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Uncertainties and responses to the financial and economic crisis
Andreea VASSThe risk of an implosion of the global financial system, as witnessed in October 2008, was overcome thanks to the set of interventionist measures taken by developed states. We all sighed with relief, and thought the worst was over. Well, apparently it isn’t! The uncertainties that we are still facing leave us with nothing but failed assumptions and inadequately planned measures rushed through the mass media. Below are several arguments in this respect.
The effects of interventionist measures in the world’s developed economies will be evident, if at all, only in the last quarter of 2010. In this respect, P. Krugman’s expectations for the American economy and J.-C.Trichet’s for the European one concur. I believe we can expect further downward adjustments of the global economic forecasts. Uncertainties are substantial, and the jaws of the economic crisis have only begun to rip our pockets.
So we have significant inconsistencies between the forecasts of international institutions, of the European Commission (EC) and those announced by Romanian authorities. Which comes as no surprise. Indeed, I believe the EC estimates on Romania’s economic growth rate are slightly optimistic.
Unless we earnestly acknowledge reality, with its weaknesses and aggravating uncertainties, we will only waste the political energies needed for countering the effects of the crisis. Subsidies, meal or travel vouchers, new charges on private asset management institutions, etc., are not solutions to the ongoing economic crisis; on the contrary. We waste money and hamper sectors that are yet to be developed.
Short-term solutions which absorb the already scarce resources we have, cannot help. As the former Polish prime minister and incumbent director of the IMF’s European Department, Belka, put it, the economic crisis offers the opportunity of in-depth reforms, which are impossible to coordinate quickly and effectively in normal times. In other words, long-term solutions must be identified; otherwise we will only generate new major imbalances.
a) The European Commission has just revised its 2009 economic growth forecast for the Euro zone from +0.1%, to -1.5%, and will soon make it public. The Romanian forecasts were based on the past dynamics of the foreign markets that we largely depend on today, so these must be once again adjusted.
b) On the one hand, there are substantial differences (close to 3 %) between European Commission (EC) forecasts made last autumn and those made in January 2009 as regards Romania’s economic growth rate in 2009. On the other hand, there are smaller differences (3/4 percentage point) between current European forecasts and those confirmed by the Romanian Ministry for Finances (MF), yet there are staggering differences between the EC and the MF as regards Romania’s budget deficit.
c) The International Monetary Fond has lowered its forecasts on the global economic growth rate, from 2.2% (in November 2008), to about 0.5% for 2009 (29 January 2009). In fact, the IMF tells us that with the global economic crisis spreading around, further contractions are to be expected.
a) The European Union late last year prepared a set of measures worth approx. 200 billion euro (1.5% of the EU GDP).
But European experts have recently stated that the situation is a lot gloomier, and that these measures will be significantly extended (January 2009):
In the EU, the GDP growth is expected to drop by approx. 1.8% in 2009, before a slight increase in 2010, by 0.5%.
The world economy will severely shrink in 2009, and the European economy will in turn be dealt a heavy blow.
Inflation is to drop quickly.
The European Commission also believes that the American and Japanese economies will witness severe contraction, by -1.6%, and -2.4% respectively in 2009.
Under the current circumstances, uncertainties are considerable.
Unlike the European Commission – which has increased the coverage of banking deposit guarantees (under a directive endorsed on October 15, 2008) to 50,000 euro and temporarily eased the procedures for State aid granting in 2009 - 2010 - Member States are the only ones in a position to draw up “bailout plans“ using national revenues, i.e. taxpayer money.
Famous for the incapacity to beat about the bushes, on November 5 the Germans proposed a Package of anti-crisis measures comprising long-term solutions, which are nonetheless immediately applicable and effective. Adding to these is a recent 100-billion euro package to guarantee loans for companies affected by the collapse of the crediting market.
Germany proves to be by far one of the world’s most creative states in launching effective solutions. The answer to the ongoing crisis raises the stake of the economic incentives package proposed early last week (and briefly presented in a BBC feature on January 2009) to 50 billion euro.
Among other things, the federal government offers 2,500 euro to those who discard vehicles older than 9 years and choose to buy a new car. Both the economy and the environment stand to gain. I wondered whether the world’s largest exporter resorted to protectionist measures, by unfairly privileging the domestic production. The answer is NO! So what makes such a reaction plausible? The Germans’ confidence in their cars: They will most certainly buy German cars. Can you imagine a German buying a Renault these days? Hardly! But what would the Romanians make of such subsidies? A similar plan to rescue carmakers also seems inefficient in the USA.
What I admire the most in this new set of measures is the easing of the fiscal burden on salaries. Specifically, contributions to healthcare funds have been cut down, and a 100-euro bonus is paid to all families for each child.
Alumnia, the Commissioner for Economic and Monetary Affairs, recommends however that all EU Member States facing balance of payments problems (e.g. difficulties in funding the current account deficit or in repaying foreign debts) should first of all discuss them with the European Commission, which is in a position to step in, alongside the European Central Bank. Only after such consultations, can the states in question resort to international institutions such as the IMF. Not least, the excessive deficit procedure is not to be initiated for minor deviations from the 3% of GDP threshold (that is, up to 0.75%).
b) An equally sharp thorn poking Romania’s optimistic eye is the European Commission’s much more pessimistic forecasts for 2009 Romania:
A 1.75% economic growth rate (as against 4.7% in the autumn of 2008 and against the approx. 2.5% rate targeted by the Ministry for Finance);
Annual inflation standing at 5.7%, as against 7.9% in 2008;
A 7.0% unemployment rate, in contrast with 6.2% in 2008;
A budget deficit yawning to -7.5% of GDP, as compared to -5.2% in 2008 (against the approx. 2% eyed by the Ministry for Finances);
A deficit of the balance of trade standing at -11.9% of GDP, as against -12.9% in 2008.
The Latvians and Spanish will have even more serious problems, because they are likely to see very harsh recession: -6.9%, and -5.0% respectively this year.
Romania’s European partner markets will not thrive either: Germany (-2.3%), Italy (-2.0%), Hungary (-1.6%) or Austria (-1.2%).
The inconsistencies between the Romanian and current European forecasts are easy to explain. If we consider the Romanian economy’s dependence on agriculture and the “Rain in May means plenty of bread” scenario, then we obviously confirm the Romanian forecast – 2.5% economic growth in 2009. If it doesn’t rain, then we will see the 1.8% European forecast come true. There is no telling at this point how intense the economic contraction will be. But there will be contraction, there is no doubt about it, and anti-crisis solutions should not rely on optimistic economic growth expectations.
There are a lot deeper mismatches between the Romanian budget deficit forecast made by the European authorities (-7.5% of GDP) and the 2% goal pursued by the Ministry for Finance for 2009. This is even easier to explain. The Europeans have taken into account all the legislative commitments made in 2008 with respect to pension increases, salary increases, social security contributions, etc., which will burden the 2009 budget. They cannot imagine that in Romania, a law that has been endorsed and takes effect may well not be enforced after all. Which I believe will actually happen.
c) IMF has available an emergency loan fund of about 200 billion US dollars, and may resort to additional resources of 50 billion US dollars. Hungary, Ukraine, Pakistan and Iceland have benefited from this programme. IMF also initiates three sets of anti-crisis solutions available at a government level:
l Specific actions to restore confidence in the market, by supplying cash, banking and inter-banking guarantees and even by acquisition of assets from companies that face difficulties;
l Fiscal expansion (i.e. a temporary tax reduction – provided that it is a reversible process) in order to encourage consumption;
l IMF simulations indicate that, if fiscal incentives amount to approx. 2% of the global GDP, and of course, if they are adequately articulated, a moderate multiplication factor (1:1) would enable the global economy to recover 2 percentage points of its growth rate—which is a substantial reduction of the risk of severe economic recession;
l in Romania, for instance, this proposal is unworkable because of the budget deficit (put at 5.2% for 2008), of the short-term foreign debt, of macroeconomic policy indiscipline and of the consumer policies, which favour imports over domestic production;
l we may nonetheless give serious thought to a fiscal reform of social contributions as an example of effective response to the economic crisis; for instance, simulations for Bulgaria (a research report titled Tax Incentives as Crisis Response), published by two World Bank economists, Georgi Angelov and Simeon Djankov, in January 2009, indicate that:
l a reduction of such contributions by 7.5 percentage points, i.e. from 31.3% to 23.8%, would facilitate the creation or maintenance of some 130,000 jobs and would increase the economic growth rate by 0.5% ;
l the static and dynamic costs of such a measure would reach approx. 0.63% of GDP;
l such a reform has at least three other core benefits:
i. the government is not vulnerable to corruption, because it is not required to lavishly offer tax incentives, as it would be the case in a fiscal expansion programme;
ii. the tax incentive is direct and benefits all companies and employees;
iii. the fiscal reform is easy to implement, quick and has immediate effects;
reduction of the monetary policy interest rate by national banks - e. g. USA, Japan.
Anti-crisis measures proposed for Romania
The debate in the media and in governmental circles primarily focuses on proposals made by trade unions, while neglecting more beneficial structural reforms. This would further undermine the public finances, which are already vulnerable because of the budget deficit (put at 5.2% in 2008), of the substantial short-term foreign debt, of the indiscipline of macroeconomic policies, which encourage imports at the expense of domestic production. This is the trap that the previous “liberal” government also rushed into.
Therefore, I believe at least four measures are worth considering:
l an exemption from the tax on reinvested profits (accounting for max. 25% of the total profit) – in order to encourage investments, production, job creation and implicitly to stimulate demand (a measure included in the PDL governing programme);
l reduction of abusive and useless public spending, a simplified and efficient central and local administration – estimates go up to 30% of the public spending;
l fast and efficient absorption of the European funds - some 80% of the total structural and cohesion funds are intended for the central and local public administration;
l reduction of social security contributions – at first sight, the reduction of such taxes leads to a decrease of budget revenues; but it will facilitate job creation and/or maintenance, will encourage consumption and production; the dynamic benefits of this measure will offset its static costs and will boost economic growth;
The multiplicative economic effects of subsidising interventions on the preservation of jobs or on encouraging consumption and/or production, are null. This only postpones the rise of the unemployment rate and the budgetary costs entailed by this, until the resources earmarked for subsidies are used up.
The advantages of such reforms:
l the government is not vulnerable to corruption, because it is not required to lavishly offer discriminating fiscal incentives, as it is the case with sectoral or other subsidies;
l the tax incentives are direct and they benefit all companies and employees;
the fiscal reform is easy and quick to implement and has immediate effects.
As for the priority investments, here are the three major priorities, and if resources are limited, the solution is in public–private partnerships, i.e. concessions on the construction works, as it happens everywhere in Europe:
Better have a motorway toll, than have no motorway at all.
In times of financial and economic crisis, there’s no room for mistakes in public management, and the room for political mistakes in governing this country has shrunk to a minimum.
By Andreea VASS
Publicat în : English de la numărul 63
Revolutia din decembrie 89: Pacatul originar, sacrificiul fondator este prima carte dintr-o serie de sapte volume dedicate ultimelor doua decenii din istoria României. Nu am pretentia ca sunt detinatorul unui adevar politic, juridic sau istoric incontestabil, si sunt gata sa discut si sa accept orice documente, fapte sau marturii care pot lumina mai bine sau chiar altfel realitatea. Educatia mea stiintifica si religioasa m-a ajutat sa cercetez faptele în mod obiectiv, eliberat de ura sau intoleranta. Recunosc însa o anume încrâncenare în ceea ce am scris venita din durerea unui om care a trait în miezul evenimentelor si se simte lovit de acceptarea cinica a crimelor, abuzurilor, coruptiei si minciunii, sau de indiferenta la fel de cinica cu care sunt înca privite de catre o mare parte a societatii românesti.... Am scris aceste carti de pe pozitia victimelor mintite sau speriate, care nu-si cunosc sau nu-si pot apara drepturile. Le-am scris de pe pozitia milioanelor de români cinstiti care cred în adevar, în dreptate si în demnitate. Emil Constantinescu (text preluat din Introducerea cartii).
MINTEA CEA SOCOTITOARE
de academician Mircea Malita, Editura Academiei Române, 2009 În volumul de eseuri Mintea cea socotitoare, aparut la Editura Academiei Române, acad. Mircea Malita formuleaza în crescendo o serie de întrebari grave ale timpului nostru: Daca omul este rational, de ce se fac atâtea greseli în economie
sau în politica?; Daca rationalitatea nu e de ajuns, care ar fi rolul întelepciunii?; Din viitorul imprevizibil putem smulge portiuni, daca nu certe, cel putin probabile?; Ce si cum învatam pregatindu-ne pentru viitorul nostru?; Este în stare omenirea sa îsi vindece crizele?; Ne asteapta oare un dezastru final? s.a. De-a lungul anilor, acad. Mircea Malita a staruit asupra acestor teme în lucrari recunoscute, însa acum o face raportându-se la dinamica realitatii imediate, inspirat de cuvintele lui Dimitrie Cantemir: socoteala mintii mele, lumina dinlauntrul capului. Eseurile sunt structurate pe patru parti - Mintea senina, Metaforele mintii, Mintea învolburata si Privind înainte. Finalul este de un optimism lucid care tine seama de potentialul de rationalitate si imaginatie al mintii umane si, fireste, de generatiile tinere care îl pot valoriza benefic.
Această carte de poezie este seismograful de mare sensibilitate care înregistrează cele două întâlniri ale sufletului, deopotrivă cu URÂTUL care ne schilodește ca ființă, ca neam, dar și cu FRUMUSEȚEA sufletească nepoluată ce stă ca o fântână cu apă curată pe un câmp plin cu peturi și gunoaie nedegradabile. Ce poate fi mai dureros decât să surprinzi această fibră distrusă de aluviunile istorice încărcate de lașități, inerții, apatii, compromisuri devenite congenitale ale românului? Vibrația versurilor, directețea lor, simplitatea dusă până în marginea cotidianului paradoxal n-au efect distructiv asupra tonusului moral al cititorului, ci produc neliniștea cea bună, cum ar spune Sfinții Părinți. Citești în revolta și durerea poetei un mănunchi admirabil de calități: o demnitate neînfrântă, o fiziologie a verticalității și, mai ales, o inimă creștină, o inimă din ceruri, cum ar spune poetul latin. Căci, în această inimă din ceruri, există lacrimi deopotrivă pentru românul umilit, distrus până și-n visele lui, dar și pentru copilul din Gaza, cu sufletul și trupul chircite sub șenilele tancurilor unui război ce tinde să devină mai lung decât viața lui, ale unui război-viață, lacrimi pentru copilul evreu ce nu a putut fi salvat de la deportarea bestială, lacrimi pentru Tibetul sfâșiat. Și toate acestea fără impostura unui ecumenism sentimental, ci izvorâte din acel suspin curat românesc ce face esența lacrimii creștine. (Dan Puric)
ISLAMUL SI SOARTA LUMII - Fundamentalismul islamic ca ideologie politica de Virginia Mircea "Islamul si soarta lumii - Fundamendamentalismul ca ideologie politca invita la o reflectie mai adanca asupra porceselor lumii contemporane. Judecata critica si independenta a autoarei a produs o lucrare de o veritabila investigatie stiintifica, exact la momentul in care tema tratata deseori fara solutii si perspective ocupa scena din fata a politicii si problemelor mondiale. Cititorii o pot aseza cu satisfactie in bliblioteca lor de referinta. Vor fi mult ajutati in intelegerea evenimentelor care ne sesizeaza in prezent si intr-un viitor in care tema nu se va desprinde de mersul lumii contemporane." (academician Mircea Malita)