ShiftingWealth

On her way to becoming chancellor, Germany´s Green Party's Annalena Baerbock enjoys strong tailwinds. Election polls for the 2021 federal election remain positive for the Greens, and the public media are blowing the horns, too. The development of the Greens from original pacifism of the founding generation to bellicose neo-conservatism (along the lines of Albright, Bolton, Cheney or Wolfowitz) is cause for concern.

The Greens are mainly targeting the undisputedly blatant human rights violations in China and Russia. However, one hears little from the Greens about human rights violations in Egypt, India, Israel, Saudi Arabia, the United Arab Emirates or in the Western countries themselves[1].

The threat of sanctions is a popular reflex of moral indignation. If you search Google for "Baerbock Sanktionen" (Baerbock sanctions), about 76300 results are retrieved in 0.36 seconds. Key statements can be found in Baerbock's interview with the Frankfurter Allgemeine Sonntagszeitung:

- On Russia: "Moreover, there are sanctions as tough measures, but they are permanently thwarted because the German government is sticking to the Kremlin's most important prestige project, the Nord Stream 2 gas pipeline. I would have withdrawn political support for Nord Stream 2 long ago."

- On China: "a different approach to authoritarian regimes is a key issue for me in a future German government - for our security and our values. We are currently in a contest of systems: authoritarian forces versus liberal democracies. This is also about China. The New Silk Road project, with its global direct investments in infrastructure or energy networks, is not just about niceties. This is hard-core power politics."

The candidate does not specify the threatened sanctions. But no one should say afterwards that they knew nothing about it. Foreign Minister Heiko Maas (SPD) has already spoken of the "confrontation cries" of the Greens. The drumbeat of the candidate for chancellor suggests that the Green leadership is not sufficiently addressing the following questions:

1) Which sanctions against China or Russia are effective at all? Sanctions ease the pressure of conscience, but their effectiveness is doubted. An earlier study (GC Hufbauer, JJ Schott, KA Elliott, 1990) of sanctions in 115 countries since 1915 - by what is now the Peterson Institute for International Economics - found that economic sanctions were inadequate to implement foreign policy goals. Behavioural changes could only be observed in small target countries and with modest sanction targets. Meanwhile, in addition to trade and investment bans, 'modern' sanctions target financial transactions, business activities and individuals. Therefore, from an analytical perspective, an attribution problem arises in effectiveness studies (Marten Smeets, WTO, 2018)[2]. With regard to Iran and Russia, Smeets doubts that sanctions can bring about the change from an economic perspective that is often sought through the punitive measures taken. However, economic sanctions in general cause costs in all countries involved in the sanctions. The country facing the sanctions is likely to establish trade relations with third parties that are not part of the sanctions coalition.

2) How high is the damage of sanctions for Germany?  This question has been resolved by a study that has attempted to isolate the effects of the Russian sanctions since 2014[3]. Broken down to individual countries and product categories, it compares the hypothetical development without sanctions with the weaker actual development. The difference is the trade loss due to sanctions and counter-sanctions. The European Union (EU) in turn bears 92 per cent. Germany accounted for the lion's share of the sanctioning countries' damage, with 38 per cent or 667 million US dollars in trade loss per month.

3) Are there perverse effects whereby our sanctions strengthen those in power in China, Russia, etc.? Julia Grauvogel from the GIGA Institute analyses (IPG, 2020)[4] that sanctions against authoritarian regimes like Russia pose a particular challenge. Sanctions may even prove counterproductive there and strengthen authoritarian regimes. Rulers can instrumentalise sanctions for their own purposes if they succeed in presenting the measures as an attack on the entire country. In this way, a chariot mentality can be conjured up against the common external enemy.

"Made in Germany" effects[5], meanwhile, have already been observed in China and Russia. China is now pursuing chip autonomy as a result of US sanctions, which is hurting the still-leading American chip designers and hitting global supply chains through chip shortages, such as in the automotive industry. Russia has imposed a ban on food imports as a result of US sanctions, stimulating domestic production; at the same time, food security is again a hot topic in import-dependent states.

4) How can a sanctions merry-go-round be stopped before it mutates into a military conflict? Western decision-makers are regularly confronted with the question of whether to maintain previously unsuccessful sanctions (Julia Grauvogel, IPG 2020). Therefore, it is important to think about the possible end of the measures from the beginning. It is easier to impose sanctions than to lift them again. Ending unsuccessful sanctions poses a foreign policy dilemma; it can damage the reputation of the sanctioning states. Clear predefined sanction targets may prevent such a loss of reputation.

The Greens would make their confrontational rhetoric more credible if they first clearly pointed out the human rights violations in Germany and in the Western allies. As long as their attacks remain asymmetrically directed against authoritarian emerging countries, the Greens come across as bellicose neoconservatives in foreign policy terms. They are thus (in my view) a security risk for Germany and Europe.

Wenn etwas leicht

Wenn etwas leicht und rauschend um dich ist
wie die Glycinienpracht an dieser Mauer,
dann ist die Stunde jener Trauer,
daß du nicht reich und unerschöpflich bist.

Nicht wie die Blüte oder wie das Licht:
in Strahlen kommend, sich verwandelnd,
an ähnlichen Gebilden handelnd,
die alle nur der eine Rausch verflicht,

der eine Samt, auf dem die Dinge ruh’n
so strömend und so unzerspalten,
die Grenze zieh’n, die Stunden halten
und nichts in jener Trauer tun.

 “Democracy Under Siege” titled Freedom House – a US government-funded organisation (that survived the Trump reign) its latest annual “Freedom in the World” report. For the year 2020, it observed the 15th consecutive year of decline in ´global freedom´. The Freedom House annual global report is on ´political rights´ and ´civil liberties´, composed of numerical ratings and descriptive texts for 195 countries (and 15 territories). ´Political rights´ encompass three subcategories: Electoral Process; Political Pluralism and Participation; and Functioning of Government. ´Civil liberties´are defined by four subcategories: Freedom of Expression and Belief; Associational and Organizational Rights; Rule of Law; and Personal Autonomy and Individual Rights.

Table 1 provides information on how ´freedom´ has evolved during the recent period 2013-20 with overall scores for ´freedom´ and its constituents ´political freedom´and ´civil liberties´ in brackets. The period is dictated by ready (raw) data availability. And Xi Jinping became China´s President in 2013.

I have critically examined political rankings and indicators at several occasions; see here or here, notably. Nonetheless, the Freedom House indices provide some evidence on political governance, a theme that lends itself too easily to factless beliefs and insinuations. When in doubt, I prefer even political numbers over blindnesss.

Table 1: Political Freedom & Civil Liberties in Selected Emerging Countries, 2013-20

Notes: * BRICS member; ^ CwA partner.

Source: https://freedomhouse.org/reports/freedom-world/freedom-world-research-methodology. All Data, FIW 2013-2021 (Excel Download).

 Western media and politicians have focused on deteriorated political landscapes in China, Russia, Turkey – and the United States under the Trump Administration (2017-21). However, Egypt - a preferred destination of foreign capital and partner of the G20 ´Compact with Africa´ - has seen its freedom index tumble most steeply, in parallel with Turkey. Only the African giants Nigeria and South Africa have upheld freedom scores as measured by Freedom House.

.

 Published on 4^th March 2021 in German at MakronomMagazin

https://makronom.de/wie-sich-die-corona-schulden-entsorgen-lassen-38585

 The EU states could deal with public debt, which rose sharply in the Corona crisis, in various ways. How promising are the individual options? An analysis by Helmut Reisen.

Like other pandemics before it, the current Corona pandemic will eventually end - either "medically" or "socially". The medical end occurs when the number of people who fall ill drops sharply. The social end takes place mainly in people's minds. It occurs when the fear of the disease decreases, people no longer want to accept the restrictions - and learn to live with the disease.

The same applies to the economic policy course, which will have to deal with the aftermath of the crisis. In Germany, the public dispute about the Corona pandemic has been very poisoned for quite some time, and unfortunately this increasingly applies to economic policy debates as well. Thus, in the meantime, it seems that even invective with ad hominem attacks in the ostensibly serious daily press regarding the financing of the pandemic measures is acceptable. This article is intended to help keep a cool head in the debate by outlining the various options for dealing with the national debt.

Historical lessons

The social and economic consequences of the virus have acted as an exogenous shock on public debt. The pandemic will leave behind high public debt/GDP ratios. There is ample historical evidence to learn from: The last 150 years have provided us with enough illustrative material on how advanced nations have dealt with debt. The Great Depression of 1929-33, the world wars of the 20th century and the world financial crisis of 2007-09 were also exogenous shocks that resulted in high government debt ratios in advanced countries. The Federal Reserve's Volcker monetary shock inflated emerging market sovereign debt in the 1980s via the dollar, commodity prices and interest rates. High public debt was also endogenous in these countries, for example as a result of balance sheet currency mismatches or loss-making state-owned enterprises.

Three notable periods of public debt relief can be identified, in the decades before World War I and in the period from the end of World War II to the beginning of the 1970s. The mean value of government debt often reached around 150% of GDP before being reduced to a value of around 40%. What were the main drivers of this erosion?

• A recent study by Eichengreen et al. describes three successful episodes of debt consolidation before World War I: Great Britain after the Napoleonic Wars, the United States in the last third of the 19th century and France in the decades before 1913. The Napoleonic Wars, the Franco-Prussian War and the US Civil War were the three most expensive military conflicts of the 19th century, resulting in debt-financed war spending. Debt relief after these wars was carried out in all three states primarily through primary surpluses in view of positive interest rate-growth differentials (interest rates were higher than growth).
• After the Second World War, debt ratios in the developed economies fell rapidly. They reached the pre-World War I level in the 1960s. However, this was primarily caused not by budget surpluses but by the rapid expansion of nominal GDP. The post-war boom had various labels: Erhard's "economic miracle years" in Germany, "Les Trente Glorieuses" in France, "Il Boom Economico" in Italy. In the case of Germany, the debt cancellations of 1948 and 1953 by the Allied victorious powers also depressed the debt ratio.
• Towards the end of the 20th century, public debt ratios in the poorest countries fell rapidly and initially remained at a fairly low level. The main reason for this was the HIPC initiative of the Bretton Woods sisters in 1996 in favour of mostly African low-income countries. These had not benefited from the Brady Plan of 1989, which had mainly provided debt relief to Latin American emerging countries.

Today, after a year of the Covid pandemic, the Maastricht criterion of a 60% ceiling for the debt-to-GDP ratio is being blatantly missed, especially in Latin Europe. How can the highly indebted EU states get off their Covid debt? And: does that even make sense with the current interest "costs", which are close to or occasionally below zero?

Debt dynamics

Public debt as a percentage of GDP only declines if nominal GDP growth exceeds interest and is not compensated by the interest-adjusted budget deficit (primary deficit). In the (first) Covid year 2020, the public debt ratio skyrocketed despite massive EU support, especially in Latin Europe, which suffered additionally from the loss of tourism.

The purchase of government bonds by the ECB and the national central banks is thus broadly equivalent to debt relief for the state

In 2020, the ratio of growth to interest rates was naturally unfavourable due to the covid recession. But if the euro countries recover economically in the current year, this relationship will be reversed. On the one hand, market interest rates are currently still negative or very low, on the other hand, governments de facto no longer have to pay interest on their outstanding bonds held by the Eurosystem: The government pays interest to the central bank, which now holds the bonds, but the central bank usually returns this interest income to the government. So the purchase of government bonds by the ECB and the national central banks is broadly equivalent to debt relief for the government.

Debt relief

Led by Thomas Piketty, over 100 economists have proposed debt relief. They argue that this would allow governments to issue new debt unencumbered by old debt to finance major projects. In doing so, the signatories also refer to the London Debt Agreement of 1953, a radical plan to cancel half of Germany's foreign debt and create generous repayment terms for the remaining debt. The agreement boosted Germany's economic growth by creating fiscal space for public investment, lowering borrowing costs and stabilising inflation.

However, the idea that a selective default on the debt held by the ECB would be without consequences is unrealistic. Such a decision would at least have the effect of closing the umbrella offered by the ECB today and increasing the cost of re-leveraging or refinancing the remaining debt. Debt relief limited to individual countries is also ruled out because of the immediate contagion effects. Finally, from a purely accounting point of view, the benefit of repudiation would be zero in the short term: after all, the debt repurchased by the ECB was acquired by the central banks of the Eurosystem, which on-lend the proceeds accruing to it to their finance ministers.

Inflation

As long as the ECB sticks to the inflation target of 2% (and does not allow medium-term overshoots), it must reduce base money M0 if it misses the target. The ECB sells either government bonds or its own interest-bearing bonds, thus taking back the seigniorage it granted the government when it bought the bonds.

It would be different if the ECB allowed more inflation in the future, i.e. did not counteract it when inflation was above 2%. Then it would not have to sell the bonds (or issue its own bonds). In this case, higher inflation would reduce the real value of government debt that is not on the central bank's balance sheet and that has been issued at very low interest rates in recent years. Governments would win first, while private bondholders would have to "pay" for the higher inflation. Nominal interest rates would rise, lowering the price of the long-term government bonds that these investors bought at negative or zero interest rates. The inflationary surprise loss would subsequently make government bond financing more difficult and more expensive. In addition, tax revenues could fall in real terms when inflation is high as a result of the so-called Tanzi effect.

Financial repression

Carmen Reinhart and Bélen Sbrancia have shown in a widely acclaimed study how governments could get rid of their debt burdens by means of financial repression. Financial repression, like a tax on bondholders and savers through negative or below-market real interest rates, reduces government debt. It is most successful in liquidating debt when accompanied by moderate inflation.

After World War II, capital controls and regulatory restrictions created compulsory buyers of government debt and limited the erosion of the tax base. From 1945 to 1980, interest rates in advanced countries were negative about half the time - so savers paid on top when they lent money to the government. Britain and the United States liquidated debts averaging 3 to 4% of GDP annually as a result. In Australia and Italy, where inflation was particularly high, liquidation rates averaged more than 5%. Average annual savings in interest expenditure for a sample of twelve countries range from about 1% to 5% of GDP for the entire period 1945-80.

However, the fiscal yield of financial repression will be lower today in the Eurozone than it was then. Even Greece was able to sell an eight times oversubscribed ten-year government bond to investors at 0.8% just a few weeks ago. In addition, 80% of Greek government debt is held by public creditors such as the Euro Stability Fund (ESM). As part of the Pandemic Emergency Purchase Programme (PEPP), the ECB is also buying Greek government bonds, despite the securities being classified as non-investment grade.

Austerity

The key determinant of future debt stability is the ratio of interest rates to growth, more specifically the average cost of debt minus nominal GDP growth. This interest-growth differential is the black box of debt dynamics: countries where nominal GDP grows at a rate identical to the average cost of debt can stabilise the debt-to-GDP ratio by maintaining a balanced primary budget. States whose GDP in nominal local currency grows faster than the average cost of debt can stabilise debt by running a primary budget deficit (the size of this debt-stabilising primary balance or DSPB is determined by the level of debt relative to GDP in the previous year and the difference between interest and growth). In contrast, countries that pay more on their debt than nominal GDP grows must run primary surpluses to stabilise the debt-to-GDP ratio.

The interest rate-growth differential is the ´black box´ of debt dynamics

Using a historical database of average effective government borrowing costs for 55 countries over a period of up to 200 years, Paolo Mauro and Jing Zhou documented in an IMF study that negative interest rate-growth differentials occurred more frequently in both advanced and emerging market economies and often persist over long historical periods. In such periods, the debt ratio erodes with comparatively little fiscal discipline.

At the IMF, such a result cannot simply be left standing. Therefore, Mauro and Zhou point to the low information content of average interest costs: the default history of sovereigns shows that after longer periods of low differentials based on average effective interest rates, marginal borrowing costs can suddenly and sharply increase and countries can be excluded from the financial markets in the short term.  And even if interest rates are quite low, this does not mean that there is a fiscal free lunch in dynamically efficient countries, as Ricardo Reis, currently much respected among "fiscal hawks", argues. The label "dynamic efficiency" does not apply to Germany, as the Federal Republic saves too much at the expense of current generations and produces high current account surpluses.

The Maastricht criterion has lost all credibility and thus binding after the Covid pandemic

The following table gives an impression of the scope of the task: The "debt ratio stable primary budget position" (DSPB) reflects the calculations of the rating agency S&P for the necessary primary budget of the countries to avoid a further increase in the respective debt ratios until 2023.* In Belgium, France, Italy and Spain, the primary balance would have to increase by more than 10 percentage points of GDP compared to the negative balance of 2020 in order to consolidate the budget in this way. The interest-adjusted primary budget will have to come down from the negative balance of 2020 at the latest after the end of the pandemic. In principle, this can only be done by increasing tax revenues or cutting spending, whereby an increase in tax rates can be just as counterproductive in fiscal terms as spending cuts are harmful in terms of growth policy, even if the EU's reconstruction fund, financed for the first time by common European bonds, will cushion some hardships.

The shortcoming of such calculations of debt dynamics is, among other things, that a higher debt ratio requires a lower primary surplus; therefore, according to S&P, Greece would manage with less austerity. The last column therefore shows my calculations of how many years it would take to squeeze government debt back below the Maastricht criterion of 60% at S&P's projected interest rate differentials to growth. In some cases, it would take several generations.

Parameters of debt dynamics in some EU countries (2020)

*Debt ratio stable primary budgetary position (DSPB) until 2023. R=(D/Y)/0.6. **"Years to Maastricht" calculated from J=-(ln R/(g-i,%)). Sources : own calculations; S&P Global (2021), Sizing Sovereign Debt and the Great Fiscal Unwind

Because of many uncertainties, precise figures are less important here than the message: the Maastricht criterion has, in my view, lost all credibility and thus commitment after the Covid pandemic.

Perpetual debt

Among others, George Soros or Guy Verhoefstadt have recently called for the issuance of perpetual bonds, also called consols or perpetuals. These have an infinite maturity and pay an annual coupon. Their principal is never repaid. The main argument for issuing perpetual bonds is that the EU should take advantage of the low interest rate environment to lock in low interest rates through perpetual bonds. Perpetual bonds are also not subject to refinancing risk as they never need to be rolled over.

Would perpetual bonds be a low-cost repository solution? Given today's very low yields, it may be worthwhile for issuers to take on long-term debt at favourable conditions. But financial mathematicians are rather unimpressed . With a positive yield, a perpetual bond is a comparatively expensive source of funding compared to issuing ten-year bonds, which currently trade at rates below 0%. The yield is the average interest rate over all coupon terms, weighted by the present value of each interest coupon. However, it is difficult to make this calculation for a perpetual bond because we cannot observe interest rates to infinity. The ECB yield curve stops at 30 years because there are few bonds with a maturity longer than 30 years.

Yield curve of Eurosystem government bonds

Source: ECB

The well-rated Republic of Austria (S&P rating: AA+) is a pioneer in Euroland for government bonds with extremely long maturities. It issued a 100-year bond with a coupon of 2.1% in 2017 and increased it to six billion euros in 2019. Currently, the yield is just below one per cent.  The 51-year bond with a coupon of 0.5% of the less well-rated France (S&P: AA) currently yields similarly high. The question is above all who will want to invest in such long-dated bonds when yields rise at the long end.

There is no such thing as a 'jack of all trades', but any variant will produce winners and losers, whether they are governments, their taxpayers or bondholders.

Currently, there is a high demand for these ultra-long maturity bonds, so their monetisation by the Eurosystem is not necessary. Why? Institutional investors or endowment funds usually use long-dated bonds to extend the maturity of their bond portfolios. The addition on their asset side helps them to reflect the maturity structure of their obligations (liabilities). Austria, like many other developed countries, is considered low-risk, so investing in the 100-year bond will at least give investors a positive long-term return - in contrast, many shorter-dated government bonds in Europe currently have negative returns.  Bonds with ultra-long durations also benefit from "positive convexity": if investors own long-dated bonds with low coupons (low payouts), their purchase price increases more when yields fall. Conversely, when yields rise, investors benefit from an implicit asymmetry of highly convex bonds. Indeed, the price of a bond with high convexity falls less when yields rise than it rises when yields fall.

Every variant has winners and losers

And the moral of the story? The multitude of historical examples of debt consolidation today inform us about different options: with and without austerity, with and without (de facto) debt repudiation, with and without financial repression or inflation. Surely, combinations of different variants are also possible, which allows policymakers to pursue the strategy of consolidating or disposing of high pandemic debt with multiple instruments.

It should also have become clear that there is no such thing as a 'jack-of-all-trades', but that each variant will produce winners and losers, whether they are governments, their taxpayers or bondholders. Who wins or loses exactly how much and when must ultimately be decided in the democratic process. For the selection and weighting of these options is the responsibility of neither economists nor journalists, but parliaments, governments and their voters, who should be as well informed as possible about the consequences of these decisions.

(This post, a translated version of my article in MakronomMagazin, replaces an earlier post here on Tunesia.)

On the tenth anniversary of the Arabellion, Tunisia´s youth fought street battles with the police. People are angry and disappointed about the desolate situation of the country. "Those in power are now others, the system has remained". "What good is press freedom if I have no work?" they complain.

The Federal Ministry for Economic Cooperation and Development (BMZ) has significantly increased funding for Tunisia over the last decade. At the heart of Germany's engagement is the reform partnership with Tunisia within the framework of the Marshall Plan with Africa. It was concluded in 2017 as a bilateral contribution to the G20 Compact with Africa initiative. According to the BMZ, Tunisia is a beacon of political hope in North Africa and, after a long phase of dictatorship, is on its way to transforming itself peacefully into a constitutional state. Despite political and social tensions, democratic development in the country is considered exemplary, says the BMZ on its official Tunisia page. Civil society has been strengthened after the end of the Ben Ali regime. The Federation of Trade Unions, the Employers' Association, the Human Rights League and the Bar Association were honoured with the Nobel Peace Prize in 2015. In short: Tunisia is a donor darling and, in the eyes of many "Westerners", something of a prime example of a successful democratic transformation.

Recent analysis praises[1] Tunisia's comparatively good social contract and its inclusive development model. But doubts are allowed as to whether Tunisians on the ground also see it that way. Violent clashes between demonstrators and the police, looting of supermarkets and hundreds of arrests currently characterise the Tunisian provinces and cities. Libanese economist Ishac Diwan warned some time ago that things were getting out of hand in Tunisia[2]. Even before the Covid pandemic, cronyism and illegal underground activities were draining the growth of Tunisia's economy - except from the corruption-prone construction sector - a consequence of weakened state capacity to enforce law and order. While public investment languished at 5% of GDP, the public wage bill rose from 10 to 15% of GDP over the past decade. The increase in social spending also benefited mainly civil servants, not the poor hinterland. The Gini coefficient remained high, at 40%.

Nearby Italy in particular is feeling the unabated wave of migration from Tunisia. In Tunisia, illegal emigration to Europe, typically by boat, is commonly referred to as Harqa (Arabic for burning the border). Harqa is an exit strategy for those who experience severe marginalisation at home. While Tunisia is also a transit country for migrants from sub-Saharan Africa, it is primarily a country of origin. According to Migrationdataportal, Tunisia's total migration loss (immigration - emigration) between 2011 and 2020 was 170,000 . Almost 7% of Tunisia's population (nearly 12 million) live abroad. In 2020, the Tunisian diaspora supported the notoriously deficit-ridden current account balance with private remittances amounting to 5% of national income (GNP).

A multitude of problems continue to plague Tunisia after the Arab Spring. Some prominent examples are the stagnation of the nationwide standard of living, pervasive corruption and an exceedingly high unemployment rate. According to the IMF, the external value of the dinar against the euro has halved since the Arab Spring, and foreign exchange reserves have also halved over the past decade ^[3].

Of course, the covid pandemic hit Tunisia particularly hard, as employment and foreign exchange earnings depend heavily on tourism. But according to OECD analysis[4], direct investors have been very reluctant to invest since the Arab Spring, so the country has not been able to diversify away from its dependence on tourism by creating new jobs. Formal employment has grown too little to engage the youth and give them a perspective. The relatively good education of young Tunisians also implies frictions in labour supply: What kind of industrial manufacturing jobs are even accepted?

Advice comes easy from "backbenchers" in Washington, Paris or Berlin[5]. It is known ad nauseam:

·       promote labour-intensive industries, ideally through attractive location conditions for foreign direct investment;

·       reduce or eliminate subsidies for fossil fuels;

·       consolidate the state budget by cutting public consumption.

However, the government's fiscal space and the people's patience seem to be exhausted. Cutting public consumption, half of which is civil servants' salaries, would also turn civil servants against the government.... High energy prices hit the province and the poorer part of the population. Foreign direct investors, despite lower political governance scores, prefer Egypt as a destination, where the military complex determines industrial policy and guarantees the security of direct investment [6]. Is Tunisia's young population too close to Europe and too well educated for the Asian model of transformation through labour-intensive industries to really have a chance there? A mismatch between skills supplied by the formally well-educated youth and the basic skills required for labour-rich manufacturing may stand in the way of replicating East Asian development strategies.

No doubt: In principle, Tunisia has undeniable assets and is quite well integrated into global value chains: its geographic location on the border between Europe and Africa, many years of investment in education, specialisation in future niches, including the pharmaceutical or information technology sectors. However, Tunisia's attractiveness suffers from

·       the numerous, often cumbersome regulations and administrative procedures,

·       the foreign investment regulations, which are more restrictive than in Egypt and Morocco, and

·       the delays in crossing the border (customs and transport logistics), which are often longer than elsewhere.

·       Some investors also complained about a skills gap, even though 28 per cent of graduates are unemployed. [7]

A remark made in 2017 by the Middle East expert Torelli of the Roman policy institute ISPI (Istituto per gli studi di politica internazionale) rings today as a warning[8] , also for the BMZ: "One of the mistakes of recent years has been the EU's tendency to sing the praises of Tunisian democratisation. While the country has achieved a good degree of formal democracy, there are still many critical problems related to the economy and political instability." Consensus politics against a backdrop of rising polarisation between Islamists and secularists has stymied Tunisian politics.

In retrospect, euphoric donor rhetoric (praising Tunisia´s rule of law and human rights) has proved counterproductive by intensifying authorities´ moral hazard. The Tunisian government had the upper hand in renegotiations with the IMF and multilateral lenders, not least backed by donor rhetoric. Conditionality was undermined (especially with regard to wage costs in the public sector), without impact on disbursements (Diwan, 2019, op.cit.). On the other hand: Instead of warm words, the EU has not been able to offer tangible incentives for higher productivity - such as an accession perspective along the lines of EU enlargement to the East.