Saturday 29 November 2014

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Who leaked the Luxleaks?

Posted by on 28/11/14

Yesterday a Ukrainian television asked me who leaked the Luxleaks. Not that they thought I knew. Their basic question was “Quid prodest”, who benefits from Luxleaks? They had in mind their country, which badly needs a strong Europe, rather than a weak one. The assumption is that by weakening Juncker, Europe is weakened. So who was pulling the strings?

Short question, short answer.

I said two things. First, I have no doubts that the Luxleaks, the famous Luxembourg tax files, were given to journalists by an intelligence service. We journalists are not equipped to get such files ourselves.
Secondly, the respective intelligence service has obviously been tasked to weaken Juncker. And indirectly, to weaken the EU.

I said I could think of two leaders who want to weaken the EU – David Cameron and Vladimir Putin. Cameron was against the appointment of Juncker in the first place, and according to my information, the Luxleaks were given to the journalistic consortium in May. That’s when Juncker won the European elections as “spitzenkandidat”.
Also, now that Luxembourg is under the spotlight, the London City can breathe.
But on the other hand, Luxleaks is now pushing the EU toward tax harmonisation, something London doesn’t want.

Putin too would like to weaken the EU, I said, and didn’t elaborate, as I was speaking to a Ukrainian audience.

Journalists protect their sources. That’s good; our profession is based on this trust. Journalists have also the duty not to be manipulated. Should they have refused to run the files? It’s a tough choice, because the Luxleaks are very valuable material.

The UK’s EU policy, progressive meltdown and rejection of `bankers’ bonus’

Posted by on 27/11/14
by Graham Bishop, EU Political, Financial, Economic and Budgetary policy expert and founder of /// The pace of collapse seems to be accelerating – and the commercial consequences for the UK may well intensify correspondingly, especially for the City of London. The timeline of the divergence between the UK’s attitude to the EU and [...]

Why Cameron should stay clear of an ‘emergency brake’ on EU free movement

Posted by on 27/11/14
David Cameron's 'immigration speech' is expected to take place very soon.

As we have noted several times, one of the options that he potentially could go for is an "emergency brake" - the ability to impose temporary restrictions on the number of EU migrants who come to the UK.

We can see why this would be appealing politically - but we fear that if Cameron does announce something like this, without having a clear vision for how it would work exactly in practice, it could turn into another net immigration target. Sounding very good in an election manifesto - but ineffective in practice.

We've made this point a few times but to elaborate, here's why:

An emergency brake would be targeted at flows of new EU migrants not the existing stocks. UK Ministers have previously spoken about the need to manage “destabilising flows” – however, this remains a vague term that could mean many different things. Pinning down what would constitute a destabilising flow could prove incredibly tricky. For example, the graph below shows that current flows are not proportionately higher than previous flows and remain small as a share of the workforce (relevant for their impact on wages). In general, if the bar is too high, the mechanism will never be used. If too low, the brake would become a long-term rather than temporary measure – a de facto limit – and be tremendously hard to negotiate in Europe.

Source: ONS
It is very difficult to codify objective criteria for pulling an emergency brake – particularly any that apply to the UK’s current situation. The UK economy is booming, unemployment is falling, EU migrants have high employment rates and the UK takes less EU migrants per head than several other EU member states. All these most obvious criteria won't work for the UK. It's hard to claim to be the best performing economy in Europe and simultaneously claim to have a 'crisis' so bad that special treatment is required. It would also be impossible to predict all the future challenges migration could pose.

Source: Eurostat
Possibly the most compelling argument the UK could use at the current time is that certain local areas are facing high pressures on public services and housing supply. However, restricting EU migration to certain areas of the UK would be very difficult to administer in practice, while national restrictions would be a disproportionate response to local problems. The impact of migrants is also hard to discern in exact terms given other domestic policies regarding housing and local services.

What the UK would effectively be asking for is a ‘time out’ from EU migration – which is largely a result of understandable political pressures. However, this necessarily makes the criteria for pulling the ‘emergency brake’ politically arbitrary – and in turn tougher to negotiate in Europe. There's not a government in Europe, it now seems, that doesn't have a populist challenge. Should Spain be granted dispensation too?

It's also difficult to sell at home. There are precedents in EU law for restricting either free movement of persons or the other EU freedoms. So in that sense, an emergency brake wouldn't be completely out of character for the EU. All of the existing 'brakes', however, are policed by the European Commission and the European Court of Justice – would a domestic audience be happy with such an arrangement? Furthermore, at the very best the brake is likely to be temporary and may only delay flows rather than actually reduce them. It would have to be activated for a very long time in order for it to really reduce net flows in the long-term.

In addition, if ‘cost of living’ is to be cited as a reason for pulling the emergency brake, it means accepting that there is a ‘cost of living crisis’ – a move that would any UK Government would be politically loathed to make in public.

If someone can come up with a criteria for how to capture all the potential variables, then we're open to suggestions. But it would be foolish to announce such a big policy on such loose grounds. As we've argued repeatedly, writing the headline first, and the policy later, rarely works.

Debate: Reunification of two Romanian states

Posted by on 27/11/14

Wednesday 25 November 2014 a debate organized by the Romanian Centre for Studies and Strategies regarding the “reunification of the two Romanian states in the context of the presidential elections in Romania and parliamentary ones in the Republic of Moldova” was held in the Parliament of Romania. Opinion leaders, politicians and analysts from both states participated at the event.
The German analyst Anneli Ute Gabany expressed its optimism regarding the capacity of the newly-elected president of Romania, Klaus Johannis, to enhance the dialog and improve Germany’s perception on the reunification of the two Romanian states.
The general Constantin Degeratu expressed his concern regarding the West lack of reaction to the military aggressions of Russia and his conviction that Moscow would not stop until we gave them a Roland for their Oliver. In addition, he underlined some deficiencies of the alliance such as the weaknesses of Hungary in relation to Russia. Degeratu also stated it might be possible to assist to some provocations after the parliamentary elections in the Republic of Moldova.
His point of view was also backed by the sociologist Dan Nicu who asserted that the pro-Russian forces in the Republic of Moldova had already proved their incapacity call for people to gather on the streets in the last 25 years. Moreover, from his point of view any violent manifestation that would follow after the elections could only be labeled as artificial and would made with people outside the republic. He also mentioned that tens of Russians citizens had been retained in the last months being considered a threat to the security of the Republic of Moldova as they were thought to attempt to destabilize the country on the Ukrainian model.
George Simion, the leader of the unionist platform Actiunea 2012 asserted that nobody believed in the Europeanism of the governing alliance in the Republic of Moldova. Through their actions they proved their lack of consistency after they had declared one thing in Bruxelles, other thing in Moscow and behaved completely different in Chisinau. George Simion highlighted that some strategic shares (Banca de Economii, International Airport in Chisinau) were sold to some Russian companies. In addition, the authorities of the republic refused to buy cheaper gas from Romania because the distribution network belongs to an external subsidiary of Gazprom.
Nevertheless, the analyst Lulea Marius believes that the elections in Chisinau are externally oriented, and voting for the ruling alliance represents the lesser evil that can maintain the Republic of Moldova on its European pro-Romanian path.
Dinu Plangau the leader of the organization Tinerii Moldovei, actively involved in the census campaign, stated that there will be great surprises at the display of results because in localities where only 2% would declare themselves Romanians in the past, now more than 60% have registered as such. This aspect should determine a change in the foreign policy of Romania and of Republic of Moldova.
The video recording of debate can be watched here:…

Gender justice is key for the next development framework

Posted by on 27/11/14
Guest blogpost by Anjali Sen, member of the VSO International Board and South Asia Regional Director of the International planned Parenthood Federation (IPPF) (full bio below). I have been part of the quest for gender justice and women’s equality for decades. And I am proud of a lot of what we achieved. But as the political [...]

Gambling on China’s Energy Revolution

Posted by on 27/11/14

The joint announcement signed by presidents Xi Jinping and Barack Obama at the Asia-Pacific Cooperation (APEC) summit in Beijing brought climate change back to the international headlines. The document set targets for both sides to achieve and was welcomed or damned in equal measure.

Although the announcement binds neither side, it was seen by many politicians and observers as a step forward. Two key global powers, the largest CO2 emitters, had come to an agreement on climate change. China had for the first time committed itself in an international agreement to targets. In the announcement. China stated that it, “intends to achieve the peaking of CO2 emissions around 2030 and to make best efforts to peak early and intends to increase the share of non-fossil fuels in primary energy consumption to around 20% by 2030”.

But the critics and sceptics have been many, especially of the targets China has set. One criticism had been that the emissions target is too loose, and allows China to continue emitting CO2 without constraint until 2030. Another, focusing on the non-fossil fuel target, has been that it is too easy, in fact setting out no more than what China plans to do anyway.

The announcement made the point, emphasized by President Obama, that meeting the target would require China to install 800 to 1000 GW of zero-emissions energy generating capacity by 2030, which is greater than the current coal-fired generating capacity in China. One man at least, the Australian Prime Minister Tony Abbott, who believes in the future of coal, was happy with the apparent weakness of the target on the grounds that according to him it meant that by 2030 80% of China’s energy would still come from coal. His government predicts that since China will still need to import large quantities of Australia’s coal its economic future is thus assured.

The EU has been pretty much on the sidelines in all of this, but it too has a stake in China’s commitments. The stake is not just political concern over global policy on climate change. Like others, the EU has an interest in the future direction of the Chinese economy. The EU does not have much coal of offer, but it does have environmental and energy technology and know-how that would find a market in a China committed to reducing energy use and emissions.

Predicting China’s future energy demand and emissions is difficult. The variables to be taken into account lead to huge differences in possible outcomes. But one of the most important elements in China will be government policy and its targets. In China this gives some idea of whether it will meet its commitments in the announcement, at least the 20% non-fossil fuels target for 2020.

In 2013 China’s primary energy production (in Standard Coal Equivalent (SCE), the measure used in China) was 75.6% coal, 8.9% oil, 4.6% natural gas, and 10.9% hydro, nuclear and wind. In this mix, coal has recently declined slightly, oil has also declined, while natural gas and non-fossil fuels have been rising. But primary energy consumption shows a different picture. Primary energy consumption in 2013 was 66% coal, 18.4% oil, 5.8% natural gas and 9.8% hydro, nuclear and wind. Coal has clearly declined from a recent peak of 71.1% a few years ago, oil has remained more or less at the same level for several years, while natural gas and non-fossil fuels have increased their share. The difference between primary energy production and consumption is accounted for by imports and exports. China imports most of its oil and increasing amounts of natural gas. In recent years, despite huge domestic production, it has also imported significant amounts of coal.

Table 1: China Share of Primary Energy Production Source: National Bureau of Statistics


Table 2: China Share of Primary Energy Consumption Source: National Bureau of Statistics

As these figures show, Tony Abbott’s belief that in 2030 80% of China’s energy will still come from coal is already wrong. He appears to suffer from two possible confusions. While it is true that currently close of 80% of primary energy production is coal this is not the case for consumption, which is what the announcement refers to. Abbott’s other possible error is a belief that even if China meets the target that 20% of energy consumption will come from non-fossil energy in 2020, then the remainder must come from coal.

Will China meet the target? Earlier this year Xi Jinping spoke of the need for a revolution in China’s energy production and consumption. At the time, he referred only to broad principles. The State Council has issued a Strategic Action Plan for Energy Development (2014-2020) which gives some detail on how this revolution will be achieved. The plan sets some targets. Non-fossil fuels are targeted to reach 15% of energy consumption by 2020, natural gas more than 10% and coal less than 62%. Although it is not specified, this leaves about 13% for oil.

The plan also calls for an installed capacity of over 200 GW of wind power in 2020, over 100 GW of solar photovoltaic (PV), 350 GW of normal hydro power and 58 GW of nuclear, with a further 30 GW of nuclear to be under construction. By comparison, at the end of 2013 China had 91.4 GW of grid-connected wind capacity and 19.4 GW of grid-connected solar PV capacity. The goals are reachable. In 2013 added 12.9 GW of solar PV and 16.1 GW of wind capacity, both the largest in the world. It also added 29.9 GW of hydro capacity.

Is not clear whether these targets will be the final word for the 13th Five Year Plan (FYP) which will cover a key period from 2016 to 2020. In recent years targets for renewables have been repeatedly raised as previous ones have been exceeded. One recent article in the Chinese media quoted an official from the planning department of the National Energy Agency (NEA) discussing the 13th FYP as saying the target for 2020 would be for coal to account for less than 60% of primary energy consumption, and he also said that the target for 2030 would be less than 50%.

On the current trend, the target for coal to account for under 62% of energy consumption by 2020 seems feasible. If the target of 15% for non-fossil fuels by 2020 is achieved, which on today’s rates of installation it probably will be, then another 5% in the following decade will not be difficult. One of the reasons why the target will be “easy” is not because it is low, but because China already is the largest investor in renewables in the world. Even if China merely continues renewable energy installations at the current rates over the next 16 years it will reach the added capacity the announcement says is required in the range of 800 to 1000 GW by 2030 with some to spare.

There are many uncertainties in all of these outcomes. President Obama has taken a political gamble on China’s energy revolution, while Tony Abbott is betting against it without apparently really understanding the odds. From a European perspective, a bet on rather than against China’s energy revolution seems wiser.

The EU & ‘benefit tourists’: Quo vadis European citizenship?

Posted by on 26/11/14
By Annette Schrauwen for ACELG On 11 November, the Court ruled in Dano that Member States can deny social assistance to EU citizens who do not work and are not looking for a job in the receiving state. According to Cameron, the decision was “simple common sense". But was it really?

Coming Soon: Another Cameron Speech

Posted by on 26/11/14

The Prime Minister is to make another much anticipated Big Speech about Europe. This time, the theme is immigration – or, rather, how to stem the alleged tide of EU citizens exercising their lawful right in accordance with Article 21 TFEU to move to and reside freely within the United Kingdom. David Cameron has already told his party conference that he promises to go the Brussels to ‘sort it’, and that unless immigration is curbed, Brexit looms. Other party leaders and eurosceptic think-tanks have already made their bids on the matter, most recently my own party leader Nick Clegg in the Financial Times.

Making a reality of EU citizenship

Few British commentators are versed in EU law. It would be better if they were. Article 21, for example, says nothing about ‘workers’ but refers to ‘every citizen of the Union’ having the ‘right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in the Treaties and by measures adopted to give them effect’. No secondary law is therefore required to permit an EU citizen to move to live in Britain. Of the Treaty-based conditions relevant to free movement, the most important is to be found in Article 18 TFEU which says that: ‘Within the scope of application of the Treaties, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited’. Article 20 spells it out further: ‘Citizens of the Union shall enjoy the rights and be subject to the duties provided for in the Treaties. They shall have, inter alia, the right to move and reside freely’ across the EU. Other articles of EU primary law (such as Article 3(2) TEU and Article 31 of the Charter of Fundamental Rights) confirm and reinforce the centrality of the principle of free movement and its direct effect. In fact, freedom of movement is the most important element of the proud concept of EU citizenship. If one were looking for one of the EU’s ‘red lines’, look no further.

Maintaining the single market

Then there is the internal market, which is defined in Article 26 TFEU as ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’. So there is an economic reason why people should be enabled to be as mobile as the goods they produce, the services they provide and the money they make. For many years it was a bane of economists that European labour was too immobile, and that the single market would never become a reality unless and until it was exploited by people on the move. Since the fall of the Berlin Wall, however, migration has been churning across Europe. Although immigrant labour is always disliked by the poorer, less-educated indigenous working class, the overall effect of immigration in terms of GDP is widely acknowledged to be beneficial. Business and the welfare state in Germany and the UK, in particular, have relied on immigrant labour for many decades, and this trend will not be reversed as their own communities age. Migration across the EU also serves as an automatic stabiliser, as a new study by Bruegel has explained: the valves of labour flow are just as reversible as the inter-connector gas pipelines that cross the continent. Many young Poles and Irish, for example, return home (plus savings and education) once the balance of economic advantage shifts.

Helpfully, the EU treaties lay down provisions so that ‘freedom of movement of workers shall be secured within the Union’ (Article 45 TFEU). Discrimination on the grounds of nationality over pay, recruitment, ‘and other conditions of work and employment’ is abolished. Recruitment is to be facilitated and job exchange is to be actively encouraged, especially for the young. Migrant workers who are sacked or retire have the right to stay. Administrative obstacles and qualifying periods which form ‘an obstacle to the liberalisation of the movement of workers’ are prohibited (Article 46). The same clause provides for EU laws to be enacted to regulate all these matters, including the management of supply and demand in the labour market ‘in such a way as to avoid serious threats to the standard of living and level of employment in the various regions and industries’. EU legislation is required to ensure the provision of social security for ‘employed and self-employed migrant workers and their dependants’ (Article 48).

Social welfare

The variety and complexity of contributory and non-contributory social welfare systems across Europe, both in-work and out-or-work, make the ensuing EU legislation mightily complicated. As Steve Peers reminds us, there is much litigation in the European Court of Justice. But the basic legal situation is clear: EU law on the equal treatment of migrant workers has direct effect. Member states retain discretion as to their own social security systems, but each and every EU citizen must be treated in an equal way under the provisions of national employment or welfare law. The definition of ‘worker’ embraces those seeking work and those who lose their jobs, students, service providers and the self-employed, as well as their dependents. EU citizen migrant workers must be catered for without discrimination under the appropriate laws of the host state. It follows that any tightening of social welfare qualifications applied by a host state to EU migrants must also apply to its own nationals. As the recent case in Leipzig confirmed (Dano), benefit tourists do not profit under EU law. But self-sufficient persons can live wherever they choose within the EU – as millions of Britons have decided to do in sunnier climes, without let or hindrance.

When making his speech, Cameron will surely advise his audience that, while changing EU secondary legislation on migrant workers is possible, it would still need to be consonant with EU primary law in respect both of EU citizenship and the internal market. He might usefully add that all EU legislation needs to obtain a qualified majority in the two chambers of the EU legislature, Council and Parliament, so it really has to be crafted (by the European Commission) in the general interest of all states and citizens. In the absence of a destabilisation of the British welfare state, chronic industrial collapse or a threat to public security, Cameron and his colleagues will find it hard to substantiate the anti-immigration case they have so glibly launched. Bending EU law to suit the narrow or partisan interests of one state will not wash.

Changing the Treaties is a good idea for other reasons, but not this one. Stopping immigration will damage the economy. Reducing the rights of migrant workers is illiberal. Blunting the force of EU citizenship is uncivilised.


Innovation Summit: better policy-making, beyond R&D programmes

Posted by on 26/11/14
The Innovation Summit hosted by the European Parliament on 17-20 November reviewed policies under the headline ‘a mandate for innovation’. The MEP-led organiser, K4I (Knowledge for Innovation), gathered 4 Commissioner, including for example the one for research , many MEPs including several committee chairs, and a large number of corporate and association representatives. Below are [...]

Parliament’s support for innovation and inter-institutional approach

Posted by on 26/11/14
Knowledge for Innovation, an MEP-led association, organized its 6th Innovation Summit this week, in partnership with several organisations including EurActiv, which covered several sessions, and moderated the conclusions (separate post). The timing was good: just after the start of the Jucker Commission and before Mr Tusk arrives: which I addressed in an Opinion piece. Having [...]

Juncker’s investment plan gets cool reception

Posted by on 26/11/14
This is the name which has been given to the long touted €315bn investment fund which European Commission President Jean-Claude Juncker has put front and centre of his programme to deliver jobs and growth. The key points of the proposal (EC press release, Juncker speech, Katainen speech) are:

  • €315bn investment from 2015 – 2017. This is made up of a €16bn guarantee from the EU budget (a 50% guarantee from €8bn of the budget) and €5bn from the European Investment Bank (EIB). This money will be used as a guarantee to raise the targeted €315bn from private financing on the market.**
  • Of the total spend €240bn will go towards long term investments and €75bn to SMEs/mid-cap companies.
  • The EFSI will be under the umbrella of the EIB but will have different goals and do a different type of lending.
  • In conjunction with the EFSI the Commission will create a “project pipeline” along with technical assistance to help identify viable projects for investment at EU level.
  • The investment plan will also contain a road map to remove sector specific regulations that hamper investment, with a focus on the financial sector to tie in with the push towards a Capital Markets Union.
This is the opening salvo of a plan which has long been muted. Judging by the initial reactions, the plan leaves something to be desired. Some thoughts below:
  • As an opening salvo, the plan has already been watered down from what many had expected it to be – a real attempt at fiscal stimulus. Whether or not you agree with that prospect, it’s clear this plan does not constitute such an attempt. As it now enters the negotiation phase with approval from the member states and European parliament needed it could still be restricted and fudged further.
  • This process seems very similar to previous attempts to create such a fund in 2012 (discussed by us here) and the failed attempt to leverage the European Financial Stability Facility from 2011 (which fell down on the reluctance of the ECB to be involved and the level of public guarantees were not sufficient and too highly correlated with potential risks). History suggests pinning significant hopes on these sorts of plans is not usually a good approach.
  • It’s not clear that this buffer will be enough to encourage private investors to take on greater risk. There are numerous factors which are leading to a lack of private investment, risk (at these levels) is only part of it.
  • Furthermore, to the point above, reports now suggest that the €21bn will actually be used by the EIB to borrow €63bn in bonds and cash which will then be used as a first loss buffer for the private investors – however, this does not seem to be mentioned in the press release, factsheets or Q&A. Additionally, we’re not sure what rating these bonds issued solely as loss protection would get or who would want to invest in them (seems akin to the lower riskier mezzanine tranches of asset backed securities).
  • The promise to review the regulatory issues and create a central system of projects could actually prove to be more important than the funds themselves. That said, we have often heard the first point and the Commission has never followed through. The latter project has potential but the focus will be around “EU value added” and “EU objectives”. We’re not sure why the EU thinks it has a better idea of the returns and benefits on private investment than the market more broadly. Furthermore, these objectives already cloud what should be a simple idea – promote economic growth.
  • More generally, questions can be asked about how these funds will be targeted. The focus seems heavily on pan-European infrastructure. While there are sectors where this could be useful – energy and high-tech – such a rigid focus is not needed for a general fund. Many parts of Europe (notably Spain) loaded up on infrastructure in the boom years; they do not really need more of it. What is really needed across Europe is investment in human capital, (re)training and R&D.
  • All this once again highlights the huge amount of waste inside the EU budget, which could of course fill some of these roles. It also raises questions about whether the EIB should rethink its investment priorities.
Overall, the response from all sides has been very lukewarm. The plan seems very similar to previous iterations and, for better or worse, does not involve new money. Negotiations are likely to further impact the structure, while questions can be raised about the target and agenda included in the fund. The accompanying proposals for a project pipeline and improving regulation could be useful and tie in with plans for a single market in capital. That said, the EU’s track record on these fronts is not good and will likely take some time for any real impact to be seen.

**Correction: A previous version of this blog post said €294bn would be raised from private finance. However, the aim will actually be to use the €21bn as a guarantee on issuing €315bn worth of bonds on the market, meaning the entire €315bn will be private financing.

Higher inflation does not guarantee more jobs

Posted by on 26/11/14

On Friday (21 November) Mario Draghi, the ECB President, has provoked fireworks at EU stock exchanges after promising he would do all in his power to push inflation in the Euro – zone up to 2%, the ceiling considered as the “target” for EU and US central banks.

Expectations of rising prices may give a push to investments, as they raise nominal profitability. But those having invested in savings accounts or bonds will have to pay for it by a depreciation of their assets.

If that is the price for reducing high unemployment it might be acceptable.

But is the ECB really capable of inducing more private and public investment?

After all, it can only do more of the same, i.e. inject liquidity into the market by buying private or even public bonds or mortgages.

Mario Draghi`s announcement raises, however, two more systemic questions:

Can modern economies ensure high employment only at the price of moderate inflation?

Why are economists so scared about the risks of deflation, though it has been an extremely rare and temporary phenomenon in the last 50 years? Why is the present 0.4% inflation rate in the Euro-zone a risk for the economy?

EU inflation rates reflect very different national trends, from Greece and Bulgaria with prices having fallen by 1.8 and 1.3% respectively in October 2014 and Romania, Austria and Finland registering price rises between 1.8 and 1.2 per cent.

Present inflation rates are substantially lower than the 2.2% average during 1991-2014, during which the Euro-Area registered a moderate average GDP growth of 1.5%. During these two decades a deflationary sign has appeared only once, in July 2009, in the early phase of the EU recession. Is the deflationary nightmare not exaggerated ?

We should appreciate the present price stability even if it goes along with excessive unemployment. It removes illusions about income and wealth and certain costs caused by necessary inflationary adaptations:

Changing millions of prices become as unnecessary as wage indexing.

Wage negotiations can fully focus on productivity rises.

Will Europe ever again witness growth rates of more than 2%? Where should that growth come from beyond reintegrating millions of unemployed into the labour market, rising productivity and retirement age? Has an injection of liquidity the slightest impact on these three variables?

Eberhard Rhein, Brussels, 21/11/2014

25 years into transformation – what’s next?

Posted by on 26/11/14

A conference commemorating 25 years of Poland’s political transformation was held at the Warsaw School of Economics on November 19th 2014. Interested in what conclusions can be drawn from past events and how these can be used to shape the future, I decided to participate. The programme of the conference was a particular attraction, featuring speeches by such reformers as Leszek Balcerowicz, Jacob Frenkel (Chairman of JPMorgan Chase International) and Stanisław Gomułka, who were advisers to Tadeusz Mazowiecki’s administration 25 years ago, as well as Lajos Bokros, who stood behind Hungary’s reforms, and Oleh Havrylyshyn, a lecturer at the University of Toronto and Ukraine’s former deputy minister of finance. Further stoking my interest, the conference was held under the patronage of President Bronisław Komorowski, rectors of Katowice, Kraków, Poznań and Wrocław Universities of Economics and of the Warsaw School of Economics. In Poland, the economic discourse on evaluating the transformation is dominated by the critics of the shock therapy, whereas other nations tend to regard the achievement with undisguised admiration. Jacob Frenkel summed it up wonderfully, quoting Mark Twain, who – asked how he liked Wagner’s music – said: “it’s better than it sounds.” Lajos Bokros argued that being able to celebrate the 25th anniversary of the transformation, and under official government patronage at that, is an extraordinary privilege few countries that followed Poland on the path to transformation can enjoy. Sadly, Hungary is not among them.

Stanisław Gomułka delivered an interesting lecture in which he matched the lessons of the transformation with Poland’s current challenges of sustaining economic growth. He argued that the biggest threat to maintaining a high growth rate is the middle income trap, which can be avoided by expanding Poland’s innovation capacities. This coincides with my view of the matter, which I have presented on this blog. Professor Gomułka believed that the Czech Republic and Hungary have already fallen into the trap, but Poland may yet avert it. His arguments, which represent a strong message to economic policy makers, were the following:

‘A long-term economic growth rate per capita depends nearly entirely on the rate of qualitative changes, such as technological and institutional innovations as well as employees’ skills. In well developed countries these changes result primarily from the innovativeness of the entire world sector of R&D (research and development) and the national level of education. In less developed countries, that is the group of so-called catching-up countries to which Poland belongs, their own innovative activity is marginal and will be insignificant for yet a number of years , while the access to the latest innovation will continue to be strongly limited. Technological changes in economy within this group depend nearly entirely on the absorption of foreign innovations, primarily those easily accessible. This absorption occurs mainly through the channel of investment activity. In the case of high investment in relation to GDP, technological changes in the catching-up countries, in percentages terms, may be for a certain period of time even several times bigger than in the most developed countries. In Poland, as a result of transformation, the access to the world resources of knowledge and technology of older generations as well as the absorption capacity of the economy have considerably increased. This explains the paradox of a high innovativeness of the Polish economy and a low innovativeness of the Polish R&D. However, with the GDP per capita at a level of 50-70% of the most developed countries, further fast technological progress of a catching-up country is becoming more difficult, as access to technologies of newer generations in necessary. At this level of development the process of catching-up may be stopped. Economists speak about the so-called middle-development trap or middle-income trap. Further progress in gap bridging is possible, but the pace of catching up as a rule becomes slower. This pace may be sustained or the pace of the growth slowdown may be reduced in two ways. One way is to strongly raise the country’s own innovation and absorption capacity, especially directly by companies. The other is to care more about the factors which increase the attractiveness of the country for investors from the most developed countries. These factors include for example a good quality infrastructure, high quality vocational and university education, stable and entrepreneur-friendly legal and financial system, low political and exchange rate risk, low interest rates and low inflation.’ For a complete text, see:

In future entries, I will talk about how we can successfully bolster the Polish economy’s capacity for innovation.


Addressing the investor-state dispute settlement (ISDS) nightmare

Posted by on 25/11/14
By Sorin MOISA MEP The importance of ISDS is blown out of proportion by its supporters, some of whom may suffer from a degree of strategic blindness. It is simply not going to be the end of the world if these clauses are remodelled or even eliminated.

What EU funded low-carbon energy solutions in Polish regions?

Posted by on 24/11/14

The low-carbon energy ambitions of Polish regions for future EU funding are very diverse with only a few promising cases as an analysis of the Operational Programmes of Polish regions shows.

by Julia Krzyszkowska, cross-posted from the Bankwatch blog

Poland is currently in the final stages of planning how European funds under EU Cohesion Policy for 2014-2020 will be invested. Yet, beyond the national level, also Poland’s 16 regions (voivodeships) are about to conclude negotiations with the European Commission about the final shape of the Regional Operational Programmes (ROPs).

The results will show whether Poland’s regions are on the path to take full advantage of the potential of EU funds’ for the country’s sustainable development – a potential that is not to be underestimated. More than half of the EUR 9 billion that are earmarked for the low-carbon economy in Poland will be allocated and managed by the regional authorities. (For comparison, the total allocations of Cohesion Policy 2014-2020 for Bulgaria is EUR 7.59 billion, for Croatia EUR 8.61 billion.)

Bankwatch and Polish Green Network analysed the final drafts of the ROPs as they were presented to the European Commission. The analysis shows how ambitious (or not) the Polish regions are to invest in a low-carbon economy, in particularly when it comes to renewable energy and energy efficiency in residential buildings.

Report: Recommendations for the last state of programming of EU Regional Funds 2014-2020 for energy projects (pdf)

An important indicator is whether ordinary Polish households will be able to benefit from EU funds, for example through lower energy bills and greater security of energy supply. For smaller, localised investments, such as improving the energy standard in residential buildings or the production of citizen-owned energy from small renewables installations, the decisions made by the regional authorities will be essential.

Map: Allocation of funds for the thematic objective 4 on low-carbon economy as percentage of the total allocation of the European Regional Development Fund (ERDF) – Click image for full size

As the map above shows the level of ambition shown by Polish regions varies significantly.

While Śląskie in the South of Poland plans to spend almost 30 per cent of its European Regional Development Plan funds for low-carbon economy measures, there are many regions who keep the allocations close to the minimum 15 per cent, prescribed by the Polish Partnership Agreement.

While indicating the overall importance placed on the low-carbon economy objective by different regions, the map does not show their spending priorities within this area.

Energy efficiency in residential buildings

Going into more detail, one of the key elements we evaluated [1] was the availability of funding for energy efficiency in housing. The residential housing sector in Poland consumes over 30 per cent of all energy used in the country. The generally very poor energy standard of buildings resembles that of the 1970s in Western Europe and means a huge waste of energy and heat.

These losses could be avoided thanks to investments in deep retrofitting, estimated to result in up to 70 per cent energy savings.

Graph: Funds for energy retrofit of residential buildings (in euros and as a percentage of all ERDF funds in a region)

Looking at the Regional Operational Programmes, the allocations for improving energy efficiency in residential buildings are alarmingly low in relation to the entire amount of funds intended to support a low-carbon economy, and even more so in relation to the total ERDF allocation in a given region (see graph).

According to our analysis, the public sector seems to have priority in the regional spending plans with more than twice as much funds allocated to improving energy efficiency in state and municipality-owned buildings than in residential houses.

Yet, it is especially in residential buildings where energy efficiency measures should get priority funding given that such investments are more difficult to undertake for private households who — in contrast to public institutions — do not have sufficient financial resources or access to subsidies and preferential loans.

Investments in retrofitting multifamily houses could significantly alleviate the financial burden faced by many Polish families and improve their quality of life. Research by the Polish Institute for Sustainable Development and the Warsaw Institute for Economic Studies shows that Polish households spend on average around 15 per cent of their disposable incomes on energy bills. According to another research paper (pdf) on energy poverty in the EU, more than 20 per cent are unable to afford comfortable temperature levels at home during the winter.

What’s next?

Once negotiations with the European Commission are finalised, it will be up to the regions themselves to prepare the more detailed implementation documents that outline exactly who will be able to apply for funding from the EU budget, for what kind of project and on what terms.

Our report “Green Energy for All: Six recommendations for the last stage of programming of EU regional funds 2014-2020 for energy projects” contains some key demands for the last, crucial stage of the EU funds programming, and recommendations on how to make them reality.

These recommendations regard:

  • allowing for deep retrofitting of residential buildings,
  • supporting RES microinstallations and prosumer energy,
  • investing in renewables to improve air quality in Polish cities,
  • financing environmental education and information campaigns,
  • ensuring high biodiversity protection standards in energy-related projects,
  • providing support for community energy and partnerships.

We call on Polish voivodeships to show ambition, go for quality and to invest rather than just spend.


1. The other elements are prosumer renewable energy, air quality, environmental education, biodiversity protection and communities and partnerships in the energy sector.