New Economist

Opening up the IMF?

The long-standing deal between the great powers was that the US Government would appoint the head of the World Bank, and the Europeans would get the head of the IMF. Hopes that this cosy arrangement might unravel with the departure of World Bank President Paul Wolfowitz came to naught, with the recent uncontested appointment of former US Trade Representative, Robert B. Zoellick.

However the surprise resignation of IMF Managing Director Rodrigo Rato has re-opened the issue. While the UK government backed Zoellick, they seem to have doubts about another European heading up the IMF, according to this evening's Financial Times story: UK calls to open up IMF chief selection

Britain added its voice to calls from developing countries against the French-led drive to position Dominique Strauss-Kahn as the sole candidate to succeed Rodrigo Rato as managing director of the International Monetary Fund.

Alistair Darling, the UK chancellor of the exchequer, will on Tuesday urge European colleagues to apply the brakes to the selection of a new IMF chief and not to be bounced into making a quick decision.

“The UK believes there should be an open and transparent process for selecting the next managing director of the IMF,” a British Treasury spokesman said, adding that the successful candidate could well be a non-European. “The UK will be pressing the fund’s board to set out publicly criteria and a timetable for the appointment process.”

At a board meeting on Monday afternoon in Washington, directors from the Middle East and Latin America were set to lead calls for an open global competition for the job. The post has traditionally been held by a European under an unwritten convention by which the US in turn chooses one of its citizens to be president of the World Bank. Some were clearly infuriated by what they saw as a move by the Europeans to pre-empt discussion about the succession by rallying around a single candidate.

Strauss-Kahn is by no means an unworthy candidate. But an open competition would give other suitable candidates a chance, especially those from developing countries. They might just know a thing or two about development that a senior European politician doesn't.

It's official: EU shoe wars

Just over a month ago I asked: EU to start a shoe war with China and Vietnam? The answer came today, and was in the affirmative. A two year tariff will commence this Saturday, replacing temporary duties already imposed. Lucia Kubosova at the EU Observer has the story: EU imposes tariffs on Chinese shoes after bitter debate

BRUSSELS - The EU's shoe-producing countries have won a battle for a two-year anti-dumping regime against imports of Asian footwear starting from Saturday (7 October), with European retailers and consumer groups strongly criticising the move.

After weeks of debate on the controversial issue, the European Commission got the go-ahead from member states on Wednesday to impose tariffs of 16.5 percent on leather-shoe imports from China and 10 percent on Vietnamese imports.

Under EU rules, the commission's plan could not go ahead if it was opposed by a majority of the 25 member states. But while this was the case during previous rounds of trade talks, Wednesday's vote saw 12 countries rejecting the protectionist move with nine voting in favour and four abstentions -which count as approvals in this case.

Sweden and the UK featured among the strongest advocates of the free trade approach, while countries with a strong shoemaking sector like Italy, Spain and France favoured safeguard measures.

The final compromise is based on a proposal tabled by Paris to reduce the period during which the tariffs should be applied from the usual five years to just two years. "In the final stages of the negotiations, the length of this period was the main and only issue we debated as a possible compromise element," said one diplomat.

A Finnish EU presidency official told EUobserver that the agreed deal - to be formally rubber stamped by ministers tomorrow, just one day before the deadline of 6 October for the EU to adopt the anti-dumping scheme - is viewed as the right "balance between the interests of EU producers and consumers."

EU trade commissioner Peter Mandelson also defended the move, insisting that it was in line with the member states' prevailing views on the issue which is "certainly not a protectionist line of thinking."

"If we're going to stand up for global free trade we must also keep in place some safeguards against unfair trade" as practised by some trade players outside the EU, suggested the commissioner.

Hmmm. 'Unfair trade' like, say, agricultural subsidies Peter? The piece continues:

The challenges of globalisation for Europe

Jonathan Dingel at Trade Diversion draws our attention to an excellent set of papers published by the Economic Council of Finland on Challenges of globalisation for Europe and Finland. The papers were launched on 20 September at an event opened by Prime Minister Matti Vanhanen. The press release emphasises that the effects of globalisation are more diverse than estimated - and European competitiveness policy requires a great deal of work:

Globalisation creates much more subtle pressures for the worldwide re-allocation of production and employment than estimated before. Earlier, it was thought that competition from the developing low-wage countries only affected certain branches of industry and mainly low-paid workforce in the developed countries.

Recent research shows that competition may affect work regardless of education level. Moreover, changes in the competition may be very abrupt and hence hard to anticipate. This highlights the importance of economic adaptability and, in particular, the ability of labour markets and education systems to adjust. Provided that we have the ability to adjust and change, globalisation will be a good thing for Europe.

These are some of the conclusions made by Professor Richard Baldwin in his article, which is one of several papers constituting the first part of the study on the challenges of globalisation for Europe and Finland organised by the Secretariat of the Economic Council of Finland, published on Wednesday 20 September.

In addition to Baldwin’s article, the first part of the study includes eleven articles written by acknowledged European experts. Two of these articles are comments that complement Baldwin’s analysis. The remaining nine articles discuss the European competitiveness and structural policies, internal market issues, innovation policies in their broad sense, the European economic policy system and governance of globalisation.

Here are links to all of the research papers contributing to the globalisation project. Also worth reading is the executive summary (PDF):

• Globalisation: the great unbundling(s) by Richard Baldwin  (GIIS, Geneva) 

• Challenges created by the new EU Member States and third countries by Mika Widgrén, (Turku School of Economics) 

• Globalisation challenges for Europe: labour market perspectives  by Torben Andersen (University of Aarhus) 

• Competitiveness and structural policies: where does the EU stand?  by Jean-Philippe Cotis and Jørgen Elmeskov (OECD) 

• Dynamic effects of European services liberalisation: more to be gained  by Henk Kox and Arjan Lejour (CPB, Hague) 

• The liberalisation of network industries in the European Union: where do we come from and where do we go? by Damien Géradin (University of Tilburg) 

• Effective innovation policies for Europe – the missing demand-side by Luke Georghiou (University of Manchester) 

• Education and economic growth: a quick review of the evidence and some policy guidelines by Angel de la Fuente (Universitat Autonòma de Barcelona) 

• Intellectual property rights in Europe–where do we stand and where should we go? by Dietmar Harhoff (Ludwig-Maximilians-University, Munich) 

• Risk capital for growing world-class companies: challenges for European policy  by Markku Maula (Helsinki University of Technology) and Gordon Murray (University of Exeter) 

• The assignment principle and EU economic policy by Sixten Korkman (ETLA) 

• The EU and the governance of globalisation by Alan Ahearne, Jean Pisani-Ferry, André Sapir and Nicolas Véron (Bruegel, Brussels) 

What are the policy implications of this reserach? The press statement continues:

Eastern Europe faces reform fatigue

Reform fatigue has hit the east, warn Stefan Wagstyl and Christopher Condon in today's Financial Times:

Once, the sight of tens of thousands of east Europeans demonstrating against their governments would spark waves of hope and joy in the west. Not any more. Riots in Hungary – the first since the overthrow of communism – are prompting doubt and concern about the region’s future. Demonstrators stormed the state television station in scenes reminiscent of the developing world, not of the well-heeled centre of Budapest.

...In Poland, voters could soon go to the polls for the second time in a year following the collapse of an unruly coalition. The Czech Republic has had no effective government since a June general election produced a hung parliament. In Slovakia, Robert Fico, the populist prime minister, holds power with the backing of Vladimir Meciar, an authoritarian predecessor, and Jan Slota, leader of the radical Slovak Nationalist party. Ferenc Gyurcsany, the Hungarian prime minister, says: “There is real rivalry in these countries between nationalist radicals and progressives.”

The dangers should not be exaggerated. Central Europe is not in crisis. Economic growth is 2–3 percentage points faster than in western Europe. Hostility to reforms may be no worse than in Germany, France or Italy. More than 15 years of economic progress, EU and Nato membership and foreign investment act as stabilising forces.

But prolonged instability would cause real harm. Mainstream parties are courting popularity by postponing painful reforms needed to complete post-Communist modernisation. While living standards are nearly 40 per cent higher than in 1989, they remain 45 per cent below west European levels. Dissatisfaction is opening doors to populists with sometimes limited allegiance to EU principles such as fiscal rectitude, market-based economic policies and respect for minority rights.

Trouble in central Europe could also undermine efforts to revive support for the EU’s further enlargement. While the European Commission on Tuesday gave conditional approval for Romania and Bulgaria to join next year, there is considerable uncertainty about future applicants, notably Turkey.

The origins of the turmoil lie in reform fatigue. Some 17 years after communism fell, central Europeans have had enough of restructuring. The benefits of change have been unevenly spread, leaving the low-paid, the unemployed and pensioners feeling abandoned and abused by corruption.

These sentiments were kept in check before EU accession, as few politicians wanted to risk losing membership through political or fiscal indiscipline. But since joining the EU in May 2004, central European politicians no longer feel the need to be on best behaviour.

In addition, with the need to maintain consensus gone, politicians are free to resume old quarrels, including disputes between ex-Communists and former anti-Communists that have resurfaced in Hungary and Poland and ethnic rows in Slovakia. Alek­sander Smolar of the Stefan Batory Foundation, a Warsaw think-tank, says: “I think we are seeing a delayed reaction to the whole very costly and very painful process of European integration.”

Bulgaria and Romania to join EU in 2007

After much deliberation and considerable controversy, the European Commission today announced that Bulgaria and Romania would join the Union from next January. This will bring the total number of members states to 27. The Commission's press statement says:

Today the Commission adopted its final monitoring report on the preparedness of Bulgaria and Romania for EU membership. Based on the solid progress achieved, the Commission considers that both countries will be in a position to take on the rights and obligations of EU membership on 1 January 2007. To address the limited number of areas where further work will be necessary, the Commission proposes a package of rigorous accompanying measures.

...Commenting the Commission’s decision President José Manuel Barroso stated: “I congratulate the people and the leaders of Bulgaria and Romania for this historic achievement. ...This enlargement has consolidated peace and brought more prosperity in Europe. This is the right decision for Bulgaria and for Romania and this is the right decision for Europe.”

In fact, since May, the two countries have successfully addressed about half of the identified open areas. Based on the current momentum, it is reasonable to expect that the majority of the remaining issues will be resolved during the months to come.

...Subject to the outstanding ratification processes in 4 EU Member States, on 1 January 2007, Bulgaria’s and Romania’s accession will bring 30 million people into the EU, thus completing the EU’s historic fifth round of enlargement and creating a Union of almost half a billion citizens.

With 'enlargement fatigue' setting in, that's likely to be it for now. Croatia, Macedonia and Turkey will have to wait some time before they get the chance to join. Meanwhile, according to press reports today, Britain is to restrict new EU migrants:

Bulgarians and Romanians are unlikely to be granted open access to jobs in the UK, the government said today, hours before formal approval of the two states' accession to the EU was due to be announced.

The immigration minister, Liam Byrne, said although a larger EU was good for the British economy, there was still a question mark over whether the new members would enjoy an open-door policy similar to that adopted after the last expansion.

Some kind of restrictions on work permits seems to be the government's thinking - though how this will work in practice has not yet been made clear. On Bulgaria and Romania, George Parker at the Financial Times reports today that:

Sweden 1, 2, 3, 4

Some more commmentary on Sweden worth noting:

1. A pleased Johan Norberg explains how radical is the Alliance?

Almost all foreign observers - and some Swedish - ask me how radical Sweden´s new government will be. It depends on your comparison. If you compare it to my ideals they are obviously far from it. Don´t expect a liberal revolution. But if you compare it to other governments, my guess is that this government will lead Europe in reform.

It´s true that the moderates were...well...more moderate this time around. But on the other hand, the three other parties are more radical than they have been before, and will push in a more radical direction, for example centern wants more labour market reform and more open borders, folkpartiet wants lower taxes on high incomes and more free trade, and the christian democrats attacks the taxes on petrol and properties...

2. Guardian columnist Polly Toynbee thinks the defeat of Sweden's Social Democrats underlines how a bored electorate could easily turn to Cameron's Tories: Why Stockholm syndrome should terrify New Labour

The fall of the Social Democrats in Sweden reverberates around Europe, but sends particular shudders through those close friends of Goran Persson in Labour ranks. As strangers occupy Stockholm's governing corridors, here is a chilly memento mori for Labour.

...Here is Labour's fear. How can a good government lose power when the country is flourishing? With a rising growth rate of 5.6%, low interest rates, thriving manufacturing and exports Britain would die for, how did it happen? True, unemployment is a problem - but hardly worse than in much of the EU, while Sweden's welfare system is the envy of the world. Abroad, Persson wasn't hampered by two unpopular wars with no end in sight. So why?

...Sweden shows "the economy, stupid" is no longer enough to win. That is alarming to Gordon Brown whose claim to the top job is Britain's unaccustomed economic strength. The warning from Sweden is that when things feel so good, voters feel they can take a punt on a fresh new party. "Time for change" is always a potential winner: a natural democratic urge tugs voters towards throwing the bastards out after a while.

...Persson forgot his wise maxim: in opposition the left must behave like a government, and in government it must act like an insurgent opposition.

3. Andrew Brown, also of the Guardian, disagrees - he doesn't think the British government can learn from Swedish politics; there are too few similarities between them: Knowing left from right in Sweden

There are some big changes under way in Swedish society that we ought to know about, but they have nothing much to do with the outcome of this election. Big changes very seldom do follow elections there, because the governing classes in Sweden tend towards agreement about the direction of policy, even if they disagree about who should carry it out.

I spent six weeks travelling around Sweden this summer, talking to small, boring, unimportant people whose perspective on the election was rather different to Polly Toynbee's. If there has been a swing to the right, it is a deep slow one, which really reflects assumptions about human nature. No one cares about equality or solidarity nearly as much as they did in the seventies. The Social Democrats are now seen as at least as upper class and potentially corrupt as their opponents.

4. Mats Engström, editorial writer at the Swedish newspaper Aftonbladet, posts at Open Democracy on why We still love the Swedish model

So have Swedish voters indeed rejected their famous model? My answer is no, on two grounds. First, there is the tightness of the vote: the "red-green" side (the Social Democrats and its allies) received 46.2% of the vote against the four-party Alliance for Sweden's 48.1%. The close result will be reflected in the balance of power in the new Riksdag (parliament), where the left bloc will have 171 seats to the right's 178.

Sweden's major overhaul

Some readers have rebuked me for my comment in yesterday's post, Sweden moves to the right, that "the much vaunted 'Swedish model' is set for a major overhaul". Likewise, Andrew Leonard over at How the World Works, wrote in his post Nordic welfare woes:

The New Economist promptly declared that the "Swedish Model" is set for a "major overhaul," and the righty blogosphere is hooting with glee at the "socialist" defeat. But the New York Times' prediction that a "fine tuning" is in the offing seems more likely. Observers have been quick to point out that four years ago the Moderates campaigned on a platform of big tax cuts and were trounced. Their proposals for reform have since become considerably more, er, moderate.

...Salon contributor and U.K. journalist Andrew Brown is working on a book about "Sweden and the Future." Taking time off from writing a column for the Guardian on the election to exchange a quick e-mail, he noted that this shouldn't be interpreted "as a big swing to the right. The thing about Swedish politics is that there is always a pretty tight consensus among the ruling class about what ought to be done; just sometimes a disagreement about who ought to do it."

Well, let's clarify what I meant. I don't expect Sweden's uber-generous welfare state to be radically reformed (though the incoming government did pledge during the campaign to cut unemployment benefit). But let's not pretend that nothing has changed. This morning's Financial Times front page has a story by David Ibison in Stockholm: New Swedish government vows to cut role of state in economy

Sweden's new government plans to reduce the state's role in the economy substantially, and will sell off government stakes in some of the country's best known companies, including SAS, the airline, and Nordea, the Nordic region's largest bank. In a shift in economic direction, it has pledged to spin off holdings in unlisted state-controlled firms and to open large parts of the economy to private sector competition.

...The Alliance's plans clear the way for a period of significant corporate restructuring and rapid changes to the private and service sectors. The new government's policy was expected to involve a three-stage period of privatisation and deregulation over the next three to five years, bankers said.

The first stage involves the sale of stakes in listed companies, then the sale of unlisted state-owned groups and finally the possible sale of public service companies, such as utilities. It will see the sale of 20 per cent of Nordea; 45 per cent of Telia-Sonera, the telecommunications group; 7 per cent of OMX, the stock market operator; and 20 per cent of SAS.

Fredrik Reinfeldt, prime minister elect, has not committed himself to a timetable for the sales but said they would go ahead when the best price was obtained. They have a combined market value of about SKr150bn (£11bn).

Carl Bildt, a former prime minister and leader of Moderaterna, the main party in the Alliance, told the Financial Times: "We need to do with the service sector what we did with the private sector in the 1990s." He was referring to the deregulation of the banking, telecoms, retail and automotive sectors in the 1990s. That created some of the country's most powerful companies, such as Ericsson, the communications company, and Volvo, the world's second largest truck maker.

That may not seem like a 'major overhaul' to US readers, but if any European readers believe a rolling five year campaign of privatisation and deregulation won't shake up the Swedish model they're engaging in wishful thinking.

Sweden moves to the right

The much vaunted 'Swedish model' is set for a major overhaul, with a four part centre-right alliance defating the Social Democrats in Sunday's election. Reuters's report Center-right alliance wins power in Sweden

A Center-right alliance led by Moderate Party leader Fredrik Reinfeldt won power in Sweden in an election on Sunday, ending 12 years of Social Democrat rule by vowing to lower taxes and trim the welfare state.

Reinfeldt, who will be the next prime minister, declared victory in a tight election. Social Democrat Prime Minister Goran Persson, one of Europe's longest-serving leaders, conceded defeat after 10 years in office and will quit as party chief.

According to almost complete results from Sweden's Election Commission, the four-party opposition bloc had won 48.0 percent of votes to 46.2 percent for Persson and his allies.

Taking the stage with his arms raised, a jubilant Reinfeldt told supporters: "We campaigned as the New Moderates, we won as the New Moderates and together with our alliance partners we will rule Sweden as the New Moderates."

The result was a victory for the alliance's pledges to stimulate job growth by fine-tuning, but not dismantling, the welfare system. Persson, whose party has ruled Sweden for six of the last seven decades, had vowed to continue government largesse and keep one of the world's heaviest tax burdens.

Despite Sweden's strong economic performance under the Social Democrats, opinion polls had shown many favored change in the Scandinavian country of just over 9 million people due to voter fatigue with Persson and a perceived lack of new ideas.

...The Moderate Party was crushed at the last election in 2002 but 41-year-old Reinfeldt enhanced his party's appeal by shifting it toward the center and paring down earlier tax and benefit cut promises.

He leads an alliance with the Folk Liberals, Christian Democrats and Center Party that says years of excessive benefits and high taxes have eroded Swedes' will to work. Reinfeldt also said the real unemployment rate was about 20 percent, almost four times the official level. Reinfeldt says changes are necessary now to preserve the welfare system for the future, a theme of reform across Europe.

Press reports are describing it as a shock - but to those who have been talking to Swedish friends, it was no surprise. The Moderate Party have engaged in a similar rebadging of their image to the overhaul the British Tories have undergone under David Cameron. They are no longer scare Swedes in the way they once did. Bloomberg's election report by Jonas Bergman adds:

Reinfeldt toned down the Moderate Party's previous tax- cutting message, which brought it only 15 percent support at the last election in 2002, and emphasized that the alliance would not cut spending on education and health care.         

The alliance has promised income and corporate tax cuts of about 60 billion kronor ($8.2 billion), partly financed by reductions in unemployment and sickness benefits, arguing that Sweden needs to stimulate hiring and wean people off welfare.         

"They have done almost everything right,'' said Anders Sannerstedt, a professor of political science at Lund University. "They changed their profile, Reinfeldt has transformed the Moderates and they have acted almost as one.

A US-Europe free trade zone?

It may not come to anything, but certainly worth watching as a possible move by the developed world against China and other developing exporters. The German government is pushing for a US-Europe free trade zone. Bertrand Benoit in Berlin reports Germany eyes free-trade zone to rival China

Spurred by concern about China’s growing economic might, Germany is considering a plan for a free-trade zone between Europe and the US.

A senior aide to Angela Merkel said the chancellor was “interested” in promoting the idea as long as such a zone did not create “a fortress” but rather “a tool” to encourage free trade globally, “which she is persuaded is a condition of Germany’s future prosperity”.

Separately, on Friday, the US, Canada and the European Union complained to the World Trade Organisation about China’s tariffs on car parts, raising the prospect of Beijing facing its first WTO dispute.

The three said they had lost patience with Beijing’s refusal to further open the $19bn-a-year market.

News that the free trade zone, last pursued by Sir Leon Brittan, when European trade commissioner in 1998, is being debated in the German chancellery testifies to the rapprochement between Washington and Berlin since Ms Merkel’s election last November.

This convergence of views was underlined this week when Wen Jiabao, Chinese premier, was politely chided by Ms Merkel for China’s poor human rights record and recent restrictions on foreign news agencies, during an official visit to Berlin.

As German perceptions of China have grown more American, Washington’s approach has shifted too. Speaking before his first trip to Beijing, Hank Paulson, US Treasury secretary, this week outlined a more balanced policy mixing traditional US criticism with praise for China’s reforms.

Ms Merkel’s aide said it was “far too early” to tell whether the project of a transatlantic free-trade zone would be part of Germany’s priorities when it assumes the six-month presidency of the European Union and chairs the G8 group of leading industrial nations from January.

Reflections on America

Stein Ringen reviews Claus Offe's new book in the latest Times Literary Supplement: The American seen. The book, Reflections on America: Tocqueville, Weber and Adorno in the United States, is published by Polity Press. These remarks caught my eye:

Tocqueville’s, Weber’s and Adorno’s reflections abound with questions that have lost none of their relevance. What is the destiny of freedom and is it better protected in the American or the European social model? Are we excessive in our demand for equality, and if so what follows? The state is both necessary for and dangerous to freedom; how do we find the balance? Is culture, now a huge sector of economic growth, an industry of manipulation? Is there a social architecture between the individual and the state or was Margaret Thatcher right that there is no such thing as society?

If anything, the European–American comparison seems to me to have become more relevant. Europe has put behind it the transition to democracy that Tocqueville correctly saw would be difficult, and is now an equal partner with America in the great drama of liberty. Europe has not been “Americanized” except superficially, and is competing with America with a distinct social model.