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GIS Statements

ECB: Broken rules and frivolous policy

GIS – Comment by Prince Michael of Liechtenstein*

For years, the ECB has egregiously violated its own statutes. Today’s high inflation is the predictable result.

EZB breaks rules GIS report
ECB: Broken rules and frivolous policy | Following in Mario Draghi’s footsteps, Christine Lagarde has helped the ECB break its own rules by pumping huge amounts of money into the European economy. © GIS

For the first time in more than 10 years, the European Central Bank has increased its key interest rate, raising it by 0.5 percent. The move follows a long period of decreasing interest rates and pumping money into the economy via so-called quantitative easing. Europe, like the United States, was flooded with liquidity.

Some in the media even called the 0.5 percent rate rise a “courageous” step, because it was more than the expected 0.25 percent. The increase is ostensibly meant to help slow inflation, which the ECB leadership first denied and then ignored for months after it first appeared. Yet even as she announced the rises, ECB President Christine Lagarde made veiled promises to continue her institution’s irresponsible financing of some member states.

She revealed that the ECB’s governing council had approved the creation of a new policy tool, called the Transmission Protection Instrument. The TPI will enable the ECB to buy government bonds from certain member countries if the “risk premium” (the rate of return above that which is guaranteed) rises too much. Its purpose is to counteract what the ECB calls “unwarranted, disorderly market dynamics which pose a serious threat to the effectiveness of monetary policy in the euro area.” This statement is outrageous. The market dynamics that increase the risk premium are entirely justified, as the risk is naturally higher in fiscally mismanaged countries. In fact, any so-called “market disorder” would be the consequence of fiscal irresponsibility among member states, which the ECB among others, had encouraged with its policies over the years.

Breaking the rules

Do these explanations expose incompetence? Or is the easy-money policy a centralist agenda at the ECB, which clearly counteracts the bank’s role, function and statutes? If a company’s management team were to break the firm’s rules so egregiously, it would be considered a criminal act.

The ECB’s primary objective is to maintain price stability. It is clearly forbidden from financing public debt or setting fiscal policy. This is the cornerstone of the euro area’s monetary system. Guaranteeing the ECB’s political independence was crucial to ensure that it would not meddle in such matters. This meant safeguarding its institutional independence: the ECB must not seek or take instruction from any institution, government, or other body. It also meant assuring the bank’s functional and operational independence, financial and organizational independence, legal independence and the personal independence of its executive board members.

Unfortunately, most eurozone member countries began violating the rules of the Maastricht Treaty, which set limits on government deficit and total debt, shortly after it was signed. France and Germany were the first to do so. Yet these criteria formed a key pillar of the monetary union. Breaching them put stress on the system and led directly to the financial crisis of 2012.

That crisis was certainly not a market failure. Instead, it was a failure of states, due to excessive debt, caused by oversized public sectors. Governments refused to tackle the problem at the root by reducing the size and role of state institutions. On the contrary, the ECB president at the time, Mario Draghi, famously said on July 26, 2012, that the bank was “ready to do whatever it takes to preserve the euro.”

With that statement alone Mr. Draghi had already broken the ECB’s fundamental rule that its primary goal was to protect the value of the euro, not finance fiscal deficits. At that point, member governments had, de facto, received carte blanche to spend. Any problems that arose were “solved” by dousing them with money. To be fair, it is worth noting that such bad practices were not limited to the euro area.

The amount spent on financing eurozone members’ deficits increased more and more. After Ms. Lagarde, a professional politician, was appointed ECB president in an agreement between German Chancellor Angela Merkel and French President Emmanuel Macron, money printing rose to staggering levels.

If Mr. Draghi’s statement had not made it clear, then in the following years it became obvious that the ECB’s main purpose was no longer protecting the purchasing power, savings and income of those in the eurozone. Instead, the goal had become the defense of the euro itself as an institution.

This mentality was rife among Europe’s leaders. Chancellor Merkel, for example, made the outrageous statement in 2011 that “if the euro fails, Europe fails.” In doing so, she essentially admitted that she believed Europe’s very existence depended on a currency that governments could use to spend away their problems. What a cynical dismissal of the continent’s strengths, rules and people!

r the past three years, one of businesses’ main concerns has become securing supply chains for raw materials and semifinished products. But another factor that has grown just as troublesome, or maybe even worse, is the lack of good workers. Inflation is now the topic on everyone’s mind. Prices are rocketing. People are rightfully concerned. Officials attempt to calm the public by claiming that this situation will be overcome because it is mainly due to the interruption in supply chains caused by Covid-19, and now by the war in Ukraine. U.S. President Joe Biden even went as far as to call it Vladimir Putin’s inflation. The European Central Bank and its president constantly denied a medium- to longer-term problem and were consequently always wrong in their forecasts. These are either cynical lies or proof of incompetence.

On the contrary, this inflation is structural. It is caused by demand exceeding the supply of goods and services. Consumers, including governments, have money in abundance. Central banks’ irresponsible money printing to cover government overspending and waste has created a situation in which the amount of money circulating throughout the economy disproportionally exceeds the goods and services on offer.
This phenomenon is exacerbated by the growing number of people in nearly all economies engaging in supervisory and administrative jobs – mainly public services – instead of productive private sector positions. The flood of laws, rules and regulations issued on national and supranational levels has become a self-fueling engine, sucking up more and more resources.

Driven by irresponsible deficit policies, the public and administrative sectors are growing. In turn, the bureaucratic complications feed such sectors as tax advisory, compliance, legal services and standardization boards, but also supranational bodies such as the 38-nation Organisation for Economic Co-operation and Development.

Talent badly needed in business is absorbed into these new professions, made necessary by expanding government. These roles then feed complications that create more layers of unproductive positions in public administration and business advisory. At the same time, we see that next to inflation and supply-chain disruptions, a severe shortage of workers in productive jobs is one of the economy’s biggest problems.

We are becoming increasingly authoritarian and hiding behind democratically unaccountable supranational organizations. The unstoppable regulatory process gives authorities increasing power and opportunities to make arbitrary decisions. Any perceived threat, from terrorism to Covid-19 to climate change, is welcomed as a pretext to tighten the screws on freedom. It is certainly necessary to fight terrorism, support sustainability and take measures against pandemics, but all of those goals can be achieved without placing disproportionate limits on freedom and constructing convoluted bureaucracies.
Through excessive administration, legislation and regulation, restrictions on freedom, government overspending and irresponsible monetary policies, we are committing suicide as a free and prosperous society. This suicide is assisted by a collusion of governments, supranational organizations, rent-seeking cronies and ideas such as the “great reset” promulgated by the World Economic Forum.

When we will have finally succeeded in killing a prosperous economy, politicians, media and nongovernmental organizations will blame the failure on markets, not the state. The proposed solution will then be more government intervention and “full equality.” Such solutions are already being implemented. When the trend is complete, the bureaucratic dream of 19th- and 20th-century communists will have come true … 

 

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ECB: Broken rules and frivolous policy


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Inflation and overregulation are markers of the end of free societies

GIS – Comment by Prince Michael of Liechtenstein*

The innovation and freedom required for prosperity are threatened by unaccountable supranational organizations, expanding state bureaucracies and misguided public policies.

overregulation-end-of-free-society
inflation and overregulation – markers of the end of free societies. Source: GIS

Over the past three years, one of businesses’ main concerns has become securing supply chains for raw materials and semifinished products. But another factor that has grown just as troublesome, or maybe even worse, is the lack of good workers. Inflation is now the topic on everyone’s mind. Prices are rocketing. People are rightfully concerned. Officials attempt to calm the public by claiming that this situation will be overcome because it is mainly due to the interruption in supply chains caused by Covid-19, and now by the war in Ukraine. U.S. President Joe Biden even went as far as to call it Vladimir Putin’s inflation. The European Central Bank and its president constantly denied a medium- to longer-term problem and were consequently always wrong in their forecasts. These are either cynical lies or proof of incompetence.

On the contrary, this inflation is structural. It is caused by demand exceeding the supply of goods and services. Consumers, including governments, have money in abundance. Central banks’ irresponsible money printing to cover government overspending and waste has created a situation in which the amount of money circulating throughout the economy disproportionally exceeds the goods and services on offer.
This phenomenon is exacerbated by the growing number of people in nearly all economies engaging in supervisory and administrative jobs – mainly public services – instead of productive private sector positions. The flood of laws, rules and regulations issued on national and supranational levels has become a self-fueling engine, sucking up more and more resources.

Driven by irresponsible deficit policies, the public and administrative sectors are growing. In turn, the bureaucratic complications feed such sectors as tax advisory, compliance, legal services and standardization boards, but also supranational bodies such as the 38-nation Organisation for Economic Co-operation and Development.

Talent badly needed in business is absorbed into these new professions, made necessary by expanding government. These roles then feed complications that create more layers of unproductive positions in public administration and business advisory. At the same time, we see that next to inflation and supply-chain disruptions, a severe shortage of workers in productive jobs is one of the economy’s biggest problems.

We are becoming increasingly authoritarian and hiding behind democratically unaccountable supranational organizations. The unstoppable regulatory process gives authorities increasing power and opportunities to make arbitrary decisions. Any perceived threat, from terrorism to Covid-19 to climate change, is welcomed as a pretext to tighten the screws on freedom. It is certainly necessary to fight terrorism, support sustainability and take measures against pandemics, but all of those goals can be achieved without placing disproportionate limits on freedom and constructing convoluted bureaucracies.
Through excessive administration, legislation and regulation, restrictions on freedom, government overspending and irresponsible monetary policies, we are committing suicide as a free and prosperous society. This suicide is assisted by a collusion of governments, supranational organizations, rent-seeking cronies and ideas such as the “great reset” promulgated by the World Economic Forum.

When we will have finally succeeded in killing a prosperous economy, politicians, media and nongovernmental organizations will blame the failure on markets, not the state. The proposed solution will then be more government intervention and “full equality.” Such solutions are already being implemented. When the trend is complete, the bureaucratic dream of 19th- and 20th-century communists will have come true.

In this state-dominated economy, we will have to forget about prosperity and freedom. A bureaucratic nomenklatura will impose an equality of mediocrity. Sustainability will become an illusion as innovation is held back. The old Soviet model is making a comeback. It is surprising that people have forgotten so quickly and do not realize what is happening. They just need to look to North Korea to see how the model works.

 

View this report on the web -> 
GIS Reports Online


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Can Russia’s tax system withstand sanctions?

GIS – Comment by Evgeny Gontmakher*

Can Russia’s tax system withstand sanctions? Russia’s tax regime puts a heavy burden on labor costs and has done little to remedy the economy’s dependence on oil and gas exports.

russia tax system
Can Russia’s tax system withstand sanctions? Under unprecedented sanctions after invading Ukraine, Russia saw the ruble plummet to record lows in March 2022. © Getty Images

The Russian tax system began to take shape after the collapse of the Soviet Union in December 1991. That month, a law “on the fundamentals of the Russian Federation’s tax system” was adopted, introducing a series of new revenue sources – including a value-added tax, income tax, excise taxes on alcohol and tobacco products, and other levies. In 1998, the rst part of the Russian Federation’s Tax Code was approved, followed by the second part in 2000. This code constitutes the main legislative act in the Russian tax system.

Like most tax systems in federal states, Russia is organized on three levels: federal, regional and local (or municipal). Of the country’s 14 varieties of taxes, eight are levied on the federal level (including state duty), three by the regional and three by the local authorities. Standing apart from this total are ve special tax regimes, along with mandatory insurance payments and a new, experimental tax for self-employed persons, introduced in 2019.

In terms of collection, almost all Russian taxes are direct, that is, charged on the income or value of the taxpayer’s property. The sole exceptions are VAT and excise taxes, which are included in the cost of goods, services or labor. In effect, these indirect taxes are paid by buyers of these goods, services or labor, with the seller acting as an intermediary between the taxpayer and the state.

Federal taxes

Federal taxes include a at personal income tax of 13 percent for annual incomes of up to 5 million rubles (approximately $45,000 after the ruble’s recent plunge following Western sanctions). For personal income above that level, the marginal rate rises to 15 percent. Of the revenue generated, 85 percent is transferred to regional budgets and the rest to local (municipal) governments. Corporate prots are taxed at 20 percent, with 15 percent of the revenue going to the federal budget, and 85 percent to the regions. The value-added tax (VAT) is set at 20 percent – 10 percent for food and medical products – and is fully paid into the federal budget …

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Can Russia’s tax system withstand sanctions


*GIS Guest Expert Professor Dr. Evgeny Gontmakher graduated from Moscow State University in 1975. He then worked as a researcher in the Central Economic Institute under the Russian Ministry of Economy. From 1992 to 2003, he held several positions, including Head of Department at the Russian Ministry of Labor, Deputy Minister of Social Protection, Deputy Chair of the Presidential Council for Social Policy, and Head of Department for the Russian Governmental Staff. From 2009 to 2006, he was Deputy Director and Chief Researcher at the Primakov National Research Institute of World Economy and International Relations (IMEMO) of the Russian Academy of Sciences. He has been a member of the executive board of the Institute of Contemporary Development since 2008. He has also held a professorship at the National Research University Higher School of Economics in Moscow since 2009. He has served as the academic director of the expert group European Dialogue since 2016.

GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. 

Ukraine requires unity

GIS – Comment by Prince Michael of Liechtenstein*

Ukraine requires unity. The EU must show unity with Poland and Hungary as Russia’s war rages.

Ukraine requires Unity GIS comment by Prince Michael of Liechstenstein
Poland and Hungary have generously welcomed more than half of Ukrainian refugees. Now is the time for the European Union to support these two members, not punish them for matters that can be taken up later. © GIS.

When on February 24, 2022, the Russian military started to invade Ukraine, a movement of solidarity could be observed all over Europe. Sanctions were swift and coordinated. Weapons were promised and also promptly delivered. Germany, however, was hesitant at first to deliver weapons, then changed course. Unfortunately, much of the materiel came from arsenals of the old East German army and was no longer functioning.

Germany and Austria are highly dependent on Russian gas and coal. They, therefore, opposed proposals on the European Union level to extend the sanctions to these sectors.

Ukrainians are defending themselves with amazing bravery. Men by the thousands have volunteered to join the army. However, more than 3 million refugees have also ed to neighboring EU countries. These are mostly women and children. Most arrived in Poland (some 1.8 million) and Hungary. These countries have started to welcome, house, nourish and start schooling children of the refugees with extreme generosity.

Yet the two most welcoming countries, Poland and Hungary, have been on the Brussels “bash list” for a long time. They are blamed for curtailing the independence of their judiciaries, among other accusations that are more than debatable about whether these should be EU matters.

Independent justice is important. But violations are issues not only in these two Central European countries. Even in Germany, there are political appointments and a strange “informal” coordination among the judges of the supreme court, the Bundesgerichtshof, and the Federal Government.

At a time when European cohesion is of the utmost importance given the attack on a neighboring country, the EU Parliament had nothing better to do than pass a resolution to force the European Commission to cut EU funds to Poland and Hungary.

In such an institution as the 27-member EU, there will always be differences. They have to be addressed. But everything in time. Today, however, is the wrong moment to punish severely the two members who are generously accepting the bulk of the eeing Ukrainians, who are true refugees and not economic migrants.

These acts are certainly damaging to the cohesion of the Union, which is so important now. Now is the time to show unity and determination to the world, not internal quarrels.

Ukraine requires Unity – More GIS articles -> 
GISOnlineReports.com


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Beyond the Ukraine War

GIS – Comment by Prince Michael of Liechtenstein*

Beyond the Ukraine War | Whatever the outcome of the war in Ukraine, eventually the West, and especially Europe, will have to learn to live with Russia, finding a path forward based on mutual respect.

comment ukraine war prince michael liechtenstein
Ukraine has become a strategic piece on the “grand chessboard” of geopolitics. © GIS

An unfortunate fate has befallen Ukraine. On one hand, it has become a bargaining chip in a larger security confrontation between Russia and NATO. On the other, the Kremlin considers the country an essential part of Russian identity.

Now, Russian troops have invaded Ukraine. The outcome of this conflict remains uncertain. The Ukrainians’ bravery in their resistance deserves our admiration and support, and we must acknowledge that Russia’s aggression has had a unifying effect on Western and Central Europe. Still, it is necessary to analyze the situation with a cool head and look beyond the war.

The dominant view in the West is that the blame lies with Russian President Vladimir Putin’s megalomania and hunger for power. There is even widespread speculation that he has gone mad. But this may not be the case, since it appears that the broader Russian public still shares President Putin’s views

In Russia, the official narrative is that NATO – in reality, a defensive alliance – is acting aggressively. The regime offers the bombing of Belgrade in the 1990s as an example that the North Atlantic alliance frequently behaves this way. Russia worries about the security of its long borders, which stretch thousands of miles, as well as about foreign intervention in its internal affairs. In Russia, Western culture and some of its values are widely considered decadent. Russia wants to avoid being forced to apply the West’s systems.

This is important to understand. There is an attitude in the West that the best way to live with Russia is to change it, to have it implement Western standards of governance and values. This is a dangerous preconception: it is arrogant and strengthens Russian assertiveness. Another view is that a change in Russian leadership would be advantageous and allow for a better relationship. This may also be a shortsighted misconception.


Living with Russia – Beyond the Ukraine War

Taking a neutral view, we can see revisionist behavior on the Russian side, justified by the pretext of national security. On the Western side, we can see a missionary-like drive to enforce certain “values” that might not be accepted by the Russian people.

What can be done in the short and long term? Certainly, the bloodshed in Ukraine has to be stopped without Ukrainian capitulation. Terms need to be carved out. Most European countries have acted decisively, although some, such as Germany, were very late in doing so. They are supporting Kyiv’s defense and President Zelenskiy, and putting pressure on Russia. Finally, the long-ignored need to improve European defense has become obvious.

We hope that Europe’s new assertiveness will prevail, allowing it to negotiate with Russia as an equal. This could also help Ukraine …

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Beyond the Ukraine War


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.