Deal done – Trump saves euro!

Wrong way!

In a missive I wrote earlier this year I puzzled whether Trump would fall victim to the same policy mistakes as Herbert Hoover (‘Is Trump Hoover?’,https://thelevelling.blog/2019/08/11/is-trump-hoover/). This does increasingly look to be the case, as the economy is slowed down by the debilitating consequences of trump’s trade war with China.

However, a reading of the Art of the Deal (consider quotes like ‘I’m the first to admit that I am very competitive and that I’ll do nearly anything within legal bounds to win. Sometimes, part of making a deal is denigrating your competition’) hint at some method behind this week’s trade related threats to China, the EU and France, not to mention the ongoing undermining of NATO.

It grants far too much credit to Donald Trump to describe him as the architect of a new world order, rather he is the bull in a china shop of increasingly brittle crockery. His role, in the context of the fracturing of the old, globalized word order is to help highlight what elements in that world order are fragile and which ones are resilient. The checks and balances in the US political system, and the wisdom embedded in them through the Federalist Papers for instance, are so far proving resilient.

Arriving in Europe this week, Trump clearly had two targets in mind – the EU and NATO, both of which lie on the deepening faultline of the consequences of America’s diplomatic estrangement from Europe. Trump has rarely had anything better to offer either institution save scorn and division. In my view this is a pity, and simply wrong.

NATO and the EU are fine examples of how collective action usually requires a strong common cause to enforce it, and that absent the magnetism of that common cause (broadly speaking the Cold War), cohesion between members begins to ebb. In addition, both institutions are finding that they have a common design flaw – namely the lack of an exit. Neither NATO nor the EU (not to mention the euro-zone) have processes where a recalcitrant member can be kicked out. Brexit shows us that even those who volunteer to leave, find it difficult.

To make an analogy, no public building can be used without a fire escape or carefully marked ‘exit’ in place, and it should be the same for multi-lateral institutions in a changing, multipolar world. This multipolar world is one where nations will increasingly have to take sides. In this context, Turkey’s membership of NATO will become increasingly problematic, and the position of EU members like Hungary, and prospective candidates like Serbia also looks strained. My prediction is that both NATO and the EU will have to change their uni-directional membership rules to include a ‘black-balling’ process.

That NATO rests on the emerging faultline of US-EU relations gives us a clue as to its future. The logical contradiction is that the White House could soon declare a trade war on Europe, at the same time as partnering with the EU to fight ‘real’ wars. To paraphrase Justin Trudeau, it is enough to make ‘jaws drop’, though it is not as peculiar as it seems. For instance, in October, as the final wrangling over the UK’s Brexit deal was taking place, French commandos joined their British counterparts in a joint operation called ‘Griffin Strike’, part of a larger cooperative exercise between Europe’s two military powers.

One way for the EU to contribute to its own security in the context of a multipolar world where the US is a less unambiguous ally, apart from making sure its military kit works (only one sixth of German helicopters and fighter planes are operational), is to develop its power as an economic and financial player.

Theoretically this approach fits into the ‘total war’ doctrine developed by Russian General Valery Gerasimov, where financial networks are just as useful strategic tools as fleets of submarines. The effect of American sanctions on Iran is one recent, powerful example of this.

To that end, the new Commission has a long task list, but it should focus on the following. First, bolster the international credibility of the euro by enforcing the Maastricht guidelines of debt levels to the point that countries with debt above the Maastricht threshold should have a portion of their debt deemed ineligible for ECB purchases and for collateral exchange.

Second, continue to clean up the follow of ‘dirty’ money across Europe’s banks and fintech players. The relatively new EBA (European Banking Authority) has failed to do this.  Third, think how infrastructure development in countries like Poland and Greece can be better supported by the EU and by EU based private investors, instead of those countries swaying towards Chinese state led investment.

If these and are other measures are enacted, Donald Trump may prove the catalyst for a stronger euro financial system.

Have a great week ahead,

Mike

Europe’s next crisis

EU a beacon for the rest of the world

The decision of the German finance minister Olaf Scholz to acquiesce to a discussion on the creation of a euro-zone common deposit insurance scheme is welcome in the light of the half-baked nature of the euro-zone financial system. However, like the proverbial drunk searching for his keys under the streetlamp, it is also a case of tardy backwards looking, policy making.

For example, the facts that the market capitalization of Deutsche Bank trades at only one quarter of its book value and that the business model of Wirecard, Germany’s fintech leader, has been surgically dissected by the FT, suggest that reform of the domestic banking system is a more urgent and yet incomplete task for Germany (Mr Scholz may hope that one day Italian savers will bail out German banks).

While the ongoing focus on remedies to a future banking crisis is a reminder of Europe’s fragilities, the most damaging and alarming crises tend to strike in areas that policy makers have not yet tended to.

In that light, if Europe is going to have another crisis, it is much less likely to be economic in nature, such has been the develeraging of European economies and corporates in recent years, and such has been the focus on building new economic architecture in the euro-zone.

Rather as the new Commission takes office, their focus should be to look forward and grapple with the emerging debate in European values and identity, of which there are at least three strands.

The first of these relates to Europe’s place in the world. As globalization ebbs, and gives away to a multipolar world made up of at least three regions – US, China and Europe who do things increasingly distinctly, the organizing ethic of the EC must be to think of Europe as part of a system of great power rivalries as opposed to a cog in an integrated world. The weakening of the diplomatic ties and communications from Washington to Europe is just one sign of this.  The notion of a more singular EU points towards a deepening of efforts towards common European defence and security capabilities, a trade strategy that is prepared for ‘the worst’, and a greater effort to bolster Europe’s financial strength.

The second strand is that as the EU defines itself more clearly relative to the US, China and to a lesser extent Russia, individual member states will increasingly feel obliged or forced to take sides. Eastern European and Balkan countries, some of who enjoy investment flows from China and political support from Moscow will be the centre of attention here. Though there are few formal means of ‘bringing them onside’ there may soon be calls to curb EU aid to member states who are too closely aligned with China and Russia, or to change voting procedures to ensure that the likes of Hungary cannot sway or bloc EU wide votes.

Then, identity and the idea of European values crisis crosses country politics and has been brought to prominence with the clunky job description of ‘protecting our European way of life’ for Margaritis Schinas.

The recent rise of Vox in Spain is another example of the emergence of far-right wing political parties across Europe, and it is a possibility that we see a ‘Heimat’ coalition of such groups across the EU. Here, the EC can do several things, such as better defining what European values are in a practical sense that tallies with the everyday lives of Europeans and using social media to capture the values that resonate Europeans. Specifically, immigration is a policy area where the EC needs to have a much clearer and better organized approach, especially so in the case of refugees.

One additional factor worth highlighting, is that the generalized picture of the many protests around the world, from India, to Honduras to Lebanon, is that people want an end to inequality, corruption damage to the environment, and arguably, better democracy. The EU can take some comfort from the fact that, as a bloc, it is a leader in the field of liberal democracy, climate change and equality.

The final task for the new Commission is to dispel the sense that as Jean Monnet is reputed to have said, ‘Europe needs a crisis to move forward’. Brexit has shown how forcefully the EU can act when united and organized. Political chaos in Westminster and Washington makes Brussels look like a bastion of good sense.

Europe’s financial crisis has many lessons – the necessity to tackle emerging risks early and if anything to over rather than underreact, the need to coordinate well across countries, Commissioners and specialist areas, and the need to better communicate with Europeans as to what is being down in their name. The new Commission should internalize these lessons and move to pre-empt the ‘next’ crisis.

Have a great week ahead,

Mike

From Rotten Heart to Braveheart?

Boris was wrong!

Regular readers, especially those toiling away in dusty cities will be less than amused that I have written this note in the beautiful setting of Nafplio, in south west Greece, whilst attending the excellent Eliamep/JeanMonnet30 seminar.

That the Greek stock market is up 35% this year and its bond yields trade some 33 percentage points below their levels of five years ago suggests some closure on the euro-zone crisis.

Another sign of this came in the market reaction to additional stimulus from the ECB. Effectively European asset prices did nothing, which I hope will persuade the ECB to move on to other policy aspects of the euro-zone system such as the need to properly regulate Europe’s fintech and payments sector.

Another important milestone in the ‘story for Europe’ came with the announcement of the composition of the von der Leyen Commission. In a previous Sunday note I have mentioned the method behind the creation of European Commissions found in the tale of political ‘three cushion billiards’ recounted by the late Wilfried Martens, formerly Belgian Prime Minister, in his 2009 book ‘I Struggle, I Overcome’.

The Commission has done well this time, though it was not always the case. One of the first books I read that helped to explain how Brussels worked was Bernard Connolly’s ‘The Rotten Heart of Europe’. It was a huge hit (in the UK) and hugely controversial. Indeed, a second edition came with a cover recommendation from the then editor of the Spectator Boris Johnson (‘one wanted to stand on the desk and cheer’).

The book did much to propagate Euroscepticism in British politics, and I suppose we might trace some of the roots of Brexit to it. With some irony, Brexit has however shown that the Commission can function in a forceful way. The challenge for the EC is to now step up a level and reinforce itself for a multipolar world where it will compete more acutely with China and the US, with at the same time Russia snapping at its heels.

Perhaps for this reason the new EU President referred to her Commission as a ‘geopolitical one’. It is welcome that there is a growing realization in Brussels of the implications of the emerging multipolar world, but for my liking, Europe-Brussels does not yet have a strategic mindset, and does not fully have a sense of its power and identity in the world.

There has already been some controversy over the designation of a Commissioner with responsibility for migration as one who would ‘Protect our European way of Life’. This clumsy effort at communication is likely a nod to right wing parties across Europe, the kind of people who ‘value the Church and families as opposed to bike riding vegetarians’ as one person put it to me.

What this incident should do, is spark a serious debate on what the core values of the EU are, and in ‘The Levelling’ I invoke Alexander Hamilton to do this. The more public life in the US and the UK disintegrates, and the more heavy-handed China is in Hong Kong, the more we are reminded that liberal democracy is at the core of Europe’s value system. One of the challenges is to make the benefits of this clear to people in Poland and Hungary whose leaders contest such a view of the world.

Back to the Commission, where several appointments will have macro and investment implications. Overall, the Commissioners are less wealthy than the Trump cabinet, better organized than the Johnson government and more colourful than the Xi Jinping administration.

Trade first. The appointment of Irishman Phil Hogan as trade commissioner means the EC will hold a firm negotiating line on Brexit, and that it is increasingly focused on the risk that President Trump might open up a trade war with the EU. The appointment of Sabine Weyand to the trade team reinforces this view.

Then, the re-appointment of Margaret Vestager as EU Competition Commissioner underlines the fact that a growing market trend will be regulatory risk to large US tech companies. Europe has already taxed and fined the FAANG companies and some Democrats increasingly agree with this stance. As the 2020 election approaches, tech will be increasingly under regulatory scrutiny and like it or not Europe will lead the way.

The final point worth waking here is the emphasis that the EC is putting on green investment, on governance in Eastern European countries and on socially responsible finance. This all adds up to a much greater emphasis role for ESG (Environment, Social and Governance) in investing and markets, not just in Europe but further afield.

So, the EC is moving away from ‘Rotten Heart’ but is not yet ‘Braveheart’!

Have a great week ahead,

Mike

Taking sides in the fight for democracy

Last week was a busy one, two days in Copenhagen for the excellent Fund Forum, then through Dublin on Wednesday to present ‘Opportunities and Challenges for a small, advanced economy’ at the Irish state’s ‘National Economic Dialogue’ and finally to London for the UK launch of ‘The Levelling’. Appearances on CNBC, Sky and a lecture at the London School of Economics were amongst the highlights.

In other media one input I would like to flag is a feature in The Economist (https://www.economist.com/open-future/2019/06/28/globalisation-is-dead-and-we-need-to-invent-a-new-world-order). The interview reflected a question that I get on a recurring basis which is how we ‘lost globalization’?

There are several strands to the response here. First, globalization has been a force for good but is now receding, trade flows are the most obvious example. Second, as globalization retreats we become more aware of its perceived side effects, such as inequality, the changes in our lifestyles and our diets, and generally “the way we live now,” to borrow Anthony Trollope’s words. Relatedly, the aftermath of the global financial crisis and the responses to it have left a range of im- balances in place.

Third, people are now reacting to these imbalances and side effects. This is manifest in growing political volatility, which in my view will bring about a revolution in politics as people search for more accountable and responsible forms of governance, rather than less democratic forms of government.

As it stands, many people like blame the ills of specific countries at the door of globalization. Radical political leaders—such as Nigel Farage, formerly of the United Kingdom Independence Party (UKIP); Marine Le Pen, formerly of France’s National Front; and the Five Star Movement in Italy—and media pundits like Sean Hannity of Fox News have spoken out loudly against globalization. The notion that everything is the fault of globalization is very convenient. It makes for an expedient culprit, and it is so pervasive that we have lost sight of its meaning and implications.

Globalization has few defenders, as it is now unfashionable and po- litically unprofitable to show support for it. It has no outright owner, though some international research bodies and thought leaders like the Organisation for Economic Cooperation and Development (OECD) and the World Economic Forum (WEF) are closely associated with it.

Similarly, many economic, political, and social stresses, such as inequality, poverty, and the decline of agriculture, are ascribed to the evils of globalization, regardless of the true origins of those stresses (in fact, during globalization the world poverty level has collapsed from 35 percent of the world population in 1990 to 11 percent in 2013). In addition, the public understanding of globalization is not strong.

Understandably, few people take the trouble to sift through trade reports or examine the flow of labor around the world. Thus, as with the issue of “Europe” in British politics, where few politicians have said or can say anything positive about Europe, globalization is vulnerable to becoming a catchall for the negative aspects of economic growth and so functions as a sort of political doormat.

There is, however, a strong case to be made that globalization, the most powerful economic force the world has witnessed in the past twenty years, has been a force for good. It is now so pervasive in its effects and has produced so many startling outcomes—for example, the rise of Dubai, the successes of small states like Singapore, growing wealth in emerging economies (from 2000 to 2010 wealth per adult in Indonesia increased sixfold), the emerging-market consumer, and fast-changing consumer tastes—that we risk taking it for granted.

With the G20 meeting in Osaka now over, there was not in my view sufficient urgency on the demise of globalization and what might take its place.

In particular, the Russian leader’s comments that liberalism is obsolete opens up a new avenue of attack in the debate on globalization, and one that will delight Mr Putin’s admirers. His remarks which I feel are just a demonstration of ‘maskirovka’ (the Russian military doctrine that is centred around deceiving and destabilizing opponents). That the American President did not upbraid Putin is striking, but not surprising. It teaches us that the idea of liberal democracy needs to be defended, and its benefits more clearly elucidated.

Hong Kong, Latin America and Eastern Europe are the battlegrounds here, and ongoing contests between ‘liberal’ and ‘managed’ versions of democracy in countries like the Czech Republic, Hungary and Poland help to uncover the motivation for Mr Putin’s remarks.

The immediate challenge here is for the new leader of the EU, whomever he or she is, to take up the case for liberal democracy. In my view, this is a core value of the EU and it is high time that countries who wilfully slip towards corrupt and mendacious approaches to governance should be asked to take sides.

Have a great week ahead,

Mike

How to reconnect Europeans with the EU

The EU elections, like the Eurovision song contest is, for some, a chance to poke fun at the EU and at the more colourful characters contesting seats. Turnout will be relatively low, reflecting the fact that for many Europeans, power lies in national assemblies, and also the fact that they do not entirely understand the role and purpose of the EU Parliament.

In this respect the EU Parliamentary elections will do little to bridge the political and emotional gulf between the EU and its citizens. My own experience is that whether I am in the north of Greece, west of France or south of Ireland, Europe’s citizens are losing their sense of what the EU means to them in a tangible way.

The core elements of the project need to be remade, and done so in a way that brings them closer and more meaningful to Europeans. One example is the constitution. One frequently noted rejoinder during debates on the politics of the EU is to ask whether anyone has in fact read the EU constitution. Few have.

The EU constitution is some four hundred pages long (at seventy thousand words, it is seven times as long as the French and Dutch constitutions), and it is unlikely that many Europeans have read it or that they keep a copy close to hand.

Lawyers and academics will tell us that constitutions are legal documents and as such are long and complicated. Still, weighty texts like the European Constitution put distance between people and those who govern over them.

This is one of the ways in which politics today has created a sense of disconnect between insiders and outsiders. From a socio-political point of view, it is a disturbing divide because Europeans are losing confidence in the European Union, and as multiple economic and humanitarian crises take their political toll, Europeans are losing their sense of what Europe stands for.

One proposal, which may go just a small way to repairing the gap between the EU and its citizens, is for Europeans to have a short, tangible and agreed account of what it means to be European.

One thoroughly modern response might be to use artificial intelligence to optimize the constitutions of the various European states and to condense them into one, meaningful page. The algorithm would extract core beliefs and principles from the constitutions of a range of countries and boil them down into a single, short document.

A more straightforward tack would be produce a short document that highlights the meaning and relevance of the European Union for its many citizens. It could be done as follows, and maybe the next Commission might take this up.

The exercise would involve European citizens running pilot projects to discover what they feel they have in common, where they feel they are different, and what policies might, to their advantage, draw them together. To think aloud, an initial pilot project could be based on the participation of a retired Portuguese teacher, a Polish bank clerk, a German policewoman, a Latvian student, an Italian pensioner, and a Swedish nurse.

Their goal is to produce, on a single sheet of paper, the answers to the following questions: What do they, as Europeans, have in common? What can they stress as common values and aspirations, what policies might bring them closer together as Europeans (i.e. the Erasmus pan-European student-exchange program).

The answers might start off with the fact that most Europeans have a common history, one that has been marked by wars, scarred by the rise and fall of empires, shrouded in Christianity, and shaped by the passage of monarchy to democracy and autarchy, the rise of learning and culture, and, from the thirteenth century onward, the evolution of great cities.

This is an altogether broad and historical view of European identity, and it might well permit the inclusion of countries, such as Russia, that are not considered part of Europe today. The sum total of this historic experience might well inspire citizens to say that they have the following common values: peace (not to have another European war), the influence of the Christian church(es), democracy, recognition of the benefits of social democracy, and free movement of EU citizens.

This may just be a starting point, and it might even gain clarity through the participation of the growing number of pan-European couples and their children. Such an exercise may not also produce the unity of views that pro-Europeans may desire, but it will make Europeans think about what defines their region at a time when the US and China are reinforcing their own identities.

The next trick will be to get Europe’s leaders to react to such a template.