Archive | November, 2012

When European liberalism is a high speed train to (neo)feudalism

21 Nov

In most of Western Europe feudal institutions had been taken apart over a century ago, but this is not so in the East. There, before communism, 17th century style latifundia were common in the countryside. Communists nationalized the land and early postcommunist governments gave them to the local farmers. But under European pressure and domestic conservative lobbying, the laws were tightened and the old landlords (most of them artistocrats and churches) sued for restitution.

Romania is probably one of the most grotesque examples of how the enforcement of an unqualified right to private property-often following rulings of the European Court of Human Rights- led to a massive restitution of land and forests to the old feudal elite.

The latest example comes from the village of Nadas in Western Romania, where an entire village (8,700 hectares of land, forests, the church, the cemetery) were given back to the original owner, an aristocratic family who lorded over the area for centuries. The entire village community was left without its livelihood and faces a modern version of 19th century enclosures.

Of course, the aristocrats in question may not exercise their right to rent out the land to farmers as better opportunities beckon. Not only because they lack the resources, but because they stand to gain quite a lot from the impending removal of the right of non-residents to acquire land in Romania and 8,700 hectares is quite a lot. Unlike the peasants, they have huge incentives to throw the property in the commodity chain. They have a great shot at doing so as the land is located in the part of the country where Italian agrobusiness has become a dominant buyer in the recent years.

It’s a state of affairs that forces 20th century Eastern liberals who are serious about private property embrace the neo-feudal restoration that even a 19th century liberal would have abhorred.



Keynesians on the eurocrisis

21 Nov

An Alternative Vision for the Eurozone Crisis

(open letter posted on Naked Keynesianism)

On the basis of our diagnosis we are convinced that Europe should reverse the current austerity policy regime. This would require profound institutional and policy change.

In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.

In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.

These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.

We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.
If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.

Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.
Amit Bhaduri
Jawaharlal Nehru University, New Delhi, India

Thomas Boylan
National University of Ireland, Galway, Ireland

Sergio Cesaratto
Università degli studi, Siena, Italy

Nadia Garbellini
Università degli Studi di Pavia, Italy

Torsten Niechoj
Rhine-Waal University of Applied Sciences, Kamp-Lintfort, Germany

Gabriel Palma
University of Cambridge, UK

Srinivas Raghavendra
National University of Ireland, Galway, Ireland

Rune Skarstein
Norwegian University of Science and Technology, Norway

Herbert Walther
Vienna University of Economics and Business, Austria

Ariel L. Wirkierman
Università Cattolica di Milano, Italy

Kazimierz Laski
University of Linz, Austria

Corresponding author: Srinivas Raghavendra (


19 Nov

One often hears in German-speaking circles that EU enlargement in the East and especially in Romania and Bulgaria was good before the crisis but that it weighs down heavy after Lehman. Just a quick fact to settle the matter for a while from today’s FT:

“80 per cent of the Vienna stock exchange depends on CEE prospects. And the cost advantages of producing in countries such as Slovakia and Romania are keeping Austrian companies internationally competitive.”

Any follow-up comments?

Derivatives may slip away, like mussels

19 Nov

Despite all the watering down of the financial reform spirit, US regulators is coming up with some stuff that actually bites, although less hard that one have expected in 2008 and given the cost that we all pay for the colossal failures of the financial sector. Mike Masters from Better Markets puts the cost at 13 trillion for the global economy.

So what is being tabled by CFTC (Commodity Futures Trading Commission) in the States is a battery of rules in effect under the Dodd-Frank financial reform law meant to throw a net on derivatives trading, one of the engines of the Lehman crisis. Two reforms stand out and they have already attracted heavy lobbying, according to NYT:

1. “One would require that most derivatives be traded on open electronic platforms, with prices visible to all participants before deals were done. That would curtail the practice of trading derivatives as private bilateral contracts, which would help to prevent destabilizing risks from building up without regulatory oversight.

Banks object to this rule because transparent trading will invariably lead to lower prices for derivatives and lower profits for banks. They want broad exceptions to the rules, especially for large trades, which they say will disrupt markets if done openly. But that problem could be managed with a narrow exemption. To protect the public, regulators must ensure that the new rule will require the vast majority of trades — more than 90 percent — to be conducted openly.

2. ‘New derivatives rules apply to trades made through the foreign branches, affiliates or subsidiaries of American banks. That is crucial, because in a global economy, risk knows no borders. Banks, however, want “substituted compliance,” in which foreign affiliates are regulated by the foreign country as long as that country has similar rules.

The trouble is, derivatives rules are weaker or nonexistent elsewhere, making the call for substituted compliance either a tactic to delay enforcement until the rest of the world updates its regulations or, worse, an attempt to avoid tough regulation altogether.”

Austerity, but not for Greek oligarchs

17 Nov

In theory, fiscal consolidation can be done through increasing taxes, cutting expenditures or a combination of the two. Conventional economic thinking (as in Alesina et al) says that the austerity that works is the one that stresses expenditure cuts, not tax increases. In practice, European austerity meant mostly expenditure cuts and increases in the most regressive tax of all: the VAT. Outside of France, the top 1-10 percent was left largely untouched. This is true in the case of Greece, where the wealthiest are really good at not paying taxes. Spiegel reporting on Greece is to be taken with a grain of salt, but the fact that the country’s most competitive business (shipping) benefits from huge tax breaks just are ordinary Greeks are experiencing a massive collapse in the quality of life is something worth discussing. As is the fact that the upper crust find the state and the unions to blame for it all.

Here are a few excerpts:


‘Horrible Citizens’ The Life of Greece’s One Percent

By Julia Amalia Heyer

“Last week, Greece’s parliamentagreed to a new package of austerity measures that are supposed to reduce expenditures by €13.5 billion between now and 2015, primarily through salary and pension cuts. The measures will lower the average monthly salary in the country to some €950. Families making more than €18,000 a year will no longer receive child allowances. And, this month, Greece is once again trembling in fear over whether it will receive the next €31.5 billion tranche of loans from the European Union. If it doesn’t arrive by the end of November, the country will become insolvent.

At the same time, there are a number of lists circulating in Athens including names attached to unfathomable sums of money. These belong to politicians, actors and businesspeople, all of whom supposedly have accounts at the Geneva branch of the British bank HSBC. Experts estimate that Greeks have up to €170 billion in assets safely stored away in Switzerland.

“Greece is a poor country with very rich people,” Finance Minister Yannis Stournaras recently said. And philanthropy, though a Greek word, is not widespread in practice. Members of the country’s upper crust continue to exploit all the loopholes the government offers them. Indeed, the state makes it remarkably easy for them to do so: For a full year now, the government has been announcing that a treaty with Switzerland aiming to put an end to tax evasion is “just about to be concluded.” But it has yet to be signed.

The Greek government can no longer pay its bills and owes private-sector companies some €9 billion. But even now, three years into the crisis, it continues to exempt commercial shipping companies, which make up its most successful industrial sector, from all taxes. This relief for the rich just puts more of a burden on the poor.

The EU’s Directorate-General for Competition recently identified 57 different tax amnesties for Greece shipowners alone and, puzzled, sent a letter to the government in Athens.

Leon Patitsas, the 36-year-old heir to a shipping company, numbers among those who have benefitted from these exemptions. Hanging in his office are portraits of his forefathers next to framed pictures of tanker ships. Patitsas is the head of Atlas Maritime, which currently owns six active oil tankers with a seventh under construction in Shanghai. The Greek merchant marine fleet, Patitsas says, is the largest in the world and he believes the tax exemption enjoyed by his industry is a necessity rather than a privilege. “Shipping ensures 400,000 jobs in Greek shipyards that could go elsewhere at any time,” he says.

But shouldn’t the shipping industry be showing solidarity with the state instead of threatening to leave at the first sign of taxation?

The state doesn’t offer any security, Patitsas says, not to investors, businesspeople or him. He says that people in Greece think that capital is to blame for everything, and not the powerful unions that actually destroy jobs with their unrealistic demands rather than preserving them.

Greece-owned ships transport 20 percent of the world’s seaborne cargo, though the ships usually sail under the flags of other countries. As such, the world’s largest merchant fleet hardly contributes anything to Greece’s economic performance, and shipping revenues aren’t taxed. In fact, shipping companies don’t even have to pay taxes for divisions that have nothing to do with transporting cargo on the seas.

Patitsas and his wife, a well-known fashion model and television presenter, recently gave birth to a son. Just a year ago, the two would occasionally allow themselves to be photographed at home for glossy magazines. But they don’t anymore. “We have to be careful,” Patitsas says. “A lot of people are envious.” When asked what keeps him in Greece, he says: “I love my country.”

While Greece has public debt of roughly €301 billion, its citizens have private assets worth almost twice as much. According to the independent Hellenic Statistical Authority (ELSTAT), the top 20 percent of Greeks earn six times as much as the bottom 20 percent.”

After two decades of capitalism, back to communist era GDP

13 Nov

This is the only table you will find with secular data on Romanian GDP.

Source: ”Produsul Intern Brut al României 1862- 2000 Serii statistice seculare și argumente metodologice”, Victor Axenciuc, ed. INS and Bănca Naționala a României.

How to make the state stronger in a peripheral European economy?

13 Nov

First, lets start with the state’s money. In 2011 Romania and Lithuania had the lowest tax receipts per GDP in the EU and at 29 percent of GDP tax collection was below the 38 percent average for the new member states. IFIs and the EU pushed for better tax collection and the World Bank in particular contributed useful expertise in 2012 on how to boost the tax collection capacity of the Romanian state. Yet political backing for massive tax evasion rather than the incompetence of tax collectors that is the main issue. For in reality there is a lot of room for increasing government revenue.

If one looks at the implicit tax rates (i.e. the ratio between actual revenue collected from a given tax handle to the size of the tax base for that tax handle) the picture is very bleak: individuals and firms pay only 40 percent of what they owe. Indeed, no less than 4.3 percent of GDP is lost through the government’s failure to shrink the size of the informal labor market. This is not for lack of simplicity. The introduction of a flat tax in 2005 is the epitome of a simple tax system yet it only marginally increased tax compliance for personal income, while for corporations it was even lower in 2010 than in 2004. Moreover, the Romanian tax system is the worst in the EU at collecting VAT, leading to a loss of 3.8 percent of GDP through tax fraud. Summing up, even if the tax system would not be made more progressive, the Romanian tax collectors could raise for the government 8.1 percent of GDP.

Oh, and did I mention the corporate sector? There is a lot of noise around state owned corporations not paying their taxes. Yet any straight talking economist in the Ministry of Finance would tell you that of the roughly ten billion euros owed to the government every year and never paid, only one is owed by the much maligned public sector. The rest is owed by Schumpeterian heroes in the private sector. So much for self-serving morality tales.

As for calls to privatize all state enterprises let’s just consider for a second the fact that two thirds of SOEs are both profitable and solvent. A little more than a third of them are loss-making, thus generating quasi fiscal deficits for the state that remain off budget. The distribution is sectoral, with energy and gas having net operating profits and transportation producing loses (Romanian Fiscal Council 2011). These loses make to arrears, undermining tax and social insurance revenue. Following the introduction of Eurostat rules, around 30 SOEs have more than half of their revenues from government subsidies over a three-year period. This means that the general government balance will lose .5 percent of GDP. Yet the bulk of loses (1 percent of GDP and growing) are concentrated in rail and coal mining. Only one manufacturing plant (Oltchim) was loss making. The next biggest miscreants were private firms in tobacco and food processing. Just for the record.