The Euro turns 20


January 13, 2019

The Euro turns 20

The euro’s first 20 years played out very differently than many expected, highlighting the importance of recognizing that the future is likely to be different from the past. Given this, only a commitment to flexibility and a willingness to rise to new challenges will ensure the common currency’s continued success.

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https://www.project-syndicate.org/commentary/four-lessons-from-euro-s-first-20-years-by-daniel-gros-2019-01

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BRUSSELS – Twenty years ago this month, the euro was born. For ordinary citizens, little changed until cash euros were introduced in 2002. But in January 1999, the “third stage” of Economic and Monetary Union officially started, with the exchange rates among the original 11 eurozone member states “irrevocably” fixed, and authority over their monetary policy transferred to the new European Central Bank. What has unfolded since then holds important lessons for the future.

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In 1999, conventional wisdom held that Germany would incur the biggest losses from the euro’s introduction. Beyond the risk that the ECB would not be as tough on inflation as the Bundesbank had been, the Deutsche Mark was overvalued, with Germany running a current-account deficit. Fixing the exchange rate at that level, it was believed, would pose a severe challenge to the competitiveness of German industry.

Yet, 20 years on, inflation is even lower than it was when the Bundesbank was in charge, and Germany maintains persistently large current-account surpluses, which are viewed as evidence that German industry is too competitive. This brings us to the first lesson of the last 20 years: the performance of individual eurozone countries is not preordained.

The experiences of other countries, such as Spain and Ireland, reinforce that lesson, demonstrating that the ability to adapt to changing circumstances and a willingness to make painful choices matter more than the economy’s starting position. This applies to the future as well: Germany’s current predominance, for example, is in no way guaranteed to continue for the next 20 years.

Yet the establishment of the eurozone was backward-looking. The main concern during the 1970s and 1980s had been high and variable inflation, often driven by double-digit wage growth. Financial crises were almost always linked to bouts of inflation, but had previously been limited in scope, because financial markets were smaller and not deeply interconnected.

With the creation of the eurozone, everything changed. Wage pressures abated throughout the developed world. But financial-market activity, especially across borders within the euro area, grew exponentially, after having been repressed for decades. For example, eurozone member countries’ cross-border assets, mostly in the form of bank and other credit, grew from about 100% of GDP in the late 1990s to 400% by 2008.

Then the global financial crisis erupted a decade ago, catching Europe off guard. The first deflationary crisis since the 1930s was made especially virulent in Europe by the mountain of debt that had been accumulated in the previous ten years, when countries had their eyes on the rear-view mirror.

Of course, the eurozone was not alone in being taken by surprise by the financial crisis, which had started in the United States with supposedly safe securities based on subprime mortgages. But the US, with its unified financial (and political) system, was able to overcome the crisis relatively quickly, whereas in the eurozone, a slow-motion cascade of crises befell many member states.

Fortunately, the ECB proved robust. Its leadership recognized the need to shift focus from fighting inflation – the objective the ECB was designed to achieve – to curbing deflation. Ultimately, the euro survived, because, when push came to shove, leaders of the eurozone’s member states expended political capital to implement needed reforms – even after blaming the euro for their countries’ problems.

This pattern of demonizing the euro before recognizing the need to protect it continues to unfold today – and it should serve as a second lesson of the last 20 years. Italy’s populist coalition government used to speak bravely about flouting the euro’s rules, with some advocating an exit from the eurozone altogether. But when financial-market risk premia increased, and Italian savers did not buy their own government’s bonds, the coalition quickly changed its tune.

In fact, the eurozone’s economic performance has not been as bad as the seemingly endless stream of bleak headlines implies. Per capita GDP growth has slowed over the last 20 years, but not more so than in the US or other developed economies.

Moreover, continental European labor markets have undergone an under-reported structural improvement, with the labor-force participation rate increasing every year, even during the crisis. Today, a higher proportion of the adult population is economically active in the eurozone than in the US. Employment has reached record highs, and unemployment, though still high in some southern countries, is continuously declining.

These economic realities imply that, even if the euro is not particularly well loved, it is widely recognized as an integral element of European integration. According to the latest Eurobarometer poll, support for the euro is at an all-time high of 74%, while less than 20% of the eurozone’s population opposes it. Even Italy boasts a strong pro-euro majority (68% versus 18%). Herein lies a third key lesson from the euro’s first two decades: despite its many imperfections, the common currency has delivered jobs, and there is little support for abandoning it.

But probably the most important lesson lies elsewhere. The euro’s first 20 years played out very differently than many expected, highlighting the importance of recognizing that the future is likely to be different from the past. Given this, only a commitment to flexibility and a willingness to rise to new challenges will ensure the common currency’s continued success.

 

Daniel Gros

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Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

 

The Sum of All Brexit Fears


December 29, 2018

The Sum of All Brexit Fears

The Leavers lied: The costs of withdrawing from the European Union were always destined to outweigh the benefits. Alas, the responsible, imaginative, and inclusive political leadership needed to minimize the damage is nowhere in sight.

 

LONDON – Day after day, week after week, most British citizens think that the turmoil over their country’s proposed exit from the European Union cannot get any worse. But, without fail, it does. Turmoil turns into humiliating chaos; a political crisis threatens to become a constitutional crisis.

Meanwhile, the date of the United Kingdom’s departure from the EU gets closer. It is fewer than 100 days until the UK leaves, and at the moment there is no deal in sight that is acceptable to both Parliament in Westminster and the European Commission and European Council in Brussels.

The problem began with the 2016 referendum vote to leave. Unfortunately, despite plotting and planning for this outcome for years, Leavers had no idea what quitting the EU would actually entail. Their campaign was rife with delusions and dishonesty. Leaving, they said, would mean a financial bonanza, which the UK would inject into its National Health Service. Negotiating a trade deal with the EU after departure would be easy. Other countries around the world would queue up to make deals with Britain. All lies.

The Brexit talks themselves, when they finally began, were hampered by the incompetence of the ministers put in charge. The UK’s negotiators were long on ideological certainty and short on workable solutions.

Moreover, the red lines that Prime Minister Theresa May laid down at the very beginning made their work more difficult. We must not only leave the EU, she argued, but also the single market and the customs union. We could not accept any jurisdiction by the European Court of Justice. We must be able to end the freedom of European citizens to come to the UK to staff our hospitals, pick our crops, fill gaps in our professional services, and increase our prosperity.

One of the central problems to emerge from this mish-mash of nonsense was how to avoid re-establishing a hard border between Northern Ireland and the Republic of Ireland if the UK stayed within May’s red lines. Such a border would (as the head of Northern Ireland police noted) jeopardize the 1998 Good Friday Agreement, which brought peace to Northern Ireland after three decades of violence.

Recent negotiations have stalled on this point, because a successful outcome must square a circle. Britain has already accepted that Northern Ireland will have to stay in the customs union until the UK has concluded a long-term trade deal with the EU. Until then, there will have to be an insurance policy – a “backstop” – against possible failure. But hard-liners within May’s Conservative Party, and Democratic Unionist MPs from Northern Ireland, on whom May depends for her parliamentary majority, will accept only a backstop with a time limit, which is no real “stop” at all.

At the root of May’s difficulties is a simple truth that she and others are unwilling to accept. It is well-nigh impossible to negotiate an exit deal that is both in the national interest and acceptable to the right-wing English nationalists in her party. This became crystal clear during a grim week for the government earlier this month.

After May and her advisers concluded that the exit deal she had negotiated with the EU would be defeated in Parliament by a large majority, they suspended the debate before voting took place. May then announced that she was going to talk to other EU presidents and prime ministers to get the sort of reassurances that might satisfy her right-wing critics.

Those critics have operated increasingly like a party within a party. Halfway through May’s frantic diplomatic safari, they announced that they had gathered enough support to trigger a vote of no confidence in her leadership of the Conservative Party. She won the vote with about two-thirds support, but with her authority badly dented.

Capping an awful week, European ministers made clear that they were not prepared to reopen the agreement with Britain to renegotiation. They could offer “best endeavours” and “good will,” but no more.

So what happens next? May’s supporters think she is determined; others reckon she is simply obstinate and blind to reason. She has continued to put off any debate on her own proposals. Critics say she is trying to push any vote as close to the exit date as possible, in order to pressure MPs to support her plan. “Back my plan or face the disaster of no deal,” she seems to be saying. “Support me or we’ll jump off the cliff.”

But pressure is building for Parliament to take control of the process and work through a more acceptable range of options. Is there a majority in favor of May’s deal? Is Parliament totally opposed to crashing out of Europe with no deal? Should we seek a Norway-style relationship with Europe and aim to stay in both the single market and the customs union, at the cost of continuing to accept free movement of workers? Should we try to postpone the date of our EU departure until we have sorted out what exactly we want? Should there be another referendum, passing the final decision back to the people?

A fog of political uncertainty hangs over Britain after Christmas. Only four things seem clear. First, the Conservative Party will have growing difficulty accommodating its fanatical English nationalist wing. Second, to save the UK from disaster, Parliament will have to get a grip on the process. Third, life outside the EU will, in any case, leave Britain poorer and less influential in the world. And, lastly, whatever the outcome, Brexit will be a divisive issue for years to come.

The Brexiteers lied. The costs of leaving the EU were always destined to outweigh the benefits. Alas, the responsible, imaginative, and inclusive political leadership needed to minimize the damage is nowhere in sight.

Chris Patten, the last British governor of Hong Kong and a former EU commissioner for external affairs, is Chancellor of the University of Oxford.

Brexit–David Cameron led us to this calamity.


October 23, 2018

 

“David Cameron is a former PM. He not only has the right to offer his solution but a duty. If he is to earn the right to a hearing, however, he must first find not only self-knowledge and courage, but an un-English seriousness of purpose he has evaded all his life.”–Nick Cohen

John Major, Tony Blair and Gordon Brown have warned of the dangers of Brexit. But where is the former Prime Minister who called the referendum that will blight Britain for as far ahead as anyone can see? Whatever happened to that likely lad? David Cameron doesn’t want to talk about it, one of his friends tells me. “He doesn’t defend the referendum, but won’t say he made a mistake either. Europe is like a family scandal. We know what’s happened but we don’t say a word: it’s his no-go zone.”

At a personal level, the consequences swirl around him. I may be exhausting your capacity for compassion but the smallest of the casualties of Brexit has been the good fellowship of the Chipping Norton set. Naturally, the Cotswolds’ wealthy Leavers are grateful. But Cameron must resent them. He must know that he has been the useful idiot who succumbed to the demands of Rupert Murdoch’s Rebekah Brooks, a member of the local nouveau gentry by virtue of her converted barn, in the crashingly stupid belief that no harm would come from his surrender.

Invitations to “kitchen suppers” from Remainers, however, can only include Samantha Cameron’s name – if, they are extended at all. Tania Rotherwick invited the Camerons to her pool at the magnificent Cornbury Park estate before she split from her husband and Cameron split Britain from Europe. She is now particularly contemptuous, I hear.

Cameron’s memoirs were meant to be published this month but have been delayed until next year. The early signs are ominous. A book has to be coherent if it is to find a readership: its opening must prefigure its conclusion. As described in the publishing press, Cameron’s effort will have no consistency. He will tell the story of the formation of the coalition, his contributions to economic, welfare and foreign policy, his surprise victory in the 2015 election and then – as if from nowhere – the conventional memoir will end with the author carelessly deciding he will settle the European question, without planning a campaign or preparing an argument and, instead, launching a crisis that will last for decades. Nothing will make sense. Nothing will hang together. It’s as if a romcom were to conclude with serial killers murdering the cooing lovers or Hilary Mantel were to have aliens invade Tudor England on the last page of her Thomas Cromwell trilogy.

The book Cameron cannot write would accept that his political battles and achievements were as nothing when set against his decision to appeal to the worst of the Tory party. It would begin with Cameron honouring the decision that won him the Conservative leadership in 2005. He would confess that he should have known better than to pull the Conservatives out of the centre-right group in the European parliament and align them with Law and Justice, the know-nothing Polish nationalists who are reducing their country to an ill-governed autocracy. The manoeuvre was pure Cameron: tactics above strategy; appeasement instead of confrontation.

The pattern continued throughout his premiership. He thought he could buy off the right by refusing to explain the benefits of EU membership to the voters. At one point in 2014 he threatened to leave the EU. He then turned around in 2016 and asked the public to believe that leaving would be a disaster and was surprised when 17.4 million men and women he had never treated as adults worthy of inclusion in a serious conversation ignored him.

If he were being honest, Cameron would admit too that Brexit ought to bring an end to a British or, to be specific, English, style that is by no means confined to the upper class, but was everywhere present among the public-school boys who ruled us.

‘One Etonian led the Remain campaign and another led the Leave campaign, and the English couldn’t see why that was wrong.’
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‘One Etonian led the Remain campaign and another led the Leave campaign, and the English couldn’t see why that was wrong.’ Photograph: Frantzesco Kangaris for the Guardian

I mean the ironic style that gives us our famously impenetrable sense of humour (which we will need now the rest of the world is laughing at us). The perfidious style that allows us to hide behind masks and has made England superb at producing brilliant actors for the West End but hopeless at producing practical politicians for Westminster. The teasing style of speaking in codes that benighted foreigners can never understand, however well they speak English. The cliquey style that treats England as a club, not a country, and allowed Jeremy Corbyn to say that Jews cannot “understand English irony”, however long their ancestors have lived here.

 

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The deferential style that allowed one Etonian to lead the Remain campaign and another to lead the Leave campaign and for the English to not even see why that was wrong. The life’s-a-game-you-shouldn’t-take-too-seriously style that inspired Cameron to say he holds “no grudges” against Boris Johnson now the match is over and the covers back on the pitch.

The gentleman amateur style that convinced Cameron he could treat a momentous decision like an Oxford essay crisis and charm the electorate into agreeing with him in a couple of weeks, as if voters were a sherry-soaked don who could be won round with a few clever asides. The effortlessly superior style that never makes the effort to ask what the hell the English have to feel superior about. The gutless, dilettantish and fatally flippant style that has dominated England for so long and failed it so completely. The time for its funeral has long passed.

A politician who bumped into Cameron said he thinks the referendum result must be respected, but that Britain should protect living standards by going for the softest Brexit imaginable and staying in the single market. This is a compromise well to the “left” of Theresa May and Corbyn’s plans and is worth discussing. Whatever his critics say, David Cameron is a former PM. He not only has the right to offer his solution but a duty. If he is to earn the right to a hearing, however, he must first find not only self-knowledge and courage, but an un-English seriousness of purpose he has evaded all his life.

Nick Cohen is an Observer columnist

Lessons from Europe


October 20, 2015

“In 2008, crisis resolution was also possible thanks to the concerted effort of key central banks. Nowadays the power of unelected bodies is rightly questioned and scrutinised. The main lessons from the long financial crisis in Europe may be lost amid economic nationalism. Experts tend to be the repository of such lessons, but there is little respect for experts in today’s politics “.–Paola Subacchi

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More than a decade on from the most devastating financial crisis since the crash of Wall Street in 1929, politicians and commentators have been extremely careful in offering predictions on when the next crisis will occur. Playing with economic predictions is like playing with fire. Nobody knows this better than former British prime minister and chancellor of the exchequer Gordon Brown, who repeatedly promised ’no return to boom and bust’.

But there are reasons to be concerned. The gradual normalisation of US monetary policy could generate adverse spillover effects and disrupt global financial stability. Red lights are already flashing in Turkey and Argentina. A major correction in the United States’ stock market could trigger a significant shock for the rest of the world. High levels of debt, maturity mismatches and carry trades financed by short-term debt could fuel contagion through financially integrated markets. In addition, the deterioration of multilateral economic relations in the last 18 months might make crisis resolution more difficult than it was in 2008–09.

As things stand, even if we don’t know how the next crisis will materialise, where the epicentre will be and which countries will be hit, we can infer that it will likely be more disruptive than its predecessor.

What lessons can be drawn from Europe and its experience during the global financial crisis?

The European economy is expected to grow, in real terms, by 2.5 per cent in 2018, a slight slowdown from 2.7 per cent in 2017. Countries that were badly hit by the crisis have finally come out of the tunnel and some, like Ireland and Spain, are in very good shape. Against this overall positive background the European Central Bank (ECB) is slowly and gradually preparing to normalise monetary policy.

For years the economy was Europe’s key problem, now it is politics. The integrity of the European Union (EU) and its single currency is being challenged by populist politics that is building consensus on voter disaffection with rising inequality and the deterioration of living standards. Brexit, refugees and tensions between Germany and Italy on fiscal leeway are now threatening the entire EU project.

Europe’s brand of populism is anti-migration and anti-financial globalisation, and resents a supranational construction like the EU that by definition is at odds with economic nationalism.

Italy is the country that could trigger a perfect storm. Some members of the Italian cabinet have been playing with the idea of severing the ties with the Europe’s monetary union in order to regain control of monetary policy. Italy has been struggling for years with poor productivity growth and GDP growth. After some recovery in the past two years, the latter is now slowing down. Youth unemployment is at 35 per cent, one of the highest rates in the EU. Interest rates are on the rise, making it more expensive to pay interest on public debt that currently stands at 132 per cent of GDP. And the expansive fiscal policy promised by the two populist parties now in government is undermining investors’ confidence.

But Italy is not an isolated case. Euro-scepticism is on the rise, especially in countries in eastern and central Europe that joined the EU in 2004. In Britain it has been driven by the idea that an independent trade policy would better serve the interests of the United Kingdom. Having served notice to the EU on March 2017, the UK is due to leave Europe’s single market and custom union in March 2019.

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It is unclear what the new relationship between the EU and the UK will look like. Political rifts inside the British government and the ruling Conservative party have resulted in a deadlock. In the meantime, a number of foreign companies, especially those in the banking and financial sector, have announced that they will relocate to the continent to maintain access to the EU market.

The prospect of a hard Brexit has taken a toll on sterling, which has dropped by almost 12 per cent against the US dollar between mid-April and mid-August 2018. The British economy is expected to grow, in real terms, by 1.6 per cent in 2018. But increasing interest rates forced by inflationary pressures and a weak sterling may pose further constraints on economic growth. The UK is a deficit country, with a deficit in the current account of 5.2 per cent of GDP and a high level of personal debt. A series of corporate collapses — most recently, the bankruptcy of the infrastructure company Carillion — may trigger some financial instability.

If there is a lesson from Europe’s experience with the financial crisis, it is to consider the long-term effects of crisis resolution. In 2011 and 2012, at the peak of Europe’s sovereign debt crisis, that followed the global financial crisis, efficiency in crisis resolution took priority over legitimacy. Draconian measures were imposed on Greece while fiscal austerity became the norm across the whole region. People, especially those in southern Europe whose economies had been decimated by the crisis, felt the hit and resented being told what to do by unelected bodies such as the ECB, the European Commission and the IMF. Today’s dysfunctional politics is significantly a response to those mistakes.

In 2008–09 international cooperation played a key role in crisis resolution. Even if the G-20 did not deliver overall reform of the international monetary and financial system, its broad-based governance system, inclusive of emerging markets, managed to get member states to work together.

Today this cooperation would be more difficult to achieve. While in 2008 politics was fairly neutral, today it is hugely divisive. The United States is in retreat and increasingly unwilling to lead. China is not ready yet to take over and to provide the financial safety net that would be necessary in case of a crisis. Europe, especially the leading countries such as Germany, France and the UK, are primarily focussed on domestic politics.

In 2008, crisis resolution was also possible thanks to the concerted effort of key central banks. Nowadays the power of unelected bodies is rightly questioned and scrutinised. The main lessons from the long financial crisis in Europe may be lost amid economic nationalism. Experts tend to be the repository of such lessons, but there is little respect for experts in today’s politics.

Paola Subacchi is a Senior Research Fellow at Chatham House, Royal Institute of International Affairs, London and a visiting fellow at ANU.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

 

Safeguarding A Rules-based Trading System against America First Trade Economics


October 16, 2018

Safeguarding A Rules-based Trading System against America First Trade Economics

by Dr. Mari Pangestu, Universitas Indonesia

http://www.eastasiaforum.org

 

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“Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.”–Dr. Mari Elka Pangestu

Despite expectations that the US Federal Reserve would raise interest rates, capital flows to the United States have led to the appreciation of the US dollar against most major currencies.

The hardest hit countries are Argentina and Turkey, which are experiencing fiscal issues complicated by their political situations. Brazil, South Africa and the emerging countries in Asia have also been affected — albeit at a lower rate of depreciation of their currencies in the 10 to 12 per cent range. Even Australia and China have experienced depreciation of around 8 per cent and 5 per cent respectively.

The level of depreciation experienced by different economies reflects how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account and fiscal deficits and policy outlooks.

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The rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose in their financial systems. Even if the current economic conditions point to a low potential for contagion from Argentina and Turkey, IMF Managing Director Christine Lagarde recently warned that ‘these things could change rapidly’. The uncertainty that already exists is a clear and present danger.

The uncertainty in the world economy has been increasing since Brexit and the election of President Trump in 2016, and in 2017 as the United States left the Trans-Pacific Partnership and announced many threats to impose trade restrictions. This uncertainty has heightened since January 2018 when US President Donald Trump made good on his threats to remedy bilateral trade deficits — what he sees as ‘unfair trade’ practices against the United States — by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.

Since March, the greatest uncertainty has been from the brewing tit for tat trade conflict between the United States and China, which started with the imposition of 25 per cent tariffs on US$50 billion worth of China’s exports to the United States. China retaliated with the same sized tariffs on the same amount of trade from the United States. Trump then escalated the trade war further in September with the announcement of 10 per cent tariffs on US$200 billion worth of China’s exports to the United States.

The US–China trade conflict and the uncertainty surrounding it is expected to have knock on effects on global trade and investment flows. The impact of the reduction in China’s exports to the United States on China’s growth will reduce China’s imports, which in turn will impact the many countries that China has become a major trading partner for.

This means that China and other countries facing US trade restrictions will look for new markets for their goods. The situation has already led some countries to impose restrictions or initiate trade remedy investigations, for instance on steel. This uncertainty has and will continue to influence trade and investment, as businesses evaluate how the increased restrictions will affect their supply chains.

It is too early to tell how large the disruption will be, as it is not easy to dismantle supply chains. But the costs down the line could be great as businesses re-evaluate their trade and investment decisions to insulate themselves from tariffs rather than to maximise their competitiveness.

The most concerning aspect of all this is that, after 75 years of being its greatest advocate, the United States is now the biggest threat to the future of the rules-based trading system that has provided predictability and fairness in the way the world engages in trade. There is no clear light at the end of the tunnel.

The key question is: what is Trump’s intention? Is it to change the rules of the game to benefit the United States and address China’s ‘non-market-oriented policies’ or is it just anti-trade and America First? Assuming it is the former, there are at least three important responses needed.

First is safeguarding the stability of the World Trade Organization (WTO) as the overarching framework to provide predictability, fairness and stability. To this end, it is vital that the WTO dispute settlement mechanism continues to operate. The test case is the Chinese and EU case against US steel and aluminium tariffs and getting past the blocking of panel judge nominations by the United States.

Ensuring that the United States does not use blunt unilateral instruments to address its concerns also means that reforms to the WTO rule book are needed. More must be done to address concerns around intellectual property rights, investment, the environment, labour, competition policy, subsidies, tax, digital data and the treatment of developing countries.

Second, the process of opening-up must continue, with or without the United States. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a good start. And it is of the utmost importance that the Regional Comprehensive Economic Partnership negotiations are concluded in November this year. These are all important processes to signal the continued commitment of East Asia to expanding markets and fostering flows of trade and investment.

Third, and what most will agree is the most important process, is unilateral reforms. Given increased global uncertainty and limited policy space for fiscal stimulus, structural reforms are a must for East Asian countries, especially China. These range from trade and investment reforms, as well as reforms related to competition policy, intellectual property, the role of state-owned enterprises and sustainability. As in the past, unilateral reforms are more successfully undertaken when there is peer pressure and benchmarking from international commitments.

Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.

Dr. Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

No deal is often better than a bad deal. Not with Brexit


August 6, 2018

No deal is often better than a bad deal. Not with Brexit–Soft BREXIT,says The Economist

Britain’s dangerous bluff betrays a misunderstanding of its negotiation with Brussels

 Print edition | Leaders

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IN MOST negotiations, the maxim that “no deal is better than a bad deal” makes perfect sense. If you are buying a car, you must be ready to walk away or the seller has you over a barrel. The way to drive a hard bargain is to persuade him that he must offer you a good deal or there will be no deal at all.

Theresa May has made this commonsense principle the foundation of her talks with Brussels over Britain’s exit from the European Union. “No deal for Britain is better than a bad deal for Britain,” she said in January last year, setting out her red lines. With less than eight months until Britain is due to leave the EU, and only about four months left to reach an agreement on the terms of its exit, her government is still stressing its readiness to depart with no deal in place.

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It is time to drop the pretence. Leaving without a deal was never a wise option. The government ought to have spent the past two years steering the public through the painful trade-offs of leaving the EU. As we have argued, Britain’s interests are best served by a “soft Brexit” that preserves markets and security. Instead, big-mouth ministers have kept expectations sky high, claiming that the deal “will be one of the easiest in human history” and that “there will be no downside to Brexit”.–The Economist

 

The trouble is that Brexit is nothing like buying a car. In most negotiations “no deal” means sticking to the status quo. If you are not prepared to pay the asking price, you can walk away none the worse and try somewhere else. The Brexit talks are different. If no deal is reached Britain will not maintain the status quo of its EU membership, but find its links to the continent abruptly and acrimoniously broken off. The metaphor is not buying a car, it is buying a parachute—having already leapt out of the aeroplane. “Walking away” would land Britain in a situation so calamitous that it should not even be on the table.

A no-deal outcome would be bad for the EU, too, particularly Ireland, whose small, open economy is closely linked to Britain’s. But Britain would be hurt most by a hard landing. Trading with the EU on the terms of the World Trade Organisation, which would raise both tariffs and regulatory barriers, would reduce Britain’s GDP by 4% within five to ten years, according to the IMF. The EU’s GDP would fall by about 1.5%. Worse still—again, for everyone, but chiefly for Britain—would be the turmoil from leaving without agreements in place over everything from airline safety to the transfer of radioactive material. The supply of such essentials as food and medicine could be disrupted, too (see article).

A hard landing

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Boris Johnson–The Ambitious Tory Iago

For this reason, the EU has never taken seriously Mrs May’s claim that Britain is ready to walk away from the negotiating table. It sees her threat as a bluff—and it is right, judging by the lack of preparation in Britain for a no-deal outcome. Even with extensive (and expensive) planning, leaving the EU without a deal would have been difficult. As things stand, almost no work has been done to prepare for such an eventuality. Lately, Britain has taken to outlining desperate-sounding plans to stockpile medicine and set up electricity generators. Chaos would be hard to avoid.

Yet, although the EU’s negotiators in Brussels do not buy it, Mrs May’s slogan that “no deal is better than a bad deal” has struck a chord with the voting public. As the talks have dragged on and the EU has extracted concessions, such as a promise by Britain to pay a large exit bill, the desire to walk away has only grown. Polls show that nearly twice as many Britons would leave the EU with no deal as would support a compromise along the lines Mrs May proposed last month. By this logic, her eventual settlement with Brussels, if she reaches one, will look even more like a bad deal because Britain will have to give more ground. Many voters will thus quote the prime minister’s own slogan back to her, and argue to crash out.

The government is trapped by its own rhetoric. The louder it shouts in Brussels that it is ready for no deal, the more it emboldens voters and Brexiteer MPs to call for just such an outcome. Yet the more the government argues at home that Brexiteers should avoid the miseries of crashing out by embracing Mrs May’s compromise, the more it convinces Brussels that, except as a disastrous accident, “no deal” is not credible.

It is time to drop the pretence. Leaving without a deal was never a wise option. The government ought to have spent the past two years steering the public through the painful trade-offs of leaving the EU. As we have argued, Britain’s interests are best served by a “soft Brexit” that preserves markets and security. Instead, big-mouth ministers have kept expectations sky high, claiming that the deal “will be one of the easiest in human history” and that “there will be no downside to Brexit”.

Mrs May has belatedly come to accept the need for compromise—to the fury of a small coterie of hardline Brexiteers who would sooner crash out of Europe, kamikaze-style, than maintain any kind of obligation to the EU. The prime minister’s continued claims that Britain can simply walk away play into their hands. She must cease such talk. With a bit more compromise on both sides, a deal is reachable. Britain must seize that parachute before it is too late.

This article appeared in the Leaders section of the print edition under the headline “No ordinary deal”