Fiscal crises threaten Europe's generous benefits

In the May 23, 2010 article "Fiscal crises threaten Europe's generous benefits," Associated Press writer Michael Weissenstein reports:

LONDON (AP) -- Six weeks of vacation a year. Retirement at 60. Thousands of euros for having a baby. A good university education for less than the cost of a laptop.

The system known as the European welfare state was built after World War II as the keystone of a shared prosperity meant to prevent future conflict. Generous lifelong benefits have since become a defining feature of modern Europe.

Now the welfare state -- cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism -- is coming under its most serious threat in decades: Europe's sovereign debt crisis.

Deep budget cuts are under way across Europe. Although the first round is focused mostly on government payrolls -- the least politically explosive target -- welfare benefits are looking increasingly vulnerable.

"The current welfare state is unaffordable," said Uri Dadush, director of the Carnegie Endowment's International Economics Program. "The crisis has made the day of reckoning closer by several years in virtually all the industrial countries."

Germany will decide next month just how to cut at least 3 billion euros ($3.75 billion) from the budget. The government is suggesting for the first time that it could make fresh cuts to unemployment benefits that include giving Germans under 50 about 60 percent of their last salary before taxes for up to a year. That benefit itself emerged after cuts to an even more generous package about five years ago.

"We have to adjust our social security systems in a way that they motivate people to accept regular work and do not give counterproductive incentives," German Finance Minister Wolfgang Schaeuble told news weekly Frankfurter Allgemeine Sonntagszeitung on Saturday.

The uncertainty over the future of the welfare state is undermining the continent's self-image at a time when other key elements of post-war European identity are fraying.

Large-scale immigration from outside Europe is challenging the continent's assumptions about its dedication to tolerance and liberty as countries move to control individual clothing -- the Islamic veil -- in the name of freedom and equality.

Deeply wary of military conflict, many nations now find themselves nonetheless mired in Afghanistan on behalf of what was supposed to be a North Atlantic alliance, shying away from wholesale pullout while doing their utmost to keep troops from actual combat.

Demographers and economists began warning decades ago that social welfare was doomed by the aging of Europe's baby boomers. Some governments had been trimming and reforming, but now almost all are scrambling to close deficits in order to prevent a wider collapse of confidence in the euro.

"We need to change, to adapt ... for the sake of the protection of our social model," European Union Commissioner Joaquin Almunia of Spain told reporters in Stockholm Thursday.

The move is risky: experts warn the cuts could undermine the growth needed to pull budgets back on a sustainable path.

On Monday, Britain unveils 6 billion pounds ($8.6 billion) in cuts -- mostly to government payrolls and expenses. The government has promised to raise the age at which citizens receive a state pension -- up from 60 to 65 for women, and from 65 to 66 for men. It also plans to toughen the welfare regime, requiring the unemployed to try to find jobs in order to collect benefits.

Britain says it will limit child tax credits and scrap a 250-pound ($360) payment to the families of every newborn. Ministers are reviewing the long-term affordability of the country's generous public sector pensions.

Funding for Britain's nationalized health care service will be protected under the new government, however, and should rise each year to 2015.

France's conservative government is focusing on raising the retirement age. Many workers can now retire at 60 with 50 percent of their average salary. Extra funds are available for retired civil servants, those with three or more children, military veterans and others.

A parliamentary debate is planned for September. Unions in France are organizing a national day of protest marches and strikes on Thursday to demand protection of wages and the retirement age.

In Spain, billions in cuts to state salaries go into effect next month, and the Socialist government has frozen increases in pensions meant to compensate for inflation for at least two years.

"They've hit us really hard," said Federico Carbonero, 92, a retired soldier. He said he was unlikely to live long enough to see the worst of the pension freeze, but had no doubts he would have to start relying on savings to maintain his lifestyle.

Spain is cutting assistance payments for disabled people by 300 million euros ($375 million) and did away with a three-year-old bonus of 2,500 euros ($3,124.25) per new baby. It also has proposed hiking the retirement age for men from 65 to 67.

Countries in northern Europe have done a far better of reforming social welfare and have unemployment systems that focus on re-employing people instead of making their unemployment comfortable, said Gayle Allard, a professor of economic environment and country analysis at the Instituto de Empresa in Madrid.

Denmark and other Nordic countries are known for the world's highest taxes and most generous cradle-to-grave benefits. Denmark has implemented a system known broadly as "flexicurity," which combines flexibility for employers to hire and fire workers with financial security and training to prepare for new jobs.

Denmark had a 7.5 percent unemployment rate in the first quarter of this year, well below the EU average of 9.6 percent. Swedish and Finnish unemployment stood at 8.9 percent. Norway, with some of the world's most generous unemployment benefits fully funded by oil for the forseeable future, has Europe's lowest jobless rate, just 3 percent in April.

Southern European countries that have not moved toward reforming welfare in the same ways are paying a steep price.

After sharp cutbacks imposed as the condition of an international bailout this month, Greeks must now contribute to pension funds for 40 instead of 37 years before retiring, and the age of early retirement is set to 60 at the earliest.

Civil servants with monthly salaries of above 3,000 euros ($3,750) will lose two extra months of salary -- one paid at Christmas, the other split between Easter and summer vacation.

In Portugal, seen as another potential candidate for bailout, the government is focusing on hikes in income, corporate and sales taxes and has avoided drastic changes to welfare entitlements. Unemployment benefits will be cut somewhat and the out-of-work will have to accept any job paying more than 10 percent more than what they would receive in unemployment benefits.

The government is also stepping up checks on welfare claims, freezing public sector pay and slicing public investment.

"There's been a lack of willingness to shift away from welfare as purely social protection towards an approach which has been in much of northern Europe in recent years, which is welfare as social investment," said Iain Begg, a professor at the London School of Economics and Political Science's European Institute.

Otto Fricke, a budget expert for the Free Democrats, the coalition partner of German Chancellor Angela Merkel's Christian Democratic Union, told The Associated Press that no decisions on cuts have been made, but everything is on the table except education, pension funds and financial aid to developing countries. At least one high-ranking CDU member has called for the idea of protecting education to be re-examined, however.

German public education, which was virtually free until 2005, when some of Germany's 16 states started charging tuition fees of 1000 euros ($1,250) a year.

Virtually all Germany's students pay that much or less to attend state-funded universities, including elite institutions. Education isn't as cheap elsewhere in Europe but the 3,290 pounds ($4,720) per year paid by British students at Cambridge is still far less than Americans pay at comparable schools like Harvard, where annual tuition comes in just shy of $35,000.

The idea of cutting education is proving hard to swallow in the face of Germany's promise to contribute up to 147.6 billion euros ($184.5 billion) in loan guarantees to protect Greece and other countries that use the euro from bankruptcy.

"I am worried that this crisis will also affect me on a personal level, for example, that universities in Germany will raise the tuition in order to pay the loan they give to Greece," said Karoline Daederich, a 22-year-old university student from Berlin.

What Happens If Greece Really Defaults?

In the March 11, 2010 U.S. News & World Report article "What Happens If Greece Really Defaults?," Matthew Bandyk reports:

Earlier this week, Greek Prime Minister George Papandreou traveled to the United States to promote a message: We're in this together. The debt crisis that has threatened the Greek economy and the stability of the European Union's monetary policies "very much involves America's interests," Papandreou stated in a speech at the Brookings Institution in Washington.

The prime minister--who was born in St. Paul, Minn.--even connected the current crisis to the Great Depression as well as the Great Recession. "If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago," he said.

But the path from a Greek crisis to a U.S. crisis is not a direct one. The European Union is hoping it can contain Greece's debt crisis before the problems spread across the continent--threatening the stability of all countries that use the euro, or the euro zone--and then over the Atlantic.

The crisis began shortly after the election last fall of the new socialist government led by Papandreou. State officials revealed that Greece's budget deficit was at 14 percent of GDP--almost twice what the official Greek government statistics had reported. Two months later, Moody's downgraded Greece's debt to A2, raising the possibility of Greece defaulting on its debt.

If Greece defaults, "it risks exacerbating the economic downturns and could even reignite an acute financial crisis" through higher interest rates, Marc Chandler, global head of currency strategy at investment firm Brown Brothers Harriman, wrote in a report.

A Greek default would hit Americans hard in one major area: exports. According to the Economic Report of the President by the White House's Council of Economic Advisers, in order to "fill the gaps left in demand" by the recession, "net exports need to rise." President Obama announced in his State of the Union address a goal of doubling exports over the next five years. That goal might be hard to reach if Greece's debt crisis is not contained. "Under the scenario where things get much worse in Europe, the dollar would get strengthened relative to the euro, and that would create a policy headache for the Obama administration," says Steve Hanke, an economist at Johns Hopkins University. A stronger dollar would make U.S. exports more expensive. In addition, as interest rates in Europe soar and the euro falls in value in response to the credit crunch, Europeans would be unable to buy as many U.S. products.

The likelihood of that scenario depends partially on what the European Union decides to do about Greece. In reaction to this panic in Greece, much of the rest of Europe became frustrated over Greece's ability to hurt the rest of the continent economically but with little accountability owing to the fact that Greece is an independent state. Because Greece uses the euro, its fiscal problems can weaken the currency and lead to higher interest rates for all Europeans. A February poll found that a majority of Germans want Greece out of the euro zone.

Greek officials have received reassuring signs from Europe's leaders that the European Union will bail out the country in some way to assure creditors that it will not default on its debt. Jose Manuel Barroso, president of the European Commission, also announced this week that whatever mechanisms the EU uses to help Greece will be in line with the laws of the EU--assuaging fears that a bailout would violate the Maastricht Treaty, the agreement that created the euro.

But it is not guaranteed that bailing out Greece will save it and, by extension, the euro zone. Hanke worries that even with a bailout, wealthy Greeks and foreign investors will not stop withdrawing their money from Greek banks, from which they have already pulled out billions of euros. In order to get the rest of Europe's support for a bailout, Greece has had to promise to fill in its budget with more tax revenue. But paradoxically, those taxes might cause even more people to flee the Greek financial system, says Hanke. "In effect, with bank runs coupled with capital flights, you would get a collapse in credit in Greece," he says.

Such a collapse would have two major potential effects. First, a credit crunch would spread to other European countries that have vulnerable economies. For example, "if you had a lot of capital flight out of Greece, all of a sudden people in Spain say, 'We're going to be next,' " says Hanke.

Second, the credit crunch would increase the likelihood of Greece defaulting on its debt. In such a scenario, Greece could temporarily leave the euro zone and return to its former currency, the drachma, which would be heavily devalued against the euro.

There are still several signs that Greece can use the market to navigate out of the crisis without a default. Last week, Athens sold 10 billion euros of 10-year sovereign bonds to foreign investors. But an amount of 23 billion euros is needed to meet government obligations through May. And Greece has only begun to implement changes to its budget that will bring it out of a fiscal hole. Earlier this month, the government announced a plan of cuts to wages of government employees, tax hikes on tobacco and alcohol, and other measures expected to raise 4.8 billion euros. But these steps will reduce Greece's budget deficit by only 2 percent of GDP. It now stands at 12.7 percent of GDP, well above the European Union's target of 3 percent. Even the changes so far have not been easy politically. Several of the country's labor unions are striking in protest of the spending cuts and tax increases.

Perhaps, however, Greece can breathe its biggest sigh of relief over the fact that the international investors who recoiled in horror over the country's fiscal problems just a few months ago appear now to be softening their stance. Investors trade credit-default swaps on Greek sovereign debts, which are contracts that function as a kind of insurance on the chance the government will default. According to credit-default-swap prices from financial information company Markit, the annual cost to insure a five-year government bond for Greece hit a high of $425,000 on February 4. That was a 67 percent increase from the previous three months. But as of March 9, the cost had fallen to $289,000, down to the levels of December.

EU drops Microsoft browser charges

In the December 16, 2009 article "EU drops Microsoft browser charges," Associated Press business writer Aoife White reports:

BRUSSELS – The European Union has dropped long-standing antitrust charges against Microsoft Corp. after the company agreed to give users of the Windows operating system a choice of up to 12 other Web browsers.

Under the terms of the deal with regulators announced Wednesday, Microsoft will avoid further EU fines if it provides a pop-up screen that lets European users — from March — replace Microsoft's Internet Explorer or add another browser such as Mozilla's Firefox or Google's Chrome. Internet Explorer is used by a majority of global internet users.

The deal will also allow computer manufacturers to ship PCs without Internet Explorer in Europe.

Neelie Kroes, the EU's competition commissioner, claimed the deal was an "early Christmas present for more than hundreds of millions of Europeans" who stood to benefit from having "effective and unbiased choice" between Microsoft's Internet Explorer and competing browsers.

"The (European) Commission has resolved a serious competition concern for a key market for the development of the Internet," she told reporters.

"It is as if you went to the supermarket and they only offered you one brand of shampoo on the shelf, and all the other choices are hidden out the back, and not everyone knows about them," she said. "What we are saying today is that all the brands should be on the shelf."

Microsoft general counsel Brad Smith said the company was pleased with "final resolution of several long-standing competition law issues in Europe" and looked forward to building "on the dialogue and trust that has been established between Microsoft and the Commission."

Wednesday's deal comes after more than a decade of EU antitrust action against the world's biggest software company that has already seen it pay euro1.7 billion in fines.

Microsoft is not totally out of the woods yet, as it was warned it can still be fined up to 10 percent of yearly global turnover without regulators having to prove their case if it doesn't stick to this commitment for the next five years.

Kroes confirmed she was still looking at complaints from software rivals that the company wasn't sharing key information that help others make products compatible with Microsoft software.

In January, the EU charged Microsoft with monopoly abuse for tying its browser to the Windows operating system software used on most desktop computers — this, they said, was an "artificial distribution advantage" that rivals didn't have.

Kroes said a lot of Internet content was specially adapted to Internet Explorer. since the browser was present "on virtually every PC in Europe." Other software makers complain that this caused technical problems that made it hard to use other browsers.

The EU said Monday that a pop-up choice screen would eliminate those concerns when it is downloaded as an automatic update to all users of Windows XP, Windows Vista and Windows 7 in Europe who have Internet Explorer set as their default browser. Other users will be asked if they want it.

The choice screen will list the 12 most-widely used Web browsers running on Windows — listing five prominently. Users can pick and download one or several of them, choosing from Apple's Safari, Chrome, Internet Explorer, Firefox, Opera, AOL, Maxthon, K-Meleon, Flock, Avant Browser, Sleipnir and Slim Browser.

Some 100 million computers will likely display the screen by mid-March and around 30 million new computers will show it over the next five years, the EU said.

People can keep Internet Explorer if they want — but they will for the first time be exposed to other browsers, providing a massive new audience to many smaller browser makers.

The choice of browsers will be updated every six months on the basis of several independent sources of market share information.

Microsoft will report back regularly to the European Commission, starting in six month's time, on how the rollout of the screen is going — and could make changes if the EU asks. The EU is also able to review the entire deal at the end of 2011.

Microsoft will also provide more information to help software developers make products compatible with Windows, Windows Server, Office, Exchange and SharePoint and will publish what the EU says is an "improved version" of an offer that Microsoft first made in July.

The EU says it is still investigating whether Microsoft is holding back some of the key data that developers need to make products that work with its software.

Regulators said they welcomed Microsoft's move but that the offer was still "informal" and wouldn't end their probe. But they offered some hope saying they would "carefully monitor the impact" of the deal on the market.

Thomas Vinje, a lawyer for browser company Opera and the European Committee for Interoperable Systems, said it was "not yet clear" that Microsoft's offer would create "a more level competitive playing field where open source software is not subject to Microsoft patent fear uncertainty and doubt."

Vinje helped file the complaints to EU regulators that triggered the investigations into Microsoft's browsers and interoperability sharing.

On The Net
http://www.browserchoice.eu.

EU officials warn of disappearing cod

In the October 17, 2009 article "EU officials warn of disappearing cod," Associated Press writer Raf Casert provides an example of how public resources (such as fish in the ocean) are subject to exploitation.

BRUSSELS – The European Union's executive body is calling for sharp cuts in the amount of cod fishermen can catch next year, pointing to estimates that the fish is close to extinction in some major fishing areas around Europe.

Officials warned Friday that only steep catch cuts will prevent the disappearance of a species prized for centuries for its flaky white flesh.

The European Commission said recent studies showed cod catches in some areas are far outstripping the rate of reproduction. It is calling for up to 25 percent cuts in some areas.

"We are not that far away from a situation of complete collapse," said Jose Rodriguez, a marine biologist with the environmental group Oceana. He and other environmentalists said pressure from the fishing industry had kept quotas at levels too high to sustain a viable populations around Europe, while lack of enforcement meant illegal fishing made the problem worse.

Scientists estimated that in the 1970s there were more than 250,000 tons of cod in fishing grounds in the North Sea, eastern English Channel and Scandinavia's Skagerrak strait. In recent years, however, stocks have dropped to 50,000 tons.

The European Commission said Friday it would seek in 2010 to cut the catch in some fishing grounds around Britain, France, Spain and much of Scandinavia from 5,700 tons to 4,250 tons.

In the Mediterranean, bluefin tuna has been overfished for years to satisfy increasing world demand for sushi and sashimi. The tuna population is now a fraction of what it was a few decades ago, but the EU's Mediterranean nations last month refused to impose even a temporary ban.

Oceana estimated that illegal fishing doubled the amount of tuna caught.

Meanwhile cod, which once sustained vibrant fishing communities from Portugal to Britain to Canada, is increasingly consumed by the ton as salt cod and fish-and-chips.

"People don't ask for fish and chips, they ask for cod and chips," said Mike Guo, a manager at Great Fish and Chips in Essex, England. "It's a traditional dish."

The depletion of the species has caused the decay and disappearance of hundreds of fishing villages on both sides of the Atlantic.

Overfishing off Canada's maritime provinces exhausted the world's richest cod grounds and forced the government to impose a fishing moratorium. The collapse wiped out more than 42,000 jobs, and 18 years later the fish have still not returned.

"It was devastating," said Tom Hedderson, minister of fisheries in Newfoundland. "This affected whole communities ... all up and down the coast here in Newfoundland and Labrador."

He welcomed the EU call to cut catches by 25 percent, but suggested more drastic cuts may be needed.

Some Canadian scientists believe the collapse of cod stocks off Newfoundland and Nova Scotia changed the marine ecosystem so dramatically that it may be impossible for cod to recover. Off Newfoundland alone, cod stocks once exceeded more than 400,000 tons but now scale only 5,500 tons, Hedderson said.

There are signs of recovery of Atlantic cod off New England, however, after years of conservation efforts. And international regulators have reopened some areas off Canada for limited fishing, Canada's Fisheries and Oceans Department spokesman Scott Cantin said.

The fishing industry in Europe, however, is in decline. The number of vessels in the 15 nations that were part of the EU in 1995 has dropped from 104,000 then to 81,000 in 2006. In Britain, employment in the fishing sector sank from 21,600 in 1990 to 16,100 in 2006.

The EU Commission's demand for cod cuts will be discussed by the bloc's 27-member states in a Dec. 14-15 meeting, when the fishing quotas for 2010 will be finalized.

"The scientific prognosis for most stocks is not encouraging, with many in a worse state than last year," Britain's Department for Environment, Food and Rural Affairs said Friday. "This, combined with the difficult economic climate, will mean that the negotiations will be even more challenging this time around."

Keeping fishermen in port with excessive quotas will add to their economic woes, said Bertie Armstrong of the Scottish Fishermen's Federation.

Norway and the EU jointly oversee cod stocks in North Sea, with each party regulating the stocks in its waters.

Norway and the EU will begin annual negotiations on cod stock management in November. Ann Kristin Westberg, deputy director-general of Norway's Fishery Ministry, said her country was unlikely to accept a 25 percent quota.

"We probably want to have it lower," she said. "We would like to point out that stock the EU are involved in managing are in terrible shape."

The cod harvest from the Georges Bank and Gulf of Maine fishing grounds, the two primary New England fishing grounds, in 2007 totaled 3,868 metric tons, the biggest catch since 2003 but far under the landings of the 1980s when fishermen often caught more than 20,000 tons annually.

"The Gulf of Maine stock is responding to the recovery plan, and the Georges Bank stock is recovering but not as much," said Teri Frady of NOAA's Northeast Fisheries Science Center in Woods Hole, Massachussets.

Are U.S. farm subsidies illegal?

According to the January 22, 2007 New York Times article "EU joins WTO complaint against U.S. corn subsidies":

DAVOS, Switzerland — The European Union, Australia, Argentina and Brazil have joined Canada in a complaint against the United States over what they claim are illegal government handouts to American corn growers, trade officials said Monday.

The request for consultations, filed by the four trading powers and others at the World Trade Organization in Geneva, threatens a major commercial dispute at a time when global free trade talks remain stalled over agricultural tariffs and subsidies and when the United States is beginning debate on a new multibillion-dollar farm bill.

Under WTO rules, a three-month consultation period is required before a country can ask the trade body to initiate a formal investigation.

A case can result in punitive sanctions being authorized, but panels take many months, and sometimes years, to reach a decision.

Canada lodged its complaint Jan. 8, claiming that some $9 billion paid out by the United States annually in export credit guarantees and other subsidies unfairly and illegally deflated international corn prices.

"This is not just about corn," said Clodoaldo Hugueney, Brazilian ambassador to the WTO. "Brazil is the world's largest ethanol exporter, so this is an important issue for us."

Hugueney said any country's large subsidy program concerns Brazil as a major agriculture exporter.

Sean Spicer, a spokesman for the U.S. trade representative, Susan Schwab, declined to comment on the countries joining the complaint. The office, however, was critical of Canada's action earlier this month.

"Corn prices have increased significantly in both the United States and in Canada," Gretchen Hamel, a spokeswoman for the U.S. trade representative, said at the time. "In addition, U.S. corn exports to Canada have declined in the last year. Given the dramatic improvement in the market over the past year, we're surprised that Canada believes that our corn programs are now causing harm in breach of WTO rules."

The WTO, in a case brought by Brazil, already has ruled that some cotton subsidies are illegal, and the administration of President George W. Bush has been coming under pressure to reform a number of its farm support programs.

"Many of the issues in Canada's complaint we have also complained about concerning U.S. cotton programs," said Hugueney by telephone from Geneva.

Canada's complaint over U.S. corn support also challenged whether the billions of dollars in overall farm subsidies paid out by the U.S. government comply with international commerce rules.

It argued that U.S. subsidy levels for a number of years on farm products including wheat, sugar and soybeans were illegal, and urged Washington to address its concerns when drafting the farm bill that would set out American agricultural support programs for the next five years.

The United States said it has offered cuts as part of the WTO's global free trade talks, but others have called the pledges largely artificial, addressing only permitted levels of government subsidies and failing to cut what Washington actually gives to its farmers.

The United States is the world's largest producer and exporter of corn, accounting for more than 40 percent of global production and nearly 60 percent of all exports in 2004 and 2005, according to the U.S. Grains Council.

Argentina, Brazil and Canada are the next largest exporters in the Western Hemisphere, and all rank in the top 10 globally.