Should governments help the airlines? (part 2 of 2)

There’s another problem when governments rescue companies and get them back up on their feet: they may quickly forget the favours they have received. Ingratitude is a fact of commercial life, but there’s no reason for governments to set themselves up for it.   If an important airline collapses, and its assets are taken over, the successor airline may not maintain all the routes to and from the country concerned. So the rescue package may not help national competitiveness after all.

But wait, you say, surely if the route is profitable it will be maintained? No, because the new airline has a finite number of planes and other routes may be more profitable. Also, the new airline may be more interested in feeding passengers to its existing routes or hubs than in maintaining the old route.

 An important option for governments is to go out to tender for air service provision. They can invite competitive bids for a subsidy to operate the route. The lowest bid, if it meets the quality requirements, gets the contract and the subsidy. Countries typically do this to maintain connectivity between the centre and remote regions: the airline in question is paid to maintain the regional route, and this is usually called a public service obligation. In 2019, there were 12 EU countries following this option, for a total of 143 routes. Greece had the biggest number of PSOs at 28, followed by France at 27. In general PSO routes connect outlying islands or distant regions with the capital or other key cities in the country concerned.

But there’s no reason why a PSO can’t be used to maintain or increase international connectivity as well. It can be an easier way to improve national competitiveness than rescuing a whole airline. But in fact, of the above PSOs, only 8 of the 195 were for international routes. Cyprus’s single PSO route was to connect it with Brussels. All of Czechia’s 3 tenders were to connect its cities with other European cities. France had 3 PSO routes connecting Strasbourg with other European cities.

Countries might usefully consider using PSOs specifically to target missing links in their international connectivity, including intercontinental links. A small country that wants better links with another part of the world could go out to tender and see what it might cost. The price might look good in the light of the possible wider economic benefits (tourism, business links, FDI, etc.)

Full disclosure: I took one of these routes last month (In Greece: Rhodes to Karpathos). The plane actually goes on to Kasos, an additional 10 minute flight, which must be one of the shortest commercial flights in the world.

Unlimited Data

The field of data is an interesting illustration of the way in which some driving forces of the world economy are interacting. Data will always keep on growing, because there are always new things to be measured and new ways of measuring. The scope and frequency of measurement continues to increase. Hardware advances allow for further improvements in data collection, and software advances encourage analysis and new secondary data. The Chinese company Tencent has become the first Chinese company to have over a million servers. Akamai has more than 240,000 servers in over 130 countries.

Hardware advances and server advances are part of the picture. So are the growth in data and the development of software that needs more and more data (data analysis, AI). But there’s a third factor: regulation in its broadest sense. It includes trade agreements (insofar as they cover data and telecommunications) as well as specific regulations on data within a country or region. The best known example of the latter is the EUI’s GDPR, which is often responsible for those irritating website notices about cookies. However GDPR has had important effects also on investment patterns: service providers are locating servers within the EU so that EU customers and others can have the additional security that GDPR provides.

Do you want euros with that?

The relative performance of the bigger EU countries in terms of GDP per capita has been interesting over the period 2006  to 2017 (i.e. from just before the financial crisis. ) If we look at the average for the EU-28 as a whole (100), only Germany has managed to increase its relative position, rising from 116 in 2006 to 124 in 2017. By contrast, Spain, France, Italy, and the United Kingdom, have seen a fall in their GDP per capita relative to the average. Actually, Spain and Italy have moved from an above-average position to a below-average position: in other words their per capita GDP in purchasing power parities is now below the average for the EU-28. The UK has seen a decline from 116 to 110 but it is still above the EU average.

It’s also interesting to look at some of the outsiders, not part of the EU. Switzerland, for instance was already in a very strong position in 2006, with  income per capita at 150, i.e. 50 per cent above the average income in the EU-28. The US in 2006 was even better off at 155. However, between then and 2018,  Switzerland did even better rising to 160 but the US fell back to 141. Finally, Japan which was at 110 in 2006, has fallen to 99,  in other words below the average income in the EU, which is rather remarkable.



GDP per capita in PPS
Index (EU28 = 100)
Data from 1st of December 2018. (Source Eurostat)


In 2006 the euro area (18 countries) was above the average for the EU as a whole, at 109, and the UK higher again at 116. However by 2018 the positions had reversed. The euro-area had fallen to 106 while the UK had fallen further to 105. In other words, people in the UK used to be better off than people in the eurozone. And now they’re worse off. Maybe if the UK had joined the euro, it might have done better.

If the UK leaves the European Union, it may not be forever. A change of government, and a change of heart, and, perhaps, economic realities in the UK, may after some years cause opinion to shift and the UK to reapply for membership. In such a situation, however, there won’t be much enthusiasm on the EU side for all the opt-outs that the UK had secured in the past, whether for budget rebates , abstaining from the Schengen agreement, or for staying out of the euro.

Which came first, the chicken or the competition?

In anticipation of Brexit, the United States has outlined its objectives for a trade agreement with the UK. Among other things, it wants to see access for its agriculture to the UK market. But US agriculture includes products such as chlorinated chicken, banned in the EU. Will the UK let these chickens in, if it “takes back control” and can make its own trade agreements?

For the US, the EU ban on chlorinated chicken is seen as a protectionist measure rather than a health protection measure. The US ambassador to the UK in an angry article in the British newspaper “Daily Telegraph” has attacked the EU approach : “Inflammatory and misleading terms like ‘chlorinated chicken’ and ‘hormone beef’ are deployed to cast American farming in the worst possible light…..It is time the myths are called out for what they really are: a smear campaign from people with their own protectionist agenda.” Even a moderate  US journal such as “The Atlantic”  states that “The European Union banned antimicrobial baths in 1997. That ban created a protected market for European and British chicken producers.” 

In fact, the picture is a good deal more nuanced. In production terms, the EU is self-sufficient in poultry meat: from 2009 onwards production has always exceeded consumption.  But the EU imports lots of chicken from other parts of the world, and exports a lot also. It imports chicken from Brazil, Thailand, the Ukraine, among others, to a total of 786 thousand tonnes in 2018, which is about 5.3 per cent of EU production, and it  exports chicken to Ukraine, Philippines, Ghana, China (Hong Kong) and others, to a total of 12 per cent of EU production.

Looking at these other countries, the UN trade statistics tell us that the EU and the US are both selling them chicken in increasing amounts. Quite frequently, the EU is selling more. The EU outsold the US in Ghana (2015-2017), Japan (2014-2016), South Africa and Ukraine (2014-2017). Only in Hong Kong and the Philippines is the EU clearly behind the US, with sales at 56 per cent and 69 per cent of the US total in 2017. It’s also interesting that the EU chicken sometimes does quite well in price terms also, with the average price per kilo higher than that for the US product in the Hong Kong, Japanese,  and South African markets in 2016 and 2017.

So, in third countries, where the EU and US are head-to-head, the EU chicken seems rather competitive. Which means that if the EU really were protectionist, it wouldn’t need to be.


Brexit and trade agreements for the UK

First of all,  Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.

Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).

As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.

A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.

Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.