American power, housing finance, and the small states

ReykjavikMay 2009

Two issues

1. Power: How did American economic power operate 1991-2005 ( +/- )?

2. Plenty: What did this mean for the small states? (and why housing?)

The core problem

• The link between supply and demand (wages and productivity) breaks down in the 1980s– In the small states (and Germany) corporatist

bargaining suppress demand– In Japan reliance on bonuses and the financial

crash suppress demand

• How to have growth?

A (non-) solution

• The US becomes the source of demand– Motive: Reversing relative decline– Opportunity: the great disinflation

Inflation 1950-2009 (via T-bond rate)

Cumulatinginflation

The greatdisinflation

1981

A (non-) solution

• The US becomes the source of demand– Motive: Reversing relative decline– Opportunity: the great disinflation– Method (planned):

• Fiscal balance, BEM strategy, global financial libralization

– Method (unplanned):• global financial arbitrage • Housing market keynesianism

The 1990-2000s US growth cycle

Asia RecyclesUS Dollars as NewMortgage Debt

Disinflation Housing FinanceSystem

More Consumption

US trade deficits

Faster US Economic Growth

↑ Tax revenue

Share of Four Basic Instruments in Total Outward Investment by Region (%, 2006)

23.4%14.6%

34.8%

17.6%

9.7%

37.5%

32.2% 30.2%

0%

20%

40%

60%

80%

100%

US to World World Into US

FDI

DEBT

EQUITIES

LOANS

Housing finance • High rates of homeownership +• High levels of mortgage debt to GDP +• Easy refinance of mortgage debt and home

equity withdrawal +• Securitization of mortgages

= “US style housing market” ** Very pro-cyclic **

1. Global disinflation & financial arbitrage (dollar recycling)

2. …activated US housing finance market keynesianism to

3. …create above-OECD average growth of employment and GDP domestically

4. …and faster accumulation of real assets abroad, in a (temporarily) virtuous cycle

= differential growth for the US

Power and Housing Finance

Differential growth (adjusted)

Population adjusted % change, 1991-2005

USA OECD

Ave.

FRG Japan

GDP (real, local currency) 33.5 28.1 17.3 13.3

# of Employed 1.8 3.0 -2.9 -2.7

# of Unemployed -24.8 6.8 91.5 109.7

GFCF 79.9 48.2 2.7 -13.5

GFCF Metals/Mach 159.8 100.1

19.0 22.8

Housing Systems and Growth

Questions?

Membershipof the European Union

What to expect from Brussels

Graham Avery

University of Iceland, Reykjavik14 May2009

Summary

• Why apply for membership of EU?• What are the conditions for membership?• If Iceland applies, what response can it expect

from the EU?• The path to EU membership

– 20 stages from application to accession

• How membership negotiations work– principles, procedure, actors

• What questions for negotiation?– 35 chapters of the acquis– top problems

• Accession:– Who else is in the queue for membership?– Would Iceland join alone or in a group?– When?

Enlargement of EU : conditions

Amsterdam Treaty 1997• Article 49: ‘Any European state which respects

the principles set out in Article 6 (1) may apply to become a member of the Union’

• Article 6 (1) : ‘The Union is founded on the principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law’

Copenhagen European Council 1993

• Membership requires that a candidate has– democracy, rule of law, human rights, protection of

minorities (political criterion)– functioning market economy (economic)– capacity to apply obligations of membership

(administrative)• Union’s capacity to absorb new members, while

maintaining momentum of European integration, is an important consideration in general interest of Union and candidate countries (absorption capacity)

Why apply for membership?

• An applicant country must decide whether and why to apply for EU membership– you need to evaluate carefully and publicly

• advantages & disadvantages, alternative options• all aspects of membership - political & economic

• EU has never encouraged countries to apply– discourages premature or unwanted bids– needs to reflect itself on

• implications for EU - political & economic • linkage with other issues

What response to Iceland from EU?

• Positive factors– Iceland satisfies political & economic criteria

• stable democracy, developed economy

– Small country - 320,000 population• cf. Malta 410,000, Luxembourg 480,000

– Member of European Economic Area• already applies many EU rules & Schengen

– Member of NATO• strategic location: North Atlantic, Arctic

• Less positive factors• difficult economic & financial situation of Iceland• uncertainty whether it accepts EU rules in important

area of policy (fisheries)• differences of view between parties in coalition

• EU also has problems• difficult economic & financial situation• uncertain institutional progress (Lisbon Treaty)• ‘enlargement fatigue’

• Conclusion: if Iceland applies, it can expect a cautiously positive reaction from EU

The path to membership

• Three phases :• Application• Negotiations• Ratification

• Within the phases :• Twenty successive stages

Application• The country submits an application for membership to

the EU’s Council of Ministers• The Council asks the Commission for its Opinion on the

application• The Commission gathers information in order to

prepare its Opinion• It delivers its Opinion to the Council• The Council confirms the country’s status as a

candidate• It decides to open accession negotiations with the

country

Negotiations

• Negotiations commence in an intergovernmental conference between the EU member states and the applicant country

• The Commission makes a ‘screening’ of the chapters of the acquis with the applicant, and submits a report to the Council

• The EU decides on the opening of individual chapters in the negotiations

Chapters of negotiations1. Free movement of goods 2. Freedom of movement for workers3. Right of establishment & freedom to provide services 4. Free movement of capital 5. Public procurement 6. Company law 7. Intellectual property law 8. Competition policy 9. Financial services 10. Information society and media 11. Agriculture 12. Food safety, veterinary &phytosanitary policy 13. Fisheries14. Transport policy 15. Energy 16. Taxation

17. Economic and monetary policy 18. Statistics 19. Social policy and employment 20. Enterprise and industrial policy 21. Trans-European Networks 22. Regional policy & coordination of structural instruments 23. Judiciary and fundamental rights 24. Justice, freedom and security 25. Science and research 26. Education and culture 27. Environment 28. Consumer and health protection 29. Customs union 30. External relations 31. Foreign, security, defence policy 32. Financial control 33. Financial & budgetary provisions 34. Institutions 35. Other issues

Principles of negotiations• Extracts from ‘negotiating framework’ presented by EU

at opening session of negotiations with Croatia in 2005• Accession implies the acceptance of the rights &

obligations attached to the Union system & its institutional framework, known as the acquis. Croatia has to apply this as it stands at the time of accession.

• Croatia’s acceptance of the rights and obligations arising from the acquis may necessitate specific adaptations to the acquis and may, exceptionally, give rise to transitional measures which must be defined during the accession negotiations

• The Union may agree to requests from Croatia for transitional measures provided they are limited in time and scope, and accompanied by a plan with clearly defined stages for application of the acquis

• Where necessary, specific adaptations to the acquis will be agreed on the basis of the principles, criteria and parameters inherent in that acquis, and taking into consideration the specificities of Croatia

• Croatia will participate in economic and monetary union from accession as a Member State with a derogation and shall adopt the euro as its national currency following a Council decision to this effect on the basis of an evaluation of its fulfillment of the necessary conditions

Top questions• Iceland will be expected to state at the opening

of negotiations if it has any major problem in accepting EU policies (for example, fisheries)

• Traditionally the last crucial phase of negotiations will focus on– financial & budgetary provisions

• linked to agriculture & cohesion policy– institutions (adaptation of votes, seats, etc.)

• principle of ‘degressive proportionality’– problems raised by applicant country that were not

already solved in negotiations

Actors• Sessions of conference at level of Ministers

– often formal (pre-scripted) until final phase

• Sessions at level of Deputies (Ambassadors)– present arguments, register agreements

• EU positions presented by Presidency, but Commission has key role– interlocutor (not negotiator) with applicant– informal explorer of solutions– proposer of ‘common positions’ on EU side

Negotiations (continued)

• When a chapter is opened, the applicant presents its position on that chapter

• The Commission proposes, and the Council adopts, a ‘common position’ to be presented to the applicant

• When agreement is reached on a chapter, it can be closed

• When all chapters are closed, the EU and the applicant agree a draft Treaty of Accession

Ratification

• The Treaty of Accession is submitted to the Council and to the European Parliament

• The Commission issues its Opinion on the Treaty• The European Parliament gives its assent• The Council approves the Treaty• The member states and the applicant country sign it• They each ratify it according to national procedures,

which may require referendums• The Treaty comes into force: the applicant becomes a

member state

Who else is in the queue?

• In membership negotiations since 2005:– Turkey (applied in 1987) Croatia (2003)

• Applied but not yet in negotiations:– FYR Macedonia (2007) Montenegro (2008)

Albania (2009)

• Potential candidates:– Bosnia-Herzegovina, Serbia, Kosovo

• Others may be interested to join

Alone or in a group?

• Principle of ‘differentiation’– Each country’s progress on the path to

membership depends on its fulfilment of the criteria, with no linkage between applicants

• But there have normally been ‘waves’– Only Greece joined singly in 1981– 2 in 1986, 3 in 1995, 10 in 2004, 2 in 2007

When?

• For Poland & Hungary– accession negotiations 4 years 10 months– from application to accession: 10 yr 1 m

• For Austria, Sweden, Finland– negotiations took 1 yr 1 m– from application to accession:

• Finland 2 yr 9 m, Sweden 3 yr 6 m, Austria 5 yr 5 m

• Date of accession will emerge only towards the end of negotiations

Membershipof the European Union

What to expect from Brussels

Graham Avery

University of Iceland, Reykjavik14 May2009

IS THE EU A STRATEGIC SHELTER?

- especially for small states like Iceland??

Alyson Bailes IIA 14 May 09

WHY SMALL STATES NEED OUTSIDE PROTECTION

• Obvious - against traditional military enemies• Modern security thinking - against non-

military threats of a natural (disease) or deliberate (terrorism) kind that exceed one nation’s resources and need wider cooperation

• Less obvious - against themselves!

ONE VIEW OF BASIC SMALL-STATE OPTIONS

• Passive: do not provoke, stay out of trouble (eg neutrality)

• Active: make friends and seek protection and pay the ‘price’ for it:

– Further options: state(s) or organizations or both• Either approach can be combined with

‘altruistic’ outward actions like aid and peacekeeping, that also promote a peaceful international order

WHY COULD THE EU BE CONSIDERED A ‘SHELTER’?

• Not military defence (but NB now likely to coexist better with NATO)

• EU military action (so far) only external and ‘altruistic’• But some strategic role visavis Russia, etc• Aspects of ‘homeland security’: Schengen +related

policies, smuggling/crime, anti-terror and anti-WMD strategies, etc

• ‘Softer’ or ‘human’ security aspects eg disease, food, energy security

• Economic and financial role (Euro and…)

HOW DOES THE EU PROTECT STATES AGAINST THEMSELVES?

• Basic internal peace function, making war unthinkable (also good for non-enemy countries who won’t be dragged in) - NB now extended to Central Europe and soon (?) to Balkans

• Political standards (democracy, international cooperation)

• Governance standards (coherence, coordination, compliance/answerability, elements of political/democratic control)

WHY WOULD THIS CONCERN ICELAND?

• For you to say, but a logical answer would need to cover all the following:

- traditional strategic exposure after US withdrawal (depends also on NATO trends, plus new Arctic variable)

- economic and financial exposure- other non-military security issues- reform/renewal of governance- AND WHAT IS THE ‘PRICE’?

The Collapse of the Celtic Tiger: Probing the Weaknesses of Ireland’s

Development Model

‘The Status of Small States in the International Community’University of Iceland: May 14th 2009

Peadar KirbyUniversity of Limerick

Introduction

• Ireland and Iceland being grouped:o What is the difference?: one letter and six monthso Not Boston vs. Berlin any longer but Rome vs. Reykjavik

• This talk:o Describes the Irish collapseo Analyses its origins in the ‘Irish model’o Draws comparisons with Icelando Comments on the role of the euro

The Irish collapse

• According to ESRI: the worst recession of any developed country since 1930s:o GDP to fall 14% between 2008-2010o Unemployment to rise to 17% in 2010o Government deficit 12% of GDP in 2009o Price deflation of 4.6% in 2009o Exports to fall 5% and imports 9.3% in 2009

The ‘Irish model’ I

• Based on:o Winning high levels of US FDIo Following dot.com bubble burst in 2001, growth

came to depend on domestic demand: Housing: price increase of 450% between 1995 and

2008 compared to consumer price increases of around 150%

Private consumption: Funded by high levels of personal debt

The ‘Irish model’ II

• Policy mechanisms:o Low-tax regime:

Corporation tax and capital gains tax Reduction in income taxes No property tax

o EU Structural Funds used to upgrade infrastructure in early 1990s

o Investment in education

The ‘Irish model’ III

• Policy making:o ‘Social partnership’:

Concertative policy making among social partners Trade-off of lowering income taxes for wage

moderation Created culture of consensus about the model: little

debate or criticism Seen by state as crucial to economic success

The model in collapse I

• A domestic crisis:o Economists estimate that 8% of the 12% government

deficit has domestic causes: Collapse of property sector has brought banks down with it:

IMF estimates stabilising banking sector will cost Ireland 13.9% GDP Extent of Irish banks’ toxic assets still not known

Reliance on asset taxes led to collapse in Exchequer returns: Income collapsed to €34bn for spending of €60bn

The model in collapse II

• Crisis in social partnership:o When unions failed to agree to a pensions levy,

government imposed it Collapse of 20-year social partnership arrangements

widely expected

• Collapse has exposed very weak culture of national innovation:o Growth ‘artificial’, based on ‘soft options’

The model in collapse III

• Responses to crisis:o Insufficient income for stimulus package:

Reliance on stabilisation: Raise taxes, cut spending

Fears of reduction in credit ratings International borrowing costing more

Pressure to return to Maastricht guidelines by 2013: bring deficit down to 3% of GDP

o Huge loss of political authority: Those who caused the crisis still run the state and the banking

sector A political crisis looms on top of economic crisis

Ireland and Iceland

• Similarities:o Crisis originated in risk taking banking sector that was

poorly regulated: Krugman: ‘Erin go Broke’: ‘like Iceland, Ireland jumped with both

feet into the brave new world of unsupervised global markets’ Extent of crisis similar

• Differences:o Ireland cannot devalue:

Faces five years of very painful cuts in costs and living standards Can an alternative emerge within its political system?

Euro: help or hindrance?

• Much focus on role of euro on helping Ireland stay afloat:o But euro also a cause of Ireland’s crisis:

Low-interest rates fuelled housing boom Appreciating euro hit Irish exports to US, UK

o Can Ireland recover within the euro? What will be the social costs of restoring

competitiveness? Will recovery be possible?

Katrín Ólafsdóttir, Assistant ProfessorReykjavik University

May 14, 2009

Economic policy in IcelandWhere do we go from here?

Where are we?

• Deep recession• Negative economic growth• High unemployment rates• High interest rates• High central government deficit• Competitive real exchange rate

GDP growth, %

Unemployment rate

Monetary policy• Inflation targeting is formally still in place

• Proved ineffective• Part of the current problem

• If we keep the current currency:– The Icelandic króna will not be traded again– Free flow of finances not an option

• If we adopt another currency– Can become part of the global financial system

• Which currency?– Euro the only real option (after joining the EU)

Central Bank’s Currency BasketBased on 2007 trade

Fiscal policy

• Currently running a large deficit• The Letter of Intent to the IMF assumes that

the deficit will be reduced in stages during the next four years on revenue side, expenditure side or both

• Regardless of what the Letter of Intent says, we need to eliminate the deficit

• Why?

General government revenue and expenditurePercent of GDP

Government debt, % of GDP

Options– Monetary policy:

• Króna with restrictions on trading currency• Euro

– Fiscal policy• No change in policy• Follow IMF plan and reduce deficit

– Furthermore,• Choosing the euro will help with reducing the deficit.