Transcript the old regime in retrospect

American
power,
housing
finance, and
the small
states
Reykjavik
May 2009
Two issues
1. Power: How did American economic
power operate 1991-2005 ( +/- )?
2. Plenty: What did this mean for the
small states? (and why housing?)
The core problem
• The link between supply and demand (wages
and productivity) breaks down in the 1980s
– In the small states (and Germany) corporatist
bargaining suppress demand
– In Japan reliance on bonuses and the financial
crash suppress demand
• How to have growth?
A (non-) solution
• The US becomes the source of demand
– Motive: Reversing relative decline
– Opportunity: the great disinflation
Inflation 1950-2009 (via T-bond rate)
The great
disinflation
Cumulating
inflation
1981
A (non-) solution
• The US becomes the source of demand
– Motive: Reversing relative decline
– Opportunity: the great disinflation
– Method (planned):
• Fiscal balance, BEM strategy, global financial
libralization
– Method (unplanned):
• global financial arbitrage
• Housing market keynesianism
The 1990-2000s US growth cycle
↑ Tax revenue
Disinflation
Housing
Finance
System
Asia Recycles
US Dollars as New
Mortgage Debt
US trade deficits
More Consumption
Faster US
Economic Growth
Share of Four Basic Instruments in Total Outward
Investment by Region (%, 2006)
100%
80%
60%
40%
32.2%
LOANS
30.2%
9.7%
DEBT
34.8%
37.5%
EQUITIES
17.6%
20%
23.4%
FDI
14.6%
0%
US to World
World Into US
Housing finance
• High rates of homeownership +
• High levels of mortgage debt to GDP +
• Easy refinance of mortgage debt and home
equity withdrawal +
• Securitization of mortgages
= “US style housing market”
** Very pro-cyclic **
Power and Housing Finance
1. Global disinflation & financial arbitrage (dollar
recycling)
2. …activated US housing finance market
keynesianism to
3. …create above-OECD average growth of
employment and GDP domestically
4. …and faster accumulation of real assets abroad,
in a (temporarily) virtuous cycle
= differential growth for the US
Differential growth (adjusted)
Population adjusted
% change, 1991-2005
USA
FRG
Japan
33.5
OECD
Ave.
28.1
GDP (real, local currency)
17.3
13.3
# of Employed
1.8
3.0
-2.9
-2.7
# of Unemployed
-24.8
6.8
91.5
109.7
GFCF
79.9
48.2
2.7
-13.5
GFCF Metals/Mach
159.8 100.1
19.0
22.8
Housing Systems and Growth
Questions?
Membership
of the European Union
What to expect from Brussels
Graham Avery
University of Iceland, Reykjavik
14 May2009
Summary
• Why apply for membership of EU?
• What are the conditions for membership?
• If Iceland applies, what response can it expect
from the EU?
• The path to EU membership
– 20 stages from application to accession
• How membership negotiations work
– principles, procedure, actors
• What questions for negotiation?
– 35 chapters of the acquis
– top problems
• Accession:
– Who else is in the queue for membership?
– Would Iceland join alone or in a group?
– When?
Enlargement of EU : conditions
Amsterdam Treaty 1997
• Article 49: ‘Any European state which respects
the principles set out in Article 6 (1) may apply
to become a member of the Union’
• Article 6 (1) : ‘The Union is founded on the
principles of liberty, democracy, respect for
human rights and fundamental freedoms, and
the rule of law’
Copenhagen European Council 1993
• Membership requires that a candidate has
– democracy, rule of law, human rights, protection of
minorities (political criterion)
– functioning market economy (economic)
– capacity to apply obligations of membership
(administrative)
• Union’s capacity to absorb new members, while
maintaining momentum of European integration,
is an important consideration in general interest
of Union and candidate countries (absorption
capacity)
Why apply for membership?
• An applicant country must decide whether and
why to apply for EU membership
– you need to evaluate carefully and publicly
• advantages & disadvantages, alternative options
• all aspects of membership - political & economic
• EU has never encouraged countries to apply
– discourages premature or unwanted bids
– needs to reflect itself on
• implications for EU - political & economic
• linkage with other issues
What response to Iceland from EU?
• Positive factors
– Iceland satisfies political & economic criteria
• stable democracy, developed economy
– Small country - 320,000 population
• cf. Malta 410,000, Luxembourg 480,000
– Member of European Economic Area
• already applies many EU rules & Schengen
– Member of NATO
• strategic location: North Atlantic, Arctic
• Less positive factors
• difficult economic & financial situation of Iceland
• uncertainty whether it accepts EU rules in important
area of policy (fisheries)
• differences of view between parties in coalition
• EU also has problems
• difficult economic & financial situation
• uncertain institutional progress (Lisbon Treaty)
• ‘enlargement fatigue’
• Conclusion: if Iceland applies, it can expect a
cautiously positive reaction from EU
The path to membership
• Three phases :
•
•
•
Application
Negotiations
Ratification
• Within the phases :
• Twenty successive stages
Application
• The country submits an application for membership to
the EU’s Council of Ministers
• The Council asks the Commission for its Opinion on the
application
• The Commission gathers information in order to
prepare its Opinion
• It delivers its Opinion to the Council
• The Council confirms the country’s status as a
candidate
• It decides to open accession negotiations with the
country
Negotiations
• Negotiations commence in an intergovernmental
conference between the EU member states and the
applicant country
• The Commission makes a ‘screening’ of the chapters of
the acquis with the applicant, and submits a report to
the Council
• The EU decides on the opening of individual chapters
in the negotiations
Chapters of negotiations
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Free movement of goods
Freedom of movement for workers
Right of establishment & freedom to provide services
Free movement of capital
Public procurement
Company law
Intellectual property law
Competition policy
Financial services
Information society and media
Agriculture
Food safety, veterinary &phytosanitary policy
Fisheries
Transport policy
Energy
Taxation
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
Economic and monetary policy
Statistics
Social policy and employment
Enterprise and industrial policy
Trans-European Networks
Regional policy & coordination of structural instruments
Judiciary and fundamental rights
Justice, freedom and security
Science and research
Education and culture
Environment
Consumer and health protection
Customs union
External relations
Foreign, security, defence policy
Financial control
Financial & budgetary provisions
Institutions
Other issues
Principles of negotiations
• Extracts from ‘negotiating framework’ presented by EU
at opening session of negotiations with Croatia in 2005
• Accession implies the acceptance of the rights &
obligations attached to the Union system & its
institutional framework, known as the acquis. Croatia has
to apply this as it stands at the time of accession.
• Croatia’s acceptance of the rights and obligations arising
from the acquis may necessitate specific adaptations to
the acquis and may, exceptionally, give rise to transitional
measures which must be defined during the accession
negotiations
• The Union may agree to requests from Croatia for
transitional measures provided they are limited in
time and scope, and accompanied by a plan with
clearly defined stages for application of the acquis
• Where necessary, specific adaptations to the acquis
will be agreed on the basis of the principles, criteria
and parameters inherent in that acquis, and taking
into consideration the specificities of Croatia
• Croatia will participate in economic and monetary
union from accession as a Member State with a
derogation and shall adopt the euro as its national
currency following a Council decision to this effect on
the basis of an evaluation of its fulfillment of the
necessary conditions
Top questions
• Iceland will be expected to state at the opening of
negotiations if it has any major problem in
accepting EU policies (for example, fisheries)
• Traditionally the last crucial phase of negotiations
will focus on
– financial & budgetary provisions
• linked to agriculture & cohesion policy
– institutions (adaptation of votes, seats, etc.)
• principle of ‘degressive proportionality’
– problems raised by applicant country that were not
already solved in negotiations
Actors
• Sessions of conference at level of Ministers
– often formal (pre-scripted) until final phase
• Sessions at level of Deputies (Ambassadors)
– present arguments, register agreements
• EU positions presented by Presidency, but
Commission has key role
– interlocutor (not negotiator) with applicant
– informal explorer of solutions
– proposer of ‘common positions’ on EU side
Negotiations (continued)
• When a chapter is opened, the applicant
presents its position on that chapter
• The Commission proposes, and the Council
adopts, a ‘common position’ to be presented
to the applicant
• When agreement is reached on a chapter, it
can be closed
• When all chapters are closed, the EU and the
applicant agree a draft Treaty of Accession
Ratification
• The Treaty of Accession is submitted to the Council and
to the European Parliament
• The Commission issues its Opinion on the Treaty
• The European Parliament gives its assent
• The Council approves the Treaty
• The member states and the applicant country sign it
• They each ratify it according to national procedures,
which may require referendums
• The Treaty comes into force: the applicant becomes a
member state
Who else is in the queue?
• In membership negotiations since 2005:
– Turkey (applied in 1987) Croatia (2003)
• Applied but not yet in negotiations:
– FYR Macedonia (2007) Montenegro (2008)
Albania (2009)
• Potential candidates:
– Bosnia-Herzegovina, Serbia, Kosovo
• Others may be interested to join
Alone or in a group?
• Principle of ‘differentiation’
– Each country’s progress on the path to
membership depends on its fulfilment of the
criteria, with no linkage between applicants
• But there have normally been ‘waves’
– Only Greece joined singly in 1981
– 2 in 1986, 3 in 1995, 10 in 2004, 2 in 2007
When?
• For Poland & Hungary
– accession negotiations 4 years 10 months
– from application to accession: 10 yr 1 m
• For Austria, Sweden, Finland
– negotiations took 1 yr 1 m
– from application to accession:
• Finland 2 yr 9 m, Sweden 3 yr 6 m, Austria 5 yr 5 m
• Date of accession will emerge only towards
the end of negotiations
Membership
of the European Union
What to expect from Brussels
Graham Avery
University of Iceland, Reykjavik
14 May2009
IS THE EU A STRATEGIC SHELTER?
- especially for small states like
Iceland??
Alyson Bailes IIA 14 May 09
WHY SMALL STATES NEED OUTSIDE
PROTECTION
• Obvious - against traditional military enemies
• Modern security thinking - against nonmilitary threats of a natural (disease) or
deliberate (terrorism) kind that exceed one
nation’s resources and need wider
cooperation
• Less obvious - against themselves!
ONE VIEW OF BASIC SMALL-STATE
OPTIONS
•
•
Passive: do not provoke, stay out of trouble
(eg neutrality)
Active: make friends and seek protection
and pay the ‘price’ for it:
– Further options: state(s) or organizations or both
•
Either approach can be combined with
‘altruistic’ outward actions like aid and
peacekeeping, that also promote a peaceful
international order
WHY COULD THE EU BE
CONSIDERED A ‘SHELTER’?
• Not military defence (but NB now likely to coexist
better with NATO)
• EU military action (so far) only external and
‘altruistic’
• But some strategic role visavis Russia, etc
• Aspects of ‘homeland security’: Schengen +related
policies, smuggling/crime, anti-terror and anti-WMD
strategies, etc
• ‘Softer’ or ‘human’ security aspects eg disease, food,
energy security
• Economic and financial role (Euro and…)
HOW DOES THE EU PROTECT STATES
AGAINST THEMSELVES?
• Basic internal peace function, making war
unthinkable (also good for non-enemy
countries who won’t be dragged in) - NB now
extended to Central Europe and soon (?) to
Balkans
• Political standards (democracy, international
cooperation)
• Governance standards (coherence,
coordination, compliance/answerability,
elements of political/democratic control)
WHY WOULD THIS CONCERN
ICELAND?
• For you to say, but a logical answer would
need to cover all the following:
- traditional strategic exposure after US
withdrawal (depends also on NATO trends,
plus new Arctic variable)
- economic and financial exposure
- other non-military security issues
- reform/renewal of governance
- AND WHAT IS THE ‘PRICE’?
The Collapse of the Celtic Tiger: Probing
the Weaknesses of Ireland’s
Development Model
‘The Status of Small States in the International Community’
University of Iceland: May 14th 2009
Peadar Kirby
University of Limerick
Introduction
• Ireland and Iceland being grouped:
o What is the difference?: one letter and six months
o Not Boston vs. Berlin any longer but Rome vs. Reykjavik
• This talk:
o
o
o
o
Describes the Irish collapse
Analyses its origins in the ‘Irish model’
Draws comparisons with Iceland
Comments on the role of the euro
The Irish collapse
• According to ESRI: the worst recession of any
developed country since 1930s:
o GDP to fall 14% between 2008-2010
o Unemployment to rise to 17% in 2010
o Government deficit 12% of GDP in 2009
o Price deflation of 4.6% in 2009
o Exports to fall 5% and imports 9.3% in 2009
The ‘Irish model’ I
• Based on:
o Winning high levels of US FDI
o Following dot.com bubble burst in 2001, growth
came to depend on domestic demand:
 Housing: price increase of 450% between 1995 and
2008 compared to consumer price increases of around
150%
 Private consumption: Funded by high levels of personal
debt
The ‘Irish model’ II
• Policy mechanisms:
o Low-tax regime:
 Corporation tax and capital gains tax
 Reduction in income taxes
 No property tax
o EU Structural Funds used to upgrade
infrastructure in early 1990s
o Investment in education
The ‘Irish model’ III
• Policy making:
o ‘Social partnership’:
 Concertative policy making among social partners
 Trade-off of lowering income taxes for wage
moderation
 Created culture of consensus about the model: little
debate or criticism
 Seen by state as crucial to economic success
The model in collapse I
• A domestic crisis:
o Economists estimate that 8% of the 12% government
deficit has domestic causes:
 Collapse of property sector has brought banks down with it:
 IMF estimates stabilising banking sector will cost Ireland 13.9% GDP
 Extent of Irish banks’ toxic assets still not known
 Reliance on asset taxes led to collapse in Exchequer returns:
 Income collapsed to €34bn for spending of €60bn
The model in collapse II
• Crisis in social partnership:
o When unions failed to agree to a pensions levy,
government imposed it
 Collapse of 20-year social partnership arrangements
widely expected
• Collapse has exposed very weak culture of
national innovation:
o Growth ‘artificial’, based on ‘soft options’
The model in collapse III
• Responses to crisis:
o Insufficient income for stimulus package:
 Reliance on stabilisation:
 Raise taxes, cut spending
 Fears of reduction in credit ratings
 International borrowing costing more
 Pressure to return to Maastricht guidelines by 2013: bring deficit
down to 3% of GDP
o Huge loss of political authority:
 Those who caused the crisis still run the state and the banking
sector
 A political crisis looms on top of economic crisis
Ireland and Iceland
• Similarities:
o Crisis originated in risk taking banking sector that was
poorly regulated:
 Krugman: ‘Erin go Broke’: ‘like Iceland, Ireland jumped with both
feet into the brave new world of unsupervised global markets’
 Extent of crisis similar
• Differences:
o Ireland cannot devalue:
 Faces five years of very painful cuts in costs and living standards
 Can an alternative emerge within its political system?
Euro: help or hindrance?
• Much focus on role of euro on helping Ireland
stay afloat:
o But euro also a cause of Ireland’s crisis:
 Low-interest rates fuelled housing boom
 Appreciating euro hit Irish exports to US, UK
o Can Ireland recover within the euro?
 What will be the social costs of restoring
competitiveness?
 Will recovery be possible?
Economic policy in Iceland
Where do we go from here?
Katrín Ólafsdóttir, Assistant Professor
Reykjavik University
May 14, 2009
Where are we?
•
•
•
•
•
•
Deep recession
Negative economic growth
High unemployment rates
High interest rates
High central government deficit
Competitive real exchange rate
GDP growth, %
Unemployment rate
%
10
9
8
7
6
5
4
3
2
1
0
J
F
M
A
1995
M
2000
J
J
2005
A
2008
S
2009
O
N
D
Monetary policy
• Inflation targeting is formally still in place
• Proved ineffective
• Part of the current problem
• If we keep the current currency:
– The Icelandic króna will not be traded again
– Free flow of finances not an option
• If we adopt another currency
– Can become part of the global financial system
• Which currency?
– Euro the only real option (after joining the EU)
Central Bank’s Currency Basket
Based on 2007 trade
Fiscal policy
• Currently running a large deficit
• The Letter of Intent to the IMF assumes that
the deficit will be reduced in stages during the
next four years on revenue side, expenditure
side or both
• Regardless of what the Letter of Intent says,
we need to eliminate the deficit
• Why?
General government revenue and expenditure
Percent of GDP
54
52
50
48
46
44
42
40
38
36
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Revenue
Expenditure
Government debt, % of GDP
180
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Options
– Monetary policy:
• Króna with restrictions on trading currency
• Euro
– Fiscal policy
• No change in policy
• Follow IMF plan and reduce deficit
– Furthermore,
• Choosing the euro will help with reducing the
deficit.