Russia and Kazakhstan have been discussing the formation of a trade agreement for some time and an agreement is now in place. From July 1 2010 a customs union between these two countries will be launched. Belarus has also been in talks with the Russian government, but as yet, it will not become a member, due to disputes with Russia. Belarus was hoping that the customs union would free it from export duties on oil, but this has not been the case. The gas dispute between Russia and Belarus has continued, although a meeting is taking place to try to resolve the issue.
President Alexander Lukashenko has said that Belarus will sign the Customs Unions documents if Russia cancels petroleum products duties now and oil duties from January 2011. He said:
“As a goodwill step, we propose removing customs barriers and customs duties on petroleum products now, and we will wait until the beginning of next year regarding oil duties; but the duties must be removed from January 1.”
Although the customs union between Russia, Kazakhstan and Belarus formally began on January 1 2010, it will not work fully until these disputes have been resolved. The following articles consider this agreement and the likely impact on the countries’ negotiations to join the WTO.
Russia, Kazakhstan agree customs union minus Belarus Reuters (28/5/10)
Russia hopeful of settling Belarus gas dispute Reuters (19/6/10)
Belarus to sign customs union documents, if Russia cancel oil duties RIA Novosti, (18/6/10)
Creation of customs union should not hinder Russia’s entering WTO RIA Novosti (17/6/10)
Kazakhstan ‘moving to re-instate Soviet Union’ with customs unions with Russia Telegraph, Richard Orange (11/6/10)
Russia, Kazakhstan launch customs union without Belarus AFP (28/5/10)
Questions
- What is a customs union? How does it differ from a common market and a monetary union, as we have in Europe?
- Russia wants to maintain its tariff on gas and oil supplies. Illustrate the effects of the imposition of a tariff. Does society gain?
- What are the arguments for and against retaining protectionist measures on trade with other nations?
- Assess the likely effects of the customs union on (a) the individual members and (b) other nations. Who do you think will benefit and lose the most?
- What will be the impact of the customs union and its disputes on the accession of these countries to the WTO.
- Is it a good idea for Russia, Kazakhstan and Belarus to join the WTO? What conditions have to be met?
‘Austerity’ seems to be the buzzword, as more and more countries across Europe make steps towards reducing substantial budget deficits. The UK has implemented £6.2 billion of cuts, with cuts of £50 billion expected by 2015 to tackle a budget deficit of over 10% of GDP. Portugal’s deficit stands at 8% of GDP and this will be tackled with rises in income, corporate and VAT tax, together with spending cuts aimed at halving the budget deficit by next year. Ireland’s austerity package includes public-sector pay cuts of up to 20%, plus reductions in child benefit, tax rises, and several key services facing cuts in employment, including emergency service and teachers. And, of course, we can’t forget Greece, with a budget deficit 12.2% of GDP, a national debt of 124.9% of GDP, and a forecast to remain in recession this year and the next. The Greek economy faces hard times with a huge austerity drive, including 12% civil service pay cuts, a large privatisation programme, and substantial pension cuts.
Greece is already in receipt of a €110bn rescue package. The Hungarian economy has already received €20bn aid from the EU, IMF and World Bank and spending cuts have been implemented, as markets began to fear that Hungary would become the next Greece. Germany is the most recent country to announce austerity measures, including plans to cut €10 billion annually until 2016.
But, what does this all mean? For years, many countries have spent beyond their means and only with the global recession did this growing problem really rear its ugly head. The only way to eliminate the budget deficit and restore confidence in the economy and ensure future prosperity is to raise taxes and/or to implement spending cuts. As the German Finance Minister said: “The main concern of citizens is that the national deficit could take on immeasurable proportions”. Unfortunately, this has already happened in some counties.
Although austerity measures are undoubtedly needed over the medium term in order to get deficits down, the impact of them is already being felt across the EU. Strikes have already occurred in massive proportions across Greece in response to the austerity package and tens of thousand of workers in Spain and Denmark also took to the streets in protest. There was anger from industry, trade unions and the media in response to €86 billion of cuts ordered in Germany between 2011 and 2014. The UK has already seen a number of strikes and more could be to come with further spending cuts in the pipeline. The Public and Commercial Services Union is threatening to re-launch strikes which began in March involving 200 000 civil servants (the action was suspended for the election.) A spokesman said: “If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable.”
EU governments have announced public spending cuts of €200 billion, together with a €500 billion safety blanket for the euro. Although these cuts are unlikely to have any positive effects for the everyday person for perhaps many years to come, in order to restore confidence and ensure a future economy that is both prosperous and stable, these austerity measures are deemed by many as essential. As Guy Verhofstadt (the former Belgian Prime Minister) said: “We’re entering a long period of economic stagnation. That will be the main problem for years. Europe is the new Japan.”
But will reduced aggregate demand resulting from the cuts lead to a double-dip recession and a (temporarily) worsening deficit from automatic fiscal stabilisers? We wait with baited breath.
EU austerity drive country-by-country BBC News (7/6/10)
Europe embraces the cult of austerity but at what cost? The Observer, Toby Helm, Ian Traynor and Paul Harris (13/6/10)
Germany joins EU austerity drive with €10bn cuts Guardian, Helena Smith (6/6/10)
G20 to endorse EU crisis strategy Reuters (28/5/10)
The Global recovery? It’s each state for itself Guardian, Jonathan Fenby (9/6/10)
Austerity angers grow in Europe AFP (9/6/10)
Austerity Europe: who faces the cuts? Guardian, Ian Traynor and Katie Allen (12/6/10)
Is this the end of the European welfare state? New Statesman (10/6/10)
Questions
- Are spending cuts or tax rises the best method to reduce a budget deficit? Explain your answer.
- What are the economic costs of the austerity packages across Europe?
- Who is likely to gain from the debt crisis in Europe?
- If austerity packages had not been initiated to the extent that they have, how do you think the rest of the world have reacted?
- Using the BBC News article and the Guardian article ‘Austerity measures: who faces the cuts?’, which country do you think is (a) in the best state and (b) in the worst state?
- How will you be affected by the austerity measures?
Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
Fears of growing debt problems in the EU have caused global stock markets to plummet. On 25th May, the FTSE was down by 2.6%, Germany’s Dax index fell by 2.34% and in France the Cac 40 was also down 2.74%. Shares across Asia fell, including those in Australia, Hong Kong, Japan and Thailand. On top of this, there are concerns of rising military tensions between North and South Korea. This has only added to the pessimism of investors.
Then came the rescue of the Spanish bank Cajasur by the Bank of Spain, which did little to restore confidence in the world economy. The Spanish deficit has reached 11% of GDP, which is nearly 4 times higher than eurozone rules allow. Spain is also suffering from unemployment of more than 20%, which has led the IMF to call for massive structural reform in the country. The euro has also weakened, as investors sell the currency, because of growing fears of debt default amongst the eurozone countries.
Amid concerns of possible default by Greece, Spain and other countries, the IMF and the members of the European Union have agreed an emergency package of €750 billion (£650 billion). €250 billion comes from the IMF, with €440 billion available as loan guarantees for struggling nations and €60 billion from emergency European Commission funding. We can only wait to see how effective this rescue package will be in restoring confidence in the Eurozone economies.
Articles
Global stock markets see sharp falls BBC News (25/5/10)
Spain must make wide ranging reforms, weak recovery – IMF Reuters (24/5/10)
FTSE falls another 2.5% after Europe’s debt crisis sparks fears in Asian markets Mail Online (25/5/10)
IMF raises fresh concerns about the Spanish economy BBC News (24/5/10)
IMF Chief Economists – doubts over Greek aid remain Reuters, John Irish (24/5/10)
Markets still tense over eurozone debt Independent, Ian Chu (21/5/10)
FTSE falls below 5,000 due to eurozone crisis Telegraph (21/5/10)
FTSE plunges nearly 3% in opening seconds (including video) Sky News (25/5/10)
The contagion of austerity BBC News blogs: Gavin Hewitt’s Europe (25/5/10)
Europe debt crisis threatens recovery, OECD warns BBC News (26/5/10)
Data
In graphics: Eurozone in crisis BBC News (24/5/10)
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission (especially sections 1, 6, 16 and 18)
Questions
- Using a diagram, illustrate why the euro has weakened.
- Explain why stock markets have fallen across the world.
- What type of reforms are needed in Spain?
- What factors are likely to determine the effectiveness of the IMF emergency package?
- Are the austerity measures in the Spanish economy likely to lead to the similar outcomes that we saw in Greece, such as widespread strikes?
- Discuss the advantages and disadvantages of the rescue package. Does rescue involve a moral hazard?
The International Monetary Fund published a report on banking, ahead of the G20 meeting of ministers on 23 April. The IMF states that banks should now pay for the bailout they received from governments during the credit crunch of 2008/9. As the first Guardian article states:
It is payback time for the banks. Widely blamed for causing the worst recession in the global economy since the 1930s, castigated for using taxpayer bailouts to fund big bonuses, and accused of starving businesses and households of credit, the message from the International Monetary Fund is clear: the day of reckoning is at hand.
The Washington-based fund puts the direct cost of saving the banking sector from collapse at a staggering $862bn (£559bn) – a bill that has put the public finances of many of the world’s biggest economies, including Britain and the United States, in a parlous state. Charged with coming up with a way of ensuring taxpayers will not have to dig deep a second time, the top economists at the IMF have drawn up an even more draconian blueprint than the banks had been expecting.
The IMF proposes two new taxes. The first had been expected. This would be a levy on banks’ liabilities and would provide a fund that governments could use to finance any future bailouts. It would be worth around $1500bn: some 2.5% of world GDP, and a higher percentage than that for countries, such as the UK, with a large banking sector.
The second was more surprising to commentators. This would be a financial activities tax (FAT). This would essentially be a tax on the value added by banks, and hence would be a way of taxing profits and pay. Currently, for technical reasons, many of banks’ activities are exempt from VAT (or the equivalent tax in countries outside the EU). The IMF thus regards them as under-taxed relative to other sectors. If such a tax were levied at a rate of 17.5% (the current rate of VAT in the UK), this could raise over 1% of GDP. In the UK this could be as much as £20bn – which would make a substantial contribution to reducing the government’s structural deficit of around £100bn
Meanwhile, in the USA, President Obama has been seeking to push legislation through Congress that would tighten up the regulation of banks. On 20 May, the Senate passed the bill, which now has to be merged with a version in the House of Representatives to become law. A key part of the measures involve splitting off the trading activities of banks in derivatives and other instruments from banks’ regular retail lending and deposit-taking activities with the public and firms. At the same time, there would be much closer regulation of the derivatives market. These complex financial instruments, whose value is ‘derived’ from the value of other assets, would have to be traded in an open market, not in private deals. A new financial regulatory agency will be created with the Federal Reserve having regulatory oversight of the whole of the financial markets
The measures would also give the government the power to break up financial institutions that were failing and rescue solvent parts without having to resort to a full-scale bailout. There is also a proposal to set up a nine-member Council of Regulators to keep a close watch on banking activities and to identify excessive risks. Banks would also be more closely supervised.
So is this payback time for banks? Or will higher taxes simply be passed on to customers, with pay and bonuses remaining at staggering levels? And will tougher regulation simply see ingenious methods being invented of getting round the regulation? Will the measures reduce moral hazard, or is the genie out of the bottle, with banks knowing that they will always be seen as too important to fail?
IMF Webcast
Press Briefing by IMF Managing Director Dominique Strauss-Kahn IMF Webcasts (22/4/10)
Transcript of the above Press Briefing
Articles
The IMF tax proposals
IMF proposes two taxes for world’s banks Guardian, Jill Treanor and Larry Elliott (21/4/10)
IMF gets tough on banks with ‘FAT’ levy Guardian, Linda Yueh (21/4/10)
Q&A: IMF proposals to shape G20 thinking Financial Times, Brooke Masters (21/4/10)
The challenge of halting the financial doomsday machine Financial Times, Martin Wolf (20/4/10)
IMF’s ‘punishment tax’ draws fire from banking industry Financial Times, Sharlene Goff, Brooke Masters and Scheherazade Daneshkhu (21/4/10)
Squeezing the piggy-banks Economist (21/4/10)
IMF, part two Economist, ‘Buttonwood’ (21/4/10)
IMF proposes tax on financial industry as economic safeguard Washington Post, Howard Schneider (20/4/10)
IMF wants two big new taxes on banks BBC News blogs, Peston’s Picks, Robert Peston (20/4/10)
Obama’s proposals
Obama pleas for Wall Street support on reforms Channel 4 News, Job Rabkin (22/4/10)
Q&A: Obama’s bank regulation aims BBC News (22/4/10)
US banks may not bend to Barack Obama’s demands Guardian, Nils Pratley (22/4/10)
President Obama attacks critics of bank reform bill BBC News (23/4/10)
US Senate passes biggest overhaul of big banks since Depression Telegraph (21/5/10)
Finance-Overhaul Bill Would Reshape Wall Street, Washington Bloomberg Businessweek (21/5/10)
US Senate approves sweeping reforms of Wall Street (including video) BBC News (21/5/10)
Obama gets his big bank reforms BBC News blogs: Pestons’s Picks, Robert Peston (21/5/10)
Questions
- What would be the incentive effects on bank behaviour of the two taxes proposed by the IMF?
- What is meant by ‘moral hazard’ in the context of bank bailouts? Would (a) the IMF proposals and (b) President Obama’s proposals increase or decrease moral hazard?
- Why may the proposed FAT tax simply generate revenue rather than deter excessive risk-taking behaviour?
- What market conditions (a) encourage and (b) discourage large pay and bonuses of bankers? Will any of the proposals change these market conditions?
- What do you understand by the meaning of ‘excess profits’ in the context of the banks and what are the sources of such excess profits?
- Criticise the proposed IMF and US measures from the perspective of the banks.