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POLITICAL ECONOMY
Outside View: A time for optimism
by Peter Morici
College Park, Md. (UPI) Mar 28, 2013


EU warned it could face capital flight
Brussels (UPI) Mar 29, 2013 - Europe is at growing risk of mass capital flight amid fears EU regulators would apply the Cyprus model of taxing deposits to rescue eurozone economies, economists said Friday.

EU leaders in Luxembourg said applying the Cypriot "bail-in" model of levying bank deposits to other eurozone countries in difficulty could lead to a flight of investors from Europe, Germany's Der Spiegel said.

Euro Group President Jeroen Dijsselbloem caused a stir -- and panic in financial markets -- when he hinted Cyprus-style bail-ins could be applied elsewhere.

Luxembourg Finance Minister Luc Frieden warned the Cyprus example of taxing people who hold 100,000 euros -- $129,000 -- or more in their accounts could drive investors out of Europe.

"This will lead to a situation in which investors invest their money outside the eurozone," Frieden told Der Spiegel. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."

Luxembourg Prime Minister Jean-Claude Juncker also denounced suggestions of levying deposits in the European Union.

"It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker told German public broadcaster ZDF.

"It's no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe's entire financial center."

Despite the debate, financial markets are far from reassured. The Financial Times said Dijsselbloem, until recently seen as "boring and responsible," had not only caused excitement but spooked the markets.

The Financial Times suggested the Dutch finance minister might be the person Germany was looking for as European Union heads toward a "sea change" in the way it may handle future financial crises.

"Foisting the burden of bailouts on private investors has been a priority for Berlin since the first Greek rescue, in May 2010, only to be blocked by Paris and the European Central Bank. In Mr. Dijsselbloem, they now have a kindred spirit," the Financial Times said.

Spain's El Mundo called Dijsselbloem a "pawn" of Germany's Chancellor Angela Merkel, who was depicted in several Spanish newspapers as knitting and smiling with satisfaction over the Cyprus outcome.

Dijsselbloem's comments caused markets to fall earlier in the week and concern over the future possibility of levies on deposits continues to worry investors in Europe.

All signs indicate the Cyprus bailout continues to be deeply divisive for financially troubled Europe. Center-left Eleftherotypia newspaper in Athens said Cyprus carried a message of warning for the other troubled EU countries in southern Europe.

European Parliament lawmakers are already looking at a levy on depositors or investors as future options for the eurozone.

Italian news media said deposit levies of up to 40 percent could be considered for future rescues. Le Monde in Paris said the Cyprus experience strengthened argument for a fuller banking union. It said Cyprus was helped but not saved by the rescue package.

Cypriot President Nicos Anastasiades said Friday that Cyprus would remain in the eurozone but criticized the bailout deal that made that possible.

Anastasiades, speaking in Nicosia, said the bailout deal from Brussels made "unprecedented demands that forced Cyprus to become an experiment."

"We have averted the risk of bankruptcy. The situation, despite the tragedy of it all, is contained," he said.

Cyprus is the fifth eurozone country to receive a bailout, joining Greece, Ireland, Portugal and Spain.

Easter is a celebration of springtime rebirth -- a good time to enumerate reasons for optimism and the tasks necessary to accomplish America's potential.

The U.S. economy is in renaissance. The wrenching recession and halting recovery have masked a major restructuring ignited by technology and good old-fashioned market forces.

Typewriters and toys have become a powerful competitive advantage.

The modern office and consumer technology industries, which began with programmable typewriters, clumsy dedicated word processes and TV-set ping pong, have blossomed into enormously powerful and highly portable computers, smartphones and more specialized devices for industrial automation and supply chain management.

These promote transparency in pricing, accelerate the movement of goods and services and make nearly anyone who would like to be a global purveyor of ideas and services.

Teenagers can become millionaires because the traditional barriers to developing and commercializing new ideas -- access to up-to-date knowhow and capital -- have been greatly reduced or removed. And the commercial applications of new technologies are quicker and dramatically more scalable, at much lower cost, beyond the imagination of entrepreneurs 50 years ago.

The fracking revolution has unleashed a new bounty of natural gas. It won't fully free the United States from dependence on foreign oil but it has some potential to substantially reduce that dependence, and instigate dramatic new growth in heavy industry -- metals, petrochemicals, fertilizer, durable goods and fuels.

The United States still imports, net of exports, about 6.8 million barrels of oil a day -- much of it from the volatile Middle East and other unstable places around the world.

Emerging compressed and liquefied gas technologies -- many already in trial use -- have the potential to replace about 2 million-3 million barrels a day in big-city taxi and fleet transportation, rail transportation, inter-coastal marine and Great Lakes shipping and inter-city trucking on the East and West coasts and within the industrial Middle West.

Extending those technologies to even limited personal automotive use could slice oil imports by nearly half.

Beneath the rubble of the recession, U.S. manufacturers, which already enjoyed the highest productivity in world, have widened that gap. They have created smart factories that have converted the abovementioned technologies into automated material handling and supply chain management to dramatically decrease labor use.

Along with those enhancements, the repricing of American labor -- as disparities in wages and work rules between unionized and other workers have been reduced -- have robbed from Asia much of its cheap labor advantage. Insourcing is now the big word in manufacturing.

Barriers to exports remain. Important are the undervalued yuan and yen, high tariffs and regulations that keep competitive products out of big Asian markets and government subsidies that make foreign products artificially cheap on U.S. store shelves but some of U.S. disadvantages are self-inflicted -- among these are regulatory barriers that make putting up factories more difficult and time consuming than in Asia and higher taxes on business.

Simply, America needs smarter policies to translate the bounties of technology and inexpensive energy into broader, more rapid economic growth and rising real incomes for middle class families.

Regulatory reviews in manufacturing must be streamlined and accelerated. Government needs to subject environmental protection to the same efficacy standards that the market applies to commercial technologies -- we need environmental protection but it must be delivered cost effectively and quickly to add genuine value.

America has some of the highest taxes on corporations and small businesses in the world -- especially considering that businesses are still expected to foot much of the nation's healthcare bill -- and too many investment decisions are made to minimize taxes as opposed to creating economic value.

Tax reform that shifts gifted human resources from gaming the tax system to making stuff is sorely needed.

Finally, it would be folly to use the bounty of natural gas for quick profits through unbridled exports of liquefied natural gas to Asian economies that subsidize energy use in manufacturing and other commercial activities. Americans would see that gas returned, incorporated into artificially cheap products on U.S. store shelves, displacing U.S. jobs and slowing recovery.

Strategically reserving natural gas for truly competitive domestic uses in transportation and industry could easily create another 3 million jobs and would knock 1 or 2 percentage points off unemployment.

Breaking down other barriers posed by inefficient regulatory and tax systems could keep the economy growing robustly and at full employment for the next generation.

(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. Follow him on Twitter: @pmorici)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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