EU without UK

EU without UK

 Tim Oliver

INTRODUCTION

Britain’s membership of the European Union has long been overshadowed by doubts about its commitment and whether it may one day leave, also known as a ‘Brexit’. The election of a majority Conservative government in May 2015, David Cameron’s January 2013 commitment to seeking a renegotiated UK-EU relationship and in/out referendum, and developments elsewhere in the EU have increased the possibility of a withdrawal.¹ This has led to a wealth of analysis and comment about what this could mean for Britain, adding to an already substantial literature on UK-EU relations. Despite this, the Brexit debate has long been a parochial one, focused largely on the implications for Britain. When in November 2015 David Cameron set out Britain’s aims for a renegotiated relationship, he did so at Chatham House. The location helped convey his message that part of the European question in UK politics was one of national security, something that had until that point been largely overlooked.² The wider implications of such a move — for the EU, Europe, transatlantic relations, NATO, and wider international relations — have often been ignored except for debates in a small international relations community of diplomats and scholars. Even Britain’s debate has its limits; Ed Miliband, former leader of Britain’s Labour party, once warned that the UK risks sleepwalking out of the EU.³ The EU itself has been asleep, oblivious to what a Brexit could mean for it. The withdrawal of one of the EU’s largest member states would almost certainly be a defining moment in the history of the EU with wider knock-on effects for NATO, European security and international relations.

This presents a problem for all concerned. Until the election of a majority Conservative government at the May 2015 General Election, most in the rest of the EU (and to some extent the UK) had refused to contemplate a renegotiation of Britain’s membership because it seemed a distant possibility. Cameron’s renegotiation and referendum have not been easy, often denounced as a step towards an EU ‘a la carte’. But if an EU ‘a la carte’ is not acceptable then this increases the risk of an EU ‘sans la Grande Bretagne’. Without being able to weigh up the pros and cons of losing Britain, the EU cannot know how far it should go in negotiating, refusing or appeasing the UK. An EU without Britain might be a more united union that functions better. It might also become more divided, with a Brexit unleashing centrifugal forces that unravel the EU.

British supporters of withdrawal or renegotiation also need to reflect on how the rest of the EU and others might respond, and how much leverage is gained from the threat of Brexit.⁴ Britain could be undermining its chance to lead Europe. As Cameron himself made clear in his speech at Chatham House, on current projections, by the middle of the century the UK will have the largest population, economy and military in the EU. Sidelining itself or withdrawing now means any deal or relationship will be determined not by what the best deal is for the UK, but what is in the much larger collective interests of the EU and Europe. This will be shaped by the outlook of the remaining EU, an outlook that Britain’s departure could change into one much less hospitable to British interests.⁵ Undoubtedly, Britain and the EU will continue cooperating, with some cooperation undertaken through forums such as NATO or bilaterally through relations with Germany or France. However, beyond military and some issues of high politics, most other cooperation and what means this is facilitated through, is likely to be decided through relations where the EU will be the predominant actor or a defining factor in the thinking of other European states.

A Brexit could also have significant implications for NATO, wider European politics, transatlantic relations and Europe’s position in the international system. It is concerns over such implications that will shape the way countries such as the USA, Russia or emerging powers will view a Brexit. A Brexit that added to Europe’s divisions and security weaknesses, or turned it inwards would be of serious concern to Washington D.C. A focus in UK political debate on US-UK relations distracts from how geopolitical thinking about a wider transatlantic relationship will shape the response of the USA to a Brexit.

Any Brexit will not happen in isolation from other events, not least of which are ongoing efforts to manage the ongoing problems in the Eurozone and Schengen.⁶ In writing about the direction the EU could go as it recovers from the Eurozone crisis, Tom Wright of Brookings sketches out three scenarios: an EU that takes a leap forward to become more united, functioning more effectively; a muddling through with the EU largely stagnating; and further divisions, possibly leading to the collapse of the EU.⁷ Understanding a Brexit requires us to take into account these wider changes in which a Brexit could play an influential — perhaps, defining — role. By taking these into account we can see more clearly that the concerns of states such as Germany or the EU’s institutions will not be about the UK or simply economic links with it, something British Eurosceptics have argued will ensure relations between the UK and the EU remain cordial and in line with the UK’s needs. We also need to keep in mind the role of ideas in European integration and relationships; supranational, intergovernmental, multilateral and bilateral links that connect Europe; global and European political and economic pressures such as the Eurozone or emerging powers; and the outlook of the political elites across the EU that will define how Europe responds to a Brexit.

HOW LIKELY IS A BREXIT?

The question of Britain’s continued membership of the EU has slowly risen up the list of concerns for other EU member states, in no small part thanks to other problems such as Russia, migration and the Eurozone being of larger concern. There is also a sense by the rest of the EU of having been here before, both with a similar referendum in 1975 and in repeated complaints and bust-ups with the UK over the following 40 years of membership. Added to this is a sense that David Cameron’s aim has not been to secure a reformed EU or UK-EU relationship, but instead has been about his holding onto power in the face of opposition from the Eurosceptic backbench members of his own party. Such an approach runs the risk of overlooking the tensions that define the European issue in UK politics. ‘To be or not to be in Europe: is that the question?’⁸ In short: no that is not the question. The question — or issues that fuel it — have been building for some time. It is not entirely surprising that a referendum has finally been called. The issue of holding an in/out referendum became an accepted norm of UK politics such that at the 2015 General Election all the main UK parties — Conservatives, Labour, Liberal Democrats and UKIP — were committed to holding an in/out referendum, albeit under different conditions.

Opinion polling shows that the British public can appear split over the issue of EU membership. There can be little doubt that they are amongst the most Eurosceptic in the EU. However, it is important to note that opinion polling has shown the British people are not overwhelmingly sold on voting for the unknowns of a Brexit. Indeed, look more closely at opinion amongst the public and political elite and we find it is more nuanced than often assumed with Eurosceptic opinion being something of a minority, albeit still a substantial one.⁹ The surge in support for UKIP is not simply about the EU. Its support is also about anti-politics, anti-immigration and anti-London.¹⁰ As a result of the UK’s majoritarian electoral system, UKIP has struggled to turn votes into MPs, buts it has succeeded in taking votes from all of the other UK parties.

As a result, UKIP is unlikely to fade away anytime soon, support for it has pushed the other parties into responding to its agendas, and it draws on unease with the EU that has long been present in British politics. Britain’s long history of strained relations with the EU will not disappear. Even if there were a referendum, and it produced a vote to stay in the EU, it would unlikely settle what David Cameron called ‘the European question’ in British politics. The European Question is not simply about whether to be or not to be in the EU; it is more about tensions within the UK’s party politics, changing constitution, identity politics, political economy, responses to globalization and place in a changing Europe.¹¹ A variety of polls have shown a willingness to back withdrawal. Scotland’s 2014 referendum result serves as a reminder that political arrangements, even those that have been set for hundreds of years, could change. Inaccurate polling over the Scottish referendum and the 2015 General Election also serve as a reminder of how unpredictable these votes can be.

The EU’s own crises — with the Eurozone, Russia and migration — have not helped to sell itself to a British electorate that like many across Europe have shown a growing weariness at European integration.¹² When contrasted with the economic opportunities from emerging markets the EU can appear to be the past, not the future it once was. The EU’s appeal in the UK rests largely on economics and trade. Declines in the trading link will add to questions about what Britain gains from EU membership. We should also be careful not to overlook the capacity for the EU itself to bring about or shape the likelihood of a Brexit. A refusal to agree to any renegotiated relationship, another Eurozone crisis or failure to grapple with another immigration crisis could make it more likely that the referendum result will be for a withdrawal.

IMPLICATIONS FOR EUROPEAN UNITY AND INTEGRATION

The first problem the EU would face from a Brexit is the unprecedented experience of negotiating the withdrawal of a member state. The very idea of withdrawal is a taboo, representing a reversal and challenge to the idea of European integration as a process that moves forwards not backwards. That said, withdrawal is not strictly unprecedented with two overseas territories of member states having left: Greenland in 1985, and Algeria in 1962. The EU also has a procedure for withdrawal as set down in Article 50 of the EU’s Treaty.¹³ It provides a withdrawal timeframe of two years, possibly longer if both sides agree this is necessary. Negotiating for the EU would be a team nominated by the Commission and approved by the Council. Article 50 requires any withdrawal agreement contain both a deal for the withdrawal of the member state and a framework for a post-withdrawal relationship with it. This whole deal would have to satisfy the remaining EU member states through a vote in the European Council, and receive the support of the European Parliament. In the case of the UK any deal would also require the support of the UK Government, British Parliament, and possibly the British people if there was pressure for the deal to be subject to approval by another referendum. The possibility of the European Court of Justice becoming involved should not be overlooked, it providing an avenue through which private individuals and/or companies challenge the withdrawal deal. Any such negotiations could also be set against the backdrop of ongoing negotiations to deal with the problems in the Eurozoen and Schengen. The context within which a UK withdrawal takes place could therefore be another period of considerable EU institutional change, naval-gazing and tense relations between individual leaders and national elites.

Any institutional naval-gazing would also be the result of the EU needing to make changes to its own institutions and procedures to fill the gap left by Britain. The EU would face the never-easy task of negotiating changes to the voting system used for making decisions in the European Council, a reallocation of seats in the European Parliament, changes to staffing quotas, and increases in budgetary payments to make up for the loss of the UK’s large net contribution (£8.5 billion in 2015).¹⁴ When combined with possible changes to the Eurozone, a Brexit could add to shifts to the EU’s balance of power and changes to the EU’s policies and outlook.

Perhaps the most dramatic consequences of a Brexit would be one that put the unity of the EU under pressure. The EU’s unity has come under considerable pressure during the Eurozone and migration crises. While they have so far held together, and the response has if anything been to push for further integration, the Eurozone and Schengen remain vulnerable and future tests of their unity cannot be ruled out. If the UK and other non- EU members thrived and the Eurozone continued to struggle, then Britain’s withdrawal could trigger centrifugal forces leading other member states to question their membership and commitment to integration, in turn stalling integration and beginning a process that unravels the EU. The key here is likely to be Germany. In writing about the potential for the EU to disintegrate, Douglas Webber notes that the EU has never faced a ‘crisis made in Germany’, the EU’s driver, paymaster and indispensable nation.¹⁵ What that crisis might be is not clear, but a Brexit that combined with another crisis in the Eurozone or Schengen could strike deep into the EU’s heart leading both Germany and other members to question their membership. Any such ‘domino theory’ by which a Brexit makes other EU members states question and abandon their membership or commitment to integration, has to be set against the likelihood of another domino effect within the EU should the UK secure a renegotiated relationship that provokes envy elsewhere. Other states could then demand concessions, creating the aforementioned EU ‘a la carte’. Whichever way is taken, Britain’s behavior could appeal to far left and right wing groups, especially in some Southern and Eastern European member states, adding to the problems the Eurozone crisis has caused for anchoring these states into the European mainstream. It could also have some appeal to groups in Northern and Western Europe, such as France’s Front National. At the same time, if the UK struggles outside the EU then its appeal and decisions would be limited, strengthening the EU’s position. Losing a member noted for being ‘an awkward partner’ could allow the EU to work together more effectively.¹⁶ That said, Britain is not the only member of the EU who can be awkward. Both the Eurozone and Schengen, neither of which Britain is a member of, have struggled to find the necessary unity and leadership in the face of ongoing problems.

The centre of power in the EU could also shift. Germany’s already strong position could be further strengthened with implications for the Franco-German axis. Britain has sometimes played a role in this bilateral relationship. France could be left facing an EU where the centre of gravity has shifted further eastwards and where Germany’s ‘culture of restraint’ and preference for geoeconomic thinking over the geopolitical, comes to shape the EU’s international standing.¹⁷ However, Germany might also be left feeling uneasy at the withdrawal of an ally that has helped it push an economically liberal, free-market agenda. The political and geographical centre of the EU could shift eastwards and southwards. Some member states may gain from a withdrawal, seeing it as a chance to enhance their position within the EU. Some such as the Irish Republic, more heavily linked to the UK than others, may face significant challenges.¹⁸

The EU’s place in Europe could also be changed. A Brexit could change the EU’s relationship with countries such as Norway and Switzerland who are connected to the EU through either membership of the European Free Trade Area (EFTA) and/or the European Economic Area (EEA). These were intended as conveyor belts towards eventual EU membership. A Brexit has the potential to throw them into reverse. A Brexit would also remove from the EU a member that has been more willing than many to contemplate Turkish membership of the EU. While such membership has long been in doubt, a Brexit would more than likely end any remaining hopes. For countries such as France, who have already made clear their unease at Turkish membership, losing a large Western, developed and largely Christian state such as Britain would make it more likely they would block enlargement to a large, developing, South Eastern European and largely Muslim state such as Turkey. At the same time, Britain’s exit and new external relationship with the EU could open new possibilities for the EU’s relations with states such as Turkey.¹⁹

How the EU’s relations with these non-EU European states develop could be shaped by whatever post-withdrawal relationship is established with Britain. The EU will be compelled by geography, economics (including the power of the City of London), law (Article 50 TEU requires it — but not the departing member state — to attempt to negotiate a post-withdrawal relationship), demographic links — indeed, by sheer realpolitik — to develop a working relationship for managing common problems and a deeply interconnected relationship. A variety of proposals have been put forward for a post-Brexit UK-EU relationship. These range from special trade deals through to membership of the European Free Trade Area and/or the European Economic Area. Each has been discussed in great detail, even been the subject of €100,000 prizes.²⁰ The focus is almost always on what would be good or bad for the UK. What would be good or bad for the EU is rarely assessed despite the EU having to agree to any such deal, and therefore likely to be in the driving seat of any negotiations.²¹ What the EU agrees to will depend on what is in its economic, social and security interests, which ideas define the political debate, institutional links, international events and the outlook of individual leaders.²²

Should a Brexit weaken the EU then Britain could try to use this as an opportunity to redraw the economic and political relationships of Europe, moving away from the more supranational political setup of the EU towards more intergovernmental arrangements focusing largely on trade. The British government and political class may also expect Britain to be treated in some special way. This does not simply reflect some high self-opinion of Britain’s place in the world. It reflects the UK’s much larger demographic, economic, social and military size compared to other non-EU European countries such as Norway and Switzerland, who also have their own unique arrangements with the EU. It is also a reflection of Britain’s future position. Britain’s economy is predicted to overtake that of France by 2020, and London looks set to continue powering ahead as Europe’s most international city.²³ Sometime in the 2040s Britain’s growing population looks set to overtake that of a declining Germany.²⁴ By mid-century Britain could therefore be the largest member of the EU. Any expectation of special treatment also reflects forty years of membership. A UK outside the EU would move from decision maker to decision shaper, but it will be the best placed country outside the EU to shape decisions through bilateral or multilateral governmental links, or through networks involving civil society or the business community. One of the biggest tests of a Brexit for the EU will therefore be whether it can present a united front to the UK. Given the mutual interests in areas such as foreign, security and defence matters, and the global power of the financial institutions of the City of London, the EU could engage the UK through forums such as an EU+1 arrangement, an EU2+1 involving France, Germany and the UK, or a modified version of the EU’s current G6.²⁵ While the ability of the UK to divide and rule should not be overplayed, it should not be underestimated either. The EU has struggled to act in a united way in dealings with a range of other non-EU states such as Russia, the USA, Turkey and Israel. To what extent then can it be expected to manage a united front to the UK? However, we should not overlook the possibility that should the EU become more united then its relationship with the UK might come to resemble that of the USA’s relationship with the UK: a one-sided ‘special relationship’.

GEOECONOMIC IMPLICATIONS

Any compilation of national views from around Europe and the world looking at what a Brexit might mean for these states soon reveals concerns about the economic costs of a withdrawal.²⁶ The UK’s economic place in the EU is substantial. Britain constitutes 14.8% of the EU’s economic area, with 12.5% of its population.²⁷ British exports are 19.4% of the EU’s total exports (excluding intra-EU trade).²⁸ Within the EU Britain runs a large trade deficit with the rest in goods and services, around £28 billion a year in 2012 and as high as £61.6 billion in 2014.²⁹ What impact a Brexit would have on Britain’s trade with the EU is hotly contested within the UK. That Britain runs a trade deficit with the rest of the EU leads some to argue the EU needs Britain more than Britain needs the EU. This is questionable given roughly half of Britain’s trade is with the rest of the EU, leaving the UK in the position where it could potentially damage more of its overall trade than the rest of the EU. Nevertheless, neither side has an interest in allowing a situation in which their economic links are damaged. As mentioned earlier, a plethora of proposals have been put forward ranging from free trade deals, membership of EFTA/EEA (or an adapted version of them), or some special membership of the EU’s Single Market. These focus almost entirely on what might be best for Britain. Yet the final agreed arrangement will also be one shaped by what is best for the EU and Europe. Few if any member states will see anything to be gained from allowing a deal whereby the UK can undercut the EU by having access to the EU’s Single Market without any of the costs of membership. Some states have already made clear they expect to attract investment at Britain’s expense, France’s foreign minister saying his country would ‘roll out the red carpet’ for investors looking elsewhere.³⁰ The City of London, already something of a target for some within the EU, could become an even clearer target for hostile acts should the UK withdraw. To what extent the EU can pursue acts that either punish or limit Britain’s behavior is debatable, but it should come as no surprise if some in the EU seek this following a Brexit.

Longer-term concerns about a Brexit focus on whether the EU that emerges (or a more fragmented Europe if the EU were to break up) becomes more inward looking and less inclined towards liberal, free-market economics. Britain has been a long-standing supporter of the EU’s Single Market and has repeatedly pushed for it to be more open and deregulated.³¹ This has led to uneasy talk elsewhere in the EU of Europe being subject to an ‘Anglo-Saxon’ agenda, or even the ‘Britishisation’ of the EU.³² However, Britain’s role in the EU’s economic thinking is already limited by its exclusion from the Eurozone. Without the UK the Eurozone and EU could more neatly align, leaving the members of the Eurozone as the undisputed heart of the EU both politically and economically. It is also questionable to what extent countries such as Germany or even France would allow the EU, or the Eurozone, to become more inward looking and protectionist. Even the European Commission, often lambasted by British Eurosceptics as a bastion of state-socialism, just as often finds itself accused of pursuing harsh neoliberal, deregulatory and free-trade agendas.³³ Reforms to the Eurozone might have struggled to overcome its problems, but the intention has been to ensure the Eurozone is more open and competitive.³⁴ The UK is also not alone in seeing the potential and feeling the draw of emerging markets, something some British politicians accuse the EU of holding Britain back from. Germany’s interests in markets such as China and Brazil dwarf those of the UK, with many other EU members also pursuing links. Pressure from the USA or China and international trade negotiations, may not leave the EU many options but to continue embracing an outward looking economic agenda. Britain itself would likely use its influence from the outside to try to ensure the EU remains open and competitive. Granted, models of state-capitalism in Russia or China may grow in appeal. But the EU would come under incredible global pressure to remain open, as would the UK. Should the EU integrate further and feel more confident then it may even begin to espouse its own models for managing globalisation.³⁵

Possible economic implications of a Brexit could be seen first with the Transatlantic Trade and Investment Partnership (TTIP), a development Britain has been at the forefront of efforts to create.³⁶ TTIP negotiations have progressed, but questions remain as to whether EU member states or the US Congress might become problematic in ratifying it. Slowed TTIP approval could see it caught up in the Brexit debate. While a TTIP without the UK would not be impossible — indeed, the USA and EU have warned this could happen — Britain’s large economic and political relations with the USA (larger than any other EU member states) mean it would be more difficult and a lesser deal if secured, and potentially a more difficult sell to the US Congress.³⁷ Given the aim of TTIP is to expand to include other states such as Canada, a UK outside the EU could secure some form of partnership. However, what this partnership with other countries might entail is not yet clear. Nor is it clear whether the EU would allow the UK anything less than a backseat role. For the EU the partnership would be a bilateral one between Washington and Brussels.

EUROPEAN SECURITY, TRANSATLANTIC RELATIONS AND NATO

A Brexit would remove from the EU one of its two military powers capable of operating and thinking on a global scale. Britain’s military capabilities might be much reduced, but they along with its diplomatic, intelligence, international aid and soft power remain considerable.³⁸ The UK has long been one of the mainstays of EU efforts at cooperation in security, defence and foreign policy, with UK-French defence cooperation being extensive. Both countries have felt frustrated with the slow progress in EU defence and security cooperation. Without the UK, France would be left as the only major military power in the EU. Perhaps France would then abandon bilateral cooperation with the UK in favour of renewed efforts at EU led cooperation, opening up opportunities for Germany to develop its own and the EU’s military capabilities and geostrategic thinking. France, Germany and Poland — the Weimar Group — could develop into the heart of EU cooperation on such matters. However, whether Germany would be willing or able to engage in such a role is open to doubt.³⁹

A great deal of how a Brexit might change European security will hang on the reaction of the USA. Focusing on what a Brexit might mean for the UK-US ‘Special Relationship’ or accusing Britain of being an ‘American Trojan Horse’ set to weaken the EU or make it serve the USA, deflects attention from the close relations the USA has with any number of other European states such as Ireland or Germany. The sheer economic size of the EU — which without the UK would have a collective GDP of $13.5 trillion compared to Britain’s $2.4 trillion — means collective US-EU economic relations would overshadow those with Britain. The USA could therefore face a double loss from a Brexit if this led to a more awkward relationship with the EU (combined with more complex EU-NATO relations) and a reduced standing of the UK in the world.⁴⁰ There would be no shortage of applicants to fill the position of claiming to be the USA’s closest friend inside the EU. While such applicants might not offer a relationship that could claim to be as ‘special’ and intimate as that with the UK, for the USA they will be of increased importance thanks to Europe, and the EU, being an area of the world in which it will retain considerable interests. Despite some high profile spats, as President Obama made clear in his state visit to the UK in 2011, Europe remains the cornerstone for US global engagement and the greatest catalyst for global action in the world today.⁴¹ As President Obama made clear in 2015, UK membership of the EU:

“gives us much greater confidence about the strength of the transatlantic union and is part of the cornerstone of institutions built after World War II that has made the world safer and more prosperous…the values that we share are the right ones, not just for ourselves, but for Europe as a whole and the world as a whole”.⁴²

Should the UK absent itself from the predominant political and economic organisation of Europe, then it would be disengaging from a partner the USA will continue to work with on shared ideas, interests and through a variety of multilateral institutions. The extra effort the US would put into other European relationships would in part stem from a desire to ensure the EU does not change to the detriment of US interests. A British withdrawal would likely add to US worries that Europe lacks the unity or political energy to think geostrategically about the rise of powers such as China and Brazil.⁴³ These concerns have been fuelled in recent years by the EU’s focus on its internal problems such as the Eurozone crisis.

The USA will also view a Brexit in the light of long-running fears that Europe will continue to free-ride on a US security guarantee provided through NATO. The result could be more frustration for the USA at Europe’s inability to deal with security issues in its near-abroad, for example in the Middle East, North Africa (the Libyan War being a clear example of Europe’s divisions and military weaknesses) and with Russia over developments surrounding Ukraine. If developments in Ukraine mean Europe once again becomes a security importer, changes to the configuration of US defence capabilities mean the USA is likely to provide at best a minimum contribution while continuing — likely in vain — to shift some of the burden of dealing with issues in Europe’s near-abroad towards Europe. For the foreseeable future the US will continue to work through NATO or through coalitions of the willing on key issues. But in the longer-term, the United States will likely need a strong and coherent European Union to advance common interests in the face of emerging powers. This is especially so given mounting pressures within the USA to leave Europeans to fend for themselves.⁴⁴ A successful TTIP would provide some balance to the part of NATO in the transatlantic relationship, and thus a powerful geoeconomic tool.⁴⁵ It would be wrong therefore to assume a Brexit would have no impact on NATO or not weaken it in anyway. While the shared links between the US and EU mean the two are likely to work around a Brexit, the disappearance from the EU of one of its major military powers could further strain efforts at Europe-wide defence cooperation, whether through the EU or NATO. Nobody should cheer the failure of the EU, Europe’s predominant economic and political organisation, to shift the grounds for better cooperation on defence spending and businesses. If the EU continues to struggle to provide a way for doing this, then Washington may well wonder what hope remains for Europe ever organising itself better on defence.

Countries such as Canada, Australia, New Zealand, Singapore and Japan — allies of the UK, the USA and the rest of the EU — are likely to be just as uneasy as the USA at an EU without the UK.⁴⁶ They would prefer a UK inside the EU, fighting for reform and standing as a reliable ally. But a Brexit would not make them give up on the EU, their relations with it being substantially larger than that with the UK alone. They too will fear the prospect of an EU that becomes more inward looking or divided, seeing in it a weakening of Europe’s position in the world and in turn a weakening of the Western alliance. The outcome could make more likely a scenario, as outlined by Jan Techau, of a Europe that, ‘is not a pillar of world affairs but a territory that risks being pulled asunder between the United States and Asia’.⁴⁷

However, there is a paradox in EU defence cooperation: Britain’s contribution has been important, but so too has it been a key obstruction.⁴⁸ Fears of jeopardising NATO, or of crossing some sovereignty line in the sand by agreeing to cooperation on defence matters has held the UK, and in turn the EU back. A Brexit could therefore remove an obstruction, allowing the EU to move forward in this area. We should remember that the EU’s international relations are varied and widespread. Its civilian, economic and soft powers remain considerable, even if they are not wielded as effectively as they could be. Its military operations, although small, should not be overlooked.⁴⁹ Even Germany, with is culture of restraint, is a leading actor on the international stage, if perhaps one that remains more reluctant to employ force than other powers.

Hopes the EU might develop a serious military capability would likely prove very difficult without the UK’s military, but this is already difficult enough. And the EU already finds itself in a Europe that is being torn in different direction, what has been termed a ‘multipolar Europe’ with Turkey and Russia as the other two European poles.⁵⁰ A Brexit would add — or perhaps make clearer — another pole. Should the EU continue to develop then these three poles would surround the larger pole of the EU. This EU pole could develop into a more robust European arm for NATO, or, as some fear, an alternative to it.

CONCLUSION

A British exit from the EU is not something to be casually overlooked. Developments in Britain and the EU have increased the possibility of the referendum leading to a vote to withdraw. Britain’s difficulties with the EU long pre-date the current government and reflect deeper problems in Britain’s party politics, identity, constitution, political economy and place in the world. A changing EU and Eurozone could also push the UK to the margins — or out — of the EU. Despite this, the implications for the EU of a Brexit remain under-researched in public. To be fair, the entire topic of EU disintegration is marginal to the large body of literature that offers theories of European integration. Further research is necessary to take the debate beyond the narrow British-focus that has so far characterized the debate.

A Brexit could confront the EU with significant and unprecedented practical and philosophical challenges. The withdrawal of any member state would be a defining moment for the EU, to lose as large a state as the UK even more so. This is especially so given Britain will remain a growing European power, even if a Brexit encapsulates the decline and end of Britain’s position as an EU power. UK-EU relations will remain an important relationship for understanding European politics. The EU’s development — whether it unites, disintegrates or muddles through — will be shaped by a myriad of factors, one of which will be its relations with the UK. The EU therefore has a calculation to make about Britain’s utility and how damaging or beneficial a Brexit could be. To borrow from US President Lyndon Johnson: is it better to have Britain inside the EU tent pissing out, or outside the tent pissing in?

It is not only the EU that needs to take this into account. Other European countries such as Norway, Switzerland and Turkey need to consider what a Brexit could mean for their relations with the EU. For the USA, a Brexit would not be seen in a narrow sense of being about the UK and UK-US relations. The USA’s concerns will revolve around how a Brexit might change the EU, European politics, transatlantic relations, NATO, European security and the EU/Europe’s place in the wider international system.

The debate in Britain also needs to take better into account the wider international dimensions of the Brexit question. The final decision to stay or leave the EU is, of course, for the people of Britain alone to make. But a full debate of such a decision requires an assessment of the likely implications for the EU and internationally. Without this the British people would be making a decision without fully appreciating what this could mean for their allies and the wider geopolitical system in which their country plays a role. Focusing exclusively on the pros and cons for the UK, or on what ideal post-withdrawal relationship Britain should secure, creates a debate that is blind to dealing with the wider implications of such a decision

U.N.F.C.C.C NEGOTIATIONS ON REDD: A BRIEF NOTE

Article: UNFCCC NEGOTIATIONS ON REDD:A BRIEF NOTE

-Dr.Debesh Bhowmik

 Journal of Education in Emerging Indian Society

  Vol-II , Number-1 , Jan-Dec,2015 , pp 262-272

APH Publishing Corporation-NewDelhi

UNFCCC Negotiations on REDD:A Brief Note

Dr.Debesh Bhowmik (Retired Principal)

(debeshbhowmik@rediffmail.com)

ABSTRACT

This article defines REDD and REDD+ in a clearly manner and relates them with climate change targets where nature can provide up to 30% of the necessary emissions reductions needed to keep warming below 2 degrees Celsius. It incorporates all the REDD negotiations from the Kyoto Protocol to Paris convention where conservation of forest, sustainable forest management, carbon trading, transfer of technology to support adaptation and mitigation actions, the creation of a new REDD+ institution; incentives for non-carbon benefits; green climate fund-its scope ,contribution and source of funds from private and public ,bilateral or multilateral, and implementation of policy approaches were mentioned  as key agreements. But the gap between negotiations and policy actions should be minimized through common laws and recommendations by international institutions.

Key words- REDD, REDD+, Forest management, Emission reduction

JEL-Q2,Q23,Q24

I.An introduction on REDD

REDD, or reduced emissions from deforestation and forest degradation, is one of the most controversial issues in the climate change debate. REDD involves some kind of incentive for changing the way forest resources are used. As such, it offers a new way of curbing CO₂ emissions through paying for actions that prevent forest loss or degradation. These transfer mechanisms can include carbon trading, or paying for forest management.

REDD, as currently conceived, involves payments to developing countries that will prevent deforestation or degradation that would otherwise have taken place. The source of this funding can be from carbon trading, where actors in industrialised countries offset their own emissions by transferring funds as carbon credits to developing countries. Or it can be some other mechanism such as a trust fund, which does not depend on offsets. The payments then, in principle, go towards actions that enable developing countries to conserve or sustainably use their forests (say, through more appropriate harvesting of wood and other forest products), when they might otherwise not have been able to do so.

REDD is described in AWG/LCA as “Encourages developing country parties to contribute to mitigate actions in the forest sector by undertaking the following activities, as deemed appropriate by each party and in accordance with their respective capabilities and national circumstances:[i] reducing emissions from deforestation,[ii]reducing emissions from forest degradation,[iii] conservation of forest carbon stocks,[iv]sustainable management of forest,[v]enhancement of forest carbon stocks.

Four key challenges have been identified,[i] measuring carbon,[ii]making payment,[iii] accountability and [iv]funding.

Trading the carbon stored in forests is particularly controversial for several reasons:

·         Carbon trading does not reduce emissions because for every carbon credit sold, there is a buyer. Trading the carbon stored in tropical forests would allow pollution in rich countries to continue, meaning that global warming would continue.

·         Carbon trading is likely to create a new bubble of carbon derivatives. There are already extremely complicated carbon derivatives on the market. Adding forest carbon credits to this mix would be disastrous, particularly given the difficulties in measuring the amount of carbon stored in forests.

·         Creating a market in REDD carbon credits opens the door to carbon cowboys, or would be carbon traders with little or no experience in forest conservation, who are exploiting local communities and indigenous peoples by persuading them to sign away the rights to the carbon stored in their forests.

Yet many REDD proponents continue to argue that carbon markets are needed to make REDD work. Environmental Defense Fund, for example, on its website states that, “ Reducing emissions from deforestation and forest degradation, which EDF helped pioneer, is based on establishing economic incentives for people who care for the forest so forests are worth money standing, not just cleared and burned for timber and charcoal. The best way to do this is to allow forest communities and tropical forest nations to sell carbon credits when they can prove they have deforestation below a baseline.”

While there has not yet been any agreement on how REDD is to be financed, a look at some of the main actors involved suggests that there is a serious danger that it will be financed through carbon trading. The role of the World Bank is of particular concern, given its fondness for carbon trading.

On the other hand, REDD+ is a way to compensate people who manage forests better, but in doing so it takes away some short-term economic benefits. It can help staunch the loss of forests and enhance their capacity to capture and store carbon. Forests lose this ability when they are:

·         Removed completely through deforestation (the first D in REDD+) or Damaged by human activity (the second D in REDD+).The "plus" takes the mechanism to another level. It enhances the land’s capacity for carbon storage by rewarding activities that improve forest health. Not only are carbon stocks protected by avoiding forest damage or outright clearing, they are also increased by measures such as better forest management, conservation, restoration, and afforestation. REDD+ is also concerned with much more than carbon, and could improve biodiversity, water quality, and other vital environmental services. And it could help ensure livelihood security and clear rights for local communities and indigenous peoples.

II.REDD and climate change

Research indicates that nature can provide up to 30% of the necessary emissions reductions needed to keep warming below 2 degrees Celsius .Deforestation and forest degradation through agricultural expansion, conversion to pasture, infrastructure development, destructive logging, fires etc., account for nearly 17 per cent of global greenhouse gas emissions. The Intergovernmental Panel on Climate Change (IPCC) estimates that approximately 25% of deforestation emissions can be abated at a cost of less than $20 per metric ton of carbon dioxide . Reducing Emissions from Deforestation and Forest Degradation (REDD) attempts to create financial value for the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development. REDD+ goes beyond deforestation and forest degradation, and includes the role of conservation, sustainable management of forests and enhancement of forest carbon stocks.

It is predicted that financial flows for greenhouse gas emission reductions from REDD+ could reach up to US$30 billion a year. This significant north-south flow of funds could reward a meaningful reduction of carbon emissions and support new, pro-poor development, help conserve biodiversity and secure vital ecosystem services. According to the influential Stern Review on the Economics of Climate Change, the resources required to halve emissions from the forest sector up to the year 2030 could be between US $17 billion and $33 billion per year.

Further, maintaining forest ecosystems can contribute to increased resilience to climate change. To achieve these multiple benefits, REDD will require the full engagement and respect for the rights of indigenous peoples and other forest-dependent communities.

Women and men have different roles, rights, responsibilities, knowledge, use of and access to forests, specific attention to women’s needs and contributions is key to efficient REDD+ strategies and programmes. Women’s rights and resource needs must be recognized, and the roles they can play as leaders, participants and beneficiaries in REDD+ must be carefully considered and reflected at every stage. The gender component of REDD+ may vary from country to country depending on local situations. The cross-practice initiative is engaged in strategic planning and implementation of a gender strategy that seeks to:

• link REDD+ mechanisms to existing national development strategies
• establish means for forest communities, indigenous peoples and women to participate in the design, monitoring and evaluation of national REDD programmes
• ensure that REDD+ funds and benefits are equally accessible to poor women and men who manage the forests
• involve civil society organizations, and women-led community based organizations
• ensure that REDD+ programmes do not restrict women’s access to the resources  they depend on for their livelihoods.

The gender and UN-REDD Programme teams are currently guiding the development of a joint study, called “the Business Case for Mainstreaming gender in REDD+” that will illustrate how inclusive, equitable, and gender-sensitive design and implementation will result in more efficient and effective REDD+ projects and programmes. If appropriately designed and implemented, REDD+ has the potential to serve as a vehicle for sustainable human development. The role of women in protecting and managing forests, and their right to equal access to resources, is an important component for an equitable, effective and efficient REDD+.

III.Climate summits and REDD

In its infancy, REDD was first and foremost focused on reducing emissions from deforestation and forest degradation. However, in 2007 the Bali Action Plan, formulated at the thirteenth session of the Conference of the Parties (COP-13) to the United Nations Framework Convention on Climate Change (UNFCCC), stated that a comprehensive approach to mitigating climate change should include “[p]olicy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries; and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries” . A year later, this was further elaborated on as the role of conservation, sustainable management of forests and enhancement of forest carbon stocks was upgraded so as to receive the same emphasis as avoided emissions from deforestation and forest degradation .

Finally, in 2010, at COP-16 (15) as set out in the Cancun Agreements, REDD became REDD-plus (REDD+), to reflect the new components. REDD+ now includes:

(a) Reducing emissions from deforestation; 

(b) Reducing emissions from forest degradation; 

(c) Conservation of forest carbon stocks; 

(d) Sustainable management of forests; 

(e) Enhancement of forest carbon stocks.

Within its remit, REDD+ has the potential to simultaneously contribute to climate change mitigation and poverty alleviation, whilst also conserving biodiversity and sustaining vital ecosystem services. The details of a REDD+ mechanism continue to be debated under the UNFCCC , and the considerable financial needs for full-scale implementation have not yet been met.

[A]The Kyoto Protocol

At COP-13,in Article 2, the Kyoto Protocol refers to the protection and enhancement of sinks and reservoirs of greenhouse gases, sustainable forest management practices and afforestation and reforestation activities . The inclusion of the above practices was restricted, as it was only afforestation and reforestation activities that were considered eligible for generating credits under the Clean Development Mechanism.

[B]COP-7, Marrakesh, 2001

At COP-7 in 2001 it was decided, as part of the Marrakesh Accords, that only afforestation and reforestation qualified as LULUCF activities capable of generating carbon credits under the Clean Development Mechanism of the Kyoto Protocol (Decision 17/CP.17) . Reducing deforestation or forest degradation was excluded from the decision due to concerns of leakage . The concern was that reducing emissions from deforestation and forest degradation was unlikely to achieve a net reduction in emissions due to the fact that whilst reduced in one area, the same pressures may present themselves elsewhere, as the emissions producing activity is merely relocated .

[C]COP-11,Montreal,2005

COP-11 saw the Coalition act through the governments of Papua New Guinea and Costa Rica in requesting that “Reducing emissions from deforestation [RED] in developing countries and approaches to stimulate action” be included in the agenda. It was proposed that, in generating credits from RED activities, developing countries could gain access to carbon markets that would incentivise the protection of forests by making their worth greater in their carbon value than from industries requiring their destruction .The issue received extensive support and Parties generally agreed on the issue’s importance in the context of climate change mitigation . Governments subsequently agreed to a two-year work programme and agreed to initiate consideration of the issue at the twenty-fourth SBSTA (Subsidiary Body for Scientific and Technological Advice) session in Bonn, May 2006. This would involve both consideration of the Parties’ views and recommendations on RED-related issues with a specific focus on scientific, technical and methodological issues .

[D]COP-13,Bali,2007

The Bali Action Plan, under Decision 1/CP.13, outlined a commitment of the Parties to address enhanced action on climate change mitigation, including the consideration of “Policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries; and the role of conservation, sustainable management of forests and forest carbon stocks in developing countries” . The Bali Action Plan also established a subsidiary body to conduct the process, the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA).

A further decision (Decision 2/CP.13): ‘Reducing emissions from deforestation in developing countries: approaches to stimulate action’ was adopted . Whilst the Decision itself in referring explicitly to deforestation maintains the limited scope of RED, it also importantly acknowledges that “forest degradation also leads to emissions, and needs to be addressed when reducing emissions from deforestation” and affirms “the urgent need to take meaningful action to reduce emissions from deforestation and forest degradation in developing countries” (REDD) .

This decision provided a mandate for several elements and actions by Parties relating to RED, including: i) strengthening and support of current efforts; ii) capacity-building, technical assistance and technological transfer to support methodological and technical needs of developing countries; iii) identifying and undertaking activities to address the drivers of deforestation, enhance forest carbon stocks via the sustainable management of forests, and; iv) mobilise resources to support the above .

[E]COP-14, Poznań, 2008

At COP-14 in Poznań, the SBSTA reported on the outcomes of its programme of work on methodological issues associated with REDD policy approaches and incentives . In its report, in response to pressure from some developing countries, the role of conservation, sustainable management of forests and enhancement of forest carbon stocks countries was upgraded so as to receive equal emphasis as deforestation and forest degradation . This saw the early progression of REDD to REDD+  and recognised that conservation, the sustainable management of forests and the enhancement of forest carbon stocks play as equally an important role in emissions reductions through protecting carbon stocks, as preventing deforestation and forest degradation. The “+”improved the potential of REDD to achieve co-benefits such as poverty alleviation, improved governance, biodiversity conservation and protection of ecosystem services .

........................read more from the journal

CURRENT PERSPECTIVES IN FINANCE

CURRENT PERSPECTIVES IN FIANCE-Edited by Dr.Indrani Saha,Dr.Kajal Gandhi and Dr.Ram Prahlad Choudhury,Rohini Nandan,19/2,Radhanath Mallick Lane,Kolkata-700012,pp  vi+352,HB,Rs 450/-,2016)

The book titled as “ CURRENT PERSPECTIVES IN FINANCE” was released on 18^th April,2016 in Shri Shikshayatan  College,Kolkata.It contains 28 articles which were presented in the seminar on 11^th September,2015 organised by  the above college.This book is edited by Dr.Indrani Saha (Shri Shikshayatan  College),Dr.Kajal Gandhi(Shri Shikshayatan  College) and Dr.Ram Prahlad Chowdhury(Calcutta University).

In the article , “Issues of finance ,entrepreneurship and growth with reference to Indian Financial System”,  Dr.P.K.Haldar (Tripura University) initiated to focus Indian financial system and its process of reforms which were also emphasized by the new Government under the programme of Start up India,Stand up India,Make in India,Digital India and so on.Make in India is consistent with financial sector reform in this context of globalization and institutional reforms.It requires good management of risk at home and foreign markets through financial integration.New Government introduced Companies Act 2013 to encourage hi-tech business,entrepreneurial venture and start ups in pursuit to create new business assets where SEBI also made reform in listing norms for start up companies,entrepreneurships to accelerate economic growth. 

In the article, “ Is there any relation between gold price and inflation in India?”,Dr.Debesh Bhowmik(International Institute for Development Studies,Kolkata) endeavours to relate gold price with inflation in India during 1960-2014 using cointegration and VAR model. The paper showed that the gold price is cointegrated with the percentage change in consumer price index and whole sale price index in the order  of (1,1) which is tested by Johansen Cointegration  Methodology. Trace statistic and Max-Eigen Statistic are found significant having three cointegrating equations. Granger causality test assured that there is two-way causality between CPI and WPI and gold price and CPI but there is one way causality between gold price and WPI respectively.VAR model becomes unstable because impulse response functions diverge from zero,and some of AR polynomial roots  lie outside unit root circle .All variables are related with previous period.Residuals are normally distributed as shown by Doornik-Hansen test.VEC model suggests that the error correction terms are adjusting speedily which are  significant yet VEC model is unstable since impulse response functions diverge from zero although roots lie inside the unit circle .Doornik-Hansen VEC Residual Normality test assures that residuals are multivariate normal.Although , gold price is significantly positively related with whole sale price index  only but the relation between CPI and gold price is direct and insignificant.

Dr Avijit Sinha and Debabrata Jana (Vidyasagar University) in their article “A study into the competition trend among the private commercial banks in India” studied the nature of competition among private banks with structural and non structural measure where they used concentration ratios like CR3,CR5 and Herfindahl-Hirsman index, h statistic using Panzar and Rosse model where labour,capital and loanable fund were taken for reaction on profitability.For H statistic the test of white heteroskedasticity and Ramsey RESET were done and did not find any heteroskedasticity and model inadequacy problems.A few selected banks dominate the major share in the market as reported by concentration ratio.The non structural measure also shows the presence of monopolistic competition in the private sector banks.

Snehamay Bhattacharjya (Calcutta University) and Sutapa Banerjee(Sri Shikshayatan College) in their paper “Dividend policy-An Unsolved puzzle” identified all possible determinants of dividend policy.It considered dividend policies like liquidity,profitability,liverages,size,risk,investor base,growth opportunities,signaling,insider ownership and dividend history.Liquidity and profitability bears mostly a positive relation with dividend policy,whereas,size,risk,and growth opportunities mostly bear a negative relationship with dividend policy.A few studies have shown concentration in the nature of the relationship between a few determinants and dividend policy for which further studies are required.  

In the article “Money market volatility in India-An empirical analysis”,Madan Mohan Jana and Nilanjana Biswas(Sushil Kar College) analysed the interdependence between the stock market and money market and investigated the movement pattern of money market instruments yield rate and NSE nifty index in India and examined how the money market instruments impulses upon NSE nifty index in India.

Krishna Dayal Pandey and Dr.Tarak Nath Sahu(Vidyasagar University) in their paper titled “Does capital structure affect firm performance and value-A study on BSE listed manufacturing firms” found a negative effect of capital structure measured by debt equity ratio on firm performance and value introducing return on assets and return on capital employed to represent performance and also introduced Tobin’s Q as a measure of value.They suggested that capital structure should be highly considered as one of the sensitive decision areas and the magnitude of leverage should be maintain at a possibly minimum level.

Samyabrata Das and Atanu Ghosh (New Alipur College) in their article “ Are Pharma funds good bets?:A study in the Indian context” studied three pharma funds,namely,Reliance Farma Funds,SBI Farma fund and UTI pharma and health care fund based on secondary data using parameters to measure risk,return, aggressiveness of funds and extent of diversification.The paper concludes that the funds are heavily titled towards equity,exposure to a single stock is more than 12%,SBI pharma fund has performed better than the benchmark index on most occasion ,SBI pharma fund has remained the most aggressive fund during all the periods and the funds are adequately diversified within the sectors.Only experienced investors having high risk tolerance and familiarity with the nifty-gritty of the concerned sector of the economy can take a limited exposure to such funds in order to add a little bit of aggression to their portfolio.

Prof.Snehamay Bhattacherjya(Calcutta University) and Ujjayani Saha Gupta(Shri Shikshayatan College) in the article titled “ A study on corporate social responsibility in Indian cement industry:A case study on select few major cement companies in India”,showed CSR activities of ACC cement,ULTRATECH cement and AMBHUJA cement during 2010-2015 where they are committing to its stakeholders to conduct  business in an economically,socially and environmentally sustainable manner that transparent and ethical.In all companies the CSR impact is strongest with welfare programme.The CSR spending of each of the companies are nearly 2% of the 3 years average net profit after tax as mentioned in the new Companies Act 2013 except for Ambuja which has contributed to nearly 3% of their average net profit after tax.The CSR activities are done in areas where the companies benefits to a lager extent especially in health and family welfare program,community infrastructure development project,contribution in religious and social program,promotion of cultural heritage,national resource management,women empowerment program,educational program,community welfare activities and agricultural development.

Dr.Kajal Gandhi (Shri Shikshayatan College) in his “Impact of economic urbanization on Indian stock market development-A review of literature” said that the long practiced state dominated economic development model has lost much of its edge  and focus has been shifted sharply towards more market determined strategy of development.After  the economic liberalization process started in 1990s  Indian stock market  has produced an average   nominal return of about 17% annually in terms of capital appreciation and now Indian capital market is 4^th largest in Asia and 10^th largest in the world in terms of market capitalization.

 In the article, “Evaluating the effectiveness of NREGA programme on rural people :An empirical study on panitor grampanchayet of Basirhat,North 24 Parganas,WestBengal”,Dipayan Singha (Sri Chaintanya Mahavidyalaya) and Dr.Amit Majumder(Bijoy Krishna Girls’ College) found that NREGA is satisfactory in Basirhat during the study period of 2012-13-2013-14 although they found decline in unemployment,decline in flood affected areas,increase in ground water level,increase in financial activity of rural households,increase in vegetation covered areas and incrase in financial activities of women.

Akraprava Chakraborty(Umesh Chandra College) in his article “The effects of interest rate changes by Researve Bank of India though their monetary policies” attempted to find out the effects of changing interest rate on banks and other financial and industrial sectors,traders and consumers and even he showed the reaction of commercial banks and capital markets.He tries to synchronise it with monetary policy and fiscal policy of the country.

Asim Kumar Roy (Dr.Kanailal Bhattacharjya College) and Dr.Samarpita Seth(New Alipore College) in their article , “ A comparative study of UTI mastershare funds and UTI equity funds” ,showed that during 2008-2015,the funds have generated satisfactory risk adjusted return,both the funds are defensive in nature,managers of both funds are successful in reducing unsystematic risk,fund managers of both the funds are successful in selecting quality stocks,both the funds exhibit very good performance so far as SIP return is concerned.

The study of Arup Kumar Sarkar  and Tarak Nath Sahu (Vidyasagar University) in “Individual investor behavior in stock market in India” revealed that people  of ages between 28 years to 37 years invest in stock market in India whose income is above 100000/ to achieve long run profit.There is heuristics,prospects and market bias on the Indian individual’s investor’s behavior in stock market in India where herding dimension is not strong.The age of individual investor has an effect on individual investor behavior including marital status.Occupation ,experience and income also matter.There is relation between risk attitude and individual investor behavior.Future research may cover relation of demographic factors and risk attitude and also consider institutional investors.    

Soheli Ghose (St.Xavier’s College)in the article “ strategies that help poverty reduction through inclusive growth” highlighted some strategies of inclusive growth like expenditure on health and education,improved infrastructure and improved employment and growth in agriculture might be beneficial to reduce in poverty ratio in India.

Souvik Mukherjee(Jadavpur University) and Tanusree Das(Shri Shikshayatan College) in their paper on “ The financial and economic crisis in Greece-A strategic analysis” concluded that there is inverted U kind of relation between levels of public debt and growth rate of GDP of Greece during 2009-2015.The levels of public debt,the rate of unemployment and the current account deficit are inversely affecting the growth rate of GDP which is a matter of serious concern.

Sreemoyee Guha Roy(St.Xavier’s College) in the paper “Inclusion through micro insurance: A case study of Malda District,West Bengal” evaluated the performance of microinsurance product in the rural Malda and found high vulnerability .

Dr.Kushal De (Dhruba Chand Halder College) in his paper “A review of the financial crisis of 2008 and its impact on India” attempted to review the global financial crisis and its impact on Indian economy based on secondary sources of information.He showed impacts on industry,trade,exchange rate,employment, poverty and cited examples of monetary and fiscal policy of government and RBI although high impact was not felt in manufacturing,services,transport,hotels etc.

In the “Income tax Act ,1961 and the problem of black money in real estate transactions”,Dr.Ram Prahlad Choudhury (University of Calcutta) and Dr.Surjya Narayan Ray(Dinhata College) analysed the Finance Act 2013 including sections 50C,43CA,56(2) and 194 1A in prevention of black money.They proposed to amend more on those acts  to resolve the ambiguities,confusions and controversies relating to implementation.

In “Impact of E-Banking on traditional services”,Asit Kumar Shit (Charu Chandra College) concluded that E-Banking is a borderless entity permitting anytime ,anywhere and anyhow banking which facilitates us  with all the functions and many advantages as compared to traditional banking services.It showed that opportunity cost of lost of banks customers will reduce to use of E-Banking and also indicate non-existing of enough knowledge and trust have led to decrease in using E-Banking  in the world  and education can increase using of E-Banking service among the banks were taken customers in the world.

Fatema Mandlaywala(Shri Shikshayatan College) and Pingla Roy Chowdhury(Shri Shikshayatan College) tried to assess the level of financial literacy among individuals in Kolkata in their paper “Financial literacy:Relevance in modern day investment -Kolkata based case study” and concluded that 39.5% individuals irrespective of gender are financially literate,male literacy is higher by 13%,age group of 40 are more financially literate as compared to 30s or 50s and above.A high percentage of people  rely on investing their savings in banks as fixed deposits to avoid any risk.

Parna Banerjee(Scottish Church College) in the paper “Effectiveness of investors’ awareness programmes among potential investors-A case study”,concludes that prices of almost all sample gold ETFs and CNX Nifty do not reflect the change in the market index Nifty except that of Kotak Gold.On the other hand,from the regression analysis where 11 sample as independent variables with CNX Nifty as the dependent  and GOLDSHARE,HDFCMFGETF,IGOLD,KOTAKGOLD are good predictors of market  return.

Sourav Dutta Mustafi(Maharani Kasheswari College) and Sudipta Ghosh (Maharani Kashaswari College) in their article “ Progress and prospect of SHG (self help groups) in light of  microfinance:A regionwise analysis in Indian context” found that although SHG movement has been empowered in recent years but region wise disparity should taken into account in order to make SHG more fruitful,so that  the benefits of SHG can be reached to the farther corner of India.

Pranjal Kumar Chakraborty(Scottish Church College) in his paper “Ethical issues in informal microfinance institutions-A study of Murshidabad District,West Bengal” explained that the expansion of commercialized MFIs in Murshidabad gradually created a stiff competition among the MFIs,thus some of the MFIs shifted from social objectives to complete profit maximization likewise a conventional private money lenders.Local informal MFIs ,Mahajans believe that both of the social and financial objectives cannot attained at the same time,but only through paradigm shift towards profitability and sustainability practices .On the contrary microfinance is effective and flexible strategies in fighting global poverty.

Sebanti Show and Nancy Jaiswal (Shri Shikshayatan College) in their paper on “Mutual Funds:As a resource mobiliser in Indian Economy” analysed the relationship between AUM mobilized by mutual fund companies and GDP growth rate of India.To find out correlation coefficient Kendall’s tau b and Spearman’s rho  correlation was applied during 1999-2000-2013-14.Kendall’s tau b correlation coefficient was found 0.886 which is significant at 1% confidence level and rho was found as 0.971 which indicates that the relation between GDP growth rate and AUM  mobilized by mutual fund companies have a strong positive relation.

Sunita Ghatak (T.H.K Jain College) in the paper “The new era of merger regime in the light of companies Act2013---without juridical prudence—A welcome move” showed true facts of rationality of restructuring concentrating  on the key issues and commercial implications of the regulatory norms of mergers and acquisitions as per the new act.The 2013 Act envisages a paradigm shift in the process of compromise/arrangements.It envisages that all the powers and functions of the company law board,company court,BIFR under Sick Industrial Companies Act will henceforth be exercised by the NCLT.Establishment of a single forum which is dedicated to corporate matters is a welcome move and removes the problem of multiple regulators.

Debayan Sengupta (Shyama Prasad College) in the article on “Conceptual study on financial implications of stress” investigated on the nature and extent of stress  among individuals in different organizations highlighting the causes of stress,the financial implications of stress and the need to identify the stress and tackle  them accordingly.He suggests that organization should identify the different work  environment contributors such that a healthy work culture can be developed within and its employees can feel more comfortable with their job responsibility.The eeficiency and productivity would improve substantially and the organization will reach to its goal smoothly.

Suvarun Goswami (Rishi Bankim Chandra College) in his article on “Corporate social responsibility in eastern coal fields limited:A study” analysed the conceptual perspectives of CSR of a lot of confusions exist as to the real meaning and essence of the term along with a thorough literature review.His findings on ECL showed that 249 workers,36 trade unions,23 management personnel gave positive views on CSR,improving standard of living of workers and their activities are adequate and even benefitted by the neighbours.He suggested PPP model in CSR who must follow voluntary guidelines of 2009 G.O.I.,,submit audit and report,permits NGOs,and concerned ministry should emphasis on poverty alleviation,gender equality,promote education and health,ensure environment sustainability and social welfare.  

***********

Is There any Relation between Gold Price and Inflation in India?

Dr.Debesh Bhowmik (Ex.Principal,and Associated with International Institute for Development Studies,Kolkata)

Key words-Gold price, Inflation,Cointegration,VAR,VECM

JEL-C32,E41,E44

ABSTRACT

This paper endeavours to relate gold price with inflation in India during 1960-2014 using cointegration and VAR model. The paper showed that the gold price is cointegrated with the percentage change in consumer price index and whole sale price index in the order  of (1,1) which is tested by Johansen Cointegration  Methodology. Trace statistic and Max-Eigen Statistic are found significant having three cointegrating equations. Granger causality test assured that there is two-way causality between CPI and WPI and gold price and CPI but there is one way causality between gold price and WPI respectively.VAR model becomes unstable because impulse response functions diverge from zero,and some of AR polynomial roots  lie outside unit root circle .All variables are related with previous period.Residuals are normally distributed as shown by Dooknik-Hansen test.VEC model suggests that the error correction terms are adjusting speedily which are  significant yet VEC model is unstable since impulse response functions diverge from zero although roots lie inside the unit circle .Doornik-Hansen VEC Residual Normality test assures that residuals are multivariate normal.Although , gold price is significantly positively related with whole sale price index  only but the relation between CPI and gold price is direct and insignificant.

I.Introduction

We are mostly aware of the fact that the Indian inflation rate depends on money supply, interest rate, oil prices, asset prices, growth rate, exchange rate, and so on but whether gold prices have any influences on CPI or on WPI is a matter of wide research and studies which are not fully done. Yet a few studies in India endeavour to analyse the said relation. Even, how much gold return hedges against inflation needs to be researched in India. Since the gold dollar convertibility collapsed and the International Monetary System is now a non-system, then how much gold price influence in the international payment mechanism is a subject of analysis via exchange rate mechanism which is either in fixed or in float.

Therefore, I have studied that gold price in India is an influential factor to change inflation rate whether it is measured by percentage change in consumer price index or by whole sale price index. This study covers the period from 1960 to 2014.

II.Earlier Studies

Soni and Parashar(2015) analyze the casual relationship between Gold demand and Inflation using  the monthly data from 2002 to 2012 .The results of Augmented Dickey- Fuller test conclude that the series are stationary and integrated of order one. There is a positive correlation between stock returns and gold price from 2002 to 2007 but due to economic crisis in USA in 2008 and 2011 this correlation seems to be fading and it was establish by using correlation and Johansen's co-integration test that there is no relation between gold prices and stock returns i.e. Sensex return in the long run period. The results of Granger causality test reveals that returns of Sensex index does not lead to increase in gold price and rise in gold price does not lead to increase in Sensex. Overall, we can conclude that gold is a significant predictor of inflation for many developed inflation-targeting countries. Worthington, Pahlavani (2006), explore the short-run as well as long-run relationships between the gold price and the general price level to investigate the hedge inflation effectiveness of gold.  The idea that gold as an inflation hedge is not new, which is virtually found with related papers like “gold is an asset of “safe havens” against the debasement of paper money” , “gold is leading indicators of inflation” or “gold is an inflation hedge” and so on. Mahdavi, Zhou (1997) test the performance of gold and commodity prices as leading indicators of inflation with cointegration and vector error-correction model (VECM) over 1958-1994. Their findings show that the stability of the gold price signalling inflation may vary depending on the time span being examined. Ranson, Wainright (2005) conclude that the price of gold is the superior predictor of the next year inflation. Capie et al. (2005) apply Exponential generalized autoregressive conditional heteroskedasticity (EGARCH) technique to investigate the exchange rate hedge of gold price by using weekly data over the period 1971- 2004. They find that the gold returns can be a hedge against U.S. dollar depreciation and that there is a negative relationship between gold price and sterling-dollar and yen-dollar exchange rates but the strength of this relationship varies over time.  Laurent (1994), Harmston (1998), Ghosh et al. (2004) who study the relationship between the gold price and wholesale price find that gold acts effectively as a long-run inflation hedge in U.S., Britain, France, Germany, and Japan. Using monthly gold price data. Wang and Nguyen(2013) investigates the rigidity of gold price adjustment and the inflation-hedging ability of gold in U.S. and Japan applying the linear and non-linear cointegration test and the nonlinear threshold regression model. Based on thirty-six years of gold price and Consumer Price Index (CPI) data, it is found in the short run that gold return is unable to hedge against inflation in both countries when gold price adjustment is in the low-momentum regime. During high-momentum regime, the gold return is unable to fully hedge against inflation in Japan because of the rigid adjustment between gold price and CPI; however, the gold return fully hedges against inflation in U.S. where the gold price adjustment is not rigid. These findings also explain why gold in U.S. effectively hedges against inflation and gold in Japan just partially hedges against inflation in the long-run. Levin and Wright (2006) examine the factors that contribute to the fluctuation of gold price with cointegration and VECM techniques over 1976- 2005. Their findings are triple. First, there is a long-run relationship between the price of gold and U.S. price level. Second, there is a positive relationship between changes in the gold price and changes in U.S. inflation, U.S. inflation volatility, and credit risk, while there is a negative relationship between gold price movements and changes in the trade weighted U.S. dollar exchange rate and the gold lease rate. Third, in the major gold consuming countries such as Turkey, India, Indonesia, Saudi Arabia, and China gold acts effectively as a long-term hedge against inflation.  The findings of prior studies that prove the effective inflation hedge of gold are almost consistent. Ghosh et al. (2004) investigate the contradiction between short-run and long-run movements in the gold price and find that the gold price rises over time at the general rate of inflation and hence is an effective hedge against inflation under a set of conditions during 1976-1999. Using data for 14 countries over the 1994 to 2005 period, Tkacz(2007) assess the leading indicator properties of gold at horizons ranging from 6 to 24 months. He finds that gold contains significant information for future inflation for several countries, especially for those that have adopted formal inflation targets. This finding may arise from the manner in which inflation expectations are formed in these countries, which may result in more rapidly mean-reverting inflation rates. Compared to other inflation indicators for Canada, gold remains statistically significant when combined with variables such as the output gap or the growth rate of a broad monetary aggregate. Zafar and Javid(2015) analysed the nature of the relationship of expected and actual inflation with gold return and its cost of carrying i.e. the interest rate. By employing an autoregressive moving average (ARMA) with generalised autoregressive conditional heteroscedasticity (GARCH) models, the time varying relationship between the variables is studied. The data sample used in the study ranges from January, 2001 to December, 2013. The results support gold as an effective hedge against inflation in Pakistan; since, the returns on gold investment exceeds its cost of carrying with the view of changing expected inflation. Another important implication of the study is that gold can also perform a considerable role with the prospect of Islamic financing because it is proven to be more advantageous as compared to its alternative interest bearing investments. Kumar and Malik(2015) examined that the inflation rate and gold prices are positively correlated with each other. When there is increasing trend of inflation in the economy the gold prices increase too. This satisfies the gold is inflation hedge in times of high inflation trend taking period of six years and six months commencing from April 2009 to December 2014 . Gold prices and repo rates are negatively correlated. It can be explained as the repo rate increases the gold prices decreases. Because increase in repo rate reduces the flow of money in the economy and purchasing power of individuals decreases. Using data for four major economies, namely the USA, the UK, the Euro Area, and Japan, Beckmann and Crudaj (2012) allow for nonlinearity and discriminate between long-run and time-varying short-run dynamics. Thus, they conduct a Markov-switching vector error correction model (MS-VECM) approach for a sample period ranging from January 1970 to December 2011. They found threefold: First, gold is partially able to hedge future inflation in the long-run and this ability is stronger for the USA and the UK compared to Japan and the Euro Area. In addition, the adjustment of the general price level is characterized by regime-dependence, implying that the usefulness of gold as an inflation hedge for investors crucially depends on the time horizon. Finally, one regime approximately accounts for times of turbulences while the other roughly corresponds to ’normal times’.

Worthington and Pahlavani(2006)studied that the inflation hedging quality of gold depends on the presence of a stable long-term relationship between the price of gold and the rate of inflation. Because of significant structural changes in both the gold market and consumer prices, this analysis uses the Zivot and Andrews (1992) test procedure to endogenously determine the most significant structural breaks impacting upon this relationship. The results suggest the most significant structural breaks in both markets correspond to the gold market moving to purely open market operations and the acceleration of inflation in the 1970s. A modified cointegration method incorporating these breaks indicates that a strong cointegrating relationship exists between gold and inflation suggesting that gold is a useful inflation hedge in the post-war and post1970s period.  Narayan, Narayan, & Zheng (2008) concluded that the investors can use the gold market as a hedge against the coming inflation and oil markets could be used to predict the prices of the gold market. Büyüksalvarcı (2010) confirms the findings by showing the effects of 7 economic variables (Gold prices, Oil prices, Interest rate, CPI, foreign exchange rate, Money supply and Industrial production index) on the Turkish stock exchange. In his study he also mentioned that gold is now an alternative tool of investment for Turkish investors. The increase in the prices of gold attract the investors, the investors tends to invest in gold rather than in stocks, which cause the stock prices fall. Therefore the relationship between gold prices and stock returns are negative, increase in one cause decrease in other and vice versa. Adibe and Fei(2009) consider safe haven, inflation hedge, and dollar destruction hypotheses. The safe haven hypothesis claims that gold returns will increase as fear increases. They use three alternative measures of fear: volatility in the S&P 500 Index, the consumer expectation in Michigan Survey of Consumers and Moody’s Baa and Aaa bond premium. Gold returns do not have significant correlation with any of these measures. Related to safe haven hypothesis is the idea of gold being a negative-beta asset. They tested this hypothesis with S&P 500 returns, U.S. Industrial Production and Kilian’s Dry Cargo Index and rejected it in favor of the zero-beta asset alternative. The inflation hedge hypothesis postulates the negative correlation between expected inflation and the return of gold. They find a very significant relationship between the price movement of gold, real interest rates and the exchange rate, suggesting a close relationship between gold and the value of U.S. dollar. The multiple linear regressions verify these findings. The decomposition of gold price under a semi-structural VAR model shows that aggregate demand shocks, monetary demand shocks, and precautionary demand shocks have only a modest influence on the price of gold. The unspecified structural shock underlying exchange rates is the driving force of the gold price. The central message of the paper is that gold’s relationships with fear and inflation are not what most people believe. We should not regard gold as a mysterious asset that is immune to fluctuations and behaves uniquely on the market. Rather, we should regard it as another currency, whose value is a reflection of the value of the U.S. dollar and U.S. monetary policy.

III.Methodology and Data

To find out the relation between gold price and inflation rate ,we used Johansen (1988) model for cointegration and Johansen (1991,1996) model for VAR Analysis. We have done Granger Causality test by using Granger Model(1969).Hansen-Doornik( 1994 ) model is used for Normality test. Data have been collected from the International Financial Statistics of IMF ,World Bank, Reserve Bank of India, and inflationindia.com for the year from 1960 to 2014.

IV.Econometric models

One percent increase in gold price per year leads to 0.1398% increase in inflation rate( measured by change of CPI) per year in India during 1960-2014 which is insignificant .The double log regression model is given below.In Fig-1,the estimated trend line is shown by green line.

Log(x₁)=0.6871+0.139821log(y)

               (0.886)   (1.366)

R²=0.034  ,F=1.867  ,DW=1.896, where x1= percentage change of CPI, y=gold price (Rupees thousand per 10 grams)

….. V.Some Policy Recommendations

If a nation fixes the target rate of inflation then gold price has its impact too and gold market is considered  as a hedge against the inflation expectation. Gold price has positive relation with inflation and inflation expectation. Therefore, Gold indexed WPI related bond sale in times of high inflation is effective OMO along with other monetary policy which is also useful when inflation expectation is very high. Gold convertible bonds is another effective tool in curbing gold price induced inflation.The control of gold price hike to the Government is the primary tool when ceremonial demand is too high. Gold flows should be more protective formulating good articles subject to FEMA.

VI.Conclusion

This paper concludes that percentage change in CPI (inflation rate) and WPI are cointegrated with gold price in the order of (1,1) and Granger Causality test(1969) confirmed that CPI and WPI has bi-directional causality,gold price and CPI has also bi-directional causality but gold price and WPI has uni-directional causality .VAR model states that percentage change in CPI,WPI and gold price are related with their previous period and gold price is also related with previous period’s WPI significantly.VAR model is unstable having diverging impulse response functions including autocorrelation but all roots lie inside the unit circle with residuals are multivariate normal.The VEC model showed the significant speedy error correction process although the VEC model is unstable. The estimated VECM states that the first difference gold price is significantly related with the change of Inflation rate (CPI) and the change of WPI of the previous periods and even related with the change of gold price of the previous period significantly.All roots lie inside the unit circle and having autocorrelation problems but residuals are multivariate normal and diverging impulse response functions. Double log regression showed gold price is significantly positively related with WPI and insignificantly related with percentage change in CPI which is negatively related insignificantly in multiple double log regression analysis during 1960-2014 in India.

---see book page 22-39