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Monday 30 April 2012

Governments,Governance and Elections - Implications for the Eurozone


In the previous blog entries I focussed on how good governance is a desirable public good but that it is tremendously difficult to export. Effective demand requires domestic political will and often it is in difficult times of austerity that sacred (policy) cows are sacrificed to the alter of balanced-budgets and sovereign de-ratings. And this equally true in developed mature economies.

Which brings me back to the challenges of governance back in the EU which often preaches developing and would-be EU entrants on the morality of good governance.

We are now in the 5th year since the onset of the financial crisis in 2007. And nowhere near the end of the pain. The news from Spain grows ever-more grim: unemployment is now 1 in 4 and the yields on its debt beginning to inch up. The new government of Rajoy has been in power since November and is in a governance-bind: its domestic political mandate is in effect hostage to the Eurozone agreement for greater austerity to balance books through the Fiscal-Compact .

And pretty much the same picture facing other so-called core Eurozoners: domestic audiences want to see growth: prosperity and jobs in their cities and countries from Finland to Portugual and from Ireland to Slovenia, irrespective of what is agreed for other places.

And this places the current Eurozone framework and, in the absence of a common fiscal policy, the intended 2nd best fiscal co-ordination through mechanisms such as common surveillance and fiscal rules with binding restraints, in a very sticky situation.

In the same way as donors call the shots in the development world since its their money, it is broadly true also for the Eurozone with the creditors doing the same -  be they via the writeoffs of Greek or Irish debt or explicit transfers in the form of EU Structural Funds.

What is different now in 2012 is that domestic EU politics is now taking centre stage and slightly away from the economics/financial debate of what is now the “new norm” of negative or low-growth trajectories for almost all economies aside from Germany and the Scandanavian countries – and even here the dynamics of political economy have changed as Finland has highlighted of late.

How will this play out at the Eurozone level? I expect increased volatility as populist sentiment of pre-electoral phase leads to a more centripetal trend within each of the countries facing elections as simple self-interest comes to the fore. In this sense every Eurozone as well as other non-Eurozone EU countries are in the same boat.

There is already a whiff of this as EU politicians feel the political winds and adjust their antennae accordingly – whispers of a more growth-enhancing focus have quickly matured to Euro-speak and the rather boringly termed Growth Compact that needs to be incorporated as a complement to the Fiscal Compact.

In the end it will still come down to who is the net creditor and Germany will continue to be the ring-master but expect a continuity of EU salami-style economic decision making with gradual weakening of German resolve for pooling sovereign risk and the weakening the Fiscal Compact deficit limits as the new government heads – most likely led by the equally soporific-looking would-be new French president Hollande – gang up. Expect a continuing policy of loose monetary policy under the stewardship of Mr Draghi to soothe bank balance sheets. The EC as the EU’s executive already has off-the-shelf papers ready to be launched if and when we see something like the Growth Compact emerge.

In the meantime, there will be some rocky moments still ahead including the always entertaining Referendums in Ireland – this time on the Fiscal Compact on May 31st coupled with a  possible tail risk that the apple cart of political stability is genuinely toppled through the election of extremists bent on fighting the EU diktat, leading to a possible exit from the Eurozone.

Folk have previously discussed the possibility of Greece exiting the Eurozone, but what probability of say Holland or another core country doing so?  

Friday 27 April 2012

Governments, Governance and Elections 2


I chose the theme of this set of blogs under the Governance plank because it has received so  much attention in recent years, not least in development circles with everyone from the UN talking about “democratic governance”, the World Bank with its large data set that covers a range of political, economic and transparency indicators through to the herd of donors from the EU to bilateral government donors committing funds for all manner of financial support under the guise of governance-enhancement.

Moreover, a considerable amount of the EU’s Budget Support initiatives - ie dollops of Euros that can be hundreds of millions of Euros - are predicated on sound macroeconomic and public finances – or governance in the fiscal sphere, to ensure that these aid transfers are not simply siphoned off for new jets or simply wired to an offshore zone by the recipient country’s leaders.

One of the fascinating aspects as an economist-cum-policy advisor has been to see how this focus on governance has actually affected outcomes in emerging economies. Put simply, does it actually have any impact?

An army of evaluators will come out with positives as regards process, transfer of knowhow and value-for-money where hard money is transferred. But the bottom line is that well-meaning advice and fingure wagging only goes so far. At the end of the day there is no substitute for domestic ownership.

Example: the Arab spring. This had nothing to do with external support or advice. The EU’s had initiatives such as the Euro-Med Partnership and now the External Neighbourhood Policy Framework in place. But frankly the EU and the West generally was caught out by the timing and speed of the contagion across the MENA region, and which is sadly now engulfed in Syria. External initiatives are now trying to catch-up by offering assistance through aid and debt-finance via IFIs including oddly the EBRD that initially started with a mandate for the transition countries in the CEE region.

The dismantling of decades-old regimes in Libya, Egypt and Tunisia coupled with modest changes in Morocco and Jordan suggest a political structural adjustment and hopefully improved political and economic governance. On the other hand, the transition toward Arab-style democracy will take time and have a specificity in the same way Asian or Latin American democracy developed, but endowed with Arab history, culture and religious values.

Whether this transition is smooth or temporarily reversible remains to be seen. But outside support will have temporary and marginal effects – be they dollops of cash from GCC countries, pledges from hard-pressed countries in the EU or the US, or well-intentioned technical assistance. 

So does outside support work anywhere? Yes, where there is a buy-in. Or put another way, where there is incentive-compatibility or demand from the recipient country. The EU Accession Process is one such success story (although some might argue about Bulgaria and Romania) and possibly where financing through Budget Support has targeted Low Income Countries.

The Accession Process was a major success in terms of the transformational effects on the formerly planned economies that underwent radical changes from economic management to the roles of the executive, judiciary and all aspects of governance. Yes external ratings and qualitative appraisals confirmed this, but the real drive was a genuine wish by these countries to meet the challenges of compliance with the EU Acquis in order to become full members of the EU. And in turn the external assistance had bite or credibility, often with solid pre-conditions as well as followup support to deepen the reforms.

Counter-examples exist as one moves east towards the CIS where a similar approach has not been credible due to lack of genuine demand by the beneficiary governments or their electorates coupled with a lack of clear goal such as EU Accession. One even wonders the relevance for sometimes highly dubious support for resource-rich countries in the 'stans when EU tax-payers are toughing it.

For the Low Income Countries I believe there is evidence that support works. In fact I authored a report for the EC in 2011 that reviewed counter-cyclical budgetary support to 20-odd LICs in Africa, Caribbean and Pacific Regions that received targeted budget support in 2009-10. Such funding worked to alleviate pressure on vulnerable countries by helping to act as safety nets for what would otherwise have been devastating cuts in budget lines for social protection and education and by leveraging funding from the IMF, the World Bank and regional development banks. But alas, it had nought to do with governance!


So all doom and gloom? Not at all. I draw key lessons:
  1. Governance is determined domestically and cannot be foisted on governments or peoples.
  2. What the Arab spring and similar movements elsewhere – eg Russia in the run up to the presidential election – shows is that the real catalyst for change is actually the rapid rise of information flow and ideas that empowers people. The fall in the marginal cost of acquiring and dissemination information is the currency of the early part of this century and will be the key driver for changes in political opinion and therefore governments and governance.
  3.  For the MENA countries the challenge is how to navigate the political changes and attend the basic demands of citizens and families everywhere: stable food prices (big issue for low income families and which will only rise given the secular rise in food prices in the coming few years), job creation (again a big issue for these countries with high youth unemployment) and access to jobs based on merit rather than party or clan loyalty.
  4. New political leaderships will mean uncertainty will continue to see high country risks although on the upside all of the countries in north Africa except perhaps Libya retain reasonably good administrative systems that will help to mitigate some of the volatility.
  5. Channels and modality of external assistance are well developed but remain tied to supply-side preferences from the donors. This is natural in terms of ensuring value-for-money for donor governments and their taxpayers and is unlikely to change. Focus on sound fiscal management and budget programming is an area which should continue to receive focus as this is often the most important tool for sectoral policy reforms.

Monday 23 April 2012

Governments, Governance and Elections 1


I have been away in the CIS, the Balkans and to Egypt over the last few weeks – the latter to lay down on the sun-fuelled beaches where the Sun God, Ra, still pontificates on a daily basis, to its current 21st Century crop of worshipers who fly over on a weekly basis – mostly a pale-faced lot from Europe!

So where are we in late April?

The Euro Crisis continues to mutate although the chances of the imminent collapse of the Eurozone has not materialised as some commentators unfamiliar with the political nature of the EU would have led you to believe.
Continuing with the classical theme, perhaps a more apt description would be to term the Euro Crisis more akin to a Madusa-isation: a wonderful creature that the gods (of Economics in this case) turned into an ugly thing to behold: that would turn any market that looked at too long -currency, credit and bonds -  into stone.

The focus continues to shift from Euro Member-State to Member State. 24-7 coverage magnifies formerly domestic political situations into another potential banana-skin, hurdle or potential fissure for the Eurozone. We have shifted from the periphery towards the core. Spain is now in the headlights but the news of the collapse of the Dutch government highlights how domestic political machinations - in this case by the rather aptly named wilder Mr Wilders who pulled out his Right Wing party from the governing coalition to protest against diktat from Brussels providing limits to the Dutch fiscal stance.

Madusa’s head was full of snakes if I recall from my school day review of Classics (and updated by the recent remake of the Clash of the Titans movie!). In this case we have 15 Eurozone heads and in fact 12 more non Euro-zone snakes for the rest of the EU countries facing the chilling impact of a faltering Eurozone on their growth coupled with the increasing realisation of what the Fiscal Compact implies.

Put more simply, we now have a potential conflagration that is affecting political calculus pretty much everywhere in Europe: Eurozone, the rest of the EU (Czech, Slovakia, Poland…) and those wannabee EUers such as Croatia and Serbia.

What does this mean in terms of strategy and outcomes for macro and political risk?

Ignore the white noise about “is there a return to growth or not”. The plain fact is that the Euro crisis is entrenched and will take a good few years to resolve. Policymakers are making efforts but are themselves hampered by domestic politics in each of these countries that means that efforts to resolve the crisis will continue to be gradual, piecemeal and sometimes perverse.

The Dutch instance is a case in point – until literally a few weeks back the Dutch were busy chastising the fiscally weak countries and now the country’s politicians find themselves facing the same challenge: fiscal machismo is possible only if you have a strong domestic plebiscite – as when the Scandinavians did so in the 80s following the banking crisis.

Programmed elections in France and forced elections through fall of government – Ireland, Greece, Italy…Slovakia, Holland…- will lead to spikes in risk as politicians rip up the European scripts and focus on the prime directive for any politician, of ensuring political survival.