Lessons for Vietnam from the EU’s imminent financial strife
Shaken by the coronavirus crisis, the world economy is currently stumbling. The European Union as well as Vietnam has taken various measures to halt the pandemic.
|By Prof. Dr. Andreas Stoffers Friedrich Naumann Foundation|
However, it is still open if the EU can cope with the crisis at all, due to the deep structural problems of this supranational institution. Since Vietnam is part of the global market, a teetering EU would also harm the country’s prosperity and growth.
When the forerunner organisation of the EU was founded in 1952, its founding fathers agreed that co-operation in the economic sphere should put an end to the devastating armed conflicts within Europe. This guiding principle of this big European peace project was to determine the policy of the European Community for decades.
The goal of the founding fathers was to create a “Europe of fatherlands”, a Europe in which the individual nations could meet peacefully and trade freely with one another and at the same time maintain their national identity and independence. The creation of a centralised super-state was not the founding fathers’ purpose at that time.
The Eurozone project
In recent years, as some critics lament, the initial peace project has become a mere nuisance. Britain began the transition phase to exit the EU at the beginning of 2020 after many years of heated and not always fair debates.
How could this happen? Shouldn’t the EU be a project in which every European nation is happy to participate? Apparently, the EU has made mistakes that need to be addressed if the EU would like to prosper and not to be maintained by force. The EU needs a fundamental reform, a kind of “doi moi”.
The reasons for this development are manifold. Some critics see the introduction of the Euro in 1999 as a cardinal error, because the common currency brought together countries that could not be more different. For some, such as Germany, the Euro was too weak and resulted in an export boom.
Due to the relative weakness of the currency, the German domestic industry no longer had to strive so hard. With its former currency, this was completely different. To be able to sell its high-priced goods at all, German products had to be of unique quality.
Moreover, the relatively cheap labour combined with still high productivity attracted many investors to Germany. For other EU countries like Greece, the Euro was too strong.
As a result, its own products became too expensive on the world market and found no buyers. Wages were also too high compared to productivity, at the same time without any option of currency devaluation. The Greek industry collapsed. To put it in a nutshell: the Euro did not suit anyone.
However, Germany only partly benefited from its own exports. This is where the European Central Bank (ECB) came into play by creating a clearing system to simplify the payment flows of the Euro countries in 2007. This system initially worked well for payments between the Euro countries, as the balances were settled promptly in the case of transnational payments.
Sometimes, for instance, the Italian central bank owed money to the German equivalent for a few days, and sometimes it was the other way round. Since 2011, this has changed dramatically: while Germany delivered goods to Italy, no payment was made to the German central bank; the debts were just put on the slate. In the meantime, they amount to almost €400 billion, which Italy owes to Germany and will probably never return.
Another issue is that the EU is not complying with the rules it has set itself. The Maastricht criteria on the soundness of its own finances has been broken many times and repeatedly. The Dublin Agreement on the treatment of asylum seekers has also been violated permanently since 2015. There is still no solution to the migration crisis.
Nations such as Hungary, which wish to retain their national identity and accept only limited numbers of immigrants from Afghanistan, Pakistan, and the African continent, are being mistreated. Meanwhile, the next migration catastrophe is just around the corner. In addition, more and more qualified citizens are now emigrating from countries like Germany.
And the fact that Greece – with the help of EU grants and supported by a major US bank – knowingly cheated in its admission to the Eurozone is now being whistled from the rooftops. But the entire event had no consequences. Greece was handed a bailout using taxpayer money, especially that of the Germans.
In this context, the risks that were previously held by French banks in particular shifted to the citizens of the EU. Greece will never be able to repay its debts.
A temporary withdrawal of the Greeks from the EU combined with a currency devaluation would certainly have been an option here, but was not done due to political reasons. This is the way it stays in the EU: business is as bad as usual.
The monetary policy in the EU is also a mess. Unlike the ECB, whose interest rates have been lowered to zero since 2016, the State Bank of Vietnam (SBV) has not yet shot its bolt in the coronavirus pandemic. The interest rate cuts by the SBV have been moderate and coming from a decent level. It can send an important signal to the economy. They enable companies to obtain loans more cheaply.
For example, how can the ECB still support the market through its interest rate policy? Negative interest rates as the only option would drive people into cash. The latter would have to be banned. A downward spiral would be set into motion, at the end of which there would be an absolute loss of confidence in the currency.
Even now, the ECB’s disastrous zero interest rate policy is already causing massive difficulties for EU banks. Up to 80 per cent of banking profits come from margins. With a zero-interest rate policy, the margins will be almost completely eliminated. The savings margin becomes negative, the transformation margin, as well and the credit margin is reduced to a minimum.
In Vietnam, the situation is much better, and the SBV still has plenty of leeway on interest rates. However, the ECB’s policy should be a warning finger for Vietnam against a zero interest rate policy. With regards to the Eurozone, an increasing number of economists initially see a deflationary phase, which has already begun with the stock market crash in March. Share prices fell dramatically, leading to a devaluation of goodwill.
Thanks to the drastic exit restrictions in most EU countries, production is also coming to a standstill. Many companies are currently facing bankruptcy.
As a consequence, they will desperately try to make whatever money they can: real estate, stocks, precious metals, and vehicles, which fuels the deflationary spiral. The European economy, in general, will also witness downward acceleration. German think tank CESifo believes that the country’s growth could decline 7-11 per cent or even more, which is resulting in mass dismissals and is fuelling the slump in demand.
At some point and certainly soon the wind will change. A low supply of goods due to the lockdown will encounter an expansive monetary policy, which in all probability will end in a hyperinflationary spiral. All in all, the outlook for the EU is poor. In Vietnam, although growth in the first quarter of 2020 was smaller than before, the economy is sounder than in the EU.
Of course, the Vietnamese policy also entails risks. For example, the national debt will increase. Since 2016, the national debt has nearly touched the ceiling of 65 per cent, which offers limited space to borrow more. In addition, it could happen that companies rely too much on government support rather than finding ways out of the crisis by themselves, which would ultimately make them strong. Vietnam should resist the temptations of long-standing Keynesian policies.
This always leads to an upward spiral of state interventionism. There have been economic crises and there always will be. It would be alchemy to believe that Keynesian instruments can eliminate or dampen them. Measures may be necessary as in this case, but they should be taken with a sense of proportion and limited in time. Nevertheless, the Vietnamese economy appears much more robust than the anemic EU.
Ten considerations to keep in mind for Vietnam during the looming global economic crisis
* The current emergency measures introduced by the Vietnamese government can be considered in due time as sensible, and prudent.
* The existing restrictions on daily life and the economy must be lifted as soon as an end to the crisis is in sight or when the cost of a shutdown is higher than the possible cost of an controlled infection in order to give the economy the opportunity to revive itself under its own steam.
* In view of the negative example set by the EU, Vietnam should take a very prudent approach regarding ASEAN integration. Economic integration is certainly to be welcomed. However, a common currency or even political integration would be the wrong way forward. The current crisis has shown that smaller entities and nation states such as South Korea and Vietnam can deal with it better, faster, and more flexibly than supranational organisations such as the EU.
* In overcoming the crisis, Vietnam will have to continue to promote university education and, above all, provide more practical elements in tertiary education. Vietnam needs to focus on value-creating STEM (science, technology, engineering and mathematics) disciplines as well as business administration/economics.
* In addition to university education, dual vocational training should be given an important role. Currently, there is still a gap between academic theoreticians and unskilled workers in Vietnam’s labour market. Here, own training programmes based on the German model, in which practical and theoretical teaching contents are imparted, would be valuable.
* Due to a misguided industrial policy, important branches of industry have been neglected in recent years in the EU, especially in Germany. For example, the German government took an active part in making energy prices the highest in Europe for allegedly ecological reasons in line with EU guidelines, which is weakening the backbone of the German economy, the automotive industry, and mechanical engineering. Vietnam should learn from these mistakes and do everything it can to continue its industrialisation. Of course, attention must also be paid to the environment.
* As regards energy policy, the EU example can also serve as a warning. While in Germany forests are being cut down in order to install supposedly environmentally-friendly but highly-subsidised wind turbines across the board, clean coal-fired power plants and ultra-modern nuclear power plants are being shut down at the same time. Other EU members are more intelligent in this respect. For example, Germany’s neighbouring countries are building nuclear and coal-fired power plants near the border to supply Germany. The consequences are no positive effects at all for the environment, but the highest energy prices, dependency, job losses, and the danger of blackouts in Germany. Vietnam should therefore continue to expand all energy sources. This includes – besides renewable energy – modern nuclear power plants as well as coal-fired power plants with the appropriate filters.
* Anyone living in a megacity like Hanoi knows that the environment is very polluted. The air quality is getting worse every year. Money has to be invested here. Climate protection is important, but in this case it has to take a back seat. Health in the here and now has priority.
* The successful path of liberalisation of Vietnam’s economy must be continued. The socialist market economy as practised since doi moi in 1986 has given Vietnam an incomparable upswing. A relapse into Keynesian concepts, as is happening in the EU, would be fatal.
* Globalisation has and will bring Vietnam many advantages. It must be maintained. However, the crisis has shown that diversification of trading partners helps to reduce dependencies and vulnerability to crises. The EVFTA in particular will open up further opportunities for Vietnam. VIR
Prof. Dr. Andreas Stoffers
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