JanuaryJune2011

SR/GFC/118

SESRICREPORTS ONTHEGLOBALFINANCIAL CRISIS

THEEUROZONEDEBTCRISIS:
ASECONDWAVEOFTHEGLOBALCRISIS?

STATISTICALECONOMICANDSOCIALRESEARCHAND TRAININGCENTREFORISLAMICCOUNTRIES(SESRIC)

SESRIC REPORTS ON GLOBAL FINANCIAL CRISIS 8

20111Issue

ASECONDWAVEOFTHEGLOBALCRISIS?

THEEUROZONEDEBTCRISIS
JanuaryJune2011

SESRIC Reports on Global Financial Crisis : The financial crisis which started in July 2007, when
investors lost their confidence in the mortgage and assetbased securities in the United States, has deepened during 20082009 with a global reach and affecting a wide range of financial and economic activities and institutions in both developed and developing countries around the world. As the crisis deepened,thegovernmentsofmajordevelopedanddevelopingcountriesaswellasinternationalfinancial regulatorsattemptedtotakesomemitigationactionsandcoordinateeffortstocontainthecrisis. Given this state of affairs, the SESRIC has been preparing short reports since May 2009 with the aim of monitoring the developments related to the current global financial crisis at the global, regional and national levels. In particular, these reports focus on the impact of the crisis on the economies of the developing countries, including the OIC Members, and highlight the actions taken by these countries to containthenegativeimpactofthecrisisontheireconomies.

I.Introduction
The latest issue was prepared when expectations on the recovery of the world economy gain strength. During the last six months, new vulnerabilities have emerged. Japanese earthquake has left some detrimentalimpactonJapanbuttheincreasingthreatofEurozonecrisisbecamemorevisible.Duetoits increasingthreattoglobalrecovery,thisissueandthenextissuewillspecificallydealwiththeEurozone debtcrisis. In the previous issue, we discussed the role of financial openness in fostering growth and transmitting the negative impacts of the crisis. Moreover, we briefly reviewed the impact of the crisis on worlds poorest. In this issue, we focus on the Eurozone crisis and discuss the causes and consequences of the crisis, policy responses and its impact on the OIC countries. The second topic in this issue is the trade policyresponsetothecrisis.Fearofprotectionismwasaseriousconcernatthetimewhencrisiserupted andwebrieflysummarizethedevelopmentsinprotectionistpoliciesinworldtrade.

SESRIC REPORTS ON GLOBAL FINANCIAL CRISIS 8

II.EurozoneSovereignDebtCrisis
The global financial crisis coupled with Greeces public debt admission in late 2009 caused dismay throughoutglobalmarketsastheEurozonedebtlevelswereunveiled,withthesituationbecomingtenser inearly2010.TheInternationalMonetaryFund(IMF)andtheEuropeanUnion(EU)haveactedswiftlyto tacklethecrisisandrestorethemarketconfidencebyrescuingsomeoftheEurozonesfiscallytroubled economies, namely, Greece, Ireland and Portugal. In the first half of 2011, however, the ongoing Eurozone sovereign debt crisis continued to shake financial markets both within and outside the monetaryunion.Perhapssomeotherwreckedcountrieswillneedtoberescuedatalaterdate.Although thethreeaforementionedcountriesareeconomicallysmall;thedangeroffinancialcontagionandpossible spreadofthecrisistootherEurozonecountriessuchasSpainandItalyhasalreadymadethedebtcrisis farmoreseriousandcomplicated.Ontheotherhand,querieshavearisenovertheeffectivenessofmulti lateral institutions like the EU. Some argue that the monetary union ceded national monetary and economic sovereignty but lacked a central fiscal authority. Without such an authority, the monetary union obviously prevents effective action by its constituents, while putting nothing in its place. As the uncertaintyaboutthefutureoftheEUremains,thereisstrongevidencethatrecoveryfromthedebtcrisis willbemoremutedthanotherupturns.

Anatomyofthecrisis:causesandconsequences
In2007,thelastyearbeforetheonsetofthefinancialcrisis,thepublicfinancesintheEUandEurozone were in their strongest position for decades, mainly due to the favourable economic conditions. The global financial crisis of 20082009 had its lasting impact on the economic activity of the EU countries basically through three transmission channels. These are financial system contagion and connectivity, wealthandconfidenceeffectsondemand,andfinally,globaltradeactivities. Although initially the losses from subprime lending mostly originated in the United States, the write downsoffinancialinstitutionsareestimatedtobeconsideratelylargerinEurope,notablyintheUnited Kingdom (UK) and the Eurozone, as the surviving financial institutions in these regions have lost significantvalue.Ernst&Young(2009)estimatedthatthe51percentand70percentofthetotalmarket capitalizationoflargest10Europeanbanksandinsurers,respectively,weresweptawaybythecrisisand the succeeding deterioration in market confidence1. At the institutional level, as shown in Figure 1, the decreaseinthemarketcapitalizationoftoptenlargestinstitutionsrangedbetween30and96percent. Thestiffenedlendingstandardsanddeclinesinhouseholdswealth,inthewakeofdropsinassetprices, savings increased as demand for consumer durables and residential investment plummeted. This was amplified by a vicious inventory cycle, with involuntary stock building prompting further cuts in production.WithrealGDPcontractedin2009bymorethan4percentonaverageinboththeEurozone and EU, the recession was clearly deeper than any recession since World War II. Except for Germany, economicrecoveryintheEurozoneremainedsluggish,asindicatedbyFigure2(a),whichshowsyearon yearquarterlygrowthperformanceintheEUandEurozone.WhileboththeEUandEurozonereached positive growth rates again in the first quarter of 2010, the moderate growth figures until the second
1Changeinmarketcapitalizationbetween1stJan2008and13thMar2009forbanksandbetween1stJune2007and20thNov2008for insurers.

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quarter of this year has already shown that the precrisis performance is still far from reachable. In Greece,thecontractionintheoutputbasedonthepreviousyearstillpersistsatlevelsabove7percent.In ItalyandSpaintheoutputgrowthoverthepreviousyearstandsbarelyatpositiverange,whereasItalys economyhasalreadystartedcontractingat1percent. Figure 1: Market capitalization of top 10 financial institutions

Banks

Insurers

Capitalizationinbillion US$,percentagechangein parentheses Source:Ernst&Young WorldTakafulReport 2009.

The volume of Eurozone trade also collapsed in the final quarter of 2009 as business investment and demandforconsumerdurablesboth stronglycreditdependent andtradeintensivehadplummeted (Figure 2(b)). The trade squeeze was deeper than might be expected on the basis of historical relationships, possible due to the composition of the demand shock (mostly affecting trade intensive capitalgoodsandconsumerdurables),theunavailabilityoftradefinanceandafasterimpactofactivity ontradeasaresultofglobalisationandtheprevalenceofglobalsupplychains. Figure 2 (a) - GDP Change (Year-on-year) (b) - Eurozone Trade Volume (2000=100)

Source:Eurostat*Yearonyearchange

Source:ECB

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As the governments acted swiftly to support both aggregate demand and the financial sector, the immediate impact of the above mentioned factors, coupled with the automatic stabilizers2, on the Eurozone fiscal stance has been a sharp deterioration in the public finances and general government balances,whichincreasedfromonly0.7percentagepointsofGDPattheendof2007toalargerdeficitof 6.2percentofGDPattheendof2010(Figure3(a)).Duringthefirsthalfof2011,theEurozonedeficithas improvedonlyslightlyanddecreasedinthesecondquarterto5.5percent.Despiteexhibitingsignificant improvements in the same period, Eurozone countries such as Ireland, Greece, Spain and Portugal continuetorunhugebudgetdeficits.ParticularlyinGreece,althoughthestrictausteritymeasureshave helpeddecreasethedeficittoaround10percent,itscurrentlevelisstillhigherthantheprecrisislevels. ThegovernmentinIrelandstillsuffersanunbearablyhighbudgetarygap,whichmoderatedto23.4per centinthesecondquarterof2011afterhitting31.3percentattheendof2010.Allinall,althoughthesize ofthefiscalstimulusintheEurozonewascomparativelysmallerthanthatoftheU.S.,itsimpactonthe governmentbudgetswasapparentlymorepersistent.

Figure 3(a) - General government deficit/surplus (% of GDP) Fiscally troubled economies

(b)Governmentdebt*(%ofGDP)Fiscally troubledeconomies

Source:Eurostat

Source:Eurostat*Governmentconsolidatedgrossdebt.

Asregardsthedebtlevels,thegrossgeneralgovernmentdebtintheEurozonereachedfrom69percent ofthetotalGDPinthefirstquarterof2007to85.5percentinthefinalquarterof2010andcontinuedto increasefurtherinthefirsthalfof2011(Figure3(b)).Attheendofthesecondquarterof2011,theaverage governmentdebtofintheEurozonereachedto87.3percentofthetotalEurozoneGDP.InGreece,the government debt as percentage of GDP has recently increased to 152 per cent. The sharpest rise in the governmentdebtlevelhastakenplaceinIrelandwhereitreachedfromonly24.8percentoftheGDPin thefirstquarterof2007to102.4percentoftheGDPbythesecondquarterof2011.Italy,whichhassofar
2

Indeed, the European Commission report Public finances in EMU 2010 argues that the European Economic RecoveryPlan,theresponseoftheEuropeangovernmentstothefinancialcrisis,allowedtheautomaticstabilizersto operatefreelyandintroducedasizeablediscretionaryfiscalstimulus.

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largelyavoidedthedebtcrisisthathasengulfedGreeceandIrelanddespitehavingtheregionsweakest growthrecordandahugepublicdebt,isbecomingembroiledintheregionsspreadingdebtcrisis,with possiblyunmanageableconsequencesinthenearfuture.ThepercentageofgovernmentdebtasofGDPin Italyhasrecentlysurpassed120percentlevelandislikelytosustainitsupwardtrend. Especiallyincountrieswheregovernmentbudgetdeficitsandsovereigndebtshaveincreasedsharply,a crisis of confidence has emerged with the widening of secondary market government bond yields. A yieldof6percentormoreindicatesthatfinancialmarketshaveseriousdoubtsaboutcreditworthinessof therespectivecountry,makingithardforthegovernmenttoaccesslongtermfinance.Theevidencehas sofarshownthatGreece,PortugalandIrelandallfoundthat7percentisthecutoffpoint,forcingeach countrytoseekabailout.Ontheotherhand,althoughtheyieldonlongtermItalyandSpainbondshas sofarremainedbelowthe6percentthreshold,theyarecurrentlyinchingupwardsandlikelytoexceed thatlevel(Figure4). Figure4: Secondarymarket yieldsofgovernment bondswith maturitiesofcloseto tenyears
Source:ECB

Asthesovereigndebtcrisiscontinuetotakeitstollontherealeconomy,manyEuropeancountrieshave seentheirunemploymentnumberssurgeinmostcasesasaresultofsevereausteritymeasuresincluding cuts in government spending and increase in layoffs. The unemployment rate has been rising significantly in the three countries that have needed bailouts, namely, Greece, Ireland and Portugal, wheretheunemploymenthit17.1percent,14.4percentand12.5percent,respectively,asofJune2011 (Figure5).Sincethesecondquarterof2008,Spainhasbeenfacingthehighestunemploymentrate,which wasrecordedat21.3percentasofthesecondquarterof2011.Thecountryisstillstrugglingtoshiftaway from its heavy dependence on the construction sector, which has supported growth for years until the onset of global financial crisis and kept national debt at acceptable levels. Furthermore, the recent unemploymentfiguresintheEUsuggestthatparticularlytheEurozoneandthecountrieswithcurrencies pegged to euro suffer higher unemployment rates as compared to the countries with floating national currencies. 5

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Figure5: Unemployment asofJune2011

Seasonallyadjusted monthlyaverage Source:Eurostat

Policyresponses
TheEurozonesovereigndebtcrisisisuniqueprimarilyduetothediversityofcountries,policies,culture, andfinancialsystemsinvolved.Therefore,aharmonizedapproachhasnotbeeneasytoprescribelikein the U.S. On the other hand, while the crisis in the U.S. was triggered by toobigtofail financial institutions, the Eurozone crisis was characterizedbytheemergenceoftoo bigtofailcountries. As the financial crisis intensified in early 2010, countries within Europe disengaged themselves from each othersproblemsandfocusedontheirowneconomicdifficulties.However,asthecrisisworsened,itwas clearthattheeffectsoftheeconomicmeltdownwouldcreateacontagionandspill overintotherestof Europe.Therefore,theEUreachedaconsensusonthenecessityofaswiftandcollaborativeresponseto the sovereign debt crisis in the Eurozone as well as its potential spillovers to the member countries outsidethemonetaryunion.InMay2010,theEUfinanceministersagreedtoenacta110billionrescue package to avoid an otherwise likely Greece default and the spread of the crisis into other peripheral economies.ThebailoutbroughtaboutstrictausteritymeasuresandviolentcommunalcriticisminGreece. Ontheotherhand,whiletheestablishmentofEuropeanFinancialStabilityFacility(EFSF)inJune2010to safeguard against a wider crisis returned a prompt positive feedback from the financial markets, the impact on the real economic indicators has remained to large extent limited. Particularly the issue of increasingitsoperationalefficiencyisexpectedtobeamongthekeyagendaitemsduringtheforthcoming EU Summit in October 2011. Originally, the EFSF was envisioned to sell bonds and use the money it raisestomakeloansuptoamaximumof440billion(750billionincludingthosebackedbyIMFandthe EuropeanCommission(EC)throughEuropeanFinancialStabilizationMechanism(EFSM))todistressed Eurozone countries. It is also envisioned that both the EFSF and EFSM will convert into a single permanentrescuefundingprogrammein2013,theEuropeanStabilityMechanism(ESM),whichclearly

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indicatesthattheresponsetotheEurozonesovereigndebtcrisiswillbetargetinglongtermstability.The ESM will be equipped with stronger sanctions and serve as a financial firewall in the sense that it will fightfinancialcontagionamongtheEUmemberstatesinthecaseofdefaultbyasinglecountry. On the monetary side, the European Central Bank (ECB) has also taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity, which has so far included vast openmarkettransactions,allotmentsofLongTermRefinancingOperations(LTROs),andreactivationof dollarswaplinesincollaborationwiththeFederalReserve(Fed). Yet, in many aspects, the crisis in the Eurozone is characterized by the breach of EU treaties, most prominentlythroughthetransgressionofthenobailoutclause,purchaseofdistressedcountrybondsby the ECB, insufficient taxpayer protection, as well as the violation of the convergence criteria, which prescribesthattheannualgovernmentbudgetdeficitshouldnotexceed3percentoftheGDPandthat thegrossgovernmentdebttoGDPshouldnotexceed60% oftheGDP.ForEurozonemembersthereis the Stability and Growth Pact (SGP) which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. After several calls during 2010 from the EU authorities for deficitreductions intheheavilyindebtedcountries,notablySpainandPortugal,inMarch 2011, theEU agreed on the newEuro Plus Pact (EPP), a more stringent successor to the SGP,which is designed to maketherulesmoreenforceablebyadoptinganautomaticprocedureforimpositionofpenaltiesincase ofbreachesofeitherthedeficitorthedebtrulesprescribedintheEUTreaties.

ImpactonOICCountries
The level of exposure of the public and private institutions in the OIC member states to the Eurozone sovereign debt has been far from creating serious financial contagion effects. Indeed, the OIC member countries have so far remained to a large extent insulated from the Eurozone debt crisis shocks. This report identifies two conduits through which sideeffects of the Eurozone sovereign debt crisis are transmittedtothemembercountries,namely,merchandisetradeanddevelopmentassistanceinflow.

Figure6OICMerchandiseTrade

Exports

Imports

Source: UNCTAD

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Figure 6 depicts the growth trend in OIC merchandise trade to various country groups, including the Eurozone. It is clear from the Figure that while the total value of exports and imports to both OIC countriesandotherdevelopingcountriesalmostfullyrecoveredin2010,thesameisnotvalidinthecase of Eurozone countries mainly as a result of the persisting impact of the global financial crisis and its evolvementintothesovereigndebtcrisis.ThetotalvalueofbothOICexportsandimportstoEurozone economiesexhibitedonlyahalfwayrecoveryaftertheirsharpdeclinein2009.

Figure7 ODAflowstoOIC countries

Source:OECD

Another area where the impact of the Eurozone sovereign debt crisis has been felt, particularly by the lessdevelopedOICmembercountries,wasthedevelopmentaidinflows.Thedecliningtrendintheaid flowsfromalldonorcountriesoverthepastfiveyearshasbeendrivenpredominantlybythesubstantial decline in aid flows from EU donor countries and particularly from the Eurozone countries. While the totalaidflowsfromdonorsexcludingtheEurozonecountrieshasremainedaroundsamelevelssincethe onsetoftheglobalfinancialcrisis,thatfromtheEurozonecountriesaagroupexhibitedasharpdecline fromUS$11.6billionin2008toUS$6.7billionin2010,registeringatotaldecreaseofmorethanhalfsince 2005(Figure7).

FinalRemarks
Going forward, long term stability in the Eurozone and the rest of the Europe is closely tied to the creation of an effective fiscal union in addition to the existing monetary union with strict and enforceablefiscalrulesandautomaticpenaltiesembeddedintheEUtreaties. Furthermore, regardless of the corrective measures taken to solve the current predicament, current account imbalances remain as an important challenge. The continuation of unregulated cross border capital flows and nonavailability of conventional monetary measures that would help raise level of savings in the Eurozone countries with current account deficits exacerbates the problem further by leavingastructuralchangeinconsumptionandsavinghabitsintheEurozoneastheonlyoption. AstheEurozonesovereigndebtcrisiscontinuetoexpandbeyondGreece,someeconomistsstilladvocate, albeit more forcefully, the gradual breakup of the monetary union. In this scenario, the debtor nations wouldunilaterallyleavetheEurozone,defaultontheirdebts,regaintheirfiscalsovereignty,andreadopt 8

SESRIC REPORTS ON GLOBAL FINANCIAL CRISIS 8

national currencies. However, unless properly managed, a nations hard exit from the Eurozone would bear catastrophic results.3 Alternative scenarios include most notably the withdrawal of Germany from theEurozoneinordertosavethecurrencythroughitsdepreciation,andcreationofanothercurrencybloc withcurrentaccountsurpluscountrieswhichwouldturnthemintotheworldslargestcreditorbloc.

III.TradePolicyResponses
World trade experienced the sharpest collapse in recorded history and deepest since the Great Depression.Globaltradefellforatleastthreequartersduringthreeoftheworldwiderecessionsthathave occurredsince1965theoilshockrecessionof197475andtherecessionsof198283and200102.Butthe recentcollapsewasmuchsevereandsudden;fortwoquartersinarow,worldtradeflowshavebeen15% below their previous year levels. It was also synchronised. All 104 nations on which the WTO reports dataexperiencedadropinbothimportsandexportsduringthesecondhalfof2008andthefirsthalfof 2009.Worldtradeinalmosteveryproductcategorywaspositivein2008Q2,almostallwerenegativein 2008Q4andallwerenegativein2009Q1(Baldwin,2009). Economiestodayaremorecloselyinterconnectedthanatanytimeinthepastandthesupplychainsfor manygoodsandservicesstretchacrossanumberofcountries.Theworldtradingsystemseemstohave weatheredtheworstofthecurrentcrisis,butseriouschallengesarestillahead.Inordertostrengthenthe recovery, adjustment to the new macroeconomic reality will be required but that is likely to create economicandpoliticaltensionsbothwithinandamongnations,withdirectconsequencesofprotectionist measures. Theultimatecauseofthecurrentcrisiswastheglobalmacroeconomicimbalancesthataccumulatedover thecourseofmorethanadecade.Thesolutionrequiresbothdeficitandsurpluscountriestoadjust,but these efforts will not be easy. Once accustomed to easy credit and booming consumption, economic agents in the deficit countries face now stagnation and austerity. Adjustment to new realities requires themtolookformoreeagerlyatexportmarkets.Easyexportsandlittletradecompetitionwillbemore stressfulforproducersinsurpluscountriesasmarketsthathadpreviouslyabsorbedallthattheycould produce are now much more constrained. In this context, there will be substantial domestic and international tensions over trade policy. In deficit countries, there will be protectionist pressures attempting to reduce imports, and pressures to open foreign markets to increase exports. In surplus countries, there will be pressures from previously economically and politically dominant exporters to maintaingovernmentsupportfortheminthefaceofexternalhostility.Inallinstances,thepotentialcosts ofadjustingtoneweconomicconditionswill createdemands forgovernmentsupport,afactorfuelling protectionismfears(Frieden2009).

Awareofthisfact,aneminentUKbusinessmaniscurrentlysponsoringa250,000prize(WolfsonEconomicsPrize) for the best plan for winding up the euro in an orderly way, which will be the secondlargest cash prize for an academiceconomicsaftertheNobelPrize.

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But,whydowecaremuchaboutprotectionism?Ifprotectionismintensifies,theconsequencesoverthe longertermwillbegrim:exporterswillinvestless,andrealincomeswillgrowmoreslowly.Theefforts atpolicyreforminpoorcountrieswillbemoredifficultthaninamoreprosperousinternationaleconomy (Kruger, 2009). The experience of great depression has already showed that the period of crisis will extendwithseriousmacroeconomicconsequenceswhenrestrictivetradepoliciesareimplemented. Below, the protectionist policies that are decided or implemented during the postcrisis period are provided. The data are taken from Global Trade Alert website. Global Trade Alert (GTA) is an independent monitoring initiative to investigate state measures that might affect foreign commercial interests. GTA consequently collects and report data on state measures that are announced and implementedsinceNovember2008,thefirstcrisisrelatedG20meetinginWashington,DC.

TradePolicyMeasuressinceNovember2008
Thetemptationtoadoptprotectionistmeasuresisstronginmanycountries.Protectionismuchharderto removethanitistoimpose.Protectionismdefinitelyservesinterestofsome,butharmsevenmore.With protectionist responses, incomes would fall in the affected countries whose exports were confronting increased protection, but in addition, their retaliation would reduce export demand in the systemically important country or countries. This process would lower income and employment in the world economy,asitdidinthel930s. Since November 2008, 1734 measures have been identified by GTA team worldwide. OIC member countrieshavetakenpartin328ofthesemeasures.Thesemeasuresareclassifiedunderthreecategories. Discriminatorystatemeasuresaretakentobethoseimplementedmeasuresclassifiedasredoramberin theGTAdatabase.Measuresneutralorfavourabletoforeigncommercialinterestsarethoserecordedas implementedandgreeninthatdatabase(seeTable1fordetailedcriteriaforthecolourcodes).Figure8 presentsthetotalsforalltypesofmeasuresinceNov.2008untilendoffirsthalfof2011fortheworldand OICcountries.

Figure8:TotalNumberofStateMeasuresReportedintheGTADatabase(until30.06.2011)
1,000 900 800 700 600 500 400 300 200 100 0 Totalnumberofmeasures Totalnumberofmeasures Totalnumberofmeasures codedred codedamber codedgreen
Source:TheGTADatabase.

888

World

OIC

432

411

154 83

91

10

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On the basis of the information provided by GTA, the governments of the world have together implemented888beggarthyneighbourpolicymeasures(red).Another432implementedmeasuresthat are likely to haveharmed someforeigncommercialinterests addupthetotalnumber to 1320(redand amber).InOICcountries,154measuresareclassifiedasredand83asamber,givingrisetoatotalof 237 state measures that involve discrimination against foreign commercial interests. In this regard, the share of OIC countries in total protectionist measures is almost 18 per cent. On the other hand, the number of benign or liberalizing measures reported by the world and OIC countries is 411 and 91, respectively. The share of OIC countries in measures listed under green category is over 22 per cent. Whiletheratioofgreenmeasurestothesumofredandamberis29.6percentintherestoftheworld, it is 38.4 per cent in the OIC countries. Overall, OIC countries were less protectionist in trade policies comparedtootherpartsoftheworld. Table1:WhatdotheGTAcolourcodesmean?
Colourcode Red Criteria Themeasurehasbeenimplementedandalmostcertainlydiscriminatesagainstforeign commercialinterests. (i)Themeasurehasbeenimplementedandmayinvolvediscriminationagainstforeign commercialinterests;or (ii)Themeasurehasbeenannouncedorisunderconsiderationandwould(ifimplemented) almostcertainlyinvolvediscriminationagainstforeigncommercialinterests (i)Themeasurehasbeenannouncedandinvolvesliberalizationonanondiscriminatory(i.e., mostfavourednation)basis;or (ii)Themeasurehasbeenimplementedandisfound(uponinvestigation)nottobe discriminatory:or (iii)Themeasurehasbeenimplemented,involvesnofurtherdiscrimination,andimprovesthe transparencyofacountrystraderelatedpolicies.

Amber

Green

Figure9:NumberofHarmfulMeasures(byQuarter)
160 140 120 100 80 60 40 20 0 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 57 150 123

116

118 106 88 64 50 85 84

Source:The9thGTAReport,July2011.

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Inordertoobservetheprotectionisttrendsinceendof2008,thetotalharmfulmeasuresintheworldfor eachquarteraredepictedinFigure9.Overallthenumberofharmfulmeasureshasaseeminglydeclining trend.However, the reported levelsof protectionisminQ42010and Q12011 havealreadyreached the levelsseenQ22010.Withfuturerevisions,theselevelsarelikelyreachtothelevelsseenduring2009,as theGTAteamcontinuouslyupdatetheirdatabase.Itisclearthatthefearofprotectionismwillbethere untilfearofcrisisfadesaway,forwhichtherearenostrongprospectsinthenearfutureasdiscussedin theprevioussection. Protectionistmeasurescanhavedifferentformsandaffectvariousproducts,sectorsandtradingpartners. Table 2 reports the countries that have the most discriminatory measures(col. 2), with most tariff lines affected(col.3),withmostsectorsaffected(col.4)andwithmosttradingpartnersaffected(col.5).Taking the27EUmembercountriestogether,EU27istheworstoffenderwith227discriminatorymeasures.In other metrics, EU27 remain in the top5 offenders. Argentina, China, Germany, India, Indonesia and Russiaareinthetop10worstoffendingnationsonthreeofthefourmetrics.VietNamisthetopcountry in discriminating against foreign commercial interests in the most product categories (927 tariff lines). Algeria leads the list for measures that harm foreign commercial interests in the largest number of economicsectors(62sectors);theEU27forharmingthemosttradingpartners(180countries).Amongthe OICcountries,Kazakhstan,Nigeria,AlgeriaandIndonesiaareinthetop10listofthecountriesthatharm foreign commercial interestsinthelargestnumber oftarifflinesand economicsectors.Byharming151 trading partners, Indonesia is the only OIC member country in the list of the top10 worst offending nationsthatharmtradingpartners.

Table2:Whichcountrieshaveimposedthemostharm?
Rankedbynumberof (almostcertainly) discriminatorymeasures imposed EU27(227) RussianFederation(105) Argentina(88) UK(53) Germany(52) India(50) Brazil(44) France(44) China(42) Italy(42) Rankedbythenumberof tarifflines(product categories)affectedby (almostcertainly) discriminatorymeasures Vietnam(927) Venezuela(785) Kazakhstan(729) Nigeria(599) EU27(549) Algeria(476) RussianFederation(438) Argentina(413) Indonesia(387) India(369) Rankedbythenumber ofsectorsaffectedby (almostcertainly) discriminatory measures Algeria(62) EU27(58) Nigeria(45) Kazakhstan(43) Germany(42) USA(42) China(41) Indonesia(40) RussianFederation(39) Venezuela(38) Rankedbythenumberof tradingpartnersaffected by(almostcertainly) discriminatorymeasures EU27(180) Argentina(175) China(172) Germany(161) UK(154) Belgium(153) Finland(153) India(153) Indonesia(151) France(149)

Rank

1 2 3 4 5 6 7 8 9 10

Source:The9thGTAReport,July2011.

There are also various types of measures used in this period. Table 3 shows the ten most used state measures to discriminate against foreign commercial interests (col. 1 and 2) as well as the number of jurisdictions imposed or harmed by these measures (col. 3 and 4). Since November 2008, bailouts and 12

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state aids are the most frequent source of discrimination imposed as part of rescue packages designed mostly for financial sector. This measure is followed by the implementation of discriminatory trade defenceinstruments(205)andtariffmeasure(126).Withrespecttothenumberofmeasuresimplemented inallcategories,tariffmeasurewith384implementedmeasurestakethelead(col.2). Tariff measure is again the discriminatory measure imposed by the largest number of jurisdiction, followed by trade defence measure and export taxes or restriction (col. 3). Export taxes or restrictions, bailouts, export subsidies, and tariff increases imposed since November 2008 are each conservatively estimated to have harmed over 150 countries commercial interests (col. 4). Although the number of exportsubsidiesisonly27,thenumberofjurisdictionsharmedbythismeasureisashighas175, third harmfulmeasureafterexporttaxesorrestrictionandbailout/stateaidmeasures.

Table3:TenmostusedstatemeasurestodiscriminateagainstforeigncommercialinterestssinceNov.2008 Numberof discriminatory (red)measures imposed 264 205 126 65 65 39 35 28 27 24 Numberof measures implemented(red, amber,orgreen) 287 252 384 108 86 61 45 79 44 35 Numberof jurisdictionsthat imposedthese discriminatory measures 49 58 63 52 22 21 19 21 41 16 Numberof jurisdictionsharmed bythese discriminatory measures 186 74 157 188 134 96 135 73 175 92

Statemeasure

Bailout/stateaidmeasure Tradedefencemeasure (AD,CVD,safeguard) Tariffmeasure Exporttaxesorrestriction Nontariffbarrier(not otherwisespecified) Migrationmeasure Publicprocurement Investmentmeasure Exportsubsidy Importban
Source:The9thGTAReport,July2011.

Withregardstothesectorsthataremostaffectedbydiscriminatorymeasures(Table4),financialsector takesthelead.Beingharmedbythecrisismostdramatically,financialsectorneededthemostprotection. However,thefinancialsectornolongerstandsoutasanunusualrecipientofstatefavours.Firmsinthe basicagriculturalproducts,basicchemicals,basicmetals,andtransportequipmenthaveseen85ormore discriminatory measures imposed since November 2008. Most of the pending measures are also identifiedinchemicalandmetalindustries.

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Table4:Top20sectorsmostaffectedbydiscriminatorymeasures AffectedSector Financialintermediationservicesand auxiliaryservicestherefor Productsofagriculture,horticultureand marketgardening Basicchemicals Basicmetals Transportequipment Specialpurposemachinery Meat,fish,fruit,vegetables,oilsandfats Grainmillproducts,starchesandstarch products;otherfoodproducts Fabricatedmetalproducts,except machineryandequipment Generalpurposemachinery Liveanimalsandanimalproducts Yarnandthread;wovenandtuftedtextile fabrics Rubberandplasticsproducts Dairyproducts
Source:The9 GTAReport,July2011.
th

Numberofdiscriminatory measures(red)affecting commercialinterests 95 91 86 85 85 76 73 66 63 55 54 53 53 50

Numberof implemented measures 102 157 145 146 166 149 117 117 105 114 83 93 89 73

Numberof pendingmeasures 5 15 75 45 25 12 17 16 40 20 9 13 21 12

CurrencyWars ManyoftheprotectionistmeasuresadoptedduringtheGreatDepressionofthe1930swererespondingto developments in currency markets (Eichengreen and Irwin 2009). National producers who found themselves under substantial pressure due to competitive devaluations in countries demanded countervailingsupportintheformofprotectionisttradebarriers.Thistypeofdevaluationswasanother widespreadmeasureaimedatprotectingdomesticeconomies.ChinaandUnitedStatesareattheheartof debate, with China being accused of manipulating its currency at artificially low levels. This issue naturallydeservesaspecialtreatmentasithasimportantimplicationsinmanyfronts.Therefore,instead of brief observations on the socalled currency wars, a more comprehensive treatment of the subject matterislefttothecomingissuesofthereport.

References
Baldwin,R.(2009),Thegreattradecollapse:Whatcauseditandwhatdoesitmean?inTheGreatTradeCollapse: Causes,ConsequencesandProspects,EBookeditedbyR.Baldwin. Eichengreen,B.andD.A.Irwin(2009)TheSlidetoProtectionismintheGreatDepression:WhoSuccumbedand Why?NBERWorkingPaper15142.

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Evenett,S.J.(2011),ResolveFaltersAsGlobalProspectsWorsen:The9thGTAReport,CentreforEconomicPolicy Research,July2011,London. Frieden,J.(2009),GlobaltradeintheaftermathoftheglobalcrisisinTheGreatTradeCollapse:Causes,Consequences andProspects,EBookeditedbyR.Baldwin. Krueger,A.O.(2009),ProspectsfortheglobaltradingsysteminTheGreatTradeCollapse:Causes,Consequencesand Prospects,EBookeditedbyR.Baldwin.

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SESRICREPORTSONTHEGLOBALFINANCIALCRISIS
1 2 3 4 5 6 7 8 TheCurrentGlobalFinancialCrisis:TheDeepestsinceWorldWarII IslamicFinanceandBankingSystem:APotentialAlternativeintheAftermath oftheCurrentGlobalFinancialCrisis,PartI UNConferenceontheWorldFinancialCrisisandItsImpactsonDevelopment TheCurrentGlobalFinancialCrisisandtheRecessionintheWorldEconomy: ProspectsforRecovery IslamicFinanceandBankingSystem:APotentialAlternativeintheAftermath oftheCurrentGlobalFinancialCrisis,PartII GlobalEconomicRecovery:ProspectsandChallengesinthePostCrisisPhase WorldEconomyonRecoveryPath:IstheCrisisOver? TheEurozoneDebtCrisis:ASecondWaveoftheGlobalCrisis? May2009 June2009 July2009 AugSep2009 OctDec2009 JanJun2010 JulDec2010 JanJun2011

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