New Economist

EU to start a shoe war with China and Vietnam?

I warned of this back in February (see From 'bra wars' to 'shoe wars') and now it seems increasingly likely: a 'shoe war' with China and Vietnam. Clearly, the European Commisison has learned nothing from last year's bra wars debacle. Helena Spongenberg of the EU Observer website reports Brussels pushes ahead on China shoe tariffs:

The European Commission has pushed for new measures against leather shoes from China and Vietnam despite member states' representatives having rejected two previous proposals this summer.

A proposal by trade commissioner Peter Mandelson to levy a 16.5 percent duty on 'leather upper' shoes entering the EU market from China and 10 percent duty on those from Vietnam was adopted by the commission on Wednesday (30 August).

The proposal has now been put forward to the bloc's 25 trade ministers who have one month to decide on the issue before temporary duties expire.

The commission said the plan was an effort to combine the different economic interests while also respecting the evidence from a 15-month long commission investigation showing that Chinese and Vietnamese shoes received unfair subsidies from their governments.

European footwear production has shrunk by 30 percent since 2001, alongside the rise in imports dumped on the EU market below the real cost of production, according to a commission statement.

"Our job is to tackle unfair competition where it exists. We have found this in these two cases and that is why we have taken the measures that we have proposed," commission spokesman Peter Power told journalists in Brussels. "It is now up to the member states to take their responsibility to decide," Mr Power said, adding that the "case is complex and highly sensitive."

...When member states next month meet to decide on the proposal, at least 13 of them must back the plan or abstain from voting for it to come into effect when the provisional duties end on 6 October.

...EU member states are divided between northern European countries, which at an early stage moved their shoe factories to Asia and are now importing them, and southern European countries that still have an active shoe industry.

The commission warned that member states rejecting Wednesday's proposal "could in theory be challenged in court to legally defend their position."

Temporary tariffs expire in October, and EU members now have a month to decide whether to back the new move.

Above all, Bulgaria needs time!

This blogs position on migration within the European Union is for open borders among all members states and to let people work and settle where they want. Although the numbers were larger than expected, and there have been some negatives, I believe the influx of Central and Eastern Europeans to Britain in the last two or three years has been a net benefit. Last year I welcomed the Polish plumber, and other posts have been similarly positive. Other members states have recognised the benefits too and are opening their borders to Eastern European workers: eight states so far, from an initial three.

But I recognise that there are potential downsides, and that the proposed accession of Bulgaria and Romania to the EU from January 2007 pose some thorny problems. No wonder some UK ministers are getting cold feet - and not just the Home Secretary. So in the interests of balance, I publish below a comment posted today on this weblog by Sam Took. I don't know who he/she is, but the post is worthy of a wider audience. Comments welcome.

WHY BULGARIA'S ACCESSION BRINGS SHAME ON US ALL

Recent comments about the accession of Eastern European states and the preoccupation with low paid jobs shows an astonishing naivety what Bulgaria is really about.

It is now widely recognised that what were seen as the last minute obstacles to Bulgaria's accession to the European Union are concerns about its ability to deal with crime and corruption. What politicians will not admit is that the problems could not possibly have been solved within the time allowed for accession . In many respects Bulgaria has to walk miles and yet it will be admitted to full membership after having taken, what amounts to only a first faltering step. I cringe when I hear politicians praising Bulgaria's efforts to put its house in order. Those of us who have lived and worked in Bulgaria know that there is a deep malaise here. The fact is that the Government in Sofia ( and its predecessor ) has lied continuously to Brussels, made promises and given undertakings which it has neither the wit nor the will to keep. Consider these things:-

1. Corruption is endemic. Prosecutions are very rare and convictions much rarer. There are only a couple of instances in which officials have received a prison sentence. In most cases even when caught redhanded, the perpetrators do not even lose their jobs. Many of the most serious culprits are post-holders and cannot therefore be dismissed. In recent times the Government has set up an information campaign inviting the public to inform on corrupt officials by channeling complaints through a confidential hotline. Under the legal system it appears impossible for any Bulgarian official to be convicted on the strength of such a tipoff. Bulgaria has a distinguished history of paying lip service to anti-corruption measures; they have attended every international conference, adopted every protocol and signed up to every initiative but the problem is as deeply-rooted as ever. The current 'anti-corruption campaign' will be as successful as its predecessors and appears to be just a PR stunt for the benefit of the European Commission.

2. Every bit of institutional foreign funding, including the pre-accession funding, which has ever reached Bulgaria has been plundered by corrupt politicians and officials. Sofia has promised that there will be "full transparency and accountability" of all future European funding. Such promises have been made in the past and have always been broken.

3. Organised crime in Bulgaria really is 'organised'.The Government in Sofia admits the existence of powerful overlords ( they were prepared to call it an oligarchy ) who have prospered since the fall of communism in what the Commission itself called "a climate of impunity ". They exercise a huge amount of influence over public figures and own large parts of the domestic economy. They are so deeply entrenched that they are de facto the Establishment and needless to say their position is unaffected by changes in the Administration. Bulgaria has a 100 percent record of failure in prosecuting organised crime and there is no possibility that this will change any time soon. Sofia will offer instead disingenuous apologies and say that it should not be judged on the outcome of any one particular case as one prosecution after another falls over, entirely predictably, like dominoes.

4. A real war on crime would need a free press and this it does not truly have in Bulgaria. It is not free of political interference and it is certainly not free of the oligarchs. Investigative journalists ( and there have been a few ) have been assassinated and their offices broken into and filing cabinets stolen. Also corrupt figures in public life have been protected by having news agencies prosecuted for making express or implied accusations about them, without of course any regard to whether the allegations are true or not. This is possible because the law of defamation is a criminal matter in Bulgaria and not just a civil one as it is in the UK.

5. Bulgaria is a marshalling yard for crimes which are aimed at Western Europe. These include the trafficking of children and young women, enforced labour, enforced prostitution, drug and tobacco smuggling, the forging of Euro notes, bank and credit card fraud and the theft of high-end luxury cars. The proceeds of crime are easily laundered in Bulgaria and the proceeds invested on an industrial scale, typically these days in tourism, building and all kinds of new property.

How do wealthy nations stay wealthy?

John Zysman and Tobias Schulze-Cleven at the University of California, Berkeley ask a good question in a recent BRIE Working Paper: How do Wealthy Nations Stay Wealthy? (PDF) Their paper, subtitled "Challenges for the European Policy Agenda", makes two arguments:

First, countries and companies face an ever more volatile competitive marketplace. They have to maneuver in a competitive environment, in which the “sweet spots” for corporate success are constantly changing as company internal functions become products, products become commodities, and the sources of differentiation for products and processes are constantly evolving. This new “formula” for corporate success requires a social capacity for flexibility and adaptation.

Second, social protections often serve as essential sources of social capacity for adaptation and change. There is not an inherent contradiction between social protections and market flexibility. The essential issues are how those protections are organized and delivered. The dilemma of many continental European countries to provide “welfare without work” (Esping-Andersen 1996, Scharpf 2001) after a history of “adjusting badly” (Manow and Seils 2000) is only one possible outcome. To the contrary, if adapted rather than abandoned, European traditions can be the basis of continued growth and productivity in a competitive marketplace.

The authors "we feel hesitant to prescribe solutions – for that task we defer to our European friends." But they do favourably cite Sapir's recent paper, which argued that only the Scandinavian and Anglo-Saxon variants of the European Social Model will in the end be sustainable.

Bye bye Berlusconi

He's finally resigned - but what was Silvio like? Alexander Stille has a fascinating account of The Berlusconi Show in the latest New York Review of Books:

Traditionally on losing an election, a politician calls to congratulate the winner and urges voters to put their differences aside and come together for the good of the country. But Silvio Berlusconi is anything but a traditional politician. Instead, after his narrow defeat by the center-left candidate, Romano Prodi, Berlusconi made charges of fraud (even though his own government had overseen the voting), demanded a recount (which quickly confirmed the original result), and demanded that he be included in any new government in order to avoid "civil war."

Prodi will probably have enough seats to put together a parliamentary majority. But a weak government, presiding over a sharply divided country, will likely make it possible for Berlusconi to block legislation. Or Prodi's government could be short-lived, and there could be new elections in the not-too-distant future.

A close outcome was not only predictable but actually planned by Berlusconi during his government's twilight as a way of lessening the impact of possible defeat. A few months before the election, Berlusconi studied polls that showed the center-left winning a substantial majority in parliament with the country's winner-take-all electoral system.

He decided to change the election system and return to the proportional representation that the Italian electorate had strongly rejected in a popular referendum in 1993. The old proportional system was thought to have encouraged a plethora of small parties, unstable government majorities, short-lived revolving-door governments, and ceaseless horse-trading among coalition partners, all of which fostered corruption and lack of clear policies in the post– World War II period...

UK migration: The Bulgarians are coming

Continuing with yesterday's migration theme, a recent report from the Institute for Public Policy Research estimates that 56,000 Romanian and Bulgarian workers likely to come to Britain next year. Quoting the media release:

ippr estimates that around 41,000 Romanians and 15,000 Bulgarians will come to work in Britain in the first year after their countries join the European Union. This estimate is based on what happened after the last EU enlargement in 2004. Although Romania and Bulgaria are poorer than the countries that joined last time, most migrating Romanians and Bulgarians will want to go to Italy, Spain and Greece because they are closer and have higher numbers already resident.

ippr argues that the Government should allow labour market access to Romanian and Bulgarian nationals to work in Britain when accession is expected in 2007 because:

• new inflows are likely to be relatively small
• the impacts on the UK labour market are likely to be positive
• free access will have to be introduced eventually and a separate scheme would increase bureaucracy
• those Romanians and Bulgarians already here would be able to regularise their status.

The IPPR report, EU Enlargement: Bulgaria and Romania - migration implications for the UK, is available free to download.

Bulgarians and Romanians are currently required to hold a visa to travel to the UK and can stay with a visa for work. EU accession is expected on 1 January 2007 but could be postponed for one year if Bulgaria and Romania, with a combined population of around 30 million, do not meet the joining criteria.

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.”

Why Berlusconi must go

He wears a handkerchief on his head. He's the richest man in Italy, and has used his wealth and influence for political ends. He may soon face trial on bribery and corruption charges. He's a male chauvinist. These are all reasons why Italians may wish to vote the Prime Minister out of office in polls starting tomorrow.

But these all take second place to Silvio Berlusconi's central crime since his coalition came to power in May 2001: economic mismanagement. As the German economy has steadily improved its competitiveness and boosted exports in recent years, Italy has lost a lot of ground.

These points are well made in an article by Floyd Norris in today's New York Times, Italy's Prime Minister, Facing Voters, Finds the Economy Is No Help. Economic growth has been sluggish, inflation has picked up, competitveness has declined, and budget deficits have blown out as the government seeks to pump-prime the economy. As Norris writes:

..Italy, on a relative basis, is becoming poorer. In 2000, its G.D.P. per person was 2 percent higher than the average of all 25 countries now in the European Union. Last year it was 2 percent below that average. On that per person basis its economy was 24 percent larger than Spain's in 2000. Now the margin is 15 percent.

The slow growth has come as Italy has struggled to stay competitive, both within Europe and abroad. Italy used to periodically regain its competitive position through a sometime violent currency devaluation. But now that it is in the euro zone, that is impossible.

Since Mr. Berlusconi took office, Italian inflation has run above that of other European countries, and he has taken to blaming his opponent this year, Romano Prodi , for allowing the country to join the euro at a euro-lira exchange rate that was too high.

Italian exports have risen, but not as fast as imports, and the current-account surplus that Italy enjoyed before the last election has turned into a deficit.

Aside from job growth, it's not a pretty picture (click on the charts below to see the whole thing). No wonder the latest Economist argues that irrespective of whether the centre-left group of Romano Prodi or the centre-right Berlusconi coalition take office, "the winner must face up to the fact that Italy's economy is in dire need of reform".

New book: Beyond the European Social Model

London-based think tank Open Europe have published a new book: Beyond the European Social Model. The book, which is available to down load free chapter-by-chapter or as a whole book (1.1Mb PDF), takes a critical view of the European Social Model - it argues that "the high-tax and highly regulated 'social model' is not working, and that the time has come for the EU and its member states to take a different approach." Here are the individual chapters:

Section 1: Is the Social Model working? If not, which policies are working in Europe?

Chapter 1. The Myth of the Scandinavian Model, Martin De Vlieghere
Chapter 2. The social failure of the European Social Model, Lorraine Mullally
Chapter 3. Will the European Social Model wreck the Irish miracle?, Constantin Gurdgiev
Chapter 4. Welfare State or Unfair State?, Johnny Munkhammar
Chapter 5. The European Social Model – One size doesn’t fit all, Chresten Anderson

Section 2: Lessons for reformers: the state of play and the way forwards

Chapter 6. Sex, Drugs and the Dutch Social Model, Eline van den Broek
Chapter 7. Social Tallies and Silicon Valleys, Meelis Kitsing
Chapter 8. Employment and welfare reform in the EU, Barry Watts
Chapter 9. The Better Regulation initiative and EU values, Malgosia Kaluzynska
Chapter 10. EU Regulation - lightening the load, Paul Stephenson

The authors are big fans of the Irish economy ("the efficient alternative"), and highly critical of the Scandinavian economies. I would take issue with several of their assertions. But agree or disagree with them, the book is a quick and provocative read.

UPDATE: Finnsense has a good critique of the book's chapter on The Myth of the Scandinavian Model. Here's a small taste:

A recurrent theme is just how crass his analysis is. He seems to have no taste for the subtleties of very small economies. As his graph admirably shows, Sweden and Finland took a massive and disproportionate hit in 1989 with the collapse of the Soviet Union, yet he doesn't mention that. He also fails to mention the various factors influencing the Irish boom. One of these is the vast amounts of EU cash pumped into the country over decades. Another is the outsourcing boom from the US, facilitated in no small part by the fact the Irish were a) very poor to begin with and b) speak English.

Read the whole thing.

Why are the French different?

Brad Setser argues that France is the most “Anglo-Saxon” of the big 3 continental economies:

Not all aspects of the French model are working right now. ...But the established narrative that focuses on France's resistance to market liberalization - Anglo-Saxonization, so to speak - misses one key fact:  France, despite the absence of reform, has enjoyed domestic-demand led growth for the last ten years.  Sort of like the US. Germany has done more reform but has far less growth in domestic demand.  And Italy lags in all respects.

And Brad noted in comments on my post yesterday:

I agree that the source of France's recent growth (housing and related consumption boom) gives cause for concern, but I also find some of the (anglo-saxon) analysis on France's economy overly simplistic.

Which raises a fundamental issue: why is French capitalism so seemingly resistant to more open markets? Monica Prasad from Northwestern University offers a different explanation on French capitalism to the usual. Her September 2005 American Journal of Sociology article, Why Is France So French? Culture, Institutions, and Neoliberalism, 1974–1981 (PDF) argues that "the French pattern is not caused by adherence to cultural traditions of egalitarianism". Instead, she argues that France has adopted a “pragmatic neoliberalism” because in the postwar period it had adopted a “pragmatic state interventionism” designed not to further goals of social justice, but to turn an agricultural country into an industrial one.

In sum, the argument of this article is that the legacies of state-led industrialization in the postwar period created a resilient politicaleconomic structure that benefits business and the middle classes and increases loyalty to the status quo in France, and the exclusion of interest groups and the continued strength of parties and other political structures dampen political innovation in France.

Moreover, neoliberalism in the United States "required a remarkable degree of extreme political innovation which has not been possible in France". So what might create the conditions for change in France? Prasad concludes:

I suggest here that change will happen in France if and when it allows either party to present itself as a contrast to the unsuccessful policies of the other, can be modeled on successful changes in other countries, or generates consensus among experts. These are the conditions under which the autonomous state has historically been moved to action.

It's an interesting historical perspective, that you seldom come across often in economic circles.