A Change for Banking

The elevation of Jane Fraser as CEO of Citi bank is a welcome sign for women in finance, especially with the UN General Assembly discussing the status of women next week. She joins a growing roster of prominent women in finance – the head of the IMF, head economists at the OECD and World Bank, President of the ECB, former Chair of the Fed and amongst others, the very effective Governor of the Russian Central Bank.   

In general, the rise of women to the top of large institutions is a marker of social development, openness and the transition to the new economy – a debate that notably is also led by a number of female economists (the World Economic Forum Futures Council for the New Economy is my reference point). However, the top of the pyramid can often be misleading. For instance, there are numerous accounts by female economists of how they have been denigrated in the academic job markets or through their careers (have a read of some of the recent interventions by Claudia Sahm).

Back to Citi. Jane Fraser faces a considerable challenge running a legacy bank. Running an enormous bank in the context of low interest rates, potentially peaking markets, complex regulation and the legacy of past balance sheet accidents and IT projects (more of a problem for European than American banks) is a difficult ask and likely to test her patience.

However, at a time when the scope for transformative mergers in banking is very small (cost cutting seems to be the only rationale for consolidation), having a woman run a bank may itself be transformative.

Let me explain myself. Many years ago I was engaged in some work on behavioural finance, specifically so in terms of how people view risk, how much risk they take as investors and how they manage it. One research finding of note is that in finance, and other walks of life, women take less risk than men.

In fact, much of this phenomenon is due to a small group within the sample of males, who take very high levels of risk. The comparison of risk taking between men and women got a lot of interest and I ended up presenting it to groups of women as far away as Sydney and Singapore. In time, and with the benefit of feedback, this risk story became one about what ‘a bank for women’ might look like.

Here, there is a risk that some people consider a bank for women is one staffed entirely by women (Ellevest is an example). I am not so sure. The idea of a bank for women comes about largely because many women are more open about what they don’t like and understand about banking than men are.

To that end, a bank for women is one where there is clarity about the function of the services a bank offers, an absence of condescension and obfuscation, transparency over costs and transactions, encouragement of financial education and a general lack of jargon around products, and a bank where customers are not encouraged to buy products that are too costly or too risky. This somewhat idealized concept of a bank should also be one that men like.

At a time when the valuation of European banks has hit its lowest level since 1992, and where large US banks still trade close to the levels of this March, ‘a bank for women’ along the lines described above may be an interesting and viable alternative. To my knowledge, there have been a few attempts (at a ‘bank for women’) but none has yet been a great success (the Women’s World Bank and several microfinance initiatives stand out). However, fintech may help.

One attraction is that the algorithms that greet customers of digital banks can be set up to treat men and women the same way (some weeks ago I wrote about Joy Buolamwini’s Algorithmic Justice League). Another innovation is that the standard building blocks in portfolios (e.g. global equity portfolio) are now much cheaper and accessible because of the growth and competition in the ETF (exchange traded funds industry). Another trend to watch, which is more prevalent in China than say Europe is that the wealth of data on our consumption habits, should in principle make credit scoring more accurate.

If these trends continue, a ‘bank for women’ type approach might revitalize a tired sector.

Have a great week ahead,


Going West

Biggles, euro fighter?

Going West

‘A Camel (Sopwith Camel – first World War fighter plane), blue skies, and plenty of Germans is the height of my ambition…’ p. 362, ‘Biggles flies East’ Capt W.E. Johns.

The above quote from one of many ‘Biggles’ books, written in 1935, comes from a very different time with different sensibilities, but is worth dragging up because I feel it captures the spirit that Boris Johnson and his Brexiteers want to portray to their followers – a Britain that is superior, in charge and powerful.

If only Brexit could be as simple as ‘buzz across the Channel, give the foreigners a bloody nose…get home in time for tea’. It’s not.

The ‘Biggles’ quote strikes a chord for at least two reasons. Unlike say Germany and France – it seems to me that many British politicians (the majority on the Brexit side) are locked in history. Their reference points are manifestly not a coherent vision of what Britain will look like in future, but more an attachment to a Downton coated celebration of past victories (notably the two World Wars).

That helps us to understand that Brexit is a crisis of national identity, rather than say a quibble with the regulatory complexities of EU membership. This view may also help to explain the chaotic ‘Game of Thrones’ nature of the Brexit process. A crisis of identity will, like a financial crisis, burn its way through the body politic until leadership and clarity emerge. This is not yet the case. More political careers will be spent and arguably sterling has a few more convulsions left before this all ends.

Back to Biggles. One thread that comes through in the Biggles books is the importance of honour, bravery and sticking to the rules. In the books, Biggles is sound on these points, foreigners less so. This is now changing.

In a recent post entitled ‘Fantastic Corruption’ (July 25th) I cited the importance of the rule of law (and noted Tom Bingham’s book on this), and how in the post globalized age we have entered, this is being degraded in both Washington and London.

The latest crisis in the Brexit saga, the introduction of a bill in Parliament that contravenes the Brexit Withdrawal Act, exacerbates the trend of the degradation of the rule of law, which in the eyes of so many has historically been exemplified by Britain. That politics can trump the law is dangerous and distasteful.

Boris Johnson’s move may well be a negotiating ploy to force the EU to close a deal as the October deadline approaches, and the behavior of financial markets (notably sterling) suggests that this is the case. If ‘breaching international law’ is a tactic, it is a costly one, and will rob Britain of respect, trust and credibility – all of which it will need if it is to make a go of ‘Global Britain’ or whatever comes after Brexit.

I have resisted writing on Brexit for some months partly because it is so unpredictable, partly because it is difficult to find new things to say and partly because events elsewhere are equally mind grabbing. The overall pattern of these events, of which Brexit was the first, points to a post globalized world, where boundaries and ties are being broken, and where laws, institutions and ways of doing things are being challenged.

The implications of this are manifold.

One is that the fracturing of ties (NordStream 2 is next?) and the remaking of nations (i.e. Belarus, Lebanon?) will encompass Scotland and Ireland. Scotland will likely vote for independence within the next six years, and it is now a matter of conceiving how independence can be achieved in as successful and less disruptive way.

Equally, there is now much talk of a united Ireland, especially I find, in the US. The first step here must be an imaginative plan to reshape Northern Ireland’s economy and society. For all the talk about protecting the peace process, very little has been done to transform Northern Ireland.

Yet, one somewhat positive side-effect of the Brexit debate is to shine a light on many of these issues and illuminate the lack of appreciation many in Westminster have for Northern Ireland in particular and Irish history in general. Arguably, a film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern Ireland’s fortunes than its local and London based leaders.

What is coming is a transformation of the political realities of the two islands off the west coast of Europe to an extent not seen since perhaps the thirteenth century. Ireland and Scotland will be European, rule of law countries. Boris Johnson’s England may sadly be the odd man out.

In a better Brexit world of the 21st century, Biggles might fly a Euro-fighter, with an Austrian co-pilot, and alternately fly out of Dutch and German airbases. In the evening he would return home to his Norwegian wife, and drink Italian wine. That would be the height of his ambitions.

Have a great week ahead,


A Tax on Bullshit Jobs?

To the rescue?

In last week’s note I outlined how the financial and economic worlds exist under a heavy monetary shroud. The cover of central banks deprives fiscal policy, supply side reforms and financial market reforms of the urgency that is needed for them to activate and innovate.

In particular, fiscal policy is still very much in emergency mode – governments are focused on the need to restart economies, and less on their longer term structural needs, though the recently announced 100 bn Eur recovery plan in France is a step in the right direction.

However, with the monetary pendulum at an extreme, the post COVID policy environment might usher in a transition from a decade of (over) aggressive monetary policy to more inventive fiscal policy, and supply side reforms (changes to the rules, regulations and structure of the economy). There are several reasons for this.

Monetary policy is now arguably reaching its limits in terms of the deployment of central bank balance sheets, and also in the plain fact that many of the problems central bankers declare they are trying to fix – the climate, inequality and racism (there is a Democratic proposal in Congress to change the mandate of the Federal Reserve to reduce racial inequality)  – are much better left to politicians and policy architects than the blunderbusses of central banks.

Central to the problems of our day, productivity, will in my view remain suppressed by the inefficient investment caused by oversupply of liquidity, and can only be repaired (for instance productivity in the UK is at multi decade lows) by ongoing investment in education, technology and reskilling.

Against this background, the potential for the passing of the policy baton from central banks to finance ministers is made more interesting by at least two new trends. The first is the way in which the labour market in changing, and the second is the percolation of ‘values’ into policy making.

In continental Europe, the coronavirus policy response has shown the value of flexible work practices and has so far staved off large redundancies. In other countries it is not so kind and in recent years I have a sense that labour markets are becoming ‘tinder-ized’ in that workers are ready to sacrifice security for a sense of liberty. The worry here is that in atomised labour markets, aggregate wages will be depressed by competition, workers won’t have the level of pension and healthcare benefits they might enjoy in more traditional systems, and across the board there is less structured learning by workers.

The economic consequences of the coronavirus have made these risks clear, and the public emergency around the virus has also managed to illicit appreciation for public sector workers (nurses for example), many of whom have, in recent years, been consistently deprived of resources by the governments they serve. To a certain extent, one accomplishment of the coronavirus has made clear the social value of certain occupations.

This particular thought was reinforced by the sad death last week of the polemic American anthropologist David Graeber. He has many claims to fame – inspiring the Occupy movement in the early 2000’s, coining the phrase ‘we are the 99%’, author of ‘Debt – the first 5,000 years’ and also more recently the book ‘Bullshit Jobs’.

In the book he strips away the real social value of certain roles, to quote from one of his articles ‘A world without teachers or dock-workers would soon be in trouble, and even one without science fiction writers or ska musicians would clearly be a lesser place. It’s not entirely clear how humanity would suffer were all private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal consultants to similarly vanish’.

Graeber’s view is a relevant and provocative one. I will let readers do the ‘bullshit job’ test in the privacy of their own home, or office. What interests me is what governments can do about this, especially in the light of the lessons of the coronavirus crisis for public service.

I think that from this starting point, especially for the Anglo-Saxon countries and some emerging economies, there are broadly two things that can be done. The first, simply put, is to reintroduce the narrative around the importance of public projects in economies and societies, and back this with investment.  In the US and UK public projects like education, healthcare and the civil society in general are being devalued. For instance, the latest gossip in Washington is that Donald Trump is alleged to have asked his generals ‘why did you serve?’, ‘why didn’t you want to make money?’.

The second is to start a policy experiment that explicitly ties the social value of jobs to economic policy. One approach, though extreme, might be to have a tax reduction for doctors and a tax hike for derivatives traders.

A first, more subtle approach might be to grant greater incentives for workers to build up human capital in certain areas. This might be more relevant in countries where education fees are high and student debt burdensome.

An enlightened government might ask a body like the OECD to draw up a broad, internationally recognized code of job roles, categorized by social impact. Then governments could add (or subtract) a tax (or incentive) depending on the social relevance of specific jobs. In such a system, a plastic surgeon might pay higher taxes, but more young doctors might be incentivized to work as accident and emergency surgeons.

An example that is close to me is that Cork Fire Brigade have for the first time since 2012 begun a recruitment campaign – we can ask what incentives could be put in place (in a historically tight labour market) to attract suitable candidates, who might otherwise work as property brokers?

I don’t know of governments who are explicitly tying the social value of occupations to tax policy, but I expect that in the post COVID world, it is an experiment that will soon be taken up.

Have a great week ahead,


Time for a Panic?

This week, some one hundred and sixty three years ago, the ‘Panic of 1857’ began. As is typically the case, the panic was preceded by years of overinvestment by banks and investment trusts, much of it in land and railway infrastructure. The fuel for this speculation was provided by a rise in the supply of gold.

Several factors – a sudden drop in the availability of gold (the sinking of the SS Central America with gold bullion on board didn’t help), falling grain prices and a prominent bank failure in Ohio set in motion a protracted market and economic slump. Political turmoil was also an ingredient, especially so in respect of slavery, which was to then lead to the US Civil War.

There are several parallels to recall the ’57 panic today, not least being the coronavirus market panic of March. The US is troubled politically, new technologies are on the rise (i.e. the telegraph in the 1850’s), there are geopolitical stresses afoot (the Crimea War had just ended) and plentiful money supply coupled with exuberant investment deals are a sign of our times. Notably in markets, the investor mood is described by euphoria rather than panic.

Amidst today’s financial market euphoria, many find the apparent contradiction between successive records in the stock market (mostly the Nasdaq) and multi-decade highs in unemployment, growing credit stress, a global public health emergency and generalized political chaos, to be troubling and also, a moral quandary. I share this view but, would also stress that the real world and the market world can remain at odds for extended periods of time.

One clue to this is central banks. The numerous ‘panics’ of the 19th century were brutal though often short, because central banks in the sense we know them today, did not exist then. Market crises tended to resolve themselves in violent ways. The Bank of England did play an important role though it was perhaps not until after the ‘Panic of 1866’ that the crisis fighting playbook was written up in Walter Bagehot’s ‘Lombard Street’.

In contrast, today’s central banks are monetary deathstars, towering over markets and economies and blasting them with liquidity shots. This much was clear in the speech given by Federal Reserve Chair Jerome Powell to the (virtual) Kansas Fed Banking symposium where he outlined the Fed’s intention to effectively overshoot its inflation target.

In so doing, the Fed risks further splitting American society between ‘speculators’ (those who have access to capital and benefit from asset price inflation) and those who have to live in ‘panic’ type conditions (credit stress, unemployment, rising costs of living).

One indicator that helps elucidate this difference is lumber prices – which have risen by 250% since March. Logically this might be because more people are redoing or building homes, but the ascent of lumber looks very like that of the Apple share price and suggests that in this world characterized by ‘the financialization of everything’, speculation is the driver of lumber prices.

There are other indicators – the presence of a growing number of market anomalies such as the 30% rise in the price of Tesla and Apple as a result of stock splits (ordinarily this move would not have much of a price effect).

Since the global financial crisis, the side-effects of very generous monetary policy have been a rapid accumulation of indebtedness by governments and companies, and the detrimental impact of negative interest rates on the profitability of banks (note that while Apple has doubled in value since March, Wells Fargo’s equity trades close to its lows). Both factors – high indebtedness and constrained banks – weaken the link between monetary policy and the real economy.

The additional risk with the Fed’s stance is to create inequalities across generations. Allowing inflation to overshoot, in the absence of strong wage growth will make it more expensive to fund a pension, to buy a house and also to afford private education and healthcare.

In a world where America has a President who is uniquely (tweets) attached to the fortunes of the stock market, the vapours of speculation create the illusion that all is well, that debt and deficits can continue to rise and that growing poverty and long-term unemployment can be cured by Robinhood.

Finally, some of you may be asking the question as to whether we have another market ‘panic’. I don’t like trying to predict big market moves – those who do usually need to be lucky and/or patient. However, bear in mind that stimulus programs are petering out, bankruptcies and restructurings are on the rise, geopolitical skirmishing nearly pandemic (Russia-USA in north east Syria, China-US in the South China Sea, Turkey v the rest in the Mediterranean, together with tense wargames in the Baltic).

We may not have a ‘panic’ in September, but volatility will rise.

Have a great week ahead,


Did I miss anything?

In early March, Daniel Thorson who works in a ‘mindful learning’ centre in Vermont went on a seventy five day silent retreat. When the retreat ended in late May, one of his first acts on reconnecting with society was to tweet ‘Did I miss anything? What about the Australian wildfires?’

He may well wish he had not broken the tranquility of his retreat, given the flood of extreme events we have witnessed this year from the assassination of an Iranian commander, to the suppression of democracy in Hong Kong to the odd combination of double-digit unemployment and record highs for stocks.

The latest such event this year, the tragic explosion in Beirut last week, has amongst many other things contributed to a sense that 2020 is an inordinately event rich year.

The logical, in my view, explanation for this is that many of the tectonic or volcanic shifts that have been slowly building in recent years, are now surfacing, and in particular have been catalyzed by the coronavirus crisis.

Climate damage is one such risk whose side-effects are now more and more manifest. To also take Lebanon as an example, long running geopolitical tensions, profound corruption and a dysfunctional bureaucracy have already spurred a debt crisis in Lebanon, and now they have combined to produce a more deadly crisis.

In this sense, 2020 is a turning point, and a great stress test of the world order. With the holidays (at home!) now upon us, its not a bad idea to look back and trace the trends whose rise has been exacerbated by the coronavirus crisis, and those are just now starting to become apparent.

In brief – because I have covered these topics in detail in recent posts, 2020 has seen globalization well and truly crashed by the coronavirus crisis, and replaced by an emerging multipolar world the signature elements of which are the lack of collaboration between the large regions (EU, China and US) and their increasingly different responses to economic policy, democracy, and the internet to mention a few areas. Economically, the dominance of central banks has been augmented, indebtedness has risen towards levels (relative to GDP) not seen since the end of the Napoleonic Wars.

This means that at very least, the idea of the economic cycle is dead. Markets, investment and economies will orbit around the contest between central bank death stars and the gravitational pull of credit risk. There are two implications for markets. One is that extremes in inflation or deflation will be found in asset prices rather than in real economies. Relatedly, it will be some time before we understand how 2020 has scarred consumer preferences (and savings habits).  

Second, it means that investors will increasingly seek out ‘new assets’ (new assets are really old assets whose ownership and risk characteristics have been adjusted) that are created through new types of debt issue (such as EU bonds), distress and bankruptcy, asset sales from restructurings and then more inventive securities in sectors like healthcare and biotechnology.

One of the other important discoveries of 2020 is the disparity in policy and adaptability between countries. This was evident across Europe, and tellingly across states in the USA. Europe has however emerged stronger from the crisis, or the knee jerk reaction that the European project would fall apart has been proven wrong. In contrast the US has emerged weakened and arguably more divided.

To a certain extent this has been reflected in recent dollar weakness. A glance at Turkey gives a good illustration of how the degradation of a country’s institutions can translate into diminished financial credibility (the lira has fallen sharply this year). The rule of law has rarely been a factor in markets, but in developed countries like the US, sustained attacks on institutions and the rule of law can have economic consequences. Here, while falling interest rates have also helped to push the dollar lower, a sustained crisis of confidence in the US (and its currency) is one of the risks to watch into the second part of the year.

The post holiday period is very likely to be filled with noisy predictions on the shape of the economic recovery, and the outcome of the US election. My instinct is to continue to track the outcomes associated with a multipolar world (i.e. Europe regulates tech, builds a green economy but fails to drive banking consolidation and a capital markets union), the financialization of everything (healthcare is next after technology) and the accelerated rise and fall of nations.

I’m taking a ‘silent retreat’ of my own from this missive and it will return on August 30th.

With very best wishes



Technology now a national strategic issue

There is no better template for the state of the world than the technology industry. In the highly globalized world of the mid 2000’s, Google had one third of the internet search market in China, while today it has close to zero. The internet is becoming multipolar – the US has internet giants that have become stock market monsters, Europe has few tech giants of its own but is leading the regulatory charge on technology, whilst China has on one hand ring fenced its internet space, whilst at the same time generating the world’s leading thriving e-commerce sector and driving tech into social policy.

Technology is interesting in many other respects, but the one I find thrilling is the way it now crosses into every domain – politics, economics, markets and society. It arguably is more pervasive than the new technologies of prior periods of globalization – such as the steam engine and railways (though the technology sector will never match the 60% share of the market capitalization of the US market that railways enjoyed in 1900).

It is not surprising then that there is a broad feeling that tech is too big for its boots. Economically, e-commerce firms like Amazon are big enough to have pricing, scale and distributional advantages that suppress smaller players (and that large ones like Walmart do not seem able to match) and the same may be true of Apple’s Appstore supermarket. Google and Facebook have become advertising behemoths and politically indispensable. Financially, these firms now account for nearly a quarter of the market capitalization of the US market (Apple added USD 170 bn in market capitalization on Friday alone), and as such have become a huge ‘swing’ factor for pension funds, the ETF (exchange traded fund) industry and day traders.

The technology industry, in the USA, India and China, has become the locus of wealth inequality – creating vast fortunes for tech owners. Moreover, tech giants vastly distort both entrepreneurship and innovation. During the testimony of the CEO’s of the large US tech firms to Congress it was revealed that Facebook had adopted a strategy of stifling competitive threats by buying them. The same might be true of other tech behemoths.

If so, the danger here is to stunt the growth of new tech eco systems, to distort innovation in that new companies are built for ‘takeover’ rather than to solve new industry problems, and to hoard the fruits of innovation within a few corporations.

The ‘what to do about tech’ should be clear to anti-trust lawyers and economists concerned with monopoly power. To this end, breaking up the large technology companies in the same fashion as the dismantling of Standard Oil in 1911 or even the Glass-Steagall act of 1933 is an option. Another approach would be to embargo tech giants buying smaller companies so as to give new tech ecosystems a chance to thrive (note how the US failed to develop a 5G ecosystem).

A more likely option is to leave the tech monoliths in place but tax them (and possibly their owners) and harvest the fruits of their superstructures. Ideally this revenue would be funneled to education, digital literacy and cybersecurity. Even the EU sees this opportunity, and plans to fund part of its recent Recovery and Resilience plan with a digital tax – though implementing this will be difficult.

What to do about tech is less clear if you are a politician – technology has replaced television and radio as the way of reaching hearts and minds, the tech community is a source of donations, and in a multipolar world it is a strategic, security related asset. In that context one option is to deepen the ties between the state and the technology complex, as China is doing.

If anything, the signs are that the US will follow the Chinese model, notably so with suggestions that Microsoft might buy TikTok, the increasing use of camera and home security system (from Amazon) data and the growing ties between the likes of Microsoft and the government in cybersecurity.   

If the relationship between American tech monopolies and the state is to become even more symbiotic, it will still have rules. One for example is that in areas where the state has a monopoly, tech will not be allowed to encroach. The best illustration here is the role of the dollar and the failure of Facebook’s Libra payment system to take off.  Another consideration is what vision the large technology companies have for the US – many of them may well prefer a more data intensive world, where technology is even more deeply embedded in governance…which again takes the US towards China’s model.

Where will this leave Europe? By default of not having managed to create its own tech giants (and I am skeptical that it will be able to do so soon) the EU can focus on raising the standards on data protection, digital identity and payment systems. It needs to also make real progress on capital markets union and on incentivizing tech entrepreneurs at a pan EU level so that companies like Stripe can thrive in Europe. If it doesn’t it may become a tech colony, and a paradise for non-tech industries, from tourism to wine to good food!.

Have a great week ahead,


Fantastic Corruption!

Cameron explains corruption

In May 2016, at a summit on anti-corruption the then British Prime Minister David Cameron said in hushed tones to Queen Elizabeth, ‘We’ve got leaders of some fantastically corrupt countries coming to Britain… Nigeria and Afghanistan, possibly the two most corrupt countries in the world’.

A month later he lost the Brexit referendum and the UK has been in a state of chaos ever since.

Nigeria most likely had little hand in Brexit, but the complacency of Cameron did. So too, according to last week’s Commons Intelligence and Security Committee’s report into Russian influence in British politics, did the openness of the Cameron government (and others) to the generosity of Russian donors (fourteen ministers in the Johnson government, including six cabinet ministers have accepted donations from Russians living in the UK).

Britain, which for so long and in the eyes of so many, is the country that has epitomized the rule of law (for instance see Tom Bingham’s book of this title). Its lackluster response to financial and other incursions by Russia, the politization of policy (Cummings v Whitehall) and the faulty response to the COVID 19 crisis have contributed to the view that the robustness of institutions and the rule of law are in decline in Britain.

It is not alone. Last week in an interview with CNN House Speaker Nancy Pelosi declared that the stock market was ‘rigged’, and that this might not be such a bad thing. For a country whose value set is based on capitalism, this is an astonishing admission, though less surprising in the context of the vandalization of the rule of law and institutions in the USA by the President. Most US Presidents have underlined the importance of the rule of law, from Eisenhower to Kennedy to Reagan, but not Donald Trump.

Like Downing Street, the change in moral tack at the White House points to the testing of core values in the two countries whose empires formed the basis of globalization (Britain in the 19th century and the USA in the 20th century), and in that respect, is yet another crack in globalization.

Policy makers in each country should play attention to the elaboration of the link between the erosion of the rule of law to the end of empire by Edward Gibbon in ‘The Decline and Fall of the Roman Empire’. More recently, there is plenty of evidence to show a link between economic growth, financial stability and the rule of law across countries.

If politicians in say the UK, or any other European country for that matter, are happy to take donations from citizens of Russia and China, it is harder for them to claim the moral high ground over China in foreign policy. It is equally problematic for US Secretary of State Mike Pompeo to travel the world looking to build an alliance of democratic countries against China whilst the rule of law is undercut in the US.

If the idea of the rule of law is going out of fashion in Washington and London, it is gaining some allure in Brussels.

Much has been made of the hard won result of last week’s European leaders’ summit (it was the second longest ever, only 25 minutes behind the Nice summit in 2000) in the sense that it has created fiscal capacity for the EU. While the classic division between fiscally conservative or ‘frugal’ countries and those like France and Italy who are fiscally indulgent was on display, a new fiscal fissure is opening up.

The agreement reached last week introduced some (yet mild) conditionality around the rule of law in terms of how it binds aid to EU members (the likes of Bulgaria, Romania and Poland are on the minds of Brussels). Though no sanction has yet fallen on the Viktor Orbans of the world this move is part of a new trend where European values are going to play a more prominent role in political discourse (seven of the top ten countries in the World Justice Project report on Rule of Law are EU states).

In the future, collaboration will be done less on the basis of geography and more on the basis of shared values – this might mean that bodies like NATO and the EU may lose rather than gain members.

It also means that the nations of the ‘old’ world need to realise that their economic and political advantage comes from the rule of law, and that the current race to the bottom in terms of practice of the rule of law, is self-defeating.

Have a great week ahead,


The Restoration

Team Restoration

The middle of the 17th century was an extraordinary period, especially for political and institutional innovation. The Treaty of Westphalia in 1648 gave us the nation-state, books like Hobbes’ ‘Leviathan’ were produced and in England the first expressions of popular constitutional democracy were aired. The tumult of the period was dampened with the return of King Charles II to England, in what was called ‘The Restoration’, which is a phrase that comes to mind when I think of Joe Biden’s Presidential hopes.

To start with, I won’t try to map the US in 2020 on to Europe in the late 17th century, save to say that both periods are marked by a sense of a ‘world turned upside down’.

However, the notion of an American Restoration is appealing in the sense that a Joe Biden Presidency would restore the thread of Democratic policy (through Obama to Bill Clinton), and very importantly would restore the competent workings and full staffing of institutions like the State Department. The idea is that the American machine of state (I wrote about the French one last week) would once again purr into action, and American credibility would be restored. The question for Biden, the Democrats and America, is whether he can accomplish more than ‘a Restoration’.

With Biden now well ahead of the President in most opinion polls on national and state by state levels, and Donald Trump sacking his campaign manager last week, the prospect of a Biden Presidency is now very real, though financial markets it seems are not yet pricing this in.

The success of Biden’s campaign and the tenor of his potential presidency will rest in good part on the extent of the economic damage ahead. If high unemployment and bankruptcies are a reality into the presidential debates in September and October, the tone of policy will tilt much more towards social justice (a topic where both Bernie Sanders and Elizabeth Warren are very comfortable).  

A Biden White House would likely focus much of its stimulus effort on infrastructure, particularly so in the ‘green’ economy. What is much less clear is the extent to which they would consider rejigging the tax system to place a greater tax burden on wealthier Americans and corporations. This may well be teased out in coming months. I also expect that foreign policy under Biden will be much more assertive, especially so towards Russia and China.

Biden’s next step is to choose a running mate. My judgement is that Biden will choose Kamala Harris as his VP, not least because she has a track record in policing and justice, which is one policy area which the Trump campaign is likely to amplify. Other VP candidates like Susan Rice may suffer from the fact that the Biden team already has a very well stocked foreign policy and security bench.

For his part (and provided he doesn’t drop out of the race!) Donald Trump will inevitably contest the election in a divisive way. Trump’s key weapon over Biden is his social media and network TV reach, and here he can do plenty of damage (to himself also).

There is plenty that he can agitate on – such as contesting the logistics of the election (i.e. postal voting), to stoking tension of topics that resonate with some voters – China, defunding police forces and the prospect of more economic stimulus. He may even claim credit for a COVID-19 vaccine, should it materialize before November.

However, such an approach may not win him a second term as it may merely serve to reinforce the views of the 40% of Americans who think ‘he is doing a good job’. Moreover, with a record number of women now contesting elections for Congress, and more states reacting in a constructive way to racial and other inequalities, the broad socio-political tide may be turning against Trump.

It is now widely recognized that Trump has vastly diminished America – it is financially weaker, its soft power is squandered and its institutions are less admired. He may now also wreck the Republican Party.

Should the Democrats take control of the Senate, it is not impossible that the rump of the Republican Party might split into those who share Trump’s political convictions, and those for whom he was a convenient political force. The ‘convictionists’ could form a harder right wing party, while the ‘conventionists’ might repent and try to rejoin the mainstream in the fashion of the country club Republicans of the Reagan era, led potentially by someone like Liz Cheney.

For their part, the dilemma is what tone to strike across states so that they take back the Senate. A mild ‘re-unite’ America approach is the most likely one, at the expense of the muzzling of the likes of Bernie Sanders. Once in power, the Democrats will be more interesting in that they feel more comfortable following the tack of the likes of Elizabeth Warren, and more emboldened in reinforcing regulation in areas like corporate governance and environmental protection.

A scenario that (according to polls today) brings about an end of Trump politically, cripples the Republican Party and reinstates the Democrats may well restore stability to America, but my worry is that it won’t change it, and much less so may postpone some of the radical policy that is needed to truly revitalize America.

The manifest social tensions, political stasis, and extremes in wealth/inequality as well as declines in human development indicators point to the need for more than a simple restoration.

Have a great week ahead,


Dans l’Ombre de Sully


I confess that on more than one occasion that I have joked to French friends that ‘Sully’ (Maximilien de Bethune, Duke of Sully) the chief minister of France for twenty years around the turn of the seventeenth century is an ancestor of mine. Most are unimpressed, and American friends suggest I would be better off being related to the other ‘Sully’ (Captain Chesley Sullenberger the US Airways pilot who famously landed his plane on the River Hudson).

Sully, the elder that is, is worth pondering for two reasons. First, he was one of the longest standing holders of the office of prime (chief) minister of France, and secondly, he was the architect of some of the early, institutional apparatus that forms France’s highly centralized system of government. Both of these elements are now in focus with the replacement of Edouard Philippe as prime minister by Jean Castex.  

With many other senior ministers still in place, the removal of Edouard Philippe is a political statement by Emmanuel Macron that he and he alone is the captain of the ship of state, with M Castex in the boiler room running the complex machinery of the country. For his part, M Philippe, now mayor of Le Havre, may spend his spare time writing (check out ‘Dans l’Ombre’ written with Gilles Boyer) and cultivating a network of regional support that might equip him to challenge Macron for the Presidency. If so, it will be an enthralling battle.

However, there are other reasons to focus on France, not least next week’s 14th July celebration.

From a European point of view, a lot rests on the collective views and behavior of the French government – which in a country with relatively tame inequality, is one of the most elitist and homogenous in terms of personnel and thought process. There are maybe three challenges to watch.

The first is Europe. With the French-German political engine now whirring again, the approaching end of the Merkel era and the long running absence of a strong German foreign policy, Quai d’Orsay will be the driving force behind EU foreign policy. This is a positive given the policy energy of Macron and the unambiguously pro-European stance of his administration. It will be problematic in the sense that France, as Europe’s military power and a UN Security Council seat holder, also prosecutes its own foreign policy – notably on Russia and Libya.

In this way, France must decide whether it is what I’ll call a ‘great’ country or a ‘strong’ country. ‘Great’ countries have had or desire empires, they have nuclear missiles and soldiers stationed abroad. Their foreign policy is grand, ambitious and causes headaches for other nations. The US, China, Britain and Russia fall into this category. France is easily a peer of theirs.

‘Strong’ countries are the poster children of the post-coronavirus era. They are generally well lead, but not bumptiously so. They value public goods like education and healthcare, have well thought out tax and welfare systems, and are resilient to shocks. Norway, Singapore and New Zealand are in this category, and France might wheedle its way in too if we consider factors such as its state lead approach to innovation.

To draw these strands together, France’s challenge is to make Europe more ‘great’ and itself more ‘strong’, especially in the sense of opening itself up to and integrating more diverse influences. Corporate France is an example, very few women and few foreigners run French companies – unlike say the UK. This is just one rigidity in the French system. Another is a groupthink across the state on the Cartesian need for uniformity. This is dangerous when applied beyond French borders on the European stage.

The mantra that there should be a common fiscal policy amongst nineteen very different euro-zone countries risks handicapping many and robbing the system of the flexibility it needs in the context of a common monetary policy. Moreover, as a mantra it allows policy makers to be blind to the reality that mounting debt loads and perennially weak fiscal deficits have made the fiscal rules of the euro-zone meaningless, to the point that they are replaced by the ‘rule-all’ policy of the ECB.

If Emmanuel Macron is a revolutionary politician, as he tells us, then his economic policy must do at least two things. The first is to reduce debt – here the sale of state assets is perhaps less unpopular than cutting state spending. The second, more important one is to cultivate the narrative that economic growth is positive and necessary. France’s lack of growth (trend growth over the last ten years is just above 1% ) is perhaps the one thing that distinguishes it from ‘great’ countries (e.g China, US) and ‘strong’ ones (i.e. Ireland, Singapore and New Zealand. Macron’s policies to help entrepreneurs for example are meaningful, though underestimated beyond France. He now needs to redouble his efforts.

The Duc de Sully took twelve years to turn around the French economy (1598-1610), Emmanuel Macron has two years left to secure a rebound.

Have a great week ahead,


Seriously Stimulating

What would Keynes think?

In last week’s missive I referred to the ‘coup de whisky’ monetary stimulus enacted by the Federal Reserve in 1927, which kick started the market boom that later ended in a resounding crash.

This week I want to focus on the fiscal side. With the US employment assistance program running out at the end of July, new prime ministers/cabinets in Ireland and France, many governments will be turning their minds to the construction of economic stimulus programs. Indeed in the last week, Italy and the UK for example have made headline grabbing announcements.

While Boris Johnson made much of a five-billion-pound building spree, I think that his government’s promise to give citizenship to three million Hong Kong citizens is the very best stimulus it could enact – if they come, the Hong Kongers will bring entrepreneurship, wealth, erudition and culture.

This cuts to the central dilemma in any post COVID 19 stimulus effort – should, in the context of already eye watering indebtedness, governments try to aggressively restart economies in as sharp a ‘V’ shaped recovery as possible, or should they try to remodel economies to the realities of the post COVID19 world. The fact that the virus has exacerbated and exaggerated many of the emerging faultlines in the world economy suggests that a far sighted rather than electoral cycle driven view is required.

In addition, a short-termist view is complicated by two facts.

First, there is a risk that many economies suffer credit crunches and bankruptcies as we move towards September (anecdotally many businesses, shops, bars and restaurants I know are struggling but that might just be O’Sullivan curse). Without seeming like a monetary masochist, it is often better to allow this credit unwind to occur than to forestall it, and then to help entrepreneurs and business owners restart quickly.

Second, one practical economics lesson is that it is always easier to enact a stimulus program if your neighbours and trading partners are doing the same. For example, in the early 2000’s Germany was able to digest tough labour market reforms because its trading partners across Europe were all growing. In that context, Ireland is in a bind because two of its ‘neighbours’ and trading partners, the US and UK, do not have COVID19 under control. What is worse is that there is very little economic coordination between the large economies of the world, and this will complicate the overall stimulus effort.

The stimulus conversation in most countries will be coloured by references to Keynes, and to the word ‘multiplier’ or rather, the sensitivity of economic activity to different types of policy ‘boosts’. Yet, the accuracy of multipliers is not great, as the debate during the euro-zone crisis showed. With the world economy having had ten years of sluggish expansion and as such at the very late stage in the business cycle, overall ‘multipliers’ are likely to be low. This means that politicians need to think very carefully how they spend capital and what the intended effect is going to be.

There are a few principles to think of.

The first is the idea of a ‘quid pro quo’. As mentioned in a recent post, the phrase entered the lexicon of American politics through George H Bush, and then in the current President’s impeachment case. The notion of a quid pro quo should reign over policy interventions, in potentially, a range of ways that will produce a more sustainable and resilient economic model. Specifically, sectors or industries that are helped out are required to change their business models in return for fiscal and monetary help – these could be agriculture (more climate friendly), transport (better governance and management). 

A second factor to consider is the view that there needs to be a sense of building the economic model of the future under the steam of a stimulus – this approach would see money devoted to reskilling and work experience, and also on green technologies or industries that the state deems to be strategic or ‘of the future’. 

Here there is a need for the EU to stop and think, in two respects. There is too much time spent on how the Recovery and Resilience program will be distributed (loans or grants) and not enough on what it will be spent on. Also, there should be some coordination across national stimulus programs, so that they all point in much the same direction.

With Europe still in mind, one factor that has changed noticeably from the global financial crisis is the absence of an ‘austerity’ narrative. This is partly because austerity is now seen to have failed as a policy, partly because markets do not appear overly concerned at the largesse of government spending across Western economies (with thanks to central banks)

A third idea is that in addition to financial support, new growth oriented industries will also need the help of better ‘soft’ infrastructure to help them survive. What I mean here is that industrial ecosystems are as much enabled by regulation, standards and human capital as they are by capital.  A good example is the need for an overhaul of fintech and payments regulatory frameworks in the wake of the Wirecard scandal. 

While it is right that governments will want to support labour markets – and most European policy responses have done a good job here – they should stop and think before splurging cash on stimulus programs – the road to recovery will be a long one.

Have a great week ahead,