The Russian economy under Putin: Growth factors and impediments to economic development. OSW Study 20/2005

After a dramatic economic decline after the collapse of the Soviet Union and the financial breakdown of 1998, the Russian economy has begun to emerge from its deep crisis. The years 1999-2004 were a period of dynamic development in all sectors of Russian economy, and saw a rapid growth in GDP of over 7 per cent per year. Russia owed the excellent macroeconomic results of that period to a combination of favourable factors. The key factors were: high hydrocarbon prices on the global markets; an increase in Russia's international competitiveness thanks to the "rouble devaluation effect" (following the 1998 financial crash); and the market reforms carried out within that period. In 2004, despite very high oil and gas prices on world markets, a slowdown of the GDP growth took place. Even though the economy is still developing fairly rapidly, we are able to say that Russia is exhausting those traditional mechanisms (apart from oil and gas prices) which have hitherto stimulated GDP growth. Moreover, there are no new mechanisms which could replace the old ones. In the longer term, these unsolved structural problems may seriously impede Russia's economic growth.

Ukrainian economy on the verge of recession. OSW Commentary No. 96, 2012-11-21

In the third quarter of 2012, Ukraine’s economy recorded negative growth (-1.3%) for the first time since its 2009 economic crisis. Q4 GDP is projected to suffer a further decline, bringing Ukraine into formal recession. In addition to the worsening macroeconomic indicators, Ukraine is also facing a series of concomitant economic problems: a growing trade deficit, industrial decline, shrinking foreign exchange reserves, and the weakening of the hryvnia. Poor economic growth is expected to result in lower than projected budget revenues, which in turn could lead to the sequestration of the budget in December. The decline evident across the key economic indicators in the second half of 2012 brings to a close a period of relative economic stability and two years of economic growth, which had been seen as a significant personal achievement of President Viktor Yanukovych and the ruling Party of Regions. The health of the Ukrainian economy largely depends on the state of the country’s export- -oriented industries. The current economic forecasts for foreign markets are not very optimistic. It is impossible to determine whether the current economic downturn is likely to be merely temporary or whether it heralds the onset of a prolonged economic crisis. The limited capacity to deal with the growing economic problems may mean that Kiev will need to seek financial support from abroad. This is particularly significant with regard to external debt servicing, since in 2013 Ukraine will need to pay back around 9 billion USD, including over 5.5 billion USD to the International Monetary Fund. In order to overcome the recession and stabilise public finances, the government may be forced to take a series of unpopular measures, including raising the price of natural gas and utilities. These measures have been stipulated by the IMF as a condition of further financial assistance and the disbursement of the 12 billion USD stabilisation loan granted to Ukraine in July 2010. The only alternative for Western loans and economic reforms appears to be financial support from Russia. The price for Moscow’s help might however turn out to be very high, and precipitate a turn in Kiev’s foreign policy towards a gradual re-integration of former Soviet republics under Moscow-led geopolitical projects.

Turkey's economy: a story of success with an uncertain future. OSW Commentary No. 120, 2013-11-05

In the decade since the Justice and Development Party (AKP) came to power, Turkey’s economy has become synonymous with success and well-implemented reforms. Economic development has been the basis of both socio-political stability inside the country and of an ambitious foreign policy agenda pursued by the AKP. However, the risks associated with a series of unresolved issues are becoming increasingly apparent. These include the country’s current account deficit, its over-reliance on short-term external financing, and unfinished reforms, for example of the education sector. This leaves Turkey exposed to over-dependence on investors, especially from the West. Consequently, Ankara has become a hostage of its own image as an economically successful state with a stable socio-political system. Any changes to this image would cause capital flight, as exemplified by the outflow of portfolio investment1 and an increase in the cost of external debt2 that followed the nationwide protests over the proposed closure of Gezi Park last summer. In addition, Turkey remains vulnerable to potential changes in investor sentiment towards emerging markets.

Supply and Demand Side Limitations Affecting the Structure of Agriculture and the Rural Economy. Factor Markets Working Paper No. 21, February 2012

The paper criticises the neo-classical assumptions of perfect factor markets and of complete information, which constitute central elements in labour market theory. Based on literature review and on economic reports from transition economies, as well as developing countries and more advanced economies, this deliverable focuses on the structural impediments and imperfections which often characterise rural labour markets and which may prevent an efficient allocation of labour. According to empirical studies, transactions costs and rigidities hinder the well-functioning of labour markets and constrain labour adjustments. The paper attempts to classify the various limitations of rural labour markets from both supply and demand side, although the distinction is not always clear-cut as some problems occur on both sides. The identification of these issues is extremely important as it allows us to highlight the inefficiencies and the failures in labour markets and to understand their impact on labour allocation. In this context, market intervention is desirable and the paper provides particular support for rural development policies such as investments in human capital. Lastly, labour institutions can play a key role in promoting the well functioning of labour markets, thus it is fundamental that they are well in place.

Determinants to Leave Agriculture and Change Occupational Sector: Evidence from an Enlarged EU. Factor Markets Working Document No. 46, May 2013

The objective of this paper is to explore the determinants to leave agriculture and change occupational sector. We adopt a 3-step multivariate probit where we control for selection bias at two stages in the decisions to work and, at a later stage, exit agriculture. The analysis is based on the European Union Labour Force Survey data expanded with additional regional indicators. The main results suggest that younger individuals are more likely to leave farming activities, although the largest outflows of agricultural labour are mainly associated with the retirement of people. Self-employed and family workers are generally less likely to leave agriculture and those with low levels of educations are found to be significantly constrained in entering the non-farm economy. Moreover, labour market conditions at the regional level do matter for switching occupational sector. Differences in the results among the selected new member states and the EU-15 can be explained by the diverse production structures, suggesting different capacities to release and absorb labour.

Afghan Opium and the EU: Fighting the War Economy through Development Cooperation. EU Diplomacy Paper No. 4, 2014

Opium is at the heart of the war economy in Afghanistan, involving a broad range of actors. It generates a sustainable violence cycle and, while international troops withdraw from the country, threatens the Afghan government’s reconstruction efforts. The European Union (EU) plays an important part in the debate on how to deal with this issue. Several counter-narcotics policies have been implemented since 2001 and have mostly failed. This paper looks at these failures and questions the European Union’s ability to help tackle the problem of opium in Afghanistan. It argues that a comprehensive development response, backed by counter-narcotics incentives, could unfasten the spiral of the war economy. It also argues that the EU has developed relevant policies based on poverty alleviation and a structural approach to the opium issue but still lacks the means for action and for donor coordination in order to significantly influence the situation.

Money, Finance and the Real Economy: What went wrong? CEPS Paperback, 17 March 2015

The functions of the financial system of a developed economy are often badly understood. This can largely be attributed to free-market ideology, which has spread the belief that leaving finance to its own devices would provide the best possible mechanism for allocating savings. The latest financial crisis has sparked the beginnings of a new awareness on this point, but it is far from having led to an improved understanding of the role of the financial institutions. For many people, finance remains more an enemy to be resisted than an instrument to be intelligently exploited. Its institutions, which issue and circulate money, play an important role in the working of the real economy that it would be imprudent to neglect. The allocation of savings, but also the level of activity and the growth rate depend on it. In this book, the authors carefully analyse the close links between money, finance and the real economy. In the process, they show why today the existence of a substantial potential of saving, instead of being an opportunity for the world economy, could threaten it with ‘secular stagnation’.

Europäische Integration aus historischer Erfahrung, Ein Zeitzeugengespräch mit Michael Gehler = European integration from a historical experience, A Discussion with Michael Gehler. ZEI Discussion Paper C227, 2015

From 1995 to 1999 Monika Wulf-Mathies served as EU commissioner responsible for regional and cohesion policy. She tells us the story of the EU Commission under President Jacques Santer with regard to the historical development of the preparation of the Economic and Monetary Union (EMU), the Union Treaty of Amsterdam (1999) and the EU-Eastern Enlargement. She touches also controversial aspects of the Santer Commission, which led to her collective demission in 1999. According to Wulf-Mathies the increase of EU's democracy deficit is result of an erosion process of the common institutions caused by the nation states which contributed to their weakness. The democratic substance of the union suffers because of the 'summarization' of the EU decision making processes. Monika Wulf-Mathies argues in favor of the community method, which needs revitalization. She proposes European democracy enforcement and transfers of the national budget und economy policies to EU bodies. This eyewitness talk offers an actual EU analysis as well as an assessment of the Santer Commission.

The “New World Order”: From Unilateralism to Cosmopolitanism. CES Germany & Europe Working Papers, no. 04.1, 26 January, 2004

On January 26, 2004, the topic of the CES-Berlin Dialogues was "The 'New World Order': From Unilateralism to Cosmopolitanism." It was the second in a series of four meetings organized in Berlin under the med_title 'Redefining Justice.' The session was intended to examine successful and failed arenas of cooperation between the US and Europe; political misunderstandings and conscious manipulation; and models for future transatlantic relations. The presenters were Jeffrey Herf, Professor of History, University of Maryland, and Prof. Dr. Jürgen Neyer, Professor of International Political Economy, Ludwig-Maximilians-University of Munich, and Heisenberg Fellow of the Deutsche Forschungsgemeinschaft at the Department of Political and Social Sciences of the Freie Universität Berlin. Jeffrey Herf was asked to speak on the basic tenets of U.S. foreign policy in the administration of President George W. Bush, and Jürgen Neyer focused on the European view of international relations and conduct in the period since the invasion of Iraq.

A ship run aground Deepening problems in the Ukrainian economy. OSW Commentary Number 173, 16 June 2015

The drop in Ukraine’s GDP by nearly 18% in the first three months of 2015 (versus the corresponding period in 2014) has confirmed the decline of the country’s economy. Over the last 14 months, the Ukrainian currency was subject to an almost threefold devaluation against the US dollar, and in April 2015 the inflation rate was 61% (year-on-year), which exacerbated the impoverishment of the general public and weakened domestic demand. The main reason behind the crisis has been the destruction of heavy industry and infrastructure in the war-torn Donbas region, over which Kyiv no longer has control, as well as a sharp decline in foreign trade (by 24% in 2014 and by 34% in the first quarter of 2015), recorded primarily in trading volume with Ukraine’s major trade partner, i.e. Russia (a drop of 43%). The conflict has also had a negative impact on the production figures for the two key sectors of the Ukrainian economy: agriculture and metallurgy, which account for approximately 50% of Ukrainian exports. The government’s response to the crisis has primarily been a reduction in the costs of financing the Donbas and an increase in the financial burden placed on the citizens and companies of Ukraine. No radical reforms which would encompass the entire system, including anti-corruption reforms, have been carried out to stop the embezzlement of state funds and to facilitate business activity. The reasons for not initiating reforms have included the lack of will to launch them, Ukraine’s traditionally slow pace of bureaucratic action and growing dissonance among the parties making up the parliamentary coalition. The few positive changes, including marketisation of energy prices and sustaining budgetary discipline (in the first quarter of 2015, budgetary revenues grew by 25%, though partly as a result of currency devaluation), are being carried out under pressure from the International Monetary Fund, which is making the payment of further loan instalments to the tune of US$ 17.5 billion conditional upon reforms. Despite assistance granted by Western institutional donors and by individual states, the risk of Ukraine going bankrupt remains real. The issue of restructuring foreign debt worth US$ 15 billion has not been resolved, as foreign creditors who hold Ukrainian bonds have not consented to any partial cancellation of the debt. Whether Ukraine’s public finances can be stabilised will depend mainly on the situation in the east of the country and on the possible renewal of military action. It seems that the only way to rescue Ukraine’s public finances from deteriorating further is to continue to ‘freeze’ the conflict, to gradually implement wide-ranging reforms and to reach a consensus in negotiations with lenders.

The Political Economy of Financial Crisis Policy. Bruegel Working Paper 2015/06, July 2015

Highlights • Government intervention to stabilise financial systems in times of banking crises ultimately involves political decisions. This paper sheds light on how certain political variables influence policy choices during banking crises and hence have an impact on fiscal outlays. • We employ cross-country econometric evidence from all crisis episodes in the period 1970-2011 to examine the impact political and party systems have on the fiscal cost of financial sector intervention. • Governments in presidential systems are associated with lower fiscal costs of crisis management because they are less likely to use costly bank guarantees, thus reducing the exposure of the state to significant contingent and direct fiscal liabilities. Consistent with these findings we find further evidence that these governments are less likely to use bank recapitalisation and more likely to impose losses on depositors.

Energising the TTIP: Political economy of the trade policy rationale. Paper No. 9 in the CEPS-CTR project “TTIP in the Balance’’and CEPS Special Report No. 113/July 2015

Despite accounting for a significant share of global trade and the resulting interdependencies from it, energy governance remains largely fragmented and there is no global framework or agreement defining the rules of energy trade. This paper, after presenting the main global and regional energy market developments, discusses the opportunities to ‘energise the TTIP’, i.e. to include a chapter dedicated to trade and cooperation in the sphere of energy. The shale revolution in the US, the ever-rising interconnectedness of energy markets (recently proven by the disappearance of the ‘Asian gas premium’) and the EU’s quest to diversify its energy supplies generally sets favourable conditions to reinforce energy relations between the EU and the US. The question, as is often the case, is whether there is sufficient political will to tighten relations in a strategic sphere with connotations for national security and sovereignty.

The Political Economy of the 2014-2020 Common Agricultural Policy: An Imperfect Storm. CEPS Paperback, 17 August 2015

After five years of debates, consultations and negotiations, the European institutions reached an agreement in 2013 on the Common Agricultural Policy (CAP) for the 2014-2020 period. The outcome has major implications for the EU’s budget and farmers’ incomes but also for Europe’s environment, its contribution to global climate change and to food security in the EU and in the world. It was decided to spend more than €400 billion during the rest of the decade on the CAP.The official claims are that the new CAP will take better account of society's expectations and lead to far-reaching changes by making subsidies fairer and ‘greener’ and making the CAP more efficient. It is also asserted that the CAP will play a key part in achieving the overall objective of promoting smart, sustainable and inclusive growth. However, there is significant scepticism about these claims and disappointment with the outcome of the decision-making, the first in which the European Parliament was involved under the co-decision procedure. In contrast to earlier reforms where more substantive changes were made to the CAP, the factors that induced the policy discussions in 2008-13 and those that influenced the decision-making did not reinforce each other. On the contrary, they sometimes counteracted one another, yielding an ‘imperfect storm’ as it were, resulting in more status quo and fewer changes. This book discusses the outcome of the decision-making and the factors that influenced the policy choices and decisions. It brings together contributions from leading academics from various disciplines and policy-makers, and key participants in the process from the European Commission and the European Parliament.

Eurozone Crisis and Social Models: What We Can Learn from Italy and Spain. CES Papers - Open Forum #20, 2013-2014

This paper considers the role of social model features in the economic performance of Italy and Spain during the run-up to the Eurozone crisis, as well as the consequences of that crisis, in turn, for the two countries social models. It takes issue with the prevailing view - what I refer to as the “competitiveness thesis” - which attributes the debtor status of the two countries to a lack of competitive capacity rooted in social model features. This competitiveness thesis has been key in justifying the “liberalization plus austerity” measures that European institutions have demanded in return for financial support for Italy and Spain at critical points during the crisis. The paper challenges this prevailing wisdom. First, it reviews the characteristics of the Italian and Spanish social models and their evolution in the period prior to the crisis, revealing a far more complex, dynamic and differentiated picture than is given in the political economy literature. Second, the paper considers various ways in which social model characteristics are said to have contributed to the Eurozone crisis, finding such explanations wanting. Italy and Spain ́s debtor status was primarily the result of much broader dynamics in the Euro- zone, including capital flows from richer to poorer countries that affected economic demand, with social model features playing, at most, an ancillary role. More aggressive reforms responding to EU demands in Spain may have increased the long term social and economic costs of the crisis, whereas the political stalemate that slowed such reforms in Italy may have paradoxically mitigated these costs. The comparison of the two countries thus suggests that, in the absence of broader macro-institutional reform of the Eurozone, compliance with EU dictates may have had perverse effects.

Saving the Banks: The Political Economy of Bailouts. CES Papers - Open Forum #8, 2012

How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? This paper analyzes comparatively what explains government responses to banking crises. Why does the type of intervention during financial crises vary to such a great extent across countries? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision-makers. Still, “crony capitalism” accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British and French bank bailout, we show that countries with close one-on-one relationships between policy-makers and bank management tended to develop unbalanced bailout packages, while countries where banks have strong interbank ties and collective negotiation capacity were able to develop solutions with a greater burden sharing from private institutions.