Not so long ago, it seemed that the worst was over. More cautious commentators warned against an excessive optimism, but in the main world economies production was regaining its normal level, people have resumed consuming, unemployment has stopped rising. It was tempting to announce the end of crisis on  the basis of tangible data and, as a result, rush back to one’s own affairs according to business as usual scheme.  However, the fact that we are in the epicentre of crisis becomes more and more obvious. Stock markets fluctuate wildly, debt soars and overpowers even potent United States of America. And what about Europe?

source: Vectorportal.com

Reliable plan of reform?

More than a year has passed since Greek government revealed the true state of public economy, and European Union has not yet managed to come up with a reliable plan of reform of eurozone. European leaders keep pronouncing pathetic word so as to attest to their determination. When it becomes obvious that the situation is critical they start gathering at emergency  summits and deliberate late into the night over bailout packages in order to ward off the threat of insolvency of Greece and other EU members. But relief does not last long – very soon it becomes clear that the action that has been taken is insufficient. Volume of credits for Greece has just been risen up and restructuring of its debts has been declared. However, an opinion prevails that established  sums are too low and settlements that has been  reached are too vague.

With reference to what has been said above the thought arises that there has to be a fault in the  very nature of the European Union. A conviction that Europe, which was supposed to be the Promised Land, does not pass its exam in the moment of trial,  becomes more and more widespread. The experts prophesying the end of the united Europe and pointing to its allegedly faulty foundations that are supposed to portend its decline are not scarce. They deride the vision of common Europe without borders and identify symptoms of centrifugal tendencies with visible satisfaction. According to them, a slow decision-making process, not being able to keep pace with changes on financial markets, is an outcome of continual quarrels which, in their opinion,  are not to be avoided because of national egoisms. As for national egoisms, those ‘experts’ denounce that they do exist, no matter how many naïve dreamers, selfish technocrats or cynical politicians have denied their existence.

European Union still functions

However, the European Union operates in a normal way. Its institutions consequently carry out their tasks by taking part in every legislation process. It is worth considering that about 70 percent of national legislation is created in Brussels. Which does not mean that the laws legislated in Brussels are imposed on member countries, for every legislation act must be at least approved of by representatives of those countries. Accumulated legislation of the European Union – in other words acquis communautaire – comprises 80 thousand of pages. Those legal acts are entirely in force on the EU’s territory and are gradually adopted by more and more countries that aspire to EU membership. Almost 500 million of Europeans rely on those laws and profit from liberties that they guarantee on a daily basis.

This having been said, the EU’s disintegration is a completely unrealistic scenario, developed by those who do not understand premises that form the EU’s foundations; by those who miss the world that has disappeared a long time ago. If an EU member took a decision to withdraw from European Union it would not be able to return to its own legal solutions without putting itself at risk of isolation – political and, which is more serious, economic. A return to full sovereignty would merely seem to be real, but such a country in the moment of withdrawal from the EU would lose the possibility of effective creation of politics in various domains that require cooperation beyond borders; such domains are more and more numerous. European Union is a modern answer to those transnational challenges. It provides nation states with a chance to regain influence on the course of events that are uncontrollable by a single nation state because of its relatively modest size.

Euro zone perseveres

However, a more moderate analyst could be willing to make clear that what we are heading  for is not the disintegration of EU  but of the Euro Zone that has been constructed on the basis of false premises form the very beginning. Those premises were that monetary union could exist in an area that was so diversified in terms of economic structures, that was not included in the Common Agricultural Policy and that kept limiting the freedom of movement of  capital and workforce. In fact, it turned out that wrong thesis has been established -  those elements truly constitute main causes of the present crisis. But it seems that there is a growing awareness of the necessity to overcome these shortcomings.

Therapy for the crisis

Because of all this tumult we did not manage to notice that apart from defensive actions taken in order to counteract the symptoms of crisis a therapy that will have long-term effects has been started. What actions comprises this therapy? Firstly, increasing the scope of competence of Eurostat so as to make it able to supervise the transparency and the quality of national statistics. Secondly,  creating  the European Securities and Markets Authority, based on common requirements regarding for instance  the amount of banks’ ownership capital and using different derivative instruments. Thirdly, establishing The European Financial Stability Facility (EFSF) that used to serve the purpose of according credits to jeopardised Greece, and at present is becoming the germ of the European Monetary Fund, which function is to transfer money in order to rule out the possibility of losing financial liquidity by any member state. All these actions tackle in a reasonable way the previous neglects.

However, the existing asymmetry will not be eradicated until the achievement of Single European Market. This flagship project of the European integration at present does not fulfill what has been promised – a free movement of goods, services, capital and workforce. Countless barriers still persist at the borders of member states that inhibit the potential of competitiveness, economic growth and employment on the EU’s territory. The problem has been identified by the President of the European Commission José Manuel Barroso who announced that his second term will be marked by the consolidation of common market. However, this intent requires systematic harmonisation of law in many domains and will not be carried out immediately and without the help of every EU institutions that participate in legislative process.

The united Europe of national egoisms

Nevertheless, this process will proceed – as opposed to the common notion of the increasing national egoisms. It is often claimed that the new era, when Europe is not considered as a value worth struggling for or investing in, has just begun. According to this idea, every member of the European Union is focused on its own benefits. It all comes down to extorting from the European treasure as much money as possible. But it is not surprising. Politicians have always been putting the blame on the European Union in order to divert attention from their own mistakes and the lack of competency. They have always been apt to make use of the citizens’ narrow knowledge of the European institutions in order to blame their own failures on Brussels or other members who, in their opinion, have been disloyal and irresponsible. They have often tried to justify own protectionist actions by means of that.
Such tendencies have been observable since the very establishment of the European Union. Every attempt to intensify the collaboration has been accompanied by a number of patriotic skeptics searching for the indications of coup d’état. The alarming forecasts have not come true up until now and, when it comes to the current situation, they also seem to be far exaggerated. The suspiciousness about this odd, unobvious and recent EU have always been present among right-wingers – the supporters of traditionalism, conservatism and nationalism – as well as left-wingers – the supporters of antiglobalism, mercantilism and protectionism. The former share the deadly fear for sovereignty and identity. The latter are concerned about the loss of control over individuals trying to make use of own enterprise and creativity.

Also the media and various experts compete each other in inventing some nightmare scenarios. According to them, the political scene, which is more and more influenced by populist parties that often benefit from the anti-European Union attitudes, is becoming more radical. Breathtaking slogans and sinister newspaper titles amaze. It is hard to shock by calming down and suggesting more balanced account. It may be assumed without any doubt that political parties which disgust and brood over past evils have recently appeared on the political scene. The Party of Freedom led by Geert Wilders came third in last year’s parliamentary election in the Netherlands. In April 2011, the Finns Party won 19% of votes during the general election to the Eduskunta. The Danish People’s Party achieved the greatest score in 2007 – 13.9% of votes. It became then the third largest party in Folketinget. But it is hard to estimate now if their strong support will persist and how long it will influence the politics both in their countries and in whole EU. It is questionable because their political programs are often monothematic and the quality of their human resources seems doubtful. As a result, their influence on the majority of political branches is limited. They usually do not take part in creating the government and their social stigma gathers a vast number of negative constituents. Their support will decrease together with the agitation around the crisis.

Populism undoubtedly threatens modern democracy as it becomes a common method for doing politics, in which necessary actions are replaced with those causing the positive reactions of constituents. This alarming trend undoubtedly requires increased vigilance and deep reflection upon what democracy is and how to cultivate it. Although it is unlikely that the radical parties will govern the European political scene, there have been many at least controversial politicians who have not cared about law and order, such as Silvio Berlusconi and Viktor Orban, or who have openly opposed close European integration. For example, Vaclav Klaus who compared the EU to the Soviet Union.

No matter how shocking this information would be, the events that prove the increasing integration of the members of the European Union take place at the same time. It is essential to mention here current works on the European diplomatic service, which is the substitute for shared foreign politics one way or the other. The European Parliament develops. It has been proved during the appointment of the new diplomatic corps when the Parliament made use of its recently increased authority in order to have a substantial influence on the form of the service.

It is worth to mention here the establishment of the Spinelli Group that gathers, among others, the EU representatives from various political parties and various countries who declare that they will consider the EU matters before their countries’ matters when voting. It proves that the European identity is not fictional, but it constitutes the part of our awareness. It would contribute to the establishment of shared public zone – the important element of every democracy.

Decision-making processes in the EU must be continued

The accusations of the democratic deficit in the EU is nothing surprising. The feeling that Europe is too abstract, too remote and too self-concerned for its citizens has been present since ages. It is interesting that those who brought these accusations forward are usually against the reforms of the federal structures in the EU, which would improve representativeness and regulate the division of competencies between European institutions. They think, however, that the reforms of the supranational structures are equivalent to the reduction of the democratic legislative processes. This is one of the main reasons for the lack of radical steps towards the harmonization of the fiscal policy in the euro zone. In their opinion, the passing of budget is the inalienable right of every country.

At the same time, the impatience connected with the lack of rapid-decision making is constantly increasing. It is the paradox because, unlike authoritarian regimes, democratic institutions are not associated with rapid decision-making. When contrasted with the immediate changes on the markets, it may be assumed that politicians take sluggish actions. Nevertheless, we must come to understanding that every process in the EU takes some time because 27 countries have to be taken into consideration. The euro zone is the unprecedented experiment in the human history. The experiment does not resemble any other before. There is no clear cause-and-effect relationship and no magic formula for the problems.

The temptation to accelerate decision-making processes with reference to strong leadership appears during every crisis. It is beyond doubt that these processes require improvement. On the other hand, we should not expect any substantial improvement in that matter. Slow decision-making is, and always will be, the foundation of the united Europe because the European Union is based on the discourse of its members. That is the reason for the lack of the unanimous decision on the European bonds or the EU tax. But it also prevents Europe from returning to the conflicts characteristic of imperialistic policy.

Crisis has always been an opportunity

Current problems are serious and cannot be ignored. On the other hand, this is not the first crisis in the EU. And undoubtedly not the last one. Everyone must realize that the foundation of the European economies remains very strong. There are certain disproportions and we have been living in clover for too long. But the great majority of the European citizens live just like before the crisis. The quality of their lives has not decreased dramatically. The indebtedness of Greece has been growing at least since the 1980s. The economic bubble in Irish banking sector has been growing since ages.

Inexplicable boom in Spanish real estate market should have put everyone on guard a long time ago. The lack of the modernization of Italian economic structures is nearly chronic. Having taken all these issues into consideration, one may assume that the current crisis of the EU is anticipated. The economic problems did not come out of a clear blue sky, but they were suddenly noticed by people (markets). According to the rule of a self-fulfilling prophecy, it may drive the crisis, but it cannot be its cause.

The current problem of politicians is mainly the result of herding on financial markets, which may appear if the urgent information concerning the state of economy and public institutions has been ignored for too long. Nowadays, it has been proved once again that both expectations and emotions are the main sources of energy on financial markets. Although sudden markets’ reactions always take place with delay, they seem to be the clear sign that the defaults of politicians have been accumulating for too long and that structural reforms, which cannot be put off, are necessary. Having taken these ideas into account, Europe will overcome current crisis without any doubt. It will become stronger and more uniform. This uniformity will result from the reforms of the EU structures and the mere fact of the crisis, which will become the part of European awareness. It will help to solve another puzzle that will appear during another unavoidable crisis.

It is beyond any doubt that another crisis will appear. We should realize that because crisis may be the integral part of a globalized world based on interdependencies. According to this idea, it may even be permanent. We should probably become accustomed to crisis, value its therapeutic properties and realize how many opportunities it gives – opportunities to infuse new blood, modernize and make progress.

Translation: Aleksandra Kozłowska, Katarzyna Laprus

source: TaxBrackets.org

Euro zone isn’t about to fall apart

I don’t believe that the euro zone is about to fall apart. This would not be either in the interests of countries which might be considered candidates for leaving the zone nor for those intending to remain. Let us not forget that this is a political project and that politicians will dictate what kind of year the zone will have. And as long as the price of saving the common currency will be lower than the cost of eurozone disintegration, everything will be done to prevent collapse. As the costs of disintegration are a great unknown, I do not expect anyone in Europe to wish to go that route. Not even one country leaving. With the current level of tension, a country leaving the common currency zone – let’s say Greece – would trigger a domino effect. This certainly doesn’t mean that leaving the Eurozone will be become an impossibility. The problem of how to organise a controlled exit should be solved swiftly and adopted together with the New Fiscal Pact.

Poland in 2012

In Poland 2012 will be fraught with serious systemic challenges. The economy will slow, debt will not decrease and businesses be reluctant to invest and create jobs in a climate of such stark uncertainty. The structural changes announced by the government may not be enough to stem rising debt but they do represent critical additional fuel for the growth of the Polish economy in the future. Two such key changes are the raising of the retirement age and the reform of the state pension and sickness fund for farm workers (KRUS). Legislation to raise the pensionable age should be adopted during the first quarter of 2012 while the Council of Ministers should adopt the necessary legislative amendments in the matter of KRUS reform. There is no point in delaying, it is better to act preemptively than be at the mercy of the markets.

For investments to maintain their current momentum, it will be necessary to invest more in both the public and private sectors than in 2011 which will not be an easy thing with the drop in public spending. Because that would mean that the increase in the volume of investments made by private investors would have to considerably exceed 2011 figures. 2011 was marked by optimism at least until summer. At the moment many large domestic and foreign investment projects have been suspended which unfortunately does not bode well for investments in 2012. The lack of urgency is primarily caused by an uncertain future which is mainly in the hands of the leaders in the euro zone who didn’t handle the 2011 crisis particularly well.

“In 2012 net exports will have a positive effect on growth” In actual fact this sentence is a little misleading as the weak zloty will make firms reluctant to expand as they fear that there will be less demand for their products. The current weakening of the zloty is linked to the risk of recession in the euro zone. For Polish businesses which have to bear the entire risk of currency fluctuations, there is nothing worse than the exchange rate roller coaster. I would like the zloty to remain stable in 2012 with no wild swings either way. These are however pious wishes because the situation on the financial markets is far from being stable. It’s enough to recall that in the first quarter of this year half a billion’s worth of bonds denominated in euros will have to be rolled over.

Italy and IMF

I cannot see Italy’s problems being solved without IMF help. Let’s not delude ourselves – there is no money available for a firewall for Italy. Not coming from the ECB at any rate and neither will the German government agree to the further printing of euro bonds. Mario Monti is capable of requesting help from the IMF and the IMF is prepared to give conditional aid. And this should happen in 2012. Those people calling for massive bond purchases by the ECB are forgetting that in economics there are no shortcuts. Just as there is no such thing as perpetual motion, there is no easy and palatable solution for rescuing countries which are heavily in debt and sunk deep in recession.

And in the end I am quietly hoping that at least towards the end of the year we will see some green shoots in the euro zone which promise growth during the coming years. I hope, or rather I fear that this will be a year of stagnation which is in itself an optimistic outlook.

‘Polnische Wirtschaft’ – this cluster of words has never sounded flattering in German mouth. In the colloquial language of our western neighbours Polish economy was for a long time a symbol of flaws, poor quality, and weak organization. This phrase also served as a counterpoint to German economic system, which was based on innovation, the newest technologies, and perfect planning. Although “polnische Wirtschaft” is just a stereotype, there was a grain of truth in this saying during dozen or so years after the fall of the Berlin Wall. The truth is that Polish and German  economies have followed separate paths. Poland (a bit of coercion) has relied on foreign investments and inexpensive labour force. German on the other hand has based its economy on export and technological innovations. It would seem these two countries were almost worlds poles apart. With such divergent economic models, it was very difficult to reach agreement, for instance on the matter of common European budget. The financial crisis, and actually the process of overcoming it, has changed the trajectory of economic perspective for both countries, which – toutes proportions gardées – appeared to be surprisingly similar. It also seems that this union of economical fate may become the strongest bond for the joint Polish – German actions on the European stage.

V for Victory

In the early phase of the economic crisis a negative reaction of German economy turned out to be much stronger than in case of Poland. At the end of 2008 and in 2009 quarterly decreases of GDP in Germany were  deeper than the average in the eurozone, while Poland remained a green island. The main cause of such a deep decline of German economy was, above all, the decrease in the value of export (especially of industrial goods). Germany based its economy on export to a much larger extent than Poland. This downward trend in the German economy underwent a significant turn in 2010, when it appeared that German economy dealt with the crisis much better than other countries of the eurozone, and in the second half of the year reached GDP comparable with Polish one (almost 4% in the 3rd and 4th quarter, year on year). The whole 2010 ended for German economy with 3.6% growth of GDP – the highest since 1989. According to the European Commission an estimate growth of GDP for Poland in 2010 reached 3.5%.

The anti-crisis actions taken by the government in Berlin were one of the main reasons for the upturn in the German economy. The condition of the automotive sector of industry visibly improved owing to the introduction of bonuses for people who buy new cars. The value of industrial production in this sector in 2010 increased by almost one-quarter. Regulations, which enabled companies to shorten working time, curbed the potential of raising unemployment rate, and in consequence prevented consumers from cutting on their expenses for fear of loosing their jobs. In 2010 a real growth in consumer spending in Germany reached 0.5%, and according to the prognosis of Deutche Bank in 2011 this growth can reach the level of 1.25%. German companies have managed to withdraw almost entirely from regulations introduced due the crisis. At the end of 2010 shorter working time applied to almost 200,000 workers, that is almost eight times less than in 2009. A stable domestic consumption of our western neighbour was one of the basic reasons for Poland’s economic growth during crisis. Germany is the biggest recipient of the Polish export.

According to the prognosis of the European Commission the growth of GDP in Germany in 2011 would be lower than in Poland (2.2% and 3.9% respectively). This slowdown in German economy is, above all, connected with expiration of some of the specific factors which boosted the economic growth in 2010. These were the impact of changes in stocks, and the delay in investment for 2009 which were carried out in 2010 instead. Nonetheless, the growth of German GDP will be still much higher than the growth of GDP in the eurozone (1.5% according to the prognosis of the European Commission).

In the last few years situation on job markets of Poland and Germany also became more similar. In May 2004, when Poland joined the European Union, unemployment rate in our country was on the level of 20% and was therefore almost two times higher than in Germany. It was one of the reasons why during accession negotiations Germany demanded relatively long (7 years) transitional period before opening its job market for workers from Poland. According to Eurostat’s data unemployment rate in November 2010 in Germany and in Poland was on a level of 6.1% and 9.4% respectively. This statistics illustrates how much smaller is the distance between both countries with respect to the situation on the job market. Poland, ipso facto, rose from the position of one of the countries at the tail-end of EU characterized by one of the highest levels of unemployment rate, to the position of an average country – in the whole EU the unemployment level reaches 9.5%.

Above-mentioned analysis is not aimed at proving obviously untrue thesis that Polish and German economy and hence their priorities in economic policy are practically the same. German GDP per capita and after taking into account differences in purchasing power was in 2009 still almost two times higher than in Poland (it is, however, worth noticing that 10 years earlier German GDP was two and a half times higher from Polish GDP). There is also a difference in the structure of both economies – German one is based to a larger extent on branches of industry and services which create higher value added and use modern technologies. This difference is reflected in an enormous difference in expenditures on research and development which, according to Eurostat’s data, amounted only 0.6% of Polish GDP in 2009, whereas Germans spent on research end development almost 2.8% of their GDP.

Polish and German economies are not identical but undoubtedly came closer in the last few years. Ties between both economies are strong partially because of the geographical proximity of both countries. Export to Germany constituted 26% of Polish export in 2009, which made our western neighbour our biggest trade partner. It is also worth mentioning that a lot of exported products contained components imported from Germany. Therefore we can discuss not only about economic situation in both countries becoming similar, but also about growing interdependence of their economies, bearing in mind that the impact of German economy on Polish one is obviously much stronger than the other way round. This correlation between Poland and Germany can be a foundation on which common economic interests and political vision for Europe can be built.

Essential pact of the disciplined.

In the context of the above-mentioned similarities and differences between the economies of both countries, in my humble opinion, Poland and Germany should work together on European forum especially in case of one crucial matter. They should focus on real and effective functioning of the Stability and Growth Pact (SGP), although probably in a version adjusted to the changed post-crisis reality, and during a period which will give Member States a chance to put down a fire which is spreading in public finances. SGP was established by Member States and anchored in the Amsterdam Treaty as an integral element of the third stage of establishing the Economic and Monetary Union (EMU), and as a result adopting common currency.

SGP obliged the Member States to maintain the discipline of public finances in such way that an annual budget deficit was no higher than 3% of GDP. In the case that the deficit of a given country breaches this level, Council of the European Union starts so called Excessive Deficit Procedure to issue recommendations to the Member State concerned to take appropriate steps in order to assure the stability of public finances. In the event of not sufficient progress in realization of these recommendations the Council can decide about imposing financial sanctions on the given Member. This system was passed on the verge of a full currency integration in order to assure stability of the common currency and to eliminate the possibility that the Member States which run balanced budgetary policy will have to suffer the consequences of excessive debt of some of the other Members. Germany, which always attached great significance to the stability of its currency, especially solicited enforcement of this specific emergency break.

In theory SGP was supposed to prevent the situation with which we are dealing currently. Some of the Member States can hardly gain resources on the free market to cover their  growing debts. In order to save them from bankruptcy the European Union must create a special aid found. The Excessive Deficit Procedure was enforced in the vast majority of Member States (Germany and France therein) although financial sanctions were never imposed on any of those countries. Therefore SGP did not become a real mechanism of preventing attempts of the Member States to giving impetus to excessive debt – some of those countries breached the deficit level of 3% of GDP even in times of prosperous economy. This lack of obedience brought five of the European countries’ budget deficits to a two-digit figure in 2009 (Ireland, Great Britain, Greece, Spain, and Latvia). Germany presents itself in this context on the top of Europe – although in 2010 its budget deficit exceeded 3% and was on the level of 3.7%, in 2011 it should fall to the level of 2.7% according to predictions of the European Commission. The prognosis of the Commission shows that Poland is in a slightly worse situation, because in 2011 its budget deficit should still exceed 6%. Nevertheless, it is worth mentioning that Poland is at the same time characterised by the level of national debt lower than in Germany and other EU Members.

Relatively good situation in the stability of the system of public finances of Poland and Germany is obviously not the only argument for more intensive actions of both countries for the enforcement of an effective system of sanctions which would prevent excessive debt of the Member States. In case of Germany these arguments are obvious. It is Germany, as the biggest and at present the strongest economy of EU, that to the largest extent will have to incur the costs of the rescue mechanisms for the countries which will not be able to service their growing deficit through selling more bonds on the free market. In the last few months Portugal, which was considered as the next candidate for the help from EU and IMF, conducted a successful action of its bonds. However, it has to be borne in mind that this success was possible thanks to clear declarations from the European Commission, and also from Germany (but less directly) that they will protect the stability of the eurozone regardless of costs. Current successes of the countries from the so called PIIGS group in raising external capital mean that problems are only postponed. According to calculations of Deutsche Bank, bonus for the risk of buying Greek bonds exceeded in 2010 even 900 basis points (the bonus is calculated as the difference between interest rates of Greek and German bonds). One day Greece and other countries with a high deficit rate will have to repay this extremely expensive debt, and the question arises if the European Commission will have to help them again. Germany will not have to give permission for saving the countries in debt, but action like that may spell the domino of insolvency of other Member States, the slump of their economies, and the collapse of the eurozone. This scenario is not only highly unrealistic politically, but would also strike German economy which is dependent on export, and would reduce financial markets’ confidence in it. From the German point of view it is essential to lobby for the EU regulations which would force PIIGS countries to heal their financial situation and would avert the risk of generating other rescue mechanisms.

Poland hit by ricochet

Why Poland, which is not in the eurozone, should opt for such mechanism? Because of two basic reasons. First of all, alarming news from the eurozone induce currency investors to move to safe harbours, such as Swiss francs. During last 12 months (from February 2010 to January 2011) Swiss franc gained 14% against euro. In a consequence Swiss franc gained also against zloty, which as a currency of a developing country is viewed as more risky investment. In the last 12 months Swiss franc gained 12% against zloty, however, in a three-year period euro lost against Swiss franc much less than zloty. This tendency is much less worrying for an average German than for Pole – for a winter skiing trip they can always choose Zell am See instead of St. Moritz and at the same time be glad with growing worth of savings amassed in Swiss currency.  Unfortunately Poles have more loans than savings in this currency and every month painfully feel its strengthening. This pain will be much stronger when the Swiss will finally raise their interest rates, which now are on an all-time low level. Polish families, which will contend with higher instalments of their mortgages, are not the only ones who should worry about further problems of Greece and Ireland. It also a trouble for Polish country which has to deal with handling the public debt.

Financial markets still see Poland in a group of those less safe economies and demand more for buying State Treasury’s debt than for German or French bonds. When PIIGS countries get into further troubles, in fear of repetition of a similar scenario in Poland, the risk bonus for Polish bonds can also grow. Lack of stability and discipline in the eurozone threatens the household budgets of Poles as well as finances of the entire state.

Currently Poland and Germany have strong joint economic foundation in order to work on a new system that would guarantee stability of systems of public finances in Europe. This situation is quite new, because up to this time Germany, as the biggest net payer, and Poland, as the biggest beneficiary of EU aid, had opposing economic interests concerning many matters. The shape of the successor of the Stability and Growth Pact, which would really extort maintaining long-term fiscal discipline by all Member States, could be a great, joint, Polish-German contribution in the development of the European integration. Although, of course, before we begin to create this great vision, we should primarily take care of one thing – a good example in the field of sustainability of public finances.

Translation: Magdalena Goździk

On the other hand, effective political union has always placed a solid basis for monetary unification. This happened in Switzerland, where the constitution, adopted in 1848, gave the exclusive right to carry out monetary emission to the federal government so that twelve Swiss franc denominations replaced several thousand types of coins that were in circulation so far.
Several years later Neapolitan ducats, Florentine florins and various local versions of lira were replaced by the united Italian currency, which was in circulation until the end of the twentieth century.
In Germany monetary union operation was performed twice. In Wilhelmine Reich no one regretted the disappearance of the southern German gulden, the Bremen thaler and the Hamburg mark, despite the significant economic differences between different parts of the united state. In 1990 the German monetary union, very dubious from an economic point of view because of joining two economic worlds, proved to be stable thanks the political determination.
Even in the weak – and surely economically not integrated - interwar Poland the reasonableness of the common currency for Galicia, Congress, Borderlands, Silesia and Great Poland was not challenged. So it will be also this time, if Europe decides to integrate more, not less, euro will survive despite all the today’s difficulties.

The reason for this is a long- term application of a creative attitude towards bookkeeping and statistics in Greece. Financial difficulties are the result of too loose fiscal policy and structural problems. The economy had been losing its competitiveness for many years, which was accompanied by a big remunerations increase and a loss in efficiency. That is why the evaluation of Greek’s economy condition does not entirely correspond to reality. In accordance with a generally prevailing opinion it is a country with a carefree financial policy. Moreover, the Greek public debt was rapidly increasing up to  130 %, due to huge budget deficit, which in 2009 reached 12,7 GDP (it has exceeded the limit allowed by the European Commission more than four times). Greece lost investors’ trust. Profitability of the bonds issued by Greek banks became lower than the government stocks.

The unit costs of work, dynamically growing in the recent years, favoured the development of a grey area, which is estimated to have exceeded in Greece 30% GDP.

Many economists claim that the situation in Greece would be better if the country was not a participant of the Eurozone. According to them, if the Greek had their national currency (drachma), they would resolve the crisis much more quickly. It cannot be concealed that the Greek did not admit to the amount of their deficit when applying for the introduction of Euro.

What is more, the Greek had been using for many years the so- called “swaps” (periodic pledging currency transactions), which allowed for a theoretical decrease in the country’s debt level. It was especially helpful when reducing on paper the deficit to the level below 3% GDP for the introduction of Euro. From that moment Greece, using credit reliability, was constantly overdrawn. For years Greece had been giving false statistics as well as not keeping promises concerning reforms.

One of the reasons of the Greek crisis was also the fact that bribes were widespread in all areas of life.

The Greek crisis is for the European politicians the most difficult exam from the introduction of a common currency. There are being revealed differences in views and interests. One of the possible effects of the crisis spreading to other countries could be a collapse of Euro, while main investors of maintaining prestige of the currency were Germany and France

Everything is brought to the standstill

Year 2010 began with a strike of Greek farmers. They mainly blocked roads in Greece, demanding higher farm subsidies. From the beginning of 2010 there were also protests of custom officers, finance ministry officials, taxi drivers. In February custom officers and tax collectors, who are to be responsible for fighting with a grey area, began a two-day strike as well.

On the 9^th of February 2010 the private sector workers began a general strike. Flights were cancelled, many schools were closed, the public transport did not work. Hospitals worked only in the emergency system. It was the answer to wages freeze, taxes increase and pension reform.

On the 24^th of February 2010 two biggest Greek union headquarters organized a 24-hour general strike. Air transport, maritime and railways were brought to a standstill. There were strikes of journalists, teachers, bank employees, museum employees and health service. Hospitals were taking patients only in life- threatening situations.

On the 25^th of February 2010 the Greek for the second time announced a general strike. Public transport and the underground were brought to a standstill. Ferry services and railways were suspended. Airports in Athens and on the islands, as well as tax offices, were closed. Classes in the universities and lessons at schools were not held. Neither public administration nor health service functioned. Newspapers were not published, and the protestants blocked the stock exchange. It was a response to the wage freeze in the public sector. In the course of demonstration the police officers answered with gas for an attack of a juvenile group throwing stones and plastic bottles in their direction. There were several injured. In street protests in Thessaloniki participated 7 thousand people, in Athens around 30 thousand.

On the 1^st of March 2010 25 thousand people demonstrated in Athens against government actions, aiming at the introduction of savings, which would enable rescuing the Greek economy. The march had a peaceful nature, but despite this there happened clashes with police. Tear gas was used and police arrested 3 persons smashing shop windows. Air space over Greece was closed, trains and ferries stopped working and monuments remained closed for the visitors. Public schools, ministries and offices were closed. Only the indispensable staff worked in hospitals.

On the 5^th of March 2010 in front the parliament building in Athens gathered few thousands of people to protest against savings. The police used tear gas and deafening grenades to disperse people throwing stones in their direction. They arrested five demonstrators; seven policemen got injured.

On the 10^th of March 2010 more than 20 thousand demonstrators passed through Athens. A general strike organized by two biggest trade unions led the country to almost total paralysis. A 24- hour general strike was organized by the  trade groups representing in total 2,5 million workers. There were clashes with police, tear gas was used. The Greeks were strongly opposed to cuts, which are to save their public finance from crash. Bus, trolleybus, tram and underground drivers, as well as doctors, teachers, some policemen and journalists were protesting, which is the reason for not broadcasting the news for the whole day. There was a shortage of trains and ferries; planes were closed in  hangars. Only the necessary staff was on duty in hospitals; airports, schools, offices and big companies of the public sector around the country were closed. Banks also worked in a limited scope. Groups of anarchists were throwing bottles with petrol, smashing shop windows and destroying cars, setting fire to rubbish bins and throwing in police pieces of marble torn out from the stairs of Bank of Greece. Manifestations of many thousands took place in the remaining agglomerations, too, especially in Thessaloniki.

On the 18^th of March 2010 the strikers were accompanied by taxi drivers, petrol stations owners and radio workers. Doctors’ strike began on the 17^th of March.

In April 2010 workers, taxi drivers and teachers went on strike. Also in April 2010 in Athens, during the biggest since 3 years anti- government riots, died 3 people.

Forced savings

In the end of January there were plans in Greece to reduce the expenses for partial wage freeze in the public sector, reduction of the social benefits, closing 1/3 of travel agencies abroad and defense. Country’s income was supposed to increase among others thanks to curbing tax abuse, imposing additional taxes on alcohol and cigarettes. Cuts were thought to eliminate most of the concessions, social spending and tax reform. Next they were thought to be frozen in the public sector, so that by 2012 Greece began to obey the European cohesion criterion.

One of the first decisions of the new government was to establish in the early February of last year a statistical agency, completely independent from the government. It was indispensible to restore credibility of the Greek statistical data and the whole Greek economy. Government accepted the programme of public finance consolidation including cuts in the deficit by 10 percentage points over 3 years. The programme consisted of 3 elements: an increase on collecting taxes, cuts in expenditures and a selective taxe raise, especially among the rich.

A plan for public finances, accepted by the European Commission  in the beginning of last year’s February, included wages freezing, a higher excise on petrol, raising retirement age to 67 years, increasing expenses in the public sector and the price rise for petrol. The plan included also cutting budgets of all ministries by 1/10, freezing or lowering public sector workers’ pays (by 4-6 %), stop employing new administration workers. Moreover, the Ministry of Finance promised to prosecute those, who evade paying taxes. There was also taken a decision to assess the income of luxury houses owners on the basis of their fixed property. Thanks to these actions the budget deficit is thought to be reduced to 2.8% in 2012.

On the 3^rd of February 2010 the plans of Greek government had been approved by Brussels. For the first time budget of the European Union’s participant was under a close watch of the European Commission. Such a solution is not provided for Lisbon Treaty. Greece committed itself to submit regular reports from the progress in savings programme. The first was filed on the 16^th of March 2010, next one in May 2010 and then it should be done every 3 months. The European Commission also launched an inquiry against Greece for submitting false statistical reports to Brussels.

In the early last year’s March the Greek Parliament passed savings programme, which assumed a reduction by 30% the salaries fund for the public sector workers, including deleting bonuses, freezing public pensions and VAT increase by 2 percentage points – to 21%, as well as tax increase on petrol, tobacco and alcohol . The Greek are to pay a luxury tax from 10 to 30%. The control of revenue office is going to exacerbate.

On the 15^th of April 2010 had been passed a new law providing for a reduced possibility of dealing cash transactions by the entrepreneurs. Moreover, yachts’, private planes’, swimming pools’ and other luxury goods’ owners are going to be obliged to submit a declaration about their financial status and reveal the source of their income. The Eastern Orthodox Church’s fixed properties were taxed. The act abolished tax concessions for taxi drivers, engineers, doctors and sportsmen. A regulation which obliged customers to keep receipts turned out to be controversial. It is thought to help in the fight with a grey area and bolster the finances. According to the economists new taxes are to increase budget revenues by 5-10 billion Euros per year.

A selfless assistance

A substantial part of Greek national debt is in the hands of banks from the biggest European Union’s countries (70%). The biggest part in the Greek debt have France, Switzerland and Germany (according to Bank for International Settlements: France – 75,5 billion dollars; Switzerland – 64 billion dollars; Germany – 43,2 billion dollars).

A considerable part of German banks in Italy, Spain, Portugal and Greece played a significant role in impelling the German government to  actions supporting Greece. German government cares about Euro and European Union’s stability, they also want to protect the native banks against another losses.

In last year’s February Nicolas Sarkozy introduced an outline of a rescue package. Its authors were France and Germany. It included a commitment to settle the costs of Greek debt and borrow money from member countries. In return, Athens committed itself to rigorous conservation and financial regime.

In the spring of 2010 Greece practically could not borrow money on the international markets, because Greek budget would not bear such a high interest rate that was expected by the potential investors on the account of  the risk of bankruptcy. The financial aid plan from IMF and the Euro area countries is spread out on preferential conditions over 3 years and is worth 110 billion Euros, so as to remove the threat of insolvency.

On the 11^th of April 2010 the finance ministers of the Euro area established a package aid for the Greek government. It is worth 30 billion Euros. The credit was granted for a year and is going to be paid on the basis of bilateral agreements with EU’s countries. The amount of their contribution will depend on the share in the capitol of the European Central Bank, which will deal with paying out this money. 3-year loans will be charged interest at about 5%. It means that the interest will be lower than the market. The International Monetary Fund will also help Greece and will additionally make 15 billion Euros available. Greece will be allowed to use this support only if it does not have any other possibility to amass capital. The government in Berlin agreed to grant the Greek a loan on favourable conditions. The Greek debt on the markets had been charged interest at more than 8 %.

On the 7^th of May 2010 the heads of countries and governments of Euro area commenced in Brussels a meeting devoted to the crisis in Greece. During this gathering they accepted a plan for financial aid for Greece which amounts to 110 billion Euros. It is spread out on preferential conditions over 3 years to reduce a threat of bankruptcy. In return, Greece committed itself to drastic budget cuts.

On the 17^th of May 2010 Greece received the first part of loan form Euroland countries and the International Monetary Fund. The sum of 14,5 billion Euros was transferred by the European Commission through the European Central Bank. This sum will be spent on the most urgent needs, among others on buyout of the government bonds.

On the 14^th of July 2010 Greece found buyers for securities for billion six hundred million Euros. In mid- November 2010 the problems returned. Due to the increasing national debt, which is now 140% GDP,  there is a threat that Greece will loose part of the international aid.

Domino effect

In the monetary union a bankruptcy of one member amounts to problems for the rest; in the worst case it leads to disintegration of the Euro area, and in the best to the necessity to help the needy. If Greece had not been saved thanks to the help of the others, it would threaten the domino effect, because countries such as Italy, Spain or Portugal could follow in Greece’s footsteps. Those states had been called by London bankers PIGS (Portugal, Italy, Greece. Spain). Their higher indebtedness and the way of dealing with the debt could threaten stability of the whole Euro area. Those countries are situated in southern Europe and suffer from a chronic lack of fiscal discipline, high unemployment and low competitiveness, which means smaller ability of those economies to achieve tax revenues. They wrestle with a quick increase of fiscal deficit and a downturn in the economy. They are responsible for 15% of GDP in the Euro area. Last year’s deficits in Spain and Portugal reached 9,3 and 11,4% GDP, respectively.

Greece’s catastrophe could provoke a slump in demand of the investors for bonds of Italy, Spain, Portugal and Greece. Cut off from the external funding sources and the possibility of the debt service, they would be condemned for insolvency, which would lead to the collapse of the Euro area. The bankruptcy of whichever of those countries would have serious consequences for banks of the remaining Euroland members, which earlier were buying high- interest Treasury securities.

Island’s selling out?

In last year’s March the German politicians and media advised the Greek to put some of their islands out for sale, saving themselves from bankruptcy. According to them the Greek budget could be recuperated by a mass sale of deserted islands of the Aegean Sea. Only 87 out of 3054 islands are inhabited. Many of them are for years private properties, and there is no problem to purchase them.

Translation: Anna Brzezińska  kamelia_88@wp.pl

Let us start with the basics of economy and common sense. Inclination to saving up in each culture to a certain extent depends on the income and wealth. The amount of income and wealth corresponds to the amount of savings. Inclination to saving up in poor countries was considered a virtue due to the need of investing (and, until the 1820s, all the countries were poor compared to nowadays). It was particularly respected in Calvinism and quasi-religion Confucianism. The fundamental law of psychology by J.M. Keynes and W. Rostow presents the rising inclination to saving up as a function of per capita income. The history of economy proves that savings of an average English (European?) did not exceed 5-10% of their income before the Industrial Revolution, in the 18^th century. With economic development and affluence, the savings rate reached about 20% of the GDP. However, it rarely exceeded 25% of the GDP.

On the other hand, relatively poor countries, with less inclination to save up, should be a magnet for capital from other, richer countries. Return on the invested capital or profitability of investments should be higher in these countries than in countries that are abundant in capital. The latter ones have exhausted their chance of lucrative investments to a large extent. This observation is consistent with the common law of economy about decreasing effectiveness of production factors. Extra 100 dollars invested e.g. in the USA could bring less profit than the same 100 dollars invested in Kazakhstan or China. In other words, capital should flow from the developed countries to developing ones, ceteris paribus.

Indeed, economic practices were concordant with the theory of economics during the first phase of globalization, that is from the 2^nd half of the 19^th century till the outbreak of the First World War. British capital at that point flooded the world. In 1913, current account surplus in Great Britain amounted to 9% of the GDP. In other words, export and income from transfers, dividends and interest from capital that was invested abroad significantly exceeded import and transferred income from capital invested in Great Britain. As much as 2/3 of English capital was invested outside the British Isles during the period between 1865 and 1914. England suffered from so called home bias only to a little extent. It could be translated as a “preference for the mother country”. British savings surplus was invested abroad. 48% of recorded bonds in London were foreign bonds. It meant that almost half of private investments performed by the English were invested outside the British Isles, while e.g. Nigerian and other colonial countries’ bonds were not secured against the risk of insolvency. The unknown was only how long the British Empire would last.

In fact, little has changed since those days. Some relatively poor developing or “emerging” countries, especially China, are more inclined to save up than many developed and rich countries of the West. What is more, export savings surplus is exported to richer countries, mainly to the USA. People’s Republic of China denied the fundamental law of psychology by Keynes and Rostow, according to which rising inclination to save up is a function of income per capita.

Chart 1: Gross national savings rate (S), gross investments (I), current account balance (CAB) and state budget balance (BudBal) in China and the USA in 2008 and 2009 (% of the GDP)

Source: IMF Executive Board Concludes 2009 Article IV Consultation with the People’s Republic of China; IMF Executive Board Concludes 2009 Article IV Consultation with the United States of America.

The above chart shows huge differences between gross national savings rate (S), gross state investments (I), current account balances (CAB) and budget balances (BudBal) between the PRC and the USA. What is interesting, while the relation of investment shares in the GDP between China and the USA is of 3:1, the relation of gross savings shares in the GDP is of about 5:1. It comes from the fact that savings of the Chinese that are not invested in their economics are exported to other countries, mainly developed ones, like the USA. Big difference in the current account balance between these countries proves this. Worth noticing are also high deficits of the public sector in the USA in the years of the world financial and economic crisis (nota bene caused by a low level of separation between the American financial system and the current internal policy). Even bigger differences between China and the USA took place in terms of inclination to save up in households. Since 2000, Chinese households saved up about 25% of disposable income, while American households (according to OECD) 1,7% (and 0,4% in 2005). Keynes as well as Marshall and other classics would look at the above chart in disbelief, because they would not accept the fact that the poor may finance the rich.

Let us think about factors that could be responsible for such inclination to save up and export of capital [demonstrated by high (almost 10% of the GDP) current account surplus of the foreign trade] among the Chinese. After all, the trade direction is from relatively poor countries to richer ones. The Chinese economic successes are commonly known and often spectacular (as extremely high and continuous rate of economic growth at the level of 9% a year between 1978 and 2005 and as much as 11,7% p.a. in the three pre-crisis years 2005-2007 – IMF data). However, Chinese economy shows many weaknesses that are rarely exposed. The relative weaknesses of their economy derive from two main maladies:

1. Common uncertainty of the Chinese resulting from:
   1. historical burdens of the Mao  epoch (and earlier),
   2. certain aspects of demographic and social policy after the death of Mao:
   3. financial implications of the “one child” policy,
   4. minimal range of social insurances,
      1. underdeveloped law and order system,
      2. relative uncertainty of private ownership rights,
      3. still significant politization of life of the PRC residents.
2. Still relatively low efficiency of production factors – physical and human capital:
   1. backwardness of financial system,
   2. domination of the extensive model of economic growth,
   3. high level of resource wasting and corruption.

Post-Mao trauma

Social and economic, sometimes catastrophic, experiments of 30-year epoch of Mao Tse Tung overshadow its few successes (e.g. increase of literacy, new railways or decentralization of decision-making). These experiments left high dose of uncertainty in everyday life, which still exists in the older generation. Of course, this uncertainty must lead to attempts of securing oneself against the potential arbitrariness of the authorities. Increased inclination to saving up in households is one of the methods to fight this uncertainty.

Let us remind some known acts of the Mao regime:

• 1952: the first “patriotic” campaign of denunciation: 3 mln victims;
• 1957: arrest of 30 000 Chinese who, encouraged to be honest, expressed their views and fears during the so called campaign of 1000 flowers;
• 1958: people’s communes based on shared farming and the economic experiment of the Great Leap Forward: 150 mln of the Chinese search for iron ore and produce iron by means of outwork – they meet imposed requirements, e.g. by melting tools, etc.;
• 1959-61: hunger and death of 30 mln people;
• 1966: famous cultural revolution that turned the Chinese tradition upside down: the second “cultural” campaign of denunciation;
• 1966-78: closing down of vocational schools, restrictions in foreign trade, almost complete lack of access to the world’s technology; as a result, the GDP per capita in 1978 did not exceed 210 dollars.

Popularization of social insurances for the workers of state-owned companies belongs to rather controversial benefits in the Mao epoch. In socialist countries, state-owned companies enjoyed soft budget restrictions hence avoiding financial responsibility. The so called rate of income replacement with social allowances amounted to 75-80%. By the end of the Mao epoch, the gross national savings rate was rather moderate – about 20% of the GDP. According to the old Chinese principle of “saving the face”, Mao Tse Tung is still considered one of the great leaders of the nation, who was 70 percent right despite several mistakes”.

Implications of the demographic policy by Deng Tsiao Ping and his successors

Since 1978, China introduced radical changes in the demographic policy, introducing the one child policy. The one child policy and deeply rooted Confucian ideology of respect and care towards parents certainly contributed to the increased inclination to saving up in households.

Extra increase in the savings rate became one of the unpredictable side effects of the “only child policy”. Deeply rooted preference for male descendants (due to the high cost of dowry for females) caused evident “losses” in female babies. This resulted in the excess of young men compared to the number of women ready to marry. The Chinese who wanted to enter into marriage multiplied their property by way of immoderate saving, e.g. to buy a flat. However, it could not contribute to a significant Chinese savings increase. It is estimated that about half of the increase in the household savings rate in the years 1990-2007 can be ascribed to the new demographic policy of China.

Social “regress”

Changes in the social policy after 1978 are not brought into people’s awareness. This is probably the basic reason for the extremely high savings rate in China (almost 59% of the GDP in 2008). China introduced (contra)revolutionary changes in social welfare system after Mao Tse Tung had left. They concentrated on the state infrastructure development at the expense social transfers. Currently, only about 45-55% of city dwellers and only about 10-20% of country dwellers (according to: Nicholas Lard, Policy brief, October 2006) have the right to free welfare services. Moreover, mere 3% of workers who migrate from the country to the cities in search of work have these rights. Unemployment insurance refers to about 14% of the workforce. Well-developed system of internal passports serves as an effective instrument of the PRC citizens classification according to rights they possess. It is estimated that expenditure on social welfare constituted only 3,5% of the China GDP in 2005.

Social welfare system

Since the death of Mao Tse Tung, the healthcare sector noted radical withdrawal of state subventions. In 1977, health insurance embraced 90% of both city and country dwellers. Private expenses for treatments amounted to about 20% of total medical expenditure. 30 years later, social system of healthcare embraced about 50% of city dwellers and only 12% of country dwellers and private expenses for healthcare reached about 55% of total expenditure in the sector.

The World Health Organization (WHO) has recently ranked China on the 144. place in the world in terms of the range and effectiveness of public healthcare and on the 188. place in terms of objectivity and fairness of healthcare system. Any Chinese who has a sense of self-respect and is outside the range of social insurances keeps a significant part of their income “for a rainy day”.

Pension entitlements

With an ageing society, the main sector of public insurances is the sector of public pension benefits. According to general social insurance proportions, pension entitlements refer to only 45% of city dwellers and 12% of country dwellers. The average for the whole China is 17% to 25% of the population, according to estimations.

In the years 1991-97, the urban pension system was based on two pillars:

1. Pillar I offers low (20%) local income replacement rate (!), 17% financed by the employer and provided after mere 15 years of work for the state.
2. Pillar II financed with individual bills which obtain 3% from the employer and 8% from the employed. They offer 38,5% replacement rate. The benefits are accessible to those who worked for 35 years.

This system is able to provide benefits for only 11 years of the pensionable age (i.e. from the 60. year for men, according to law). However, having entered the pensionable age, an average Chinese lives 20 years in the case of men and 27 in the case of women. What is now and especially what is to come in terms of demography reduces the effectiveness and solvency of the Chinese pension system. One of the reasons is the one child policy. The current ratio of working people to pensioners is 3:1, and it is going to be 1:1 in 2035. It is estimated that all citizens of China will be entitled to pension rights at the earliest about 2155, that is in 150 years’ time, given the current pace of state pension insurance extension. Of course, it will significantly affect estimations about the savings rate in Chinese households in future.

Education

Education has enjoyed great respect in the Chinese society for a long time. What is more, it has gained the often deserved reputation for impartiality. It is worth mentioning that studying in Chinese schools is different from the German ones, where children end lessons at 1 p.m. Chinese students spend at school 14 hours, from 7.40 a.m. till 10 p.m.! Education de facto is paid to a large extent despite an opposite regulation in the Chinese constitution. Expenses on state education at all levels make up mere 2% of the GDP. As a result, parents pay even for primary education for their children.

No independence and rule of law tradition, limited private property rights

The so called third power, the judiciary, has been executive-independent neither in the tradition of Imperial China nor now. It is weak and extremely politicized. Lawfulness does not stand firm in the political system of China. More important is the position occupied by a person or a company in the formal or informal hierarchy as well as relations and contacts they possess (quanxi). In 2002, the World Bank ranked China on the 94. place in terms of “lawfulness” among 199 classified countries.

Private property rights are subject to similar, though changing, factors. Having suffered confiscations, communes and the communism of Mao Tse Tung, the Chinese obtained limited rights of land, flat and capital lease rather than ownership. They have the right to flat lease for 70 years and land lease for 30 years, which is then automatically prolonged. It is worth mentioning that, according to Lee John, lack of full land property rights is a feature of a docile society.

Rights in terms of capital are limited in the PRC. In 2003, only 13,3% out of 180 000 companies with 0,6 mln dollars turnover had (according to OECD) the undisputed status of private enterprises. Only 40 out of 1500 companies (2,7%) registered at the Shanghai stock market had the status of a private entity. The Chinese state has the majority of shares in most major companies registered at this stock market (31 out of 35). The state owns about half of the registered companies, but it probably controls about 80%. In concordance with tradition, party cells (the CPC) are present in every major company.

China does not possess developed anti-monopoly law. State-owned companies enjoy privileged access to capital and credits. They obtain about 70% of China’s capital, though they produce only 30% of national income. It is notable that these proportions are almost exactly opposite to Taiwan. It is estimated that only a small proportion (2,5%) of short-term credit is given to private domestic companies. According to the theory of economy and tradition, production factors’ effectiveness in major state-owned or state-controlled companies is low. It amounts to about half of effectiveness in private companies. Property confidence index published by the Heritage Foundation is 20 points for China (same as Bangladesh and Uzbekistan), but for Taiwan and South Korea – 70 points. The difference is substantial. The high savings rate is of course essential to maintain the high pace of production increase in state-owned companies that have relatively low factors’ effectiveness. Consequently, high capital investments can be financed to compensate low factors’ effectiveness.

Three-sector economy

From the legal point of view, Chinese economy does not consist of two sectors (state and private sector), but rather three: state, domestic private capital and foreign capital sector. Chinese law treats domestic and foreign capitalists differently. Foreign capital is privileged compared to domestic. For example, the PRC citizens can possess only 20% of Chinese bank’s shares, while foreign residents can possess 25%. Joint ventures are particularly popular and enjoy privileges in the Chinese legislative and economic system.

Financial system’s backwardness

Low effectiveness and profitability of the banking system, which is dependent on the state (or the CPC), and the high amount (about 40% of the GDP) of non-performing credits also influence the low effectiveness of the economic system. It is estimated that 2/3 of these credits are not based on economic criteria.

The public sector has limited access to investing in banking. Banking and the judiciary alike are politicized to a large extent. Problems of the Chinese financial system are well-known:

• no strong and independent central bank;
• banks have limited chances to borrow on security due to the imperfect system of private property rights;
• limited selection of saving forms and financial assets (products)
  • only 11% of the young Chinese take mortgage loans;
  • low and controlled interest rates (1,8% for a three-month credit) make it necessary to ration the credit – often according to political needs;
  • no independent bank audit
    • in 2002, the World Bank ranked the Chinese system of financial responsibility on the 186. place among 199 assessed countries.

As a result, the high private savings rate compensates to a large extent the negative effects of the low effectiveness of the Chinese banking system.

Extensive development

Significant insufficiency in the PRC economy demonstrates the need of high savings.

Many sectors dominated by state-owned companies, which remain under the strict supervision of the state and the CPC, are not subject to market competition. Capital consumption, and in particular – energy consumption, is too high in many sectors, despite overpopulation in the Chinese country. It is estimated that energy consumption (based mainly on coal) per product unit is 4 times higher than in the USA and 8 times higher than in Japan. In 2008, China consumed 2760 million tons of coal (Poland – 83 million tons). According to some sources, capital consumption of the investment process worsened compared to the epoch of Mao Tse Tung. It revolves around the ratio of 5 yuans of investment to 1 yuan of product.

The relatively ineffective process of investing must be compensated by the high savings rate. It seems that this process has even strengthened. The investment rate increased from 40% of the GDP to 49% of the GDP in 2008 despite the fact the CPC and Chinese politicians have supported (at least since 2004) the capital-intensive nature of production and the fast development of sectors that produce consumption goods. According to the World Bank’s study, the rate of return is negative in 1/3 of investments.

Neomerkantilism

Extensive, capital- and energy-intensive super-growth of Chinese economy is supported by the policy of yuan depreciation and enormous payment surplus abroad. The real exchange rate of yuan depreciates and helps to find large trade surplus and use large labour resources (particularly in the country). China works out large current account balance surplus [i.e. export and import surplus from interest rates of foreign assets (mainly the US bonds) and dividends over the import and export of interest rates as well as dividends for the foreign capital and netto transfers] – which amounts to 364 billion dollars a year in 2009, i.e. 6,1% of the GDP. Such a policy results in a spectacular export increase.  Export share in the China’s GDP rose from 3% to 40% between 1979 and 2007, and the average export increase rate between 1980 and 2007 reached the staggering pace of over 30%. During six years (1999-2004), China moved up from the 9. to the 3. place in the world in the scale of export. Real depreciation of yuan lifts the relative internal price of “trade goods” (i.e. goods subject to foreign trade) at the expense of the relative price of “non-trade” goods and services and also disciplines the economy. It moves the means of production to trade sectors and increases the economic growth rate. On the other hand, China lifts the price of the US government’s bonds by investing in them, and consequently contributes to the interest rate reduction in the USA. Thus, China is indirectly responsible for overinvesting in the US mortgage loans (low real interest rates reduced the investment risk a few years after the terrorist attempt, thus China is indirectly co-responsible for the world financial and economic crisis 2008-2009).

The degree of economy politization, production factors’ effectiveness and the savings rate

The China’s record savings rate is almost 3/5 of the GDP. It comes from the high degree of legal, social and political confidence, backwardness of private land and capital property rights, excessive state property (following the CPC military operation on the Tiananmen Square, a significant decrease in the private sector investments took place, especially in the Chinese country) and state control of economy on the one hand and extensive phase of economic growth that is relatively ineffective in terms of production factors, on the other. Record-breaking on the global scale savings rate reduces the negative effects of weak roots of the major capitalism institutions and the CPC arbitrariness. A weakness turns into an advantage in this way.

Chimerism

Another glance at the Chart 1 shows large differences in savings and investment rates between the USA and the PRC. The difference between the investment rates in these countries was about 32 per cent, according to recent data. The difference in the savings rate amounted to 46 per cent, i.e. almost half of the GDP. The savings rate in China is almost 10 per cent higher than the investment rate. Notable is the fact that the situation is opposite in the USA, where the investment rate is about 3-4 per cent higher than the savings rate. Of course, the opinion of the known economist Feldstein Martin: “low national savings are the fundamental reason for the trade deficit in the USA” is not true.

As it has been mentioned in the introduction, capital should theoretically be sent to countries where it brings more profit. It seems that a relatively poor country, like China, is definitely less saturated with capital than the USA and therefore capital should be sent there. Combined with cheap labour, it should bring high profit. In other words, the current account balance in China ought to be negative, while in the USA – positive. Reality is the opposite. It is possible to explain the paradox of apparent irrationality in the capital flow directions, looking at the size, structure and profitability of capital invested in the USA by other countries (by China, among others) and in the rest of the world (in China, among others) by the USA. It turns out that about 50% of the world’s financial assets and as much as 60% of fluids and private financial assets are invested at the financial markets (shares and bonds) of the USA. The US financial markets owe their popularity in the world to the high degree of confidence towards American capitalism institutions (no nationalization risk and fast settling of disputes) and the fluidity of financial markets. Moreover, the American capital abroad reached considerably higher rate of return than the world’s capital in the USA, though the world’s investments’ value in the USA exceeded the US investments abroad by about 2,2 trillion dollars (i.e. the netto balance of the US investments abroad was negative).

What is interesting, only 35% of the world’s investments in the USA were invested in more risky companies’ shares that brought more long-term profits. At the same time, 61% of the American capital abroad was invested in shares. As a result, the average rate of profit for the world’s and China’s capital engaged in the USA was 6,2% in the years 1990-2005. During that period, the average rate of profit for capital that belonged to the US residents who “worked” abroad was 10% a year. Although the netto international investment balance of the USA is negative, the profitability of these investments exceeded the profitability of the foreign investments in the USA by 60% (10/6,2) on average. In other words, while China and other foreign countries are looking for safe investments in the USA by investing mainly in the US government bonds (the Department of the Treasury), the US residents are looking for high profit abroad. The USA can be said to fulfil the role of China’s and the world’s savings manager.

The USA is specialized in venture capital investments. The US Department of the Treasury fulfils the role of a financial intermediary. It issues bonds that have fixed and relatively low interest rates. Increasing the fluidity on the US financial market, it supports investing substantial funds in foreign assets and companies with relatively low risk. Since the crisis of 2008-2009, the USA has used its comparative advantage in exchanging the low-interest debt into shares with more risky and more profitable capital.

The major reasons for the US financial crisis 2008-2009

China invests large sums of money (2,3 trillion dollars of reserves) in the bonds of the US government, which increases their price and at the same time decreases their profitability and interest rates in the USA. Low real interest rates in the USA since 2001 have caused an artificial boom on the real property market. The price of the risk has decreased and the politization of the sub-prime mortgage market has become easier. The excessive love of risk is connected with the bad habit of breaking the invisible boundaries easily. The following story will show the excessive love of risk and the politization of the American real estate market and banking:

§ 1977: the US Congress passed the Community Reinvestment Act after race-based riots in Detroit in 1976 (43 killed, 3000 plundered buildings, 7200 arrested). The Act forced American banks to give home mortgage loans to people with low income, who had not fulfilled the traditional criteria.

§ 1999: revocation of Glass-Steagall Act (1933), which had forbidden linking low-risk (commercial) banking, i.e. accepting deposits from people with high-risk (investment) banking. Since then, great groups of banks, such as e.g. Citigroup, started creating securities based on high-risk mortgage loans.

§ 2000-08: credit default swaps (CDS) started securing uncertain mortgage loans. Their volume increased from 0,1 trillion dollars to 50 trillion dollars during the years 2000-08.

§ 2000: the Commodity Futures Modernisation Act exempted stock markets from supervising the Commodity Futures Trading Commission. It exempted high-risk transaction protection (CDS) and other derivatives from bank supervision and revoked extra requirements for reserves, audit and central transaction clearing etc.

§ 2000-05: gradual departure from the traditional requirement of deposit while acquiring real estate in order to “grant property rights” to the US residents. During these five years, the number of people who were exempted from deposit while buying real estate increased from 0,6% to 32,6%. About 10% of customers lived at homes bought exclusively on credit.

§ 2004: banking supervision (Securities and Exchange Commission) exempted five great American banks (Goldman Sachs, Merrill Lynch, Lehman Bros, Bears Sterns and Morgan Stanley) from the required traditional maximum ratio of equity to debt 8,3% (in 1901, this ratio had been 25%). Just before the crisis, this ratio in one of the greatest banks, the Bank of America, was 0,7%, i.e. 142 dollars of credit to 1 dollar of equity. The ratio takes into account commitments beyond the overall balance. The risk was taken.

§ 2000-08: derivative packets based on mortgage loans (collateralized debt obligations = CDO) paid higher interest rates that the US Treasury bonds, although reputable rating institutions assessed their insolvency risk at the highest “AAA” level. It was a sort of new economic law: “lower risk – higher profit”.

Conclusions

Too much risk tolerated by the authorities, mistakes in the financial policy of the Federal Reserve and the politization of the real estate market have become easier by the policy of China, which invests the current account surplus mainly, though not exclusively, in the bonds of the US government.

It can be stated that “Chimerism”, i.e. financial and economic symbiosis of the USA and China (the term quoted from the book The Ascent of Money by Niall Ferguson) is based on co-complementation of both political and economic systems. It is the symbiosis of:

• uncertain and incomplete property rights in the PRC and certain and complete property rights in the USA;
• an extensive increase and an intensive increase;
• low production factors’ effectiveness and high production factors’ effectiveness;
• investments in bonds of the government in return for investments in shares;
• the excessive fear from the risk and the excessive love of the risk;
• an underdeveloped financial system and an overdeveloped financial system;
• the export of goods and savings in return for the import of goods and the export of technologies.

This is the symbiosis of the law and quanxi, the symbiosis of authoritarianism and democracy.

Tłumacz: Marek Pinta (marek.plinta@gmail.com)

I remember very well the day when I ‘discovered’ new, unknown China. It was September 1999. I was wandering through Liulichang, district full of antique shops, not far from the Tiananmen square. Determined to try out my knowledge of language I came into some old bookstore. Stammering the titles, full of complicated strange signs I was reaching the conclusion that there is a long way in front of me. And then I saw four easy Chinese numbers ‘1984’.

It was famous Orwell’s dystopia!

The book which was banned in Poland and in the Soviet Union until the year 1989 was there on the Chinese shelf, even though in June of the same year Communists in Beijing made it clear that they will mercilessly crush any attempt at challenging their power. Amazed by my discovery I started to thumb it thinking ‘how much do we really know in Poland about contemporary China?’.

Poland, Chinese gate to Europe

Since then I was observing how China is being ‘discovered’ by new circles of Polish society. Negative image of this country starts gradually losing its supporters. Less and less people want to see China as solely merciless regime which sends tanks against students.

There is a growing acceptance for the vision of a new superpower, which by its dynamic and relatively peaceful development questions Fukuyama’s thesis about ‘the end of the history’ and Huntington’s idea of ‘clash of civilizations’. This is a superpower, which cannot be underestimated and with which business can be done, because this is exactly what Germans, French and Americans do. Polish businessmen dream about conquering populous market but for now on – similarly to their counterparts from Europe and the United States – they benefit more from importing Chinese goods.

The value of Polish import from China has been systematically increasing. In the year 2008 it reached 11,5 billion euro while the value of our export to China – only 0,9 billion euro. Obviously the United States or Western Europe have the same problem, but it seems that it is more widely discussed there.

In Poland the debate is full of extremes. A few years ago Marek Jurek in the parliamentary commission for foreign affairs warned that Poland through trade ‘supports Chinese Communism’. On the other hand it can be argued that in Poland there is a powerful lobby around import from China. Because how else it can be explained that while Poland is flooded with goods made in China our Ministry of Economy pays importers to go for the fairs in Canton?

Recently our economic relations with China entered a new level: we start to benefit from the Chinese capital. In the year 2008 the value of Chinese investments in Poland reached 200 million dollars, in the middle of this year – already twice this amount. It is not much comparing to investments from Germany or Holland (1,6 million dollars each) but the dynamics of the increase is impressive. This is why the deputy Minister of Economy Rafał Baniak said at the end of June: Poland can become for China a gate to Europe, to the European Union.

Industries in which the Chinese can invest in Poland include automative industry, electronics, aviation, biotechnology, IT and telecommunication. Public company PKP Cargo together with public company China CNR Corp. is already organizing in China production of carriages which are supposed to be used on Polish as well as European train tracks.

Not long after the conference of Minister Baniak there was information that Chinese company Chery can ‘save’ – meaning take over by controlled purchase of the shares – company FSO in Żerań, the icon of Polish automative industry. China sets its heart on other symbols of Polish economy. The company LiuGong, which already controls Waryński Trade, wants to buy shares in the Ironworks Stalowa Wola, which is a part of pre-war Central Industrial Region. Directorate of Chinese port from Ningbo wants to build a logistics centre in the port of Gdańsk.

The symbol of Chinese presence in Poland can be found elsewhere however – in the most visible industry: construction. The fact that company COVEC won the tender for building two sections of highway A2 from Warsaw to Łódź is considered to be a key symbol of Polish-Chinese cooperation and the first such case in the whole European Union. The Chinese lowered the price of the investment by 40% explaining that they do not have to take expensive credits. Meanwhile the companies from the Union – especially from Germany – hold a grudge against Polish authorities and made a complaint. They point out that the low price offered by COVEC is supported by the Communist authorities. Polish officials just shrug their shoulders. Because even if the financial aid of the Chinese state is a fact it means – paraphrasing words of Marek Jurek – that Communist China helps building roads for Polish drivers.

To fix the relations because ‘what China is going to do with us’?

In the face of these dynamic changes there appear suggestions which a few years ago would have been in the sphere of a political fiction, namely development of economic relations should be widened into the sphere of foreign affairs.

Such a suggestion was published in ‘Rzeczpospolita’ by professor Antoni Dudek, political scientist and historian from the Jagiellonian University and advisor of the president of Institute of National Remembrance. In the article ‘Chińczyków trzymajmy się mocno’ (‘Let’s stick to the Chinese strongly’) published on 3.10.2009, which was a reaction to the US giving up the idea of building anti-missile shield in Poland, professor Dudek suggested: ‘If the Americans have more important issues to deal with than Poland, we should consider possibilities of deepening the relations with the new global superpower, namely China’.

Author presented two main arguments. First, China is prone to build relations with Poland by investing in our country into infrastructure and production for the Union’s markets. In the Western countries such an ‘enter the dragon’ would not make any sense: infrastructure in a shape of roads or railways were built there a long time ago and the costs of work are still higher than in the East.

Second reason for a potential alliance could be Russia. Professor Dudek assumes that China would oppose its closer relations with the European Union so Poland comes to its aid.

Professor Dudek’s thesis was critically developed in the Cracow’s magazine ‘Arcana’ by Radosław Pyffel, the founder of the Centre of Studies Poland-Asia and author of the reports from China, published in ‘Najwyższy Czas!’ (‘High Time!’). While Dudek presents China as an alternative to the US, Pyffel suggests that Poland basically does not have a choice anymore. In the article ‘Polska strategicznym partnerem Chin?’ (‘Poland as a strategic partner for China?’, published in ‘Arcana’, issue 94, July/September 2010) we read: “If the march of China towards global power continues, their influences will sooner or later reach also this part of the globe. Because of that the question what to do with China should be changed into: what will China (then) do with us?’.

Pyffel underlines the disappointment with the US, judging that Polish involvement on the American side in Iraq and Afghanistan is ‘rather contemporary Somosierra and Haiti’. With conciliatory gestures of Obama towards Moscow, Poland is losing its power as a bulwark and ‘Prometheus of democracy’ in the East which was a dream of late Lech Kaczyński.

What is more, existing for a few years Chinese-American rapprochement can soon come to an end, in a painful way. Both giants already compete for the influences and resources in the Middle Asia, Moscow is additionally concerned with the growing presence of China in the Siberian Far East.

Economic aspects are also important. As Pyffel writes ‘Poland seems to be attractive as Chinese bridgehead and a gate to Europe’ and it is already ‘becoming a centre for Asian wholesale trade in the Eastern Europe’.

These arguments fade though against Polish political elites’ reluctance characterized by emotions towards China. Author provides fresh arguments. At the summit of ASEM in Beijing in the year 2008 Poland, as one of six countries, was selected for talks with the Chinese leaders. At the same time members of European Parliament voted for granting the Sacharow Award to a dissident Hu Jia, imprisoned before the Olympic Games. In Warsaw the members of city council from the Civic Platform supported the idea of calling one of the crossroads the ‘roundabout of Free Tibet’ (the idea was given up this year after receiving the negative opinion from the Ministry of Foreign Affairs).

Similarly, Pyffel judges negatively the totality of Polish policy towards China after the year 1989. In his opinion it was shaped by emotions and stereotypes. Immersing ourselves in the reluctance towards Communism we missed the emergence of the superpower. This is why he calls: ‘Let’s try to fix what was destroyed in the last two decades’.

Chinese challenge

Pyffel is right saying that Polish elites – with very few exceptions – do not know well the Far East. This problem has lasted for a long time and results from, among others, the fact that Poland has never been a colonial power. Very short period of close relations between Poland and China in the 50s improved the situation for a while, but after the Chinese-Soviet split the Polish authorities had to – more or less – realize the guidelines of Moscow and treat China critically, if not in a hostile way.

For a bigger scale the Polish started to travel to China no sooner than at the end of the 90s but because of the massacre in Beijing they still looked at China suspiciously. Our new allies, the Americans, approached China already in the 70s in order to weaken the Cold War enemy – the USSR. Nixon’s visit behind the Great Wall was a blow for the Soviet policy of isolation applied to China and in a way it contributed to the fall of the Soviet country.

At the end of famous ‘God’s playground’ from 1981 Norman Davies reminds that one of the authors of American pragmatism when it comes to China was Zbigniew Brzeziński and that it can be ‘put down – at least partially – to his Polish upbringing.’

Professor Dudek and Pyffel underline that the role of China is growing which should find its reflection in the Polish foreign policy. But can such rapprochement be made without deep knowledge about our potential partner? This is why it is the best idea to start from the Decalogue ‘What China Is and Is Not’ presented in the book ‘Geostrategic Traid. Living with China, Europe and Russia’ (2001) by Zbigniew Brzeziński. It is written from the American perspective but – as the American ally – we can accept similar optics.

1. China is neither an enemy nor a strategic partner of the US, although it is hostile towards what it perceives to be an American ‘hegemony’.

2. China is not going to become a global power, although it is a regional power, capable of ensuring its interests.

3. China does not constitute a direct threat to the US.

4. China does not constitute a global ideological challenge for the US.

5. In its region China is not a destabilizing force and on the international stage it behaves relatively responsibly.

6. In the political sphere China is neither totalitarian nor democratic but is an oligarchic- bureaucratic dictatorship.

7. In places such as Tibet and Xinjiang China does not fulfill the universal standards of human rights and tolerance towards the minorities.

8. In an economic sphere China is developing in the desired direction.

9. China will not avoid serious internal political tensions as commercial Communism is an oxymoron.

10. China does not have clear vision of either its political evolution or its international role.

After this enumeration it is clear that present relations between Poland and China – or wider: the West and China, are a combination of complex political and economic tendencies.

To sum up, for the West and for Poland China is a difficult partner. Partnership created in hope for stopping world-wide march of the Communism. Then it was widened in hope for economic benefits and stimulating – through the economic development – positive changes in China. As the liberal doctrines claim, the development of the welfare has to cause political claims.

Indeed: to some extent Western investments, which helped to develop Chinese economy at the end of the 90s, cause that China is still “evolving in the positive direction’.

No mistake can be made though. It was this positive from the Western perspective direction which transformed totalitarian autarky from the times of Mao Zedong into today’s ‘oligarchic- bureaucratic dictatorship’, the definition of which still causes a confusion in terms of terminology in the West, embodied for example by constant repetition of the question ‘is China a Communist country?’.

Even though Chinese state gave up the control over many spheres of life of its citizens (this is why Brzeziński does not want to use the word ‘totalitarian’), in case of a political sphere it still uses ‘Communist’ praxiology. For this reason the relations between Poland and China will never reach the level of mutual understanding and trust that Poland has with South Korea or Japan. In such a situation can we talk about strategic partnership at all?

A catalogue of problems

Not to be groundless, I decided to present outline of the most important problems influencing mutual relations. In reference to the articles of professor Dudek and Radosław Pyffel I would like the discussion to continue. I hope that the division below will make it easier.

Defensive alliance against Russia. There are no rational reasons to believe that China would stand on Polish side in case of our potential conflict with Russia. Some come to such a conclusion on the basis of China’s stand in the year 1956 when the president of a Permanent Committee in the Chinese ‘parliament’ Liu Shaqoi dissuaded Nikita Khrushchev, concerned by Władysław Gomułka’s coming to power, from the plans of the armed intervention in the People’s Republic of Poland. This position did not come however from a particular affection for Poland but from a wider calculation. The fact that half a century ago Polish issue came in Moscow against new Chinese political assertivness, was a sheer coincidence.

What is more, Beijing is linked with Moscow now by ‘antiterrorist’ alliance within the Shanghai Cooperation Organization. If China ever attacked Russia, it would be only in its own best interest. And Poland – let’s drop any illussions – does not have any impact on defining this best interest.

Intelligence issues. French writer Roger Faligot in the book ‘Les services secrets chinois, de Mao aux JO’ (‘The Chinese Secret Service, from Mao to the Olympic Games’) reminds: ‘secret service is not only, as it is in democratic countries, an organ which acquires information, with limited influence and area of operation. It is a basic pillar of power, next to the army and the only party’. In Poland the problem of the scale of Chinese secret service’s operation unfortunately is not widely discussed. In spite of amazing economic successes, China is still a police state. Until we start looking closely at the methods which are used by the Chinese institutions we will always be in the weaker position.

Economic relations. Even though the European Union put China on the list of its strategic partners, it constantly refuses China the place on the list of the countries with free market economy. Meanwhile some of the Polish businessmen involved in trade with China repeat that there is more economic freedom in China than in Poland.

This paradox can be easily explained though. Ideas of the businessmen come from relatively law tax burdens which the enterpreneurs in China are subject to. On the other hand, social support in the People’s Republic of China is underdeveloped; there are neither common pensions nor free medical help. Trade unions are also poorly developed because Chinese state learnt its lesson from the Polish example of Solidarity and from the 90s it has made sure that there are no strong independent trade unions in this country. Numerous leaders of trade unions and dissidents, who were called ‘Chinese Wałęsa’, had to leave the country. For example Han Dongfang lives in Hongkong, Harry Wu – in the United States.

At the same time Chinese state remains an important player in the state economy. Chinese banking sector, growing stunningly in the last years, remains under the control of the state. On the other hand some of the private companies are a pure nomenclature. They are set up by so-called princes – children of important party activists. Since Jiang Zemin developed the theory of Marxism by the rule of three representations, businessmen also join the party.

Having investors from the People’s Republic of China in Poland, the government in Warsaw and the public opinion have to be aware of the fact that Chinese companies might have in mind something more than pure desire to gain profits. Among companies operating in our country there already were the ones in which French or German states had their shares. It is worth remembering however that French and German authories come from democratic elections and are subject to many forms of control. Central Chinese government is not going to undergo such democratic control.

Institutions. With growing Chinese influence, Poland should set up institutions which would provide the decision-makers – both in the government and in the private sector – with the multidimensional and up-to-date assessment of Chinese activities. It will not come as a surprise if I say that there is a lack of such institutions in Poland. Polish think-tanks – governmental or non-governmental – are in their infancy and only since recently they hire experts dealing with the issues of China and East Asia. Growing Chinese presence in whole our region should be looked at. For instance latest big Chinese investments in Belarus can serve to strenghten the authority of Alexander Lukashenko and drive his country away from the European Union.

Common European Union’s policy towards China. Centralized and disciplined China successfully benefits from European antagonisms and differences of interest. The European Union will continue to ask itself a question why in comparison to the People’s Republic of China it is a political midget even though it is a giant in the sphere of economy. Potential partnership between Poland and China would have to develop against this background. The idea of Eastern Partnership could be widened to include the Far East. By shaping Union’s policy towards China we would build up our position in the Union. Foundations for such an undertaking already exists – our good relations with Germany. Both countries coordinated its activities for example at the time of the Olympic Games in Beijing when Angela Merkel and Donald Tusk boycotted the opening ceremony.

The problem of pragmatism and axiology. Polish politicians often showed evidence of sympathy towards the Tibetian nation, which since 1950 lives under the Chinese authority. More and more often such attitude is criticized because it is not only ineffective but also spoils the relations with China, including economic ones. In my opinion however Polish attitude towards the Tibetian issue plays an important identity function and it is not a disadvantage but a virtue. Poland, which itself had to deal with the problem of sovereignty, can make out of supporting nations without state its hallmark, or to say it in a more modern way – soft power.

Government and society. Polish policy towards China should differentiate authority from the nation. Establishing strategic dialogue between Poland and ruling Chinese regime would be a sad news for the Chinese dissidents. During the meeting in the bookstore in Beijing Adam Michnik was applauded loudly when he admitted that ‘Western governments pursue shamelessly pragmatic policies towards China’.

Chinese dissidents are these few people who look beyond the current economic successes of the Communist regime and want more permanent, fair foundations for the further development. In comparison with 1,3 billion of the People’s Republic of China’s citizens it is easy to disregard these people – such a small number of them. Chinese government neutralizes them without any problem. However it has to be remembered that Polish Workers’ Defence Committee has been once similar handful of dissidents.

Conclusions

Quoted authors are right when they write that we are ‘sentenced’ to China. New superpower – whether we want it or not – is already present in the everyday life of every Polish citizen in shape of products made in China and many of us may find in the close future Chinese or Chinese-Polish employers.

It does not have to be a relation of subordination however. As a member of the European Union and NATO we have numerous instruments which will enable us to talk with Bejing as equals. We also have a historic wisdom of ‘crossing the Red Sea’, thanks to which we can see China in a different way – possibly deeper – than citizens of other Western countries, who do not have such experiences.

It is high time to complement this wisdom with the knowledge about contemporary China. Ryszard Kapuściński in the book ‘Travels with Herodotus’ mentioned that he has never seriously dealt with China because he came across ‘Great Wall of language’ and a face of a typical Chinese man is ‘a face which hides something which we do not know and we will never know’. Every graduate of Contemporary Chinese Studies will say however that China can be understood.

In the Orwell’s book ‘1984’ average Chinese will not recognize his country – probably this is why Beijing is not afraid of this book as the authorities in Poland and the Soviet Union have been afraid for many years. Economic freedoms solved the problems of lack of goods or the basic articles a long time ago, producing enough to share it with the whole world. Politicization of life in contemporary China is far smaller than over 30 years ago when the country started to emerge from the cultural revolution and the foundations of the economic pragmatism were built. Any tourist coming to Shanghai could mistake this city for Tokio or Hongkong. But knowing the language it can be noticed that a Chinese immigrant from Canada, praising Canadian democracy in a train falls silent when the conductor approaches.

Chinese regime has still more in common with scary Big Brother than the majority of regimes in the world. Similarly to the Orwell’s character it does not particularly like criticism (which is proved by the problems with visa that the author of this text encountered) and it enjoyes improving reality, including numerous translations of foreign books. Among censored books there is for example autobiography of Hillary Clinton. In one of the Polish books the circumstances of the death of Jerzy Popiełuszko were changed – instead ‘murder’ there was a ‘suicide’.

If we are seriously considering strategic partnership with China we should first think why the emerging world superpower is afraid of the truth about the death of a modest priest in distant Poland 26 years ago.

Translation: Martyna Bojarska

http://www.flickr.com/photos/mac_fun/2254316721/sizes/m/

Many of them are not grounded on fundaments of systematic knowledge. Many come directly from some visions of how the world functions (or, even worse, from the utopian idea how the world s h o u l d function). Sometimes these are products of personal obsessions and phobias. One of them is, for, example, anti-Americanism of left wing elites. Aversion to a better, richer, and more competitive, valorous country can be seen in many people. Anti-American Americans are additionally connected by the aversion to life philosophy and style of the majority of so dynamic and innovative society.

That is why they so willingly prophet the fall of the USA. A textbook case is a historian, Paul Kennedy, who, in his book, The Rise and Fall of the Great Powers prophets the twilight of America. He was, however, unlucky because in 1989, the year of publishing his book a great superpower collapsed but it was… the USRR. 20 years have passed and next people prophet the same in the case of America; they may well be right this time but because of different reasons (the real reason is America going etatistically and socially crazy).

Aversion to our world – liberal democracy and capitalistic market – is seen in many visionaries. Their problem is that they  most often use categorical statements instead of arguments. And we should remember that what will happen in the future is burdened with irremovable and radical uncertainty as one of Nobel economics prizewinner, Friedrich von Hayek, highlighted.

However, prof. Meinhard Miegel from Bonn has no doubts, putting forward statements which a serious scholar would not dare to formulate. Miegel openly states that a “continuous increase in prosperity has finished forever” or that “technical innovation will not increase prosperity”. And he calls those claims that are groundless and contradictory with experience “a statement of fact”.

It is common that behind faulty forecasts lies lack of knowledge of economics which is, unfortunately, anti-intuitive science. For example, counting meticulously some amounts of mineral resources these forecasters forget that besides future supply and demand there is also price and when it changes, stimuli and finally behaviors change. We have gone through such mistakes very often and we will probably do it again. Other forecast mistakes come from excessive faith in corrective state actions. From Plato’s utopia to a perfect state, through Thomas More and Jean-Jacques Rousseau utopias up to a monster Jacobin, communist and other ones – all of them believed in the future not only unrealized but also nor realizable…

Sometimes when I read visions of what people have in heart I wonder if complete ignorance of cumulated knowledge is possible. Once I came up with a term: “two reactionaries”. One is a pre-scientific reactionary, pre-enlightment one known for ages. The second is much younger, only a several dozen years old. I call it  a post-scientific reactionary. These are people so sure of their intellectual and moral superiority, of the rightness of what they say and do that no empirical knowledge or a coherent theory will dissuade them from their visions.

For “fighters of a good cause” the fact that science undermines the reality of their visions discredits… science. And it does not make them feel worse. The most important is feeling good. As Jerzy Dobrowolski, a satirist used to say: “good mood is half of your success. And a very good mood is just as the whole success…”. So scenarios and forecasts may turn out to be faulty or non-sensical from the beginning but it does not seem as important. Success is just a margin for them; the most important is that they signal “their people” a distinctive feature of fighters for a good cause. What is “fine” should develop in the scenario or a forecast; what is “wrong” inevitably (as Paul Kennedy’s America) must wait for a twilight…

Translation: Małgorzata Mrożewska; gosiamro@interia.pl

“Liberte!”: Council of Ministers has decided to apply a new rate of VAT next year, which means its growth. Do you think it is the right action?

Ryszard Petru:  In my opinion, the tax rise was not a necessity. It was possible to make alternative arrangements with a similar result. I would like to also emphasize, that the tax rise is not always a bad thing. Although I am not a supporter of this type of procedures, sometimes it is simply the lesser of two evils. Greece, Great Britain or Hungary are currently in such  a situation, where a scale of irresponsibility of politicians was so big and deficits were so high that these countries fell into unimaginable spiral of debt. The situation there is so serious that actions on the side of expenditures only is not enough to avert the crisis. It is hard to find the expenditure savings within one year, for example on the level of 6-8% GDP. In such cases it is necessary to reduce spending as well as raise the taxes.

Currently Poland is not in such a situation as Greece or Hungary. In Poland the scale of changes which are needed in the near term should refer to the expenditures side only. The actions on the income side should rather reduce the tax allowances than raise the main VAT rate.

For average citizen tax allowances are perceived as something positive, because after all it is nice to have them. Most people then have a sense of ‘being ahead’ but it is a false belief.  Tax allowances make the tax system leaky. If they did not exist, the VAT rate would be harmonized and lower than now and the entire system would be clearer. Speaking about the tax allowances, I also mean the allowances for children included in PIT (Personal Income Tax). We are all using it but it does not fulfil its function. Apart from that, it is unfair tax allowance because it benefits the same for taxpayers with high and low income. Calculation of the Civil Development Forum shows that the elimination of this tax allowance could contribute even 6 billion zloty to the budget in 2012. Thus, it can be seen that such a change in the tax system is more desired than increasing the main VAT rate.

This problem is inherently political. Politicians may believe, that raising the VAT rate by one percentage point will hurt less than elimination of the tax allowances. Maybe it is right, however the activities that aim at limiting the consumption of Polish people are not increasing the chances for development of our country. In addition, the tax rise will contribute about 5,5 billion zloty to the budget, which is not enough in proportion to the needs. In fact, to improve the situation of the budget standard VAT rate would have to increase up to 25%. Nevertheless, such a solution would have a huge impact on a consumption and consequently on a growth.

Prime Minister Tusk has announced that the new thresholds are valid for three years, but the law, introducing amendments in the VAT, contains the clause that allows further correction. Professor Krzysztof Rybinski is willing to bet that in one or two years the top VAT rate will reach 25%. Do you share this opinion?

Personally I am not going to bet on this matter, especially since we know less about the future, it is becoming more unpredictable. I do know that 25% VAT rate would significantly reduce the consumption and it would be one of the highest rates in Europe. The example of Hungary shows that it can help to repair the budget deficit, but involves a large economic slowdown. In recent years the Polish economy has grown in scale of 6-7% a year, whereas the same indicators show Hungarian economy in scale of 1-3%.  The chances are good that at the end of this year the income per capita will be higher than in Hungary.  I would like to recall that in 1989 Hungary seemed to be a country of the West for many Polish people, by reason of the Goulash socialism. Today these relations look quite different.

Hungary is an example which shows how much it can be lost by irresponsible policy, deficit expansion and engaging in the economic populism. It has never been that bad in our country. Perhaps it may be related to legal and Constitutional regulations of public debt or to a memory of the Transformational Crisis in 1989. None of the Polish governments has gone so far as both Hungarian socialists and conservatives. The wisdom should be gained by learning from someone’s mistake, not your own.  A lesson should be learnt from what happened and Hungarian mistakes should not be repeated.  From technical point of view, it is possible in Poland to introduce 25% VAT rate, but it would be an act of suicide.

I like honesty of our government about the fact that by this action the government “buys” another year and Minister Boni declares this openly. The case was presented fairly but current actions are not what we expect from such statesmen. I do not know which coalition will win the parliamentary election next year but I am afraid that it might be the coalition of the Law and Justice (PiS) and the Democratic Left Alliance (SLD). However, if the government is based on the Civic Platform (PO), the party must be aware that further tax rising will kill the economy and the one who is responsible for this will end up like Hungarian socialists.

Professor Belka and professor Balcerowicz recommend the government to cut the spending and stimulate the labour market. These solutions appear to be beneficial in the long term and the government needs the extra money right now. What are the other options to obtain a fast income for the budget, excluding tax rise or loans?

It is possible to obtain a lot within short period of time from different kind of actions, other than those mentioned above, but the question is whether the changes are expected to be immediate or well thought and structured. One of these “quick” possibilities is suspending the valorisation of pensions. There are actions, which allow saving a lot very quickly.  If we want to make the structural changes, for instance rising the retirement age, it is necessary to determine how fast this will occur. The same applies to the reform of Agricultural Social Insurance Found (KRUS) and the taxation of farmers. If the present government want to make savings in this friendly to society way, which means less painful, according to Prime Minister Tusk, must remember that is it a long process and it needs to be initiated as soon as possible.

So I have a grudge against the government for accepting the Development and Consolidation of Finance program, which has not been enforced yet. Supposedly, if declared actions were taken in 2010, situation of public finances would be much better.  The savings, as I mentioned before, are accumulating each year, for example in regards to raise of retirement age, every year each age group is working longer.

Poland is not in a bad situation, but we are getting closer to the constitutional barrier of debt. Fortunately, our politicians are responsible enough and do not want to move this up. Therefore, we can commend the government for actually doing things. They could though, not respond at all and let things drift, keep high deficit, wait until the election and then think what to do. Most of the governments, in an election year, act exactly this way. The cabinet of the Civil Platform (PO) and the Polish People’s Party (PSL) decided to take an action, hoping perhaps for re-election and remaining in power.

On the other hand, there is a large group of people accusing the government of too little activity and linger about the economy reformation.

It is because the government indeed is not active enough. I want to emphasize that the government could do nothing but yet is trying in any way to secure the country from the financial crisis, the crisis of debt. Nevertheless, I am not sure whether the way that was chosen by the government is worth anything. I think that sometimes it is better to carry out painful reforms and be assessed by history than be guided by political calculation only.

Jacek Zakowski, in weekly POLITYKA (32/2010) in the article `Four Gentlemen B.`(“Czterej Panowie B.”) describes the ideas and the actions of four the most important Polish liberals: Leszek Balcerowicz, Michal Boni, Marek Belka and Jan Krzysztof Bielecki. Zakowski argues that only professor Leszek Balcerowicz defends the economic neoliberalism and the other three gentlemen left this position. Do you think that Balcerowicz’s way of thinking was defeated?

Today, when Poland is recovering after the crisis, when countries of Western Europe are falling into a spiral of debt, where there is a significant expenditure reduction, return of capitalism, which we deal with, is the most spectacular in the history.  I do not remember such a rapid recovery of free-market thinking about the economy on this scale. Yet the end of capitalism was proclaimed a year ago and today is the return of conservative approach.  I do not know what is going to happen next year, but today politicians and economists have concluded that keeping too low interest rates lead to a disaster. In this context and with a large simplification, I think Balcerowicz’s approach is vindicated. Governments around the world refrain from the interventionism and the fiscal stimulation. In my opinion, if Barack Obama does not choose this way, he will loose the election in two years.

As the chief economist of one of the largest commercial banks in Poland, how do you assess the stress test exercise conducted in July by the European Central Bank (ECB)? Don’t you think that the accepted criteria of the stressors were not stressful enough for the European financial institutions?

Yes, of course. I agree with all of the allegations against the ECB and the stress tests. However, the advantage of these tests was that the banks had to disclose a large dose of information on their portfolio and assets. By publishing this information, a picture of the financial sector became clearer for the investors.  Although there is no evidence, I am convinced that the financial supervision of the EU countries has carried out their own, more rigorous stress test, which has not been published. The institutions which exercise protection over the capital markets have knowledge on how the banks would cope in case of the crisis. Responsible actions of these supervisors should aim at making various financial institutions apply the rules, which could help to pass through a mild slump, such as requirements for assets or liquidity of the banks. I am not too sure if these kinds of tests were carried out but it would be extremely unreasonable to abandon such activities.

Banks, which are in bad situation and barely passed the ECB stress test, should be kept under the close watch of the financial supervision and may be there are actions taken, that we do not know about. I also think that if the ECB did not carry out any kind of tests, it would be too pricy in terms of image as well as finances. The stress tests cleared the atmosphere and prevented the possible threat of a market panic.

Interviewed by Pawel Luty.

TŁUMACZENIE: EDYTA OSTROWSKA

http://www.flickr.com/photos/30928442@N08/3771689308/sizes/l/

Przemysław Żurawski vel Grajewski: Of course, we can only guess rather than know if the economic reasons were not the deciding factors. We should not forget that Gazprom requires capital as it is the main subsidiser of much energy-consuming Russian economy. As much as 70% of Russian natural gas is consumed in Russia. Gazprom sells LPG on the Russian market at a very low price, so it has to squeeze out the foreign receivers as much as it is possible.

Till March 2006, because of political reasons, Belarus had been subsidised by Russia. When Lukashenko won the presidential election, Moscow thought that the scenario of the “Orange Revolution” was much unlikely to come true. Therefore, they decided that financing Belarusian economy is not essential to keep the regime.

On the other hand, Lukashenko is still resisting Russian endeavours to take over the transit infrastructure of gas and oil on Belarus territory. During the last 2 years he has shown that he does not necessarily follow the Moscow’s guidelines for the foreign policy. After all, Minsk has not acknowledged the independence claimed by Abkhazia or South Ossetia and has lately granted diplomatic asylum to the president of Kyrgyzstan – Kurmanbek Bakiyev – who was overthrown with the support of Russia. We can figure out that the last crisis is just an element of Russia’s pressure on Lukashenko to change his foreign policy.

P.L.: Is there a chance of Lukashenko’s losing  this year’s presidential election because he has sunk in Moscow’s and perhaps his own nation’s estimation? Can this crisis result in the change of regime in Belarus?

P.Ż.v.G.: I do not think so. I believe that Moscow does not have such a sound substitute. I do not mean that I have some unusual fondness for Lukashenko, but we must remember that from the Russian point of view the most important is to make Belarus stay in the sphere of influence of Moscow and to stop it from entering the Western sphere. Lukashenko guarantees that, thereby there is no need of change and taking unnecessary risks.

On the other side, Lukashenko’s regime does not pose any systemic challenge for the domestic Russian policy. The “orange” government in Ukraine was such a threat, which ideologically undermined the order in Russia. Russians largely perceive Ukrainians and Belarusians as Russians, which in my opinion is wrong. However, it has its effects on Russia’s domestic policy. Namely, if it turns out that the Western democratic model succeeds in Kiev or Minsk, it may be successful also in Moscow. And that would be against the Kremlin who promotes the native model of controllable democracy. Thus, there are no ideological reasons for fighting against Lukashenko’s regime as it does not threaten the position of Putin and Medvedev in Russia.

To my mind, Moscow does not sense any rivalry from the European Union in this sphere, thus the most important for Russia is to reduce the costs of maintaining its domination in Belarus.

P.L.: Can we then perceive any serious change of Russian policy towards Belarus?

P.Ż.v.G.: I think that Moscow could bring on a palace revolution if it wanted to. What is more, the external conditions are much favourable for the Kremlin as they could accomplish the revolution in disguise of Belarus’s democratisation. Such an operation could be supported by the European Union and the US. The West would gladly believe in the Russia’s interpretation of overthrowing the dictatorship. I believe it to be completely technically and politically doable. Albeit, I do not think it would pay off.

In my opinion, Lukashenko did not support the Russian intervention in Georgia in fear of such a scenario. Nevertheless, Minsk is still implementing Russian strategic goals, what can be proved by last year’s massive manoeuvre “Ładoga”, when Belarus showed that it is just a part of Russian strategic forces, not an autonomic military agent in the international relations.

P.L.: Since we cannot see any changes in Moscow-Minsk relations, we should consider the implications for Poland of the crisis.

P.Ż.v.G.: I fear that we can experience only the negative results. The countries of the European Union, especially Germany, will press for a hastening of the investment of the construction of Nord Stream. Poland can make use of a certain psychological trend for hurrying up the law alterations of the EU system of energetic  safety. The Polish government should rise the issue of the EU solidarity in case of another gas crisis, but we should keep in mind that the efficiency of such solidarity is decided by the transit structure rather than signed pacts. Thus, till some transit connections sending gas to the EU through our territory are designed, we will not be able fulfil even our earnest promises of help. But we cannot expect any huge investments because of the crisis in Greece and the need of the eurozone stabilisation. Simply, there is no money for that. However, we can expect some serious political declarations. What is more probable is the appropriation of funds by the biggest EU actors to building the Nord Stream under a veil of getting rid of the threat for the gas transit of another Ukraine or Belarus versus Russia conflicts. And that would be disadvantageous for Poland.

P.L.: You have mentioned the possibility of improving our energetic safety in the EU. So, what our energy policy towards our Eastern neighbour should be like? Should we cooperate with Lukashenko’s regime or perhaps promote the democratisation of Belarus? Is Belarusian “Orange Revolution” probable?

P.Ż.v.G.: The prospects of the democratisation of Belarus are not promising. The spirits of the nation do not serve it well. The presumptive economic destabilisation of Lukashenko’s regime could open the path of democratisation, but we are not facing such a situation today. Having said that, Poland should truly support the democratisation of Belarus more than the deal with the dictator. Even though he is currently against Russian intents, it is not a tenacious and firm trend. Truly pro-Western option in Belarus can appear only among strong democratic opposition, nonexistent yet. The anti-Lukashenko movement is still too weak, although it is pro-Western. Only in the democratic environment Belarus can turn to the West not temporarily but permanently. Currently Moscow holds a variety of means of control of Lukashenko which can make Minsk return to implementing the Kremlin’s policy, which can put him in his place.