Tag: european union

Why Is Economic Populism Supported By Those Who Loathe Political Populism?

The Economist, perhaps more than any other magazine or newspaper, has outlined the dangers of populism in recent years.

In the past month alone, headlines on its website have included: “Why cosying up to populists rarely ends well for moderates,” “Populists fall short of expectations in the European election,” and “Populism and polarization threaten Latin America.” The populist style of politics, which seeks to pit “ordinary people” against “elites,” is rightly anathema to a magazine rooted historically in a classical liberal worldview.

It’s therefore surprising that the magazine’s Charlemagne column has endorsed a populist as the next president of the European Commission. On Tuesday, a piece entitled “Why Margrethe Vestager ticks all the boxes,” backed the current competition commissioner for the presidential role. It described her as having “applied both a liberal sense of consumer rights and an interventionist commitment to defending the little guy to the task of regulating technology giants.”

Make no mistake: on economic issues, Vestager is a populist in the truest sense of the word. A new paper, Antitrust Without Romance by Dr. Thibault Schrepel (an assistant professor of antitrust at Utrecht University), documents this by analyzing her speeches and comparing them with previous commissioners. He shows clearly how populism and the moralization of antitrust and competition policy has accelerated in recent years in the EU, with Vestager in the vanguard.

Rather than explaining antitrust as a sort of technocratic pursuit, the study finds Vestager’s discourse “emotional.” She seeks to pit the people against the elites in the form of big digital companies. In terms of populist rhetoric, Vestager refers to “the people” in 91 percent of her speeches, to companies as “them” in 81 percent, and puts herself in the “us” camp – as part of “the people” - in 85 percent of speeches. She has ramped up talk about “fairness” in competition policy since 2016.

Her ire has been wrought most obviously on the digital giants, who she pitches as elites undermining the interests of the people. They are said to “distort or fabricate information, manipulate people’s views and degrade public debate,” or help “harmful, untrue information spread faster than ever, unleashing violence and undermining democracy.” She has drawn analogies between digital technologies and products that cause death, and at various times has talked up public “fears” about companies.

This kind of rhetoric is a complete break from her predecessors. Dr. Schrepel finds that while previous Competition Commissioner Joaquin Almunia talked about the “people” often, he did not tend to pitch them against the companies, sometimes referring to the latter as “our firms.” Neelie Kroes, Competition Commissioner from November 2004 to February 2010, made very few references to “us” and “them.” When she did, she always described converging rather than diverging interests between the public and companies. Mario Monti, Commissioner from 1999 to 2004, scored lower still on all metrics of populism and moralism, only using “us” to refer to “the people” twice, instead using it regularly to refer to the European Commission or his competition team.

Dr. Schrepel’s work warns of the dangers of this populist rhetoric manifesting itself as a moralizing and highly politicized approach to antitrust, rather than a policy framework seeking to keep open and competitive markets with high levels of consumer welfare.

It is striking that The Economist and others are alive to the dangers of political populism, which pitches “the people” against political classes, the media or government institutions, but ignores the same techniques and rhetoric when it comes to business competition.

The Benefits of Frictionless Trade, as Seen in Saarland

The European Union comes in for a lot of criticism, including around these parts. Not all my colleagues have been so critical. Still, burdensome regulations by an unaccountable bureaucracy would trouble any libertarian. 

But this article in the Washington Post reminded me of the original promise of the Common Market, which grew into the European Union:

The degree to which the European Union’s post-nationalist vision has transformed the continent is evident in the German region of Saarland, an area of 1 million residents hard on the French border. 

The region — marked by lush forests, gentle hills and rich coal deposits that once made Saarland an industrial jackpot — has changed hands eight times over the past 250 years. In the past century alone, it was traded between France and Germany four times.

The first of those came in the aftermath of World War I, when France claimed the territory as compensation for German destruction of France’s own coal industry.

Germany lost the land again after World War II and only got it back in 1957.

As recently as the 1990s, the nearby border was subject to strict controls. But today, it’s largely invisible. French citizens commute to Saarland for work or pop by to buy a dishwasher. Germans cross into France for lunch or to pick up a bottle of wine. French — the language of the longtime enemy and occupier — is part of the fabric of Saarland, and it’s welcome.

“We’re neighbors. We’re friends. We marry each other. One hundred years ago, we killed each other. It’s been a great evolution,” said Reiner Jung, deputy director at the Saar Historical Museum in the region’s capital, Saarbrücken.

Of course, countries could drop their trade barriers without creating a supranational bureaucracy. But too many people misunderstand economics and believe giving up their trade barriers is a cost, so creating a customs union, a common market, or even a European Union may often be the only way to get the substantial benefits of free trade. And frictionless trade is even harder to achieve without multinational negotiations. So there are pros and cons to arrangements such as the European Union, but we shouldn’t underestimate the great benefits of commerce and movement across national borders.

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Two Minimum Wage Charts for Andy Puzder

Donald Trump has tabbed Andy Puzder to lead the Department of Labor. Puzder is the CEO of CKE, the restaurant outfit (read: Hardee’s and Carl’s Jr.). CKE, thanks to Puzder saving it from the bankruptcy hammer, employs 75,000 workers (read: jobs). Puzder knows that “high” minimum wages, such as the $15 per hour one thrown around by progressives, is a job killer for low-skill workers.

During his nomination hearings, Andy Puzder will no doubt be grilled about his views on “high” minimum wages. His inquisitors will trot out glowing claims about the wonders of a $15 per hour minimum wage, as did President Obama in his 2014 State of the Union address. As the President put it: “It’s good for the economy; it’s good for America.” Not so fast.

The glowing claims about minimum wage laws don’t pass the most basic economic smell tests. Just look at the data from Europe. The following two charts tell the tale and should be tucked into Andy Puzder’s briefing portfolio.

There are six European Union (E.U.) countries in which no minimum wage is mandated (Austria, Cyprus, Denmark, Finland, Italy, and Sweden). If we compare the levels of unemployment in these countries with E.U. countries that impose a minimum wage, the results are clear. A minimum wage leads to higher levels of unemployment. In the 21 countries with a minimum wage, the average country has an unemployment rate of 11.8%. Whereas, the average unemployment rate in the seven countries without mandated minimum wages is about one third lower — at 7.9%.

Italy’s Renzi Goes Toe-to-Toe with the EU over Italy’s Troubled Banks

Only 17 percent of Italy’s money supply (M3) is accounted for by State money produced by the European Central Bank (ECB). The remaining 87 percent is Bank money produced by commercial banks through deposit creation. So, Italy’s banks are an important contributor to the money supply and, ultimately, the economy.

In anticipation of poor results from the Italian banks’ stress tests (which will be reported on July 29th), Italy’s Prime Minister, Matteo Renzi, has indicated that his government will unilaterally pump billions of euros into Italy’s troubled banks to recapitalize them, so that they can continue to extend credit and contribute to the growth of Italy’s broad money supply. There is a problem with this approach: it is not allowed under new EU rules. These rules require that bank bondholders take losses (a bail-in) before government bailout money can be deployed. But, in Italy, a big chunk of bank debt (bonds) is held by retail investors. These retail investors vote in large numbers. So, the EU bail-in regulation, if invoked, will certainly put Renzi’s neck on the chopping block. And that will come sooner rather than later because the Prime Minister has called for a referendum on Italy’s constitution in October and stated that he’ll resign if the referendum is voted down.

It’s no surprise that Renzi has his eye on banks. It’s also easy to see why he is worried and ready to pull the trigger on a state-sponsored bank bailout. The accompanying chart on non-performing loans should be cause for concern.

To put the non-performing loans into perspective, there is nothing better than the Texas Ratio (TR). The TR is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

So, the denominator is the defense against bad loans wiping the bank out, forcing it into insolvency. A TR over 100 percent means that a bank is skating on thin ice. Indeed, if the non-performing loans were written off, a bank with a TR in excess of 100 percent would be wiped out. All of the five big Italian banks in the accompanying table — including the Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank — fall into this ignominious category.

They need to be recapitalized. This could be done by issuing new shares on the market. But, all these banks’ shares are trading well below their book values. BMPS’ price is only about 10 percent of its book value, and Intesa Sanpaolo (the best of the lot) is only about 66 percent. In consequence, any new shares issued on the market would dilute existing shareholders and be unattractive. This is why an Italian state rescue is the most attractive source for the recapitalization.

What if the United Kingdom Departs the European Union?

Donald Trump’s success in the U.S. is not unique. Europe is being buffeted by similar populist currents.

The United Kingdom might vote to exit the European Union in June. Moreover, a yes victory might spark what John Gillingham of the Harvard Center for European Studies and Cato’s Marian Tupy of the Cato Institute called a “rush for the exits.”

The most important question for UK voters is: Does belonging improve their lives?

European unity originally was designed to expand economic markets. The “European Project” took a dramatic new turn in 1993 with the Maastricht Treaty, which created the European Union and set as a goal “ever-closer union among the peoples of Europe.” This process was enthusiastically endorsed by a Eurocratic elite, many of whom are located in Europe’s quasi-capital of Brussels.

Are the benefits worth the cost? The single market remains the organization’s greatest contribution to Europe. However, regulation increased as Brussels expanded its authority. The London-based group Open Europe figured that the 100 most important EU regulations cost Britons about $33.3 billion annually.

The EU unabashedly infringes national sovereignty. For instance, Nile Gardiner of the Heritage Foundation wrote: “For decades, the British people have had to surrender their right to self-determination and have been forced to endure the humiliation of having British laws being overruled by European courts, and a multitude of rules and regulations imposed by unelected bureaucrats in Brussels.”

The UK government figures about half of economically significant laws originate in EU legislation. Yet London doesn’t need oversight from Brussels, having set the global standard for parliamentary government for much of the world.

Which is why Prime Minister Cameron pressed for broader British exemptions from EU dictates. He won only modest concessions.

At least Brussels still is less Leviathan than is Washington. But some Eurocrats openly pine for a United States of Europe.

Unfortunately, continental government is almost inherently anti-democratic. The EU has been attacked for its “democratic deficit.” Washington suffers a similar problem.

What the American Experience Suggests for Brexit

A few years ago President Barack Obama urged members of the European Union to admit Turkey. Now he wants the United Kingdom to stay in the EU. Even when the U.S. isn’t a member of the club the president has an opinion on who should be included

Should the British people vote for or against the EU? But Britons might learn from America’s experience.

What began as the Common Market was a clear positive for European peoples. It created what the name implied, a large free trade zone, promoting commerce among its members. Unfortunately, however, in recent years the EU has become more concerned about regulating than expanding commerce.

We see much the same process in America. The surge in the regulatory Leviathan has been particularly marked under the Obama administration. Moreover, the EU exacerbated the problem by creating the Euro, which unified monetary systems without a common continental budget. The UK stayed out, but most EU members joined the currency union.

Economics of the Syrian Refugee Crisis

The Syrian Civil War has produced about 5.8 million Syrians seeking refuge or asylum elsewhere–a scale of population displacement unseen since World War II. Although the flow into Europe dominates the news, most of the registered Syrian refugees remain in the Middle East. Lebanon, Turkey, and Jordan are the main recipients of the immigration wave, receiving roughly 1.1 million, 2.7 million, and 640,000 Syrians, respectively. The Gulf States are hosting about 1.2 million Syrians on work visas but they are not legally considered refugees or asylum seekers because those nations are not signatories to the UNHCR commission that created the modern refugee system. Regardless, the humanitarian benefit of Syrians working and residing there is tremendous.

The movement of so many Syrians over such a short period of time should result in significant economic and fiscal effects in their destination countries. Below is a summary of recent economic research on how the Syrians have affected the economies and budgets for Lebanon, Turkey, Jordan, and Europe. 

Lebanon

Syrian refugees are 24 percent of Lebanon’s population–the highest Syrian refugee to population ratio in the world. However, neither the Lebanese government nor the United Nations has established official refugee camps in the country and registration of new Syrian refugees stopped in May 2015. International NGOs provide humanitarian aid that benefits over 126,000 destitute Syrians, but significant funding shortages have left some Syrians living on less than half a dollar per day. To more efficiently provide aid, the United Nations High Commissioner for Refugees has divided the country into four areas: Mount Lebanon and Beirut, North Lebanon, Bekaa Valley, and South Lebanon. Most refugees have settled in the underdeveloped areas of the Bekaa Valley and North Lebanon because the Lebanese in these areas share many family ties with Syrians. Locals in these areas are struggling to accommodate Syrian refugees despite the family ties.

Many Syrians, especially those with more wealth and greater skills, are responding to the poor economic conditions in North Lebanon and Bekaa by moving to South Lebanon and Beirut where there are more job opportunities, higher wages, cheaper rents, and safer communities. Syrian entrepreneurs are also welcomed in these regions of the country.

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