Massenbach-Letter: NEWS 18/04/14


Udo von Massenbach

Guten Morgen.

· U.S. Tops Other Global Leaders in Approval

· Fangen wir an: Schüler-Helfen-Leben in Jordanien für Syrien*

Massenbach* *Germany’s Schaeuble Says Russia’s ‘Imperial Moment’ Will Pass*

Apr 11, 2014 8:48 PM GMT+0200

German Finance Minister Wolfgang Schaeuble said Russia’s display of force on Crimea will be a passing phenomenon and urged the U.S. to work more with its allies to maintain the allure of American “soft power.”

In a speech to the Council on Foreign Relations in Washington, Schaeuble said Russia’s economy faces a “rather gloomy” outlook, depends on commodities, is less diversified than in Soviet times and has an industrial sector in decline.

“Globalization and empires don’t go together,” Schaeuble said. “Because of this, Russia’s current imperial moment will remain just that — a moment, especially since it’s already based on a shaky foundation.”

The standoff between Russia and the U.S. and its European allies is dominating talks of finance chiefs in Washington for the spring meetings of the International Monetary Fund and the World Bank. The U.S. Treasury today added seven individuals and a natural gas company to the list of those subject to sanctions over Russia’s incursion into Ukraine.

Group of Seven finance ministers and central bankers had a “discussion of the situation in Ukraine, its financing needs and the international response,” they said in a statement after talks in Washington yesterday. The G-7 comprises the U.S., U.K., Canada, France, Germany, Italy and Japan.

Russia’s annexation of the Crimea has prompted the U.S. and Europe to move closer together, Schaeuble said, pointing to President Barack Obama’s first visit to Brussels, where the European Union’s executive arm is based. The Ukraine crisis will strengthen trans-Atlantic ties and help both sides focus on joint interests, he said.

Soft Power

Globalization favors the so-called soft power of countries with strong economies that are able to support “attractive” social models, Schaeuble said. For the U.S. to maintain its soft-power status, it should exercise its leadership more within the framework of multilateral relations, he said.

“When it comes to civil rights and data protection, everyone in the world must enjoy the same rights,” Schaeuble said in a reference to National Security Agency spying on individuals including German Chancellor Angela Merkel. “When there’s visible damage between friends, you can be sure that it’s going to be even worse in the rest of the world.”

The U.S. should ratify changes to voting rights at the International Monetary Fund that would give emerging economies more say, Schaeuble said. U.S. rules that place higher regulatory requirements on the U.S.-based activities of foreign banks violate the spirit of reciprocity and risk leading to discrimination, he said.

The U.S. is delaying implementation of a 2010 agreement by all IMF member countries that would adjust some nations’ shares, or quotas, in the fund and double its lending capacity to about $739 billion.



Policy= res publica

Freudenberg-Pilster* Germany’s Minimum Wage: A Costly Experiment

Posted on April 4, 2014 by Klaus F. Zimmermann

The new German government coalition has announced the introduction of a national statutory minimum wage of €8.50 per hour. The wage will be implemented as of January 1, 2015, allowing interim wage agreements until December 31, 2016.

Given that the decision to introduce a minimum wage has already been made, the discussion now needs to focus on identifying the negative consequences for the German labor market. In particular, that means proposing ways to minimize those negative effects.

Although many European countries have a minimum wage, they differ substantially in terms of the wage level, the chosen mechanism of adjustment, and the exceptions for certain labor market groups.

Minimum wages can be compared internationally by relating them to median earnings. This measure is commonly referred to as the Kaitz index. For Germany, the median hourly wage for full-time employees was €17.10 in 2012.

Thus, the proposed minimum wage amounts to 50 percent of the median income in the country, placing Germany considerably above the OECD average (see chart below). These results suggest that this asymmetry will have serious consequences for the German labor market.

Minimum wages in Europe relative to median full-time earnings (2012). Source: OECD.
* based on median wage for full-time employees (€17.10/hour)
** based on median wage for all employees (€14/hour)
*** mean of available calculations (€15.26/hour)

What Will Be the Likely Outcome?

One has to be concerned about seven negative consequences in total.

First, a number of simulation studies have examined the employment effects of implementing a statutory minimum wage. Studies undertaken by researchers of the IZA for Germany have shown that at least 600,000 people – among them mainly part-time employees, women, low-skilled workers and East Germans – will lose their jobs. That is 1.38 % of the country’s labor force and could drive up the German unemployment rate from the present 7.3 % to 8.7 %.

Second, significant consequences for employment can be expected particularly in areas that have contributed strongly to recent job growth, such as the service sector and part-time employment.

Third, many small businesses and employers in East Germany will be forced to make significant upward wage adjustments. This will also affect employment and it will create incentives to circumvent minimum wages, e.g., by working unpaid overtime or by shifting employment to work contracts based on formal self-employment.

Fourth, as is common in other countries, young workers, trainees, interns and long-term unemployed individuals should be exempt from the minimum wage in order to prevent them having to face an additional barrier to labor market entry.

Fifth, past research shows that (high) minimum wages encourage adolescents to drop out of training programs. Why? A minimum wage makes even simple jobs more attractive. Instead of accumulating human capital, which is increasingly important in a global economy reliant on higher qualifications, young workers may accept unstable and low-skilled jobs. This damages their future labor market prospects.

Sixth, due to large differences in minimum wage levels across EU member states and in view of the free movement of labor within the EU, it is also possible that additional workers from countries with lower minimum wages may seek work in Germany. This would have adverse effects on Germany’s overall labor market.

Finally, the political rationale behind the introduction of a statutory minimum wage is usually dominated by social fairness considerations. Given that, it is important to look at the distributional effects.

Although a minimum wage has a positive impact on the wage distribution in a country, the interaction of minimum wages with the given country’s tax and transfer system means that there is little change in disposable income. How so? Simply because higher wage income raises tax liability and that, in turn, leads to reductions in supplemental income benefits these individuals receive.

Further, and even worse, most of those who currently qualify for the minimum wage do not live in low income households. Hence, it is not at all surprising that the income distribution across households can hardly improve. Minimum wages are known to be very inefficient tools to fight inequality.

What Should Be Done?

First, if the introduction of a minimum wage is politically desired despite its potentially negative labor market effects, a cautious approach is advisable as it was taken in the United Kingdom. Starting off at a lower level than €8.50 would allow the German government to test the impact of a minimum wage on the market. Based on the results, the minimum wage could be incrementally raised or such increases might be found inadvisable.

Second, a lower minimum wage for adolescents without training, as well as for trainees and interns, is reasonable provided that skills acquisition has priority, as it should. Moreover, an exception for the long-term unemployed helps to prevent the minimum wage from becoming a permanent hiring obstacle.

And third, what is of utmost importance after any implementation is the ongoing analysis of dynamic changes in the level of employment and wages, corporate workforces, labor demand, particularly the creation of new jobs, or the quality of employment.

It would be interesting to see how the statutory minimum wage in Germany affects the wage distribution above the minimum wage threshold.

However, the German government does not plan to establish such a careful evaluation based on independent scientific research. And it attempts to impose a strict and general implementation of the minimum wage with practically no exemptions.

However, policymakers should tread carefully. Despite the political dynamics, they should use caution and proceed in a gradual fashion – lest they accept the risk that their good intentions will result in great disappointment in the end.

After all, the road to social policy improvements is plastered with examples that ended up backfiring, not just diminishing the intended positive effects from becoming a reality, but contravening them. That is a luxury – read: waste – no country can really afford any longer.

An adapted version of this article appeared in the Wall Street Journal (April 2, 2014).



Politics: From Vision to Action

Barandat* *ANALYSIS – Middle East Drought A Threat To Global Food Prices*

* U.N. and experts say Middle East driest in decades

* Rain-fed cereal areas in Syria and Iraq hurt

* Experts say poor management worsens drought’s impact

* Increased need for imports will pressure global prices

AMMAN, March 7 (Reuters) – The Middle East’s driest winter in several decades could pose a threat to global food prices, with local crops depleted and farmers‘ livelihoods blighted, U.N. experts and climatologists say.

Varying degrees of drought are hitting almost two thirds of the limited arable land across Syria, Lebanon, Jordan, the Palestinian territories and Iraq.

"Going back to the last 100 years, I don’t think you can get a five-year span that’s been as dry," said Mohammad Raafi Hossain, a U.N. Food and Agriculture Organization (FAO) environmental economist.

The dry season has already hurt prospects for the cereal harvest in areas of Syria and to a lesser extent Iraq. Several of the countries under pressure are already significant buyers of grain from international markets.

"When governments that are responsible for importing basic foodstuffs have shortages in production, they will go to outside markets, where the extra demand will no doubt push global food prices higher," said Nakd Khamis, seed expert and consultant to the FAO.

The Standard Precipitation Index (SPI) shows the region has not had such low rainfall since at least 1970.

This was part of the initial findings of a joint technical study on Drought Risk Management undertaken by several U.N. agencies, including the FAO, UNDP and UNESCO, that would be formally published later this month, Hossain said.

Water and agriculture authorities, alongside specialist U.N. agencies, have begun preparing plans to officially declare a state of drought that spreads beyond the Eastern Middle East to Morocco and as far south as Yemen, climatologists and officials say.

Drought is becoming more severe in parts of the Eastern Mediterranean and Iraq, while Syria, having seen several droughts in recent decades, is again being hit hard, said Mohamad Khawlie, a natural resources expert with Planinc, an international consultancy focused on geospatial studies in the Middle East and Africa (MENA) region.

In Jordan, among the 10 countries facing the worst water shortages globally, Hazem al-Nasser, minister of water and irrigation, told Reuters precipitation levels were the lowest since records began 60 years ago.

Even after an exceptionally heavy snow storm that hit the region in mid-December, the kingdom’s dams are still only 42 percent full, down from 80 percent last year, officials say.

In Lebanon, where climate change has stripped its mountain slopes of the snow needed to recharge groundwater basins, rain is "way below the average", said Beirut-based ecosystem and livelihoods consultant Fady Asmar, who works with U.N. agencies.

He said the stress on water resources from prodigal usage was exacerbated by the presence of nearly a million registered refugees since the Syrian civil war began in 2011.

Only Israel will not face acute problems, helped by its long-term investment in desalination plants and pioneering water management techniques.

In Iraq and Syria, where most of the country is too arid for agriculture, civil conflict and lack of water storage facilities will add to the hardship of rural communities dependent on crop cultivation and livestock.

U.N.-based field studies show that over 30 percent of households in Iraq, Syria and to a lesser extent the Palestinian territories and Jordan, are connected with agriculture.

"Crop production is going down because of drought, and so in these agro-pastoral economies you are looking at many, many lives that are now affected," Hossain said.

In Iraq, which once boasted the largest tracts of fertile arable land in the region, it is only three years since the last major cycle of drought ended, which covered more than 73 percent of the country.

Extracts from a soon-to-be released U.N.-commissioned study says drought in Iraq will persist, increasing in severity from 2017 to 2026, increasing further the dependence on foreign food imports by one of the top grains importers in the world.

The U.N. study extracts say Turkey, where much of Iraq and Syria’s water resources originate, has cut the volume of water flowing into the Euphrates and Tigris rivers by dam construction to meet their own growing domestic needs.


A poor rain season in Syria has already hit its 2014 wheat outlook in the main rain-fed areas in the north eastern parts of the country, which should be ready for harvest in June and July, Syrian agriculturalists say.

Experts say that even if late heavy rain comes in March, this will not save the rain-fed cereal harvest, which farmers are already resigned to relegating to animal fodder.

"When there is delay in rains, then the cereals will eventually wilt. Annual growth has not been achieved for the rain to come and continue maturity of the stalks," Asmar said.

Crop production in the conflict-torn country that once boasted bumper wheat seasons is expected to decline further.

Syria’s wheat production is now pinned on the irrigated sown areas that depend on the Euphrates and underground water, which before 2011 accounted for no more than 40 percent of total annual production.

The drought and war could slash Syria’s total wheat output to less than a third of its pre-crisis harvest of around 3.5 million tonnes to just over a million tonnes in 2014. Agricultural experts say the most favorable estimates for last year’s harvest did not exceed 2 million tonnes.

Drought that peaked in severity during 2008 and 2009 but persisted into 2010 was blamed by some experts inSyria for the soaring food prices that aggravated social tensions and in turn triggered the 2011 uprising against President Bashar al-Assad.

"Prior to the protests, food costs were soaring. In fact, because of these food costs, the protests were instigated, so this was brought on by drought and lack of planning," said FAO’s Hossain.

Economic hardship was aggravated by faltering public subsidy schemes that once efficiently distributed subsidized fertilizers and seeds to millions of drought-hit farmers in both Syria and Iraq, agro-economists add.

Middle-Eastern experts predict more frequent drought cycles in coming years, accompanied by delayed winter rainy seasons that damage fruits by promoting premature flowering and prevent cereal crops growing to full maturity.

"The climate change cycles are now shorter, which means … we will eventually have less rain and more frequent droughts," Fady Asmar said. (Reporting by Suleiman Al-Khalidi; Editing by Veronica Brown and Will Waterman)



Suter* *Why Refugee Influx Threatens Lebanon, Jordan Stability*

David Schenker *Also available in CNN Global Public Square* April 10, 2014