Thursday, 24 November 2016

The Trump Identity: So what is Trump really going to do?

So what is Trump going to do? He has said a great deal during the campaign, which is his true "identity" as a policy maker. Let's look beyond the gimmicks and his vast political in-corrections.

Let's look into some policy areas:

He may appoint one or two fairly conservative Supreme Court judges. Is he going to change the status of issues such as abortion and gay marriage? There can be future implications by SC rulings. Only he knows, maybe even he has not made up his mind yet.

He will probably pursue government investment in infrastructure and show low preference for government-centered money redistribution schemes like entitlements and ObamaCare.

 Trump is an isolationist based on his rhetoric. That means military and trade implications, even more so if an economic recession hits. For one thing, it looks like fewer US troops will be operating on foreign lands. How is that going to affect NATO? Europeans may have to find ways of defending themselves, via NATO or other forms (EU army).

Trade. He has already announced he is pulling the US out of the Trans Pacific Partnership. What will happen to NAFTA? Is he going to revoke other US trade deals? Is he going to break any WTO rules by offering incentives for US companies to move factories back in the US? He has already spoken with Apple's CEO urging him to open big plants in the US. Keep in mind that to impose trade sanctions a country must first appeal to the WTO.

He may attempt regulatory changes, especially in the energy, transportation and heavy industry sectors. Many will have negative implications to pollution but positive implications to the US economy and employment.

Trump's biggest challenges will be managing the defense budget and the interest on the massive US debt vis-à-vis his ambitions for job creation and the Congress’ funding preferences. Pentagon may wind up being on the losing end.

Will he attempt a tax overhaul? Readers of his tax plan with just three tax brackets claim he may leave many low incomes worse off.

Some form of the wall on the Mexican border will happen, mostly as an expansion of the existing portions. The deportation of illegal residents will see a boost, mostly targeting criminals, human traffickers and drug operatives or will he expand his scope?

The US president does not decide alone, he needs the House and the Senate to vote along.

 But what is probably the "scariest" factor is that he does not seem to be bound by the negotiations' constraints politicians normally have. But he is no Jason Borne.

Tuesday, 22 November 2016

"It's the Economy Stupid", yes it is!

In recent posts I have argued that the Clintonian motto applies to everything.

Does it apply to the Trump election? It does. US unemployment may be just 4,9% but:
a) Many people are making not enough to live comfortably
b) People are still worried about losing their job and getting a new one.

Among so many things he said, Trump promised:
a) Lower taxes (ie more money in your pocket)
b) Doing away with Obamacare (many cannot afford its fees)
c) Trade protectionism and an end to US companies moving to low wage countries

Other things he said attracted voters too and what is key, people who cared about a-c above were willing to overlook the unacceptable other things he said. Why? Because it's the Economy! Money walks. Shocking, but it does.

Yes, it is not just a job any job that people want. They want good pay and security. So the unemployment rate does not tell the whole story. Not in the US not anywhere.

Unemployment is at or near 5% in the UK, in Germany and the Netherlands. Does that mean that Brexit was not going to happen, that AfD won't do well in 2017 or that PVV won't do well in 2017 either? No, it does not.

In Germany, people are still struggling with mini-jobs, they feel job competition from migrants and EU nationals too. In the NL, people have seen their jobless allowances cut and worry about their pensions. In Germany, people do not want to pay for roads in Spain and Greece anymore.

In France, unemployment is high on top of other things. People have felt the terror in 2015 and 2016.

Humans have lived in caves, huts, tents. You cannot survive in a tent in 2016 Germany or UK, some do in Greece. How do the homeless in the US survive?

Work does make you free. Ask the 23% and 19% unemployed in Greece and Spain. How do they survive (note that eg in Greece unemployment benefits last for just 12 months and are about 400 euros). Simple: They are supported by relatives who work or have pensions, those who do not, are left in the cold, albeit warmer than the north's.

What makes Spain, Greece, Portugal, Ireland, Slovakia, Lithuania et al different is that they are not the core of the EU. Germany, France and the Benelux are. Italy to some extent, that's the reality. The core of the EU are two strips. One extends from north to south across eastern France and west Germany, all the way down to the Mediterranean and the other covers parts of northern Italy all the way to south-eastern Spain. That was the case 25 years ago and still is.

Ireland uses low corporate taxation to attract business and Hungary has decided to lower its corporate tax rate to 9%! But Ireland and others get all this regional policy funds one may argue. True.

Why isn't Greece Europe's Florida and why isn't there a Euro Hollywood and a Euro Silicon Valley in Spain-Portugal? Why are not the Baltics Europe's New England? These issues will be addressed in a forthcoming post.

Talk to average people around Europe and listen to their real concerns. Their foundations are economic. Why? Because we do not live in caves and tents anymore, everything costs money. We do not hunt for food or self cultivate it.

Sunday, 20 November 2016

EU: What happens if Le Pen wins

The Guardian has an article where it quotes Farage saying that Le Pen will comfortably make it to the second (and final) round in the French presidential elections in 2017. And while he is not predicting a victory for her, he says she could win. First of all, Farage did not predict the outcome of the UK ref and the US elections, he simply made his wishes predictions and they happened to come through.

Now, of course it is reasonable to say that Le Pen will make it to the second round and such thing will not be the first time for a Front National candidate. What usually happens then is that the rest rally behind the other candidate, that is how Shirac got elected some years ago after all. But let's assume that the Brexit-Trump wave carries Le Pen to the presidency in 2017. What then? Let's think it through.

Well, like Trump and UK Leavers, Le Pen is anti-immigration. Like Leavers, she is anti EU. And of course anti-Euro.

Unlike the UK, Germany and Spain, in France the president has executive powers. But the election is for president not for the Parliament.

Le Pen is not simple. If she gets elected, the shockwave will be enough of an achievement, it will rock Europe and the world, for many a trifecta after the UK and the US. But Le Pen's government will not have a majority in Parliament. So what is she likely to do?

She may call for a national election, I am sure not she has the power, but let's assume she does.Is it likely that FN will get a majority of the Parliament (Assembly) seats? Unlikely.

The French populous only narrowly approved the EU Treaty of Maastricht and it rejected the EU Constitutional Treaty in 2005. So there is enough euroscepticism in the country, fear of terrorism and relatively high unemployment.

But let's take the worse case scenario first. Let's assume Le Pen either decides to take France out of the EU or calls for a referendum on EU membership. Let's also assume that the decision is Frexit. Article 50 will have to be triggered in this case too.

So, an EU without France! Sounds like the end. Or not? Without the UK and France, there go two of the three biggest members. There goes one of the main reasons the EC was created in the first place. But with some 390 mio inhabitants the EU26 will still be the third largest entity in the world after China and India. Its Single Market will still be potent. The largest members will be Germany, Spain and Poland. The French army will be gone so army will have to be developed. 18 of the 26 members will be Euro members. German may become the working language, with or without English, thus making Volker Kauder (CDU) happy.

Le Pen's France will probably go for a Hard Brexit although there is no indication that anti-immigration extends to EU nationals as was the case in the UK, thus maybe there will be room for a Norway type of deal.

Now assuming again that Le Pen wins, there will be six month period until the German national elections. It is probable that Le Pen does not merely want France to leave the EU but also wants the EU to dissolve, at least in its present form. In that case, she may play a hand that helps AfD in Germany. The result: Uncertainty. Nerve wracking spin. Divide and rule.

Another soft scenario is that Len Pen takes France out of the Euro and Schengen, satisfy her voters, but remains, for now, in the EU.And makes everyone's life difficult.

Interesting times and remember the Chinese curse.

What the EU needs to do is be firm. As it has with the UK. With 28 members the EU can afford to. An EU without eg free movement would not make sense. Let's not forget that in the current EU to live in another member state you have to get a job, start your own firm or work as self employed or show you have the means not to be a burden to that state, it's not like the US.

WTO. Will then the US, the UK and France try to change WTO rules? Well, maybe Trump and Le Pen would like to, but there is no indication May wants to, after all she wants to make the UK a champion for free trade.

Immigration: Le Pen may simply push for an end to the EU's stance on refugees. Many people in the EU28 currently blame Merkel for the current "liberal" policy.

What can pro EU circles do during the phase from now until the French elections? Well, one way is to point out what could happen if Le Pen wins, so French voters won't have the illusions British ones had. Could that backfire? It could, but what's the alternative? "You have nothing to fear but fear itself". The EU has been too political for a very long time, too willing to accommodate diverging views by members (not public opinion), the result has been delay in evolution and many weird Treaties, ie full of illogical compromises, that later had to be fixed.

Of course the EU would be better off with the UK and France. But an EU that knows what it is and what it wants is an EU that it makes sense to belong to. A wishy-washy EU may appear more democratic but is it? There has been enough spin about unelected EU offcials, "Brussels", and EU directives and regulations. With 28 members, soon 27, the EU can well afford to lose some, as long as it is clear where it is going. And it has to make sense, no "punishment", just cause and effect. Right now, it does not. A full EU makes sense. With 27, 26 or less. Probably one large state as a member is necessary and that is Germany. One could even argue that in theory the EU could even survive, with some changes, even without any of the big three, but that is pure theory, let's look at reality.

France can stay or leave, it's up to France to decide. But Europe has paid the price for fuzzy solutions, in its long history. So voters next spring have to be clear what they vote for.

Le Pen should be thoroughly questioned by the press as to what the stance will be if elected, no fuzz.

It should be noted that it is not up to the European Commission to tell the French people what would happen if France decides to leave. It is up to the other members, their politicians and media. And you, the European, in social media. When you want to leave a flatshare you do not bring the place down. And I should note this is not just Merkel's job or the FAZ, it is a job for all leaders of the 26 or at least most of them (surely some of the Visigrad 4 current leaders would love a Le Pen victory). The EU's future is everyone's job, not just Germany's. That should be clear.

People in France should be made aware that voting for Le Pen is not a protest vote (same for AfD but will come back to that). A protest vote would be to vote for a minor candidate, Le Pen is not. One could even vote for Mickey Mouse or Donald Duck on the ballot, that's protest.

The message should be "Dear French friends, if you vote for Le Pen that means you want out of the EU, hence we shall miss you but Adieu".

PS.
1) What happens if Len Pen gets elected and says: We are not leaving the EU and the Euro, but we want a different refugee policy.
2) What happens if AfD gets 20% in the German elections. We shall look into that too.
3) What happens if Austria elects the ultra right president. We shall cover that too.
4) One lesson from Brexit is that the 2 years in Article 50 is too long.

Brexit means Hard Brexit, let's move forward, shall we

Labour has come aboard the Brexit train. A YouGov poll shows that a pro Brexit Labour may get fewer votes than the LibDems in the next election. But the next election is in 2020 and Brexit will have happened by then.

Let's recap. The ref was 52-48 for Leave. It was non binding legally but it was the will of the people. One can ex post facto say that Remain did not campaign as hard and as early as it should have (not officially as Remain but as pro EU) but all is now history.

Some in the UK entertain the notion that Article 50 can be reversed. My opinion differs. What they basically wish for, and that includes the LibDems, is that the exit deal the UK gets is so bad that a new ref will vote for Remain!

So let's assume that the European Court of Justice says that Article 50 triggering can actually be reversed. Let's also assume, notwithstanding legal issues in the UK, that it is triggered as the government intends to, in March 2017. So let's say we are in late 2018 and negotiations have taken place and the deal looks bad. The LibDems seem to operate under the assumption that a new ref can be called to decide on Brexit! Now, a ref is usually a binary choice. You choose A or B. A would be "accept the deal". What would B be? Go for "Soft Brexit" (with free movement) or Remain (after all)? Or simply "reject the deal"? Has anyone thought through that? Now, since the election law was changed in 2010-2015, which government will decide? A Tory government with most likely May at the helm. Most likely, a ref won't be decided at all. Elections won't happen until 2020, keep that mind.

So what's the deal?

What this realm of thinking also misses is that the Brexit negotiations does not include a new trade deal. Plus trade deals take a long time to negotiate. The deal is WTO rules, ie the default. Of course the May government now operates under the notion that it can keep the EU Single Market without free movement, so not change in the status quo for goods, services and capital, only for people.

Other negotiations issues will include the payments to the EU as part of the UK membership, the status of EU officials of UK citizenship, the status of EU citizens in the UK and of UK citizens in the EU27 member states.

So what will be the benefit of hindsight in late 2018? How complicated all this is? By late 2018 everyone's nerves will have been tested.

Recent pres articles in the UK have suggested that the EU plans to come down on the UK hard, "punish" the UK, so that other members are kept in line and do not ask what the UK will get. But what is there to punish the UK for? Surely the UK can get a CETA (EU-Canada) type of deal but his will take more than 2 years and won't include freedom for services and capital, ie financial services and other business services that the UK should care about. But is that "punishment" or simply playing by EU rules? Spin is nice, but reality is even better.

So will the 2 years in effect from now until late 2018 will spent to either
a) Help Remainers come to terms with Leave, or
b) Push Leavers to change their minds re Brexit or free movement - immigration?

Unless May is doing this on purpose and plans to take the fall so that the UK remains in the EU (see relevant post), which is unlikely, the May government has chosen Hard Brexit and will proceed with it.

For all practical purposes we can assume that Brexit means Brexit and a hard one. And let's move on.
To where?

Companies have to assume that they will deal based on WTO rules. For goods that is tariffs of less than 4%, no customs union (like Turkey), no Single Market. For services there's a vacuum. For the City, loss of passporting rights.

For EU nationals in the UK who qualify for UK citizenship, they will probably have to do so. For UK citizens in the EU27, the same, different states have different rules (re minimum stay before you apply). Some of the people already in the UK and in the EU27 won't have fulfilled the criteria by the time the "divorce" happens.Those who are not are in limbo.

The UK will also have to start doing trade deals with the countries the EU currently has deals with (and cover the UK too for now).

So where's the beef (to borrow a phrase from an old US election)?

The UK hopes to use its market as leverage to have EU27 exporters to the UK push for single market to the UK. The German BDI has followed Merkel's lead and said that this is not possible since it would undermine the whole EU.

The EU27 think and say that such a deal would make others ask for it too. Who are these others? Norway, Switzerland and maybe EU members. But which EU member would like to lose free movement for its citizens? The Visigrad 4? Unlikely. Romania and Bulgaria? No.

Technically such a deal is possible, while EU Single Market is written in the EU Treaties that does not prevent a deal that emulates the Single Market without free movement with a non member (eg the UK). But who wants that? The UK's best hope is EU27 exporters to the UK.

UK based companies are already looking into plans for relocation, who is willing to wait those 2 years, especially services firms.

EU27 companies exporting to the UK are getting used to the idea of export with some tariffs. There is no indication that EU27 services are that present in the UK, those that are stand to lose too.

UK citizens who want controlled immigration are happy. Same as those who do not want Brussels rules on the UK.

The May government has decided to make Brexit hard (no free movement) but try to keep the Single Market. There is no indication that the hard Brexit stance will yield. Two years from today we will probably all be at the same point but simply more aware of the effects. The likely scenario is that no side will give in. A standoff.



Saturday, 19 November 2016

World: May you live in interesting times. Where do we go from here?

One national leader, when asked to comment on Trump's victory replied that it is not time for comments now, it is time for thinking. He is very right.

So what's next? Let's think about it.

There are elections coming up in the next few months in Austria (for president, the last one was annulled), a referendum in Italy on constitutional reforms which could cause PM Renzi to resign, national elections in the Netherlands and Germany in 2017, inter alia.

The key issue is what's going on in the economy and society. That's what drives politics too after all.

I insist in the Clintonian motto "It's the Economy Stupid", in spite of what people may think caused Trump's victory. People want a job, good pay, job security (ie the expectation that they keep their job or find a new one if they lose it), a nice enough life. When they do not have such things, other issues become active. Then the blame game starts and usually scapegoats pay the price.

In other words, the theory I support is that when you have sound economics in your household then you are less likely to be concerned what language your next door neighbour speaks, less likely to be irritated by hearing someone speak in a foreign language in the tube (subway) or the bus. No wonder Britons on benefits and low salaries were key to Brexit. But they were not the only ones. Because in the UK at least  (because of the language inter alia) foreigners do not compete only for low pay jobs but middle and for high end jobs too. So the fact that UK unemployment is just 5% (that is supposed to be a normal rate since people change jobs), this stat alone does not tell you how people feel about their economic and job security.

On top of that, many in America don't appreciate US companies moving production facilities to Asia. Manufacturing jobs were not pretty but they paid relatively well. Plus, consider this. A few weeks ago I was talking to a European IT professional with US citizenship who spent the last three years working in the US. He had to relocate several times to have a job and in the end decided he could not compete with IT work being outsourced to Asia and Asian IT professionals on professional visas in the US hired via middlemen, he claimed. Of course he was now supporting Trump.

Yes, you can now buy a laptop made in Asia for 300 Euros instead of 1000 or so 10 years ago and that is benefit to the Western consumer. But it comes at a cost: Jobs at home. The cost-benefit analysis does not work for everyone.

With Trump president the TTIP (US-EU) deal is probably off and was not progressing well anyway. Will Trump recall existing trade deals of the US? Will he question the WTO Uruguay trade rules as far as the US is concerned? What stance will the GOP led House and Senate have on trade?

The Brexit UK (in trade deficit for years) wants to champion free trade (without free EU movement). Will it push for a new WTO deal? Unlikely it has the muscle or can get a momentum going after the Doha Round of WTO talks failure.

Everyone wants to export and host tourists. All countries/economies do. But as a UKIP fan pointed out in a recent discussion only 6% of UK firms export. That is probably true for most countries. Can things be done to make exporting a game for everyone?

Of course many people have jobs due to inter-national trade. They work for multinationals in country units, provide services to them (eg advertising, PR, tax, IT). They sell in small stores goods made elsewhere. They export. But many don't.

As Angela Merkel pointed out, some people take advantage of free movement to get a job in another EU state, keep it for a few months and then benefit from benefits natives do. Will come back to this issue in a separate post.

Refugees and economic migrants hope for a better life in another country. Let alone their skills
sets, what about language barriers? We are very very far from real globalisation and we are facing the cons of the existing phase. And it looks like they have serious effects, socio-economic thus political too. The Trump election showed that political correctness is not a way to suppress these concerns. Their roots must be addressed. How?

Countries are a system of modern life. They evolved from city states in Ancient Greece, empires (Alexander the Great's, Persian, Roman, Byzantine, British, etc), local kingdoms in Europe (eg Italy and Germany were "united" merely 150 years ago), the US is a result of migration first from Europe and now mostly from other continents, China is now capitalist and a member of the WTO since 2002, Russia is now in the WTO (but has an embargo going on with the EU), some people are concerned about the potential of new world war.

Western economies in recent decades have become Services based ones. The dotcom phenomenon led to a bubble and its bursting. Why did the financial world invest so heavily in subprimes instead of industry? Have derivatives and other financial instruments created too much "fake" money in the world?

Austerity aka budget discipline has become a fashion in recent years, especially in Europe (Germany, NL, UK, etc). Now it seems that Britons want less austerity out of the May government. Obama implemented Obamacare and brought inflation down to 5% but some people cannot afford the Omabacare care fees. Of course they voted for Trump, who also promised lower taxes. Obama skyrocketed the US debt, let's keep that in mind.

It's the Economy Stupid but with 7 billion souls on this planet and some 200 countries ie national economies, large (US, China, India, Russia), medium, small and extra-small, go figure how to make it all stick. They are ways and I will discuss some of them in the near future. But what is a national leader supposed to do? Push exports, help his people move as economic migrants to other economies (eg India), bring in foreign investment, these are the usual main ways. Many are using immigration barriers, the UK now wants to do that too.

Wallonia received angry and dismissive reactions when it temporarily vetoed CETA (the EU-Canada deal). Yet many said "Kudos", especially in social media. Yes, trade is good but does not benefit everyone.

In recent years regional arrangements seemed to provide an outlet. UNASUR, African Union, ASEAN, Trans-Pacific, NAFTA (to some extent) and of course the EU and the European Economic Area, with mixed results. They have to be part of the re-think.

The obvious way is of course to focus on your national economy, try to get everyone jobs and other benefits, use barriers that are not against WTO rules, keep your voters happy or at least as happy as possible. But what will be sum result? Walls. 27 years since the fall of the Berlin Wall. No wonder some people in or from the ex-USSR and ex-Comecon are said to miss the days they "could sleep worry-less at night" (as long of course as they did not oppose the regime). What does that show? That in the modern era people want safety, not just from crime but economic one too and foremost. Ten years ago a BBC survey, global, showed that many in the world are not happy with the current system. They do not want communism, who knows what they want and who can deliver it. But the current system does not please them. Of course compared to 1016 or 1716 everyone in 2016 has a better life, right?

I will end this post by pointing out that maybe over-legislation and bureaucracy are an ill of at least the West. They depress the economy and create many effects. But create many jobs too. Will come back to that. "May you live in interesting times" was a ancient Chinese saying. But it was a curse!

Does the EU make sense?

In past posts I have looked at the present and at the potential future of the EU. I have argued for a scenario in which the EU will evolve into a deeper union. Even pointed out that maybe the next EU Treaty should be "take it or leave (the EU)" But of course deepening is not the only scenario.

Another scenario is things remain pretty much the same. Will come to that. A third scenario is a move backwards. Let's look into that.

Why is there an EU in the firstplace? The three communities were created to help avert a new war in Europe. They succeeded in that.

The idea was that via co-operation in carbon and steel, nuclear and trade between European countries peace would be promoted.

But nowadays there is there is a free trade system (or a near free trade one to be precise) via the evolution of GATT, the WTO.

The EU Single Market provides the ease of common product standards which otherwise can be used as a trade barrier, but with WTO rules trade tariffs under 4%, is that such a big deal after all? Is the EU Single Market worth sacrificing national sovereignty and for German and Dutch taxpayers spending money on roads and bridges in Spain or Greece? If the Brexit and Trump phenomenon is indeed real and not exclusive to those countries then many are wondering the same in Germany (eg AfD), the Netherlands (PVV), France (Front National), etc. After all, Finland's biggest export markets are Russia, Sweden and the US and Germany's Angela Merkel has been smart to promote non EU exporting for Germany (and thus affecting the EU's trade policy, ie to be open, no fortress Europe).

Without the EU, each country will decide its own immigration policy (of course it may have to build more walls).

What about defense? The Russia factor? Well, if Trump indeed makes NATO less potent, European countries can always start an ETO (European Treaty Organisation), no need for a whole EU.

What about free movement? Of course, there will be much less of that. But that is exactly what many want. They want exports, they are willing to buy foreign products and services, they want foreign tourists but they do not want foreigners competing for the same jobs head-to-head. What if these jobs move en masse to Asia? That is what has been happening too and many voters are not happy about that either.

Have I just described Boris Johnson's wet dream?

Friday, 18 November 2016

EU: From Maastricht to Brexit

Twenty five years ago, in December 1991 during a Dutch presidency of the Council of the EU (EC back then) there was a European Summit and an Intergovernmental Conference (IGC) to decide on a new Treaty. It was finally signed in February 1992.

Spearheaded by Jacques Delors, Helmut Kohl anf Francois Mitterand the EC12 back then wanted to move things forward. The European Union created as an evolution of the three European Communities. The Treaty also established the process towards Economic and Monetary Union (EMU) part of which is the Euro, as well as new provisions in Social Policy.

The UK, led by John Major, vetoed both the EMU and the Social Policy articles. The latter were agreed by the eleven and were attached to the Treaty as a Social Protocol. The UK as well as Denmark got a formal opt out of EMU.

Europe moved forward via Maastricht (the Single Market had been decided in the 1980s and started on 1/1/1993) in spite of a very narrow adoption by the referendum in France and initial rejection by the Danish voters.

A year earlier, in December 1990, on a train from Brussels to Paris, one could read the feature about the EC in the Economist, pondering whether Europe would become fortress. It did not. The EU has maintained a free trade stance and signed many agreements on top of the WTO (Uruguay Round). It has not used the muscle provided by its 540 mio consumers to defend its industries. Next year, Donald Trump may do that for the US. May's UK wants the Single Market without free movement using its market as a card. The Italian minister for the Economt reminded Boris Johnson that if Italy and the other 26 lose the UK market, the UK will lose 27. Of course if there is no agreement, there will still be trade based on WTO rules (average tariffs of 4%).

What has been gained in 25 years, what has been lost?

In 1990, one could also read in the Economist about the break of the USSR into separate countries with separate currencies. People in eg Georgia lost their bank deposits in Rubles. Some Eurosceptics call the UK a "USSR". Has Pandora's Box been opened via Brexit? Will others follow down the UK's path? Will Front National's Marine Le Pen be elected president in 2017? Will AfD gain much to even force Angela Merkel out?

In the aftermath of the Trump victory many have elevated Angela Merkel to a defender role for Liberalism in the West and in Europe of course.

Delors, Mitterand and Kohl and others at Maastricht had vision. Many they should have gone further than they did. Even without the UK.

In previous posts I have argued that maybe new EU Treaties should be on a "take it or leave (the EU)" basis. Of course not easy to put forward. but maybe necessary, since the EU stands in between the US and Russia (geographically).

Are EU citizens going to elect EuroTrumps? Trump after all promised lower taxes. And a stop of business moving to Asia. The migration issue of course played a role, but so did the fact that many could not afford to pay Obamacare's fees. In the EU27, many are anti-migration, unemployment varies, it is low in Germany but still high in France and Italy. In the Netherlands, the eurosceptic PVV brought the government down in 2012 as an anti-austerity stance, note that.

For many years now, the EU28 comprised on mostly conservative national governments, pro trade, pro budget discipline, pro EU, pro Euro.

Hungary is lowering its corporate tax to 9% and does not plan to enter the Euro. The Visigrad 4 want more sovereignty. The governments that will be called upon to agree on a new Treaty will have to worry not only about rejection in referendums but also national and local elections' backlash. We may not have EU wide TV and radio but we are in the era of social media.

One of problems of entity as large as the EU is how do you understand what is going on sur-le-terrain across the entity. In other words, who understands the economy and society in all 27 states? Many in the European Commission, how many in the European Parliament? Of course members of the ECOFIN and the Eurogroup know the macroeconomic date outside their national economies. But how do they understand these economies. Of course you also have the permanent delegations to the Council and the COREPERs, But is that enough to understand what "Europe" needs, what the EU citizens will accept, what they will reject? Brexit showed us that the ground is good for populism, so did Trump's election. But what is the real solution to populism?

So who understands the people of the WU27 or at least the Eurozone19 to express them? Does Angela Merkel do? She may or may not, but she seems the only viable option.

Why? Because with 27 or 19 it is difficult to decide together. It is. When you do, you can reach weird agreements and the EU history is full of such. In Athens, Barack Obama gave monumental speeches about democracy and citizenship. That is maybe the kind of leadership the EU needs. But do not forget that the EU speaks not in one but 24+ languages.

Bonne chance Angela!


Thursday, 10 November 2016

Europe with Donald Trump: EU 2.0?

So, who would have guessed that 27 years after the fall of the Berlin Wall, a man like Donald Trump would be elected POTUS.

It has been a rocky 27 years for the West. They have included the dotcom bubble, the subprime bubble, the WTO, China's entry in the WTO, the EU (Maastricht) and the Euro, Doha's failure and the proliferation of regional trade agreements and NAFTA among others.

In retrospect, maybe capitalism was performing better with competition from communism. Maybe.

Europe has had it good. It has grown from 12 to 28.

Soon 27.

Trump's campaign has shown he is an isolationist, in both defense and trade matters. Plus he wants lower corporate taxes.

Many in Europe are thus concerned about the Russia factor. Whether that is a real factor or not is maybe besides the point.

In recent weeks, I have posted food for thought on EU Reform, some far fetched, some not.

In view of Trump's election, let's have a brief look again.

- EU Army or something like that.
- Closer economic union, including tax matters.

Are these possible? Front National, AfD, PVV and others are banking on nationalism - anti-EU feelings. Won't such proposals play in their favour? Why would CDU, French conservatives, et al ever agree to such proposals?

Well, one way to move the EU forward is convince taxpayers-voters in Germany, NL and other parts of Europe that this won't cost them more. Even better, if it costs less!

For example. should the EU continue to fund regional policy in Spain, Greece and others? It has been 25 years since it started.

The other factor is "take it or leave it"!

Europe has enjoyed protection from the US. Europe has also given in to members' diverging points of view. best example the UK. Where has it led? Brexit.

People in Europe should not feel that their countries have to participate in the EU. The EU has benefits as well as costs. Sovereignty is one of them. So why push members to stay in. Even better, makes the new draft Treaty an EU 2.0. Those states that adopt it, stay in, those that don't, join the EEA or some new form of it.

This may sound harsh or cruel, but is it, really?

If Europe needs a defense and real economic union, then it must proceed. Those that do not share that view should not be forced. The EU should stop being seen as a Hotel California!

The US is 320 mio. EU 2.0 should have a least the same population, same or better GNP/capita and above all commitment to union, by its people. In defense and economic matters, above all. The Trump era may witness trade and currency wars among others. A real union is needed in Europe, that's the rationale. Not more relying on the US. Ability to negotiate with the US on trade matters, as well as the whole world. A common immigration policy. And other parameters. That is a different EU than the one so far.

For the rest, the European Economic Area (EEA) or a revised EEA should do.

Germany and France seem necessary members of an EU 2.0. Together they make 145 mio.
Membership of all other existing 25 members should be welcome but not required. Of the 25, enough will join in to make it 320 mio plus and have a real union.

Are "the Russians coming"? I doubt it, but so many think so that this could be the driving force, but not merely for an EU army, that would be shortsighted, for an EU 2.0.

The alternative is no EU or a stale EU as the current one is.

Friday, 4 November 2016

Should Greece, Spain and Portugal have joined the Eurozone?

In a previous piece I looked at the range in unemployment rates in the EU28 and pointed out that the Eurozone19 has a 1.5 pc points higher unemployment rate than the EU28 average. That this difference comes from high unemployment in Greece, Spain, Cyprus, Italy, Portugal and France (all Eurozone, all South and mostly Mediterranean) plus Croatia (the EU's newest member, since 2013).

One reason for these statistics is that in these countries flexible employment (eg part time, mini jobs) is not as wide as eg in the UK, Germany and the Netherlands.

So why have these countries-economies not been able to produce enough jobs?

The Euro was established as a tool by the 1992 Maastricht Treaty of the EU. It was part of Economic and Monetary Union. And was implemented ten years later. The criteria for entry were public debt (as a % of GNP), convergence of inflation and interest rates as well as public deficit (as a % of GNP).

Many economists, eg German had pointed out that these macro-economic criteria were not enough and that the real economies had to converge before they joined (not after). The EU was not a US with strong regional policies and funding to help lagging areas. EU regional funding existed by it was not comparable to the US. Economies had to be prepared to join.

All countries mentioned above joined from the start except Greece that joined one year later and Cyprus that joined even later (it after all joined the EU in 2004).

The Euro reduced lending rates (including bonds) and allowed states and companies and people to borrow at much lower rates. That led to consumption increases.

The Euro was managed as a hard currency (I will do a separate piece on that) and thus it encouraged imports to the Eurozone and discouraged exports for many of its goods categories.

Post subprime crisis and in the last few years Greece, Spain and Portugal went through crises (Greece of course faced and still faces the biggest one). So did Cyprus.

None of these economies have become economic powerhouse, but they were supposed to do so before they joined. They did not become competitive by simply joining the "Champions League" of the Eurozone. But that was not supposed to be the case.

The Euro became a reality because Germany was willing to join. It is natural that the Euro and the European Central Bank was designed based on the DM and the Bundesbank (for example, unlike the US Fed, only inflation is the ECB's concern, not growth/employment).

Countries rushed to join the Euro as a status symbol and it seems that they paid a price. It more than clear Greece joined the Euro too early ie unprepared from a real economy point of view). Evidence shows that this partly applies to Spain and Portugal too.

Should some member leave the Eurozone? That is a very complicated issue. The Eurozone is not a country club that one can easily join, leave and re-join. Entry and exit cause major adaptations.

What members lost was the ability to absorb loss of competitiveness by changes in the exchange rates of their national currencies and that means that once you are in the Eurozone you have to be extremely mindful of your competitiveness.

There are anti-Euro feelings in Greece and in Italy. But in the Netherlands and even Germany too. One way to make the Euro more economically sound at this stage is to make the Eurozone an even closer economic union (and possibly political too). Make the Eurozone more of a "Single Economy" I have referred to in previous posts. With 19 or less. With a Eurozone tax system, especially in corporate taxation, and other features too.

But one drawback will always exist: Linguistic barriers, both in the Eurozone and the EU. Nothing can be done about it but it has to be taken into account in every new design idea in EU Reform.

Thursday, 3 November 2016

Brexit: An analysis of the UK court's ruling from a European POV

So the UK Parliament must vote on whether the UK government triggers Article 50 or not. That seems rather straightforward. Either it thinks that leaving the EU is a good thing or not.

Yet this is quite more complicated and disturbing as far as the rest of Europe as well as Europeans in the UK are concerned.

Let's first see what the Court said:

The Lord Chief Justice, Lord Thomas of Cwmgiedd, declared: "The government does not have power under the Crown's prerogative to give notice pursuant to Article 50 for the UK to withdraw from the European Union".

The three judges ruled there was no constitutional convention of the royal prerogative being used in legislation relating to the EU. That triggering Article 50 would fundamentally change UK people's rights and that the government cannot change or do away with rights under UK law unless Parliament gives it authority to do so.

Based on that, one would think that MPs and Lords would say a pure Yes or No.

Yet it has been interpreted as a need for government to present its negotiations plan.

Let's see what the leaders of the two main opposite parties said:

Labour's Jeremy Corbyn : "This ruling underlines the need for the government to bring its negotiating terms to Parliament without delay. Labour respects the decision of the British people to leave the European Union. But there must be transparency and accountability to parliament on the terms of Brexit."

Why on Earth should the government reveal its negotiations terms, to weaken them? The decision should be about Yes or No to triggering Article 50.

Liberal Democrats' Tim Farron: "Ultimately, the British people voted for a departure but not for a destination, which is why what really matters is allowing them to vote again on the final deal, giving them the chance to say no to an irresponsible hard Brexit that risks our economy and our jobs."

The reactions of both Corbyn and Farron are troubling from a European point of view.

a) Both seem to choose to ignore that the ref was non binding. They are conveniently yielding to the political pressure placed on them by Theresa May (side note: good for her). As Remainers point out I) the ref was non binding II) the decision was 52-48 not 65-35 III) much of the population did not vote.

At the end of the day, all that is the UK's business. What those of us not British in the EU have a say in is:

b) What Tim Farron says involves the rest of the EU. As I pointed out in a previous post, he seems to be under the impression "Europe" is going to wait for the end of negotiations and give the UK the chance to change its mind and remain in the EU if it the UK does not like the Brexit deal! Does he even consider the precedent that would set for other members?

As a non British analyst of UK affairs (and European ones), it seems to me that:

1) Once Article is triggered, Brexit is Brexit (as May says). The choice set becomes what type of Brexit. If MPs give it the go ahead, Brexit is Brexit, no turning back.

2) The only way to avert Brexit is for Parliament to reject triggering of Article 50, clearly and directly, have a second referendum, this time binding and well informed, and decide, for good, for all sides concerned.

There are no trial separations and wait and see how the divorce negotiations work out. The UK has been a complaining "spouse" in the "marriage" with the EU for decades, the ref was not the start but the end.

It is maybe up to the 48%, the Remainers, to explain these facts of life to MM Farron and Corbyn.

The role for us in the rest of the EU is to make clear, here and now, that once article 50 is triggered, Brexit is Brexit and there is no turning back.  Maybe in 15-20 years, but not in two.

PS. Some people I have spoken to have suggested that a No vote by the Parliament and a new ref would lead to civil unrest and that the drafter of Art 50 has said that is reversible.

a) About Art 50: This is not a law that carries an explanatory memorandum. What matter is what the text says. And it does not foresee untriggering. Of course the ECJ will have the final say if need be.

b) About unrest:  If in 2 yearrs there is 60-40 Remain ref the 40% will not cause unrest then? People are afraid to speak a foreign language in the street, the damage has been done.
Tbh I think Brexit is by now a done deal, the best scenario is soft Brexit. Not what we would have wanted but events have proved too many in the UK don't want the EU or foreigners. Sadly. Very sadly.

A Single Economy

Why are unemployment rates so diverse in Europe? Why is it 19.5% in Spain and less than 5% in Germany? Are Northern European hardworking and the Southern Europeans lazy? Not really. For example Greeks work the third longest hours in the OECD and yet they are in a huge crisis. Is bad weather conducive to productivity and the Mediterranean sun counter productive? Not really.

Then why are companies manufacturing mostly in North and Central Europe and not in the periphery? Of course there are factories in Portugal and in Spain but why aren't there more of them?

Are Southern Europeans well educated but not in the right fields?

Why are Ireland and Finland doing so well? Why does Malta have record low unemployment while Cyprus high (and it even higher during the crisis)?

Well, like in most issues, there are many reasons aka factors.

Some like to dismiss countries for not having the right work culture or for state corruption. That is superficial treatment.

The indirect cost of labour may be high eg in Greece but it is no that low in other EU members either. Why did auto makers from other continents invest and produce in the UK and not in Spain, Portugal or Greece? The simple answer is English and a flexible labour market. But what does one really mean by the term "flexible"?

All companies are not allowed to fire at will in the EU, there are caps on monthly firing volumes via EU directives. In some countries when you fire an employee you have to pay him/her off a high severance pay than in others, but multinationals in general like to send off an employee with a gift higher than what the law says.

Very few people have a thorough understanding of what it's like to do business in the EU 28 member states as well as outside the EU and they are usually not available to policy makers (because they are not sought by them). With Brexit, some governments have sent letter to corporations luring them with low tax rates. But when companies make location decisions they look at many factors. Infrastructure, hard and soft (human capital), logistics, etc. On the other hand cars and other equipment is being made in Asia and shipped to the EU and they are still competitive.

Why are so many companies locating in Ireland which is in the periphery? Is it just low taxation and the English language (as well as proximity to the large UK market, asset which is now being lost due to Hard Brexit)?

In a well performing economy each geo segment has some competitive advantages. Plus there is aid by the government (eg Wales by the UK). How well has east Germany adjusted in the 25 years since reunification?

The EU Single Market which started in 1993 required many regulations and directives. It was a major breakthrough. But it was not panacea. As a UKIP supporter argued in a recent debate, only 6% of UK companies export. For a large number of companies in the EU doing business beyond the national borders is still an orama not a reality. One has to look at the real life reasons for that and not rely on economic theories and traditional business analysis.

The EU economy is not doing badly but it is underperforming. People are not satisfied and blaming the EU, globalization, foreigners in addition to their national policy makers.

"It's the economy stupid" I have argued applies to the 2016 EU too. The Dutch have in the last few years seen cuts in their social security, the Germans had Hartz including mini jobs. Their unemployment benefits have been cut (yet they are still generous compared to those of the Greeks or the Polish). So of course they are easily upset by money given to Greece or other periphery members.

Germany wants convergence of tax rates (corporate ones) and seems to want France. It makes sense. But why will others agree? In a united states or federal republic of Europe maybe they would agree. But we are nowhere near that and many leaders across Europe think it is not feasible. A Gordian Know? Is there a need for a new Alexander the Great? Tusk is obviously not that. Delors conveyed a vision that may not have been shared in the UK but was largely effective. Of course the EU at that time had 12 members. Now it has 28 (soon 27).

So is "union of sovereign nations (or states)" the only feasible solution politically? It may be, but does it make economic sense?

A Single Economy will of course require further surrender of national sovereignty.

A single or converged tax rates for companies
A single VAT rate for all
Single labour laws/rules
Use of a single business language (!)
An EU IRS and EU personal tax rates

Can such endeavor be marketed to the people of the EU27 in 2016 or 2017? Maybe it can, when it is sold on the USP (unique selling proposition) of Jobs (more and better ones). An EU27 (or even EU26 or EU25) will be powerful as a Single Economy, inside and outside (in trade negotiations).

A single immigration policy (for refugees and economic migrants)
Single environment rules (we have them already largely)

Some say these will come, eventually. That it took centuries to build the US. True, but maybe the EU is now in a do or die situation. Why? Because like any half built house, it is not easy to live in.

Leavers in the UK are starting to realise that life outside the EU is not going to be that easy. Federalists have not been convincing in Marketing Europe.

If Europe does not move forward it will move backwards. A federal republic of Europe does not 460 mio, it can work with even 320, thus with 25 lander or less.

More Europe for more Economy and for more Jobs.

If the EU economy is doing so great at its core today why are AfD in Germany and PVV in NL doing so well?


Tomorrow: Argumentation for Less Europe

Wednesday, 2 November 2016

Jobs in Europe

When one takes a look at unemployment rates in the EU, one notices the wide range. In July, they ranged from 3.9% to 23.5%!

The Eurozone's average is 1.5 points higher than the EU one. That is because Eurozone members tend to have higher unemployment rates than the non Eurozone ones. Could that be attributed to Eurozone policies, eg the 3% budget constraint?

Before we look into that, let's see who has the really high unemployment. Greece, Spain, Croatia (non Eurozone, the EU's newest member), Cyprus, Italy, Portugal and France. These job markets are above the Eurozone average and other than Croatia, they are all Eurozone members.

But they have something else in common. They are all South states and all except Portugal are Mediterranean ones.

Add to that one fact: The lowest unemployment rate in the EU can be found in a very small Mediterranean member, Malta, a member of the Eurozone!

Next to Malta is a former Comecon member, the Czech Rep and then Germany (Eurozone member). Then the UK, Hungary (another ex-Comecon) and the Netherlands (another Eurozone member).

One could say that non Eurozone members, because they have wider economic policy options than Eurozone members have better performing economies, thus lower unemployment and that Germany and NL are part of Eurozone core thus best adjusted to the Eurozone. Whereas Greece, Spain, Italy, Portugal and Cuprus are not Eurozone's best members.

One other theory could be that flexible employment contracts (part time, zero hours, mini jobs) are more predominant in Germany and NL, as well as the UK, and that ex-Comecon member have low wages thus more jobs compared to the Southern states that have less flexible labour markets than Germany, NL and the UK and higher wages than the ex-communist states.

Add to that the language barriers to mobility in the intra-EU labour market and you may have an explanation why rates vary so much.

What is the net result? An inefficient EU labour market.

What can be done? Not much.

a) Establish English as the language in the EU labour market? Not possible.
There types of jobs (medical, IT/engineering, cleaning/care services) where there is high intra-EU mobility, from the poor member economies to the richer ones. But if you are working in Marketing or PR in Hungary or Spain or Greece why would a company in Germany or the Netherlands hire you, especially if you do not speak German or Dutch? That is a feature of the EU market compared to the US.

b) So in effect the 28 (soon 27) national EU labour markets remain "sovereign". How do you then explain the high penetration of non EU migrants? Well, a very large % is in blue collar - manual jobs. A very good example of that is Greece.

With respect to EU Reform, are there any insights? Not really, other than the EU needs to become more of a united/single economy. Feel free to send me a comment at nickpana2017@gmail.com if you think there are.

Would Greece, Spain, Cyprus, Italy, Portugal have been better off outside the Eurozone, ex post? That is a topic for a future post.

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