Posts tagged ‘EU’

Nothing To See?

Tomorrow’s election in the Netherlands may not be very exciting after all. Until recently it looked as though the nationalist PVV would emerge the clear winner, to the extent that keeping its leader from the Prime Ministership would be very difficult. (PVV wishes the Netherlands to leave the European Union among its other policies.) But then the party’s leader, Geert Wilders, was convicted for inciting discrimination before Christmas, and as the campaign got underway the incumbent PM, Mark Rutte, deployed much hard rhetoric and advertising on PVV’s key issue, immigration. The current polling is finely balanced. Mr Rutte has repeatedly ruled out coalition with Mr Wilders. Dutch politics may remain an earthquake-free zone; we will soon know either way.

Eurozone asset markets are priced rather sanguinely in any case. Back in 2011 it was the bond market, and specifically the Italian bond market, which threatened to ignite a wholesale global banking collapse with an internationally unaffordable sovereign default. Back then, the credit default swaps which can be bought to hedge against Italian credit risk cost almost 6% over LIBOR, as against 6bp in mid-2007. Today the rate is 192bp: higher than the pre-credit crunch levels, but then Italy has been downgraded from AA to borderline junk since then. Even the end of the country’s government last December at the hands of a referendum seen as a valve for anti-Establishment sentiment did relatively little to move the price.

Elsewhere in the euro area the story is similar. The exception, which is worth dealing with separately, is Greece. Here the debt burden, which has of course already been restructured once, has reached over 180% of GDP. The IMF – one of the “troika” of creditors dictating Greek fiscal policy – has said that it has again become unsustainable. Fraught negotiations with the Greek government have continued. But none of this is news. Furthermore the Bank of Greece’s November estimate for the country’s budget was of a “primary surplus” (budget balance before debt interest) of +4% of GDP, indicating both a sustainable underlying spending pattern and compliance with creditor demands. There are those who expect the contradiction between monetary union and fiscal autonomy to upend the single currency at some point, but then at the zone-wide level debt to GDP peaked back in 2014 and again, this is hardly news.

Another recent source of concern over Europe was the banking system – or, to be more accurate, the solvency (or otherwise) of various European banks. Deutsche Bank caused consternation for a time, but then the German government has been cutting its debt burden since 2010 and if anyone can afford a major bailout, it is surely them. In any case, no bailout was necessary; DB shares have risen by more than 70% from their lows. Where restructuring has been needed, at Banca Monte dei Paschi di Siena, it has not been anything like sufficiently material to threaten the whole Continent. And where banks are daily dependent on emergency central bank facilities (Athens), this is, once again, not news. Their shares have been available for a handful of cents for years.

There is only one moving part that has shown real signs of weakness: the euro itself. This has fallen by 23% over the last three years. Its low against the dollar of $1.0388 back in December was the weakest level it had reached since the opening sessions of 2003. However, even this is not a credible sign of structural malaise. The currency has been much lower still in the past, hitting an all-time record of $0.8272 in late 2000. And while the ECB has been loosening policy in a range of ways, the Fed has embarked on a tightening cycle. Like the Italian credit spread the euro’s weakness can be interpreted as nothing more than a rational response to changed circumstances.

In other words, there appears to be nothing to see here. Political risk remains, yet seems not to be priced in.

This blog argued at the time that the support of the stronger eurozone economies for the weaker ones in 2010 answered a key existential question for the single currency. In theory, (a) there is no debt mutualisation in Euroland and (b) its members enjoy complete fiscal autonomy. In practice, when the going got tough, there was a very EU-esque “pooling of sovereignty” over debt via the European Financial Stability Facility / European Stability Mechanism. And bailout nations have had to comply with the rules of their emergency lending regimes.

There is another factor to consider, however, and that is Brexit. Attention in the UK tends quite understandably to focus on the consequences for ourselves, but there will also be consequences for the rest of the EU.

A harsh deal, or no deal, with Britain, and some businesses and industries will suffer. It was interesting that a senior executive at global food giant Mars Incorporated spoke about this a few days ago. Agriculture has managed to remain immune to the GATT / WTO decades of compromise on tariff reduction and quota control. Look at the WTO tariff tables and food, drink and tobacco are about the last redoubts of punitive import duties. From the BBC last Friday:

Fiona Dawson . . . said the absence of a deal with EU member states would see tariffs of up to 30% for the industry.

Speaking at the American Chamber of Commerce to the EU, she warned this would “threaten [the] supply chain and the jobs that come with it.”

“The absence of hard borders (in Europe) with all their attendant tariff, customs and non-tariff barriers allows for this integrated supply chain, which helps to keep costs down,” she said. “The return of those barriers would create higher costs which would threaten that supply chain and the jobs that come with it.” Ms Dawson said those costs could not be absorbed by confectionery companies, meaning consumers would have to pay more for their products . . .

Companies in the automotive and the financial sector have been the focus since the vote, according to Ms Dawson. But with food and drink the largest manufacturing sector in the UK, accounting for 16% of turnover, she said she wanted a new focus, and called for EU leaders to look at the bigger picture when negotiating. “There can be no economic advantage either side restricting trade with a large market situated on its doorstep,” she said.

“In simple terms, if the UK and the EU fail to agree on a new preferential deal, it will be to the detriment of all. Other member states should remember this is not about ‘punishing’ Britain for her decision to withdraw, but rather about finding the best solution for European and UK workers and consumers.

The emphasis at the end there is my own. And it is not just manufacturers who could, in theory, be walloped in this sector. Pity the poor farmers, logistics firms, supermarkets, restaurauteurs who would be crippled by the reimposition of border controls. (The EU’s “Border Inspection Post” system is, to put it mildly, neither rapid nor straightforward. Our own government has helpfully printed the details here.)

A no-deal Brexit, then, would entail potentially disastrous consequences for certain sectors.

This is not priced in. Does this mean that Britain will leave with many of the customs union’s features still in place? That we will, as Ms Dawson clearly desires, not be “punished”?

That is a possibility but it could spell the end of the EU, which appears not to be priced in either . . .

Just imagine. An economically benign Brexit would mean Britain securing a free trade deal that goes way beyond current WTO rules in the key areas of agriculture and fish, while maintaining border control-free access in these and related markets. At the same time we would be regaining complete control of our immigration, lawmaking and judicial processes – and saving part, if not all, of our contributions to the Brussels budget.

A core of true believers – Luxembourg, for instance – might want to stay in the bloc and accelerate the move towards political federation. But surely, plenty of other “member states” would want to follow such an example.

This year’s electoral cycles across the Channel may not threaten the euro, then. But Brexit seemingly has to threaten either some sector-specific but nonetheless material economic damage, or the continued existence, to some extent, of the EU. If a eurozone country wanted to leave the EU, it could in theory continue to use the single currency. But might financial market pricing, by that point, not have begun to look rather different . . ?

So much of the focus has been on Article 50 and the possibility that Brexit might be somehow derailed that thinking has yet to turn to this apparently logical conclusion. The question for investors is: what are the euro assets which are so compellingly attractive that one should wait until it does so?

14/03/2017 at 6:43 pm

European Politics

Think “political risk in Europe” this year and you would most likely have thought about the Brexit vote. It is of course true that Britain faces an uncertain future, and that Brexit will have consequences for the EU too. But it is far from the only game in town.

On Sunday week the electors of Hungary will cast their votes in a referendum on the issue of migrants. Specifically, they are being asked if they accept the EU’s allocation of a migrant quota to Hungary without the consent of their national parliament. The most recent opinion polls suggest that anywhere from three to four percent of citizens are inclined to vote, “yes”. Barring a miracle, Hungary is about to throw down the gauntlet to Brussels in a few days. This has already appalled one or two other EU members: Luxembourg’s most senior diplomat has called for Hungary to be expelled from the Union altogether. In response the Hungarian government is calling for treaty change (specifically reform of the constitutional Treaty of Lisbon).

The question for investors, of course, is: will markets care about this? Even if Hungary were to leave the EU it isn’t in the euro and is a smallish country, so the answer, in isolation, is almost certainly “no”.

It is equally obvious, however, that the Hungarian vote is not an isolated incident. Portugal was talking about a Greek-style referendum on bailout terms over the summer, though this has yet to amount to an actual plan (and didn’t do Greece herself any good in the event either). And next week the Italian cabinet is to fix a date for a referendum on constitutional reform. The detail here is extremely boring but Prime Minister Renzi staked his political future on the outcome. He has tried backsliding on his promise this week but by turning the referendum into an effective vote of confidence in his government it is being seen as a conduit for Italian euroscepticism. This has gained sufficient strength for the Five Star Movement – an anti-establishment party founded by a comedian which sits in the same group as UKIP in the EU parliament – to be leading the polls. “M5S” does not actually want Italy to leave the EU – but it does want a referendum on the euro. In the meantime opinion polling suggests that the constitutional referendum is balanced on a knife edge.

Will rising Italian euroscepticism, or at least anti-euro feeling, present a challenge to the markets’ confidence? Not in isolation perhaps . . .

The Italian situation might well be complicated further should neighbouring Austria elect Norbert Hofer of the Freedom Party to be her president this December. Mr Hofer, who is currently in a dead heat with his Green Party opponent, once called for the border with Italy to be changed and the province of South Tyrol to be incorporated into his own country. Be that as it may he certainly wants to close the Italian border to migrants. And there is more: the last time the Freedom Party came into power (as part of a coalition in 2000) the EU imposed sanctions. Would they do so again?

Looking to the new year, the Netherlands will hold elections in March. There, another party with “freedom” in its name is topping the polls and its leader, Geert Wilders, once banned from entering the UK for his views on Islam, could end up as premier. He and his party want out of the EU.

Soon after the Dutch it is the turn of the French to vote for their president. Marine Le Pen, leader of the National Front, is almost certain to wind up in the second round vote, probably against a centre-right opponent. Like her father in 2002 she will almost certainly go on to lose, but her share of the vote will be interesting. The National Front is, as its name suggests, a nationalist party and has always opposed the existence of the EU.

Then, at around this time next year, we will have the Germans. The migrant crisis has propelled support for a new eurosceptic party, the Alternative for Germany (AfD) to 16% in the polls. It has been winning seats in regional elections. It looks set to establish itself firmly as Germany’s third party come next autumn. Some of its members have an enthusiasm for Nazi memorabilia and have defended some of the actions of Hitler’s government. The party has not yet advocated EU withdrawal, but it was founded to bring back the Deutschmark and stop Germans having to bail out other member states. It is also implacably opposed to immigration, effectively opposed to the idea of the Schengen area and overtly anti-Islamic.

Again, it is possible that the EU and the euro will muddle through all this. France and Germany are not going to elect eurosceptic governments, yet. Wilders’ lead in Holland is not unassailable – and the collaboration of his main opponents could, in theory, keep his party out of power anyway. It is impossible to predict these things but it does seem unlikely that the single currency will be seen to be facing as much of a threat over the next twelve months as it was seen to be facing at the nadir of the sovereign debt crisis in 2011.

The risk, however, is there.

Apart from the voting calendar there are simmering tensions to consider within the EU bloc. Perhaps most serious among these is the stress caused by the migrant crisis. The “Visegrad Group” comprising Czechia, Hungary, Poland and Slovakia submitted a list of demands proposals at the Bratislava summit last week which included flat opposition to mandatory migrant quotas. The EU is at loggerheads with Hungary and Poland over constitutional issues; meanwhile the Polish and Hungarian leaders are extremely close allies who hold frequent bilateral meetings. This is a barrier to sanctions which some in the EU would like to impose on Poland. (It is seen as a lesser problem that the current Polish government swept to power last year with the first absolute parliamentary majority since the restoration of democracy in 1989.)

Of course there are external issues to consider too, most notably relations with Russia and Turkey. Even more widely, the Brexit vote, support for Donald Trump in the US and the threat of the Philippines to pull out of the UN among other things might suggest that supranationalism as a concept is struggling at this point in history.

But we don’t need to worry about that. There is quite evidently enough within the EU to worry us already.

In isolation, none of these risks appears to pose much of a threat to the bloc or its currency. Importantly, the result of this is that such risks are no longer remotely priced in. Given what we know about the political calendar over the next twelve months it is hard not to conclude that this represents too high a level of complacency.

23/09/2016 at 5:17 pm

Nobody Knows

During the summer of 2015 this blog dedicated a post to “Brexit”. The discontinuation of the United Kingdom’s European Union membership had become a possibility on the strength of a wafer-thin 12-seat governing majority won in May of that year by the only political party offering a referendum on the subject. Back then, it looked likely that

The economic consequences will equally obviously be argued over with increasing volume as the date for the Breferendum approaches. There is little to be gained by getting into that argument now as the actual consequences would depend on the options available to the UK should the decision to leave the EU be taken.

Lately, however, several analysts have been putting out research pieces making market calls on Brexit. This week the Chancellor himself joined the fray, trying to make it seem during his Budget speech that the Office for Budget Responsibility were all for “remain”. So what has changed? Do we know any more now about the economic or market consequences should Britain vote on 23 June to regain full political self-rule than we did the previous summer?

Mr Osborne said to the House of Commons on Wednesday that such a vote could entail “an extended period of uncertainty” which could depress “business and consumer confidence” and might mean greater volatility in markets. Couched itself in uncertain terms, it was damaging uncertainty which thus formed the substance of the Chancellor’s argument for the UK’s continued adherence to Brussels, and which forms the substance of those of others on his side of the discussion.

Dealing with what ought to be the most obvious point first: markets are quite capable of exhibiting volatility without political assistance. Just look at the past 18 months. First, tumbling oil took 90-day historic volatility on the S&P 500 to its highest level since mid-2012. Then the turmoil over the summer and into the end of last year pushed it up further, into a range not seen since the panic over eurozone sovereign debt and the attendant market crashes of 2011. A Brexit vote might well ginger markets up a bit, but this is nothing new: it has nothing to contribute to the argument one way or another.

The point about business confidence specifically, as opposed to the impact of any future post-Brexit agreements on international trade, needs to be addressed in two different ways.

Firstly, there is now evidence on this subject from business leaders themselves, and they are divided: as the referendum has drawn closer, British executives, entrepreneurs and spokespeople have come out on both sides of the debate. Foreign investors, too, have given conflicting guidance. JP Morgan and Goldman Sachs announced donations to the “remain” side back in January, and other Wall Street firms have considered throwing in their lot, hinting at their preparedness to move to Frankfurt or similar. On the other hand, overseas car firms with UK plants began indicating a strong willingness to look through the vote and stay invested in Britain as far back as the autumn. So far, then, there has been uncertainty, but no more concerted gloom from businesspeople than there was several months back.

Secondly, as with markets, the corporate sector – including financial services – must have an eye to considerations beyond the political. Skill sets, regulations, tax, costs – including relocation costs – and other factors all enter the mix. Again, this is nothing new: whatever the decision in June, Mr Osborne and his successors at the Treasury are arguably more important in this context.

Consumer confidence is driven by earnings, employment, house prices, inflation and interest rates. The more secure we feel in work, the more we have to spend and the more stable the required level of our spending on goods and services, the greater our confidence in the economy and the more aggressive our activity within it. The impact of Brexit on those factors is no clearer today than it was after the general election.

Finally, much of the economic analysis of Brexit has centred on the pound. The consensus seems to be for devaluation to one degree or another (20% from Goldman Sachs earlier in the year). Yet when Scotland looked like it might vote to leave the United Kingdom back in September 2014 the most significant one day fall in the trade weighted sterling index was -0.9%. The splitting up of the currency’s economic area was a real prospect at that time yet it hardly budged. Again, this analysis is purely speculative, and for the same, over-arching reason: it is trying to analyse something which doesn’t exist.

Should the UK “vote leave” this June, then, there may be market turbulence attributable to this. Nobody knows – just as nobody knew back in the summer.

Brexit would be a historically significant political event, not an economic one. And should it occur, then whether it would present more of a threat to or opportunity for the country’s economy would depend on the political response.

Readers may well have their own opinions on how confident, or otherwise, to feel about this.

18/03/2016 at 5:28 pm


One of the unforeseen consequences of the sovereign debt crisis has been the proliferation of English portmanteau words. “Greece” plus “exit” has given us “Grexit”; more recently, and less successfully, there was an attempt to promulgate “Greferendum”. But as the odds of a Grexit recede again – for the moment – the prospect of “Brexit” seems to be drawing closer. It was predictable that the Greek experience might play a part in this, but as with the spawning of some rather inelegant language, nobody seems to have seen it coming.

For people in Britain, our membership of the European Union is supposed to be a boring issue. It regularly comes 94th in the rankings of things which opinion pollsters find we care about. Some years ago the Prime Minister famously instructed members of his party to stop even talking about it. Two or so decades back the middlebrow tabloids would print stories of the impertinent substitution of kilograms for Fahrenheit, and so on, but all that blew over long ago. We may not feel European but we have got very used to belonging to the Union and that, until very recently, seemed to be that.

Then a little over a year ago a ragtag rabble of a political party called UKIP won the expensive exercise in window-dressing known as a European Election. Front and centre of their campaign was the topic of immigration policy. Rather than no. 94 down the list of people’s concerns this subject has been no. 1 for most of the last ten and more years. Despite some absurd protestations to the contrary there is a very material effect here from EU policy on freedom of movement – and crucially, the right to reside anywhere in the Union – and our own parliament has no control over this policy whatsoever. UKIP itself was painted as the most racist political party anywhere since the US Democrats. Its supporters were authoritatively presented as poor, ill-educated, “left behind” working class knuckle-draggers incapable of adapting to the progressive glories of the modern world. The party polled 27%, winning the election hands down.

One of the consequences of UKIP’s success was the Conservative party’s commitment to an in / out referendum on Britain’s membership of the EU. After Mr Cameron’s surprise election victory he was lumbered with actually having to deliver this, and given the tiny size of his majority in parliament has already been unsuccessful in his early attempts to stitch it up. Still, opinion polling has almost always favoured the “in” side. This is not surprising when one considers that EU membership is an issue which for the last twenty years has only exercised the country’s political right, and a minority of it at that.

Enter the Greeks.

Readers of this blog will know that the attitude of the Greek government to negotiations with its creditors has been childish and dangerous. Readers of the news will know too that despite a referendum in which the Greek people voted not to accept their creditors’ terms of a month ago, the Greek parliament has just voted to accept terms more stringent – including a large majority of the ruling far-left Syriza coalition.

This has widened ancient cracks in the support for EU membership on Britain’s own left. Only a month ago it was down to Ms Kate Hoey MP, no longer a high-profile figure, to remind us in the words of the New Statesman that “it was once Labour that was the Eurosceptic party of British politics”. Since the Greek experience, however, support for EU withdrawal in the Labour movement is growing. Like Syriza there are many in this country who believe that balancing the nation’s books is an unacceptably “austere” approach to fiscal policy and they are dismayed that the Greek government has given in to reality so easily. Leftist media commentator Owen Jones gave an excellent account of this position in the Guardian this week:

At first, only a few dipped their toes in the water; then others, hesitantly, followed their lead, all the time looking at each other for reassurance. As austerity-ravaged Greece was placed under what Yanis Varoufakis terms a “postmodern occupation”, its sovereignty overturned and compelled to implement more of the policies that have achieved nothing but economic ruin, Britain’s left is turning against the European Union, and fast.

“Everything good about the EU is in retreat; everything bad is on the rampage,” writes George Monbiot, explaining his about-turn. “All my life I’ve been pro-Europe,” says Caitlin Moran, “but seeing how Germany is treating Greece, I am finding it increasingly distasteful.” Nick Cohen believes the EU is being portrayed “with some truth, as a cruel, fanatical and stupid institution”. “How can the left support what is being done?” asks Suzanne Moore. “The European ‘Union’. Not in my name.” There are senior Labour figures in Westminster and Holyrood privately moving to an “out” position too.

“Its sovereignty overturned”. A few weeks ago it would have been unthinkable to find anyone significant on the left of politics in this country remotely concerned about a backward-looking hangup like that.

Most significantly of all, Mr Len McCluskey of the Unite mega-union – who has the Labour party in his pocket – told the Financial Times yesterday that if Mr Cameron succeeds in watering down the employment law component of the EU’s imperium his organisation may join the “out” campaign:

“My union is a pro-Europe union [but] if Cameron was successful and watered down workers’ rights, I believe my union would need to seriously consider its position,” Mr McCluskey told the Financial Times.

Asked explicitly if the union could switch to the No camp, he said: “The whole question about what Cameron does to workers’ rights would require us to review fully our position, and that could be anything.”

We began by observing that this series of events was predictable. Succumbing to technocratic hegemony from Brussels in several key areas of one’s national life can appear sensible so long as Brussels makes decisions which are to one’s liking. While the Commission was whimsically busying itself with the destruction of coal-fired power stations and such like the Joneses and McCluskeys had nothing to say about it. But get in the way of double socialism before breakfast? Heaven forfend!

So the Greek fiasco has now whipped up secessionist sentiment on the left as well as the right of British politics. The odds of Brexit have therefore increased.

This is of huge political significance of course. The economic consequences will equally obviously be argued over with increasing volume as the date for the Breferendum approaches. There is little to be gained by getting into that argument now as the actual consequences would depend on the options available to the UK should the decision to leave the EU be taken. From an investment perspective, however, that increased likelihood of uncertainty itself could have an impact.

The Big Two ratings companies have both threatened the UK with downgrades should Brexit come to look more likely. International portfolio flows might well put downward pressure on sterling and on British assets. Confidence might be impacted and growth could suffer, which would jeopardize our already rather fragile debt arithmetic.

There are, in that immortal phrase, several “known unknowns” to consider. The Greek story has made UK withdrawal from the EU thinkable for the first time since the chaos of the Maastricht Treaty. As that referendum approaches times might just get very interesting indeed.

17/07/2015 at 3:02 pm

The European Question

Europe has been much in the news again lately. David Cameron expressed a preference for the Presidency of the European Commission to go to an unknown arch-federalist other than the one seemingly favoured by his fellow leaders. This is exciting enough. But a wiretapping scandal in Poland, which initially passed unnoticed when as a purely local matter it threatened only to unseat the governor of the Polish central bank and plunge the ruling party there into crisis, is more exciting still. According a magazine report, foreign minister Radosław Sikorski – who to top things off was once a member of the Bullingdon Club – has, in the even-handed vocabulary of the BBC, “criticised UK Prime Minister David Cameron’s handling of EU affairs”:

He goes on to say, using expletive-laden terms, that Mr Cameron messed up the 2011 EU fiscal compact on budget discipline, which the UK tried to block. “Because he’s not interested, because he doesn’t get it, because he believes in this stupid propaganda, he stupidly tries to manipulate the system,” Mr Sikorski was quoted as saying.

Readers might well have forgotten that the fiscal compact of which Mr Sikorski speaks began life as a putative new EU treaty, which Britain vetoed in December 2011. It subsequently took off as a “compact” between every EU member state except the UK and the Czech Republic – though the Czechs are due to sign up any minute now if their new leader has his way. Once again, Britain looks destined to stand alone, etc.

Whether or not we forget about it, however, Europe marches on. While it has not received any attention, the fiscal compact has been making and is set to make further advances. The budget rules and submission timeline agreed back in 2011/12 have already swung into action: last October saw the first occasion on which every nation signatory to the compact had to present its annual budget to the Commission for scrutiny. And from 1 November this year, prudential supervision of financial institutions in all signatory countries – not just eurozone members – will become the prerogative of the ECB.

It is traditional to interpret the plenipotence of Brussels from a position of coyness. For example, the fiscal compact sets the Commission up with the same sort of mandate as the OBR here in Britain: a dispassionate and final compiler of economic data for national budgets. Yet EU member states still possess every freedom to come up with their own data (in some areas, for now). This is why Spain was able to dismiss the EU’s concerns over its budget this year as “a mere difference in growth forecasts”, and proudly plead that deficit targets would, nonetheless, be met. For Italy, facing similar concerns, the answer was even simpler. By the time this year’s budget had received Commission feedback the country had already decided – quite independently – to privatise a few more state assets, thereby meeting its solvency targets while not bowing to usurpation of fiscal policy at all.

It is at times like these that one can become grateful for England’s generous allocation under the Common Humour Policy. But for those taking a medium term view of European affairs and Britain’s continued involvement with them there are three very serious points to take on board.

  1. The sovereign debt crisis for Europe in particular was / is a defining moment in its history: the goal of “ever closer union” became not just a political ideal but an imperative of economic survival.
  2. The United Kingdom benefited throughout the crisis – however irrationally – from having decided to remain outside the euro.
  3. The UK view on the necessity of “ever closer union” has thus diverged ever more markedly from the views of other EU states, and those of the euro countries especially.

So what comes next?

Most obviously, point (3) will persist. ECB supervision of Britain’s banking system is not seen as necessary, will not happen this November – uniquely, perhaps, in the EU – nor will it happen in the foreseeable future. British budgets will not be subject to Commission scrutiny. Indeed, compliance with the fiscal compact rules in that regard would require us to change our tax year to match the calendar year, as it does elsewhere: the financial equivalent of metrication and likely to be just as welcome.

More broadly, Britain’s position in the EU has never been quite as comfortable as it has been for other, equally proud sovereign nations such as Luxembourg. That level of comfort seems ever more unlikely to improve. This blog quoted one expert observer on the subject back in November 2011, after that month’s emergency summit but before the UK veto had been exercised:

A rival treaty organisation, predicated on common economic government, would become de facto the new forum for integration. One by one, political powers would pass from the EU to the eurozone until the EU became a shell, an amplified free trade area, a kind of EFTA-plus. Which, of course, would suit Britain very well indeed

Two and a half years ago, a two-speed EU looked like a dramatic idea. Today it is getting closer to being policy, on all sides. In another two and a half years’ time the UK could be on the brink of a decision as to whether or not to remain a member of the EU at all.

When it comes to the gathering European question of Brexit we should apply the same quality of analysis as we do to markets. Forget about the fluff – who said what on which tape, which faceless figurehead gets to be Chief Bureaucrat for the next six months, or what precise party postures are adopted to squeeze votes out of people that electoral cycle. The years we have just lived through represent exactly the sort of tectonic movement that causes major earthquakes. Whether we like it, or want to believe it, or not: these years have widened the English Channel, and undercurrents which were always there have grown more powerful.

It’s possible, if not a little hopeful, to see how Britain’s increasingly likely exit from the EU as the relationship now stands might benefit all involved. Of course it might also be a disaster. As a pair of alternatives that at least speaks to volatility. And over the medium term, we should be prepared.

27/06/2014 at 6:37 pm

Europe’s Moment

An enormous amount has been written about the current situation in Ukraine and one intention of this post is not to duplicate overmuch. The politics has mostly been well covered elsewhere for instance. The economic discussion, however, has tended to focus on its direct effects, such as trade sanctions, commodity prices, and Russian asset and currency weakness. But there is an indirect effect at work that could have important economic and market consequences over the medium and long term; consequences which would have seemed very surprising only a short time ago.

The maps displayed on news websites over the last couple of weeks have tended to focus on Ukraine itself – colour-coded from time to time by language or broad ethnicity – and more latterly on the Crimea. Events further north have received less attention, yet there has been some real anxiety and sabre-rattling in the Baltic too.

On Monday, Russian forces conducted exercises in the Kaliningrad exclave on the Polish and Lithuanian borders:

Defense Minister Sergei Shoigu earlier said the snap inspections of more than 150,000 troops of western and northern military units were not connected with events in Ukraine.

Perish the thought. On the same day, a website in Poland published photographs of troop movements observed by members of the public, connecting them speculatively with events over the border with Ukraine:

Poland’s defence minister … told the TVN24 news station that “there are no movements of Polish troops which deviate from their usual routine” and that any movement[s] of soldiers and equipment are due to “routine exercises”.

Naturally. Then yesterday, it was announced that American fighters and service personnel are to be dispatched to Poland, and also that fighters and tanker planes had arrived in Lithuania to reinforce air patrols over the Baltic states. This time the connection with Ukraine was explicit. Both Poland and Lithuania are members of NATO.

This brings us on to the economic point: neither Poland nor Lithuania are yet members of the euro. Estonia joined in 2011, Latvia has just joined this year and Lithuania is set to join in 2015. Poland, however – observing the sovereign debt crisis and benefiting from currency depreciation on occasion – has been lukewarm on the matter and is not yet even in the ERM. But this week, governor of the National Bank of Poland Marek Belka said that security concerns should change the country’s thinking:

Belka said the standoff in Ukraine is increasing the political benefits of becoming part of the euro area and its $12 trillion economy, which would give Poland a seat among the “core group” of EU countries …

“There’s more influence” inside the euro area on issues ranging from defense to energy policies, Belka told reporters this week. “Even if the economic benefits today look modest, we need to make the political calculation as well.”

The euro area “is an island of stability” that “certainly looks attractive” to countries that feel threatened by the situation in Ukraine, Mario Draghi, the president of the European Central Bank, told reporters in Frankfurt yesterday, when asked about Belka’s comments.

This kind of thinking, coming from the biggest economy in the eastern part of the EU bloc, could carry over to other EU members who remain wedded to the euro only in theory. Bulgaria and Romania, for instance, have put back firm plans for joining in the past. Might these be brought forward again? The Czech Republic made weaker commitments after joining the EU in 2004 but these fizzled out; again, it may be possible for the tide there to turn. Various weaknesses have emerged as stumbling blocks to Croatia and Hungary, though European recovery should help overcome them.

On the other hand, Sweden has no plans to join and is unlikely to be subject to the same pitch of political concerns over current events in the east; and Britain and Denmark remain opted out of the project.

The policial point raised about membership by Mr Belka is of course a valid one. During a chequered visit to the UK recently, EU Commission Vice-President Viviane Reding stated her belief that “the eurozone should become the United States of Europe.” And in connection with Ukraine, Commission President Barroso – in addition to his commitment to supporting the country with €11bn of aid – said only yesterday:

Not only we have reiterated the European Union’s commitment to signing the Association Agreement … we have also decided, as a matter of priority, that we will sign very shortly the political chapters. This means notably the general principles, the part on political cooperation and the Common Foreign and Security Policy (CFSP) of the Association Agreement. This will seal the political association of the European Union and Ukraine.

This might not mean too much in practice. After all, how many divisions has the EU Commission? And there are several countries – including Finland, who has a peaceful shared border with Russia – which are signed up to the EU and the euro and are not members of NATO. Still, one can see why some in Poland and elsewhere might be encouraged by this kind of thing, and Vladimir Putin and others rather less enthralled.

To summarise: negative sentiment on euro membership arising from the sovereign debt crisis has abated with the crisis itself. Further, it is clear that an unwitting consequence of the new crisis in Ukraine has been to make membership seem more attractive, at least to some.

Over the medium term this could entail market convergence as seen in the late 1990s: the extra yield on ten year local currency debt issued by Poland compared to euro-denominated debt is 1.5%, for example, and this gap would be expected to close.

Over the longer term, as the eurozone in particular gains momentum in its quest for “ever closer union”, the position of the dwindling number of EU states outside it would look increasingly anomalous. The economic consequences of political change taking place as a result of this, especially here in Britain, are unpredictable.

07/03/2014 at 4:45 pm

Thrilling Budget Showdown

No, not the one between Mr Osborne and Mr Balls on Wednesday – the one between Portuguese prime minister Jose Socrates and the country’s opposition parties the same day. Portugal’s government saw its latest package of austerity measures defeated, Socrates resigned, the country is heading for an election and (so the consensus believes) a Greco-Irish bailout courtesy of the EU / IMF.

The consensus view finds support in recent bond market movements – specifically in the widening of the spread of Portuguese government debt over that of Germany. (Similar moves preceded the Irish bailout last November.) In fact, ten year Portuguese paper yields 4.3% more than Germany’s at time of writing – this remains well short of Greece and Ireland, at +9.1% and +6.4%, but well clear of Spain and Italy too (+1.9% and +1.5%).

Furthermore, Mr Socrates’ likely successor as Portugese PM, Pedro Passos Coelho, has been a bit cagey about his commitment to fiscal discipline and the avoidance of bailouts.

Before we treat the bailout as a foregone conclusion, however, let’s look at the numbers.

Portugal’s budget deficit on a Maastricht basis peaked in calendar ’09 at 9.3% – bigger than the eurozone average but much lower than equivalent figures for Greece, Ireland and Spain. The deficit for 2010 is estimated at 7%, and on the proposed measures was targeted to reach 4.6% this year. In the Greek and Irish cases, a large part of the problem was that deficits into 2010 were continuing to widen.

Taking a thoroughly non-random example to compare: the UK’s 2009 fiscal deficit on the same basis came in at 11.4%, is estimated at 9.8% for last year and forecast to come in at 7.9% in 2011.

Now Portugal has other problems. Its growth rate for the last ten years averaged a miserly 0.7% p.a., and unemployment, though stable, is rather high for comfort at some 11%. But it is clearly in a stronger fiscal position than the countries which have already been bailed out.

One view of Portugal’s vote this week is that it was about politics rather than economics. That Mr Coelho and his supporters are happy to continue on the path of deficit reduction – albeit by different means – but that they also want to overhaul a sclerotic economy viewed as increasingly corrupt. They must also understand that a bailout would come with austerity measures attached that would be harsher than those they have just voted down.

Ultimately, as one senior European politician put it, “Portugal won’t be left alone by the other Europeans.” We have already noted that such an attitude augurs well for the euro’s long term survival. But evidence that the eurozone’s less responsible borrowers are capable of getting their houses in order independently would bode even better.

25/03/2011 at 1:49 pm

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