Nov 29, 2008

Nationalization of energy companies (Slovakia not Venezuela this time)

By Andrej Nosko

That Mr. Hugo Chavez, Venezuelan president, is not too 'fond' of foreign investors is no secret, but that he has a zealous follower in the fastest growing economy of the EU, Slovak Republic, is not that well known. Slovak Prime-minister, Robert Fico is recently gaining attention for his plans of restoring full state control, and ownership over (49% of) previously privatized assets as his way of winning (?) the price war against the partly state-owned gas supplier. The previous government of Mikulas Dzurinda (and Finance Minister Ivan Miklos), has succeeded in putting Slovakia on the global investor map, and provided solid basis for the current economic growth. In 2002, this government has also sold 49% 0f Slovak gas company, SPP - previously integrated (now legally unbundled) to the Slovak Gas Holding B.V., a consortium of Gaz de France and E.ON Ruhrgas. The remaining 51% of SPP's shares are held by the Slovak National Property Fund.

"Our relations are and will be special Dmitry Anatolyevich"
"You have nothing to do with it"

"Bad, bad capitalists are responsible for the rising prices of gas"
"And Miklos"
"And Dzurinda"

Prime minister Fico, who in line with his political philosophy, has vocally opposed any and all privatization, is now, at least verbally, trying to get hold of the previously privatized assets, and calls for limiting the scope of private entrepreneurship in the country. Be it in the health care, pension, or energy sector. In this post I focus on the case of gas company SPP (although the story of Transpetrol deserves some interest as well). The current Slovak government doesn't believe in markets, and especially not in those in energy sector, and would like to dictate prices, and conduct social welfare policy by digging into the private pockets of foreign investors. To the calls, that prices of gas are into large extent dictated by Russian Gazprom, and SPP has to reflect rising prices on the wolrd markets Fico remains silent. When asked why Fico's government does not negotiate better prices of gas for Slovakia, he only replies that they would be stupid to do so if there are foreign co-owners to cover the costs of subsidizing the prices as well. The above cartoon says it all.

There are following options signalled by Mr. Fico to his co-owners of energy sector companies:

  1. either the private companies succumb to the political decisions (sometimes conveyed via the energy regulator) to keep their prices artificially low, conduct investments as Fico's government wishes, or

  2. their assets will be nationalized (threats to, SPP, Enel (EN: subscription required) article in SK), or
  3. the government changes the law in such a way to get the company to do what they want, or

  4. they sell their share back to the government (at the price they bought it for 6 years ago)

"Independent" regulator as a means of social policy
The story is not new. Chairman Fico, has been opposing the privatization since it was on the agenda. This is not incongruent with his party line. Since his party SMER got into the government, Fico has been struggling to gain control over the 'monopolies,' and the economy as a whole. The 'independent' regulatory body URSO (Regulatory Office for Network Industries), cannot be any longer seen as independent. To illustrate this point, we can quote the chairman of the regulatory board Jozef Holjencik, and his reaction to the alleged using of the regulator to promote social policy: "simply, it was interest of the state to protect them [households and small companies]. We respect that." That the work of the Slovak regulator is under political pressure was recently pointed out also by Blahoslav Němeček from the Czech regulatory authority during a recent conference in Bratislava.

Fight against 'the bad, bad capitalists' as a political marketing
Fico, was using the anti-capitalist rhetoric of class struggle against the corporations to get elected, and has never approved of the privatization (although very much needed for financing of the economic reforms (he did not approve of those either)). The price war (leaving the question whether he actually means it or its just a strategy of political marketing) of the government and the foreign investors in SPP has had so far three phases:
  1. Verbal threats of nationalization (August 2008)
  2. Attempts to change the conditions of privatization contract via change of legislation
  3. Concurrent Buy-back offer and change of Business Code (November 2008)
First the Prime minister has stepped up his attacks on the company during the summer, when he remarked: "We are loosing our patience. I would like to remind all foreign owners of energy monopolies, that we have Artcile 20 of the Slovak Constitution, which says that in the public interest, a thing (sic!) can be expropriated." (leading constitutional lawyers have since questioned the possibility of appropriation of shares as having no basis in the costitution) Meanwhile, the prices of gas imported from Russia have risen, following the general increase of prices on the global markets (prices of gas follow prices of oil with a time delay of few months). Therefore, SPP has continued filing requests for permission of price increases from the regulator. In November, during an extraordinary session, Fico's government changed the law no. 513/1991 Col. (Commercial Law) in order to change the internal functioning of the company to affect how the decisions inside the company are made.

Although the foreign investors have minority of shares, at the time of privatization, they were given managerial control over the company - an element that has been a thorn in Fico's side since then - he has attempted to change the business law in order to change the conditions of the privatization contract, since that hasn't work out; he has threatened to expropriate the company, or offered an unrealistic buy-back at previous price (TA3, Téma dňa, 17.10.2008, 19h55) and finally succeeded in changing of the law (TA3, Téma dňa 04.11.2008, 19h55). Previously, an application for price increases to the URSO was a decision of the management. Now the general assembly of all stakeholders has to vote on the decision - thus state (with its 51% of shares) can block such decision.

Mr. Fico's argumentation is quite surprising, according to him (Téma dňa, 17.10.2008, 19h55), companies should follow the political decision of the government, or sell their shares back to the state at the original value (of 2002). Nonetheless, when the reporter asked him how this operation would be financed, prime minister only replied that he, "cannot say how this would be done, since they would do it in a similar way as buying back of Transpetrol (from Yukos Finance), but he cannot share details, in order not to threaten the Transpetrol buy back operation."
It is also important to remind in this context, what will happen according to Russian media (article in Russian, article in Slovak), after Slovak government buys back shares of Transpetrol from Yukos. If the Russian media is better informed, they might be handed to Russia, I have observed this eventuality already at the end of the previous post.

Absolutely surprising is how prime minister Fico, suggests to the co-owners of SPP to cross-subsidize the sales of gas. Pointing out the fact that SPP group is generating profit, nonetheless, he is indirectly hinting that SPP should subsidize the prices for households from the income from the transit-generated profits. The logic of this might be surprising to those in the EU, that are well versed in the Energy legislation. Slovak prime minister, although aware of this, is trying to push SPP to figure out how to bypass the anti cross-subsidization legislation in order to lower the prices for households. In the context, when the chairman of the regulatory board of URSO Jozef Holjencik also thinks that unbundling doesn't solve anything and only leads to higher prices (sic!), this comes at no suprise.

Finally, when a journalist asked, why state doesn't use its dividends (from the 51% shares) to cover for the protection of households, and to conduct the social policy directly, Fico only responded: why should only state cover for the costs of the household subsidies, [...] and if there is a 49% foreign shareholder, [...] they [state] are not stupid to cover it. (sic!)

Read more on Nationalization of energy companies (Slovakia not Venezuela this time)

Nov 17, 2008

G20 on banking regulation and leadership responsibility of EU

By Zdenek Kudrna

The G20 meeting this weekend was more important for the fact that major emerging economies were invited than for the substantive decisions. It all makes sense to get India and China at the same table with G8, but it does not make it easier for the US to swallow any kind of supranational financial regulation. I guess we need to wait for the new brand of Obama multilateralism to see any progress on this front.

The G20 statement is thick on good intentions, but thin on specific proposals: Increased transparency of financial sector, regulation of rating agencies, avoiding pro-cyclical regulation, increased information sharing between national authorities, expanding the FSF to include emerging economies and ensuring that IMF and other multilateral institutions to have sufficient resources to support emerging economies capital needs. It practically shifts the ball to the Financial Stability Forum that should develop substantive proposals for the next meeting of G20 in April 2009.

I doubt that FSF would be able to cut through the complexity of the global financial markets and formulate the future vision of the global financial architecture that could deal with all aspects listed by G20. Actually, I believe the EU 27 should be the leader in terms of substance of the new financial regulations. If EU cannot make progress towards supranational regulatory regime, than chances for global progress are slim.

Today EU is composed of both developed (EU15 + 2) and emerging economies (EU10) and its financial sectors cover the full spectrum from cutting edge of finance in the City of London, to rather sleepy backwaters in Prague or Bratislava (Today the 'advantage of backwardness' is worth billions of dollars as it means little exposure to 'innovative' financial products that proved 'toxic'. So Czech and Slovaks may still hope to get through the financial crisis without involvement of state finance). At the same time, EU financial markets are highly integrated, but the regulation is still based on home-country supervisors and its supranational dimension did not progress beyond vague memoranda of understanding and more or less informal consultation process.

EU is well aware of the discrepancy between the financial integration and fragmented regulation. A few years ago it even devised the so-called Lamfalussy procedure to be able to catch up on the regulatory side. However, even before the financial crises the regulatory integration hit the wall. Even the idea of regulatory colleges for major internationally active banks that now seems a nobrainer proved too politically contested to be passed.

As is often the case, lack of compromise boils down to interest-group politics. The political cleavages among vested interests in different countries proved too numerous. Brits, like Americans on the global scale, are suspicious of the supranational regulators. French push for centralized heavy-handed approach. Germans worry about their parastatal landes banks. The EU10 countries are not quite sure whether they should try somehow to adjust their regulatory regimes to the fact that all their banks are controlled from abroad (so they just hope for the best now). Moreover, the non-euro countries are not keen on letting ECB (which usurped the bank supervision responsibilities) to supervise their banks. Moreover, the retail banks are not keen on reducing regulatory barriers to competition, whereas wholesale banks support it. Moreover, parties on each side of these plentiful cleavages are shifting all the time. No wonder EU did not make much progress.

the other hand, times of crisis force some clarity of thinking and make clearer the relative costs and benefits of various arrangements. Some refined objections to supranational regime lose their persuasiveness as bad news keeps coming. Some political compromises (such as principles for agreements on burden-sharing of fiscal cost of bailout of banks active in many EU countries) that would be unthinkable in the normal times may be possible in extraordinary times. Economists call this benefit of crisis. If EU could seize on it, the rest of the globe would be more likely to follow.

Read more on G20 on banking regulation and leadership responsibility of EU

Hungarian promises to IMF and future trends in EU10 banking regulation

By Zdenek Kudrna

Hungary had signed a Stand-by agreement with IMF on November 4, 2008. Apart the standard clauses on the fiscal and monetary policy, it includes a section on the financial sector policies. Although, these commitments are made under pressure to fence off the impact of the global financial crisis, they may foreshadow future changes of the EU10 banking regulatory regimes.

The reason why Hungary is threatened by the financial crisis more than her Visegrad neighbors is fiscal profligacy of her government. High debts and high deficits of public finance over the last few years induced the independent central banks to restrictive monetary policy. In turn, high interest rates (and rather stable exchange rate of forint) motivated households to borrow in euro, Swiss francs or even yen. This resulted in the much higher vulnerability of household balance sheets as they essentially bear unhedged exchange rate risk. Both of these risks were exacerbated by the financial crisis that triggered liquidity trap and capital outflows from emerging markets.

In this context, the Stand-by agreement reviews what by today counts as standard firefighting measures including:

  • IMF stand-by of up to 12.5 bn euro for the next 17 months;

  • ECB lending facility of up to 5 bn euro;

  • EBRD is also mentioned as ready to step into banks;

  • doubled deposit insurance from 6 to 13 million HUF, topped by blanket guarantee of all deposits;

  • providing a support package for systemically important banks that contains provisions for added capital and funds a guarantee fund for interbank lending (up to 600 billion HUF in total); this support could increase banks' CAR to 14 pc.

To address the foreign lending problem of households, the agreement envisages that banks and indebted families would

  • at the request of the debtor, allow the duration of the loan to be extended with fixed monthly installments;
  • debtors who deem that exchange rate fluctuations carry excessive risks will be allowed to convert their foreign currency-based loan to a forint loan, without extra charges; and
  • in the event that a debtor is unable to service the existing loan, the banks will be amenable to transitionally reducing the installments at the request of the debtor.
The crisis also induced the Hungarian government to submit laws to the parliament that would allow Hungarian Financial Service Authority and financial infrastructure to catch up with what most of their EU10 neighbors have done a few years ago.

  • introducing well defined triggers of remedial actions and emergency powers;
  • improving the efficiency of the bank resolution regime to facilitate paying out quickly to depositors in case of need,
  • introduction of a positive credit registry for households,
  • modification of the Central Bank Act to allow the MNB to request individual but unidentifiable data to adequately analyze credit risk,
  • enhanced regulation of insurance and credit brokers and their products,
  • introduction of maximum loan-to-value ratio requirements for new mortgage loans,
  • close monitoring of banks’ foreign exchange exposures, and
  • strengthening communication with financial authorities in home and host countries regarding risk assessments and liquidity contingency plans.
Judging what all this means for the future of banking regulation in EU10 is fraught with uncertainties. However, unless we see major moves on the EU level and providing that existing regulatory regime will only be patched not scrapped, we could observe the following:
  • a comfortable capital adequacy for turbulent times in emerging markets is neither 8 pc required by Basel Accord, nor 9 to 12 pc. observed across EU10, but more (Hungarian government is betting on 14);
  • reintroduction of some simple regulatory measures such as loan-to-value ratios that fell out of fashion during the good times;
  • to make the EU10 regulatory regime credible vis-a-vis parent banks and their home-country regulators, a rigid trigger of regulatory action may be needed;
  • more transparency and data sharing to monitor system level risks;
  • integration of regulation of banking and other financial services;
  • stronger regulatory cooperation on EU level.
All of this has always been on the table. However, the unpleasant experience of Hungary and also Baltic states, Romania, and Bulgaria, may help to turn proposals into action in other EU states and on the EU level.

Read more on Hungarian promises to IMF and future trends in EU10 banking regulation

Nov 15, 2008

Crude’s Bumpy Ride: In Search of Fundamental Determinants of Oil Price

By Michal Trnik, PERG guest author,

Providing credible and accurate forecasts of crude oil prices was always a tricky business resembling rather fortune telling than an exact science. With the unfolding oil price volatility, the reputation of analysts suffered a heavy blow once again. Only recently, many experts prognosticated record high $200 per barrel to be hit in a reasonably short time. Today, oil price continues its unexpected nose-dive, and oscillates below $60 a barrel, however.

Source: Shooty; used and modified with the kind permission from the author.

To be clear, explanations and estimates of crude prices were always a messy field. The recent unexpected price volatility unraveled weaknesses of many silver bullet explanations and left average consumers with the pressing question on their mind: "So who the hell can I blame?" The list of potential culprits has always been long.

It’s OPEC, stupid
The OPEC’s influence is still by many believed to be one of the most important causes defining the crude oil price. However, the market power of OPEC today is not what it used to be. Although the shortening of supply to increase oil price was used as a tool to boost producers’ profit, nowadays the situation is largely different as a result of OPEC being an example of undisciplined cartel; increasing availability of energy substitutes, and the nature of the current oil pricing system. The so called reference price regime in place today is based on two main freely traded reference crudes – Brent and WTI – both of which determine the price of other types of crudes, which are not freely traded. This current regime thus largely eliminates the drawbacks of the OPEC price regime (1970-85) in which prices were unilaterally determined by producers.

Crises raise prices
Political crises and instability in oil-producing regions became one of the most routine media used explanations on oil price increases. Such interpretation, however, is of no use given that political unsteadiness is rather a norm than an exception and in today’s globalized world it is fairly easy to find a geopolitical disturbance to which climbing prices can be attributed. No doubt that severe geopolitical crises can impact oil prices. Nevertheless, this explanation has to be used reasonably and with extreme caution.

Running out of oil (once again)
The Hubbert’s famous peak-oil theory rightly predicts that oil as a definite source will have to reach its production peak sooner or later. The price is expected to rise as a consequence of oil production reaching its terminal decline and thus becoming increasingly scarcer. There are many "prophets" who regularly omen that the end is near or had mistakenly announced the peak already some decades ago (video at 5:45). Briefly, we’re not there yet. Linking any oil price run-up with the alleged peak thus cannot be taken seriously.

Hedge funds, pension funds, speculators and other vermin
Various funds and fortune hunters are often accused of sky-rocketing oil prices and such view still enjoys credibility whether among consumers, politicians, analysts, industry executives, or among former chief speculators themselves.

Keeping the argument as simple as it gets, it was very recently the speculators were accused of artificial inflating of oil price, which was believed to be above the level at which demand is in balance with supply. Higher price allegedly created by artificial speculative demand would in effect mean a necessary existence of physical excess oil supply that has to be hoarded by the seller for future sale to fulfill his commitments to the buyer. Likewise, if the price is suddenly too high, then demand from the traditional consumers would shrink, leading to a large surplus of the oil in the market. The question is: what happens to this excess supply then? Well, as it is not consumed it should be stored in physical inventories somewhere. There is no empirical evidence of such accumulation at any point during the last price increase, however, which in turn means that the alleged existence of price bubble does not hold up to the economic reality.

Moreover, speculators cannot directly influence prices as they are nothing more than price bettors willing to throw their millions into the market hoping their forecasts of future price will be accurate enough to earn them profits. In any case, the oil price remains unaffected as betting on the future oil price has no direct effect on actual price moves similarly as betting on horses has no direct effect on the winner of the race no matter how much cash and how many people bet on that particular horse. It is the futures market which is the main playing field of all ‘speculators’ who instead of buying physical barrels bet on future prices of oil by buying futures contract.

What the future(s) hold
Sometimes the least sexy explanations are the most valuable ones. The futures market and trading of futures is the key to understanding the working of current oil price mechanism. The market with futures, which is a market for financial contracts, is where the oil price is determined.

The oil market, like any other commodity markets, can be divided into the spot market and futures market. In the spot market physical “wet barrels” of oil are traded. The futures market, where “paper barrels” are traded, on the other hand serves the needs of those who need oil in the future but do not want to purchase it today but rather when their actual demand arises. These traders instead of purchasing physical oil barrels opt for a futures contract which entitles them for those barrels later on. The price of such contract is set by an agreement between the buyer and seller. At the same time these contracts make predictions about the future direction of prices, which determines also the current price on the stock market. Today, only a small portion of oil is traded on the spot market, however, as it has became very thin due to its insufficient liquidity caused by a rapid decline in oil production of the two reference crudes (WTI and Brent). The futures market should not be understood as a cause of the oil price changes but rather as a place where it happens.

Current volatility and good ol’ supply and demand
In economics you won’t usually go off the track too much if you go for the supply and demand explanation whenever you are not sure about the answer. There is nothing fundamentally wrong with such answer neither in the oil markets. As the world tends to be complicated, saying supply and demand is not enough, nevertheless it is crucial for understanding the recent oil price tumble. Moreover, the recent unexpected plunge of oil price indirectly confirms that OPEC, political crises, peak oil or speculators are not the most important factors shaping the oil price.

One barrel of fresh crude without bubbles please
The recent extreme volatility is related to shocks to both supply and demand. First, the sharply increasing demand for crude in developed and developing countries combined with structurally stagnant supply stemming from persistent shortage of refining capacity stood behind the soaring price. Second, its subsequent plummet is a logical reaction to contracting demand caused by slumping economies all around the globe triggered by the credit crunch.

Supply and demand, no rocket science. Making analogies between the development of price in oil markets and the price bubble we’we encountered in the US housing market thus seems rather inadequate.

Read more on Crude’s Bumpy Ride: In Search of Fundamental Determinants of Oil Price

Nov 5, 2008

The Current Financial Crisis: Causes, Consequences and Lessons for Theory and Policy

Picture from Wellington Grey's page, used with author's kind permission

POLITICAL ECONOMY RESEARCH GROUP organized a round table discussion on:


Pictures and complete audio recording (also for download as mp3), and full written summary, from the event available bellow .

Event took place on Tuesday, November 4th at 5.30 p.m. at Central European University Budapest, Nador ut. 9 (MB 201)

Discussion was chaired by Julius Horvath (IRES/ECON), with following participants: Laszlo Csaba (IRES), Bob Hancke (POLSCI/IRES and LSE), Don Kalb (SOC.AN), Ugo Pagano (ECON), Gyorgy Szapary (ECON)

Audio Recordings provided by Gergo Medve-Balint:

1. Gyorgy Szapary Download mp3

2. Bob Hancke Download mp3

4. Ugo Pagano Download mp3

5. Don Kalb download mp3

6. Laszlo Csaba download mp3 A download mp3 B

Part 1: download mp3

Part 2: download mp3

Part 3: download mp3

Part 4: download mp3

Financial Crisis Panel - PERG - CEU, 4 November 2008

Summary: By Vera Asenova
The Current Financial Crisis: Causes, Consequences and Lessons for Theory and Policy

The good news for academics these days is that in time of financial crisis explanations for what the hell happened, are in high demand. The supply of analysis of the situation is not scarce either. Suddenly, all schools of thought celebrate the ultimate prove of their point, the crisis finally demonstrating empirically what the theory has been developing for so many years. Yet none of them is admitting defeat, and none will really disappear.

In an attempt to generate an inclusive debate across disciplines, theories and viewpoints PERG organized a public round table discussion under the title: The current financial crisis – causes, consequences and lessons for theory and policy. Our guest speakers were CEU faculty members from different departments: Laszlo Csaba (IRES), Bob Hancke (POLSCI/IRES and LSE), Don Kalb (SOC.AN), Ugo Pagano (ECON), Gyorgy Szapary (ECON), the discussion was chaired by Julius Horvath (IRES/ECON).
Prof. Szapary, who is also a vice-governor of the National Bank of Hungary, started with outlining the main reasons for the subprime crisis - excess liquidity, and low interest rates, which were kept for too long of a period in the USA, while inflation was also low; on the housing market the high loan to value ratio generated a big amount of toxic assets in the banking system, which is the second main reason for the crisis. He presented the bubble as a rise of real estate prices much higher than the rise of production costs for homes and the population growth. This bubble soon triggered panic: “social intoxication,” and confidence crisis, with banks having stopped lending to each other. The lack of regulation on investment banks and hedge funds had put them in a position of being “too big to fail”, which was not recognized by the national authorities on time. What followed were bankruptcies unseen before in the USA, UK, and Europe, which called for decisive government action. They had “nothing right on the left and nothing left on the right” to use Szapary’s words. Still, two kinds of policy actions followed – central bank injection of liquidity into the financial system, and government bailouts of banks through recapitalization of banks, purchases of toxic assets and deposit guarantees. 3000 billion USD is the total US government commitment so far. Growing fiscal deficit and government debt, followed by increase of taxes, unemployment, inflation and huge losses of wealth are the main consequences of the crisis. One of the lessons to learn is that measures for international burden sharing are needed in a globalized financial world. The countries with the majority of foreign owned banks face a problem of mother banks terminating lending to their subsidiaries abroad, thus forcing the national central banks to bail them out, or inject liquidity beyond its capacity. At the same time, an obvious conflict of interests arises for the central banks in the countries of the origin of the mother banks, who feel reluctant to export capital to foreign financial systems. Who should be the lender of last resort in a globalized financial system?

Bob Hancke spoke of the political roots of the crisis, which in his view lies in the independence of central banks. Lack of regulation, the political roots of the crisis lie in the decision taken in the nineties to deregulate the financial sector. Central Banks have failed as apolitical regulatory agencies, and many of them have in fact been captured by investment banks – serving their particular interests by keeping the interest rates too low. The rule based monetary policy worked for a short while, but soon governments had to come back into the driving seat, although formerly they were considered incapable. Today’s crisis proves this is not true; governments are the viable alternative to failing markets. What they are doing today is not so different from what they did in the thirties. After ”trying out” communism and fascism as alternatives to laissez-faire, social democracy emerged as an understanding that markets are fundamentally good, but you need to regulate them well. It is the kind of viable system where governments play a large role in the economy through central banks and fiscal policy. Hancke opened the debate on central banks and what they are really for. Currently their mandate is diffuse, focused on price stability without achieving it, while the stability of the financial system is taken out of the mandate. Thus the current crisis has shown that central banks are losing their legitimacy, as well as their independence.

Ugo Pagano’s talk entitled “The End of Anglo-American capitalism?“
Both models of capitalism are susceptible to systemic crisis – the one based on flexible financial and labor markets, and the one based on arms length relations between creditors and debtors. The weakness of the Anglo-American flexibility model have now become very clear, and they come down to diluting of agency relations, and destruction of social capital; lower total monitoring; and arising of new rigidities. This new rigidity plays itself out as an impossibility to renegotiate the debt when the price of the collateral went down – when everybody is a creditor the bargaining and renegotiating of debt becomes very difficult.

Secondly, Pagano also shares the view that bubbles are characteristic of the economy – high expectations drive prices up, this was the case of the internet bubble, oil bubble etc. each bubble has a grain of truth – a reason to believe that prices will go up (internet is a great thing; emerging industries, China and India will increase global oil demand etc.) but this grain of truth gets hugely inflated. The more financial instruments created on the basis of this inflated expectation the bigger the bubble gets.

A third phenomenon is the moral hazard problem – some actors are too big, and too interconnected to fail. The danger would have been less severe if these institutions were never allowed to become so big, or to have kept the financial sector under control.

What will happen now? America and Europe follow two different roads. America is an earlier democracy, which believed that wealth should not be concentrated in the hands of a few big families but dispersed. Still the financial sector performed a hidden redistribution function, and is currently in crisis.

Europe’s trajectory starts with first having the big families ruling through concentration of capital. On the other hand, the power of workers is concentrated in trade unions that react, and trigger change.

England started as a strong families, and strong unions capitalism, and moved to a dispersed ownership American model, and is now in crisis due to its huge financial sector and huge state intervention. But this is not the end of the Anglo-American model of capitalism.

Don Kalb – the VoC [Variety of Capitalism] schools is happy about this crisis as it puts the question of what kind of regulation are we going to have. But we need to discuss societies, because societies drive politics, which drive institutions. One thing we learn from this crisis is that institutions don’t work if they are left alone. Even if you introduce more regulation, you need societies to do politics. To analyze the real social forms beyond the Polanyian and VoC framework. Kalb proposed a society-based explanation of the crisis. The neoliberal policies dominant in the last thirty years had two crucial characteristics, which are deeply contradictory and colliding:

  • Increased ‘financialization’ of social life – social relations, markets, states;
  • Increased social inequality and polarization.

These coinciding developments can explain why the subprime private sector is the domain of the crisis. Regulatory interventions try to prevent, or react to the problem, but cannot succeed. The neoliberal era is an era not of deregulation but of private regulation of risk; the crisis starts form large private indebtedness in the core, which built up in the nineties, and burst out recently. Income stagnation was combined with injections of cheap liquidity (provided by China, Japan and Germany) prevented the contradiction from colliding. Growing private indebtedness, declining prices and inflexible relations have been the causes of the crisis. The possibilities of reversing this adverse combination of social polarization and ‘financialization’ of society lies in the future political decisions taken in the USA. Hopefully Obama, who gets elected today, will listen better than his predecessors.
Laszlo Csaba “The Hungarian reaction. A reaction to what?” Csaba focused on the situation in Hungary which is not facing a deep capitalist crisis like the USA but a panic on the financial market. Due to the underdevelopment of its financial system, Hungary can never commit the mistakes of the USA – the benefits of backwardness. Before discussing the Hungarian government reaction, one needs first to define a reaction what is being sought. Unlike the great depression 1929-35 an overall contraction of GDP in the American economy is not present om the real economy which is not in recession yet. Situations of panic are typical of the financial market. This market has been the source of immense wealth creation – the system which is unregulated, unjust etc. has contributed to eighty percent of the wealth in the last hundred years.

The name of the game is psychology, and the main issue here is the trust. In Hungary the government has very low credibility both because of its members, and because of its economic policy. People do not care about the government because it is politically compromised, and also because it keeps making welfare promises it does not deliver. Low level of credibility is an especially big problem in times of crisis.
Now the reaction of the government was not to listen to the warnings. The national bank, research institutions, and other organizations have been warning the government that tax and spending policy does not work in a small open economy, which has high degree of vulnerability. In this case sustaining a national currency is a luxury and it also enhances the vulnerability of the economy. Joining the currency union as soon as possible should be a priority also of the government, as well as of the median voter. When the crisis hit, the government did not believe it, and kept saying that this was an American problem, which does not affect Hungary. In addition to the liquidity crisis, there was a recent attack on the Hungarian Forint, which lead to almost 20% devaluation of the exchange rate, and from this moment the panic spread. The forecasts was a slum of - 1.5%. An emergency plan was provided by an IMF standby loan of 25 billion dollars together with the European Union, and the World Bank. The attack has now been partially reversed, and the stock exchange is recovering.

Csaba was skeptical regarding the benefits of crisis often discussed by economists – the idea that hard times provide a window of opportunity to sell the wonderful ideas of the economic science to politicians, and bring reform. The primacy of politics will close the window of opportunity and instead of long term economic growth, short term measures, and muddling through will take place for as long as possible.

What followed was an exciting discussion, which can be found on our blog. A commitment to organize another discussion on the topic later, and a few rounds of drinks at a nearby bar.

Read more on The Current Financial Crisis: Causes, Consequences and Lessons for Theory and Policy

Nov 3, 2008

George Soros' lecture at CEU

Public Lecture by George Soros, Founder of CEU and Honorary Chairman of its Board of Trustees

Comments on the Global Financial Crisis

Date: Tuesday, November 11, 2008
Time: 6:15 p.m. - 7:45 p.m.
Location: CEU Auditorium

Dear CEU Community Members

We are privileged to announce a Public Lecture by George Soros, Founder of CEU and Honorary Chairman of its Board of Trustees

Comments on the Global Financial Crisis

Chair: Lajos Bokros, COO/Professor, Department of Public Policy/
Department of Economics
Date: Tuesday, November 11, 2008
Time: 6:15 p.m. - 7:45 p.m.
Location: CEU Auditorium

George Soros is not only a legendary financier and philanthropist, but also a widely-read author. His latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means was released in April 2008.

The opening sentence, summarizing his sense of urgency about the turmoil in the financial world, “We are in the midst of the worst financial crisis since the 1930s.” has of course proved to be an accurate prophecy. As the subsequent global financial crisis has unfolded, he has been asked to speak and write on this topic in the leading financial and news publications and television worldwide.

As there will be an enormous amount of interest in this lecture we are restricting it to the extended CEU community for this reason. We also ask you to indicate whether you will be attending by Monday, November 10, at noon. Seats cannot be reserved, except for one group of students originally included in program, and will be on a first come-first served basis. Your response regarding your attendance will give us an indication of numbers and thus assist us in arranging additional seating, including a screening area.

Please RSVP to by November 10 at 12 noon.

For your reference we have some background reading materials before the lecture. These are available on


Yehuda Elkana

Read more on George Soros' lecture at CEU

Nov 1, 2008

'Return Ticket to Dublin Please'

by Colm Kelly, Ireland (PERG blog guest author)

From my experiences working in two major Financial Institutions, which are primarily involved in the funds industry, I have noticed a rapidly growing number of vacancies are being filled by Central European Immigrants. The majority of whom come from Poland with the remainder hailing from countries like Hungary, Lithuania, Slovakia and the Czech Republic. From my view point there are three main factors in the influx of CEE workers:

Firstly, financial companies based in Ireland are made up largely of American and Japanese firms which enter the European markets at the place of least barriers. Ireland provided least barriers to entry approx. 15 years ago through substantial tax breaks/incentives and a highly educated and young workforce. This highly educated workforce is now also highly paid and such companies now seek other opportunities to minimise costs and first on the list is to relocate. Relocate where though? China? Too far removed from their market place. Australasia? Already possesses a fully developed financial services industry and wages will provide a huge problem. So what about Central Europe? Relatively low wages. Good infrastructure. Close to the target market and also possesses a very highly skilled and educated workforce. So what is the best way to kick-start the transition? Attract the target CEE workforce to your current location, allowing them to receive the perfect on the job training while preparing the company for a move to CEE.

This leads to the method of attraction, the second reason. My current employers, the global market leader, selected a target demographic and advertised heavily in local and national newspapers and also targeted university graduates. By offering good wages and helping with accommodation costs they attracted a large group of Polish recruits which were brought over to the Irish office and settled into the working environment with ease, largely due to their excellent grasp on the English language and because of their strong work ethic.

What lead to their easy integration into the Irish workforce was the third reason. The governments ’open door’ policy allowed the importation of EU8 workers without any restrictions or limitations. It was quite literally a ’help yourselves’ policy. Whereas other immigrants, Nigerians for example, had to apply for visa’s and re-entry visa’s anytime they’d like to return home for a holiday, the CEE workforce were free to come and go as they pleased without restriction.

Other factors which helped promote the influx include, word of mouth, a 100,000 strong Polish community which has fully integrated into Irish everyday life and the opportunity for CEE immigrants to enjoy a high standard of living with many opportunities to discover other European cities through quick and easy local airlines. As more and more Polish workers arrived and integrated into Irish life, word would spread back home and would also filter through other countries such as Lithuania. About 3 years after the initial influx of Polish workers, other nationalities started arriving in greater numbers. I now work in a newly acquired company which is made up of 50% CEE workers, all hailing in equal numbers from all of the above named countries. From many conversations with these workers, they all have common reasons for migrating to Ireland. The opportunity to earn a higher wage and save enough to return to their home countries with a sufficient nest-egg. The lifestyle played a major part in their choice of destination with a solid CEE base community now living and working in Dublin, many immigrants find it easy to settle into life over here.

So what does this mean for us Irish? Well in the eyes of our employers we have now become a highly educated but also highly overpaid workforce. While I have seen no restriction in the progression of immigrants up the corporate ladder, most have not been here long enough to have climbed very far so now is the ideal time for these foreign companies to relocate as wage ‘cut backs‘ in high positions are now possible. By chance, my company just happened to be building a new European base in Poland over the last 3 years which has just recently opened and a large portion of the Irish based work and Polish workforce have been redeployed to Krakow. The global recession has also timed itself perfectly to allow such a company to justify the move to its Irish hosts, who are among the worst hit by the credit crisis and housing market collapse. This is routine business strategy for a global player though and it was our turn to play our part as grateful hosts for ten or so years and to now accept our fate. Now I believe CEE states will play the very same role as we did and hopefully they will last longer than we did.

Read more on 'Return Ticket to Dublin Please'

Nine “Truths” about Central European Migrants or "Who they are and how they fare?"

by Lucia Kurekova

Not much attention has been given to unraveling the backgrounds of the EU8 migrants in Britain and Ireland, the two countries which attracted the most labor from the new accession states. While the magnitude of flows from EU8 and the disputes about the impact of these flows on the labor markets of host countries has generated much new research, the investigations remain to work with aggregate categories. This in essence means that most of the knowledge we have about who the Central European migrants are and how they fare at the labor markets exists in the aggregate form for all EU8 countries together. Hence, while we cannot really establish whether or how are the Czech migrants different from the Slovak migrants, here is what we know about them as a group from the transition economies so far:

1. A great majority of all EU8 migrants are between the age of 18 and 35.

2. Male migrants slightly prevail over female migrants.

3. Nearly two thirds of migrants, when registering, claim that they do not intend to stay (in the UK) longer than 3 months.

4. Most frequent sectors of employment for EU8 migrants (in the UK economy) are: administration; hospitality and catering; agriculture; manufacturing; and food/fish/meat processing.

5. EU8 migrants earn the least relative to other migrant groups (in the UK).

6. EU8 migrants are on average the most educated relative to other migrant groups (in the UK).

7. EU8 migrants have not been entering the host country economy in order to succumb to the welfare system.

8. The social and wage mobility of EU8 migrants seems to be so far very low.

9. The success of EU8 migrants is strongly defined by the knowledge of English language.

If you come from any of the EU8 countries or happen to be living in one of the host countries, these facts are perhaps not much of a surprise to you (if they are, please let me know). Nevertheless, all together - as they are and if we are to believe them - they seem to point to a number of failures. Among other things, they raise a series of questions about the quality of education in ex-transition economies, about the ability of home governments and markets to provide opportunities which would allow freshly educated teachers to teach in Presov (eastern Slovakia) rather than serve beer in Cardiff as well as about the ability of host governments and markets to use ‘well’ the human capital they have at hand. Still, the story is clearly more complicated and definitely more interesting once we look behind the dry numbers and facts. For that I recommend the post of my guest writer, Colm Kelly from Ireland.

Data based on:
Accession Monitoring Report. May 2004 – June 2008. A Joint Online Report by the Home Office, Department for Work and Pensions, HM Revenue & Customs and Communities and Local Government, June 2008.

Pollard, Naomi, Maria Latorre and Dhananjayan Sriskandarajah. “Floodgates or turnstiles? Post-enlargement migration flows to (and from) the UK.” Institute for Public Policy Research. April 2008.

Drinkwater, Stephen, John Eade and Michal Garapich. “Earnings nad Migration Strategies of Polish and Other Post-Enlargement Migrants to the UK”. Paper prepared for the presentation at the European Ecnomics and Finance Society Annual Conference, Sofia, May 31 – June 3, 2007.

Read more on Nine “Truths” about Central European Migrants or "Who they are and how they fare?"