Irobiko Chimezie

UK threatens to boycott trade negotiations with EU

Britain laid out its opening demands for upcomingtrade talks with the European Union on Thursday,including a blunt threat to walk away from the negotiating table if there is no progress within four months.

The two sides appear headed for a rocky first round of negotiations as they try to forge a new relationship following the U.K.’s departure from the now 27-nation bloc.

Britain and the EU both say they want to reach a free trade agreement, but have starkly divergent views on how it should be overseen and what constitutes fair competition between their two economies.

The EU says Britain must agree to follow the bloc’s rules in areas ranging from state aid to environmental protections, and give European boats access to U.K. fishing waters, if the two sides are to strike a good deal. But the U.K. is demanding the right to diverge from the bloc’s rules in order to strike new trade agreements around the world, and to give the British government a freer hand to intervene in the U.K. economy.

“In pursuit of a deal we will not trade away our sovereignty,” Michael Gove, the minister in charge of Brexit preparations, told lawmakers in the House of Commons. “We will not be seeking to dynamically alignwith EU rules on EU terms, governed by EU laws and EU institutions.”

That conflict will be one of the big hurdles in talks, which are due to begin Monday in Brussels. Fishing is likely to be another flashpoint. EU nations — especially France — want Britain to grant European boats long-term access to U.K. waters. Britain wants to negotiate fishing quotas annually.

Britain left the EU on Jan. 31 but remains bound by the bloc’s rules until a post-Brexit transition period ends on Dec. 31. A divorce agreement between the two sides allows for the transition to be extended for two more years, but British Prime Minister Boris Johnson insists he will not agree to that.

That leaves the two sides just months to seal a wide-ranging deal. Britain’s negotiating guidelines insist that there is “limited, but sufficient time” to get an agreement. The document says a “broad outline” of an agreement should be done by June. It warns that if there is not sufficient progress by then, the U.K. could walk away and focus on “domestic preparations to exit the transition period in an orderly fashion.”

Johnson’s Conservative government says that with or without a trade deal the U.K. will be leaving the bloc’s structures — including its single market for trade in goods and services — as of Jan. 1, 2021.

Britain hopes by then to have a trade agreement with the bloc similar to the one struck between the EU and Canada. Such a deal would eliminate tariffs and quotas on trade in goods, but it’s less clear what it would mean for the services sector that makes up four-fifths of Britain’s economy.The U.K. also aspires to strike side agreements in areas including fisheries, law enforcement and judicial cooperation.

The British government is warning businesses that no matter what happens there will be new barriers between Britain and the EU, which currently accounts for almost half of U.K. trade. Even with a free trade deal there will be new border checks and customs forms to fill out.

Allie Renison, head of Europe and Trade Policy at the Institute of Directors business group, expressed disappointment that “securing market access continuity seems to be less than a fundamental priority.”

She said that for most of the group’s members, “maintaining ease of trade with the single market is more important than being able to diverge from EU regulations.” Britain’s tough talk is unlikely to impress EU negotiators, who already accuse Johnson of trying to water down commitments Britain made in the divorce deal that paved the way for the country’s seamless departure on Jan. 31. That withdrawal agreement dealt with three broad issues — citizens’ rights after Brexit, Britain’s liabilities after 47 years of membership and the need to keep people and goods flowing freely across the border between EU member Ireland and Northern Ireland, which is part of the U.K.

The two sides have agreed to maintain an open border by keeping Northern Ireland aligned to EU rules even if the rest of the U.K. diverges. But recent comments by Johnson’s government seeming to downplay the significance of that agreement have set off alarm bells among EU leaders.

Behind the hard rhetoric, the two sides do have room for agreement. Britain has promised it won’t undercut the EU by lowering standards on environmental protection, food hygiene or workers’ rights. “We’re not going to engage in some race to the bottom,” Johnson said.

But Britain won’t agree to let the EU be the judge of whether it is living up to those commitments. The challenge for negotiators will be to find a way to make that commitment binding that both sides can agree on.

Former British trade negotiator David Henig said both Britain and the EU appeared “too optimistic” in their conflicting opening gambits. “Which is fine at this stage. As long as we’re aware we won’t in fact get all we want. As the EU won’t,” he wrote in the Daily Telegraph.

In Brussels, EU spokeswoman Dana Spinant said she “wouldn’t want to jump to conclusions about the outcome” of talks. “However, the commission maintains its capacity to prepare for a no-deal (U.K. exit)” even as it prepares for “a positive result of those negotiations,” she said.

A major post-Brexit challenge for the EU

The Brexit drama shook the foundations of the European Union for years and laid bare the need for much-delayed political renovations at the 27-nation bloc. But now that Britain has finally left, where does the EU revamp even start and who is going to foot the bill?

Those questions loom large for EU officials and European leaders alike, because substantial structural changes require some common vision of what a future EU should look like. Yet even without such unity, the bloc is already a major construction site — with changes pondered in foreign affairs, business, defense and enlargement into the Balkans, just to name a few projects aimed at making the EU reach its full potential.

The clamor for change has come from both outside and inside the bloc, including from French President Emmanuel Macron, EU Commission President Ursula von der Leyen and the new EU foreign policy chief.

“It all requires a renewal of the European approach,” Macron said. “We no longer live in the world of the 1990s.” The EU’s lack of clout to match its potential in the world goes well beyond the departure of Britain. The EU’s institutional quagmire makes smooth, swift decision-making a pipe dream and its shared euro currency proved quite wobbly during the bloc’s financial crisis, which almost saw debt-strapped Greece leave the euro.

But like little else, Brexit brought home the EU’s need to change with the times. Beyond losing an economic giant, the departure of the United Kingdom was also a geopolitical blow to the EU, since Britain is a U.N. Security Council permanent member with nuclear weapons and a standing in the world outside Europe that few other countries can match.

Britain’s vote to leave the EU in 2016 was followed by U.S. President Donald Trump’s arrival on the world stage. Since then, the feeling has only grown in the EU that its foreign policy has to change to meet the bruising, confrontational challenges of a new age.

“The European Union needs to shoulder greater responsibility for its own security and also step up its geopolitical presence,” EU foreign policy chief Josep Borrell said at the EU parliament this week. “When it comes to something as vital as defense, EU powers are limited.”

That calls for some fundamental changes, Borrell said. For decades now, the EU has tried to be the counterpoint of alpha male superpower politics, spreading its “soft power” brand across the globe based on economic and developmental aid, cultural clout and the promotion of human rights, among other non-coercive strategies.

That system is now close to a breaking point. “We Europeans must adjust our mental maps to deal with the world as it is, not as we hoped it would be,” Borrell wrote in an article last week. “To avoid being the losers in today’s U.S.-China competition, we must relearn the language of power.”

That will be something made even more difficult without the military clout of Britain.

French leader Macron says “Europeans must take more responsibility for European defense.”

The EU has been stung by the unraveling of its geopolitical pet project, the 2015 Iran nuclear deal with global powers to make sure that Tehran doesn’t produce nuclear weapons. Trump two years ago decided to turn against the deal co-brokered by his predecessor, Barack Obama, and Iran has responded by saying it would ignore some of deal’s demands.

Firas Modad, a senior analyst with IHS Markit, issued a downbeat assessment of the EU’s stature as it struggled unsuccessfully to keep the Iran nuclear agreement intact. “Europe is regulated from Washington,” he said. “The European banking system depends on the dollar, the European economy depends on the European banking system. The Europeans don’t spend on their own defense. The weak don’t have a say. Full stop.”

Somehow, the EU’s 15.3 trillion euro ($16.6 trillion) economy is not delivering its political equivalent. The EU can often be held back by unanimity rules that require everybody to be on board before any action can be taken. And even as it drops to 27 nations with the loss of Britain, the objections and power of a single EU member can still overwhelm reform plans.

To change this paralysis, many in the EU hope to increase majority voting in more cases. “”With unanimity rules,” Borrell wrote last week, “the risk of paralysis is always present. Member states must realize that using the vetoes weakens not just the union, but also themselves.”

This split between what’s good for the EU and what works best for an individual EU member is at the heart of a budgetary quandary playing out these days at EU headquarters in Brussels. The bloc needs to come up with a new, 1 trillion euro ($1.09 trillion) EU budget — give or take a few tens of billions — for the next seven-year span.

No EU nation wants to pay more to make up for the 75 billion euro ($81.5 billion) gap the British have left in the next EU budget, but a great many poorer EU members want to receive at least as much from the bloc as they did in the past. And new projects, like the vaunted Green Deal project for the EU to become climate neutral 2050, need to be funded.

To reconcile the irreconcilable, EU Council President Charles Michel has asked EU leaders to see what their budget demands are and how he can temper them ahead of a special summit next week. The fight comes down to whether the EU’s budget will be 1%, 1.1% or 1.3% of the bloc’s GDP. That fight over a fraction of a percentage point — as much as lofty goals about the EU’s place in the world — will dominate the EU for the next few months much like Brexit dominated the bloc’s agenda for the last four years.

Still, when EU leaders gather next Thursday for the special summit on the budget their chances of immediate success are considered minimal. “Arriving at an agreement will therefore be a serious challenge, we all know this,” von der Leyen acknowledged.

EU gets ready for no-deal Brexit

Brexit UK EU referendum concept with flag and handwriting text in, out, leave, remain is written in chalkboard, close up

With UK Prime Minister Theresa May conceding a third vote in the House of Commons is increasingly unlikely, and that it is now likely the United Kingdom will leave the European Union without a deal on 12 April, the European Commission on Monday completed its no-deal preparations.

At the same time, in a major policy statement, it says it is continuing to support administrations in their own preparations, and has urged all EU citizens and businesses to get ready for the consequences of a possible no-deal scenario.

This follows the European Council (Article 50) conclusions last week calling for work to be continued on preparedness and contingency. While a no-deal scenario is not desirable, the EU statement says it is prepared for it.

Following a request by Prime Minister Theresa May, the European Council agreed last Thursday to extend the UK’s departure date to 22 May 2019, provided the Withdrawal Agreement is approved by the House of Commons by 29 March 2019 at the latest. If the Withdrawal Agreement is not approved by the House of Commons by then, the European Council has agreed to an extension until 12 April 2019. In that scenario, the United Kingdom would be expected to indicate a way forward before this date.

While the European Union says it continues to hope that it will not be the case, this means that if the Withdrawal Agreement is not ratified by Friday 29 March, a no-deal scenario may occur on 12 April. The EU says it has prepared for this scenario and has remained united throughout its preparations. It is now important, the UE says, that everyone is ready for and aware of the practical consequences a no-deal scenario brings.

A no-deal scenario

In a no-deal scenario, the UK will become a third country without any transitionary arrangements. All EU primary and secondary law will cease to apply to the UK from that moment onwards. There will be no transition period, as provided for in the Withdrawal Agreement. This will obviously cause significant disruption for citizens and businesses.

In such a scenario, the UK’s relations with the EU would be governed by general international public law, including rules of the World Trade Organisation. The EU will be required to immediately apply its rules and tariffs at its borders with the UK. This includes checks and controls for customs, sanitary and phytosanitary standards and verification of compliance with EU norms. Despite the considerable preparations of the ER countries’ customs authorities, these controls could cause significant delays at the border. UK entities would also cease to be eligible to receive EU grants and to participate in EU procurement procedures under current terms.

Similarly, UK citizens will no longer be citizens of the European Union. They will be subject to additional checks when crossing borders into the European Union. Again, European states have made considerable preparations at ports and airports to ensure that these checks are done as efficiently as possible, but they may nevertheless cause delays.

The EU’s no-deal preparedness and contingency work

Since December 2017, the European Commission says it has been preparing for a no-deal scenario. It has published 90 preparedness notices, three Commission Communications, and has made 19 legislative proposals.

The Commission says it has held extensive technical discussions with the EU27 countries both on general issues of preparedness and contingency work and on specific sectorial, legal and administrative preparedness issues. The Commission says it has now also completed its tour of the capitals of the 27 EU nations The aim of these visits was to provide any necessary clarifications on the Commission’s preparedness and contingency action and to discuss national preparations and contingency plans. The visits showed a high degree of preparation by EU members for all scenarios.

European countries have also been engaged in intensive national preparations.

Contingency and preparedness legislative measures

To date, the Commission has tabled 19 legislative proposals. 17 proposals have been adopted or agreed by the European Parliament and the Council. Formal adoption of all those files by the European Parliament and Council is currently taking place. Two proposals are to be finalised by the two co-legislators in due course.

As outlined in the Commission’s Brexit Preparedness Communications, the EU’s contingency measures will not and cannot mitigate the overall impact of a “no-deal” scenario, nor do they in any way compensate for the lack of preparedness or replicate the full benefits of EU membership or the favourable terms of any transition period, as provided for in the Withdrawal Agreement. These proposals are temporary in nature, limited in scope and will be adopted unilaterally by the EU. They are not mini-deals and have not been negotiated with the UK.

The EU says it has maintained – and will continue to maintain – a fully united position throughout its preparations, and during any possible no-deal period.

The no-deal contingency measures include:

– PEACE programme: the continuation of the PEACE programme on the island of Ireland until the end of 2020. As for the period after 2020, the Commission has already proposed as part of its proposals for the next Multi-annual Financial Framework to continue and strengthen cross-border support for peace and reconciliation in the border counties of Ireland and Northern Ireland.

– The EU Budget (in the process of final adoption): in a no-deal scenario, the EU will be in a position to honour its commitments and to continue making payments in 2019 to UK beneficiaries for contracts signed and decisions made before 30 March 2019, on condition that the UK honours its obligations under the 2019 budget and that it accepts the necessary audit checks and controls.

– Fishing rights and compensation: these measures provide for compensation for fishermen and operators from EU countries under the European Maritime and Fisheries Fund for the temporary cessation of fishing activities. It also ensures that the EU is in a position to grant UK vessels access to EU waters until the end of 2019, on the condition that EU vessels are also granted reciprocal access to UK waters.

– Financial services: temporary, limited measures to ensure that there is no immediate disruption in the central clearing of derivatives, central depositaries services for EU operators currently using UK operators, and for facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty.

– Air connectivity and safety: these two measures will ensure basic air connectivity in order to avoid full interruption of air traffic between the EU and the UK in the event of a no-deal scenario.

– Road connectivity: allows for the continuation of safe basic road connectivity between the EU and the UK for a limited period of time, provided that the UK gives reciprocal treatment to EU companies and operators.

– Rail connectivity: ensures the validity of safety authorisations for certain parts of rail infrastructure for a strictly limited period of three months to allow long-term solutions in line with EU law to be put in place. This is, in particular, related to the Channel Tunnel and will be conditional on the United Kingdom maintaining safety standards identical to EU requirements.

– Ship inspections: this aims to ensure legal certainty and secure business continuity in shipping.

– Re-alignment of the North Sea Mediterranean Core Network Corridor: This adds new maritime links between Ireland, France, Belgium and the Netherlands to the core network, and introduces a new funding priority to the Connecting Europe Facility (CEF): adapting transport infrastructure for security and external border check purposes.

– Climate policy: this measure ensures that a “no-deal” scenario does not affect the smooth functioning and the environmental integrity of the Emissions Trading System.

– Erasmus + programme: students and trainees abroad participating in Erasmus+ at the time of the UK’s withdrawal can complete their studies and continue to receive the relevant funding or grants.

– Social security entitlements: the entitlements (such as periods of insurance, (self) employment or residence in the United Kingdom before withdrawal) of those people who exercised their right to free movement before the UK’s withdrawal are safeguarded.

– Visa reciprocity (in the process of final adoption): visa-free travel to the EU for UK nationals if the UK also grants reciprocal and non-discriminatory visa-free travel to all EU citizens.

State aid

As regards the need for financial resources and/or technical assistance, the EU’s says it’s existing State aid rules make it possible to address problems encountered by businesses in the case of a “no-deal” Brexit. By way of example, State aid rules permit consultancy aid for small and medium-sized enterprises (SMEs) or training aid which could be used to assist with SMEs preparedness (including possible future custom formalities). The Rescue and Restructuring Guidelines contain provisions on temporary restructuring support schemes for SMEs, which could be useful to address their liquidity problems caused by Brexit. Access to finance is possible in various formats, e.g. through State-financed lending schemes respecting the reference rate or State guarantees under the guarantee notice (contact point available here).

Funding and support under the EU budget

Technical and financial assistance from the European Union can also be made available in certain areas, such as the training of customs officials under the Customs 2020 programme. Other programmes can help similar training projects in the area of sanitary and phytosanitary controls. For agriculture, EU law provides a variety of instruments to cope with the most immediate effects of the withdrawal of the United Kingdom, in particular in a no-deal scenario.

Britain after Brexit: A Nation Divided

For a long time, Britons who wanted their country to leave the European Union were regarded almost as mentally ill by those who wanted it to stay. The leavers didn’t have an opinion; they had a pathology. Since one doesn’t argue with pathology, it wasn’t necessary for the remainers to answer the leavers with more than sneers and derision.

Even after the vote, the attitude persists. Those who voted to leave are described as, ipso facto, small-minded, xenophobic, and fearful of the future. Those who voted to stay are described as, ipso facto, open-minded, cosmopolitan, and forward-looking. The BBC itself suggested as much on its website. In short, the desire to leave was a return to the insularity that resulted in the famous—though apocryphal—newspaper headline: fog in the channel: continent cut off.

If insularity is indeed on the rise, it is affecting increasing numbers of Europeans.

According to the latest polls, nearly a half of the Italians and Dutch want their countries to leave. Discontent with the Union is also widespread in other countries. The French have a poorer opinion of the European Union than do the British, but because the French believe it to be reformable, fewer want to leave.

Before the vote, the danger of Brexit to the integrity of the European Union was described in the French media in pathological terms, as a possible “contagion,” rather than merely an example to be followed—or not, as the case might be. And now the Union is faced with a dilemma: on the one hand, it will not want to make Brexit too painless for Britain, in case other countries, such as Sweden, follow suit; but on the other, it will not want to disturb trade relationships with one of Europe’s largest economies. Britain’s trade with Europe is largely in Europe’s favor, but it’s easier for Britain to find alternative sources of imports than for Europe to find alternative export markets.

There is now a race between the breakup of the European Union and the United Kingdom itself—for the Scottish leader has threatened another referendum on independence. This breakup would be even more difficult, especially for Scotland; Germany has already said that it would welcome Scotland into the Union, but if Scotland thinks that it would then be able to escape George Osborne’s policy of so-called austerity—which is to say, his feeble attempts to balance the budget—it might get a nasty shock when dealing with German finance minister Wolfgang Schäuble. And, if Scotland were to sign up to the Schengen Agreement, a ridiculous but real and damaging land border between England and Scotland would suddenly become a reality. This is something not seen for hundreds of years.

The vote might also lead to a unification of Ireland, for the Northern Irish also voted to remain in Europe. Sinn Fein has already called for a referendum on unification. Such unification would be a great blessing for England, but not necessarily for Ireland.

One possible reason for the success of the Brexit campaign was President Obama’s ill-conceived intervention, when he threatened that if Britain voted to leave the Union, it would have to go to the “back of the queue” as far as any trade agreements are concerned. This sounded like bullying, and was not well-received by much of the British population, which had already been subjected to quite a lot of such bullying from others. If I were an American, I shouldn’t have been pleased with it either, for Obama spoke not as a president with a few months left in office, but as a president-for-life, or at least one with the right to decide his successor’s policy.

Among the many subjects not properly discussed during the campaign was whether large and fundamental political changes should be made based on 50 percent-plus-one of the votes cast in a single plebiscite. The House of Commons is not constitutionally bound by the results, and most members of Parliament support remaining in the European Union. They could argue, not without plausibility, that a vote representing no more than three-eighths of the total electorate isn’t quite the groundswell of opinion that should be required for fundamental change. If they acted on this argument, however, violence might erupt

EU and the new politics of globalization

The world of EU law woke-up on June 24th with a hangover.

Every member of our academic community is or knows well friends and colleagues studying and teaching EU law in the UK whose futures are in question. Yet, the referendum raises a larger scientific question for EU law. As well as the technicalities of divorce and variable geometry that will deservedly receive renewed attention, there is the broader question about the kind of political reshaping of EU constitutionalism that Brexit will bring about.

Many, including Floris de Witte and I, have argued that the EU must do a better job of internalizing democratic and political conflict. The most obvious conflict is along the traditional left-right axis. But this campaign has shown us that this axis is increasingly meaningless in our world. The real cleavage in modern 21st century politics is not about the state per se but about globalization. It pits the forces of internationalism and the liberal exchange of values and peoples against the reified, protectionist nationalism of the Leave campaign (culminating in posters of desperate Syrian refugees forcing Britain to a supposed “breaking point”).

The Leave campaign tapped into this cleavage with terrifying but effective vigor. It did not try to win the Brexit debate on concrete issues. It won, instead, on a promise to shield Britons from the (both real and imaginary) winds of change that economic transformation has produced. The message we saw in the Leave campaign was the message we see in populist movements throughout Europe and in the rust-belt populism of Donald Trump. It was a message as appealing to the post-industrial working class of Sunderland as it was to shopkeepers in the East Midlands or retired army officers in the prosperous South. It is reshaping the political landscape across Europe.

How should EU constitutionalism respond? It seems impossible to imagine an EU response that does not take into account this seismic political force. This requires a form of EU constitutionalism that is able to reassure and provide hope and opportunity for those who see globalization as a threat (including the non-mobile). While the defence community is often identified as the EU’s “road not taken,” another plausible candidate would be the Coal and Steel community itself—it contained a notable social dimension that was designed to compensate those who would be left behind by its shift to a more integrated European industrial base.

At some point along the road of integration the idea of linking the fate of integration’s “winners” with the fate of its “losers” was decisively lost. It also surely requires an EU that allows the debate between these two forces to take place within, rather than in opposition to its institutional structure. The EU’s Treaty rules in this sense—rules which settle a host of questions over economic policy, market access, discrimination, and many other issues that speak directly to the political concerns of populist parties and voters—do not help.

Just as the UK’s historic permissive consensus over Europe (to criticize it without subjecting it to real democratic choice) boiled in a wave of populist anger, EU constitutionalism is also in danger of suppressing rather than
channeling democratic discourse over Europe’s political future.

Accommodating the cosmopolitan/nationalist cleavage in EU constitutionalism is a dangerous exercise: it will provide the Le Pens, Farages, and Trumps of this world with a new platform. But what is the alternative? Brexit should signal the end of EU politics by stealth.

The estimated effect of Brexit on trade and living standards

Brexit Direction Sign

To estimate the effect of Brexit on the UK’s trade and living standards, we use a modern quantitative trade model of the global economy.

Quantitative trade models incorporate the channels through which trade affects consumers, firms and workers, and provide a mapping from trade data to welfare. The model provides numbers for how much real incomes change
under different trade policies, using readily available data on trade volumes and potential trade barriers. Our model uses the most recent data (WIOD) which divides the world into 35 sectors and 31 regions. It allows for trade in both intermediate inputs and final output in both goods and services. Additionally, the model takes into account the effects of Brexit on UK’s trade with the EU as well as UK’s global trade relations.

To forecast the consequences of the UK leaving the EU, we must make assumptions about how trade costs will change following Brexit. It is not known exactly how the UK’s relations with Eurozone countries will change following Brexit, which means that there is a lack of clarity over the consequences of Brexit for trade costs between the UK and EU countries. To overcome this difficulty, we analyse two scenarios: an optimistic scenario in which the increase in trade costs between the UK and EU is small, and; a pessimistic scenario with a larger rise in trade costs.

The optimistic scenario assumes that in a post-Brexit world, the UK’s trade relations with the EU are similar to those currently enjoyed by Norway. As a member of the European Economic Area (EEA), Norway has a free trade agreement with the EU, which means that there are no tariffs on trade between Norway and the EU. Norway is also a member of the European single market and adopts policies and regulations designed to reduce non-tariff
barriers within the single market. But Norway is not a member of the EU’s customs union, so it faces some non-tariff barriers that do not apply to EU members such as rules of origin requirements and anti-dumping duties.

Campos et al (2015) found that Norway’s productivity growth has been harmed by not fully participating in the EU’s market integration programmes.

In the pessimistic scenario, we assume that the UK is not successful in negotiating a new trade agreement with the EU and, therefore, that trade between the UK and the EU following Brexit is governed by World Trade Organisation (WTO) rules. This implies larger increases in trade costs than the optimistic scenario because most favored nation (MFN) tariffs are imposed on UK-EU trade and because the WTO has made less progress on reducing non-tariff
barriers than the EU.

Increases in trade costs between the UK and the EU following Brexit can be divided into three parts: (i) higher tariffs on imports; (ii) higher non-tariff barriers to trade (arising from different regulations, border controls, etc.); and (iii) the UK may not participate in future steps that the EU takes towards deeper integration and the reduction of non-tariff barriers within the EU.

In the optimistic scenario, we assume that the UK and the EU continue to enjoy a free trade agreement and Brexit does not lead to any change in tariff barriers. In the pessimistic scenario where trade is governed by WTO rules, we assume MFN tariffs are imposed on UK-EU goods trade.

Regarding non-tariff barriers, in the optimistic scenario, we assume that UK-EU trade is subject to one quarter of the reducible non-tariff barriers that are observed in trade between the United States and the EU. In the pessimistic scenario, we assume a larger increase of three quarters of reducible non-tariff barriers.

Finally, trade costs between countries within the EU have been declining approximately 40% faster than trade costs between other OECD countries (Méjean and Schwellnus, 2019). In the event of Brexit, the UK would not benefit from any future reductions in intra-EU trade costs.

In the optimistic scenario, we assume that in the ten years following Brexit, intra-EU trade costs fall 20% faster than in the rest of the world, while in the pessimistic scenario, we assume intra-EU trade costs continue to fall 40% faster than in the rest of the world. This implies that in the optimistic case, non-tariff barriers within the EU fall 5.7% over the next decade, while in the pessimistic case they fall by 12.8%. Our estimates also account for fiscal transfers between the UK and the EU. Like all EU members, the UK makes a contribution to the EU budget. The net fiscal contribution of the UK to the EU budget has been estimated to be around 0.53% of national income.

One benefit of Brexit for the UK would be a reduced contribution to the EU budget. But Brexit would not necessarily mean that the UK would make zero contribution to the EU budget. In return for access to the single market, EEA members such as Norway make substantial payments to the EU. On a per capita basis, Norway’s financial contribution to the EU is 83% as large as the UK’s payment (House of Commons, 2013). Therefore, in the optimistic case we assume that the UK’s contribution to the EU budget falls by 17% (that is, 0.09% of national income).

In the pessimistic case where the UK is outside the EEA, we assume that the UK saves more of its current contribution. The 0.53% saving includes only the public finance components so excludes all the transfers the EU makes directly to universities, firms and other nongovernmental bodies. Under the reasonable assumption that post-Brexit the UK government does not cut this funding, the saving is 0.31% according to Eurostat. This cost essentially comes from the agricultural subsidies in the Common Agricultural Policy.

 Brexit: The role of European Court of Justice (ECJ)

 

The Court of Justice of the European Union – to give it its full name – is the EU’s highest legal authority. It is based in Luxembourg. It is an entirely different thing to the European Court of Human Rights (ECHR).

It is the European Court of Human Rights, not the ECJ that has often upset British politicians by making it harder, for example, to deport terrorist suspects. The ECJ interprets and enforces the rules of the single market, settling disputes between member countries over issues like free movement and trade. It is at the center of pretty much everything the EU does and it having the power over UK actions has been a key issue for those arguing for the UK to leave to the EU to regain full sovereignty.

Prime Minister Theresa May has vowed that Britain will not be under the “direct” jurisdiction of the ECJ after Brexit. But she has suggested that elements of relations could – where the UK signs up to specific EU agencies – still be covered by the ECJ after Brexit

After that, there will need to be a new mechanism for settling disputes between the UK and the EU but what form that take has yet to be decided. There has been talk of an ombudsman, or some other third party, being appointed to settle disagreements.

The version of the Brexit deal, published on 8 December 2017, do also give limited powers to the ECJ in terms of EU citizens living in the UK for up to eight years. The political declaration document makes clear that ECJ will continue to have a role on interpreting EU law after Brexit.

Doing Business in the United Kingdom

The UK’s position, both geographically and in respect of business culture, puts it at the center of a diverse collection of markets and sectors. Its open market and diversified economy present opportunities for new investors to access a domestic market and to use the location as a gateway to the rest of the world.

Based on the World Bank Doing Business survey, the UK is ranked top in Europe in terms of ease of doing business and fourth in the world. It offers a number of competitive advantages as a hub for investors to conduct their business, which can be summarized as follows:

• The UK is culturally a highly efficient place from which to access world markets. It boasts a central time zone position, being ideally placed between the markets of the East and West, good transport infrastructure, accessibility
of language and familiarity of business culture for many new investors.

• The UK is a flexible and business-minded location, historically recognized as a well-established and reputable jurisdiction in which to conduct business.

• A company can be incorporated in the UK with same day formation.

• It attracts an internationally mobile and highly-skilled workforce.

• The headline tax rate from 1 April 2013 for companies is 23% but reduced to 21% by the government in 2014.

• Foreign businesses coming to the UK should be aware that the accounts of all UK companies are subject to public disclosure through the Registrar of Companies.

• It has one of the largest treaty networks.

• The scope of personal taxation varies according to the length of the individual’s stay in the UK and whether they are domiciled in the UK, allowing foreign nationals to arrange their tax affairs efficiently. With effect from 6 April 2013 a new statutory residence test was introduced, providing certainty to individuals regarding their UK tax residence status. The government is also introducing a number of measures designed to prevent tax avoidance and
make the reporting in the UK more transparent.

• New immigration rules introduced in 2008 mean that procedures for visiting and working in the UK have changed recently and companies should ensure that they are addressing these. Special rules are in existence for high net worth individuals and entrepreneurs investing in the UK. The government in the UK is actively addressing opportunities for investors to come to the UK through fiscal reforms. Whilst there is a genuine drive to ensure that the UK has a simple and easy to understand legal environment in which to do business, investors still need to be aware of regulatory aspects relating to their specific sector, where appropriate.

Will Britain accept terms of its divorce from the EU?

Britain’s financial sector needs stability to secure its future, along with deeper access to the European Union market after Brexit than what non-EU countries normally get, a senior industry official said on Wednesday.

Britain is due to leave the bloc on March 29 but has yet to agree the terms of its divorce after parliament two weeks ago rejected the deal negotiated by Prime Minister Theresa May with the EU. On Tuesday parliament told May to renegotiate aspects of her deal, though the EU has ruled out any changes.

“We want markets to continue to operate smoothly, without disruption,” said Paul Manduca, chairman of TheCityUK’s advisory council told the promotional body’s annual dinner.

“As we get closer to March 29 the need for clarity is becoming ever more urgent.”

Manduca, who also chairs insurer Prudential, said the financial sector wants market access for both Britain and the EU that has more “depth and certainty” than the bloc’s existing “equivalence” trading regime.

The EU is Britain’s biggest financial services customer.

“Any new arrangements should be as robust as the EU regime that we have helped build as members. But we must also have the flexibility to ensure our regulatory system reflects the unique aspects of the UK economy and the global opportunities ahead,” Manduca said. TheCityUK had proposed “mutual recognition”, a broad form of EU market access based on each side accepting each other’s rules.

Brussels rejected this proposal and instead offered equivalence, a patchier, less predictable system of market access whereby the EU alone decides if a foreign financial firm can serve customers on its turf in limited areas of finance.

Many banks, insurers and fund managers in London have instead opted to open hubs in the EU by March to avoid potential loss of access to continental clients.

Manduca said that creating a stable and welcoming business environment and a globally competitive tax system will provide firms with the confidence they need to invest in Britain.

“We know markets take a long time to move elsewhere, but alongside the risks associated with Brexit, the large financial centers in Asia are rapidly emerging as genuine contenders to compete with us and New York,” Manduca told the event, which was attended by British finance minister Philip Hammond.

French protesters join Yellow Vests march in London

 

Demonstration by the "Yellow vests" movement in Paris
A protester in a yellow vest wearing a Guy Fawkes mask walks near Hotel de Ville during a demonstration by the “yellow vests” movement in Paris, France, January 5, 2019. REUTERS/Gonzalo Fuentes

Hundreds of protesters inspired by France’s yellow vest movement are rallying in Britain, drawing attention to government austerity programs that have hit the poor hard.

Wearing yellow vests with slogans such as “Britain is Broken” written on the back, the demonstrators marched in London to demand that politicians pay attention to their plight rather than being endlessly diverted by the spectacle surrounding Britain’s departure from the European Union.

They also want to show solidarity with French protesters who have staged weeks of nationwide anti-austerity protests.

Some French protesters also joined the London march on Saturday.

Erick Simon, 57, who traveled from the Normandy in France to the London rally, says “all European countries must join up in this battle against austerity.”

Washington downgrades diplomatic status of EU delegation to the U.S.

 

White House.jpg

Trump’s government downgraded diplomatic status of the European Union (EU) mission to the United States, according an EU official.

Media reports confirm the demotion happened without notice in the last quarter of 2018.

The unannounced move by the US State Department, which has not previously been reported, downgraded the EU delegation’s diplomatic status in Washington from member state to international organization, DW reported.

“We don’t exactly know when they did it, because they conveniently forgot to notify us,” the unnamed EU official said.

“I can confirm that this has not been well received in Brussels,” the person said, adding that the issue and an official EU response was still being discussed. Meanwhile EU officials in Brussels said on Tuesday that per protocol, the diplomatic rank of David O’Sullivan, the EU’s ambassador to Washington, had been reinstated.

After the delegation noticed that the EU’s Washington ambassador had not been invited to certain events late last year, officials organizing the state funeral for President George H.W. Bush provided final confirmation to EU diplomats that the status of the representation had in fact been downgraded. Diplomats believe the downgrade must have been implemented in late October or early November.

At the high-profile event on December 5, as diplomats gathered in Washington to pay their respects, O’Sullivan, was not called up in the usual chronological order from the longest-serving to the newest ambassador, said the EU official. “But he was called up as the last person.”

Prior to the demotion, O’Sullivan, who has served as the EU’s ambassador to Washington since 2014, would have been ranked among the first 20 or 30 ambassadors of the more than 150 foreign representatives dispatched to the US capital.

According to DW, a Washington-based diplomat of an EU member state also confirmed the downgrade, and denounced the move.

“This is clearly not simply a protocol issue, but this is something that has a very obvious political motive,” the person said. The diplomat added that the negative view of the EU mission downgrade was shared by the majority of member states.

After discovering the downgrade, EU diplomats in Washington reached out to the State Department, which is responsible for diplomatic affairs, for clarification. “They have told us that they forgot to notify us and that this is a decision they have taken because that is apparently what the chief of protocol thinks is the proper thing to do,” the person said.

The EU official said the bloc ambassador’s status in Washington was upgraded to the level of a nation state ambassador in September 2016, after a lengthy and intensive process by the State Department under former President Barack Obama.

PM confirms new date for Brexit vote

 

Brexit.jpg

Prime Minister Theresa May said Monday that the postponed vote in Parliament on Britain’s Brexit agreement with the European Union will be held on 14 January, more than a month after it was originally scheduled and just 10 weeks before Britain leaves the EU.

But even as May insisted she could salvage her unpopular divorce deal, pressure was mounting for dramatic action — a new referendum or a vote among lawmakers — to find a way out of Britain’s Brexit impasse and prevent the economic damage of a messy exit from the EU on March 29 with no agreement in place.

Jeremy Corbyn, leader of the main opposition Labour Party, said he would submit a motion of no-confidence in the prime minister over her delays. Losing the vote on such a motion would increase the pressure on May, but unlike a no-confidence vote in the government as a whole, it wouldn’t trigger a process leading to the fall of the government and an early election.

No date was immediately set for the confidence vote, AP reported. The British government and the EU sealed a divorce deal last month, but May postponed a parliamentary vote intended to ratify the agreement last week when it became clear legislators would overwhelmingly reject it.

She tried to win changes from the EU to sweeten the deal for reluctant lawmakers, but was rebuffed by the bloc at a summit in Brussels last week. May’s authority also has been shaken after a no-confidence vote from her own party on Wednesday that saw more than a third of Conservative lawmakers vote against her.

May told lawmakers in the House of Commons on Monday that they would resume debate on the deal when Parliament comes back after its Christmas break the week of 7 January, with the vote held the following week.

“I know this is not everyone’s perfect deal,” May said. “It is a compromise. But if we let the perfect be the enemy of the good then we risk leaving the EU with no deal.” Opposition legislators — and many from May’s Conservative Party — remain opposed to the deal, and accused May of deliberately wasting time by delaying the vote for several more weeks.

“The prime minister has cynically run down the clock trying to maneuver Parliament into a choice between two unacceptable outcomes: her deal and no deal,” Corbyn said. A growing number of politicians from across the political spectrum believe a new referendum may be the only way to break the political logjam over Brexit.

But May told lawmakers that staging another referendum would ride roughshod over voters’ 2016 decision to leave the EU and “would say to millions who trusted in democracy that our democracy does not deliver.”

May’s deal is loathed both by pro-Brexit lawmakers, who think it keeps Britain bound too closely to the bloc, and pro-Europeans, who see it as inferior to staying in the EU. The main concern for pro-Brexit lawmakers is a contentious insurance policy known as the “backstop,” which would keep the U.K. tied to EU customs rules in order to guarantee the border between Ireland and Northern Ireland remains open after Brexit.

EU officials insisted at last week’s summit that the withdrawal agreement cannot be renegotiated, although they also stressed that the backstop was meant only as a temporary measure of last resort. May said she had had “robust” exchanges with other EU leaders in Brussels, but that the two sides were still holding talks about “further political and legal assurances” about the backstop.

European Commission chief spokesman Margaritis Schinas, however, said Monday that “at this stage, no further meetings with the United Kingdom are foreseen.” With Britain’s departure from the bloc just three months away, it remains unclear whether the country will leave with a deal or crash out with no deal— a chaotic outcome that could see economic recession, gridlock at U.K. ports, planes grounded and shortages of essential goods.

The Cabinet will discuss “no-deal” planning at its weekly meeting on Tuesday, with details to be announced soon of 2 billion pounds ($2.5 billion) in government funding to absorb some of the potential economic shock.

Pro-EU Cabinet ministers, meanwhile, are seeking to work with opposition politicians to find a way out of the morass. One suggestion is to give members of Parliament votes on a range of options — from leaving without a deal to holding a new referendum — to see if there is majority support for any course of action.

May’s spokesman, James Slack, said Monday that the government had “no plans” to hold such an indicative vote. But the idea has support in Cabinet. “We can’t just have continuing uncertainty and I think Parliament should be invited to say what it would agree with,” Business Secretary Greg Clark told the BBC.

He said, “I think businesses up and down the country would expect elected members to take responsibility, rather than just be critics.”

 

Trump says France not doing enough to sustain NATO

 

President Donald Trump wasted no time taking a poke at his French host Friday as he arrived in Paris for events marking the 100th anniversary of the armistice that ended World War I, tweeting as he landed that President Emmanuel Macron had made an “insulting” proposal to build up Europe’s military to counter the U.S., China and Russia.

Trump and Macron.jpg

Image: Donald Trump and Emmanuel Macron

It was a clear sign that the “America first” president was ready to chart his own course yet again as world leaders gathered to remember the coalition that brought an end to the first global war. Trump’s visit comes on the heels of midterm elections in which Americans delivered a split referendum on his presidency, keeping the Senate in his party’s control but ceding the House to opposition Democrats.

He planned to meet with Macron on Saturday for talks on topics expected to include European security, Syria and Iran.

As he arrived, Trump tweeted that Macron “has just suggested that Europe build its own military in order to protect itself from the U.S., China and Russia. Very insulting, but perhaps Europe should first pay its fair share of NATO, which the U.S. subsidizes greatly!”

Trump’s brief visit to Europe comes amid uncertainty about the U.S. relationship with the continent. Trump has railed against trade deals with the European Union and has criticized some EU nations, including France, for not spending enough to defend or sustain NATO, the decades-old Western alliance formed as a bulwark to Moscow’s aggression.

Trump’s national security adviser, John Bolton, said Friday in Paris that the U.S. was concerned about stability in Europe and that Trump was not shirking from global engagement.

“I think the enduring lesson (of World War I) for the United States is that when you become a global power … you have global interests to protect,” Bolton said.

“Great world leaders,” he continued, “are driven by national interests.”

Lessons learned from the Greek Financial Crisis

 

Greek Crisis.jpg

The principles of Keynesian economic theory are considered as effective financial intervention plans and are very effective in resolving economic crisis (Keynes., 1936), especially when governments “responsibly” apply them with clear understanding of the current situation and future forecasts. This is one of the reasons an economic index from the Heritage Foundation ranked Greece poorly among other countries for having the worst policy performance in Europe–such that is comparable only to some sub-Saharan African countries (Heritage., 2015).

However, another major problem for the Greek economy was its adoption of the same monetary policy with other EU countries. Greece joined Eurozone in 2001 and enjoyed very low interest rate from the ECB, including a single currency which encouraged excessive borrowing and spending until the huge debt accumulation and consequential relapse in 2010.

Government intervention through stimulus has different results.

Further, austerity measures have proved less tolerant than fiscal stimulus but they produce powerful short-term results. Despite the fact that both austerity and stimulus have long-term negative effects, they are also effective in stabilizing out-of-control market forces which present greatest challenges in global economy and are often the only way a government can stabilize trade imbalance (Baldwin & Giavazzi., 2015).

Lessons learned.jpg

Every government, in its bid to restructure the economy, carefully considers how it can use incentives to boost economic growth without driving the economy further into debt – a situation which is less likely to occur through fiscal stimulus. This was exactly what happened when the IMF decided to break the lending rule by turning a blind eye to how sustainable the Greek debt was and providing it with funds (IMF., 2015).

However, using austerity as a measure against economic depression may pose worse problems in the long run. For instance, spending cuts are required to implement austerity programmes when an economy is in turmoil but critics on the fiscal approach, in contrast, argue that the commercial strategy stimulus can also weaken economies. This implies that applying one control measure or using reduction of government debts may not produce the desired result (Munevar., 2016).

In the words of Alogoskoufis, the problem with Greek economy is “not simply a debt crisis” but “a dual confidence crisis”. Leaders in both developed and developing countries covet China’s path to economic recovery which was facilitated by a tightly managed, top-down decision-making apparatus which avoided bureaucratic bottlenecks. The historical results prove that an autocratic regime with incompetent personnel cannot achieve meaningful feats but promoting effective public sectors and adopting the right economic strategies can provide a balance (Nancy & Francis., 2011).

An assessment of the Greek Financial Crisis

 

Greek Crisis

Data credibility has been a problem since Greece applied to join the European Union in 1999. It is also a fact that most researchers, when citing the origins of the Greek financial crisis, use fabricated statistical data provided by the government. This was evident in the widely criticized deal between Goldman Sachs and the Greek authorities in 2001 (Eurostat., 2004; 2012).

Between 2005 and 2009, Eurostat expressed reservations about Greek fiscal data on yearly basis, with claims that all previously reported figures were manipulated to create a flaw that made it impossible for analysts to ascertain or predict deficit, GDP growth and debt (EC., 2010; Hellenic., 2011, 2012). Although the agency admitted that data problems are common occurrences in many countries, the quality of data received from Greece in the 2009 revisions was suspicious. The European nation used some questionable currency swaps at undervalued market exchange rates to deceitfully meet the requirements outlined in Maastrisht thus enabling it to earn membership of the Eurozone in 2002, a move that the government defended as legal and acceptable (Bénassy-Quéré., 2015).

Despite the denials, renowned economists believe that several factors such as tax evasion, current account imbalance, government spending, manipulated data and budget deficits were the main causes of Greek Crisis; a breach of Eurostat’s statistical data was only a trigger that opened the canker-worms. To understand the real causes of the debt crisis, a complete analysis will not only distinguish the most recent origins but provide a broad view of the causal factors (Corsetti., 2015).

  • Political Analysis

The political side of Greece financial crisis has an underpinning to the long-lasting challenges presented by its unstable foreign relations with Turkey. Terrorism in the neighboring Muslim-majority country has been a cause for concern for a large number of Greeks in Cyprus, in the sense that political unrest leave a large number of them homeless and in need of financial support. This has created diplomatic rift between the two countries, and even inspired huge budgets for the Greek military (Helena Smith., 2017).

In addition, years of scandals in the political and financial sectors, notably under the PASOK Party and ND Party, show how badly the nation’s development has been hampered by nepotism, bribery and corruption.

Figure 2: Satisfied Citizens in the EU

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Source: Special Eurobarometer (2017)

In furtherance to the pictorial evidence above, it is worth noting that no Greek minister has been probed or sent to jail for mismanagement of public funds since the 70s. This highlights the government’s acceptance of corruption as a part of administrative services. The systemic failure also breeds faithlessness in citizens, the EU and other world leaders. Greek politicians are generally idealized as a special interest group with an inclination to self-aggrandizement (Athanasios A., Constantinos K., and Emmanouil T., n.d.).

  • Economic Analysis

In the 90s, Greece was an emerging economic power with strong GDP growth in Europe until sustainability needs arose and its policymakers liberalized the financial sector, encouraging banks to dole out loans at minimal interest rates. The government also received loans from the EU at less interest rates. Consequentially, demand for consumer credit expanded and citizens embraced ravenous consumption patterns, leading to an unprecedented level of investments within the country. But an unfavorable difference in real per capita income became unavoidable when compared to EU-15 (Bank of Greece., 2010).

After 2008, the Greek national statistical agency reported that GDP growth was significantly lower than expected, and the Ministry of Finance encouraged reduction of salaries and bureaucratic positions/structures as the most productive strategy to improve competitiveness. The ministry also proposed that governmental spending should focus more on growth-stimulating sectors and less on non-growth sectors such as the military. By 2009, the global financial crisis hit hard on Greece’s highest earning sectors – shipping and tourism. The outcome was an outrageous 15% drop in revenues (Rebecca M.N., Paul Belkin & Derek E. M., 2010).

In the years that followed, Greek economy recorded a continuous increase in deficits due to poor planning, unproductive spending and reduced earnings. Affected firms were forced to cut down on their number of employees to reduce decline in profits and tax earnings, including application of cost-cutting measures in buying and leasing equipment, research and development, as well as in marketing and promotion strategies. New product rollouts were also stalled to maximise growth. Many companies which couldn’t adjust to competitions in the volatile economic situation relocated to the north of Greece and other Balkan countries (op. cit).

The fact that payment of taxes among citizens was not encouraged since defaulters are not punished, was one the biggest obstacle to economic recovery. In Manolopoulos’ explanation, this mindset was at the heart of the problem and goes further in explaining the unwillingness of a typical Greek citizen to make meaningful contributions for the general good (Charles S., 2016).

The World Bank report on its Doing Business pitched Greece as 142nd among a total of 178 countries for its unproductive regulation of employment and the complex nature of the nation’s employment index which contributed to a springy labor market and drastically reduced competitive advantage of the Greek economy (World Bank., 2015).

Figure 3: Greece GDP (1999 – 2009)

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Source: Data Monitor, Greece, 2009

As shown in Image 3, the income gap vis-a-vis the best performing countries is highest for Ireland and Greece before the financial crisis. However, a variety of structural reforms in the product and labor market have greatly controlled shortfall in productivity while enhancing utilization of labor.

For its “statist” nature, the public sector’s inefficiency was a key contributor to the financial crisis because it offered generous pension packages, a pre-determined retirement age and incremental salaries which made public service more attractive. An inefficient and corrupt bureaucracy thereby created a sense of job security, laziness, and an unavoidable impoverishment. Also, the spoil-sharing mentality presented a worse scenario for implementing policies, and up to date, there is no statistical data to prove there’s a link between employee productivity in the civil service, job performance and basis for increased salaries. Worse still, there are no incentives to promote competitiveness among civil servants, instead, public sector wages and pensions rose by 9% in 2008 and workers continued to receive mouth-watering wages whereas firms in the private sector were downsizing and going for closure (Trading Economics, n.d.). To buttress the Greek low-end governmental position in restructuring the public sector for growth, retirement age remained at 58 with full pension offered whereas the average retirement age in the rest of EU stood at 63. Stats show that a Greek retiree earns about 98% of their original salaries (op. cit).

Figure 4: Impact of the 1st and 2nd Greek Bailouts on Employment

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Sources: Eurostat, World Bank and Trading Economics (2016)

In December 2009, an estimated 750,000 Greece nationals registered at the Public Employment Service (commonly known as OAED) but only one-third of the applicants received job offers. However, the number raised hopes for the Greek economy considering that it represents a 20% increase from what was recorded in November 2009. Despite the private sector’s huge lay-offs from 2009, the public sector maximised Greece’s first and second bailouts in expanding its workforce and increasing productivity levels.

  • Social Analysis

An unbalanced increase in birth rates and the aging population in Greece present another challenge since fewer people are joining the labour force. According to economic statistics, a noticeable decline is expected from 2020, when citizens aged between 64 and above will most likely double. By 2050, only one out of two persons will be eligible to work. In addition, a dramatic 77% rise is also expected in the dependency ratio between people older than 64 and those aged 15 to 64 (Nikolaos A., 2017).

Further, inequality in the workforce is also a challenge for the Greek economy which has a total labor force of about 5 million with 60% males. Notwithstanding the large number of males, an analysis of the total labor force shows only 48% are productive, an indication of low male participation in the rebuilding process. Contributions from females are even lower (Thanasis D., 2015; Kathy n.d.).

Although the trend has been blamed on low mobility in the labour market and structural stiffness, the outdated Greek education system stands tallest among other social factors for its low graduation numbers and high number of drop-outs recorded in comparison to the rest of EU-15 (Yannis P., 2017)

  • Technological Analysis

For many years, Greece has recorded low returns on R&D due to minimal expenditure which falls far below other countries in Euro zone. R&D activities were restricted for both private and public sectors thus stifling innovation as we see in the image below.

Figure 5: R&D Expenditure

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According to the OECD data, most economists believe the centralized nature of Greek education system hampers technological growth by producing less number of quality graduates. In the years preceding 2009, what the country needed was more vocational education for its teeming youths whose inputs could have balanced high demands from booming industries. The labor-intensive economy was worsened by increasing wages, administrative costs, small number of registered patents and high inflation rate, which placed Greece below EU and OECD-average in technological advancement (Michael M., 2011).

It must be emphasized, however, that despite the setback from low investments on R&D, Greece has competitive advantage that it can exploit to rise above its security and financial problems; the European nation boasts of a qualified workforce, strategic location, and many multinational corporations such as Siemens, Ericsson, SAP, Motorola, and Coca-Cola which established their regional R&D headquarters in the country.

On the other hand, Greek public sector’s inept attitude to high productivity rates suppressed technological development. With a largely labor-intensive economy, inefficient and unproductive workforce, increasing wages, outrageous pension packages, and high administrative costs, we need not probe further on why inflation in Greece became much higher than EU-average.

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