Most national embassies and consulates will be closed by 2040

Posted by Eberhard Rhein on 16/12/14

The EU and its 28 member states maintain the most extensive network of diplomatic representations on earth. This situation will become financially unsustainable and no longer necessary after the creation of the European External Action Service which is running 140 missions today.

Diplomatic representations have become very expensive; their cost has kept rising through increased safety measures and the need to pay high salaries for qualified personnel and premiums for the growing number of hardship posts. That is why member states have come under pressure for cutting costs and closing embassies and consulates.

Thus the Netherlands will lower the expenditures for their Foreign Ministry by a quarter until 2018; and the new Belgian government has decided to reduce its diplomatic missions from 137 to 104. Both countries will do this within the framework of comprehensive reforms with the purpose of cutting budget expenses.

The EU is definitely over-staffed with diplomatic personnel and missions.

EU Delegations have largely taken over political and economic reporting for EU headquarters in Brussels and national capitals. They should also progressively assume consular duties for EU citizens, especially issuing visa where still required and organising assistance to EU citizens in situations of natural catastrophes and political unrest.

Member states` diplomatic missions should focus on promoting business contacts to the extent that joint chambers of commerce do not do so, as is the case in some major business centres like Beijing or Tokyo.

For cost reasons member states are therefore likely to close most of their diplomatic missions during the coming 25 years and rely on EU missions.

What may look like a revolution today will be perfectly normal by 2040. The transition should take place smoothly and start as of today with intermediate stages like pooling missions or offices of several member countries.

Eberhard Rhein, Brussels, 10.12 2014

Effective climate policy requires action by governments and people

Posted by Eberhard Rhein on 10/12/14

COP 20, the 20th annual climate conference, has started in Lima in a mood of increasing realism. Those who still believe in containing global warming within two degrees Celsius target are becoming rarer. The issue becomes more and more if Humanity will get away with acceptable conditions of survival or succumb to famine, non-ending natural disasters, tens or even hundreds(?) of millions of climate refugees and conflicts for water and fertile land.

The 20-year history of “combating” climate change has been a succession of “too little, too late”, starting with the Kyoto Protocol that turned into a failure because of its late entry into force and the non-participation of the biggest emitter countries.

For the last 20 years, we have continued to live as if climate change did not exist. The political elites in major emitter countries like Australia, Russia or, until most recently, even USA have continued to simply ignore it, whatever the rising numbers of natural catastrophes across the planet.

No political leader has dared to impose hardship on potential voters, say gasoline prices of €3/litre or electricity rates of €0.15/kWh. Our life has remained as comfortable as ever, with no restrictions on heating, cooling and lightening our homes and using planes or cars as before the climate challenge.

The global “climate policy elite” seems satisfied with the few “positive” developments in 2014, from the bilateral China-USA“deal” with the Chinese promise to peak its emissions latest until 2030 and generate 20 per cent of its energy from non-fossil sources and the US commitment to lower emissions by close to 30 per cent until 2025.

It puts a lot of faith in the bottom-up/top-down approach for the Paris Climate Summit in December 2015, under which each of the 190-odd participant countries is expected to present a strategic road-map for reducing green house gas emissions.

Judging by the response given by China to start reducing emissions latest by 2030 and the more than wary reactions from India,which will become the biggest emitter country in a few decades the outcome from Paris will not have a a positive impact on the global climate in the first half of the21st century. After all, it will have taken the EU from 1990 to 2030 to reduce its emissions by 40 per cent and, if everything works to schedule, 60 years to reduce them by 80 per cent until 2050. And the rest of the world is far behind the EU in terms of preparedness.

Climate scientists have not stopped warning policy makers about the need to go fast. But their calls have gone unnoticed because policy makers have constantly been engaged in more pressing day-to-day issues and have not dared to confront their citizens with painful measures to be taken.

Let us therefore hope that the international community will finally get serious and step up its joint efforts, focusing on mitigation and considering adaptation as the secondary issue. Indeed, if humanity fails to mitigate emissions dramatically financing adaptation will no longer help. We must prevent the natural glaciers storage of the Himalayas from melting instead of financing artificial dams for storing water.

On December 15th, at the end of the Lima Conference, which so far has not been very successful in solving the well-known technical details, we should be better able to assess the chances of success of the crucial meeting in Paris at the end of 2015.

Eberhard Rhein, Brussels, 6/12/2014

Reforming European corporate income taxation

Posted by Eberhard Rhein on 05/12/14

The recent revelations about complex financial transactions of some 300 major companies profiting from differentials between corporate income tax bases and rates among member states and specific tax deals reducing their tax bill raise questions about the compatibility of national company taxation regimes with an economic and monetary union.

After several fruitless efforts during the past the moment may have come for a leap forward.

Ideally, the EU should introduce an EU-wide corporate income tax for financing the EU budget.

In 2014, the average corporate income tax rate of the 28 member states was 23%, varying between only 10%-15% for Bulgaria, Cyprus, Ireland and Luxembourg and rates exceeding 30 per in seven member states (Belgium, France, Germany, Italy, Malta, Portugal and Spain).

This diversity allows companies to find ways and means for having their profits taxed in low-tax countries like Luxembourg or Ireland and for governments to use low corporate income taxes and specific tax arrangements to allure companies establish their legal headquarters kin their countries, though the bulk of the business may take place in other parts of the EU.

This what Ireland, Luxembourg, Netherlands and Cyprus have practised. The approach is perfectly legal, as member states continue to be full masters of their income tax systems. But it constitutes an unfriendly act towards their neighbours whom they deprive of tax revenue of billions of Euro.

The minimum answer to these dubious fiscal practises would be a harmonisation of the corporate tax bases and rates within the EU and full transparency of tax deals with companies.

The most ambitious response would be for the EU to place the corporate income tax under EU jurisdiction, which is the case in federal federal states like USA, Germany and Brazil.

The combined revenues from the corporate income tax in the EU account for 2.6% of GDP, more than twice the amount of EU budget. The simplest way would be for the EU to introduce a corporate income tax with a rate of some 12%, enough to finance EU expenditures.

Member states would be free to maintain a corporate income tax of their own, provided they apply the EU-wide tax base. National tax deals with companies would lose their attractiveness because of lower rates throughout the EU.

This system would greatly simplify the financing of the EU budget, which would be based on the corporate income tax, import duties/levies and penalties.

The opposition to an EU corporate income tax would be immense and come from three quarters: member countries critical of any additional transfer of competences to the EU; those with low-tax regimes and those which may feel better off with the present way of financing the EU budget.

For the EU to survive in the future it will need much more solidarity among member countries. The use of low corporate income tax rates and fiscal manipulations by mostly small and wealthy member states will no longer be tolerated when billions of Euro profits go untaxed because of fiscal paradises in certain parts of the EU.

Europe has to take the courage and  tackle these fiscal anomalies that have far too long escaped a political debate. The best way to do so is for the Commission to produce a white paper on profit taxation in Europe as a first step towards legislative proposals

Eberhard Rhein, Brussels, 25/11/2014

Low oil and fossil fuel prices are a climate poison

Posted by Eberhard Rhein on 02/12/14

Within a few months oil prices have seen a precipitous decline from $ 100/barrel to $ 70/barrel. While consumers across the globe may rejoice, this development is bound to be judged with serious misgivings by the 2000 diplomats meeting as of today in Lima/Peru for another conference with the objective of containing the emission of green house gases.

The decline of the oil prices is the result of the USA becoming the biggest oil producer, thanks to the shale gas/oil “revolution”, the slow-down of world demand due to higher efficiency and slower economic growth and the refusal by the Gulf countries, enjoying by far the lowest production costs, to curb their production and restore higher prices.

Low prices are expected to continue until 2016 or longer.

Low oil price do not fit into a global climate situation that calls for high carbon prices to reduce the consumption of fossil fuels.

Governments should therefore rapidly react to the lower oil prices.

  • Those that still afford the luxury of granting consumer subsidies should seize the opportunity for phasing them out and thus reduce their budget deficits. This goes in particular for countries whose production costs are higher than present market prices, like Venezuela, Russia, Algeria, Iran or Egypt. Failing to do so will sooner or later put them into an unsustainable budget situation.
  • On the other hand, European countries must resist the temptation to enjoy the bonanza of temporary low oil prices. On the contrary, must not hesitate to raise their excise taxes and prevent consumers from getting used to the low prices. The extra revenue would best be used for reducing their budget deficit or extending subsidies to wind and solar energy whose competitiveness will will be impaired by low prices.

EU countries should lose no time in responding to the oil bonanza.

Eberhard Rhein, Brussels, 30/11/2014

Higher inflation does not guarantee more jobs

Posted by Eberhard Rhein on 27/11/14

On Friday (21 November) Mario Draghi, the ECB President, has provoked fireworks at EU stock exchanges after promising he would do all in his power to push inflation in the Euro – zone up to 2%, the ceiling considered as the “target” for EU and US central banks.

Expectations of rising prices may give a push to investments, as they raise nominal profitability. But those having invested in savings accounts or bonds will have to pay for it by a depreciation of their assets.

If that is the price for reducing high unemployment it might be acceptable.

But is the ECB really capable of inducing more private and public investment?

After all, it can only do more of the same, i.e. inject liquidity into the market by buying private or even public bonds or mortgages.

Mario Draghi`s announcement raises, however, two more systemic questions:

Can modern economies ensure high employment only at the price of moderate inflation?

Why are economists so scared about the risks of deflation, though it has been an extremely rare and temporary phenomenon in the last 50 years? Why is the present 0.4% inflation rate in the Euro-zone a risk for the economy?

EU inflation rates reflect very different national trends, from Greece and Bulgaria with prices having fallen by 1.8 and 1.3% respectively in October 2014 and Romania, Austria and Finland registering price rises between 1.8 and 1.2 per cent.

Present inflation rates are substantially lower than the 2.2% average during 1991-2014, during which the Euro-Area registered a moderate average GDP growth of 1.5%. During these two decades a deflationary sign has appeared only once, in July 2009, in the early phase of the EU recession. Is the deflationary nightmare not exaggerated ?

We should appreciate the present price stability even if it goes along with excessive unemployment. It removes illusions about income and wealth and certain costs caused by necessary inflationary adaptations:

Changing millions of prices become as unnecessary as wage indexing.

Wage negotiations can fully focus on productivity rises.

Will Europe ever again witness growth rates of more than 2%? Where should that growth come from beyond reintegrating millions of unemployed into the labour market, rising productivity and retirement age? Has an injection of liquidity the slightest impact on these three variables?

Eberhard Rhein, Brussels, 21/11/2014

Ukraine will scrap gas subsidies

Posted by Eberhard Rhein on 24/11/14

For many years Ukraine has wasted huge amounts of energy through exorbitant subsidies on gas consumption, coupled with in-transparent multiple gas prices and large-scale corruption. Due to these factors, Ukraine has become one of the most wasteful energy consuming countries in the world. With household gas prices substantially lower than in any other European country and lower than the wholesale purchase prices, this regime had long become unsustainable.

Under the new political leadership it will finally disappear. There will be a single wholesale gas price which will cover the supply costs and yield a decent profit for the state-owned gas company. The IMF and the EU had conditioned their financial assistance to a profound reform of the Ukrainian gas market.

Gas prices will have to more than double, which cannot happen overnight. This huge rise of prices will induce consumers to a much more economic use of gas and higher energy efficiency. By the same token it will dampen the social impact of the price rise.

The future generated profits will be used to financing improvements of the gas distribution, improving energy efficiency and offering specific assistance to vulnerable groups of society.

This will be a revolution for Ukraine and other the countries still indulging in the luxury of fossil subsidies. It will not be easy to “sell” politically. But Ukrainians, having shown they can be tough, are likely to accept a higher gas price in exchange for security of supply.

If the anticipated increase of energy efficiency happens in the wake of the phasing out of subsidies Ukraine might become an example for other developing and emerging countries to be followed.

Eberhard Rhein, Brussels, 20/11/2014

New G20 ‘commitments’ on phasing out fossil fuel subsidies are worthless

Posted by Eberhard Rhein on 20/11/14

At the Pittsburgh G 20 meeting in September 2009 the heads of government had agreed to phase out subsidies on fossil fuels by 2020. At that time, the global volume of these climate-damaging consumption subsidies amounted to $ 300 annually, mostly in developing and emerging countries. Today, their volume has risen to $500 billion, and only few countries have lived up to their commitments to phase them out.

In Brisbane, November 15-16, 2014, the heads of government have repeated their commitment, using almost the same wording, but without fixing a date by which subsidies should be phased out.

This is regrettable, for for oil and gas prices constitute an incentive for higher consumption, which should be avoided in view of reducing green house gas emissions.

Whatever the G 20 agrees upon, whether fiscal behaviour by governments, investment packages, extra economic growth, is only of limited value as it does not bind any of the 20 countries and lacks a credible follow-up.

Unfortunately, the G 20 has failed in its role as a sort of global economic governance. Consensus remains the guiding principle. It is therefore one of the “loosest governing bodies” on earth. That raises increasing doubts about its utility considering the ever rising costs of security, travel and time spent for preparation and organisation.

The Brisbane summit will above all be remembered for Putin coming under heavy fire from the host and other prime ministers for shooting down a plane over Ukraine killing nearly 400 Dutch and Australian citizens. If this were to change his mind on Ukraine the meeting will have been very much worth the costs. Unfortunately that seems quite unlikely.

For the time being there is no better alternative for G 20 “diplomacy”. But summit meetings should take place only every three years!

Eberhard Rhein, Brussels, 18/11/2014

The climate deal between China and US is not good enough

Posted by Eberhard Rhein on 20/11/14

At the margin of the APEC meeting in Beijing November 8-10th 2014 the US and Chinese Presidents have concluded an “historic” deal on how to address the common challenge of climate change.

China will stabilise its green house emissions starting in 2030, while the USA will reduce its emissions by 26-28 per cent until 2025. This deal has raised hopes for what is considered the decisive Paris Climate Conference in December 2015. Other major climate polluters are expected to come up with meaningful commitments, after the EU, USA and China, being jointly responsible for more than half of global emissions, have started to make offers.

From an equity perspective, the deal seems correct: bearing a historical responsibility for rising emissions and unacceptably high per capita emissions developed countries, especially the USA, must go ahead with ambitious reductions. But emerging countries must also come on board their share in global emissions having started to exceed that of developed countries.

From a climate perspective the “offers” are insufficient.

According the latest “synthesis” assessment by the International Panel on Climate Change time is running out for keeping the global temperature within a two degree Celsius increase. Humanity must not emit more than 1000 Gt of C02 in the future, one quarter of the known coal reserves (!), and undertake substantial emissions reductions in the next few decades. Without doing so global temperatures are most likely to rise by more than two centigrade until 2100, a nightmare perspective.

The intentions of the three big players therefore lack the necessary ambition. Our top leaders are too much focused on their short- term political tasks and overlook that – for the first time in history – they have to act within a multi-decade perspective.

Even the EU, the pioneer of climate policy, has been too prudent with its 2030 objective of a 40 per cent green house gas reduction over 1990. To reach its own ambition of reducing its emissions by 80-95 per cent until 2050 it should aim at 50-55 per cent reduction by 2030.

This could be possible by complementing its system of emission capture&trading by “emission performance standards” comparable to those introduced for cars and light vehicles by EU and USA. The USA and UK will apply these also to reduce emissions in new power plants and put high hopes in them for a substantial reduction of their GHG emissions.

The US objective for 2025 looks ambitious, but would still leave the US with unacceptably high per capita emissions of around 10 tons per year. Unfortunately, the US government has little leverage to improve its offer considering the Republican majority in the Congress adamantly opposed to any type climate policy.

The eyes should therefore be directed to China.

The stabilisation of its green house gas emissions starting in 2030 will be the result of slower economic growth, an impressive deployment of hydro, wind and solar energies (20 per cent of total energy demand by 2030!), and more low-emission cars &e-vehicles, complemented by closures of the most polluting coal power plants in metropolitan areas in response to growing calls for clean air.

For a country having totally focused on economic growth during the last four decades that is quite impressive, but still not good enough for the biggest emitter with more than a quarter of global emissions and per capita emissions exceeding 7 tons.

It is not easy for China to rapidly implement effective remedies. The best ones are phasing out of most the coal-power plants in favour of lower emission gas-power plants and investing much more in energy efficiency.

In conclusion, the recent announcements by world’s biggest three emitters do not augur well for the 2015 Paris Climate Conference and the earth’s future climate.

Eberhard Rhein, Brussels, 17/11/2014


Higher petrol excise taxes are more efficient than road toll systems

Posted by Eberhard Rhein on 13/11/14

About two thirds of the EU member states are using toll systems for financing the construction and maintenance of highways. National governments monitor the rates being charged; and this functions quite satisfactorily.

There is no reason for the EU to intervene, except insisting on strict non-discrimination between road users from different member states. This seems never to have been an issue, until two weeks ago Germany also announced its intention to introduce highway tolls from which German citizens would, however, be exempted for the equivalent of the vehicle taxes. Such a construction would be a discrimination and therefore an infringement of basic EU rules.

Toll systems are an expensive way of charging users for road construction and maintenance. Gasoline and diesel excise taxation is a far more effective instrument for charging cars simultaneously for using the roads and polluting the environment.

The EU applies minimum tax rates for gasoline and diesel. But the present rate of € 359 per 100 litre gasoline and diesel are too low to encourage citizens to buy fuel-efficient vehicles and help neutralising the external costs. The EU should therefore double the minimum rate to € 700/100 litre. Adding the 20 per cent VAT, taxation would account for roughly two thirds of the gasoline/diesel price which is in line with excise taxes on tobacco or alcohol.

A doubling of the excise tax on diesel and gasoline would have four positive effects. It would:

  • raise member states` fiscal revenue to finance the construction and maintenance of roads;
  • charge road users according to the level of their C02 emissions;
  • make it easier to attain the 2050 EU objective of reducing C02 emissions from road traffic by 60 per cent;
  • make further road toll systems superfluous.

    Eberhard Rhein, Brussels, 12/11/2014

    China can reduce air pollution when it has to

    Posted by Eberhard Rhein on 06/11/14

    From November 3 to 11 Beijing is hosting an APEC Summit, which 20 Heads of Government from the Pacific region will attend.

    To that end, the local authorities have undertaken utmost efforts to clean up their city, which is one the most polluted on earth.

    The streets are “empty” because schools, local government, public and private companies send their students and staff on temporary leave. This enables the authorities to halve the number of cars on the roads, according to even and uneven number plates.

    The air is “clean” because some 300 energy-intensive factories around Beijing have to close down or reduce their activities during the Summit. Public works within the city are temporarily suspended.

    The APEC meeting can therefore take place in a beautiful, clean and quiet city that in reality does no longer exist; and the international visitors can return home with the impression that China is finally coming to grips with pollution, something its citizens have been demanding for years.

    After this impressive “clean-up” in Beijing popular pressure on local and central government is bound to grow to tackle air pollution and thus help reigning in rising health costs and climate-related natural catastrophes.

    This will require phasing out coal-fired power plants,and introducing equipment to eliminate small particles in factory-chimneys as well as less-polluting vehicles.

    The Chinese political establishment is becoming increasingly aware of these risks and would be well advised not to further delay urgent action.

    The Chinese position at the Paris Climate Conference in December 2015 will show to what extent awareness will have turned into action.

    Eberhard Rhein, Brussels, 5/11/2014


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