Portugal Becomes First Eurozone Country to Ratify EU Fiscal Pact

BBC: Portugal First to Approve EU Fiscal Pact
EU Business: Bailed-out Portugal Takes Lead in Ratifying EU Budget Pact
FT: Portugal Ratifies European Fiscal Treaty
WSJ - Portugal Approves EU Pact

On April 13, the Portuguese Parliament became the first country to approve the European Union’s new Fiscal Pact. Both main political parties supported the Pact while three left-of-center parties wanted the treaty to go through a public referendum. The Pact sets forth strict new rules and penalties for countries running excessive deficits and debts. Under the Pact, member countries’ deficits must not exceed 0.5% of the country’s gross domestic product (GDP), debt must be below 60% of GDP, and countries must add balanced-budget rules to their constitutions or national laws. The European Court of Justice has the power to impose fines on the member countries to ensure that they adhere to these rules.

Currently, the Portuguese Parliament is discussing whether it will add the balanced-budget rules to its constitution or instead pass a law that can be overturned by a two-thirds majority vote. The ruling party favors the limits to be set in the constitution, while the Socialists (the second-largest party in the parliament) are in favor of the second option. Likewise, the parliament is also considering whether it should pass pro-growth clauses to offset the negative effects that would arise from the tough austerity measures (spending cuts and tax increases) the country will have to impose to bring the debt and deficit within the Pact limits. Many other European leaders share this desire to spur growth while reducing deficits, including French Presidential candidate Francois Hollande who has pledged to pass such growth provisions if he wins the election in May.

By ratifying the Pact, Portugal aims to demonstrate to the European Union and investors that the country, which received a €78 billion ($102.86 billion) bailout, is committed to bringing down its deficit and debt. As of December 2011, Portugal’s government debt was 90.6% of GDP and its deficit was 5.2% of GDP—well above the limits set out in the Pact. Although Portugal is not expected to immediately abide by the debt and deficit limits (the European Commission will establish the time frame for compliance based on Portugal’s individual economic situation), the country faces a tough road ahead as it imposes austerity measures to comply with the Pact. Economists expect the Portuguese economy to contract by 3.3% this year and unemployment to rise to nearly 15% as there has been a sharp fall in internal demand in the country due to the lower wages and increased taxes.

Deforesting the Paraguayan Forest for Beef Production

Sources:

BBC:Forest Fears As Paraguay’s Chaco Region Sees Land Rush

NYT:Vast Tracts in Paraguay Forest Being Replaced By Ranches

TheGuardian: Chaco Deforestation by Christian Sect Puts Paraguayan Land UnderThreat

South America’s Chaco forest has long been known for its violently hot temperatures and vast stretches of thorn trees and, as a result, it has remained undeveloped for centuries. The Chaco stretches across segments of Paraguay, Argentina, Bolivia, and Brazil, covering an area about the size of Poland. It is home to several unique species that make it one of the most diverse areas of the world, like the largest living species of peccary, which are pig-like mammals, and guanacos, which resemble llamas. Hunter-gatherer indigenous groups have also traditionally lived in the Chaco.

Paraguay’s Chaco forest, however, has changed in recent years due to an increased global demand for beef. Ranchers have cleared approximately ten percent of the Chaco in the last five years to meet this demand. Satellite images show that at least 1.2 million acres of Chaco forest have been deforested over the last two years. The availability of cheap land in the Chaco made it attractive for ranchers to buy. Paraguayan law, which permits the deforestation of seventy-five percent of a plot of land, has also facilitated the transformation of the Chaco. Experts are concerned that if deforestation continues, the Chaco will be destroyed within thirty years.

The ranchers profiting from the increased beef production are mostly Brazilian immigrants and Mennonites who have lived in Paraguay for almost a century. In response to protests by conservationists that fear the destruction of the Chaco, its native species, and its native inhabitants, ranchers claim that they are contributing to the economic development of the region and making productive use of it. As a result of the cattle land rush, property prices in the region have risen almost fivefold in the last few years. The traditional Mennonite way of life has changed due to newfound prosperity. Mennonite teenagers, for example, are often seen driving new Nissan pickup trucks.

The deforestation has also impacted indigenous groups in the Chaco. Experts have classified a group of Ayoreos, one of the hunter-gatherer tribes living in the Paraguayan Chaco forest, as the last “un-contacted” tribe in South America outside the Amazon. However, many Ayoreos have been forced from their homeland to live and work near the boomtowns that have formed as a result of the cattle land rush. Some wait for ranchers to hire them for about $10 a day, living and sleeping on the side of the highway. Others live in small communities outside the Mennonite townships, where their quality of life is very poor. The men try to make a living producing charcoal from burning trees, and the women make crafts to sell. They fear that they will never live in the forest again and that their traditional way of life is over. Although the global demand for beef has led to economic prosperity for ranchers in Paraguay, it has not benefitted indigenous groups in the Chaco. The deforestation of the Chaco has displaced the Ayoreo from their native homeland, threatened their cultural heritage, and widened the economic gap between people of European ancestry and indigenous groups in Paraguay.

The "BRICS" Propose a New Multilateral Bank

Sources:
BRICS Joint Statistical Report: Economic and Social Indicators Comparison of BRICS Countries
International News, The: World Bank Chief Backs BRICS Idea
Macau Daily Times: Rising Powers Mull Bank for Developing Nations
Telegraph, The: Robert Zoellick Calls for BRICS Bank

Brazil, Russia, India, China, and South Africa, collectively known as the “BRICS,” are five of the most important emerging economies. At their joint financial summit in New Delhi during the week of March 27, 2012, the BRICS officially proposed a new developmental bank, which would serve as an alternative to other development banks such as the World Bank. The outgoing World Bank president, Robert Zoellick, said that he would support a World Bank program to work with the BRICS to make their plan for a new bank a reality. Such a move would not be unprecedented, as the World Bank has previously assisted in the creation of the Islamic Development Bank and the OPEC Fund.

Zoellick does not believe that ignoring the BRICS is a good economic decision, as the countries are already serious players in the world economy. Collectively they account for 18% of the world’s GDP, 40% of the world’s population, 15% of global trade, and 40% of global currency reserves. Many financial experts expect the BRICS’s economies and political influence to continue growing in the future.

Some political experts view President Obama’s nomination of an American to lead the World Bank (instead of a person from the BRICS or another emerging economy) as adding momentum to a BRICS bank. The BRICS believe that the World Bank does not effectively address the unique needs of developing countries. They believe that a World Bank president from an emerging market economy could help address this issues. However, Obama’s nomination of an American is in line with past practice, as an American has always been the leader of the World Bank. The BRICS bank would focus on middle-income countries and be largely free from the political influences of advanced economies.

However, political experts are concerned that because the BRICS do not have one coherent foreign policy, it will be difficult for the countries to pool their economic resources and settle on an aid strategy. The lack of agreement was recently demonstrated when the BRICS failed to unite behind one nominee for World Bank president. Political experts are also concerned about the vast difference in economic power between the BRICS. For example, Brazil’s GDP was $2,090 billion in 2010, while China’s was $5,879 billion, India’s was $1,293 billion, Russia’s was $1,465 billion, and South Africa’s was $363 billion. China also has $3.2 billion in foreign currency reserves, an amount much higher than any of the other BRICS. Because China has the largest economy and currency reserves, it will likely want to permanently lead the bank—a proposal that India and Russia would likely reject. Additionally, unlike the World Bank, where the leadership generally consists of democracies, the BRICS bank would represent an authoritarian government (China), a quasi-democratic government (Russia), and several democracies (India, Brazil, and South Africa).

With the fast-growing economies of the BRICS, the countries have the funds and political will necessary to create their own development bank. However, the exact structure of that bank and the World Bank’s potential role in its creation remain unclear. While the BRICS have numerous differences, both political and economic, a developmental bank backed by the five countries’ immense economic power would have the ability do much good in the world.

The JOBS Act: An Experiment in Capitalism

Sources:

Forbes: JOBS Act to Jumpstart the Jobs Market

NYT: JOBS Act Jeopardizes Safety Net for Investors

NYT: Obama Signs Bill to Promote Start-up Investments

U.S. Congress: The Jumpstart Our Business Startups Act

WSJ: Obama Signs Bill Easing IPO Rules

The U.S. economy is showing signs of a timid recovery; home sales are increasing, the job market is slowly improving, and the stock market just posted one the best first quarter performances in over a decade. To encourage continued growth, entrepreneurship, and the creation of additional jobs, President Obama signed the Jumpstart Our Business Start-ups (“JOBS”) Act. The JOBS Act is the result of bipartisan efforts to ease securities regulations and make it easier for small businesses to raise money from investors.

The Act simplifies access to funding through the capital markets for small companies by relaxing regulatory requirements for initial public offerings (IPOs). An IPO is a company’s first public sale stock shares, often referred to as “going public.” Historically, the cost and complexity of IPO’s precluded small businesses from participating in this type of fund raising, however the JOBS Act removes some the obstacles and reduces the cost. In addition to other measures, the JOBS Act exempts emerging growth companies (those with less that $1 billion in revenue) from expensive outside audits for up to five years, removes certain marketing restrictions, reduces disclosure requirements, and allows web-based fundraising.

Critics argue that the Act opens the door to potential fraud and high-risk investing as relaxed disclosure requirements allow companies to withhold critical financial information. One provision in particular, called “crowdfunding,” allows companies to raise up to $1 million from online investors with minimal financial disclosure. Under the Act, crowdfunding is largely exempted from securities regulations, offering little protection to investors against profiteering, which contradicts efforts to increase transparency in the financial markets. Critics also argue that the Act negates lessons learned from the high-risk investing strategies and under-regulated markets that lead to the 2008 U.S. financial crisis.

With access to increased financing options, the Act will allow small businesses to expand and potentially create new jobs. While the Act passed with a strong majority in both the House and Senate and offers significant opportunities to small businesses, detractors fear that lowering regulatory standards sends the wrong message in the wake of a three-year recession caused, in large part, by unregulated securities and a lack of transparency in the markets.

Vietnam Plans Reforms to Aid Slowing Economy

Business Recorder: Vietnam’s Economic Growth Slows to Three-Year Low
Reuters: Vietnam Inflation May Have Peaked; Now the Hard Part
Reuters: Vietnam May Remove Deposit Rate Ceiling by July-Report
WSJ: Vietnam: Reform To Stabilize Economy

In the first quarter of 2012, Vietnam’s economy grew at a three-year low of 4%, down from 6.1% during the last quarter of 2011. In response, Prime Minister Nguyen Tan Dung stated on April 3rd that he plans to reform the communist country’s troubled state-owned companies.

Since his appointment in 2006, PM Dung has urged state-owned companies, which account for 40% of the country’s economic output, to diversify their businesses to promote Vietnam’s economic growth. In many cases, however, this strategy has been unsuccessful. Many state-owned companies took on huge debts because they were losing money in industries in which they lacked expertise. For example, Vinashin, a state-owned ship-building company, defaulted on $4.4 billion in debt to foreign companies in the summer of 2010 after it got involved in the beer brewing and tourism businesses. Following Vinashin’s troubles (eventually nine Vinashin executives went to jail), PM Dung apologized to Vietnam’s parliament and narrowly escaped a vote of “no confidence” in early 2011.

Moreover, this episode shook foreign confidence in Vietnam. Credit rating agencies, more aware of the state of Vietnam’s highly indebted state-owned companies, began to cut Vietnam’s bond ratings (effectively making it more expensive for Vietnam to borrow), and investors pulled money out of Vietnam’s stock market. With less confidence in the economy, investors around the world began to sell off Vietnamese assets valued in Vietnam’s currency, the dong, which contributed to inflation that reached 23% in August 2011. Another cause of high inflation was rising food prices, which was followed by government action to raise minimum wages. Both the selling of Vietnam currency and the higher minimum wage increased the amount of money chasing after the same amount of goods, creating inflation.

Since then, the government has raised interest rates, which promotes saving and reduces spending, to stave off inflation. As a result, inflation subsided to 14% as of March 2012. However, with interest rates over 17%, borrowing is expensive for Vietnamese companies (both public and private) and the more expensive credit has had a deteriorating effect on growth-producing investment.

With investment stalling, PM Dung has targeted reforming state-owned companies to promote economic growth. PM Dung removed the head of the state’s electricity company after it diversified into the mobile phone business instead of building up its energy capacity. He also urged oil and gas firms to pull out of their real-estate ventures. By refocusing on the proper size and scope of Vietnam’s state-owned companies, Mr. Dung hopes to put Vietnam on a path toward higher growth, but whether he will be successful remains to be seen.

Germany Supports Increase in Funds to Combat the Debt Crisis Contagion

Sources:
Chicago Tribune: Merkel Signals Readiness to Compromise on Firewall
Nine News Australia: Merkel Gives Ground on Higher Firewall
San Fransisco Chronicle: Merkel Backs Firewall Increase for First Time Amid Spanish Concerns
WSJ: Euro Zone Raises Ceiling on its 'Firewall'

To limit the spread of the negative effects of a potential default in Greece, Portugal, or Ireland, European leadership has created a permanent rescue fund named the European Stability Mechanism (“ESM”) with a maximum value of €500 billion that will come into effect in July 2012. A current temporary fund with the same goal, the European Financial Stability Facility (“ESFS”), has already disbursed €200 billion and has €240 billion in unused capacity.

Having the necessary funds to combat default is vitally important because one country’s default can create a domino effect that causes enormous problems in other countries. This spread of economic harm based on one country’s default is called “contagion.” A simplified example of this problem is as follows. Suppose that country A (“A”), which is barely able to make its debt payments, holds €100 billion in debt from country B (“B”) and receives annual interest payments of €6 billion on that debt from B. A also owes €5 billion in interest payments each year to a number of other countries. If B defaults, A will no longer receive its €6 billion in interest payments that it counts on to be able to meet its own obligations. In this simplified example, the default of B could force A to default. Additionally, a default in one country could cause panic throughout Europe, leading banks to greatly reduce the amount of money they are willing to lend. Both of these problems could be devastating to the world economy.

Germany, one of the most economically powerful countries in the EU, previously believed that funds to combat the debt crisis contagion should be limited to the €500 billion maximum of the ESM. However, on March 26, in response to concerns that the economies of Spain and Portugal are in serious economic danger and pressure from the IMF and the governments of top global economies, Germany agreed that €500 billion may not be sufficient to combat the debt crisis contagion. Germany then agreed with other Eurozone members that the ESM and ESFS could run in parallel. Germany’s new position is that the permanent ESM will remain capped at €500 billion, but the €200 billion already distributed by the ESFS will not be included in that total, giving the Eurozone a total of €700 billion to combat the debt crisis. The increased availability of funds will allow countries nearing default to meet their current debt obligations, which will give these countries the additional time needed to implement economic changes that will allow them to meet future debt obligations.

On Friday, March 30, 2012, Eurozone finance ministers agreed to increase the bailout limit to €700 billion, but many in the euro-zone are concerned that it will not be enough. For example, the European Commission (the EU’s executive arm) argued that the ESM needs €940 billion to adequately contain the crisis. Germany however, believes that €700 billion is sufficient and was successful in defeating those lobbying for an even higher debt ceiling. The option chosen by the finance ministers still must be ratified by the 17 euro-zone member parliaments.