Refluxing Globalism (2)

Cat: ECO
Pub: 2015
#2003b

Shumpei Takemori (竹森俊平)

20221u

Refluxing Globalism

逆流するグローバリズム

0. Introduction:
1. European integration lacked strategic thinking:
2. Euro is the cause of crisis:
3. Where was the relief of Greece mistaken:
4. German excessive rule supremacy:
5. Unknown battle between US and Germany:
6. Suffering IMF:
7. Cause of concern of Japan:

0. 序文:
1. 欧州統合に欠けていた戦略的思考:
2. 危機の原因はユーロそのもの:
3. ギリシャ救済はどこで間違えたか:
4. ドイツの過剰がルール至上主義:
5. アメリカとドイツの知られざる戦い:
6. 苦悩するIMF:
7. 日本が今真剣に考えるべきこと:

• Flux and reflux is globalization is the today's most issue of concern in the world. Is the world getting to be flat or uneven?
• The trend of Refluxing Globalism is still in the process, such as Brexit, Tramp's US First, and US-China trade war; and even Human Coronavirus (COVID-19) accelerates refluxing globalism.

Résumé

Remarks

>Top 0. Introduction:

• In 2015, many phenomena occured worldwide to indicate global change; Greek financial dcrisi, financial support for Uklaine, establishment of AIIB.
  • Fast Track is urged

0. 序文:

>Top 1. European Integration lacked strategic thinking:

• Euro crisis:
  • Since end of 2009, the enormous deficit of Greece was revealed.
  • Good strategy has 1) clear goal including boundary and depth 2) means to accomplish, 3) consider possible risks; but the process of establishing EU has no such clear strategy.
• 1999 Maastricht Treaty:
  • didn't aimed 'financial integration.'
  • required each member state to keep:
    • Budget deficit no more than 3%; Government debt balance no more than 60% of its GDP
  • 2001 Greece joint EU by 'creative accounting' (a kind of window dressing)
  • >Top ’Dialectic thinking' of Europe:
• Emil Lederer: commented Japanese society as without dialectic development.
• European wars before Napoleon:
  • War between Kings by their mercenaries; war is a kind of risky investment
• Citoyen (Citizen): was created by French Revolution as the protagonist.
• General soldiers created by low cost by conscription
• Napoleon mobilized 700K soldiers to attack Russian.
• caused nationalism, and unified the country; nation state
• Why WWI occurred:
  • 9M war dead;
  • WWI continued until disappearance of the three empires (Germany, Russia, and Austria)
  • without WWI, WWII didn't occurred; but after two decades WWII happened.
• Jean Monnet (1888-1979); (Jean Omer Marie Gabriel Monnet)
  • one of the fathers of founding EU.
  • former a merchant of Cognac; making J/V by Germany and France
  • >Top ECSC (European Coal and Steel Community):
    • Integrated operation of French iron ore in Alsace and German coal in Ruhr area.
    • 1950; published as Schuman Plan by French foreign minister Robert Schuman (Schuman Declaration); will proceed to 'Customs Union'
    • 'Europe will not be made all at once; it will be built through concrete achievements which first create a de facto solidarity.
    • 1951: Treat of Paris signed by Germany, France, Italy and Netherlands, Belgium and Luxembourg.
  • Business first, Industry first, Economics first, forgetting the difference of culture and religion.
  • 1951 ECSC →1957 EEC→1967 EC→1993 EU
    • 1957 EEC (European Economic Community); core six countries.
    • 1973 UK, Denmark, Ireland joined EC.
    • 1990/10; East Germany merged into ECｈ
    • 1993 established EU by Maastricht Treaty
• Three pillars of EU:
  • European communities (economic, social and environmental policies)
  • Common foreign and security policy
  • Police and judicial cooperation in criminal matters.
• >Top The cause Euro crisis is Euro itself?
  • EU has inevitably developed by the way of 'Natural Selection'. (Social Dawinism)

1. 欧州統合に欠けていた戦略的思考:

• 提言→反論→矛盾→統合
  • 欧州: 異質性の宝庫
  • 芸術の多様性
  • 小規模戦争→文化的identity確立

• 1951 ECSC →1957 EEC→1967 EC→1993 EU
  • 商売第一、産業第一、経済第一
  • 3本の柱
    
    
• Expansion of EU:

>Top 2. Euro is the cause of crisis:

• Home bias:
  • tendency for investors to invest the majority of their portfolio in domestic equities, ignoring foreign equities; as a result of legal restrictions or additional transaction costs, and quoted in domestic currency.
  • North America 0.9; Japan & world average 0.8; EU 0.6 (>Fig.)
• High liquidity indicates easier transactions with many sellers and buyers.
• Japanese Government Bond, issued too much, has typically high liquidity.
• European banks had considered that Italian Government Bond was safer and standard asset.
• In 2011:
  • Greece crisis diffused to Spain (suffered from housing bubble), and Italy (suffered from bad financial situation, and interest rate rose sharply to 6.7% with 4% spread with German bond)
• >Top LTRO (Long-term Refinancing Operations):
• ECB (European Central Bank) financed with long-term and low rate to the banks in EU; European banks borrowed with not more than 1% within 3 years, and invested to the bonds with higher interest (5-6%).
• Italian banks did this LTRO operations and actively bought Italian G-bond.
• Since 2007, the home bias deceased in EU; German or French banks sacrificed Italian G-bond, which Italian banks bought back. (Reflux of globalization, or collapse of globalized pyramid)
  • Smaller countries in EU (Ireland 4.6M, Iceland 0.3M population) had benefited from Euro; they could easily construct less regulated zone for their financial center.
  • Ireland decreased corporate tax rate from 43% to 12.5%, inviting MS, Intel, and Dell, and foreign banks with light touch.
• Asset ratio to GDP: hold by Ireland banks is 9 times, Italian banks 5 times those of the countries.
  • Too much asset ratio hold by banks are riskier; the country could not control the asset by the nation's economy.
• >Top Defect of Euro: In EU, the currency was integration, but not the financial integration.
  • Abrupt capital flight: occurred in Greece crisis.
  • Exchange rate vs. Inflation rate:
    • Economic difference of each EU country appears in the difference of inflation rate.
    • International competitiveness appears in the inflation rate, not the exchange rate in EU.
  • Nominal or real interest rate:
    • In Germany, the nominal interest rate is, say, 2%, and the inflation rate is 1%, then the real interest rate will be 1%.
    • In Spain, if the inflation is 5%, then the real interest rate will be -3%; this shows the fund raised in Germany at 2% interest rate and invest in Spain gaining 5% inflation; the real interest rate will be -3% (profit margin).
    • Money flows from EU core countries (lower inflation rate) to EU peripheral countries (higher inflation rate).
• >Top GDP Deflator: Nominal GDP / Real GDP ☓100
• Fallacy of composition:
  • Continuous investment in the peripheral countries by the fund raised in the core countries.
  • Cause of Euro crisis: it has been seriously mentioned that the common financial policy must be applied to all EU member countries having different economic situation.
  • Difference of stance to deflation between credit country vs. debt country.
    • Voting right of ECB is one vote per country plus policy committee vote. (Germany and France have two votes)
• Ants and grasshoppers: ants made grasshoppers sing during summer.
  • But German banks (lending to peripheral countries) have also competed with US banks (lending subprime loans)

2. 危機の原因はユーロそのもの:

• Home bias in investment:

• EU GDP:

>Top 3. Where was the relief of Greece mistaken?

• 'Non bail-out clause' is the key: ECB is not the last resort.
• 1974: Greece democracy was established after the military dictatorship.
  • governed by two major parties; ND (New Democracy) and PASOK (Panhellenic Socialist Movement)
  • In 2009, changed to PASOC government; realized unexpected Greek financial deficit (published officially the deficit from 4% to 12.5%)
    • Maastricht Treaty requires the deficit should be not more than 3%.
    • In 2004, Greece was already over deficit when joined EU.
  • 2010/5 >Top the Troika banks started to support Greece.
    • There is no withdrawal clause from Euro. (Grexit)
    • Greece is faced with the choice of either accept the conditions of EU, or make default.
    • If Greece defaulted, it could not raise fund from ECB; may trigger a run on the bank.
  • Z-Plan: (simulation of Grexit case)
    • must avoid capital flight, including ATM stop and border control.
    • must print and distribute new Drachma currency.
      • In 2003, Iraq distributed new Dinar within 3 months under the eye of US military.
    • must establish new payment system other than conventional ECB network.
      • amputation of leg or spread of crisis (Domino to Portugal, Italy, & Spain)
• Troika system: financial supporting system to Greece
  • the >Top Troika method (EU, ECB, & IMF) financed $143B to Greece.
• The problem of Troika: UK is included EU, but not Euro; IMF supports countries borrowed in foreign currency.
• But Greece is EU members, having debt in Euro which is in liquidity crisis.
• ECB expanded the definition of Non bial-out clause, applying OMT (Outright Monetary Transaction) allowing indefinite buying the bond.
• IMF's support Greece enormously, beyond the limit of lending of 6 times of quota.
• >Top Greek's GDP decreased 17%, lower than initial estimation of 5.5%; and the government debt increased 170% from 130% of its GDP, though Greece succeeded 4% improvement in its primary balance.
  • Greek fiscal austerity caused further shrink of GDP.
  • IMF estimated 'the fiscal multiplier effect' as 0.5; but revised it as 1.0;
    • Greek debt amounted 200% of GDP; which means 5% decrease of government expense caused 10% shrink of GDP; thus the multiplier effect increase by the budge cut.
  • >Top Debt relief or acquittal is indispensable when repayment becomes impossible.
  • Bail-in: cancel of debt by the creditor
  • Bail-out: giving financial assistance as the third party, such as bridge finance.
• The Troika program function to make German & French banks escape from Greek G-bond; the owner of Greek G-bond rapidly changed from EU banks to public lenders such as IMF, ECB, & EC governments.
  • In 2011, the bail-in relief was finally executed, which was not effective to improve Greek inability of repayment.

3. ギリシャ救済はどこで間違えたか:

>Top 4. German excessive rule supremacy:

• ESM (European Stability Mechanism): located in Luxemburg.
  • replaced former EFSF (European Financial Stability Facility) and EFSM (European Financial Stabilization Mechanism)
• EU Financial crisis:
• In 2011, Italian premier changed from S. Berlusconi to Mario Monty to respond financial difficulty.
• In 2012, French president changed from Nicolas Sarközy to Françoa Hollande; lost tripple-A ration of G-bond, expecting some restriction from the market, and continued fiscal austerity.
• 2005- German Premier Angela Merkel took active responses during these times.
  • German showed better economic performance even in Euro crisis due to export competitiveness and lowered interest rate.
• Germany
• >Top Germany rejected bond-buying scheme by ECB; or quantitative easing policy of ECB.
• Germany's Constitutional Court orders only minor limits OMT (Outright Monetary Transactions) program launched by ECB's President Mario Draghi.
  • While, quantitative easing is a normal financial policy by ECB to stabilize prices; which is following FRB's policy (such as QE3, Quantitative Easing 3) purchasing MBS (Mortgage Backed Security) instead of G-bond.
• Two Mythological Events:
• In 1923, hyper-inflation occurred by buying G-bond by the central bank.
• In 1933, NSDAP (Nationnalsozialistische Deutsche Arbeiterpartei) seized government.
  • 1930-32: Heinrich Brüning adopted austerity and deflation policy under depressed economy, causing 6M unemployed people.
• >Top State debt burden:
  • should be DCF based annual burden, not only the principal amount.
  • defacto debt relief; but both EU and Greek government didn't mention about debt relied due to non bail-out clause.

4. ドイツの過剰なルール至上主義:

• Public debt balance ration against GDP and interest rate:
  1. Japan: 240% of GDP; 2.1%
  2. Greece: 175%; 2.6%
  3. Portugal: 130%: 5.0%
  4. Italy: 130%; 4.7%
  5. Spain; 90%; 3.3%
  6. Germany 80%: 1.9%

>Top 5. Unknown battle between US and Germany:

• German economist: doesn't accept Keynes economics.
  • Germany has adopted classic economic policy pursuing financially sound economics just like 19C pre-Keynesian idea.
• In 2011, US (Obaba administration) proposed EU an alternative idea to use SDR (Special Drawing Right, established 1969), maintaining 'non bail-out policy' as well as avoiding Greek default; which was preliminarily arranged by US treasurer Geithner and French president Sarközy
  • German Merkel had tried to solved the problem within EU, expecting no more support by IMF.
  • >Top In 2011/11/3, President Obama participated at the Cannes Summit, preparing some kind of fire wall against Greek crisis.
    • In 2008, US established TARP (Troubled Asset Relief Program) with $700B.
    • In 2010, EU established EFSM (European Financial Stability Mechanism) with €60B.
    • Italian new premier Mario Monty urged the relief plan as soon as possible.
    • But Deutsche Bundesbank (Jens Weidmann, president) opposed to use SDR to relieve a nation.
    • After the summit meeting without conclusion caused further confusion in the market; surging the interest rate Greek bond as high as 33%.
      • Obama reproposed Merkel the revised plan discussed on the Cannes summit; making ECB be able to relieve a nation which keeps financial discipline in EU.
      • This revised idea of Mario Monty was executed by Mario Draghi of ECB. (OMT, Outright Monetary Transactions), subject to the bond-issuing country's structural reform. (Conditionality)

5. 米国とドイツの知られざる戦い:

>Top 6. Suffering IMF:

• Merkel heard the opinions from Asmussen (ECB), Veidmann (DB), and Hindebrant (Swiss National Bank); their opinions differ but coincide in the difficulty of Grexit.
  • a different policy could be applied in case of peacetime or emergent time.
• IMF's function:
• IMF's support by SDR is unprecedented level; 32 times of Greek quota ($39B) rather than the usual upper limit of 6 times; Greek total debt is about $310B.
  • IMF's main function is to make bridge loan in US$; with IMF quota: US 17.69%, Japan 6.56%
    • The quota ratio doesn't reflect present economic balance; the total quota of Belgium and Netherland is more than that of China.
    • The reform of IMF is rejected by US congress, particularly by Republicans.
    • Now European countries need borrow from IMF, while Asian countries are lenders.
• IMF's important decisions (change of rules, appoint of executive director, and decision of borrowers, etc.) are decided by not less than 85% vote; meaning only US has the power of veto.
• >Top In 1997, Korean currency crisis:
• a typical liquidity crisis;
• IMF enforced Samsung to focus at semiconductor, Hyundai at automobile industry.
• Greece and Ukraine are the two main issues of EU, asking exceptional support from IMF.
  • But US congress, which has defacto veto of IMF.

6. 苦悩するIMF:

>Top 7. Causes of concern of Japan:

• Common Values:
  • 1) Democracy, 2) Market economy, 3) Financial resources are needed to support the common values.
  • But the financial resources are decreasing due to introverting trend in US/EU countries.
  • >Top Euro is the essential hard peg to German economy.
    • Euro is the common currency without pursuing financial integration.
    • EU is a movement of 'Open End'; gradual progress of integration, as deep as Euro, and as wide as up to Ukraine.
    • George Solos comments that EU's expansion is a kind of bubble; a cycle process of leverage and deleverage.
    • Imperial Overstretch like the ancient Roman Empire; whose peripheral countries could not be supported.
  • After Greece, Portugal, Spain, and Italy will have similar situation of national debt problems.
    • Could ECB could support endlessly to these countries.
    • Further progress toward 'disintegration.'
  • >Top In 2015, AIIB (Asian Infrastructure Investment Bank, capital $100B) was established; participated by 100 countries as of 2019/7.
    • Creation of AIIB is Chinese long-standing demand of Chinese status according to its economic influences.

7. 日本が今真剣に考えるべきこと:

Comment

• EU started from 1957 EEC by six core members but Brexit occurred in 2020 (after 64 years) and what will in 2031 (75 years after EEC)
  • USSR started in 1917 but dissolved in 1991 (75 years)

• a