01

moSCoW

AGENCIES

THE Group of 20 nationshave declared therewould be no “currencywar” and deferred plansto set new debt-cuttingtargets in an indicationof concern about the

fragile state of the world economy.Japan’s policies, which have driven downthe yen, escaped criticism in a statementagreed on in Moscow on Saturday by fi-nancial policymakers from the G20,which groups developed and emergingmarkets and accounts for 90 percent of theworld economy.

After late night talks, finance ministersand central bankers agreed on wordingcloser than expected to a joint statement is-sued last Tuesday by the Group of Sevenrich nations backing market-determined ex-change rates. A draft communique seen bydelegates on Friday had steered clear oftheG7’s call for fiscal and monetary policynot to be targeted at exchange rates but thelater version included a G20 commitmentto refrain from competitive devaluationsand stated monetary policy would be di-rected at price stability and growth.

“The language has been strengthenedsince our discussions last night,” Jim Fla-herty, Canadian finance minister, said. “It’sstronger than it was, but it was quite clear lastnight that everyone around the table wants toavoid any sort of currency disputes.”

The communique did not single outJapan for aggressive monetary and fiscalpolicies that have seen the yen drop 20 per-cent. The statement reflected a substantial,but not complete, endorsement of Tues-day’s statement by the G7 nations - theUnited States, Japan, Britain, Canada,France, Germany and Italy.

“We all agreed on the fact that we re-fuse to enter any currency war,” PierreMoscovici, French finance minister, said.

The text also contained a commitment

to credible medium-term fiscal strategy, butstopped short of setting specific goals.

The G7 has long been the powerhouseof financial diplomacy. But tension be-tween the US and Japan has risen over anattempt by Shinzo Abe, Japan’s new primeminister, to end two decades of deflation.

The G7 issued a joint statement onTuesday reaffirming “our longstandingcommitment to market determined ex-change rates”. Yet the show of unity wasquickly undermined by off-the-recordbriefings critical of Japan.fiScAl StrAtegieS: A debt-cuttingpact struck in Toronto in 2010 will expire

this year if leaders fail to agree to extend itat a G20 summit of leaders in St Petersburgin September. “Advanced economies willdevelop credible medium-term fiscal strate-gies ... by the St Petersburg summit,” thecommunique said. The US says is on trackto meet its Toronto pledge but argues thatthe pace of future fiscal consolidation mustnot snuff out demand. Germany and othersare pressing for another round of bindingdebt-cutting goals.

Backing in the communique for the useof domestic monetary policy to supporteconomic recovery reflected the US Fed-eral Reserve’s commitment to monetary

stimulus through quantitative easing, orQE, to promote recovery and jobs.

QE entails large-scale bond buying -$85bn a month in the Fed’s case - that helpseconomic growth but creates money, muchof which has leaked into emerging markets,threatening to destabilise them.

That was offset in the communique bya commitment to minimise “negativespillovers” of the resulting financial flowsthat emerging markets fear may pump upasset bubbles and ruin their export compet-itiveness. Russia, this year’s chair of theG20, said the group had failed to reachagreement on medium-term budget deficit

levels and also expressed concern aboutultra-loose policies that it and other bigemerging economies say could store uptrouble for later. Anton Siluanov, Russianfinance minister, said a rebalancing ofglobal growth required more than an adjust-ment of exchange rates.

Stephen Barber, a political economistfrom the London South Bank University,told Al Jazeera that “unlike shares you can-not devalue all currencies in the world, allat the same time.” “So, what the G20 is in-terested in, notably those representativesfrom the eurozone, is more stability at atime when growth is very fragile.”

bUsiNEss

BMonday, 18 February, 2013

G20 leaders aGree to avoid currency war

via BloomBerg

The seven-year budget plan announced by the Eu-ropean Union’s governments last week came as adiplomatic win for U.K. Prime Minister DavidCameron, for which he has been showered withpraise at home. As that surprise wears off, the deal

serves mainly as a depressing reminder ofthe EU’s skewed priorities.

EU leaders agreed to cap spendingcommitments at 960 billion euros ($1.3trillion) from 2014 to 2020. That’s a cutfrom the previous seven-year budget, to1 percent of the EU’s economic outputfrom 1.12 percent — the first reduc-tion in the bloc’s history. It is alsopeanuts. Europe’s national govern-ments typically spend 40 to 50 timesmore as a share of their respectiveeconomies.

Reducing the fiscal impactfurther is the EU’s lack of budgetdeficits or surpluses: Revenuealways matches spending.

Governments worked onthe deal for 18 months andneeded a 25-hour closing

session to wrap things up.The European Parliamentnow has to approve the

budget and is soundingmutinous. Don’t let thetheatrics mislead you,though: The macroeco-nomic implications arevirtually zero.

Much more was at

stake in diplomatic and symbolic terms. Cameron re-cently stirred complaints in Europe by calling forstructural changes to the EU that would protect theU.K. from unwanted political integration, and allowit to renege on existing EU rules that it doesn’t like.He threatened the U.K.’s withdrawal from the unionif he doesn’t get what he needs. Critics at home andabroad said this stance would cost the U.K. influence,and that Cameron had made himself irrelevant in EUpolicy making. SucceSSful AlliAnce: Not so — or at least,not so long as Germany’s austerity chancellor, An-gela Merkel, happens to want the same outcome asCameron. The U.K. formed a successful alliancewith Germany and other northern European coun-tries in arguing that the EU’s budget shouldn’t growwhen national budgets were being cut. The agreedfigure was more than Cameron or Merkel had calledfor, but was still a reduction of more than 3 percentin inflation- adjusted terms, and significantly lessthan the 5 percent increase that the European Com-mission first proposed. Cameron also preserved thehallowed rebate of British contributions to EU rev-enue, a concession negotiated by Margaret Thatcherin 1984. In this case, obstinacy didn’t weaken theU.K.’s hand. The evident displeasure of the Frenchgovernment only sweetened Cameron’s win. Yetviewed dispassionately, rather than through the lensof these traditional quarrels, the new EU budgetgives little cause for celebration.

The agreement continues to reduce spending onEurope’s notoriously wasteful Common AgriculturalPolicy — an elaborate system of controls and pay-ments — but not by enough. Farm subsidies andrural-development spending will continue to take upmore of the EU’s budget than any other area for thecoming years, with 39 percent of the total. French

President Francois Hollande even managed last weekto add some money for rural development, the priceof his agreement.

At the same time, the European Commission’sproposed increases to funding for some of the growth-oriented, transnational areas where the EU should domore — such as building cross-border energy andtransport links, and boosting research and develop-ment — were reduced. Spending to help develop theEU’s poorest regions, which Europe also ought tosupport with increased outlays, was cut in absoluteterms. The budget for administration, on the otherhand, was enlarged. Huge DiSpAritieS: Real budget reform wouldhave attacked farm subsidies more forcefully andused the savings, and then some, to accelerate EU-wide economic integration by building new infra-structure. Europe’s current economic travails areworsened by the huge disparities between the bloc’smost successful countries and those that are lesswell-off. Narrowing those gaps requires, amongother things, additional investment to link Europe’snations together.

Successive rounds of budgeting have so far failedto get the EU’s fiscal priorities right. There may soonbe another chance, when the European Parliamentvotes on the new plan later this year. Regrettably, themain political factions in parliament appear to be fo-cused on the overall size of the budget. They see theproposed cut in spending as a precedent- setting attackon ambitions for the EU — the same reason that euro-skeptic rebels in Cameron’s Conservative Party are sopleased with the deal.

Our advice to members of the EU Parliament isthis: Worry less about reversing the overall cut and in-stead shift resources to where they can stimulate trade,growth and high-value job creation.

New EU budget is a missedopportunity to focus on growth

16-17 Business Pages (18-02-2013)_Layout 1 2/18/2013 6:29 AM Page 1

bUsiNEssMonday, 18 February, 2013

02

B

NeW York TimeS

JAmES B StEwArt

Last month, Vladimir V. Putin hugged his newlyminted fellow Russian citizen, the actor Gerard Depar-dieu, posing for cameras at the Black Sea port of Sochi.“I adore your country,” Mr. Depardieu gushed — es-pecially its 13 percent flat tax on personal income.

Sochi may not be St. Tropez, but it does have win-ter temperatures in the 60s and even palm trees. Mr.Putin’s deputy prime minister confidently predicted a“mass migration of wealthy Europeans to Russia.”

Here in the United States, the three-time Masterschampion Phil Mickelson recently walked off the 18thhole at Humana Challenge and said he might movefrom California because the state increased its top in-come tax rate to 13.3 percent from 10.3 percent.

“Hey Phil,” Gov. Rick Perry of Texas wrote in aTwitter message, “Texas is home to liberty and lowtaxes ... we would love to have you as well!!” TigerWoods later said that he had left California forFlorida for just that reason years ago. Mr. Mickelsoncan “vote with his Gulfstream,” a Wall Street Journaleditorial noted, and warned California to “expect acontinued migration.”

It’s an article of faith among low-tax advocatesthat income tax increases aimed at the rich simply

drive them away. As Stuart Varney put it on FoxNews: “Look at what happened in Britain. They raisedthe top tax rate to 50 percent, and two-thirds of themillionaires disappeared in the next tax year. Same

things are happening in France. People are leavingwhere the top tax rate is 75 percent. Same thing hap-pened in Maryland a few years ago. New millionaire’stax, the millionaires disappeared. You’ve got exactlythe same thing in California.” That, at least, is whatlow-tax advocates want us to think, and on its face, itseems to make sense. But it’s not the case. It turns outthat a large majority of people move for far morecompelling reasons, like jobs, the cost of housing,family ties or a warmer climate. At least three recentacademic studies have demonstrated that the numberof people who move for tax reasons is negligible,even among the wealthy. Cristobal Young, an assistantprofessor of sociology at Stanford, studied the effectsof recent tax increases in New Jersey and California.

“It’s very clearthat, over all, modest

changes in top taxrates do not affect mil-

lionaire migration,” hetold me this week. “Nei-ther tax increases nor taxcuts on the rich have af-fected their migrationrates.”

The notion of taxflight “is almost entirelybogus — it’s a myth,”

said JonShure, di-

rector ofstate fis-

c a l

studies at the Center on Budget and Policy Priorities, anonprofit research group in Washington. “The anec-dotal coverage makes it seem like people are leavingin droves because of high taxes. They’re not. There area lot of low-tax states, and you don’t see millionairesflocking there.” Despite the allure of low taxes, Mr. De-pardieu hasn’t been seen in Russia since picking up hispassport and seems to be hedging his bets by maintain-ing a residence in Belgium. Meanwhile, Russian bil-lionaires are snapping up trophy properties in high-taxLondon, New York and Beverly Hills, Calif.

“I don’t hear about many billionaires moving toMoscow,” said Robert Tannenwald, a lecturer in eco-nomic policy at Brandeis University and former FederalReserve economist. Along with Nicholas Johnson, heand Mr. Shure are co-authors of “Tax Flight Is a Myth,”a 2011 research paper. Of course, some people do movefor tax reasons, especially wealthy retirees, athletes andother celebrities without strong ties to high-tax loca-tions, like jobs and families. In renouncing his Frenchcitizenship, Mr. Depardieu follows other French celebri-ties, the chef Alain Ducasse, the singer Johnny Hallydayand Yannick Noah, a former tennis star. Several Parishedge fund managers have decamped to London and thefashion mogul Bernard Arnault applied for Belgian cit-izenship, though not, he has said, for tax reasons.

Stars like Mr. Depardieu and Mr. Mickelson cer-tainly have incentives to move. Mr. Depardieu com-plained that he paid 85 percent of his income in taxesin France last year and has paid 145 million euros over45 years. France has a top rate of 41 percent as well asa wealth tax, and the Socialist president, François Hol-lande, is trying to impose a temporary surcharge of 75percent on incomes over 1 million euros. Mr. Mickel-son earned more than $60 million last year, Sports Il-lustrated estimates, which means thethree-percentage-point California tax increase couldadd up to an additional $1.8 million in tax.

The myth of the richwho flee from taxes

via BloomBerg

it’s debatable whether PresidentBarack Obama can revive U.S.manufacturing, as he proposedin his State of the Union ad-dress. It isn’t debatablewhether he should try. TheU.S. can already go toe-to-toe

with (or beat) other countries on energycosts, workforce quality, supply networksand legal rights — even if it can’t (andshouldn’t) compete over wages and envi-ronmental controls. If Congress cherry-picked just a handful of ideas fromObama’s long list of proposals, the U.S.could jump the competitiveness queue.

U.S. manufacturers have added roughlyhalf a million jobs since 2010, when em-ployment bottomed out. Today, about 12million people hold factory jobs, downfrom 17 million at the peak in 2000. Get-ting back to the previous level will betough, and it shouldn’t be the only measureof success.

A better yardstick is whether busi-nesses think it’s smart to consider the U.S.,alongside China and other low-cost manu-facturing hubs, when deciding where to lo-cate new plants. This is beginning tohappen. Cheap energy has shifted the costcalculus for Caterpillar Inc., Intel Corp. andFord Motor Co., which are moving produc-tion jobs to the U.S. from overseas. Laterthis year, as Obama said in his address,Apple Inc. will again make Mac computersin the US Obama hopes to accelerate thetrend. The problem is that he offers an av-alanche of ideas — some innovative, othersrecycled — without tying them together ina holistic way. The result is that Congresswon’t adopt most of them.

Laundry List Obama would bolster clean energy sub-

sidies, hire hundreds of people to lobby for-eign companies to open U.S. plants, andend tax breaks to companies that ship jobsoverseas. He would expand free-tradepacts, crack down on unfair trade practices,enhance job retraining programs, establish

supply-chain coordinators, and on and on. The president could be more effective

if he sharpened his focus on two areas: pub-lic-private partnerships and corporate taxreform.

Start with his request for $1 billion toopen 15 manufacturing innovation insti-tutes. It has gotten little notice, yet deservesconsideration, as we have advocated. Theinstitutes would be modeled on a Germanprogram that develops and showcases newmanufacturing technologies. With abroader mandate, the U.S. versions coulddeliver a lot of bang for a billion bucks.

The institutes could, for example, makesure local colleges are equipped to offer thespecialized training that workers need, no-tably in high-tech manufacturing. Theycould help foster a pro-business environ-ment by pushing legislatures to trim redtape, such as licensing and permitting re-quirements. They could make sure basicservices, including broadband communica-tion and efficient transportation, are avail-able. And they could help diversify their

local economies to avoid overdependenceon a single employer or industry.

The day after the State of the Unionspeech, Obama toured a plant owned byLinamar Corp. near Asheville, North Car-olina, where a partnership of local col-leges, economic development agenciesand private-sector startups helped bringabout an economic resurgence. Linamar,an Ontario company, began makingheavy-duty engine parts in a closed Volvofactory in 2010. It now has 160 workersand plans to add 40 more this year. Othercompanies have followed and, in threeyears, the region has attracted 1,900 newmanufacturing jobs and more than $500million in investment. tAx coDe: The tax code is Obama’sother challenge. Again, he asks Congressfor too much. He wants to lower incometaxes on manufacturers to 25 percent from35 percent, enact a new global minimumtax on manufacturing profits, make perma-nent the research and experimentation taxcredit, deny companies deductions and

credits when they move overseas, and cre-ate a new tax credit for companies that addfactory jobs in hard-hit areas.

These are all worthy ideas, but it’s acomplicated array. Why not just lower taxeson earnings for all manufacturers? Corpo-rate income taxes, after all, aren’t actuallypaid by companies, but are passed on toworkers in the form of lower wages, to con-sumers in higher prices and to shareholdersin smaller investment returns. The U.S.’s35 percent corporate tax rate — one of thehighest in the world, even if most compa-nies use loopholes and credits to pay far less— makes it difficult to attract investment. A15 percent tax on manufacturing profitswould be reasonable. One happy byproductmight be the repatriation of overseas profitsby U.S. manufacturing companies.

Reinvigorating manufacturing won’tcure the problem of high unemployment.Still, declining energy prices in the U.S.and rising labor costs in China have put thewind back in the U.S.’s sails. The key nowis to chart a precise course.

16-17 Business Pages (18-02-2013)_Layout 1 2/18/2013 6:30 AM Page 2