Anwar Shaikh, an economist now teaching at the New School for Social Research in New York City, summed up the problem of core/periphery trade relations and the inevitable imbalances that result from "free trade." Such imbalances only promote further inequality within the global economic system and consequent debt crisis. Instead of market forces restoring a balance between deficit and surplus countries (for example, Germany and Greece respectively) by shifting terms of trade through exchange rates and relative prices to eliminate surpluses, the gap widens which is filled not by increased exports by the deficit country but by profit seeking capital flows from the surplus country generating not balance but debt crisis. Shaikh explains;
In a country that enjoys an initial trade surplus, the resulting inflow of funds would enhance the availability of credit, which would lower interest rates. Conversely, in the country with the initial trade deficit, the fund outflow would tighten the credit market, and raise interest rates.With interest rates lower in the surplus country and higher in the deficit country, profit-seeking capital would flow from the former to the latter. Thus the surplus country would become a net lender on the world market, and the deficit country a net borrower. Instead of eliminating the trade imbalances, this would end up offsetting them with capital flows. Trade imbalances would be persistent, and deficit countries in particular would become international debtors. This is an exceedingly familiar historical picture.Familiar indeed! Such is the basis of the ongoing economic imbalances between the core (surplus) economies of the EU and the peripheral (deficit) ones. The Greek debt is not the result of Greek government fiscal mismanagement, excessive Greek wages or low levels of productivity; it is the result of chronic German surpluses within the EU generated by artificially low German wages and low consumption levels. This has resulted in what Keynes once called a "beggar thy neighbor" policy whereby one country seeks to manipulate internal economic fundamentals such as exchange rates and (in this case) wage levels in order to grow the domestic economy through trade at the expense of that of its trade partners. This has been the source of chronic deficits in countries such as Greece and Portugal.
Costas Lapavitsas, an economics professor at the University of London, has argued for Greek withdrawl from the EMU which he claims has been a disaster for Greece. Lapavitsas is one of those who argues that the creation of the EU, and the EMU in particular, was less about trade promotion and economic growth than about forcing neo-liberal, free market policies (often through austerity) to the detriment of the peripheral economies of Europe while benefiting the core economies, specifically banks and transnational corporations. Lapavitsas argues that this has led to chronic indebtedness of peripheral countries like Greece. He asserts;
The true cause of the eurozone crisis is cumulative loss of competitiveness by peripheral countries, not fiscal indiscipline. Germany has won the competitive race within the EMU by keeping its unit labour costs almost flat for nearly two decades. This has led to large current account deficits for the periphery, mirrored by large German surpluses. The deficits were financed for many years by cheap credit because of lax ECB monetary policy, causing the vast indebtedness of the periphery. The peripheral states are to all intents and purposes insolvent.Bailouts, coming with conditions of austerity and "structural adjustment," only worsen the long term prospects of economic growth and prosperity for the peripheral economies and deepen a relationship of dependency within the region economic bloc. Lapavitsas believes that the recommended solution from the ECB would be for Greece to impose fiscal austerity and lower real wages in order to restore Greek competitiveness. However, this would only worsen domestic demand in Greece causing economic chaos and poverty while contracting Germany's export markets. Lapavitsas argues that this would only cause a "social explosion and the collapse of the Eurozone" This would obviously worsen the debt crisis as the overall economic picture in the region (and probably the world) economy dramatically declined.
Debt crisis is the result of growing inequality between economies just as it is within economies. Since becoming a WTO member in early 2008, the Ukraine balance of trade has worsened with its EU trade partners. According to one source, the Ukraine's trade deficits between 2008 and 2012 grew to $63.7 billion from a substantially lower level in the early 2000s. Since WTO membership, Ukrainian trade deficits with the EU have risen more sharply that with that of Russia even though both are equally significant trade partners with the Ukraine.
Current imbalances between the EU and the Ukraine in trade and direct foreign investment will worsen under a free trade agreement between the two which will flood the Ukraine with imports costing jobs and increasing debt and dependence on the EU. One observer writes;
"...the business linkages between the EU and Ukraine are quite skewed already. Ukraine exports EUR 14.6 billion worth of goods to the EU and imports EUR 23.8 billion, producing a 9.2 billion trade imbalance. In the area of investment, the imbalance is outright grotesque: EUR 2 billion from Ukraine, EUR 23.8 billion from the EU to Ukraine (resulting in a fairly breathtaking, EUR 21.9 billion, imbalance). Given those figures, even without the DCFTA (Deep and Comprehensive Free Trade Area), the economic linkage structure between the EU and Ukraine offers itself as a textbook study in external trade and investment dependence."The data was taken from the European Trade Commission website in 2012 and argues that further EU/Ukraine free trade relations will impoverish the Ukraine and increase its debt dependence on the EU and the IMF. The Ukraine's economic relationship with Russia is far less detrimental to the long term health of the Ukraine's economy. The future of EU/Ukrainian trade/investment relations is more debt and shrinking export markets when downturns occur. ECB austerity measures will only entrench the Ukraine's dependent position within the European Community.
The Ukrainian economy has enormous potential. It has rich ore deposits and is the world's seventh largest steel exporter according to the Commodities Research Unit (CRU). In 2013, 75% of all finished steel products made in the Ukraine were exported with about 28% of all iron and steel exports going to the EU. There is very little demand for steel products in the Ukraine itself given the economic crisis and widespread poverty. Current steel output and jobs may be secured for now but the Ukraine's higher unit cost structure mean competition may edge it out of its EU steel markets. Experts believe that free trade conditions will disadvantage Ukrainian steel which can't make up lost export markets with internal demand. According to the International Steel Statistics Bureau (ISSB) in London, Ukrainian steel exports averaged about 29 million tons a year between 2004 and 2008; from 2009 to 2013, average annual exports declined to about 24 million tones. This decline indicates an imbalance in trade relations between the EU and the Ukraine.
Trade relations with the EU began in 1998 with an initial free trade agreement called Partnership and Co-operation Agreement (PCA). After Ukraine's ascension to the WTO in 2008, the beginnings of negotiations on a Deep and Comprehensive Free Trade Area (DCFTA), in conjunction with earlier such agreements, began. Between 1992 and 2011, industry as a share of Ukrainian GDP fell from about 51% to 31.7% reflecting a surge in industrial imports from the EU over the last 15 years. According to one European Trade Commission report, in 2012 the Ukraine had a 7.3 billion Euro trade deficit with the EU in machinery, a 3.9 billion Euro trade deficit in chemicals and smaller trade deficits in the hundreds of millions in textiles and other goods. Eventually, Ukrainian steel and other major merchandise exports will decline as these trade agreements open up the Ukrainian economy to more and more EU goods. The recent trade agreement signed with the EU in March of this year expands trade and investment relations in an effort to draw the Ukraine further away from its relationship with Russia.
This is the problem with the precarious export-led growth model. As with Greece and Ireland, export booms in high value added products are short lived and debt and poverty result from the consequences of crisis. Ukraine's debt is increasing rapidly and a new austerity program adopted by the provisional Ukrainian government which succeeded Yanukovich will have a devastating impact on most Ukrainian working people. Bond yields on ten year Ukrainian notes due in 2023 are currently about 10% down from a peak of 11.37% in February during the height of the debt crisis before the IMF stabilization package was accepted. The current total debt of the Ukraine is about $75 billion or more than half of Ukrainian GDP. Much of this reflects a real possibility of a Ukrainian default on its foreign debt similar to Greece. A financial industry research institute, the Institute for International Finance, released a report in February 2014 that details the unsustainability of the Ukraine's debt service problems;
Ukraine’s external finances are unsustainable and a major adjustment is unavoidable. With no policy change, the current account deficit would amount to 7% of GDP, or roughly $13 billion this year. Including $9 billion in external debt repayments due by the government through the remainder of the year ($2.7 billion of which owed to the IMF) and $3.3 billion due Gazprom in natural gas payment arrears, Ukraine’s financing needs would amount to at least $25 billion this year. (This estimate assumes, for illustrative purposes, that all other external debt obligations are rolled over in full and resident capital outflows would drop to near zero for the remainder of the year.) With foreign exchange reserves at perhaps $12 billion at the end of January and another $12 billion pledged by Russia (disbursement of which appears increasingly unlikely in the light of the recent political developments), available resources would amount to $24 billion at most, suggesting that Ukraine cannot service its foreign debt.Debt crisis is a chronic feature foreign dependence. A loss of Ukrainian export competitiveness and an inability to weather the current global economic downturn has led to indebtedness, austerity and foreign dependence on export markets that haven't provided the jobs and growth needed for a recovery.
The best solution for the Ukraine is not free trade agreements with foreign powers like the EU-28 which only aggravate existing inequalities and imbalances resulting in greater merchandise trade deficits with core powers. Making up these deficits with aid, loans and capital imports (foreign direct investment or FDI) will only result in net long term capital outflows and greater debt and currency devaluation that cannot be offset with exports to hard currency areas like the EU due to structural imbalances from a lack of manufacturing competitiveness. Shaikh's description of the fate of chronic deficit countries, which often seek export led solutions out of chronic stagnation and indebtedness, well sums up both the Greek and impending Ukrainian problems. Deficit countries remain chronically deficit with foreign aid and loans and FDI balancing payment accounts in place of market driven trade adjustment through price and exchange rate adjustments. The result is chronic poverty, austerity based stabilization policies and dependence on foreign markets for growth and employment. This has been shown to be a failed solution, especially during profound global economic crises.
The best solution is to develop internal demand by boosting wages and increasing public sector spending to stimulate growth and provide better economic stability. Export led strategies, especially under free trade conditions, lead to chronically high interest rates pushing down on domestic growth and consumption as well as foreign domination of key sectors of the domestic economy limiting growth and employment. As the Ukraine weighs its current options in the midst of growing poverty, inflation, debt and interest rates and the inevitable foreign reliance that will surely follow, it should consider the experiences of other countries with long term free trade export led development strategies and the deep poverty and inequality that has resulted long term. Dependence on Russia might not have been a panacea but neither will total reliance on free trade with the EU. Such agreements may have been successful between 1998 and 2008 when the crisis hit but the free trade chickens are now coming home to roost as endemic crisis, stagnation, debt and poverty deepen over the coming years.