Notice

The next blog post will be published on the 21st June, due to AS exams in May/June.

Does Eastern Europe Still Exist? By Professor Anne Applebaum

Eastern Europe is mostly used as a political term to define those countries who were under Soviet control, such as being a satellite state, prior to the collapse of the Soviet Union in 1991. However, when this collapse occurred all these countries were no longer under control and they took very different approaches at reforms. This lecture by Professor Applebaum, provided a sound argument on whether eastern Europe still exists, both economically and metaphorically.

Firstly, when one thinks of eastern Europe with counties like Poland and Hungary, they imagine poor and unstable economies with low living standards and in desperate need of western Europe’s help. However, it is clearly apparent that this view held for the last twenty years is now completely false, as was demonstrated with the Great Recession of 2008. Professor Applebaum accurately revealed that in fact it was Iceland that was first hit by the recession, possibly the furthest western country of Europe. Furthermore, eastern European countries were mildly affected by the recession and some not at all, for example Poland which has had staggering figures of continuous growth since the 1990s. 

The common belief, prior to the Great Recession, was that eastern European countries would be the first to collapse and that the western countries would have to help, to prevent a Eurozone Crisis. However, the exact opposite has occurred with most of the western European countries on the brink of collapse, with eastern European countries helping. It is now obvious that the people who a few years ago greatly criticised EU enlargement, were incorrect, as if the enlargement never occurred, then the Eurozone crisis would have taken place much sooner, with drastic consequences, as Professor Applebaum revealed.

The reasons behind the success of these eastern European countries and the failure of most of the western European countries is difficult to decipher. However, one argument that Professor Applebaum pointed out was that they paid little into bonds, whereas other western European countries did not, instead countries like Greece and Spain paid up to 8-10% in forms of bonds, whereas their eastern European counterparts where doing about half. However, this is just one reason behind why eastern European countries are becoming prosperous. 

The graph below shows the growth rates of most, if not all, European countries. It was produced by the Ministry of Treasury of Poland. It clearly demonstrates the true extent to which eastern Europe was overtaking western Europe. However, upon close analysis, it is evident that not all of eastern Europe is experiencing this prosperity that their neighbours have been, such as Slovenia.

To conclude, this lecture presented by Professor Anne Applebaum was interesting and offered another opinion on these rising economies. Perhaps it is time for us, as Professor Applebaum suggested, to stop having these stereotypes and old cliches about eastern Europe, because in fact western Europe should learn from the failures and successes of eastern Europe.

State of the Economy Conference 2013, Institute of Economic Affairs, Institute of Directors

I was very fortunate to have the opportunity to attend this very prestigious event with many well-known and famous speakers. The day was split into four sessions, each discussing a different aspect of the title of the conference:

‘Stagnation or Recovery – What does the future hold?’

Session 1 – Chaired by David Smith, Economics Editor of The Sunday Times:

To talk first was Charles Bean the Deputy Governor of the Bank of England (BoE). This was a very interesting lecture, as many people were curious of what somebody of this authority believed, regarding the current economic situation of the UK. The majority of his talk was about the dismal state of the economy following the Great Recession of 2008, including the high inflation, demise of Lehman Brothers and the impact of this on the Banking world, uneasy growth rates and the failure of many polices such as Quantitative Easing (QE). Furthermore, it was evident that the demand and supply of the UK had been significantly impacted by the Recession and this led to further economic complications. However, Mr Bean claimed that the Monetary Policy Committee (MPC), which he has some control over, would be trying to maintain growth rates amid these economic uncertain times.

The next talk was by Roger Bootle the Managing Director of the Capital Economics. Mr Bootle’s talk was on the possible solutions of the Eurozone crisis. Firstly, a brief introduction on the problems the Eurozone faced were outlined: shrinking economies, the near collapse of the economies of peripherals (i.e. Spain, Italy and Greece) and the failure of competitiveness which is a main drive for markets to keep their growth rates. Moreover, it was apparent that the banks of Europe were still very weak following the collapse of Lehman Brothers and their exposure to risks was high, such as credit risk. However, it became increasingly obvious with the facts and figures that the Eurozone might break up and that this could occur in many ways, for example a strong country, like Germany, would leave first. Furthermore, Mr Bootle touched on the point that economies were prosperous before the Euro was formed in the 1990s and that after the formation of the Eurozone, countries began to slowly suffer. So, perhaps a break up of the Eurozone would be a good thing?

The last talk of this session was by Stephen King the Chief Economist of HSBC. Mr King’s talk was regarding the dynamics of global economies, in particular China. China in the last few years has received exceptional boosts in its economy and consequentially it has helped on a global scale, as it is a significant contributor to exports in the world. In addition, there was an excellent diagram to accurately describe the reasons why China has excelled to this great economic state. It was apparent that American and other countries’ investors placed money into China, which would sub sequentially end with companies and firms with higher profits, yet in the process the economy of China greatly excels.

Session 2 – Chaired by Louise Cooper, Senior Financial Analyst of BGC Partners:

The first talk was by Antony Browne the Chief Executive of the British Bankers’ Association. The main focus of this talk was regarding how to promote financial stability. The current banking sector is very risk orientated, with substantial losses or wins being made, based mostly on chance. However, when a bank loses on a risk for a trade or deal, they need to be bailed out by taxpayers, which further negatively affects the economy. This means the culture of ‘too big to fail’ needs to be eradicated as people highly depend on banks, so when they collapse as Lehman Brothers did, there are many consequences that ensue. There needs to be many more safety procedures in place to ensure that banks are safe regardless of how risky a transaction is. For example building a ‘firewall’ so if one bank collapses others will not be affected too much. Mr Browne’s ideas and suggestions were very interesting and posed a different opinion on the anti-bank attitude that has arisen following the Great Recession.

The remainder of session 2 was a panel discussion with Professor Phillip Booth the Editorial Director of the Institute of Economic Affairs, Professor Laurence Copeland of Cardiff Business School, Antony Browne the Chief Executive of the British Bankers’ Association and Chris Leslie MP, the Shadow Financial Secretary to the Treasury and a Labour and Co-operative MP for Nottingham East. The discussion was regarding regulatory reforms in trying to maintain a strong and healthy financial sector. A shared idea was that the problem with banks in the UK was the size of these banks and that a break up was required, not to remove them all together, as most people believed. The legislation that was discussed would have evidently prevented the collapse of Lehman Brothers, as they ‘wind’ the banks back, if they fail.

Session 3 – Chaired by Edmund Conway, Economics Editor of Sky News:

The entire session was a panel discussion featuring Professor Trevor Williams the Chief Economist of Lloyds Bank Commercial Banking, Andrew Lilico the Principal of Europe Economics and Dr Kwasi Kwarteng an MP of the Conservative party. The topic of this session was how to use supply-side reforms to boost the economy.

There were many ideas and policies discussed such as: freedom of the labour market, higher interest rates to curb inflation, to improve education and training schemes, increasing the size of the labour force, by increasing the age of retirement, increasing competitiveness of markets and to cut government spending. However, there were conflicts in ideas such as government spending, it was argued that a cut in government spending would help to decrease the budget deficit; yet increasing government spending could cause the multiplier effect, which would also positively affect the economy. This panel discussion offered many views and opinions that conflicted with others and all seemed viable but none seemed to single-handedly achieve the prime economic target of kick-starting the economy.

Session 4 – Chaired by Graeme Leach, Chief Economist & Director of Policy of the Institute of Directors:

The first talk was by Simon Hayes who is the chief UK economist of Barclays bank. This talk was about the change in bond yields, equities and interest rates over the years especially over the course of the Great Recession of 2008. It is apparent that the recession had a tremendous impact on the economy of the UK, as uncertainty and interest rates were affected by this event. Furthermore, it is evident that there is now a scarcity of ‘save-haven’ assets, where consumers and firms are safe and feel safe in financial matters.

The next talk was by Thomas Mayer, Senior Fellow at Frankfurt University and advisor of Deutsche bank, regarding the impact of the Eurozone crisis. Firstly it was evident that there have been adverse consequences to the crisis of the Eurozone that followed the Great Recession, such as: public debts rising, public budget deficits increasing and the increase in labour costs. There are many solutions to these problems; however there are always alternatives and choosing one is not easy as was demonstrated in session three. Mr Mayer emphasised the importance of competition of markets but of currency too, which has been lacking in the last few years. These possible solutions could help to turn around the crisis of the Eurozone and needs to be dealt with soon, as economies could begin to collapse if otherwise.

The final talk of this session and of the day was about trying to improve prospects of growth in Europe by Ludger Schuknecht the Director General of the German Ministry of Finance. It has been apparent that weak growth has been common over the last few years, along with rising public debt in the European Union (EU). To help the economies of the EU, there needs to be three prolonged strategies, according to Mr Schuknecht: fiscal consolidation, structural reforms and the strengthening of the institution of framework. Referring to case studies of Ireland, New Zealand, Sweden, East Germany and many other countries, it is obvious these past crises have required these three reforms to successfully exit their economic depressions. Normally, these fiscal changes can be considerably large and have a tremendous impact on society and the economy. However, these types of reforms should hopefully reverse the image the Eurozone has acquired, of being an economic disaster to a prosperous alliance of countries.

In conclusion, all four session combined presented a sound and intriguing argument regarding the state of the economy. There were many conflicting opinions, such as Ludger Schuknecht believing that the Eurozone should become a strong and prosperous alliance whereas Roger Bootle claimed that the Eurozone should break up, as evidence suggests that the members of the EU were economically successful prior to the formation of the EU. All in all, the conference featured many famous and influential people and was very informative of the options that governments have to help revive their economies.