggiorparte dei pareri è per una recessione breve, io credo che durerà non meno di 18 mesi a partire dall' iniziodel 2008. Diciamo che sono della scuo­la della 'U' ma con molte incertezze sulla profondità della crisi perché i fattori di debolezza sono tanti. Sarà una delle recessioni più violente da diversi decenni a questa parte, molto peggio di quelle del 1990-91 e del 2001».

Il suo "vicino dì università" Jo­seph Stiglitz della Columbìa pro­pone che sì crei un'authority sui mutui e venga rafforzata la Fed. A proposito di Fed, fa bene ad abbas­sare così tanto i tassi?

«Sui tassi laFed non sta sbagliando: non si deve mortificare l'econo­mia per paura di fare un favore alla finanza. Ora che ha abbassato i tas­si fino al 2% prenderà un momento di respiro, ma poi riprenderà ad ab­bassarli nella seconda metà del­l'anno per la pesantezza della re­cessione».

Lasting euro success requires bolder proposals

By Jean Pisani-Ferry and André Sapir

As the euro nears its 10th anniversary, the celebration season started this week with the publication of a report by the European Commission that com­bines hype, critical assessment and cautious recommendations. We share much of its assessment, but we think that its prescriptions should go further.

Here is why:

The Commission is right to claim that the euro is a resounding success: the transition to the new currency was astonishingly smooth and, for all the talks about break-up, the reality is one of a steady increase in membership of the eurozone. Citizens have admittedly been disgruntled by price rises in energy, food and some services, but these have clearly more to do with glo­bal conditions and the lack of competi­tion in sheltered sectors than with the introduction of the new currency.

The Commission is also right to admit that the euro has fallen short of some initial expectations. It points out that potential European economicgrowth remains too low and that incen­tives for growth-enhancing reforms have been too weak. It implicitly recog­nises that the initial obsession with fiscal rectitude, although understanda­ble given the poor budgetary record of several member countries, has deflected policymakers' attention from the need to correct big macroeconomic divergences. Spain and Ireland, where unsustainable property booms have recently come to an abrupt end, are strong reminders that it may not be enough to put one's own fiscal house in order to achieve stability.

The Commission also acknowledges (though in an oblique way) that enlarg­ing the euro area to include new European Union members is a signifi­cant challenge. Finally, it bluntly admits that, in spite of having created the world's second most important currency, the euro area still lacks a clear international strategy. These are frank and useful assessments; the Commission should be praised for making them.

However, the recommendations do not measure up to the challenges iden­tified. To start with, they do not touch upon the monetary strategy of the European Central Bank. Institutional constraints are real. But, although there is much to commend in the per­formance of the ECB, any serious dis­cussion of the euro area record should include monetary policy.

The Commission rightly calls for a more focused co-ordination and surveil­lance of national policies but is not candid enough on what has worked and what has not in the current sys­tem. Ten years into the euro it is time

to be lucid: detailed procedures that aim at fine-tuning national policies cannot and do not work. Governments are accountable to their citizens. They find it useful to share information, benchmark their performances and consult each other on priorities, but they will not abide by detailed guide­lines drafted in Brussels. As we and our colleagues pointed out in a recent report, Coming of Age (Bruegel, 2008), the euro area needs fewer routine procedures and more ability to act in times of real crises or to prevent them. The role of the euro area system is to create the right incentives and to allow individual governments to pursue their own goals -within that framework, while providing the means for joint action when the stability or the func­tioning of the common good - mone­tary union - is in danger. The wisdom of this philosophy - with less frequent attempts to coordinate and a greater emphasis on watching the big picture -will only grow stronger as the euro area enlarges further and becomes even more diverse.

The Commission is embarrassed on enlargement. This is unfortunate because the overly legalistic approach to joining the euro area that has pre­vailed until now risks creating a last­ing divide inside the EU.

A country that is catching up - with fast growth in output and prices - may, for a while, need to retain a flexible exchange rate regime, which provides a better way to control inflation than joining a monetary union where the interest rate is set in relation to the situation of a large group of mature countries with slow growth and low inflation. But when the country that is catching up decides that it wants to join the euro, its ability to do so should be assessed on the basis of criteria that take into account its specificity. At the moment the EU acts incoherently: it insists that new member countries have a duty to join, but that their read­iness should he assessed on the basis of criteria designed for mature economies at a time when the euro did not exist. The Commission goes some way towards recognising the challenge but fails to draw the consequences.

Finally, the Commission is too shy on the external dimension. The frag­mented representation does not allow the eiiro area to play its full global role. This contributes to making the US and emerging countries unhappy about Europe's continuing over-representa­tion in institutions, such as the Inter­national Monetary Fund, and compli­cates global governance, which the EU proclaims it wants to strengthen. Yet procrastination prevails because no euro area country is in a hurry to relin­quish its international standing. The euro area now needs a roadmap. If there is one player that should dare to propose it, it is the Commission.