New Economist

Western Europe opens its (internal) borders

Two years after enlargement, 7 out of 15 "old" European Union member states have now opened up to workers from central and eastern Europe, writes Lucia Kubosova at the EU Observer: Western Europe remains wary of new member state workers:

Two years after becoming citizens of the EU, workers from central and eastern Europe will see a further four 'old' member states lift their labour barriers – in line with basic EU rules.

Greece, Spain, Finland and Portugal have all agreed to remove worker restrictions before the 30 April deadline. These countries join the UK, Ireland and Sweden – the only member states of the 'old' 15 which never introduced temporary measures against workers from the new member states.

The remaining west European governments will either keep their labour markets closed or open them gradually. "It is a real success, as a few months ago nobody would have expected a half of these countries to be without any restrictions and most of the others choosing some way to weaken them," commented social policy commissioner Vladimir Spidla.

Germany and Austria however are keeping full barriers in place, with Berlin and Vienna indicating they will make use of the whole transitional period – until 2011 – to keep the restrictions.

France informed Brussels it would "gradually" drop the barriers on a sector-by-sector basis and in line with agreements between the government, employers and trade unions.

Denmark is also planning to relax its existing restrictions and phase them out completely in the next three years, with the national authorities promising to "take steps to help enterprises recruit foreign workers to sectors that experience a shortage of labour."

A similar cherry-picking method will be used by Luxembourg and Belgium, which reported they would make the work permit procedure more flexible in certain sectors or occupations.

Italy increased a quota for foreign workers from 85,000 to 170,000 with statistics showing that previous quotas were not filled in the past.

The Netherlands postponed a final decision on the issue until the end of this year. The government has suggested opening up the country's labour market but parliament still has to make a decision.

The European Commission has urged all "old" member states to lift their national restrictions, arguing that the May 2004 enlargement has not resulted in an overwhelming influx of new workers or increased unemployment among home citizens.

Only in Ireland and Austria do nationals from new EU member states represent more than one percent of the working age population, hitting 3.8 percent and 1.4 percent in the two countries respectively.

Europe's Gazprom problem

I don't often write about energy matters, but it seems that Europe has a looming Gazprom problem. The largest natural gas extractor in the world, and third largest oil company, Gazprom appears keen to dominate European energy markets.

It is a huge company, overtaking Microsoft to become the world's third largest company by market value. But this is no ordinary goliath - the Russian government has a majority on the board of directors. Gazprom has already flexed its muscles by cutting off gas to the Ukraine, and warning Belarus it will triple gas prices by year-end. Now it has turned its attention to the European Union.

A feature article by Richard Orange in The Business, on the recent Russian Economic Forum in London is a warning of things to come: Don't stand in the way.

The Russian bear was growling and Moscow was demonstrating its growing economic influence on the West. Alexander Medvedev, gas giant Gazprom’s deputy chief executive, even made it on to the BBC’s main evening news signifying just how far Russian companies have come in establishing their global profile.

President Vladimir Putin’s seizure of control over Russia’s oil and gas sector is now complete. Russia is flexing its muscles to recover its former superpower’s swagger on the world stage.

The forum’s week came after a threat from Alexei Miller, chief executive of Gazprom: if Europe didn’t allow it the access it wants to European gas pipeline and supply companies, Gazprom might divert its European energy supplies to the US and the Far East. On the BBC, Medvedev put it even more clearly: “There are two concepts available – a weak Russia or a strong Russia. There are still people who believe that weak Russia is good for the world. We completely disagree with this. A strong Gazprom is good for the world.”

Cliff Kupchan at Eurasia Group, a consultancy that studies the politics of energy told The Business: “In the 20 years I’ve been doing this, I’ve never seen Gazprom exert this extent of bullying or political pressure. I could describe the Moscow mindset right now as ‘Petro-steroid’. They think this is their ticket back to the world stage … and they may be right.”

Latest on the Doha debacle

Doha? Don't hold your breath. With 149 conflicting agendas, the WTO trade talks are failing to recast the rules of the global marketplace, reports Heather Stewart from Geneva: Poorest farmers get no harvest from WTO. Here's a small excerpt:

Pascal Lamy, the WTO's director-general, had been pushing hard for negotiators to sketch the outlines of a deal ('modalities' in Geneva-speak) by today, so that trade ministers could come together and discuss the details. But ..he was forced to accede to their demands and admit that the deadline would be missed.

While some were insisting that a few more weeks of hard graft in the Swiss city could roll the talks to their next stage, some observers have already started to question whether the round is about to 'run into the sand' (an especially popular metaphor), and even whether the future of the WTO itself is at stake.

George W Bush will have to reapply to Congress for his right to negotiate trade deals next summer and many analysts believe he is unlikely to get it. Without that authority, any deal would almost certainly be chucked out - so unless the details can be pinned down before then, the whole trade round is in jeopardy.

Europe and America's unwillingness to dismantle their lavish farm subsidies is often seen as the crux of the fraught negotiations, but the game at the WTO involves 149 players, arrayed in a dizzying constellation of overlapping groups. They are all hoping to protect their various interests and prevent signing away the livelihoods of their citizens, as many developing countries felt they had after the Uruguay round of trade talks which ended in 1994.

UPDATE: Tuesday's IHT has a short piece with various encouraging noises: WTO negotiators work to salvage a deal by July:

"We believe that there is a way for us to get to yes and to come up with a successful conclusion to the round," Robert Portman said after a meeting with his nominated successor, Susan Schwab, and the WTO director general, Pascal Lamy. Lamy said, "We've been working hard on precise topics, numbers and texts, so I can get a sense of where the red lines are."

Did Germany's Hartz reforms work?

Gerhard Schroeder's implementation of the Hartz report recommendations for labour market reforms were highly controversial. Was the pain worth it? A recent study by Lena Jacobi and Jochen Kluve from the RWI suggests that it might. Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany found that, so far at least, most of the reforms have had positive effects:

Having faced high unemployment rates for more than a decade, the German government implemented a comprehensive set of labour market reforms during the period 2003-2005. This paper describes the economic and institutional context of the German labour market before and after these so-called Hartz reforms. Focussing on active policy measures, we delineate the rationale for reform and its main principles. As results of programme evaluation studies post-reform have become available just now, we give a first assessment of the effectiveness of key elements of German ALMP before and after the Hartz reforms.

The evidence indicates that the re-organisation of public employment services was mainly successful, with the exception of the outsourcing of services. Re-designing training programmes seems to have improved their effectiveness, while job creation schemes continue to be detrimental for participants' employment prospects. Wage subsidies and start-up subsidies show significantly positive effects. On balance, therefore, the reform seems to be moving the German labour market in the right direction.

The UK current account deficit and all that

Chris Giles in today's Financial Times alerts us to a new paper by Steven Nickell, member of the Bank of England MPC: The UK Current Account Deficit and All That (PDF). Nickell notes that the annual current account deficit is now around 2½% of GDP, with a trade deficit around 3.9% of GDP, "a significant portion of which is offset by a substantial positive net income position" close to 2%. Is this sustainable?

We may summarise this discussion of sustainability as follows. We have now reached a position where the stocks of UK assets and liabilities are enormous, at four times GDP, and relative to these stocks, the gap between them is tiny. Furthermore, the asset side is overweight in equity type investment and underweight in debt type investment relative to the liabilities side.

If the historical pattern of returns on these two different types of investments continues, then it is probable that the overall net asset position will not worsen dramatically even if the current account deficit remains at existing levels. Furthermore, it is also probable that the net income position will continue to be significantly positive.

...So long as average returns on equity type assets continue to exceed average returns on debt type assets, the current position is probably sustainable.

So what are the risks? Nickell lists four:

Risks include first, a continuing and rapid increase in the trade deficit which might eventually undermine the favourable adjusted net asset position. This would probably take a long time. Second, a significant fall in the long-term returns on equity relative to returns on debt. Third, UK assets held by foreign residents become more weighted towards equity type investments, perhaps by a massive purchase of UK companies by foreign concerns. Finally, a large and permanent real appreciation of sterling which would significantly reduce UK assets relative to UK liabilities. At present, this seems unlikely.

He does not see these risk as likely, suggesting quite a benign assessment.

George Akerlof on macroeconomics

A relatively new feature on the World Bank website is their BSPAN video webcasts. One that's worth clicking on features UC Berkeley professor George Akerlof presented his work on “The Missing Motivation in Macroeconomics.”

Akerlof spoke on how inclusion of certain norms changes our view of macroeconomics, by negating the concept that decision makers are utility maximizers. He put forth a view of motivation that involves individual dignity and behavioral expectations, the use of which broadens the application of the utility function for each individual.

The implication of these motivations is that it is not only outcomes that lead to certain behavior, but also expectations about what should occur. These missing motivations give us a better understanding of why people make economic decisions, and may recommend a more naturalistic and observational approach for understanding decision-making processes.

Akerlof answered questions regarding neutralities in economic equations, influencing social norms, and country assistance strategies.

Hat tip: Harry Clarke at Kalimna blog.

Migrants boost UK growth, keep rates low

Several articles in the Sunday papers cite a new report by the Ernst & Young ITEM Club, which claims that migrant workers help keep inflation and interest rates low and are set to add £4bn to GDP next year. Heather Stewart in The Observer writes that migrants boost UK's growth:

Eastern Europe migrants have brought powerful benefits to Britain's economy since 10 new countries joined the European Union in 2004, according to research by the Ernst & Young Item Club.Item, which uses the Treasury's forecasting model, says interest rates are half a percentage point lower than they would have been without the influx of low-cost workers from the new members of the EU club. It calculates that economic growth will be boosted by 0.2 per cent this year, and 0.4 per cent in 2007.

'Economic elixir': East Europeans are breathing new life into Britain, by Jason Nissé of The Independent, put it like this:

It estimates that this fiscal year, immigrants will add £2bn to GDP, and that this figure will rise to £4bn next year and £6bn in 2008-09. This is feeding through to a 0.1 per cent reduction in the rate of increase of average earnings, and to the maintaining of the base rate at a steady 4.5 per cent.

E&Y reckons that without the same level of immigration, interest rates would be 0.5 per cent higher and there would be pressure to increase them further over the next couple of years. These figures have been arrived at by taking official statistics and applying the Treasury model to them.

The report is published on Monday. See also Migrants ‘have kept interest rates down’, by David Smith, Sunday Times, and Polish plumbers 'boost UK economy', by Robert Watts, Sunday Telegraph.

C'mon, get happy!

Happiness is all the rage in Britain at the moment. Inspired by a positive psychology course from Harvard University, pupils at an English boarding school are to be taught how to achieve happiness, the headmaster Anthony Seldon has said. Seldon is a leading historian and political commentator. he was quoted by the Daily Telegraph last Monday as saying:

"We are introducing classes on happiness. We have been focusing too much on academics and missing something far more important. To me, the most important job of any school is to turn out young men and women who are happy and secure - more important than the latest bulletin from the Department for Education about whatever."

..."Celebrity, money and possessions are too often the touchstones for teenagers, and yet these are not where happiness lies," he said. "Our children need to know that as societies become richer, they don't become happier - a fact regularly shown by social science research."

In Wednesday's Independent, Seldon explained Why I'm teaching happiness:

As a teacher, I have seen far too many tortured and unhappy pupils who have achieved four or five A grades at A-level. If they can achieve these grades while leading balanced lives, taking part in a wide variety of activities which will develop different facets of their character, and if they blossom as human beings, then all is well and good.

But as any teacher will know, this isn't always the case with high achievers. Neither is it with high achievers in life. These driven people see their lives flash by in fast living and fast cars, and most fail to realise they are missing the point of life. Is it more important to be highly successful, or to be a respected colleague and a valued friend, and a loving parent whose children grow up in a secure environment in which they know they are valued and treasured? I have had to learn the hard way, the answers are obvious.

Meanwhile BBC2 has announced a six-part television series, The Happiness Formula, beginning on Wednesday 3 May at 7pm. Mark Easton, producer of the series, has written an article on The survival of the happiest, in the latest New Statesman. Instead of simply making us richer, politicians should aim to make Britain happier, say the "new utilitarians":

... A quiet revolution is under way in Whitehall, and already its subtle influence is being felt in local and national affairs. Happy politics has arrived.

It was a damp November afternoon in 2002 when, over tea and biscuits at the Treasury, strategists plotted the first steps in a pamphlet entitled Life Satisfaction: the state of knowledge and implications for government. It was circulated the following month and clearly stamped: "This is not a statement of government policy." Its motive was grander. "This is a revolution in how we think about everything," argued the economist Professor Richard Layard, one of those gathered in Room 2/18 that day.

The apparently innocuous conclusion of the 2002 tract was that "there is a case for state intervention to boost life satisfaction". Who could argue with that? But it implied a redefinition of political purpose. Instead of simply making us richer, politicians should aim to make Britain happier. "Government has got to rethink its priorities," insisted Layard. "I am hoping that each department will review its objectives and see how closely they are in line with the idea of promoting the happiness of the people."

Over the past three years, new utilitarians have tried to nudge the government towards a happy agenda. They are muted radicals, preferring to whisper in ministers' ears that encouraging "a more leisured work-life balance, and a more positive appraisal of public spending and progressive taxation" has a feel-good pay-off.

Among the most influential of the happy evangelists is Tony Blair's senior policy adviser David Halpern. "I know it's difficult for us to believe," he told me recently, "but - at least at a certain level - it looks like taxes are likely to increase the well-being of the population." The "certain level" at which taxes make us happy is, he calculates, about where taxes are now. Indeed, much of the new scientific literature is being translated into policies with a distinctly New Labour look.

Happiness is dangerous territory, however. The science cuts across ideology. Progressive politicians enthusiastically embrace findings which suggest that the redistribution of wealth is good for our well-being; that state intervention in public services raises joy in the national heart; that policies encouraging a work-life balance are good for the general jollity. But traditionalists prefer the scientific papers showing that marriage (rather than cohabitation) has a hugely positive effect on happiness; and that God and the Boy Scouts add to the sum of human contentment while entertainment TV and multiculturalism tend to reduce it. That last finding has, understandably, caused some head-scratching among those on the centre left who see happiness as the justification for a new form of social politics.

Bubble trouble - or not?

Is the US current account deficit sustainable? Are global stock markets heading for another crash? These are two issues discussed by Patrick L. Smith in the weekend edition of the International Herald Tribune piece, Bubble, schmubble - foil or trouble? Smith manages to touch on the dark matter debate, 'sweat equity', 'plutonomy', and the 'brave new world' views. Here's the introduction:

There seem to be only two possible explanations for the performance of global stock markets: Either they are on an ever more reckless binge that has no logical grounding, or they are operating on the basis of a new set of assumptions about conditions that used to be considered dangerous.

If the former argument proves true, as those of bearish sentiment predict, the markets are headed for a crash similar to that of 2000, when the dot-com bubble burst. Such is the underlying fragility, the bears say, that almost any piece of bad news - another spasm of violence in the Middle East, instability in a big oil-producing country, an outbreak of avian flu, a big corporate bankruptcy - could be the tipping point.

If the latter perspective is correct, the world has entered an era that will require new ways of measuring and interpreting economic data. In a globalized economy, those in this camp assert, what once moved markets no longer does, and we do not yet have all the tools needed to gauge what moves them now.

"Are massive U.S. imbalances sustainable? This is the hottest debate today in international finance," said David O'Rear, chief economist at the Hong Kong General Chamber of Commerce and a longtime voice on the bearish side of the question.

Until recently the lines drawn in this debate were clear. Those arguing that economic fundamentals will again prove relevant tended to be economists, like O'Rear, who were not directly involved in the markets. Those casting fundamentals aside tended to be investors or traders - anyone in search of a "story" - an explanation for why share indexes keep heading upward.

Now things are not so simple. A number of economists - at universities, in leading investment houses, in market research firms, at policy institutes, and even at the U.S. Federal Reserve - are adding intellectual weight to the view in the markets.

They are beginning to argue that long-accepted methods of measuring economic trends - rising global imbalances, falling savings rates, record liquidity flows and the like - must be rethought and possibly replaced to reflect new economic conditions.

Chief among these trends is the continuing increase in the U.S. current account deficit. How much does this mean, these economists ask, given that U.S. assets are more globalized than ever and production abroad often goes uncounted in the bottom line at home?

It means plenty, the traditionalists assert. Even as investment and production are globalized, an obstinate deficit in the accounts of the No. 1 economy remains a potential source of instability. "Six years ago we said profits don't matter," said O'Rear, referring to the prevailing market view at the height of the dot-com bubble. "Now we're invited to say deficits don't."

...All of this, traditional economists say, makes the markets look frighteningly overbought. "This is a bubble, plain and simple," said Andy Xie, chief Asia/Pacific economist at Morgan Stanley. "Every bubble has a theory about itself and every bubble bursts. There's never been an exception."

On the other side of the debate lie two core arguments: Either the globalized economy has made traditional economic measures inaccurate, or if they are still valid, they are no longer relevant.

Either way, those favoring a new look at accepted economic thinking arrive at the same conclusion: There is no cause for concern over those quaint things called structural problems, they say.

In praise of John Stuart Mill

British philosopher John Stuart Mill left no systematic legacy -  there is no "Millism." But 200 years after his birth, his liberalism is still relevant. And Britain's greatest ever public intellectual was often surprisingly contrarian. Richard Reeves writes about Mill's legacy in the June issue of Prospect magazine.

For those who want more on Mill, papers from the John Stuart Mill Bicentennial Conference held in London earlier this month are now available online.