Regarding ‘‘Wise men’ chief admits EU failure on growth agenda’:

Felipe González, a former Spanish prime minister and chairman of a reflection group on the future of Europe, stated that the Lisbon Strategy for Growth and Jobs had failed.

That is right as regards the initial objective. But we must learn from history.

In 1961, Nikita Sergeyevich Khrushchev, first-secretary of the Communist Party of the then-Soviet Union, announced the objective of surpassing the United States in per capita production within twenty years. Thirty years later, the Soviet Union dissolved itself. The paradigm failed and objective was missed.

Also in 1961, John F. Kennedy, president of the USA, announced the goal of landing a man on the Moon: “No single space project in this period will be more impressive to mankind, or more important […] and none will be so difficult or expensive to accomplish.”

The objective was achieved when men landed on the Moon on July 20, 1969, almost six years after JFK’s death. The paradigm shift was successful in mobilising society, research and the economy. The eventual success of the undertaking was secondary. Kennedy said it best himself: “We choose [to] do the other things, not because they are easy, but because they are hard.”

In 2000, political leaders of the European Union (EU) adopted the Lisbon Strategic Goal for the next decade to become the most competitive and dynamic knowledge-based economy in the world by the year 2010. Five years later, the strategy was re-focused; the initial objectives remain on the distant horizon. Nevertheless, it has started a process that can hopefully only be beneficial for the entire EU and possibly beyond.

Obviously, the statement of González does not tell the full story. It is observable that the Lisbon process has become more important than the initial objectives. Another lesson for history. If history has taught us anything, it is that humanity needs long-term vision, not short-term political opportunism.

Political determination certainly demands respect. But high-flying declarations are not enough. Unrealistic and over-ambitious objectives are misleading and result in public loss of confidence in the political establishment when the time comes to redeem the promises.

It has become good Latin to pick-up from time-to-time opportune catchwords with limited meaning for the laymen, like “most competitive and dynamic knowledge-based economy”, or “GDP as measure for economic- and social advancement”, or “percentage of GDP spent on research as a measure for competitiveness, or clean, green investment”.

Political leaders can be short-sighted and opportunist, and thus make mistakes. In the absence of discerning debate with public and societal involvement, buzzwords get their own life and remain hanging in the political arena and its gravitational pools. At least until a new buzzword emerges.

In this process the wisdom of democracy: (‘demos’ viz. people and ‘kratos’ viz. rule) appears by hook or by crook to have sunk into oblivion and forgotten that people first of all need food and a place to live in a clean environment. Certainly not buzzwords…

Gilbert Fayl

European Academy of Sciences and Arts

Regarding ‘MEPs back new rules on nanomaterials in cosmetics‘:

The era of nanomaterials has arrived. Let’s not make the same mistake as we did with industrial chemicals, where we passed them off as safe on the back of animal tests, only to discover that many are very dangerous to human health.

Today we can use modern toxicology to test the safety of nanomaterials. The science of toxicogenomics is a good example, because it uses human cell lines to pick up early warning signs – even of minute particles, such as titanium dioxide, contained in cosmetic products.

Andre Menache

Antidote Europe

Regarding ‘Unreformed European school system ‘might collapse’‘:

Thank you for reporting about the European schools and the public hearing about the system in the European Parliament.

I draw your attention to a comment made by one of the parents during the hearing: when talking about the European schools and the issues connected to them, all the attention focuses on the situation in the big centres of Brussels and Luxembourg.

Eight of the 14 schools are situated elsewhere, and the circumstances in these schools are very different. The percentage of cat. 1 pupils can be fairly small, giving the opportunity to enrol even a majority of children of ordinary European taxpayers. So no social apartheid there, but an opportunity for expats as well as citizens of the host country to be educated in a European-oriented, international environment and experience in real life that foreigners are perhaps different, but not weird.

Europe should seize the opportunity offered by those schools to promote the integration of Europe and work towards the implementation of the Treaty of Lisbon.

Moreover, the European schools outside of the big centres are at least as much needed to ensure the proper working of the European Institutions as those in the big centres. As pointed out during the hearing, some of the EU institutes are located in rather unfavourable areas, e.g. because there is a nuclear reactor on the site.

This leads to difficulties for the institute to attract and maintain staff and also to husbands and wives living separate from one another because the needs of the children do not fit in with the needs of the job. The presence of a fully-fledged European School is necessary, as only the national education system is available as an alternative.

Carine Lingier

Bergen European School

Regarding ‘Romania seeks IMF loan as Eastern crisis worsens‘:

wiiw recently published its forecasts for Central, Eastern and Southeastern Europe, Kazakhstan and China, in a report entitled ‘Differentiated Impact of the Global Crisis’. It analyses recent economic developments and short- and medium-term development prospects, covering the countries in Central and Eastern Europe (CEE) and Southeastern Europe including Turkey (SEE), together with China, Kazakhstan, Russia and Ukraine.

A broad variety of growth slowdown and recession patterns

Common to all countries covered by the wiiw report is a pronounced economic downturn. Effects of the global financial crisis – a credit crunch, a decline in industrial production and foreign trade – are now observed in the CEE and SEE countries, as well as those further east.

Individual countries’ performance, both current and projected, is not uniform. Differences stem from country-specific conditions. Several new EU members have managed to strengthen the international competitiveness of their corporate sector in recent years, and have attained a relatively high degree of trade diversification.

In other countries, mostly in Southeastern Europe, the corporate sector has been severely strained on account of pronounced real appreciation. This is reflected in high current account deficits.

In 2009, some countries in the region will experience a significant slowdown in GDP growth: the Czech Republic, Poland and Slovakia; Albania; Kazakhstan and Russia; and last but not least, China.

Other countries are expected to suffer a significant drop in GDP: Estonia, Hungary, Latvia and Lithuania; Croatia, Macedonia and Turkey; Bosnia and Herzegovina, Montenegro and Serbia; and Ukraine.

Straddling the two sub-groups are three new member states, in which GDP may stagnate or decline slightly in 2009 – Bulgaria, Romania and Slovenia.

Risks associated with major imbalances and high indebtedness

Whereas as a rule, fiscal deficits have shrunk relative to GDP in recent years, countries had ample room for manoeuvre space in which to run up substantial or even massive trade and current account deficits.

Except for Turkey, in all SEE countries, the current account deficit in 2008 exceeded 10% of GDP. It ran as high as 27% in Montenegro, 25% in Bulgaria and 18% in Serbia, while it ranged between 10 and 15% in Albania, Croatia, Macedonia and Romania. Outside SEE, only in Latvia and Lithuania were the deficits of a similar magnitude: 12-13% of GDP.

However, the current account deficits in the CEE and SEE countries are high in general. With the exception of the Czech Republic, current account deficits exceeded 5% of GDP throughout the region. By contrast, China and Russia have a long tradition of current account surpluses.

When international financial markets assess risks, a country’s degree of indebtedness may play an even more decisive role than its current account deficit. Gross external debt is quite high in some of the CEE and SEE countries, amounting in some instances to over 100% of GDP. The countries in question are Latvia (137% in 2008), Hungary (121%), Estonia (117%), Bulgaria (112%) and Slovenia (104%). In Croatia, the ratio in 2008 was 96%. Some of this debt will fall due in 2009 and require refinancing, thus posing a major vulnerability problem.

Indicators such as government deficit, government debt, current account deficit or external debt typically tell us something about an economy’s vulnerability. However, if applied to Russia, we see that the country has recorded no government deficit in recent years and government debt has been low, further to which the current accounts shows a large surplus and external debt is low.

All that notwithstanding, Russia is suffering an economic setback and its currency is depreciating. Owing to the country’s extreme dependence on revenues from energy exports, the sharp decline in energy prices has had a disastrous effect, revealing severe structural weaknesses in both the financial and non-financial sectors.

Turkey, another large economy by CEE and SEE standards, faces a drop in its GDP and devaluation of its currency, despite a rather strong corporate sector and a correspondingly diversified trade structure.

Under the impact of the international crisis, China’s growth has slowed down. The government’s budget has been balanced in recent years, while current accounts are in surplus.

Exchange-rate regimes do matter

When current account deficits or foreign-currency debts are high, a fixed currency peg, for example in a currency board context like in Bulgaria or Estonia, may come under severe strain. This is clearly visible in the case of Latvia.

In any country, the real exchange rate can develop in such a manner that puts the international competitiveness of a larger number of its companies in jeopardy; they may thus find it difficult to service their debt. Quite a few of them may go ‘Detroit’ in the sense of their being both important and yet unable to survive without state aid, thus causing governments still more trouble. Cases of this kind may occur also in some of the CEE or SEE countries, or east of them.

In countries with a flexible exchange rate, the real sector, especially producers of tradables, will benefit from devaluation against the lead currencies, whereas companies and households with high foreign currency debts will face trouble. This holds true for the Czech Republic, Hungary, Poland, Romania, Russia, Serbia, Turkey and Ukraine.

In most cases, depreciation is likely to decrease their current account deficit (at least, in terms of percentage of the GDP). For countries with a fixed peg, regardless whether the peg is official or de facto, keeping the nominal exchange rate constant will lead to a decline in GDP, which will be pronounced enough to incur a substantial reduction in current account deficits.

The divide between flexible-currency and fixed-peg countries will also be of significance in terms of price developments. Fixed-peg countries might well go through a phase of declining prices: a trend in fact that is already in motion. In flexible-currency countries, depreciation will have an inflationary impact, although this may be less than in periods of economic prosperity.

The wiiw projection of consumer price inflation shows that only in countries experiencing major devaluation viz. Russia and Ukraine will the rates of inflation be two-digit in 2009, yet for both countries the report expects deceleration compared to 2008.

Very limited space for anti-cyclical fiscal policies

The government deficit in the CEE and SEE countries will probably increase in both 2009 and 2010. The main reason will be a combination of lower revenues and overextended expenditures. The increases in expenditure will mainly stem from the need to support ailing financial and non-financial companies and pay out higher unemployment benefits.

Under such circumstances, the countries in question will – with very few exceptions – hardly be in a position to enact substantial demand-stimulating fiscal policies over a longer period. China and Russia’s governments, however, have some room for manoeuvre.

No swift return to high growth

The extent and eventual date of a recovery from the current slowdown and slump in the various CEE and SEE economies is shrouded in uncertainty. Increasing net exports have the highest potential of becoming the engine of future growth; the balance of CEE and SEE trade can, however, improve only in the case of some partner countries’ trade balances deteriorating correspondingly vis-à-vis these countries.

It is uncertain as to whether the United States or Western Europe will assume that role in the near future. The impact of major devaluations, and hence improved competitiveness, might ultimately be the key component of demand that leads to an upswing. In the event of favourable international developments, the region’s economy may start growing again in 2010 or 2011.

A return to high growth rates on a par with past years is somewhat unlikely in the near future, as foreign financing will not return to its previous level.

Peter Havlik

Vienna Institute for International Economic Studies (wiiw)

Source: wiiw (February 2009), Eurostat. Forecasts by wiiw, European Commission (Interim Report, January 2009) for Euro area (16 countries) and EU-27.

Regarding ‘Strauss: Europe ‘wasting billions’ by duplicating research‘:

The EU only funds only a small proportion of research in Europe. It would be bad for fundamental research in Europe if it were possible to carry out a single type of research in a single laboratory, instead of using several independent groups, because the most important findings are often independent and can occur simultaneously.

All research must be repeated by independent groups. Letting the European Commission tell us which group will make the discovery will hamper overall research.

Prof. K. Kristoffer Andersson

University of Oslo

Regarding ‘EU climate negotiator signals end of ‘free lunches’‘:

In the run-up to the Copenhagen COP and further to your interview with the European Commission’s Runge-Metzger, PWR would like to raise the question: ‘Is what is being negotiated by all parties in fact simply ‘business as usual’?’ (BAU).

To be effective, non-BAU scenarios normally require targets or limits that are challenging and which are achieved in realistic timeframes. In turn, this leads to real changes in behaviour and hence real reductions in GHG emissions.

Our research suggests that for the most part, GHG policy has so far lead to BAU and increasingly features timeframes disconnected from electoral or political cycles (e.g. 2030 or 2050).

Moving from the general to the specific: the USA. In its public COP paper published in January, the Commission proposes that the US reduces its GHG emissions by 24% below 1990 levels by 2020. The current US position aims for parity with 1990 emissions by 2020. The EU position seems unrealistic, the US position looks like BAU.

Taking one representative industry sector: in the US transport sector, cars and trucks account for 20% of US GHG emissions. Average fuel consumption for new cars and trucks (2004) in the US was 12lit/100km. There have been various proposals to raise US standards to around 9lit/100km by 2022.

EU new fleet average consumption was around 8lit/100km in 2004 and will reach about 6lit/100km in 2012. Given that US automotive companies are active players in EU markets, it would be easy for them to transplant their EU engine technology into US vehicles.

A doubling of US fuel economy by 2020 (or indeed by 2012) could lead to a halving of transport emissions. This won’t happen, because although disruptive change is needed, the default setting for most policymakers (and industry’s preference) is BAU. In February, a US car manufacturer opened a state-of-the-art engine plant to build V6 3 litre motors for passenger vehicles: BAU.

The EU is no better. The EU regulation covering Cars and CO2 is simply BAU. Two European OEMs will launch this year, mass market vehicles that will have lower CO2 emissions than those mandated for 2012. Indeed, before 2012, the EU light vehicle fleet will for the most part easily exceed the provisions of the regulation. A cursory glance at the recent Geneva motor show and its ‘green vehicle’ emphasis reinforces this view. So much for EU GHG legislation driving GHG reductions by pushing industry to do more.

Within the EU COP document, there is also talk of American forests somehow counting towards emission reductions. This can be classed as an accounting sleight of hand. Although forests help reduce the rise in GHG emissions, it is only concrete actions (burning less coal, burning less oil etc) which will lead to real emission reductions. Anything else is BAU.

Moving on to the ‘developing (?) world’, and more specifically the dynamic duo China and India. The EU’s COP document is somewhat vague with respect to addressing this pair’s growing GHG emissions. It mentions a 15 to 30% reduction by 2020 over 2020 BAU. Some straightforward creative accounting is more than capable of producing a 15% reduction below BAU.

Expressed another way, if there are no challenging targets (15% is not challenging in rapidly growing economies), there is only BAU. A recent McKinsey report on China notes that even deploying the best available green technology, Chinese emissions will rise by around 10% by 2030 on already high 2005 emissions.

A key element of current EU policy is to develop CCS and hope that China will use it to reduce its emissions. A glance at the trade balance between China and the EU shows a supplier–customer relationship. In the real world, it is normally the customer that calls the shots. However, in the ‘Alice in Wonderland’ world of climate negotiations, this relationship seems to be reversed which bodes ill for ‘challenging’ GHG emission reduction targets. In the case of India, recent comments by Mr Saran, India’s chief climate negotiator, indicate that India will accept no targets on GHG emissions, so for India it is BAU.

With respect to GHG financing, the EU document and Mr Metzger mention all sorts of impressive numbers ending in billions and aimed at “developing countries”.

Many ‘developing’ countries are becoming very unhappy with the current situation. In turn, this will make the COP negotiations much more difficult. If money that has already been pledged has not been disbursed (cue: doners warbling on about developing countries having a ‘lack of capacity’ to absorb the aid) then how does Mr Metzger propose to disburse all the new lucre supposedly on offer?

The EC COP position paper is not all bad. It slays the Indian IPR dragon and starts to address CDM. But for the most part it looks like BAU.

PWR will be undertaking further work in the near future to confirm the hypothesis that current EU and by extension global GHG emission reduction policies will result in BAU and that 450ppm will be exceeded unless action is taken which is disruptive.

Mike Parr

PWR

Your LinksDossier on the PSD (‘Payment Services Directive: The end of cash era‘) states:

“The Payment Services Directive does not cover Internet payments. Online purchases are regulated by the eMoney Directive adopted in 2000. The Commission is currently waiting for the PSD to enter into force before coming out with new proposals to amend the eMoney Directive and integrate it into the PSD.”

This information is wrong and misleading! The subject of the eMoney-Directive is e-money and not all kinds of Internet payments, which can be made by credit cards, debit cards, direct debit, credit transfer etc. PSD Titles III and IV are relevant for all kinds of cashless payments at physical or virtual point-of-sale, e-money included.

Dr. Hugo Godschalk

PaySys Consultancy GbmH

Germany