Friday 31 October 2014

Currently browsing 'Euro & Finance'

In early 2010, fears of a sovereign debt crisis, the 2010 Euro Crisis developed concerning some European states. What should be the response? How should economic and financial policies be coordinated at the EU level?

 

¥uan and Waterloo of Petro$ (Part 1/2)

Posted by on 30/10/14

yuan logoOngoing western sanctions due Ukraine are pushing China and Russia to close cooperation – the great Eurasian axis is already in motion. Despite the headlines in mainstream western media related to civil war in Ukraine the primary war is being fought monetarily. The Russia-China Strategic Partnership (RCSP) is truly global in scope, having come to encompass the entire world to varying degrees. The Ukraine War might be the U.S. Dollar Waterloo event.

As the Americans and their allies are trying to squeeze Russia and Iran with a combination of economic sanctions and political isolation, alternative poles of power are emerging that soon may present a serious challenge to the U.S.-dominated world that emerged from the end of the Cold War.

The Russian response to ongoing western sanctions has been launching a counter-strategy that could bring the cost boomeranging right back to Washington. Namely, the formation of a potential non-dollar trading block among major players in the global energy markets including Iran and China.

 

 

The end of the Petrodollar

(In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar.In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. )

For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.

Last year Russia produced about 10.5 million bbls. of oil per day and exported 70% of it. That amounts to nearly 2.6 billion barrels with a value of nearly $250 billion at world market prices. It also exported the equivalent of nearly 1 million barrels per day of natural gas with a market value of upwards of US$50 billion. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world. If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar.

China just overtook the US as the world’s largest economy. The US national debt is now past €17 trillion. China – their biggest creditor – has been cutting on US debt holdings and hoarding gold on the side to be prepared for the possible collapse of the dollar. The US federal government ran an estimated budget deficit of $486 billion, or 2.8 per cent of GDP, in fiscal year 2014. By contrast, Russia just posted a federal budget surplus of 2 per cent of GDP.

dollar collapseWhen U.S. politicians started plan economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States.

The largest natural gas producer on the planet, Gazprom, has signed agreements with some of their biggest customers to switch payments for natural gas from U.S. dollars to euros. If other nations start following suit – start trading a lot of oil and natural gas for currencies other than the U.S.$ – that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.

Moscow, allied with the BRICS, is actively working to bypass the US dollar. The core point is that Russia is not alone. Besides the BRICS also the G-77, the Non-Aligned Movement (NAM), the whole Global South is critical to U.S. led bullying and would like to have other alternative in international relations. This past summer, the BRICS countries created an alternative to the largely U.S.-controlled World Bank and International Monetary Fund (IMF), and the Shanghai Cooperation Organization (SCO) added 1.6 billion people to its rolls.

G-7 vs E-7

Back in 1971, it was necessary to assure that the dollar would retain its position in world trade as the world’s premiere currency, in spite of the fact that it was no longer backed by anything. The U.S. reached an agreement with Saudi Arabia that, in trade for arms and protection, the Saudis would denominate all future oil sales, worldwide, in dollars. The other OPEC countries fell into line, and the “petrodollar” was assured.

Now the Sino-Russian cooperation is challenging the Americans, and there are many countries that would be happy to join them in dethroning the US dollar as the world’s reserve currency. The historic gas deal between Russia and China is very bad news for the petrodollar – it might be start of the “de-Americanised” world.

 

Yuan replacing the Petrodollar

petrodollarOn April 24th 2014 the Russian government organized a special “de-dollarization meeting” dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.

Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies, and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times, The renminbi is the official currency of the People’s Republic of China. literally means “people’s currency”. The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts.

Moving the yuan towards internationalisation involves three distinct phases: turning the Chinese currency into a) a trading currency, b) an investment currency, and c) a reserve currency.

Some recent developments:

  • Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.
  • China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.
  • Back in June 2014, China signed a major currency swap agreement with the United Kingdom. This was another very important step toward internationalizing the yuan.
  • China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.
  • Mei Xinyu, Commerce Minister adviser to the Chinese government, warned (on Oct 2014) China may decide to completely stop buying U.S. Treasury bonds.

China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations and in addition China plans to buy another 5,000 tons of gold.) There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically. One could claim that the entire way of life in U.S. depends on the U.S.$ being the primary reserve currency of the world. (Source: The Economic Collapse )

eu-china trade map

The dollar does not just predominate in China’s trade with the United States, but with other countries as well. The first steps towards the internationalisation of the yuan emerged in 2008-2009. At that time, businesses and companies were allowed to use the yuan in trade with Hong Kong (Xianggang), Macau, and ASEAN countries. In 2012, every Chinese company with a licence for export and import transactions was able to use the yuan. An active transition to foreign trade settlements in yuan is happening alongside an increase in the use of the national currencies of China’s trading partners. This is being facilitated by the signing of bilateral currency swaps between the People’s Bank of China (PBC) and the central banks of China’s trading partners. To date, the PBC has signed more than 20 currency swap agreements. At the end of 2013-beginning of 2014, the yuan overtook the euro in terms of the amount of payments used for international trade, and took second place after the US dollar. According to the People’s Bank of China (PBC) , there was more than 1.3 trillion yuan overseas at the end of 2013, which is equivalent to approximately US $250 billion. In fact, this money is forming an offshore yuan market. At present, the yuan can be directly converted with the US dollar, the Japanese yen, the Australian dollar, the Russian rouble, the Malaysian ringgit, and the New Zealand dollar. The latest such agreement was signed between China and New Zealand in March 2014. (Source: Strategic Culture Foundation )

 

My conclusion

In my conclusion the era when the IMF, World Bank, and U.S. Treasury could essentially dictate international finances and intimidate or crush opponents with sanctions, pressure and threads are drawing to a close – the BRICS and the Shanghai Cooperation Organization are two nails in that coffin. These independent poles (BRICS, SCO, USAN) are developing fast and it remains to see what their ultimate impact on international politics will be – my scenario is that the impact will be a drastic shift from U.S. dominance to more balanced juxtaposition of U.S. and Eurasia.

the end of dollar

Short memory of Prime Minister Orban

Posted by on 28/10/14

History teaches us to remember its lessons and draw relevant conclusions. Someone who doesn’t do it will be punished sooner or later.
Unfortunately, this truth hasn’t been comprehended by Hungarian governmental authorities who have come into power as the fates decree. Prime Minister of Hungary Victor Orban is a good example of this opinion. A great number of reforms, that was promised by him before his election chief of government was not carried out neither in 2010 nor in 2013 after reelection. Moreover, he has started crackdown on human rights and freedoms in the country and coming back to totalitarian ideas.
Nowadays, Hungary is a small country with communist past, which joined the European Union and has been trying to approach political, economical and social standards of leading Western nations. The experts have started, however, to find impartial similarities, comparing his policy with policy of Russian president. As example there is adoption of “Media act”. This act tightens up Media control in the country and permits the state structures to fine Mass Media for “non-balanced” or “amoral” publications. It’s known that this act caused mass protests in Hungary.
It should be noticed that so warm relations between Hungary-Russia caused by Russian credits. These credits make Hungarian government much more compliant. So, Orban’s government has blocked the EU sanctions against Russia.
Besides, in June of current year Hungarian parliament adopted disputable 10 billion euro credit contract for building and financing of 2 nuclear reactors by Russian concern “Rossatom”. In spite of the EU insisted to carry on tender. Implementation of this contract can significantly strengthen economic and political dependence on Russia. Also, building of nuclear reactors needs further utilization of nuclear waste. In result the cooperation with “Rossatom” will lead to, that Russia will be able to tie fuel supply with its political demands. Nevertheless, Hungarians gave its peremptory preference to Russians. Thus, Hungary neglected Brussels’ commentary, signed contract with “Rossatom” and intensified energetic dependence on Russia.
Victor Orban openly criticized implementation of next package of sanctions against Russia after the EU Council Meeting on the August, 30-31. He stated that sanctions against Russia are self-deception and it will be inefficient action.
In connection with such declaration we should remind Vicror Orban about event had happened 60 years ago. Then Hungarian government’s attempts of implementation of harmless reforms caused in instant reaction of Kremlin. In October 1956, soviet troops bloodily suppressed aspiration for liberty and independence of Hungarian people. Despite of Hungarian people resistance Soviet Union imposed its values on Hungary for many years.
Mr. Orban shouldn’t forget lessons of history and price that nation paid. Don’t forget about drag of country development but only if Hungary was not under the yoke of Soviet Union it could be one of the most advanced European states. It’s a good example of dangerous friendship with Russia because this friendship isn’t on an equal footing. That’s why when the scale is trembling between personal sympathy of some politicians and fate of the country, high rank officials must make a right choice.

What’s Osborne’s plan in the face of increased borrowing?

Posted by on 28/10/14

Whitehouse Consultancy Head of PR Chris Rogers claims increased borrowing will make George Osborne’s austerity message a harder sell.

To read Chris’ article, please click here.

The Whitehouse Consultancy is one of Europe’s leading public affairs and communications agencies.

Stresstest der Europäischen Zentralbank (EZB)

Posted by on 27/10/14

Beim Stresstest der Europäischen Zentralbank (EZB) sind 25 der 130 untersuchten Institute im Euroraum durchgefallen – ist das eine gute oder eine schlechte Quote? Egal, denn dieses Ergebnis ist ja eh nur vorläufig – die “angeschlagenen” Häuser haben nämlich die Möglichkeit, die geforderte Kapitaldecke innerhalb von neun Monaten aufzubringen. Vorausgesetzt, sie schaffen es – sind dann die 130 Banken, die 85 Prozent des europäischen Bankensektors abdecken, gegen künftige Finanzkrisen gewappnet? Das kann keiner beantworten. Und insofern ist der Stresstest zwar ein sinnvolles Druck-Instrument gewesen, um einfach eine höhere Eigenkapitalquote bei den Banken zu “erzwingen”, aber letztlich keine Garantie, künftigen Krisen genügend Geld entgegenzusetzen. Der Stresstest ist wie ein Airbag im Auto: Er ist sinnvoll, weil er unbestritten die Sicherheit erhöht, aber schwere Verletzungen sind durch ihn auch nicht gänzlich ausgeschlossen. Die Wirkung des Airbags kann bei einem schweren Unfall manchmal auch nicht mehr das Schlimmste verhindern. Und wie schwer ein Unfall in der Wirkung ist, hängt von vielen Faktoren ab: der eigenen Fahrweise, der der anderen und den Witterungsbedingungen. Die Banken täten gut daran, wenn sie sich nicht nur auf ihren Stresstest-Airbag verlassen würden.

Jet Crash at Moscow’s Vnukovo Airport: Undesirable Person Elimination

Posted by on 27/10/14

On October, 20 at Vnukovo airport the corporate “Falcon-50” jet was taking off as it clipped a snow-plough and burst into flames. Three members of crew and Total’s CEO Christophe de Margerie were lost. The Investigations Committee of Russia has set out two basic versions of the accident: criminal negligence by the dispatcher and the crash through snow-plough driver fault. The driver was accused by investigating authorities of being drunk. The lawyer and relatives of the driver state that he has a chronic disease non compatible with drinking. Observers has taken notice to the following: the plane was in good order, the crew was experienced and capable to flight in any circumstances (It was foggy that day). In other words, there was no objective cause for the accident to happen, but it occurred. The first obvious factor which led to the tragedy is systemic deficiencies in business activity arrangement at the aviation enterprise as well as at the safety ensuring units. The second one is a human factor (euphemism for Russian disorder, sloppiness and irresponsibility). It is possible to conduct show investigation and then to punish a little man. Most likely they let it be so. But one can be sure that the story about malice or elimination of the undesirables will never appear in the investigation reports, at least, in official papers. However one cannot exclude that the crash at Vnukovo airport has been a contract killing. Christophe de Margerie was an enthusiast of doing business with and in Russia. On the day of his death, he took part at the Advisory council annual meeting devoted to foreign investment in Russia chaired by the Prime-Minister of the Russian Federation Medvedev. Now public doesn’t know exactly what had happened at the meeting or in its margins, but it is widely known that in September 2014 Mr. de Margerie announced suspension of joint venture creation together with Lukoil due to EU sanctions. This project was aimed to explore for shale oil in Russia. One more Total’s project – participation in Novatec’s “Yamal compressed natural gas“ project – appears to be a problem. The joint venture has confronted with great difficulties trying to attract investors; moreover, some western companies have refused to deliver equipment for LNG plant (Total has just been constructing the facilities). Besides the Shtokman field development project (with Norwegians and Gazprom) was shelved, and Total lost 340 million dollars it had already spent for the project. Thus one can reasonably suggest that Total’s management and Christophe de Margerie personally, had revised approach towards Russia and decided to curtail Russian projects. Such a stand could have pushed large Western companies operating in Russia to similar conclusions concerning doing business with Russians and, finally, have painfully hit Putin’s image and pride. It’s easy to guess what resolution had the person with KGB-past been able to adopt. There is an important fact, backing the given assumption. Major-general Gurevich has been appointed the head of investigation team to investigate the air crash in Vnukovo international airport. It’s interesting, but it was he who investigated circumstances of the jet TU-154 wreck with Polish President Kachinsky onboard near Smolensk.

Why is the UK being asked to pay in more to the EU budget and what can it do about it?

Posted by on 24/10/14
By Open Europe There are a number of headlines today around the EU’s request for a further €2.1bn from the UK in terms of its contribution to the EU’s budget. We breakdown exactly how and why this has happened and what options the UK has now.

Again and again the same play in Eurozone?

Posted by on 20/10/14

Mr Pierre Moscovici takes office in less than 10 days, after a tumultuous hearing a couple of weeks earlier. During this month, stock markets were shockingly destabilized with distrust over Eurozone to put again into the spotlight. Recent reports unveiled the weaknesses of the German economy, while Britain is heading into the sixth day of protests due to constant income squeezing. In the meantime, the Greek government has declared its will to exit from IMF’s surveillance into its public finances and policy, with international reports focusing on the next day in Greece, after the almost-proclaimed national elections in the first months of 2015. In this respect, it Eurozone recovering?

Paris is in talks with Berlin with reference to the German backing towards the “exceptionality” that French economy should enjoy. As President Hollande wants to increase public debt and escape the threshold of 3% of public deficit agreed under the Stability Pact, the question of equal treatment of all member-states comes again into surface. France’s public debt is now 92% and it is expected to grow and reach almost 97% by the end of 2015. Meanwhile, Spain’s public debt is 94%, Belgium’s 102%, Portugal’s 128%, Italy’s 133%, and Greece’s 170%. From these countries, only Greece is faced with increasing distrust from the markets, with Portugal and Spain having gained significant confidence, and Italy having escaped the turmoil for the moment due to its Presidency in the Council of the European Union. But hard days are coming for Mr Renzi and his government. Nonetheless, all the above member-states have decreasing trends when it comes to public deficit – except for France.

The problem with the exceptionality of France is that it is hard to avoid it. Even if the Commission might call France to make the necessary amendments – i.e. meaning more job and income cuts and possibly higher taxation- it is quite irrelevant for a country with the power and influence of France to push further any austerity policy. What we have seen so far from President Hollande in his tenure in office is a decision-maker that can hardly accommodate his electoral promises a couple of years ago with the ongoing economic reality in Eurozone.

Having this in mind, the following question comes again: as long as Eurozone cannot deal with austerity and stabilize its economies long-term, why EU leaders do not think the opposite way and push for a more flexible monetary policy? ECB’s President Mario Draghi has already pinpointed such a possibility one year ago, at least in the context of a more expansionist policy in the short run, but still we are faced with a mix of restrictive policies that bring Eurozone closer to instability. Again.

The case of France and the expectations from the hardliners in Eurozone can certainly give us the lesson we did not learn these four years. In 2010 and in 2012 Eurozone had to deal with increased distrust from the markets, with Portugal, Spain, and Greece swept down to tough monitoring and in need of bailing-out. Now, in 2014, we risk to watch again the same scene and a really exhausting play for the people of Europe and the young generation. If we are to avoid another flash-back, the European Commission should revisit the normative approach of the Stability Pact and relax any measures taken or agreed. It might be time for more inflationary policies and less austerity, at last.

UK takes another blow over bankers’ bonus cap

Posted by on 19/10/14
EBA HQ in London
The European Banking Authority (EBA) on Wednesday released the results of its investigation into whether banks across Europe have been using ‘allowances’ to skirt the EU’s bankers’ bonus cap. This is obviously a hugely contentious issue in the UK and the fact that UK banks have been taking this approach has been well publicised and oft criticised by EU politicians. But it’s interesting to note that the EBA found 39 banks across six EU states had been using such allowances, so clearly it is an issue which extends beyond the UK’s big banks.

Nevertheless, the opinion does not bode well for the UK with the EBA concluding:
“The EBA found that in most cases institutions had topped up the fixed remuneration of their staff and had introduced discretionary ‘role based' allowances which have an impact on the limit of the ratio between variable and fixed remuneration required by the EU Capital Requirements Directive (CRD IV).”

“The report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification.”
The report is much as expected, with the EBA making the case that the allowances are not permanent pay for a number of reasons: they are revocable with little notice, specific to the staff member not the role, often have forfeit clauses therefore not permanent and are often linked to proxies for the firms performance (such as the economic environment).

The last point in particular clearly chimes with concerns from banks that they will have less control over their costs at times of economic hardship. This is exacerbated by the point (number 37 in the report) below which is frankly just a bit strange:
"Some role-based allowances might only have been introduced to comply with the bonus cap introduced by the CRD IV while retaining some cost flexibility. Cost flexibility is of importance where the performance of the institution or a business unit is no longer considered adequate."
Surely, cost flexibility is always relevant for a business, particularly one in a very competitive environment, and not just when it is failing? We’re not quite sure what the EBA is getting at there.

What happens now?
  • The opinion isn’t binding, although the EBA has said it expects national regulators to make sure that all banks are in compliance by the end of the year, however, it has no legal way to enforce this (yet).
  • The EBA is currently reviewing its guidelines on the issue and will hold a public consultation before the end of the year with the new official rules being published in the first half of 2015 (at this point they will be legally binding).
  • In particular, if banks want to continue using allowances they will have to be “predetermined, transparent to staff and permanent”.
  • Ultimately, this throws a bit more uncertainty in the mix with banks uncertain over exactly how and when to adjust their allowances.
What does this mean for the UK?
  • Clearly, this is a bit of a blow for the UK. That said, the issue has already to an extent moved out of the EBA’s hands. The UK is challenging the original proposal at the European Court of Justice. Even if this proposal fails it could challenge the updated guidelines/rules which are used to implement the cap. Banks themselves could of course choose to launch legal challenges although this looks unlikely at this stage.
  • Banks will ultimately find a way to pay their staff the market rate. This will likely end up being in the form of higher base salaries, something which will make banks less flexible and push up their average costs. This could potentially harm competitiveness and possibly force banks to pass on such costs to consumers.
  • The biggest concern is a broader one of precedent and where laws are really made. The bonus cap was a specific law tagged onto a much larger piece of legislation to which it is largely unrelated. This significantly aided its passage through and watered down scrutiny. Then given the technical nature of the rules a lot of the holes were filled in by the Commission and the EBA in setting the exact parameters for implementation – providing a lot of power to the two institutions. The temptation to take such an approach with complex financial regulation is obvious and circumvents the little accountability and control which member states have.
This debate surely has some way to run yet but this looks to be one battle which so far the UK is losing.

Frage: “Sollten die Deutschen mit dem Sparen aufhören?”

Posted by on 16/10/14

Frage:…Sollten die Deutschen mit dem Sparen aufhören?

Antwort:… Tatsache ist, dass die Politik langsam keine Optionen mehr hat, dass dieser Einbruch hier vielleicht viel gefährlicher ist als der, den wir 2008 hatten. Das haben wir durch billiges Geld wieder rausgerissen. Aber die Politik der Notenbanken kommt jetzt an ihre Grenzen, und deswegen ist diese Diskussion über neue Konjunkturprogramme jetzt im Umlauf.

Frage: Stehen wir wirklich vor einem Abschwung – oder schlimmer noch vor einem Kollaps?

Antwort: Ein Abschwung oder auch eine Deflationsspirale ist nicht auszuschließen… Wir haben nach 2008 mit sehr viel fast schon staatswirtschaftlichen Maßnahmen, also der Politik des billigen Geldes, die Zinsen gedrückt in der Hoffnung, dass damit die Wirtschaft angekurbelt werden sollte. Das funktionierte auch einigermaßen…

Aber die Politik der Notenbank ist jetzt am Ende. Wir sind schon fast bei null Zinsen, wir haben Strafzinsen. Das erinnert ein bisschen an die Spätzeit der DDR, wo auch solche potemkinschen Dörfer aufgebaut wurden.

Frage: Der Untergang für die Europäische Union… oder für Deutschland?

Antwort: Wenn es uns jetzt trifft, dann wird es wahrscheinlich eine Abwärtsspirale in der gesamten Weltwirtschaft. Wir haben diese unsäglichen Sanktionen viel zu früh und viel zu stark gegen Russland beschlossen, die natürlich vor allem Deutschland und Österreich treffen. Andere können sich da eigentlich bequem zurücklehnen. Wir haben jetzt den Abschwung ansonsten. Da kann ich schon verstehen, dass Rufe laut werden, dass man sich dem entgegenstemmen muss und die Sparpolitik aufgeben muss.

Frage: Dafür würden Sie votieren, einen Abschied von der schwarzen Null in Deutschland zum Beispiel?

Antwort: Ja. Man muss ja sehen, dass Amerika und England und viele andere, Japan seit Jahren eine hemmungslose Schuldenpolitik betreiben, damit ihre Aktienmärkte stützen und oben halten, während wir in der Europäischen Union eine doch relativ schizophrene Politik haben. Wir haben zwar auch die Politik des billigen Geldes der Notenbanken, das ist das Gaspedal, und gleichzeitig ziehen wir dann die Handbremse mit dem Stabilitätspakt.

Wenn schon es Richtung unbegrenztes Geld geht, dann müssen wir da unter Umständen mithalten, denn sonst haben die anderen nachher eine wachsende Wirtschaft, sie haben dann zwar Schulden, aber wir haben dann keine Schulden und keine wachsende Wirtschaft. Und wenn dann die Bereinigung kommt, wenn Schuldenschnitte erfolgen, dann stehen die anderen besser da.

Frage: Das heißt, Schäuble muss nachgeben, oder er macht eine Politik zum Niedergang der deutschen Wirtschaft?

Antwort: Das ist überspitzt… Der Mann hat sich ja auf das Sparen fixiert und er kann sich ja ganz gut fixieren, wenn er mal eine Idee hat, und das ist dann seine Linie, die will er durchhalten. Aber in der Tat wäre eine Auflockerung der Sparpolitik im Moment durchaus diskussionswürdig.

Frage: Und wenn wir das machen, wofür geben wir das Geld dann am sinnvollsten aus?

Antwort: Ja, das ist schon das nächste Problem. Das ganze viele Geld, was wir jetzt gedruckt haben, das ist an die Banken geflossen, das ist zum Teil in spekulative Bereiche geflossen und es ist nicht wirklich dahin geflossen, wo es hinfließen müsste, nämlich in den Süden, dort in den Mittelstand in Deutschland, dort wo Investitionen sinnvoll sind.

Von daher ist die Idee, die Schäuble da gebracht hat, dass die Europäische Zentralbank zunächst eine Kapitalerhöhung benötigt, an der sich dann ja alle beteiligen, dass dann die Europäische Zentralbank mehr Kredite gibt, gar nicht schlecht. Aber das ist natürlich weit weg von den 300 Milliarden, die Jean-Claude Juncker gefordert hat.

Frage: Und wofür sollte das Geld ausgegeben werden? Was kurbelt die Konjunktur an? Was hilft?

Antwort: Wir haben in Europa schon natürlich Rückstände in der Infrastruktur, auch in Deutschland. Infrastruktur ist eines, Bildung, Wissenschaft, Hightech. Aber wenn wir unseren Hightech-Sektor wirklich hochbringen wollen in Europa, dann müssen wir uns erst mal aus der totalen Abhängigkeit von Amerika lösen. Das sehe ich noch nicht. China ist da etwas eigenständiger, während im Hightech-Bereich die Europäer im Prinzip ein Anhängsel der USA sind und Territorium von Google, Amazon und Microsoft. Das wird nicht einfach, da was dagegenzusetzen.

Frage: Nun sagt ja Wolfgang Schäuble, mehr Investitionen seien schon okay, aber die sollten am besten durch Strukturreformen erreicht werden. Heißt das im Klartext, Deutschland wird wieder Sozialleistungen kürzen…?

Antwort: Leider wird es das in der Konsequenz heißen, wenn es so umgesetzt wird. Aber Strukturreformen sind ja mehr. Die EU ist im Prinzip in vielen Bereich zu einer Standortwettbewerbsmaschine im Hinblick auf Kürzungen von Sozialleistungen und sonstigen Gesetzen geworden. Aber man kann ja auch positiv was machen. Man kann Fördergesetze machen zum Beispiel für den Hightech-Sektor. Leider reicht dazu die politische Kraft der EU im Moment nicht.

Frage: Die Regierung in Deutschland gibt ja auch viel neues Geld aus, aber möglicherweise für die falschen Dinge. Sollte die Große Koalition so etwas wie die Rente mit 63, den Mindestlohn und das Betreuungsgeld wieder kassieren?

Antwort: Ja, das waren Wahlgeschenke. Die sind natürlich unsinnig…, kosten viel Geld, und sie entziehen dem Arbeitsmarkt produktive Kräfte. Es ist doch viel wichtiger, dass wir Arbeitsplätze schaffen. Mindestlohn habe ich ein gewisses Verständnis für. Da gibt es auch Untersuchungen, dass der nicht auf die Arbeitsplatzanzahl drückt, dass er nicht schädlich ist. Aber eine Rente mit 63 war ein ganz klares Geschenk.

Insofern brauchen wir tatsächlich Strukturreformen, die neue Arbeitsplätze schaffen. Das wird aber auch nicht ohne Geld gehen, und es geht nicht nur, indem man einen Dumping-Wettbewerb um Billiglöhne und um die günstigsten Standortvorteile im Hinblick auf Steuern und so weiter macht, sondern da muss man sich was Intelligentes einfallen lassen, zum Beispiel ein Förderprogramm für Hightech.

Frage: Sie haben kürzlich gesagt…, Sie hätten noch nie so viel Angst ums Geld gehabt wie angesichts der Krisen in der Ukraine oder in Syrien… Was raten Sie den Bürgern in dieser Situation?

Antwort:… Die Lage ist diesmal so ernst wie seit mehreren Jahrzehnten nicht, denn wir haben wirklich viele Krisen, und die Notenbanken sind mit ihrer Politik am Ende. Man kann nicht alles auf dem Sparkonto lassen, man kann nicht alles in der Lebensversicherung lassen. Geldforderungen sind tatsächlich irgendwann bedroht. Es muss eine Mischung her zwischen Sparkonto und dann vielleicht langfristigen Aktienfonds, globale einfache Aktienfonds, vielleicht auch ein kleines bisschen Edelmetall, sodass man wenigstens eine gewisse Streuung im Vermögen hat.

Frage: Wie schätzen Sie die Chance ein, dass die Weltwirtschaft noch einmal davonkommt?

Antwort: Mit Prozentzahlen tue ich mich immer schwer, aber die Gefahr, dass sie nicht davonkommt, die ist wie gesagt sehr real und so hoch wie lange nicht mehr. Zahlen sind wirklich schwer, Fifty-fifty vielleicht das davon kommen, vielleicht auch ein bisschen mehr. Aber die Gefahr ist absolut gegeben.

Frage: Und wie schnell wird sich das erweisen?

Antwort: Das ist wieder schwer zu sagen. Im Jahr 2008 hatten wir den Kollaps und da gab es Panik, und wenn da die Notenbanken nicht eingegriffen hätten, dann wäre es damals so weit gewesen. Diesmal ist es eher ein schleichender Prozess… Diesmal kann sich das wie eine schleichende Krankheit etwas länger hinziehen. Aber ich denke, in ein bis zwei Jahren haben wir Klarheit.

EU-Russia Relations: Reloading again?

Posted by on 16/10/14

The Asia-Europe Meeting (ASEM) will be held on October, 16-17, in Milano (Italy). German Federal Chancellor, British Prime-minister, Presidents of Ukraine and France confirmed their participation at the forum. Russian Prime-minister Medvedev was declared as a participant but at the very last moment President Putin announced his arrival to Milano.

Russians also confirmed that Putin was planning to meet with EU leaders as well as with the head of Chinese Parliament Li Kecian. There is also possibility of Putin-Poroshenko talks.

Putin’s primary goal in Milano is to convince EU leaders to lift sanctions imposed by Europe. It is worth to add that the future of these restrictive measures will be the main issue at the EU foreign ministers meeting on October, 20, in Brussels.

According to Kremlin’s official statements, Putin is going to offer for Europeans to ‘reload’ EU-Russian relations. The Russian economy has entered into recession. Russia should intensify its political and economic dialogue with Western countries, otherwise the decline of its economy cannot be stopped. The main source of the Russian budget income is oil & gas export (nearly 50%), but due to the latest trends in the oil markets Russia has lost profits – up to five trillion rubles. The Russian budget was based on oil price of $114 per barrel, therefore budget-2014 revenues will be reduced by 20-25%.

Trying to redirect its cooperation vector, Russia chooses China as the main strategic partner instead of EU. Lots of agreements were signed between Moscow and Beijing during last few years. The gas contract is one of the most important. The contract is worth $440 billion and the period of its validity is 30 years. However, gas deliveries will be possible not earlier than in 2018. But by that time, the Russian economy will not be able to survive without economic and political cooperation with EU.

“Reloading” of European-Russian relations is positively assessed by EU. But the Ukrainian issue is still open. A few European countries support lifting of sanctions against Russia: Hungary, France & Slovakia. Most of the EU members agree that sanctions against Russia must not be lifted until the situation in Ukraine becomes stable.

EU representatives consider that it is not the time to begin a new “Cold War”. All parties interested in resolving the Ukrainian conflict should carry on the effective dialogue. Only political negotiations can bring results.

The issue of economic sanctions lifting will be discussed during the meetings between EU leaders and Putin. Sanctions can be canceled under the only condition: Russia should withdraw its troops from the territory of Ukraine. This condition concerns not only the Eastern Ukraine, but also the annexed Crimea. So, EU-Russia relations reloading is possible but in case of fulfillment of this demand.

According to EU experts, Ukrainian and Russian economies bear loses due to the protracted conflict in the Eastern Ukraine. The countries have deeply integrated system of co-production in many industrial fields.

ASEM in Milano may become the starting point of the Ukrainian conflict resolving. Putin face a dilemma: to support EU peaceful initiatives and to create conditions for sanctions to be lifted or to destroy the Russian economy.

Ukraine and Russia may become a reliable economic bridge between Europe and Asia.

Nobel Prize for Economics: a missed ex-aequo

Posted by on 16/10/14

Dr Jean Tirole has won the Nobel Prize for Economics having pursued studies centred on regulations suited to ex State monopolies, like Power supplies, Telecom, Gas, Banks…
Mr Tirole concludes that those sizable companies, once privatized, tend to accumulate excessive profits, often not decorously compatible with the community of citizens.
Hence the opportunity to legislate in a differentiate way, paying due regard to the potential excesses of a specific market segment.

However, we should ask ourselves if the privatization of utilities is the right way forward or rather, we should direct the glance (the study) toward a better management of State enterprises. If a State-managed utility is not efficient in administering its services to the members of the public it might need less politics and better management with adequate salaries. A political system that is not capable of managing its state-enterprises economically will, almost surely, waste as well a large proportion of the national budget.

Dr Thomas Piketty, another French economist, has achieved a research that demonstrates the diminishing growth of a country to the widening of salaries beyond a certain point. In other words, the excessive accumulation of wealth in a few, compared to the whole population of a country, causes a dwindling in the purchasing power of citizens, hence the diminishing income to the State. The difference in compensation along the professional ladder is positive to stimulate motivation but if this difference becomes excessive then the economic system misfires. The work is detailed in his book “Capital in the Twenty-First Century”, a bestseller applauded by most economists and some of the political elite but insubstantially criticised by the “financial nomenclature”. Is this the reason for a missed ex-aequo? Dear Mr Piketty, the 21st century has just begun and you might enjoy a full bounty in the near future.

Closed Doors: The ECB’s New Strategy

Posted by on 06/10/14

The draft report of the Committee on Economic and Monetary Affairs of the European Parliament over the regulations and powers of the European Central Bank to impose sanctions (EC No 2532/98), issued on September 17, includes a rather ambiguous, to be polite, provision, entitling the ECB to decide whether to publish or not decisions of its board that could jeopardize the stability of the financial markets. In other words, and with reference to bail-out member-states like Greece, the ECB can delay a publication of a certain sanction or administrative pecuniary penalty up to three (3) years after the date on which the decision was taken.

Connecting the provision of this draft with the “embezzled hearing” of the Commissioner-designate Pierre Moscovici last week, we are in front of a double dilemma: either start deliberating on the executive powers of the ECB and the depth of censorship that we might see it implemented in the months to come (i.e. considering the sensitive case of Greece and the fact that the government is not abiding by troika’s budget goals for 2014-15), or re-consider Mr Moscovici’s strategic plan for more austerity, added with sort of misleading information.

The above draft actually diminishes European Parliament’s checks and balances over ECB. On the one hand, it might be beneficial for certain circumstances, especially in a highly fragile economic and financial environment, but on the other hand the concealment of a decision for up to three years is considered a long period that inevitably creates transparency burdens in every possible respect. For member-states with increasing phenomena of corruption, such a delay could also undermine both investors and depositors and distort the credibility of the banking institutions.

From a similar perspective, ECB’s new strategy to increase its powers in such a manner can definitely lower the influence of the political system, and therefore the executive and influencing power of the European Parliament, in a top-down process affecting also the relationship between the banking institutions and the political systems of the member-states. The debate is crucial for the future of decision-making as well, as the “forced” stability of the banking system in the European Union can alter the current democratic model of policy-making and turn the markets literally dependent to selective information.

For the time being, the governing parties of Greece and of other fractious economies like Spain and Italy that implement austerity measures can only benefit from such a development.

Showdown between France and Commission set to test EU’s budget rules

Posted by on 06/10/14
It has been widely reported over the weekend that the European Commission (EC) is seriously considering rejecting France’s new budget proposal which will see it run a deficit of 4.3% next year rather than the EC target of 3%.

















As the graph above shows, France has strayed significantly from the path originally agreed with the EC, even after it requested and was granted additional time to meet its deficit targets just last year.

Importantly, this is the first time a country has flagrantly flouted the budget rules. Other countries have missed their targets or asked for extensions, but with the presumption of good faith and serious efforts being made to meet said targets. However, with its latest budget France has rejected the previously agreed cuts (worth 0.8% of GDP) and offered just 0.2% of GDP in savings. In other words it has flat out chosen to ignore the rules.

This may seem like semantics but it puts the EC and the EU more broadly in a tough position. With much of peripheral Europe failing to meet the fiscal rules agreed under the Stability and Growth Pact (SGP), the Fiscal compact and the European Semester, many have already been questioning the effectiveness of these tools. Ultimately, the EC risks replaying one of the key features of the previous crisis – letting a big country break the SGP and then being unable to effectively enforce it for other countries, helping to facilitate the large build-up of sovereign debt.

This is therefore a key test of the viability of the new rules and whether this time will really be any different. Combined with the renewed bank stress tests and bail-in rules, the coming months are an important testing ground for the new financial architecture which the Eurozone has put in place.

Sadly, as Reuters highlights, another fudge looks to be on the cards. While the EC will probably reprimand France to the fullest extent before getting to outright fines, it will also work up a new looser programme which gives it more time. This helps all sides save face and avoids the risk of further weakening French President Francois Hollande to the benefit of the Front Nationale (something which the EU wants to avoid).

As for what happens now, the EC will provide a verdict on the budget by the end of the month in what will be one of the last acts of the Barroso Commission. This is of course all complicated by the hand-over of the EC and the wrangling over who will actually be in charge of enforcing the budget agreements. When all is said and done another muddle through is likely, but with the Eurozone facing economic stagnation investors may be less than convinced by such moves.

Germany is not less keen on debt than others

Posted by on 06/10/14

As the rethoric goes, Germany has always been careful in taking out debt financing. In German culture debt is considered a sin, from which the literal translation of “die Schulden” is “fault” or “guilt”.

Every day Wolfgang Schäuble, the German finance minister, remembers all other European peers that debt is the problem, not a solution.

So the story goes and that would explain the relatively low current levels of government debt over GDP ratio, at 74.55% in 2014. In that respect Germany outdistances most European partners, that are struggling to stay below 90%.

Is this performance due to a trend of low debt or simply good growth performance compared to other EU states? To check, let’s assume that France, Germany, Italy and UK would have all grown at Italy’s GDP growth rate from 1991 until today. The result is shown in the graph, where data are taken from the IMF website.

Now Germany is not performing so well. France and UK are looking even worse than Italy.

So, it might be the case that the problem of the Maastricht debt/GDP rule is not the “debt” but the “GDP”. Asking for more relaxed conditions in public spending to boost GDP does not look like a stupid idea afterall.

Launch of Next Europe

Posted by on 30/09/14

My new book Next Europe is now officially launched. Of course this comes with a modest campaign to create attention for the book.

I published several opinion articles, on news sites as well as in the Dutch paper Het Parool. You can read the ‘launch article’ at EurActiv (English) and on Opiniestukken.nl (Dutch).

The presentation took place on September 22 at the Press Club in Brussels. More than 100 people attended the event. First I gave a short summary (link to Prezi) of Next Europe to the audience, followed by the handover to Constantijn van Oranje-Nassau, chief of cabinet of Commissioner Kroes. A panel of experts – Shada Islam of Friends of Europe, Claude Grunitzky of TRUE, and Marietje Schaake of the European Parliament – gave their first responses.

Shada Islam: ‘This is an insightful study of Europe by a young, thoughtful EU Watcher.’

Dutch public radio 1 made a report on the launch event, you can listen to it here.

On October 14, Next Europe will be presented in Amsterdam, followed by a debate with Paul Scheffer and Adriaan Schout. Programme and registration on the site of Pakhuis de Zwijger

Photos of the Brussels launch, September 22 at the Press Club

 

 

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