Category: Euro zone

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Economical policy Euro zone

Central banks digital currencies : benefits and hazards

While cash payments shrink, a phenomenon accelerated by the pandemic, and in response to the growing attraction of private cryptocurrencies and the lead taken by certain countries including China, the European Central Bank (ECB) too is now considering the possibility of creating its own digital currency.

A digital central bank currency can be a “wholesale” currency used between banks and the central bank – in this case, other than technically, the economy of the monetary system as a whole scarcely changes – or a central bank currency held by the public, thus co-existing with physical banknotes, also issued by central banks.

For some of the public and depending on the country, the importance of fiat money to better protect privacy varies. This is why the ECB is careful to state that it will create a digital currency alongside and not instead of fiat money, and to specify that the ECB “cryptocurrency” could potentially guarantee the anonymity of its users. In countries where banks are relatively inaccessible because branch networks are much less dense, a central bank digital currency could well increase financial inclusion.

Why do central banks want to launch such currencies, beyond the legitimate interest of not lagging behind new technologies? The fundamental reasons are their no less legitimate interest in preserving the effectiveness of certain transmission channels from monetary policy to the economy. And their need to have (monetary) contact with the general public, which could diminish, and possibly vanish, with the gradual reduction in the use of banknotes. Competition with private cryptocurrencies does not seem to me to be an argument, however, because it is down to the banking currency denominated in the national currency (or in euros, in the case of the eurozone), and therefore down to the “official” currency system as a whole, to be more credible than private (crypto) currencies, and not down to central banks alone.

While the intentions are perfectly understandable, however, care should be taken to ensure that this desire to create a digital euro does not cause financial instability. It must not be the case that at the slightest concern, whether well-founded or not, about the banking system as a whole or a particular bank, massive transfers occur from bank accounts to the central bank’s digital currency. The possibility of panic would consequently be considerably increased. To guard against this hazard, the ECB is considering capping deposits in its digital currency. If the ceiling was not very low (less than an individual holds in banknotes in their wallet on average), the creation of such a currency would potentially precipitate the possibility of systemic risk.

Moreover, such a currency – whether it is held in accounts in commercial banks or not does not change anything – in insufficiently small quantities could raise fears that a significant portion of bank deposits will gradually evaporate, thereby automatically diminishing the role of commercial banks as financial intermediaries. In the long term, it is even conceivable that deposits could be entirely held in digital central bank currencies, ultimately forcing commercial banks to refinance almost exclusively on the financial markets or with central banks to secure credit. This would then seriously damage the economy; under-estimating the role of commercial banks, the fundamental economic role of which is to be a centralised centre for risk, would have serious economic consequences. By transforming deposits, the desired duration of which is generally very short-term, into loans with an average maturity in the medium to long term, banks essentially shoulder the liquidity and interest rate risks that economic stakeholders, households and businesses do not know about or want to take. This role is extremely useful, because it underpins the proper functioning of the financial system, which consists of aligning the financing capacities of some parties with the financing needs of other parties, given that they rarely spontaneously match in terms of maturities, liquidity, and appetite for credit risk.

Lastly, the creation of a dollar-denominated central bank digital currency by the Fed could precipitate dollarization of the economies of countries with weaker currencies, which would further reduce their room for manoeuvre in terms of economic policy.

It is therefore crucial that central banks make the right decision, and make their calibrations and adjustments, with due consideration of both the benefits and the challenges and hazards of such innovation in terms of the ultimate effectiveness of financing the economy and financial stability. The potential risks could, otherwise, be significant.

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Economical policy Euro zone

The post-Covid economic paths are very narrow

This much is obvious: the longer the pandemic lasts, the higher the debt will be. To counter the economic effects of the lockdowns, governments and central banks have taken powerful and vital desensitising actions. After the pandemic, they will have to reduce, and then end them. With the very good outlook brought by the vaccines, fortunately; but this phase is when the economic crisis will gradually surface, with a rise in bankruptcies and lay-offs in the affected sectors. Then will come the “debt trap”. Either the central banks will pull out of their quantitative easing policy little by little, and long-term interest rates will rise, triggering the insolvency of many companies and governments, if the latter do not find a new credible trajectory for their debt. Or they do not, and fuel the financial and real estate bubbles that exist already, which after a while would pop, bringing disastrous economic and social consequences. And, ultimately, a possible loss of confidence in money. What paths could be taken to best escape falling into this debt trap?

Cancelling the debt, a mandatory government bond issue or tax hikes are not real solutions.

Cancelling the public debt is an idea that makes no sense – as it is a zero-sum game – which is very dangerous for the credibility of a country. A mandatory government bond would be considered confiscatory. It would lead to a drop in consumption to build up savings. Savings that these days are no longer stored under the bed, but used by banks to finance loans. Lastly, taxing wealth would not make any more sense given the extent of the stakes at hand and the absolute necessity to value entrepreneurs and innovators in these changing times. A general tax rise in France, where mandatory contributions are among the highest in the world, would have a negative impact on both demand and supply.

A “Covid debt”: It would be necessary for the ECB to continue warehousing the higher government debt resulting from the pandemic over a fairly long period of time, to avoid a loss of confidence of the markets if they suddenly had to take on this part of the public debt purchased by the central banks over the period.

But the fundamental solution lies in an increase in potential growth. In the hope that controlled inflation will also come and contribute to solving the debt issue. The vital reform allowing the government to improve its efficiency will have to be launched later. The pension reform can be made now. It would contribute greatly to reducing the public deficit. Longer life expectancy requires increasing the number of annuities. Which would increase potential growth, thanks to a rise in the participation rate, and incite the French to save less, having greater confidence in their future pensions.

The unemployment benefits system also has to be reformed: the number of jobs that go unfilled remains high. The formula currently proposed, which could adjust different allocation criteria according to job market indicators, appears to be well adapted. The essential corollary: the need for individual protection, notably via a more intensive and more efficient professional training strategy to support employees during the major transformations underway.

Lastly, coming out of the Covid era, what will the economic policy mix be? The support and stimulus fiscal and monetary policies need to remain in place as long as there has not been a return to a stabilised level of growth. Austerity must be avoided. But the governments and the central banks will quickly have to commit to following a path to a return to “normal” over several years to install confidence in the debt and money. The idea that near-zero interest rates mean that there is no need to worry about debt is based on a theory according to which money and finance are neutral. History has proven the contrary. The exit paths described here are narrow, but are probably the only ones possible without significantly further exacerbating the risks.

Original column from Les Echos 16th Feb 2021

This much is obvious: the longer the pandemic lasts, the higher the debt will be. The real economic difficulties are therefore ahead of us. To fight the effects of the pandemic, governments and central banks have taken powerful and vital desensitising actions. After the pandemic, they will have to reduce, and then end them. This phase is when the economic crisis will gradually surface, with a rise in bankruptcies and lay-offs. Then will come the “debt trap”. Either the central banks will pull out of their quantitative easing policy little by little, and long-term interest rates will rise, triggering the insolvency of many companies and governments, if the latter do not find a new credible trajectory for their debt. Or they do not, and fuel the financial and real estate bubbles that exist already, which after a while would pop, bringing disastrous economic and social consequences. And, ultimately, a possible loss of confidence in money. What paths could be taken to best escape falling into this debt trap?

Cancelling the debt, a mandatory government bond issue or tax hikes are not real solutions. Cancelling the public debt is an idea that makes no sense – as it is a zero-sum game – which is very dangerous for the credibility of a country. A mandatory government bond would be considered confiscatory. This would lead to a drop in consumption to build up savings. Lastly, taxing wealth would not make any more sense given the extent of the stakes at hand and the absolute necessity to value entrepreneurs and innovators in these changing times. A general tax rise in France, where mandatory mandatory contributions are among the highest in the world, would have a negative impact on both demand and supply.

Increasing potential growth will be key in order to face the debt problems. The vital reform allowing the government to improve its efficiency will have to be launched later. The pension reform can be made now. It would contribute greatly to reducing the public deficit. Longer life expectancy requires increasing the number of annuities. This would increase potential growth, thanks to a rise in the participation rate, and incite the French to save less, having greater confidence in their future pensions. The unemployment benefits system also has to be reformed: the number of jobs that go unfilled remains high. The formula currently proposed, which could adjust different allocation criteria according to job market indicators, appears to be well adapted. The essential corollary: the need for individual protection, notably via a more intensive and more efficient professional training strategy to support employees during the major transformations underway.

Lastly, coming out of the Covid era, what will the economic policy mix be? The support and stimulus fiscal and monetary policies need to remain in place as long as there has not been a return to a stabilised level of growth. Austerity must be avoided. But the governments and the central banks will quickly have to commit to following a path to a return to “normal” over several years to install confidence in the debt and money. The idea that near-zero interest rates mean that there is no need to worry about debt is based on a theory according to which money and finance are neutral. History has proven the contrary. The exit paths described here are narrow, but are probably the only ones possible without significantly further exacerbating the risks.

Categories
Economical and financial crisis Euro zone

The debt issue : risk of financial instability and of a loss of trust in money.

First, I am very grateful to Euro 50 for this invitation to debate the issue of debt in the Europe.

We all know that the fiscal and monetary policies currently in force are essential to limit the damage caused by the pandemic. And everything that governments and central banks have undertaken was absolutely necessary. We also know that it would be a serious mistake to drop our guard too quickly.

But, given the huge size of the debt generated by the crisis, coming on the back of a widespread increase in debt over at least 20 years, should we not be concerned about what is likely to happen when the health situation and growth return to normal? Should we not be worried about debt?

The non-repayment of public debt to private creditors would have significant consequences for the economy and for society, with a catastrophic impact on household savings and pensions. Clearly this is not a viable option. And not repaying the public debt to the central bank alone, even if this were possible, would be playing a zero-sum game insofar as the shareholders of central banks are States, so the situation must therefore be analysed in a consolidated manner. 

One could possibly imagine that only the additional debt resulting from the pandemic would be refinanced at very long maturities by the central bank. But can we envisage this option being extended to future increases in public debt?

How, therefore, do we avoid succumbing to the allure of “magic money”? Particularly as during the pandemic we have ultimately found the financial resources needed to fund what previously seemed impossible. Under these conditions, it could appear to some that there is no reason not to continue down this road.

But a policy of quantitative easing with no end in sight would not work and must be avoided at all costs. Allowing the state to spend without limits and private agents to amass debt indefinitely with no constraints would have major consequences on the financial instability thus caused. With the return to a more normal rate of economic growth, keeping interest rates too low for too long would encourage or even trigger financial cycles. This would lead to even bigger speculative bubbles which, sooner or later, would inevitably burst. These well-known phenomena are the causes of major financial, economic and social crises. This point is key. In recent decades, every time that interest rates have remained too low for too long, we have seen inflation in the price of financial and/or real estate assets, with no inflation in the price of goods and services. This is because globalisation and the digital revolution have not allowed wages and prices to rise.

Finally, over the longer term, we could end up seeing a flight from money. The absence of a payment constraint, i.e. a monetary constraint, due to a policy of quantitative easing that is too strong and continues for too long, allowing debts to be financed over the long term without constraint, could give rise to a crisis of confidence in the “official” currencies insofar as the monetary system is essentially a system for settling debts, providing consistency for trade. The effectiveness of the economy depends on this. In fact, the only companies that are likely to survive over the medium and long term are those that do not incur continuous losses. Failing that, economic effectiveness would be impossible, and no Schumpeterian growth would be conceivable. The same applies to households, which cannot spend more than they earn on a lasting basis.

The entire system depends on this trust. In essence, trust is the ability to rely on someone’s word or on a signed agreement. In this case, agreements for debts and receivables, on which the whole system is based, must be respected. Trust in the banks themselves is also essential. So is trust in central banks. This is a key point, as central banks are responsible for monetary regulation, i.e. confidence in money, which is the keystone that holds the whole economic system together. If they were to issue too much central bank money for too long and without limits, a major crisis could occur, comparable to the collapse of the assignat during the French Revolution or hyperinflation during the Weimar Republic. Beyond an unspecified threshold, the national or regional currency may be rejected. This situation would lead to the disintegration of the debts and receivables system and, consequently, the potential disintegration of our whole society. This trust must be protected, or there is a risk of flight to a foreign currency. And even if all central banks acted in the same way at the same time, it would be possible to find a safe haven in gold, physical assets such as real estate, or a cryptocurrency issued someday by one of the GAFA companies that has become more solvent than the governments themselves.

Currency is an institution and must be managed as such. It must be based on trust and respect for the rules that are the alpha and omega of solid institutions. Insofar as debts undertaken by companies and governments are generally repaid by the issue of new debts, the monetary constraint is therefore based on the obligation to maintain a sustainable debt trajectory. Keeping interest rates at extremely low levels will not on its own be enough to guarantee this necessary sustainability, firstly because there is no long-term guarantee that interest rates will never rise again. Fears about future inflation already show this. But also because central banks will eventually stop buying any new debt issues and the financial markets will not step in to take their place, if the solvency trajectory is not realistic.

It is therefore possible to temporarily suspend monetary constraints, as is currently the case, but this cannot go on forever.

The legitimacy of the central banks depends on their ability to rise above private and public sector interests. In other words, making sure they protect themselves against any domination by governments or by the financial markets. Ultimately, it is the central banks’ duty to defend the public interest and preserve their credibility. Otherwise, they will not be able to maintain an efficient economic system and confidence in the currency, nor will they be able to use expansionary monetary policy in a meaningful way if it becomes necessary again. This is how they contribute to the common good and to the preservation of the social order itself. Governments and central banks will therefore quite quickly need to announce their commitment, when the time comes, to resuming fiscal, structural and monetary policies that give rise to credible trajectories.

Thank you.

Categories
Bank Euro zone

Pan-European banking consolidation: need and dangers

 

The European Central Bank (ECB) is calling for banking concentration in Europe. For monetary policy to be effective, it is desirable to have greater integration in financial markets and the banking system in Europe. This would in fact contribute to better regulation of the eurozone.

To set this process in motion, the ECB is currently working to ease the prudential framework in relation to banking sector consolidation. It has consulted stakeholders on these new guidelines, particularly on capital and liquidity requirements, which do not currently encourage cross-border movements within the sector. 

While the market welcomes this progress, other issues may hinder the creation of a real merger trend and the emergence of large Pan-European banks.

First of all, cross-border tie-ups do not always generate significant economies of scale, since banking and financial products within the European Union continue to be subject to very different regulation and taxation. Economies of scale in infrastructure therefore almost never work: IT systems mostly remain domestic. This issue can also be observed in other sectors. 

Second, as can be seen from the history of a number of large groups in numerous sectors of activity, mergers do not necessarily lead to greater efficiency. More than one merger in two does not create value, and may even destroy it. The race for size is not therefore always intrinsically favourable. 

Finally, and also in terms of financial stability, what has become of “too big to fail”, which regulators highlighted, not without reason, after the crisis of 2008-2009 as a guarantee of security? Is it not counter-intuitive to seek to create even more powerful banking groups when it would be even more difficult not to support them in the event of a major banking and financial crisis?

These questions need to be properly examined and shared if the desired search for large European banking players is to continue in an appropriate manner. 

Categories
Economical policy Euro zone Global economy Uncategorized

“The situation in Europe in the era of coronavirus” : the speechs of Olivier Klein and Philippe Jurgensen at the conference of the European League for Economic Cooperation on June 24, 2020

Transcription of the video-conference debate organised by ELEC-France on 24 June 2020

Olivier Klein 

Executive President of ELEC-France, CEO of BRED and professor of financial macroeconomics and monetary policy at HEC

At this complicated time for everyone, ELEC’s board felt it important to organise a discussion about the pandemic and the financial and economic crisis we are currently experiencing, in order to try to provide some analysis and perspective, insofar as possible at this stage, as we clearly have a long way to go.

  • The question of total lockdown

The first question to be addressed – to which obviously no definitive answer exists at this stage, since we don’t yet have sufficient perspective – is whether total lockdown has been positive or negative? While many countries tried to avoid lockdown, before later going back on their decision, in France the question did not arise in the same way, since we did not have either masks or tests. Hence, total lockdown was therefore probably inevitable.

The second question which arises is more “metaphysical” than economic – the price to put on life. This underwent a major revaluation compared with previous major health crises, without necessarily taking into account the potential resulting impacts on poverty, and perhaps even on health.

Despite being a slightly fallacious comparison, it is worth noting that in France we currently have around 30,000 deaths due to coronavirus, while each year 150,000 people die from cancer, and the Spanish flu caused 400,000 deaths in France. But how many deaths would there have been without lockdown?

  • Financial consequences of coronavirus

The pandemic and lockdown in the most developed countries caused major disruption on financial markets in the second half of March. In the first fortnight, the financial crisis was more intense than that of 2008-2009. Stock market volatility, for example, was almost double that of 2008-2009. The debt market exploded, with a massive increase in spreads (i.e. risk premiums). Fortunately, central banks immediately took stock of the situation and reacted at once by injecting plenty of liquidity, which may cause problems later on, but without which the financial markets would have triggered a catastrophic crisis.

On this point, I believe that the reason financial markets came close to almost total meltdown was certainly due to the unprecedented and global nature of the crisis, but also because of the advanced stage reached in the financial cycle. Markets had previously seriously underestimated risks, while also seriously overestimating the value of many companies, making the crisis much more severe when it eventually occurred.

Central banks responded very quickly and effectively, by injecting large quantities of liquidity wherever it was needed. Interest rates were cut in the United States, which had a positive effect. The same could not be done in Europe since rates were already negative or zero. Central banks reined in both short-term and long-term rates, as well as many spreads. Bank financing was then very effectively secured by renewing or enhancing a range of special measures. Following a spectacular fall, the stock market eventually rebounded strongly. Governments, supported by their central banks, enabled companies to finance their losses.

  • Economic consequences of coronavirus

The pandemic caused extremely violent economic turbulence simultaneously around the world. INSEE estimates that in France, one month’s full lockdown resulted in a 35% decrease in GDP.

For information, a little calculation of my own indicates that the private sector actually saw its GDP slashed by practically 50% during the month of lockdown. This is because the one-third decrease in GDP also takes into account public bodies whose production is measured according to their cost. Yet since their cost did not decrease during lockdown, neither did their production. With 25% of jobs being in the public sector, a simple cross multiplication based on the principle that the number of jobs is proportional to production gives a result of just under 50% – an extraordinarily sharp and violent collapse.

Depending on the number of months of lockdown and the number of months of recovery, this naturally leads to the conclusion that we will not return to the levels of production seen in January and February 2020, but that we will return more gradually to previous levels. The Fed considers that we will not see previous levels of production again before 2022. This has led the OECD to forecast recessions in the UK, Italy, Spain and France of between 11% and 13%. The forecast for France is around 11%. The Netherlands and Germany are set to be between 7% and 8%, which is a big difference, even though the levels remain high. The OECD forecasts just under 3% for China and India, although care should obviously be taken to consider usual growth rates when making comparisons. The recession in the United States is set to see a decline of 7%, while Korea, for example, is set to decline by 1%. Sharp falls compared with previous levels are therefore being seen across the board, although not all countries will be affected in the same way.

  • Reactions from governments and central banks

Central banks immediately responded very strongly in terms of supplying liquidity and buying up all kinds of debt, including government bonds, of course, as well as corporate debt. They also bought some speculative-grade debt, which is unusual for banks such as the Fed and the ECB. They purchased all kinds of private and public debt, to maintain rates and spreads at reasonable levels and to avoid a cascade of bankruptcies, as well as financial market contagion.

Governments also immediately responded, although this has led to major public deficits. In the United States, the government deficit for the year compared with GDP is currently estimated at around 20%, which is very high. It is forecast to be around 8% in the eurozone and 11% in France. The estimate for Japan is 8% and an average of 14% in the OECD, bearing in mind the significant weighting of the United States. The effect on public debt will be an increase of between 10 and 20 percentage points compared with GDP. In France, for example, public debt is set to increase from 100% to 120% of GDP by the end of the year.

What did governments and central banks actually do? They temporarily removed the monetary constraint, or payment constraint, which ordinarily means that a loss-making business cannot continue to be financed over the long term or that a household’s outgoings cannot be more than its income over the long term. This monetary constraint, normally a legitimate part of banking operations, was suspended for completely understandable and vital reasons. Faced with this catastrophic situation, if the constraint had not been temporarily suspended, a significant number of companies could or would have gone bust, causing a lasting loss of production capacity in each country. This would be extremely damaging to countries’ wealth.

If governments had not supported households and businesses at the same time, by taking on the salaries that companies were no longer able to pay employees, households would have severely suffered, leading to a social catastrophe, while companies would have suffered even greater losses. It was therefore useful, and even vital, to temporarily suspend the monetary constraint, for both companies and households. Governments did this, with support from central banks in relation to companies, by buying their corporate debt directly on the markets.

Obviously, the success of this measure depended on governments’ own monetary constraint being temporarily suspended. The central banks therefore enabled this by buying up the additional government debt themselves, at least temporarily ignoring what is known as “debt monetisation”, to prevent the markets from panicking in the face of unprecedented levels of public debt and triggering an insolvency crisis.

We therefore saw the suspension of monetary constraints on two levels. Bear in mind that such constraints are necessary in normal times for the proper functioning of the economy, as without them there would be nothing but zombie companies leading healthy companies to become zombies in turn. If a company makes a loss long term on a market and continues to survive, other companies will also start to lose money and all the economic efficiency that minimises human toil would cease to exist. It is therefore essential for this constraint to be re-established at a certain point, to ensure economic efficiency and confidence in the economy as well as the currency.

  • The recovery: what reconstruction will be needed?

Markets’ ability to be captivated by the prospect of a rapid recovery is worrying. Countries have suffered severe falls in GDP – almost 50% in the private sector in France. The United States, for example, shed 20 million jobs in a few months. It is therefore no surprise that two million were instantly restored when businesses and restaurants reopened there. It would be more surprising if the country managed to restore the 20 million lost jobs in the next 12 to 18 months. The artificial, sometimes even self-deceptive, enthusiasm shown by markets is therefore of concern.

The relaunch will necessarily be rapid at first, but then gradual. Firstly, since it takes a while for supply and value chains to gradually be rebuilt. Secondly, because of companies’ excessive levels of debt. Depending on the sector and country, they were already heavily indebted previously. With the crisis caused by the pandemic, they have had to finance their losses, leading to an increase in their level of debt, which, without careful supervision, risks hindering employment, investment and growth.

Savings also increased sharply during lockdown, when households consumed significantly less than before. In France, they increased from around 15% to 20%. The question is: are households going to lower their savings rate quickly or will they keep some of the excess as a precaution, due to fears over their future remuneration or future employment?

There is certainly a close and reciprocal relationship between supply and demand. Many companies will wait to see if demand picks up enough to allow them to reinvest and recruit, while many households will wait to see if employment holds up before increasing their consumption again.

Economic policies will therefore play a central role in this interaction between supply and demand. Furthermore, all countries, around the world, are in a bad situation, from China, which is certainly starting to recover, although in a non-linear way, to the United States. This conjunction further adds to the negative effect on the economy, considering that international trade has obviously fallen dramatically during the period.

Economic policies will therefore be necessary following lockdown and will need to be different from those we have seen recently. Firstly, in order to boost supply, which needs to be rebuilt. Measures need to be taken to help increase companies’ capital so that they reduce their debt without slowing down investment and employment. But how? Will the government at least partially guarantee companies’ capital risk-taking? These are topical questions. It will also be necessary to revitalise employment and adopt measures to facilitate investment, on the one hand, and recruitment, on the other, especially among young people entering the job market, for whom the situation will be much more difficult.

Taxes should not be increased in any way, as supply would suffer. Now more than ever, we need entrepreneurs and innovators, as well as savers open to taking capital risks. Anything that might discourage them should therefore be completely avoided.

Certain strategic relocations will be necessary, which will not be easy. Strategically, however, everyone understands that having 90% of penicillin and paracetamol manufactured in China is an issue that needs to be dealt with quickly. And these relocations also present an opportunity to promote a low-carbon economy and thereby meet future climate challenges.

These policies should also make it possible to support demand. We need a policy that facilitates employment. We need to support poorer households while ensuring that they are encouraged to seek employment.

Finally, we will need to strike a careful balance in restoring monetary constraints, vital payment constraints, neither too quickly nor too slowly. Too quickly would be catastrophic, as it would require government austerity policies or budget cuts. At the moment, however, spending and investments are needed to support the lack of private demand. And if interest rates were to rise too quickly, the mountain of debt would become explosive. Steps need to be taken fairly slowly. But not too slowly either. We need a clear and transparent programme for a return to normal. Without this, we could enter a voodoo economy since if, as some continue to argue, we were to do away with all constraints in the future and allow the central bank to swallow any increase in future debts indefinitely without repayment, we would see a catastrophic situation with a series of severe financial crises and, ultimately, a catastrophic loss of confidence in money.

Finally, the whole of economic history demonstrates that whenever monetary constraints have been ignored or disregarded, there has been a flight from money triggering catastrophic financial and economic crises. The value of debts is essential. The debts of households, companies and governments must inspire confidence, and money represents banks’ debt in respect of non-banking agents. So if money lost its value, it would be because debts no longer had any value, since they would no longer be repayable. The fact of not having a monetary constraint would lead to a loss of confidence in money, in other words a massive economic catastrophe. It is therefore vital to find a slow, but nevertheless realistic and credible, way forward to return to a certain normality.

Discussion

Edmond Alphandéry: One subject seems very important to me in our country: the problem of the negligence of the French administration revealed by the pandemic. Until now we have heard absolutely nothing at governmental level about the real reform in France, that of the administration. There are around a million civil servants too many compared with a country like Germany, at an extra cost of between €84 and €100 billion. If we take the most recent example, concerning subsidies for green vehicles, it is clear once again that the administration set up an absurdly complicated system rather than adopting the most elegant solution, chosen by Germany, namely a reduction in VAT, which affects all vehicles without any means testing. Another important point to mention in a comparison with Germany is the experience of the pandemic: how the pandemic was managed and how Germany is emerging from it. Aside from the outbreaks we may see appearing, there are 600,000 people currently in lockdown in Germany, but in the automotive sector and the largest sectors, Germany has still bounced back much more quickly than us.

Olivier Klein: On the first point: yes, for a long time the French government had not prepared for the possibility of a pandemic, since we had neither masks nor tests, which set us back a long way.

Furthermore, I completely agree that this is not the time to slow down or abandon structural reforms. Structural reforms, contrary to what some may think, are not about wanting austerity for a country, but making the economy as a whole more efficient and increasing the potential growth rate. They are about increasing productivity gains by all well-known means and increasing the capacity to mobilise labour. It is therefore vital at this time to implement structural policies. But it is important to choose them well to ensure they do not lead to a worse situation in the short term. And obviously a lot of political courage is required to carry them through.

In Germany, there were around 8,000 deaths for 83 million inhabitants, while in France there were 30,000 deaths for 67 million inhabitants. Growth in France is estimated at -11% for this year, and -7% in Germany. The public deficit will fall to 11 in France and 5.5 in Germany. It is also worth noting there was a decrease in workplace attendance of 43% in France at the end of April and only 18% in Germany. So it is unsurprising that growth has fallen by much less and now the recovery can be much stronger. Finally, the number of short-time workers during lockdown was around 10 million in France out of the 20 million people in work, i.e. around 50%, while in Germany the percentage was only 22%.

Valérie Plagnol: I think we cannot avoid or be afraid of the term austerity, which will clearly be with us after 2022. The question is: how will we organise it in France? Today, the term is taboo. Indeed, in France we have arrived at this point with heavy baggage and baggage that has been packed badly. Today the reforms and the responses are structural in nature and I am worried about the increased government intervention. You mentioned the need for it, but this economic interventionism is accompanied by extremely restrictive directives, including economically. I fear that in the end we will be in a situation of give-and-take. And on the other hand, protectionist behaviour is also emerging. It has been discussed at European level, with predatory behaviour, but it is more a question of protectionism in relation to posted workers, airlines, etc. So the reconstitution or reinforcement of a monopoly which, in the short term, risks leading us into greater inflation. And therefore the accentuation of that famous French drift towards “Club Med”.

Olivier Klein: As I was saying, I believe that structural reform policies are needed, very modestly. If we do not implement them, we will save the short term by considerably worsening our situation in the medium term. So we must implement them. Is the country ready for them? That is another matter. We need to present them properly and explain why they are necessary. Austerity policies, as such, are not the same as structural reforms. In reality, countries that have not adopted structural policies will sooner or later be forced to implement drastic austerity policies. This was the case to some extent in Spain, Portugal, Italy and Greece after 2010, during the eurozone crisis. Countries that had not adopted structural reforms were suddenly forced to implement austerity policies to try to restore their current account balances as quickly as possible, causing considerable social and political harm. Structural policies are therefore not austerity insofar as they increase the potential growth rate, while austerity policies lead directly to lowering the effective growth rate in order to restore balances. I think and I hope that there is a way to create structural policies that do not encourage deflation or austerity, even if there will naturally be difficulties here and there, since certain parts of the population will unavoidably have to make efforts in terms of the quantity of work, level of efficiency, etc. Close attention will therefore need to be paid to the vocabulary used and the use of concepts in order to have a small chance of convincing the population of the need for these reforms, which otherwise will be immediately criticised as contrary to the interests of the population, which is absolutely false.

Patrick Lefas: A question about the role of banks. The situation now is radically different from that of 2008: banks increased their equity and were therefore in a position to finance the economy, obviously with support from government through government-backed loans. My question is: how will the banks manage the increased cost of risk? Because there may be a number of companies unable to continue and which will therefore go out of business. What tools should be developed now? Should we focus on equity loans?

Olivier Klein: As the head of a bank, my impression was that all banks did their job remarkably well during the period, since during the two months of lockdown they provided “essential services”. At BRED, 100% of branches were open and 85% to 90% of employees were physically present. They responded on the basis that they were useful to the nation and that it was absolutely necessary to be present.

To answer the question more precisely, the banks particularly granted government-backed loans, which was vital, but which will inevitably lead to an increase in indebtedness at a time when French companies’ debt level is already fairly high, which will cause problems. I know a lot of business leaders who don’t know how they will repay those loans. Admittedly, they can be spread over five years after the first year, but it will sometimes be very difficult to ensure repayment as it will be necessary to find additional cash flow and margin during the subsequent period, without at the same time hindering investment and jobs. That is really the issue – it is difficult to successfully square the circle. We have therefore all begun to consider, with the public authorities, what solutions could be adopted. There are equity loans. Banks cannot carry out unlimited lending of their deposits as equity loans, as obviously that type of loan is riskier. Fairly substantial guarantees, at least partial, are therefore required from the government.

There is private equity. The difficulty, for insurers as well as for banks, is that since Basel III the capital cost of capital invested in companies is enormous. Three and a half to four times more equity needs to be raised than for a loan to invest in companies’ capital. Reflection is therefore needed at European level: should the cost of capital be considered, for both insurers and banks, when investing in companies’ capital? This is an important debate to have. Should French banks become more business partners to companies, by holding more of their capital, a little like in Germany, with the associated long-term risks and advantages? Advantages for German medium-sized companies: they receive much more support and have more capital. And disadvantages: sometimes too much proximity. And some German banks are not necessarily doing well. Should we create convertible bonds? Many subjects are on the table and will need to be discussed.

Philippe Jurgensen 

Honorary President of ELEC-France

I am going to talk to you about how Europe is trying to tackle the economic situation and prepare for recovery, and particularly about the European recovery plan, Next Generation EU, which is a major innovation. A financial innovation, adding to a colossal rescue package including ECB funding (€1 trillion for the PEPP alone, in addition to existing measures and government and corporate bond purchasing), €200 billion from the EIB, with a pan-European guarantee fund, and €100 billion from the SURE instrument for short-time working. The European Next Generation recovery plan is therefore in addition to all of those measures. The Commission’s proposal is very recent, since it was announced on 27 May. France and Germany had proposed €500 billion, the Commission is proposing €750 billion, or 6% of European GDP! If we take into account all the other funding, which is not always clear and is partially duplicated, we arrive at a figure of almost 15% of European GDP, which is considerable.

Today we will try to answer three simple questions: where does the money come from? Who is it going to? And who will pay?

  • Where does the money come from?

€500 billion of the recovery plan comes or will come from the EU budget and €250 billion from EU loans. But in reality, the €500 billion is also being borrowed. So €750 billion is being borrowed, €500 billion of which comes from the budget and €250 billion in actual loans. The budget money is being financed by the usual budget keys, including the rebates originally negotiated by Mrs Thatcher, but expanded to many other countries; and naturally the so-called “frugal” countries are keen on this.

The burning question is whether this €500 billion budget is indeed in addition to the 2021-2027 Multiannual Financial Framework. The tendency would be to think so, but it is not so obvious, since that multiannual framework is itself under discussion. As such, there will be possibilities for interference. In the February 2020 council meeting, there were 27 hours of discussion without reaching any agreement on this multi-year financial programme, since the four “frugal” countries – the Netherlands, Austria, Sweden and Denmark – backed by Germany at the time, did not want to exceed the cap of 1% of GDP. No multiannual framework was therefore adopted. The question of whether the €500 billion is actually additional is therefore unclear.

As for the €250 billion in EU loans, on the other hand, this is a real breakthrough since it was an addition adopted by the Commission at a Franco-German level, and it is above all a first, since it represents the creation of a European Treasury.

This innovation was rejected by Germany for a long time and is still challenged by a number of participants. It is true that this EU loan is presented as unique and exceptional, a “one-off”, which may therefore allow those who are against the measure to say that it is not final. It is nevertheless a great innovation and extremely important, I believe, and federal in nature despite everything.

Is there too much debt in Europe? The total debt of eurozone countries is currently equivalent to 86% of GDP. It will reach 103% by the end of 2020 according to European Central Bank forecasts. For France, we were at 98% at the end of last year, 102% last April, and we are set to reach 121% by the end of the year. The fact that there is a European federal community debt alongside national debts is an important innovation.

  • Where is all this money going and who are the beneficiaries?

Three pillars will be paid in successive instalments. A main pillar, alone accounting for €655 billion, a second of €56 billion and a third of €38 billion.

  • The first pillar is composed mainly of what is called the Recovery and Resilience Facility, equivalent to €560 billion. It is supplemented by REACT-EU, a €56 billion transitional assistance programme for the most affected regions, which strengthens current cohesion policies, and which largely goes to the most backward EU countries, especially in Eastern Europe. Finally, €40 billion goes into funding the Just Transition Mechanism.
  • The second pillar is support for companies and private investment. The aim is to provide them with as much capital as possible, in the hope of generating much more private investment. Of that amount, €15 billion is intended for strategic investments.
  • The third component mainly concerns research, with a budget of €13.5 billion. It also concerns health systems. Finally, €15 billion in development aid is allocated for non-EU countries, since emerging countries are more affected by the crisis than ours.

Who are the recipients? The biggest beneficiary would be Italy, at almost a quarter of the overall amount – roughly half in subsidies and half in loans: €173 billion in total. Spain takes second place with €140 billion in total, accounting for 18.5% of the total amount, with more subsidies than loans. Then comes France, which has no loans but a significant share of subsidies, with an amount of €38.8 billion or 5% of the total. If we count the sum of subsidies and loans, Poland comes above France, with €64 billion budgeted, or 8.5% of the total amount. Next come Germany, Greece, Romania, etc. The rescue package is obviously intended to be spread between all countries, including those which have suffered the least, which will therefore receive much less than the others.

  • Who will repay?

Firstly, out of the €500 billion in budgetary appropriation, only €433 billion is actually in subsidies. The remaining €67 billion corresponds to loan guarantees, a very effective mechanism but not a definitive expense, as normally a high proportion of those loans will be repaid and the guarantees will not have to be invoked. It would be unfortunate if all of the €67 billion was spent, since that would mean that the loans had not been repaid.

As for the €250 billion in loans – EU loans – the question is whether or not they will be repaid:

  • According to the budget keys, with the European Commission proposing repayment over 30 years from 2027, extending until 2058;
  • Or according to what each country has received;
  • Or else according to an ad hoc key: since it is an EU expenditure, it should be financed other than by ordinary budget keys.

This raises two very difficult questions: firstly, the four previously mentioned “frugal” states feel that there are too many subsidies and not enough loans. They therefore want to increase the share of loans in the €750 billion amount. Those same countries, and a few others, also want additional conditionalities, rejected by countries such as Spain, Italy and particularly Eastern European countries. What would these additional conditionalities be? Respect for the main objectives of the plan and the fight against fraud, for example the fight against the black economy in Italy or respect for the rule of law in Eastern European countries. These conditionalities will be managed by an intergovernmental committee, which will have to agree annually to the plan’s expenditure, but which fortunately will decide by qualified majority rather than unanimously.

So could the plan be financed with new own resources as the Commission is proposing? This would be a federal approach which would require increasing the ceiling for own resources, currently at 1.2%, to 2% of European GDP. This is an essential prerequisite for making the loans provided for under the programme. What additional resources could be found? Four are mentioned:

  • Extend the ETS (Emissions Trading System) market, the carbon market on which the price per tonne of CO2 is fixed, which could be expanded to maritime and air transport, for example;
  • Consider the border carbon tax, which would make it possible to have a sufficiently high carbon price within Europe without damaging our companies’ competitive position;
  • Introduce a tax on GAFA, on digital platforms;
  • Introduce a tax on European companies.

So what can we conclude from this? Firstly, this is a real rebound for the European Union. The most optimistic are even talking about a “Hamilton moment”, meaning the beginning of debt federalisation, which Hamilton obtained in the United States in 1790. This rebound introduces solidarity, a step towards the transfer union that the Germans dread so much. There is also the creation of a European Treasury. If the Council manages to take the proposed decisions – it will still need to have them approved by the European Parliament and ratified, unanimously – Europe will have made great progress.

Discussion

Laurent Diot: How do we interpret the decision by the Karlsruhe Constitutional Court and the very bad signal it sends out in terms of European construction?

Philippe Jurgensen: This is an obvious legal problem. The Karlsruhe Constitutional Court bases its decisions on rulings by the European Court of Justice, which has said that the ECB’s policy is legitimate. This manner of denying the jurisdiction of the Federal Court is extremely questionable and dangerous for Europe. However, the Bundesverfassungsgericht stated that its position did not apply to the exceptional plan linked to Covid-19 and that furthermore it could be provided with explanations justifying the policy adopted.

Olivier Klein: It would not be impossible, according to my own interpretation, for it to allow part of Germany to set out its future position by saying: “We can have a moment, a one-off, when we will pool debt, but be careful that the ECB does not finance any indefinite increase in debt in the future, because then we would have a means of saying that it has exceeded its mandate.” In a way, there is probably part of Germany, if not all, which is setting out its position or adopting a stance for negotiations.

Valérie Plagnol: Two questions: what are your feelings about the success of this plan and particularly its direct financing component via revenue that would go directly to the European Commission? How can we imagine that we would revise the treaties to move towards the federalism initiated by these first steps?

Olivier Giscard d’Estaing: And have you mentioned the issue of Brexit? Because that is a permanent problem and one which has a major influence on the future of Europe.

Philippe Jurgensen: With regard to Brexit, the problem has moved into the background in recent months, but it is still there and is unresolved. The British strongly refuse to extend the transition period until the end of the year and as negotiations are not progressing, we are heading straight for a no-deal Brexit, which would be considered very bad on both sides.

On the first question, it is really very important to know whether we will be able to free up federal own resources, as the United States did in 1790. Perhaps the fact that four are mentioned proves that none are certain or even very close to succeeding. Each of these options is interesting, however, particularly the border carbon tax, which it is difficult to do without, but there are obstacles and objections for each of these four possible sources.

Olivier Klein: From a general perspective, is losing the UK from Europe such a very bad sign? At times like these when we are discussing a possible step towards slightly more federalism and the construction of an additional budget, wouldn’t London’s presence hinder the possibility of reaching agreements?

Olivier Giscard d’Estaing: In fact, I think it would actually be a relief if the problem were resolved, as it would enable us to consolidate our federalist efforts on the continent. What I deplore is this indefinite postponement of the solution, with England playing its hand and then the European Union playing its own.

Philippe Creppy: On the other hand, we may see a harder stance adopted by Northern countries, which feel that they have a different position to take following the UK’s departure.

Philippe Jurgensen: If England were still here, those countries would obviously have relied on its support and it would have been among the frugal countries. Unfortunately for them, they are now all alone and abandoned by Germany.

Jacques Lebhar: We have not discussed the international trade dimension, and particularly trade between the European Union and the rest of the world. Firstly, because it is an important aspect of the economic recovery and growth. Secondly, because when it is addressed, it is via taxation, even if that is justified from a protectionist perspective. And finally because all the discussions about economic sovereignty and relocations tend towards a renunciation of traditional EU policies, of its trade policy, and could lead to a lower proportion of international trade in economic activity within the EU. So how do you see this dimension being taken into account within the Commission or the Council? What do we do about international treaties? We are seeing changes to the policy towards China. This is an element that is fairly central to EU countries’ macroeconomic outlook and which is directly or indirectly linked to the search for own resources.

Philippe Jurgensen: I think that we need to continue to have an active foreign trade policy and to conclude agreements like the CETA agreement, even if it is strongly contested by certain parts of European opinion. And moreover the European Union has also continued to negotiate and conclude trade agreements in the midst of the coronavirus crisis. The environmental dimension needs to be included, in accordance with public opinion. And in this respect, I do not agree with the idea that the border carbon tax is a protectionist measure. It is a vital measure if we want to meet ambitious targets such as achieving carbon neutrality by 2050. It will be impossible to achieve this if we have an economy in which European companies pay a heavy price to emit less carbon, but we continue to import products duty-free that have been manufactured without any respect for the environment. Either we abandon environmental objectives – despite increasingly public support for them – or we implement this carbon tax.

Patrick Lefas: I completely agree, especially since when we look at the situation in France, the carbon footprint is greater than the carbon costs of French production. So we face a real question: how do we reduce the carbon footprint of the imported portion? This is an especially important issue since it involves very considerable sums.

Olivier Klein: Furthermore, we are going to need a fairly strong trade policy towards the outside world, because the United States is starting to announce surcharges on exports of European products. We will therefore need a fairly consistent, well-established and well-negotiated position.

Categories
Economical and financial crisis Euro zone

ELEC High Level Opinion : Let us use the “Next Generation EU” Fund, imbedded in an ambitious Multi-Year Financial Framework, as a driver for change in the European Union

5 June 2020 – European League for Economic Cooperation – Fondation Universitaire Rue Egmont 11 – Brussels

This High-Level Opinion is a follow-up to the Opinion adopted by ELEC on 2 April 2020 on “Audacious solidarity and coordination to save EU citizens and the EU project”. It builds on contributions from several ELEC national sections, including ELEC-Spain and ELEC-France. Now that lives have been saved and measures have been taken to keep infection rates low and contagion at bay, jobs and entire sectors of the economy need to be saved. The proposed “New Generation EU” Fund unveiled by President von der Leyen on 27 May could be a game changer in restoring hope, demonstrating that sacrifices have not been vain and becoming a model of European solidarity.  ELEC wants to express its full support for that initiative.

It is complementary to the previous agreements and initiatives that ELEC also welcomes and supports:

  • The agreement at the European Council of 23 April on a comprehensive economic policy response to the Covid-19 crisis, with three components, providing safety nets respectively for workers (SURE), businesses (the EIB Guarantee program) and sovereigns (ESM Support) for a global package worth 540 billion euros. However, these safety nets are using only loan instruments, which have the disadvantage of increasing the debt of their beneficiaries.
  • On the monetary policy side, the ECB program of asset purchases against the pandemic (PEPP) at € 1.35 trillion euros after the increase of 600 billionn euros announced on June 4th; the extension of the horizon for net puchases under this program until June 2021; and the commitment to conduct such  net purchases until it judges that the coronavirus crisis phase is over. This is a crucial program to maintain confidence in financial markets and prevent an unwarranted increase in interest rates paid by Member States. However, the May ruling of the German Constitutional Court shows that the ECB bond-buying programs are meeting resistance and have to be complemented by bolder initiatives, demonstrating fiscal solidarity among countries of the euro-zone.
  • The joint initiative announced on 18 May by German Chancellor Angela Merkel and French President Emmanuel Macron. The way of raising funds up to an unprecedented size by European Commission   borrowing on capital markets and their allocation in the form of grants (rather than loans) are a real breakthrough towards a Fiscal Union –albeit limited-. Fiscal Union, whichhas been until now the most significant missing piece of the Economic and Monetary Union, needs in fact to be further developed in the European architecture. These 500 billion euros, to be allocated in the form of grants, would now be complemented by 250 billion euros in the form of loans, forming together a new recovery instrument called “Next Generation EU”. ELEC very much hopes that, despite objections voiced by some Member States, the size and design of this recovery instrument will be accepted, bearing in mind that the funds will be spent on commonly agreed programs and priorities.

In ELEC’s view, this constructive initiative is a step in the right direction, significant in terms of policy message but still rather small in macroeconomic terms. The dynamic approach must be maintained, including the link to an ambitious Multiyear Financial Framework (2021-2027). The new MFF proposal appears well balanced. ELEC supports the idea of contemplating the introduction of new resources (linked to the Emissions Trading Scheme, a Carbon Border Adjustment Mechanism, a digital tax, etc.).  New impulse should be given to the discussion of a minimum corporate income tax level in the EU to prevent fiscal dumping.

Now kick-starting the economy is essential. Even though Member States have given their agreement in principle for a recovery plan considering the exogenous, global and symmetric nature of the shock, there is a considerable asymmetry among the countries in the consequences of the crisis and the resulting financing needs in this post-lockdown period. Economic positions of countries differ indeed with regard to their labour markets, public finances and fiscal space to support their domestic economy[1], their sectoral structure (exposure to services dependent on person-to-person such as tourism and leisure) and their belonging or not to the eurozone while some were already more vulnerable than others when the health crisis hit. No countries nor regions should be left behind. EU needs to start thinking strategically on the purpose of the fund and the way it will implement it in building a more resilient economy and a stronger European Union.

“Next Generation EU” should focus on the broader EU societal goals, in particular the green and the digital transitions

“Next Generation EU” should concentrate on investment: public investment –which has been lagging behind at least  for a decade- and support to private investment, which could be paralyzed by the crisis. It should serve as a trigger for a new and ambitious growth strategy. The funds must be applied throughout the European territory, targeting the regions, the sectors and the companies, including SMEs, that have been most severely hit by the pandemic. Its design should promote the broader E.U. societal goals and the priorities adopted by the von der Leyen Commission.  A more proactive industrial policy should complete the encouraging EU4Health program aiming to invest in prevention, crisis preparedness, procurement of vital medicines and equipment through enhancing R&D:

  • “Next Generation EU” should support, even accelerate the EU’s Green Deal ambition and the transition towards new forms of economic organization such as the circular economy.
  • As concerns the Digital Strategy, funds should be dedicated in priority to facilitate the transition from the installation phase to a deployment phase of the digital economy in order to benefit from productivity effects[2] A digital strategy can help support key sectors such as tourism and the sectors involved in the transition towards a zero-carbon economy. A proper strategy for digital infrastructure throughout the E.U. territory should be elaborated, making sure that infrastructure also covers remote areas in order to avoid a social divide between those who have access to digital instruments and those who are not connected.
  • The crisis also put light on the vulnerabilities of global supply chains. Companies will review and restructure their supply chains, tending towards diversifying out of Asia and re-shoring some elements of the chain. A proper industrial strategy is needed in Europe in order to benefit from a coherent redeployment of supply chains within E.U. member states.
  • Education, up-skilling  and retraining should be a priority in order to ensure that the labor force is properly prepared to foster disciplines in urgent need: health, environmental science, digital technologies, artificial intelligence, cybersecurity, etc.  … This is the only way to fight long – term unemployment.
  • Finally, debt issuance by the European Commission on a large scale would create the much wanted “common safe asset”, which is essential for the future development of the Capital Market Union3. CMU would facilitate the allocation of capital to long-term projects and the financing of innovation by mobilizing household savings towards longer-term instruments dedicated to growth and innovation. It would also foster the development of the euro into a full-fledged international currency. As many companies will face solvency issues in the coming months because of the sudden interruption of businesses and the sluggishness of aggregated demand, it would be appropriate to initiate some forms of harmonization of insolvency rules throughout the E.U (inspired by Chapter 11 in the US for example).

A crisis is an opportunity to move the EU forward and it should not be missed. Let us not miss this one.

Bernard Snoy et d’Oppuers (President ELEC International), Rainer Boden (Vice-President ELEC International), Servaas Deroose (Special Advisor to President ELEC International), François Baudu (Secretary General ELEC International), Andreas Grünbichler (ELEC Austria), Branco Botev (ELEC Bulgaria), Olivier Klein (ELEC France), Wim Boonstra (ELEC Netherlands & Monetary Commission), Maciej Dobrzyniecki (ELEC Poland), Antonio Martins da Cruz (ELEC Portugal), Radu Deac (ELEC Romania), Frances Homs Ferret (ELEC Spain), Thomas Cottier (ELEC Switzerland), Philippe Jurgensen (President ELEC Economic and Social Commission), Senén Florensa (President ELEC Mediterranean Commission), Javier Arias (ELEC International).www;elec-lece.eu

[1] Example: Some countries have provided state aid and risk capital to companies e.g. risk capital : Germany at national and regional level, Austria, only regional, City of Vienna.

[2] Bart van Ark, University of Groningen, The Conference Board, The Productivity Paradox of the New Digital Economy; Antonin Bergeaud, Gilbert Cette, Banque de France, Current and past recession, a long – term perspective.

3 See in this connection the  ELEC « T-Bill Fund » proposal on https://ec.europa.eu/economy_finance/articles/governance/pdf/elec.pdf