Thursday, 12 December 2013

Despite economic woes, Europe appears on the mend, EU diplomat says

Eurozone optimism has dissolved, despite signs of strength in the UK and Germany. After a three-year wait, the UK’s economic recovery appears to have finally taken hold. This is no ordinary recovery and it has required the coalition government to take the bold step of releasing household credit from the strictures of tight bank regulation to help it along. Aggregate inflation and growth - once the weaker economies of southern Europe are included - paint a picture that worries politicians and bankers. They fear renewed pressure could again test political and monetary union in Europe, setting the stage for additional bailouts and extended austerity. The countries of northern Europe also appear to demonstrate high levels of entrepreneurial activity, so the region is likely to maintain an economic advantage over their southern and eastern neighbours in Europe. Despite tremendous opportunities for growth, however, a number of obstacles block the Continent from reaching its full potential. 
Michalis Rokas, Chargé d'Affaires for the EU
Delegation to New Zealand (left) with NZ Foreign
Minister Murray McCully (right)

All this bodes well for the EU-NZ trading relationship as Michalis Rokas, Chargé d'Affaires for the European Union Delegation to New Zealand, points out in an interview with INTEL and Analysis.

How does the ongoing EU crisis affect New Zealand trade with the union? What measures are being implemented by Brussels and Wellington, if any, to insulate the trade partnership with NZ and ensure the worst of the effects of the crisis do not hurt our exports?

Let's first address the successes of the EU in response to the crisis. Firstly, the Eurozone did not break up – both the single market and in preserving the common currency were upheld. The EU will also expand when Lithuania will become the 18th member state to complete the transition to Economic and Monetary Union by adopting the single currency in 2014.

Throughout the crisis, the EU maintained its strong trading relationship with New Zealand as New Zealand's third largest trading partner after China and Australia. The EU's trade in goods and commercial services with New Zealand has increased every year since 2010, the peak of the economic crisis. Trade between us is now valued at NZ$12 billion, representing 26% of New Zealand's total trade. The EU is also New Zealand's third-largest source of foreign investment, with stocks worth nearly NZ$9 billion at the end of 2012.

The key lesson from the crisis was the need to strengthen the mechanisms and policies of Economic and Monetary Union in the EU. Important strengthening measures are being formulated and will only bolster trade with all partners, including the already strong EU-New Zealand trading relationship.

As things improve in Europe, the opportunities for New Zealand exporters will continue to increase. With the EU's increasing banking sector stability, the timing is also good for New Zealand firms to look at investments, mergers, or acquisitions in Europe.

The regional picture is mixed. Germany continues to be the engine of economic growth in the eurozone, even though it continues a hurtful trade surplus. France is flat lining. In Spain and Greece, austerity measures have reduced expenditures and led to economic stagnation. Policy prescriptions might be quite different if each country still had its own currency; but since they all use the euro, the ECB is in a quandary. What is the right path forward for the EU at this point in the crisis? How can we expect the EU to evolve in the next 5 years?

Economic growth has returned to the euro area: Germany and the UK posted better-than-expected positive growth figures, mirrored in other northern European countries; while Ireland has managed to secure an imminent exit from the international bailout programme.

The way forward for Europe is more Europe in well-designed and targeted areas. The EU has made the political commitment to strengthen Economic and Monetary Union. The logistics of that decision involve three interrelated elements in order to sustain economic recovery and ensure against a repeat of the crisis.

Firstly, the crisis highlighted that, in the long term, monetary union cannot work without steps towards a fiscal union. A fiscal union, as proposed by the European Commission, would ensure sound public finances across Europe and solidarity mechanisms for extenuating crisis situations. These include indicators that can alert policymakers to incipient threats which may require timely responses.

Secondly, while banks in Europe have been operating increasingly across borders, oversight of their activities has remained a national responsibility. A shared currency and close financial integration make the euro area particularly vulnerable to banking crises spilling over from one EU country to another. As part of a wider banking union, the European Commission recently proposed a single supervisory mechanism which would give the ECB new powers to monitor the performance of the 6,000 banks in the eurozone. If a bank breaches – or is at risk of breaching – capital requirements, the ECB would be able to ask the bank to take corrective action. Meanwhile, national supervisors would continue to carry out day-to-day checks. A single rulebook on capital requirements, standardised deposit protection schemes, and new recovery and resolution provisions – all proposed earlier in the year – would complete the ‘banking union’.

The third component lies in deeper and wider political integration. The sovereign debt crisis exposed the unsustainable economic policies pursued by some euro area countries. An integrated economic policy framework is necessary to guide the policies of member states towards strong and sustainable economic growth and employment. In the absence of exchange rate adjustments, a well-functioning EMU requires efficient labour and product markets. This is essential to fight large scale unemployment, and to facilitate price and cost adjustments.

The crisis exposed weaknesses in the original policy framework of the EMU. However, rather than dwell on these deficiencies, the EU is seizing the opportunity to both strengthen policies and mechanisms to bring the wider EU closer. We are confident that the euro will return to its position of strength and stability in the global economy and that the EU will extend its role as a pre-eminent global actor.

In the United States and the UK, a program of quantitative easing and low interest rates delivered a turnaround. In Japan, a combination of currency depreciation, stimulus and asset purchases has produced a current GDP growth rate of 2.7 percent. Some economists have articulated concerns that the ECB is not doing enough and should consider following the example of United States and Japan. Should the ECB purchase bonds directly and introduce a greater scheme of quantitative easing and lower interest rates? How would this help the ECB?

The European economy is the largest economy in the world. Unlike the United States or Japan, the EU is a unique political entity - although each of the 28 member states are independent countries, each has agreed to pool sovereignty in some areas in order to gain strength and the efficiencies of size. In this way, some decision-making powers, such as trade, are delegated to the shared institutions so matters of joint interest are resolved at the European level, while other decisions reside with the governments of the member states.

The question of the European Central Bank purchasing bonds directly and introducing a greater scheme of quantitative easing and lower interest rates, for example, tests the delegation of powers within the EU’s structure. The ECB has independent control over monetary policy and its overriding objective is to maintain price stability within the euro area. At the same time, however, the ECB is forbidden from creating money to finance public debts directly in order to maintain its political independence. In this way, member states must decide whether it will be the Commission or the finance ministers who determine whether schemes such as quantitative easing should be used to stimulate the economies worst affected by the crisis.

The EU is a vitally important market for New Zealand, second only to Australia in importance as a market for New Zealand goods. Two-way trade is approximately NZ$12 billion annually. What can the New Zealand government do to retain these numbers? What can they do to boost trade? How are NZ businesses encouraged to set down roots in the EU?

The EU is a predictable market for New Zealand. Our commitment to a rules-based trading system means, for example, that we do not arbitrarily shut our borders; we engage in a thorough process with our exporting partner to check the extent of the problem. For example, the EU did not shut its borders to New Zealand dairy products at any stage during the recent whey protein contamination scare. The European Commission was in early and close contact with the New Zealand regulator and was able to quickly determine that the scare posed no health risk to European consumers.

Trade remains very important but the wider political and economic relationship has broadened considerably in scope over the last years. Areas of cooperation and common concern include climate change, openness of world trade, security and development in the Asia Pacific regions, and promotion of human rights. In all these areas, the EU and New Zealand endeavour to help reinforce one another’s positions at international meetings.

Lots of gloomy news reaches us from the EU. At the same time NZ is bombarded with public relations material touting our blooming relationship with China. The general feeling is that New Zealand is an Asia Pacific country and our concerns should be with our immediate neighbours. Why does the EU still rate very highly on our trade numbers? How long will it be until trade with China and the ASEAN nations overwhelm trade with the EU? Will this even happen?

As the world's largest single market, Europe is home to half a billion people representing 7% of the world's population and producing 25% of global output. While the United Kingdom remains New Zealand's first export destination in the EU, other countries, such as Germany and the Netherlands, have become more important. In 2012, over 73.3% of EU imports from New Zealand were primary products for a total of NZ$3.3 million, and 24.4% manufactures (NZ$1.1 million). While 87.6% (NZ$6.4 million) of EU exports were manufactures and only 8.2% (NZ$690,000) primary product. Although the primary focus of New Zealand's trading relations may currently lie in the Asia Pacific region, the size of the European economy and the important historical links with New Zealand ensures that the EU will always remain an important trading partner for New Zealand.

New Zealand is also important in the Asia Pacific region, which is currently the fastest growing region in the world. In recognition of the economic importance of this region, the EU has stepped up involvement in east and southeast Asia, through political presence at meetings such as ASEM, in bilateral cooperation, with humanitarian aid, and in bilateral trade deals, including with Singapore, Japan, South Korea, and China. Strong relations with New Zealand inherently strengthen the EU's engagement with the Asia Pacific region.

Very quickly in the timeline of the crisis after 2008, the problem for the EU moved from a fiscal issue to a political problem. Many of the countries on the continent still harbour animosity for other European cultures. What needs to change politically in Europe to pull the eurozone out of this serious quagmire? How can the eurozone survive with so much pushing and pulling from different directions among the members?

The sovereign debt crisis exposed the unsustainable economic policies. Current trade imbalances between member states might also be harming economic recovery of the euro area.

However, the crisis has taught us that it is simply not enough to try to solve each country's situation in isolation. Rather, the crisis revealed our deep interdependence. Member states have had to pull together like never before and so the solution to full economic recovery will come from the Union as a whole working together. Accordingly, the EU has made the political commitment to strengthen the policies and mechanisms of Economic and Monetary Union within the EU.

The major divergences in the effects of the crisis and in the rate of economic recovery between member states highlights the pertinence of an integrated economic policy framework to guide the policies of member states towards strong and sustainable economic growth and employment. In the near term, it is essential to complete the Single Market as it provides a powerful tool to promote growth.

The solution to economic recovery is not through dwelling on the deficiencies in policy or divergences between member states, but rather through bringing the wider EU closer and strengthening the policies and mechanisms in the euro area.

Because unemployment will remain at seriously high levels in most EU member countries for the foreseeable future, the gap between the rulers and the ruled will not narrow anytime soon. The position of the ruling elites is weakening, but the anti-establishment groups which seek to replace them are not strong enough to take over. How long till a double digit unemployment rate last in many EU countries and is it a time-bomb waiting to explode in regards to trade?

We do not underestimate the social and political risks incurred by widespread high unemployment. It threatens growth and trade in the short term by weakening demand, as well as our relationships with our major trading partners. However, as the crisis of the last three years revealed the depth of our economic and financial interdependence, it also revealed our social dependence, rather than our independence.

Overcoming the existential threats to the euro was the first step towards recovery. Next year, economic growth is projected for all but one of our 28 countries. In 2014, consumer spending is expected to rebound by 1.5% in the EU and 1.3% in the euro area, as labour market conditions start improving more visibly and the recovery gains strength. As a result, the economic outlook is promising.

Yet employment remains weak and uneven and the social situation is precarious in a number of countries, with a rise in poverty, inequality and lack of access to basic healthcare. We cannot wait for economic growth to eventually lead to jobs and for these jobs to improve social conditions. Growth is a necessary condition for job creation, but it is not an end in itself. Our social objectives extend well beyond employment and the strength of our labour markets to include guaranteeing adequate social protection, combating social exclusion and ensuring a high level of education, training, and protection of human health.

Accordingly, it is essential that our continued economic recovery addresses not only economic and fiscal solutions, but also the social dimension of Economic and Monetary Union. After all, social cohesion is a feature that distinguishes European society from alternative models. Stability, fiscal consolidation and reforms are not an aim in themselves but instruments to create well-being and jobs. Our objective is in essence social: employment is the social dimension.

Which parts of Europe will struggle more with protests than others?

Before the introduction of the euro, the average unemployment rate in the EU was 10.7% for the years 1994-1998, with an economic growth rate of 2%. In 2008, despite artificial economic growth based on rapid expansion of private and public credit in many countries, unemployment stayed at around 9%.

Although unemployment figures have reached unacceptably high levels of 10.9% in the first half of 2013, these figures indicate that despite the crisis making action more urgent, we are facing longstanding structural problems. The labour market is a national competence, and therefore a national responsibility. Some countries have managed to reduce structural unemployment substantially, and others not at all. While unemployment fell by 3.6% in Latvia in the first half of the year, it rose by 4.3% in Cyprus and by 4.1% in Greece. This concerns us all both collectively and individually.

However, the EU has identified this problem and is undertaking measures to boost both economic growth and employment. The European Commission has recently published a report on the problems of the labour market in the EU: onerous taxation on low-income workers, low transition rates to more permanent forms of work and continued growth in youth unemployment and in undeclared work.

In response, the EU has launched a number of programmes, particularly ones designed to increase youth employment - programmes such as the Youth Employment Initiative, Entrepreneurship 2020 Action Plan, the PROGRESS Microfinance Facility. But more skills will not be enough on their own. The overall conditions also need to be right: this implies a well-financed economy, especially when it comes to small and medium-sized enterprises.

Good progress has also been made in relation to lifting the retirement age and making adjustments to minimum or public-sector wages. Employment will remain the cornerstone of the European Council's work. But, as most employment policies are determined at national level, the real challenges involved in implementing them rapidly are first and foremost a matter for the member states. It is a question of working together – a joint effort which also involves social partners at all levels. It is also a question of credibility and only concrete results will convince Europe's citizens and Europe's major trading partners.

New Zealand and 12 other countries are supposedly in the final throes of sorting out the details of the TPP. The EU and the United States are also moving down the path of their own free trade deal with TTIP. Together, these partnerships appear to give quite a bit of benefit to the United States. How do these kinds of deals affect bilateral trade partnerships with existing links, say between New Zealand and the EU? Will they succeed in the long term?

Together Europe and the United States are the backbone of the world economy. It is only logical to move towards bringing these two economies together through agreements such as the proposed TTIP. The benefits and opportunities for businesses and consumers not just of our economies, but also those of our trading partners, make such an agreement particularly attractive.

Although an agreement between the EU and the United States would create the largest free trade zone in the world, the EU will always remain focussed on preserving and strengthening existing trading relationships, including with New Zealand, through the multilateral trading system. The expansion of the TPP agreement would only increase New Zealand's presence in trading relations in this region.

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