European groups warn sanctions on Russia taking toll

Companies across the eurozone warned that the crisis in Russia and Ukraine is already taking its toll on business, as stringent sanctions imposed on Moscow sent ripples through European boardrooms.

The warnings came as the European Union published its toughest sanctions against Russia since the end of the cold war, targeting Russia’s energy, financial and defence sectors.

Shares in Adidas, the world’s second-largest sportswear group, dropped 15 per cent after the company issued a profit warning and said it would accelerate the closure of stores in Russia because of increasing risks to consumer spending in the region. Volkswagen, Europe’s biggest carmaker by sales, reported an 8 per cent decline in sales in Russia in the first half of the year, compared to the same period a year earlier.

Joe Kaeser, chief executive of Siemens, warned geopolitical tensions including those in Ukraine posed “serious risks” for Europe’s growth this year and next.

Metro, the eurozone’s second-largest retailer, said events in Russia were creating risks for the group as it revealed sales had declined sharply in Ukraine. The German group said that a planned listing of part of its Russian arm was on hold until the situation improved, citing uncertainty in the region and the fall in the value of the Russian rouble.

Royal Dutch Shell’s chief executive Ben van Beurden said that along with other western oil majors he was assessing the impact of tightening sanctions on Russia’s energy sector imposed by the US and EU. “It’s a bit early to say how it will play out, what the consequences might be and how we will react,” he said. The oil company last month suspended operations in the Yuzivska field of eastern Ukraine amid mounting clashes between separatist and government forces.

Erste Group, the third-largest lender in emerging Europe, warned the turmoil could impact banks in eastern Europe. “I can’t exclude any nasty surprises in the region due to political decisions or developments,” said Erste chief executive Andreas Treichl. “If the crisis accelerates of course we will have to revise our forecast for all over Europe in 2015 and 2016.”

The German machinery association, VDMA, lowered its forecast for growth in the industry this year as it said the Russian situation was starting to affect bilateral trade and weigh on demand in important sales markets.

French oil major Total said on Wednesday it had frozen its purchases of shares in Russia’s second-largest natural gas producer, Novatek, on the day that flight MH17 was shot down over Ukraine. BP, which owns a fifth of Russian energy company Rosneft, said earlier this week that its profits could be hit by the crisis.

US companies have also been affected. Visa and MasterCard are facing the prospect of tighter restrictions on the way international credit card companies can operate in the country as the government considers its own national payments system in response to earlier US sanctions.

Last week, Visa cut its fourth-quarter sales guidance, partially because of lower than expected cross-border transactions in Russia and Ukraine. Bank of America has almost halved its exposure to Russia this year to $3.9bn.


S&P Dow Jones Indices announced a reviewing of Russian securities in its indices, as some licensees may have to divest holdings of companies facing US or European sanctions.

ExxonMobil, which is developing a large liquefied natural gas export facility at Sakhalin in Russia’s far east, said it was awaiting further details to understand the effect of sanctions designed in part to prevent the transfer of new technology to Russia’s oil and gas industry.

David Rosenthal, vice-president of investor relations, declined to say whether the Sakhalin operation was financed through ExxonMobil resources already in Russia or was reliant on financing from outside. The distinction could make a difference to the company’s ability to continue with the investment under the sanctions


n the City of London, bankers warned it was not feasible for Russian companies to list on the London Stock Exchange until a de-escalation of the crisis.

“Until there is some clarity and some sort of positive news that shows mutual understanding, I don’t think any Russian companies will be able to come to market,” said a Russian equity capital markets specialist at a major investment bank.

Two other big Russian IPOs in London – for privately owned Russian oil company Bashneft and Detsky Mir, Russia’s largest retailer of children’s goods – would also struggle to come to market in the current environment, bankers said.

Fonte: FT

David Pilling: The Brics bank is a glimpse of the future

Thirteen years ago, Brics was a marketing ploy dreamt up by Jim O’Neill, then chief economist at Goldman Sachs. Now it is a bank. Next thing you know, it will have its own line of designer handbags.

This month in Fortaleza, the five Brics nations – Brazil, Russia, India, China and South Africa – agreed to establish a development bank. They also set up a $100bn swap line, known formally as a contingent reserve arrangement, a deal that gives each country’s central bank access to emergency supplies of foreign currency. To borrow a phrase from Anton Siluanov, Russia’s finance minister, the five countries are attempting to conjure a mini-World Bank and a mini- International Monetary Fund.

The Brics’ plan is good for the world, although you would not know it from the sniffy reaction in the west. There have been two default positions. One is to scoff at the very idea of five such disparate nations organising anything coherent or staying the course. The other is to worry that the world order reflected in the two US-led institutions set up at the Bretton Woods conference of 1944 is about to crumble.

It is indeed a minor miracle that five countries whose initials happen to form a catchy acronym have so quickly gone from Brics to a bricks-and-mortar bank. This is a reprimand to western-led institutions that have failed to adapt. If the postwar order really is being upended, the right response is “hear, hear.”

The new Brics bank, which will fund infrastructure projects, will have initial capital of $50bn and maximum allowable capital of $100bn. Each country will pay in $10bn, giving them a theoretically equal say. The bank will be based in Shanghai, a sop to Beijing, which clearly intends to wield influence. Yet the presidency will be rotated, starting with India. China will not have a turn until 2021.

By contrast, the five countries will contribute to the CRA swap line according to size, with China pitching in $41bn to South Africa’s $5bn. The contingent reserve is a safety net for times of financial stress, for example if one country’s currency comes under speculative attack. It is modelled on the Chiang Mai Initiative, a $240bn Asian currency swap arrangement concluded after the 1997 Asian crisis when the region’s proposal to launch its own IMF equivalent was squashed by Washington.

The Brics bank, too, was born of frustration. The IMF in particular is disliked in much of the developing world. In the 1990s, its rigid adherence to market reforms led many to see it as an instrument to keep poor countries down, not to lift them out of poverty. In Asia, it is regarded as hypocritical. In 1997, it insisted on ruinous austerity in countries such as Indonesia. Following the 2008 financial crisis it has happily embraced monetary and fiscal laxity in the west.


If the IMF has changed its spots it has not changed its structure. Its quota system, which determines what each country pays in and how many votes they are given, fails to reflect the reality of a changing world. The Brics nations, which account for more than a fifth of global output, have just 10.3 per cent of quota. European countries, by contrast, are allocated 27.5 per cent for just 18 per cent of output. To add insult to injury, the IMF presidency is reserved for a European, while that of the World Bank routinely goes to an American. Reforms were agreed in 2010 that would have doubled the IMF’s capital to $720bn and transferred 6 percentage points of quota to poorer countries. That this did not go far enough is a moot point. The reforms were never ratified by the US Congress.

From the Brics’ perspective, the global financial system is stacked against them. Raghuram Rajan, governor of the Reserve Bank of India, has accused rich countries of pursuing selfish policies with no thought of their impact on emerging economies. The fact that the US Federal Reserve, without warning, announced plans to “taper” its bond purchases showed it was willing to turn the monetary spigots on and off even at the expense of turmoil in poor countries.


One reason to welcome the new bank is that it will bring competition. China’s lending in Africa has drawn valid criticism that it is not tied to good governance or environmental standards. Yet the presence of alternative Chinese funding in Africa has been a net positive. The same should be true of the new Brics bank, given the huge number of roads, power plants and sewerage systems that need funding. “Any new institution that is adding to long-term capital has to be good for the world,” says Urjit Patel, deputy governor of India’s central bank, who was in Fortaleza.

The new bank is no panacea. As critics point out, it is relatively small. Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, between them, China, India and Brazil have borrowed $66bn from the World Bank alone, more than the entire subscribed capital of the Brics bank. Similarly, while the idea of conditionality can be overdone, it would not be a good thing if the new bank lent willy-nilly to dictators intent on ransacking their countries’ natural resources. Nor is the Brics bank necessarily as democratic as it makes out. Its articles ensure the founders will never see their voting rights drop below 55 per cent, no matter how many countries join.

Still, the Bretton Woods institutions reflect the realities of a receding age. The world has changed, mostly for the better, as poor countries close the gap on rich ones. The Brics bank encapsulates this. It is a glimpse of the future.


David Pilling


Fonte: FT

Christopher Granville: EU’s sanctions on Russia will fail to be a knockout blow

The new sanctions against Russia agreed by the EU on Tuesday are described by European officials as “level three”. This implies higher levels still to come if Russia’s approach to Ukraine fails to satisfy the US and EU – the logical end point being, as in some computer game, a final confrontation with the supreme adversary: President Vladimir Putin. All such talk of levels obscures the reality that there are only two types of sanctions.

The impact of the lesser type of sanction works through sentiment. The actual measures in this category have targeted individuals and economically insignificant businesses owned by those individuals. Such measures have created an atmosphere in which Russian companies have found it increasingly difficult and expensive to refinance their foreign debt (totalling $650bn at the end of 2013) and the collapse of Russian issuance in the capital market. This has intensified capital outflow, rouble weakness (resuming now, after a bounce in May-June) and declining domestic investment. Real gross domestic product growth fell below 1 per cent in the first half of 2014 compared to the same period last year and 1.3 per cent last year as a whole.

The US already moved up to the second broad category of sanctions on July 16 (the day before the downing of Malaysia Airlines Flight MH17). This type of sanctions is designed to squeeze the financial lifeblood out of the Russian economy by banning credit and capital flows to major Russian banks and corporations, starting with Rosneft, Novatek, Vnesheconombank and Gazprombank. The EU is set to follow the US across this Rubicon – with the focus, judging by the European Commission’s consultation paper, on cutting off Sberbank, VTB and other state-controlled banks from external funding markets.

Whatever sanctions the EU governments finally agree to impose now and in the future, the US’s control of the dollar funding markets gives it the financial power to tip the Russian economy into recession single-handedly. Since the European economy would suffer much more from a slump in Russia than the US, the main significance of the MH17 tragedy in this context is that European governments no longer object to the US using that power, so there will be no transatlantic splits for Russia to exploit. As it turns out, the EU is proving ready not only to endure the effects of serious sanctions passively but to follow the US across the sanctions Rubicon. This will tighten more quickly the financial garrotte around the neck of the Russian economy.

Placing Russia under a financial interdict will have a more powerful longer-term impact than other so-called sectoral sanctions, such as the European Commission’s recommended ban on defence equipment and advanced drilling technologies for tight oil and offshore hydrocarbons in the Arctic. The natural Russian response will be to step up import substitution efforts. While this always takes time even in normal conditions, in the absence of easily accessible financing, the challenge will be that much tougher – and perhaps insurmountable in some cases.

It follows that Russia will have to fall back on its domestic savings. The country’s strong national balance sheet includes about $160bn in the government’s reserve funds that could be used to recapitalise and fund the state banks, which could then refinance the existing foreign debt of non-financial corporations. But with almost $100bn of principal external debt repayments falling due between now and the end of 2015, the sanctions regime will result in these reserves being rapidly depleted – leading in turn to further devaluation, credit rating downgrades and negative growth rates.

If the Ukraine crisis is not resolved by this stage, the whole European economy will feel the pain. A Deutsche Bank study at the outset of the crisis in March concluded that a repeat of the 8 per cent contraction in output suffered by the Russian economy in the wake of the global financial crisis in 2009 would now reduce Germany’s already lacklustre growth rate by half a percentage point.

Until these general blowback effects are felt, the main burden of the EU sanctions mooted by the commission would appear to fall on the UK. The core measure targets debt and equity capital raising by the Russian state banks and bans European intermediaries from offering associated underwriting and advisory services, and the bulk of such business is done in the City of London. Capital market funding is also a small portion of overall foreign funding of Russian banks (about 3.5 per cent as of March 2014), so an important detail about the EU sanctions package as regards both overall impact and burden sharing between the member states will be whether the prohibition on financing Russian banks will extend to ordinary lending. The international syndicated loan market for Russian borrowers is dominated by continental European banks. French banks have the largest exposure of $52.5bn.

This analysis presupposes that the EU will never go for the “nuclear” sanctions option of banning gas imports from Russia, and that the EU and US together will not try to replicate against Russia the ban on oil exports imposed on Iran. The EU cannot for now substitute its present annual gas import volumes of 150bn cubic metres from Russia, and the loss of Russia’s present level of crude oil exports – 7m barrels a day, compared to Iran’s 2.5m b/d – would trigger a sharp rise in the oil price and a global economic slump. This would be the economic equivalent of the Cold War-era concept of nuclear deterrence based on mutually assured destruction.

Short of the “Mad” options, the Russian economy will decline and Europe will suffer, but there will be no knockout blow and, as so often in Russia’s history, the Russian nation may be expected to rally around in the face of hardship caused by foreign foes.


Christopher Granville Managing director and director, Russia/FSU research for Trusted Sources


Fonte: FT

Thomas Wright: Europe should confront its enemies as one citizenry

Two thousand years ago, the words civis romanus sum (I am a Roman citizen) were like a charm for warding off evil, such was the protection that the empire bestowed on all its citizens no matter where they might travel. In the 19th century Lord Palmerston, the British foreign secretary, invoked Roman precedent to promise that any British subject “shall feel confident that the watchful eye and the strong arm of England, will protect him against injustice and wrong”.

Today, more than a week after 210 EU citizens perished in an attack on a civilian airliner, European diplomats are due to debate sweeping economic sanctions against Russia, which supports the Ukrainian separatists who are widely believed to have been responsible for the attack and probably supplied the weapons. Roman precedent should again be at the forefront of diplomats’ minds.

In the days that followed the downing of Malaysia Airlines flight MH17, the Ukrainian rebels failed to protect the site, allowed the victims’ possessions to be looted, and threatened observers from the Organisation for Security and Co-operation in Europe. “In defiance of all the rules of proper investigation, people have evidently been picking through the personal and recognisable belongings of the victims,” said Mark Rutte, the Dutch prime minister. “This is appalling.”

Consider the situation if the same number of American citizens had been killed. Images of the site being desecrated would have placed the White House under immense pressure. Serious consideration would have been given to retaliatory air strikes against separatist positions in Ukraine. The Ukrainian armed forces would probably have received lethal military assistance.

At a minimum, the separatists would have been given an ultimatum to hand over control of the site to US or Nato forces for the duration of the investigation. Crushing sanctions would have been passed with overwhelming bipartisan support. The authorities would have insisted that those responsible be handed over; and if that failed, the US would have pursued them to the ends of the earth.

One can debate the accuracy of this counterfactual. What is beyond dispute, however, is that the US would have responded with righteous anger from Florida to Alaska. The Dutch, who suffered an unbearable loss, are certainly outraged – as are the British, who had 10 among the dead. But elsewhere, people were detached. There was no visceral cry of pain in Rome, Paris or Madrid; no sense that there, too, people had been attacked. Outside the Netherlands, no one marched in solidarity with the 210 fellow EU citizens who died. In Brussels, the flags stayed hoisted to full mast.

In the debate over sanctions that followed, President François Hollande said France should not be expected to repay the €1.1bn it received for the first Mistral warship it had sold to Russia. It would undoubtedly be different if the 210 were French – but that is precisely the point.


The revanchism of Vladimir Putin’s Russia might have been expected to bring European nations together. So far, it has sent them running for cover. Governments have tried to protect their economic interests by maintaining their own countries’ ties to Russia, instead of standing shoulder to shoulder with their allies. In private, officials openly question whether western European nations would make good on their commitment, under Article 5 of the north Atlantic Treaty, to defend the Baltic states if Russia were to launch an operation there of the kind that led to its annexation of Crimea earlier this year.

This is a dangerous time for Europe to signal that it is unable, and even unwilling, to defend its own. Further Russian aggression could be in store – not to mention the lesson that other actors may possibly draw.

Today’s discussion in Brussels is an opportunity to change course. If tougher sanctions are agreed, as many now expect, it will be a start. However, EU leaders must explain to voters why the attack on a civilian air route is an attack on all of Europe. They must resolve to bring those responsible to justice – including the separatist leaders, if their troops are found responsible. And since sanctions may not be enough to deter Mr Putin, they must also do more to help the Ukrainian government to prevent him from achieving his territorial goals.

Europe should appoint a high representative for foreign policy with the heft and understanding to meet the challenge posed by a revanchist Russia. Carl Bildt, the Swedish foreign minister, would make an excellent candidate. So would Radek Sikorski, his Polish counterpart, or Toomas Ilves, the Estonian president.

The EU confronts an existential question. Is there a price to be paid for killing 210 of its citizens? Will the words Ich bin ein Europäer resonate in foreign lands as civis romanus sum did in a previous age? Or is it every nation for itself? Today the EU begins to give its answer. It must be full-throated.


Thomas Wright is a fellow at the Brookings Institution

Diplomacia e poder

Spektor é uma raridade no deserto intelectual  que ainda é a área de pesquisas de International Political Economy no Brasil. Seu livro e artigos são leitura obrigatoria aos interessados no tema.

Neto de ucranianos e italianos, nascido na Argentina e criado no Brasil, onde ganhou seu leve sotaque na Bahia e os primeiros títulos acadêmicos em Brasília, Matias Spektor, doutorado em Oxford, com passagens em Washington e Londres, é a globalização em pessoa. Dias atrás, por celular, Twitter, Facebook, por e-mail e em chamadas nos serviços gratuitos de telefonia e mensagens Viber e Skype, conectou-se com autoridades e amigos brasileiros e indianos para acompanhar, de Londres, a reunião, no Ceará, do grupo dos Brics, que reúne Brasil, Índia, China, Rússia e África do Sul. Gostou do que ouviu. "Foi um passo importante na institucionalização que o grupo não tinha", disse ao Valor, citando a criação do banco dos Brics e do novo arranjo de reservas para socorro em caso de risco nas contas externas. Uma das vozes mais originais e independentes surgidas no debate de política externa ultimamente, o historiador e especialista em relações internacionais diz que os Brics "aumentam capacidade de alavancagem da diplomacia brasileira, dão acesso a um mundo que, de outra forma, o país não teria."

Mas Brasil, Rússia, Índia, China e África do Sul são diferentes entre si. Seus interesses e recursos de poder diversos os impedem de, algum dia, constituir uma espécie de G-7, o clube das potências ocidentais, que, apesar de divergências pontuais, compartilha valores culturais, econômicos e políticos. A reunião com grandes líderes regionais dos Brics é importante por dar maior autonomia de decisão ao Brasil nas grandes discussões mundiais, analisa Spektor. E por aproximar o país da maior economia do grupo, a China.

"Os Brics abrem oportunidade de investimentos, de negócios comerciais e, acima de tudo, dão algo de que a gente precisa muito: acesso ao governo chinês", diz, lembrando a crescente dependência da economia brasileira em relação à China. "Se o Brasil tem problemas para construir canais com os EUA, que dirá com a China." Sobre a construção de canais de entendimento com os EUA, Spektor não precisa falar; deve ser lido. Ele acaba de lançar o livro "18 Dias - Quando Lula e FHC se Uniram para Conquistar o Apoio de Bush" (Objetiva, 288 págs., R$ 36,90) é muito mais do que o título promete.

Sem dúvida, vale a pena, no cenário polarizado da política brasileira, conhecer em detalhes a história de como o governo tucano, já no fim, deu apoio aos petistas para afastar em Washington e em Wall Street a imagem de incendiário colada ao recém-eleito Luiz Inácio Lula da Silva. Além de espírito público, tratava-se de evitar colapso financeiro que afundaria a economia brasileira e, com ela, o legado de estabilização econômica pelo qual o presidente Fernando Henrique Cardoso esperava marcar sua passagem pelo Planalto. A partir de sólida pesquisa acadêmica em documentos de arquivos oficiais e privados no Brasil e nos EUA, Spektor traz revelações que explicam opções de política externa nos governos FHC e Lula como resultado da tradição da diplomacia brasileira somada a visões diferentes sobre o espaço reservado ao Brasil na cena internacional.



O livro de Spektor seleciona momentos-chave no período que vai desde o anúncio da vitória de Lula nas eleições de 2002 ao encontro dele, ainda não empossado, com o presidente George W. Bush, em dezembro daquele ano. Cobre um período bem mais longo que esse, porém, e lembra como o governo FHC rejeitou proposta de Bush para integrar o G-7 e adotou uma política de "resistência defensiva" em relação aos EUA, que chegou a irritar Washington.

Spektor conta, ainda, como o americano rechaçou proposta de acordo comercial entre EUA e Mercosul e relata o esforço do então embaixador brasileiro em Washington, Rubens Barbosa, para atrair o interesse do candidato tucano José Serra pelas relações Brasil-EUA, até que o diplomata recebeu instruções de Brasília para ajudar Lula a entender-se com a Casa Branca. Apesar de visto com desconfiança até no governo de Bill Clinton, com quem construiu um forte relacionamento pessoal e "uma falsa ilusão de sintonia diplomática", Fernando Henrique era tido como o presidente de maior experiência na região sul-americana, e tinha credibilidade, que usou, no governo Bush, para avalizar as promessas de gestão responsável feitas por Lula à comunidade internacional.

Spektor não se prende ao eixo Brasília-Washington, e traz novas informações, muitas delas baseadas nos arquivos da FGV, do Rio, e da diplomacia americana. Mostram como o governo tucano apoiou a consolidação de Hugo Chávez no poder na Venezuela, e como operou para evitar golpe de Estado no Paraguai. Traz, ainda, uma memória da rejeição do governo Fernando Henrique aos esforços no continente contra a ditadura de Alberto Fujimori no Peru.

Para explicar a guarida de FHC a Alberto Fujimori, Spektor recorre à justificativa de um diplomata anônimo, segundo o qual o governo brasileiro optou por evitar, no Peru, envolvimento numa crise sobre a qual não teria total controle, ao contrário da crise paraguaia (esta última descrita em detalhes saborosos, como o conselho do então ministro do Exército de FHC a seu ex-aluno e general golpista paraguaio Lino Oviedo: "Lino, não faz isso").

"18 Dias" é também um remédio para as análises maniqueístas e superficiais que costumam aparecer em manifestações sobre política externa no Brasil. São pontos altos no livro os personagens apresentados por Spektor, em papéis diferentes daqueles em que geralmente são vistos na cena política, como José Dirceu, que, aliado a Antônio Palocci, foi um dos principais defensores e gestores da relação com os EUA, em contraposição a um talvez excessivamente cauteloso e desconfiado Itamaraty.

No livro, lê-se como, ao defender os interesses nacionais - contra negociadores europeus e americanos - na questão dos medicamentos genéricos, José Serra encantou-se (e chegou a cogitar chamá-lo em um eventual ministério) pelo diplomata Celso Amorim, quando ainda não personificava a diplomacia de Lula. Acompanha-se também o notável esforço do então embaixador do Brasil nos EUA, Rubens Barbosa, para elevar o perfil do Brasil na capital americana, o que também lhe gerou enormes atritos na defesa dos interesses brasileiros em temas como comércio e propriedade intelectual.

"Estivemos perto de construir uma parceria estratégica", disse Lula, em entrevista para o livro, falando da "relação muito boa" com Bush. Spektor defende esforço semelhante de busca de afinidades e cooperação com os EUA, assim que definido o cenário político com as eleições presidenciais deste ano. Como explicita "18 Dias", diplomacia não é feita para câmeras de TV nem microfones de palanque, embora exija satisfação à opinião pública e possa usar os holofotes para atingir seus resultados. A partidarização excessiva do debate público da política externa também cria preconceitos que livros como o de Spektor ajudam a desmontar.


Fonte: Valor

Philip Stephens: Europe needs a cold war lesson in deterrence

Europe faces a realist moment. Nearly 25 years have passed since US President George HW Bush saw an opportunity for a new, liberal international order. The EU hoped the landscape would be remade in its postmodern image. The dream has been lost to systemic disorder. Myriad conflicts in the Middle East now lap at Europe’s borders. Russia’s war in Ukraine has crossed them.

There is nothing to be gained from another cold war, even if it is evident that Vladimir Putin wants to tear up the post-communist settlement in Europe. There are, however, lessons to be rescued from the decades-long confrontation with the Soviet Union. One of them is about deterrence. Politicians sedated by hopes of a world organised around international collaboration will have to wake up again to the dynamics of great power rivalry.

Francis Fukuyama was half right in declaring the end of history. Capitalism reigns supreme, but rising states such as China and declining ones such as Russia have found a new political model. Authoritarian capitalism, as the Harvard scholar Michael Ignatieff called it in this summer’s Ditchley Foundation annual lecture, presents them with an alternative to liberal democracy. As for a rules-based global system, these states prefer to dine à la carte. They take what they like and reject what is inconvenient.

Europeans have been slow to recognise the world as it is rather than as they imagined. The reaction to Russia’s march into Ukraine has made this painfully obvious. The reflex has been to seek to defuse the crisis. On one level this is admirable – war did not solve much in Iraq and Afghanistan. The snag is that ceding ground to Mr Putin does not amount to de-escalation. To the contrary, weakness stokes the Russian president’s expansionism.

The west’s priority – and the downing by Russian-backed insurgents of Malaysia Airlines flight MH17 provides an opportunity – should be to recover the concept of deterrence. Not the nuclear deterrence of mutually assured destruction but the traditional understanding that political resolve and a readiness to deploy force can apply a brake. The mistake many Europeans have made – and, to a lesser degree, Barack Obama’s White House has done the same – is to confuse deterrence with escalation. I cannot count the times I have heard politicians and policy makers say they must tread carefully for fear of provoking Mr Putin.

Some of these protestations are self-serving – what these people really mean is that they do not want to jeopardise economic relationships. But there seems also to be a genuine misunderstanding about the purpose of deterrence. Imposing sanctions on Moscow will not of itself persuade Mr Putin to pull out of Ukraine. It might persuade him to think twice before marching his army into other Russian-speaking territories.

To be effective, deterrence has above all to be credible. The potential adversary has to believe that aggression will provoke proportionate retaliation, whether economic or, as a last resort, military. The sanctions imposed on Moscow by the EU have been anything but credible. Washington has gone further, but not far enough to signal serious intent. What Mr Putin has seen of a divided west tells him it is bluffing. He will take sanctions seriously when he sees that those threatening them are ready to bear the costs.

European hesitation has ceded to the Kremlin control of the public debate. The annexation of Crimea overturned the cardinal pillar of European security since 1945: states cannot extend their territory by force of arms. As such, Russia’s action represents a profound threat to the security of the continent. Yet to listen to the discussion in some European capitals is to wonder if Mr Putin is not among the victims.


Nato has a chance to remedy this when its leaders hold a summit in Newport, Wales, in September. The gathering had been intended as a stocktaking exercise after the alliance’s planned withdrawal from Afghanistan. The imperative now is to restore Nato as a solid guardian of the post-1945 security order.

Many of the things the alliance needs to do are practical. They are set out persuasively in a report published this week by the think-tank Chatham House. Nato needs to find ways of working in groupings smaller than the full membership of 28. The alliance should extend the interoperability of forces and improve planning and burden-sharing. Governments badly need to re-explain to their electorates why Nato is vital for their security. Jihadis are not the only threat.

The big danger, though, lies in the credibility deficit. Seen from Moscow, Nato looks like two-tier alliance. No one doubts its resolve to defend, say, Germany, but does the Article 5 guarantee of collective security apply equally to the states that joined after the collapse of communism? Would the US – or Britain, France, or Italy – really resist if Mr Putin turned his attention to “protecting” the Russian-speaking people of the Baltics? If the answer is no, the alliance is worthless.

The best way to make sure the commitment is never tested is to make it credible. That can be done by stationing sufficient “tripwire” forces in the east to persuade Mr Putin that a robust response to aggression would be unavoidable.

The heavy lifting, as ever, will have to be done by the US. Europe has depended since 1945 on Washington’s security guarantee and events in Ukraine suggest that is not about to change. But Europeans cannot forever be reluctant partners in their own defence. The way to avoid war is to deter aggressors.




Philip Stephens




Fonte: FT

Devesh Kapur: Western anti-capitalists take too much for granted

There is something paradoxical about the crisis of capitalism that has unfolded since the financial turmoil of 2008. Westerners are heirs to the capitalist system – and to a vast trove of wealth that it has created. But many in the developed world now count themselves among capitalism’s discontents. It is in the east, where the tradition of free enterprise is still young, that its virtues are more easily perceived.

Capitalism has of course been tarnished by its role in a financial crisis that plunged many countries into recession and put millions of people out of work. It is resented, too, for its perceived tendency to exacerbate inequalities, which sting all the more now that so many people find themselves poorer.

Look east, however, and you see something different. Economic statistics show that hundreds of millions are being lifted out of poverty. Below the surface, the social changes are even more profound.

Among the most striking beneficiaries are India’s Dalits (previously known as the “untouchables”), who for centuries were victimised by one of the most hierarchical societies in the world. Capitalism’s role in erasing this stain on Indian society is comparable to the contribution it made to curtailing slavery, serfdom, feudalism and patriarchy in the west.

Since India underwent market-based reforms in the early 1990s, Dalits have advanced their economic lives. If they have the money they can now buy what was once out of reach, and receive the education they were once denied. They have made still more impressive gains in securing dignity and ending social humiliation. Surveys have found that in the early 1990s, for example, fewer than 3 per cent of non-Dalits who visited Dalit homes in the state of Uttar Pradesh would condescend to drink water or tea; two decades later, two-thirds would accept.

Dalits have also increased their consumption of high-end food, grooming products and other goods associated with high social status. They participate in ceremonies, such as weddings, that were once reserved for people of more fortunate birth. They are no longer confined to their own parallel economy, but buy from the same merchants and sell to the same customers as everyone else.

Capitalism has played a critical role in securing this emancipation. The Dalits were once consigned to demeaning occupations, such as handling dead animals or working as bonded agricultural labourers. This transmitted the patterns of caste oppression down the generations. But market forces are driving out these humbling activities.

No longer the indentured servants of high-caste groups, the Dalits have instead become their customers – leasing land or hiring capital goods such as tractors, and selling their wares at market. They are also moving away from rural settings, where many people are still obsessed with caste, to the cities, where there is less discrimination.

And the Dalit community is producing its own capitalists, too – entrepreneurs who are profiting from opportunities in everything from construction to healthcare to education. In a growing economy that is open to all, fortune rewards those with grit, ambition, drive and hustle. Even if stories of self-made success are rare, such role models will inspire future change.

Echoes of the Dalits’ new freedoms reverberate through India’s democracy – indeed, they are amplified by it. In the most recent elections, for example, a plurality of Dalits voted for the Bharatiya Janata party, which has traditionally been dominated by the upper castes.

This is a constituency that can no longer be ignored. Dalits have received legal and constitutional protections, and benefited from affirmative action in public employment and education – measures that have helped create a small Dalit middle class. In 2007 Mayawati Kumari, a Dalit, was elected chief minister of India’s largest state. That a woman of her caste should have risen to high office largely on her own efforts would, until recently, have been unimaginable. Caste has by no means disappeared. But India’s economic growth and dynamism, unleashed by market forces, are at last providing new ways for Dalits to liberate themselves from servility and servitude.

At the end of Aravind Adiga’s Booker Prize-winning novel on contemporary India, The White Tiger, the amoral protagonist says, after slitting his master’s throat: “I’ll say it was all worthwhile to know, just for a day, just for an hour, just for a minute, what it means not to be a servant.” Happily, the liberation of India’s Dalits has been accomplished at a far lower price. Capitalism has been a wrenching force in human history – but also a revolutionary one, weakening deeply entrenched social hierarchies. In the tropics the people are cheering as capitalism undermines social inequalities. Whatever its flaws, westerners are short-sighted to lament it.


Devesh Kapur is a professor at the University of Pennsylvania and
co-author of ‘Defying the Odds: The Rise of Dalit Entrepreneurs’Tagged



Fonte: FT

Adam Posen: The errors of conservatives obscure the case for trade

Twenty years after Bill Clinton, former US president, signed the North American Free Trade Agreement, its very name chills the spines of US voters and congressmen alike. Even advocates of new regional trade agreements insist that they are not countenancing “another Nafta”. Yet Nafta-phobia is irrational. None of the terrible things that were, according to its opponents, supposed to result from its implementation have in fact occurred. Members of the free-trade area – Canada, Mexico, and the US – enjoy a large joint market and a common supply chain. Consumers in all three countries have gained.

It is true that America’s less-skilled workers have received an increasingly raw deal since the 1970s. But Nafta is not to blame. To claim otherwise is at best to mistake coincidence for causation. At worst, it is a cynical tactic employed to protect special interests at the expense of the common good.

Econometric studies have established that when US companies invest abroad, the net result is increased employment, stronger demand and more investment at home. This makes sense, since it should on average be the more competitive businesses that have the resources and opportunities to expand abroad, and investing should increase their productivity. This conclusion applies specifically to US companies that have invested in Mexico. Recent research has found that, on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their US research and development spending by 3 per cent.

At least until the 2008 financial crisis, US unemployment rates were much lower in the decades following Nafta than before the agreement came into effect, even at a time when the US labour force was growing steadily. Doomsayers claimed that after Nafta, US exports of corn and other agricultural products would lead to a surge of displaced Mexican farmers drifting northward. Yet US Border Patrol apprehensions from Mexico have been declining steadily since 2000, in line with most estimates of illegal immigration from Mexico to the US. The current tragedy of minors from Central America crossing the southwestern border illustrates how desperation, not globalisation, is what truly triggers migration.

True, there have been job losses as a result of competition from Mexican (and Canadian) exports. Some critics of Nafta estimate these at an average of 45,000 a year over the past two decades. But out of a US workforce of 135m workers – between 4m and 6m of whom leave or lose their jobs every month – that is less than 0.1 per cent of turnover. What about the 4m or more other American workers who change jobs every month, many of whom are forced to do so through no fault of their own? It is unclear why someone who loses their job because digital photography replaces film, or because the taste for business-casual decreases demand for suits, or because an industrial plant moves from California to Texas, is any less deserving of support than someone who loses their job because assembly of computers and flatscreen televisions moves to Mexico. It is clear, though, that since such a tiny fraction of total labour force churn in the US is due to Nafta, that deal cannot be a significant cause of wage or employment conditions at home.

Many on the left in the US nevertheless use international trade, and especially Nafta, as a scapegoat for the weakening of labour rights and growing inequality. Others have tried to use trade legislation as a bargaining chip with which to secure concessions on extending the American welfare state – something that conservatives oppose.

For all their efforts, opponents of trade legislation have won only meagre adjustment funds for workers whose job loss is supposedly attributable to international trade. Pro-trade Democrats and Republicans alike have seen these as the minimum concessions required to secure consent for liberalisation. But the result is that job losses attributable to trade are unjustifiably given an outsize significance in the public mind. Moreover, this relatively minor cause of unemployment has been demonised in a way that other job losses are not, even when they are involuntary.

This bogeyman-based approach to trade has failed both the progressive agenda and the US economy as a whole. America has ended up delaying or missing out on opportunities for trade expansion and thus income growth, while the welfare state continues to shrink.

In most countries, increases in openness to trade are associated with a more generous welfare state. In contrast, the US has steadily cut back benefits and worker protections at both the federal and state level. This has nothing to do with international trade. It is the result of legislative majorities that favour a smaller role for the state. Even many Democrats have attacked forms of welfare.

Progressives should stop blocking or scapegoating trade, and instead tackle the problems that contribute to voters’ grievances head-on. Nafta resulted in increased employment, higher productivity, and greater purchasing power for American consumers. This did not come at the expense of less-skilled American workers. Attacking Nafta has done little to help progressives win elected office. Nor has it produced policies that would offer workers greater security. It is time to move on.


Adam Posen is president of the Peterson Institute for International Economics



Fonte: FT

A peek into the IMF machine

A couple of years ago, Liaquat Ahamed, a Washington-based fund manager turned writer, flew to Tokyo to participate in the annual meeting of the International Monetary Fund. It was a febrile moment for the global economy: the eurozone region was on the brink of a crisis, and speculation was sky-high about what the Fund should (or should not) do.

But unlike the other 12,000 delegates who typically attend such meetings, Ahamed was not lobbying for policies, cutting business deals or reporting. Instead, for a few days he observed the IMF circus as if he were an ethnographer plunged into a strange tribe – or a botanist planted in a jungle. Then he travelled to Mozambique and Ireland to watch IMF missions at work. This was not to evaluate the efficacy of IMF programmes but simply to see how the Fund’s staff interacted with each other and local officials as human beings, within the dizzy cross-cultural kaleidoscope of encounters.

The results, published this month in a monograph, Money and Tough Love: On Tour with the IMF , are not just hilarious but shrewdly provocative. These days, as I observed in last week’s column, the issue of globalisation is more emotive than ever. As Ian Goldin, the Oxford-based economist (and a former World Bank official himself) notes in The Butterfly Defect, another thought-provoking new book, “The tidal wave of globalisation that has engulfed the planet in the past two decades has brought unprecedented opportunity. But it has also brought new risks that threaten to overwhelm us.” Financial crises – of the sort the IMF was created to contain – are just one case in point.



But while this means that the question of international governance is also becoming more important, what is striking is how little on-the-ground ethnographic research has been done into organisations that try to implement this. In the wake of the Great Financial Crisis there has been a plethora of books that offer blow-by-blow accounts of what happened inside banks before and after the meltdown. There have also been some fly-on-the-wall accounts of what occurred inside national finance ministries, central banks and regulatory agencies, often written by officials themselves (Timothy Geithner’s Stress Test is simply the latest in this genre). But there are almost no inside accounts of what happens when central bankers congregate for international meetings at the Bank for International Settlements in Basel, or when finance ministers and others gather at the IMF or World Bank.

It is not difficult to work out why. Institutions such as the IMF are generally terrified of letting outsiders peer too closely inside, and Ahamed probably only received permission to do this research because his last book, Lords of Finance, was a weighty, prize-winning tome. Even with these credentials, Ahamed could only peek into the more sanitised edges of the IMF machine.

But even this limited glimpse is fascinating, because Ahamed lifts the lid on seemingly irrelevant details about the fabric and rhythm of IMF life and on the myriad subtle cultural symbols that are used to signal hierarchy, tribal affiliation and power – and which the IMF economists themselves almost never talk about. Ahamed describes, for example, the dress code patterns, noting that “the men [at IMF meetings are] uniformly dressed in dark suits and ties, apart, that is, for two groups: the Iranians, who have this odd habit of buttoning up their collars but refusing to wear ties, and the hedge fund managers, who [are] young, fit and wear designer suits…[they] no doubt refuse to wear ties for much the same reason as the Iranians – to signal their rather self-conscious freedom from arbitrary social conventions.”

. . .

He also tries to explain how policy ideas emerge to dominate the debate – via media platforms. In the case of the Tokyo meeting, for example, he details how the issue of austerity took centre stage, even amid linguistic confusion. “When someone asked the panel why, in view of the costs exacted by fiscal austerity on the social fabric of the countries in crisis, it did not make sense to go slow on budget cuts,” he writes, “[Jörg] Asmussen tried the following comparison: if you plan to cut off a cat’s tail, better to do it in one fell swoop, rather than in slices. This left the half-Japanese audience quite bewildered: why would anyone want to cut off the tail of a cat in the first place?”

Of course, while his account is deliciously droll, this mass of observation reveals a serious point. Although policy makers and economists might like to pretend that international governance is all about abstract ideas or quantitative models, it is actually rooted in complex cultural patterns and languages that outsiders struggle to understand. That is no surprise; all institutions have such traits. But I just hope that the experiment that Ahamed has started will now open the door to other ethnographic accounts of how our huge cross-border bureaucracies really work – not simply to spark more reflection among voters but also among the staff of groups such as the IMF too.




Gillian Tett


Fonte: FT

Gillian Tett: The darker side of Iceland’s showcase recovery

Six years ago, Iceland became a miniature emblem of the crazy credit boom – and bust. This volcanic island has just 320,000 people; think of Buffalo, New York. But in the 2000s, the country’s three main banks expanded at such a breathless pace that they assumed $85bn of debt to fund a collective balance sheet 10 times bigger than the country’s economy. And when the 2008 crisis hit they collapsed, sparking a brutal downturn.

Iceland today is a showcase once more – but this time for the unfinished policy challenge that now hangs over the western world in relation to deleveraging. The economy has staged a laudable rebound, producing a growth rate above 3 per cent as tourism, energy and IT businesses have replaced the frothy banking world as a source of activity and jobs. Growth has been so strong that the central bank is even deliberating over whether the economy could soon overheat.

This is a testament to what can happen to a post-crisis economy when a resilient population embraces painful restructuring and its currency loses half its value. Leaders of Greece, Portugal and Italy would be forgiven a twinge of jealousy.

But there is a problem with this cheering tale. All the laudable growth has not magically removed the cause of Iceland’s crisis: debt. Its sovereign debt is “just” 84 per cent of gross domestic product, according to the International Monetary Fund. But if you add the remaining liabilities of the banks – which are implicitly owned by the government – the total debt ratio is 221 per cent, and there is little chance of the island repaying it in full.

The government has managed to avoid dealing with this problem because it has been using capital controls to prevent investors freely exchanging the krona for foreign currency. This has helped prevent widespread capital flight and enabled Iceland to protect its financial system since the crisis hit. This, in turn, has created breathing space for the economy to recover; but also removed the pressure to deal with the debt overhang or make hard choices about how to allocate the costs of debt restructuring.

As in much of the west, the system feels calm – partly because of heavy state intervention. As one Icelandic policy official says: “Capital controls are our version of quantitative easing.”


But the big question in Iceland – as elsewhere in the west – is how long policy makers can defer dealing with the problem. When the three banks collapsed, the government decided to save the domestic parts of the system (and its own taxpayers) by piling pain on to foreign creditors and depositors. So bank bonds held by foreigners were tossed into default and turned into implicit equity claims on the collapsed lenders – and bank deposits that foreign investors held in Icelandic krona were trapped in the country by capital controls.

In the past few weeks the government has indicated that it wants to start removing these controls to attract more investment to the energy sector and to create a more “normalised” financial system. And, as Mar Gudmundsson, central bank governor, points out, any relaxation will force a new debate about that debt mountain, since the $7.4bn of krona held by foreigners in Iceland’s banks will almost certainly flee if controls are removed without any clarity on how creditors who hold Icelandic bank debt will be treated. And a flight of capital could spark a fresh crisis.

The good news is that the government announced this week that it has appointed external advisers for talks with creditors. But the bad news is that finding any resolution could prove very hard. A group that represents about 70 per cent of bond holders wants its claims to be settled by selling the successors to the collapsed Icelandic banks to new foreign owners.

However, since nationalist sentiment on the island is running high, politicians seem loath to give foreign creditors anything more than a token settlement. So there is every likelihood the country will either end up in a protracted court fight, like the one between Argentina and its “holdout” creditors; or that the government keeps playing for time by extending those supposedly “temporary” controls indefinitely.

Either way, investors would do well to keep watching. For, while the details of any restructuring fight are likely to be complex and the money involved small on a global scale, Iceland reminds us all of two crucial points. The first is that “emergency” policy measures that distort the financial world tend to become addictive. Second, this addiction is very hard to break when there is an unpleasant debt overhang, be that of the public or semi-public sort.

That is a lesson that Lilliputian and giant nations alike need to remember now. And doubly so, as the Bank for International Settlements trenchantly notes, since total gross debt burdens are still rising, not falling, across the west.


Gillian Tett


Fonte: FT

Zhiwu Chen: Foreign companies are easy prey in Xi’s China

Eighteen months into China’s anti-corruption campaign, officials are still being removed from positions of power every day – and corporations and business people are increasingly caught up in the investigations, too.

GlaxoSmithKline was caught in the middle of this campaign a year ago, with evidence emerging that the UK drugmaker’s managers bribed doctors and officials with large sums of money. The scandal is among the most high-profile corporate corruption stories in China, with television stations repeatedly broadcasting the lurid details. With the company’s confirmation last month that executives had been emailed a secretly filmed sex video of Mark Reilly, then the company’s China head, the scandal made headlines worldwide.

Executives are asking why GSK, of all the multinationals operating in China, has been picked on – and what the case means for their own businesses in the country.

Before the anti-corruption campaign started, under the leadership of President Xi Jinping, it was no secret that corruption was widespread, and that pharmaceutical companies, both domestic and foreign, often had to bribe doctors with hongbao, or cash packets, and expensive goodies. If so, why are foreign companies more likely to be picked on and their practices subjected to maximum publicity?

There is an old Chinese saying: “Sa yi jin bai”. It means kill one to deter hundreds of others. Given the large number of corrupt companies, the government cannot afford to investigate and punish them all. So they pick and choose. In particular, they choose those that maximise the deterrence value – well-known foreign multinationals that have engaged in bribery. This is despite the fact that most of them follow better practices than China’s domestic companies because they have more at stake in terms of reputation and they face greater potential liabilities back home.

In the 1980s and 1990s, foreign multinationals would never have been picked on; officials would have looked the other way. The country was poor and in need of foreign investment and expertise. Companies willing to do business were given the red carpet treatmen t, with privileges such as tax breaks and free land use. Their jobs were sought by the best students from the finest universities; even Chinese people who returned from working and studying overseas would be given higher rates of pay. The door was wide open to foreign capital and knowledge.

Today it is a different story. Foreign capital and knowledge have no premium; indeed, it may even be the reverse. Multinationals face a significantly harsher landscape. Returning Chinese no longer enjoy a pay premium.

This all adds up to a significant shift in society’s attitudes towards things foreign – not least towards multinationals.

The first big difference is that, in a reversal of the situation of two or three decades ago, China is a capital-rich nation. It is perhaps second only to the US. So the red carpet is no longer being rolled out for foreign money. From computer to car manufacturing and more advanced industries, the country is internationally competitive on its own terms and no longer hungry for technical knowhow.

Second, entrepreneurship is booming, fuelled by abundant venture capital, angel investors and private equity funds. In the past decade, Chinese technology companies’ initial public offerings on Nasdaq, NYSE and the Hong Kong Stock Exchange have created many millionaires and billionaires, encouraging a number of talented senior executives to leave multinationals and investment banks and start their own businesses. This brain drain has blunted the multinationals’ competitive edge and eroded their position in China. They no longer enjoy unfettered admiration and reputation.

Third, while most multinationals are staffed by good citizens, a few individuals have undoubtedly helped take corruption to a new level. Before the mid-1990s, government agencies and state-owned enterprises would be the most favoured places to work for relatives of the powerful. But then Wall Street bankers came to Beijing. To win contracts to restructure and float SOEs, foreign investment banks competed hard to hire relatives of officials. In a country where relationships are everything, this is a sure way to secure deals.

Soon they had an over-concentration of well-connected relatives among their employees. Such hiring practices helped create resentment against foreign companies among the public.

China has also become more assertive on the international stage, which only adds to multinationals’ vulnerability in the anti-corruption campaign. Targeting them poses little risk but offers much in terms of potential domestic political gain.

Taken together, all these changes combine to make foreign multinationals easy targets to single out.



Zhiwu Chen is a professor of finance at the Yale School of Management

Fonte: FT

Wolfgang Münchau: What central banks should do to deal with bubbles

The world has conducted two controlled experiments on how to fight financial bubbles in the past decade. Both failed.

The first was to ignore the bubble and to mop up later. The idea seemed plausible to a lot of people. But it was based on the false premise that the costs of mopping up would be bearable.

The second experiment has just concluded in Sweden, also with calamitous results. There, the central bank did the exact opposite. It had previously raised interest rates to rein in a domestic housing bubble. In doing so, it generated deflation and raised unemployment. It recently corrected that policy error by cutting the interest rate back to 0.25 per cent.

These two experiments present the opposite ends of our thinking: either ignore bubbles or ignore everything else. What should central banks do?

The consensus view is that they should rely on macroprudential regulation. The Hong Kong Monetary Authority, for example, imposed restrictions on loan-to-value ratios for mortgages. The Bank of England recently placed caps on mortgages with very high income multiples.

Central bankers love macroprudential tools because they are in thrall to an old idea that is simultaneously true and useless. The Tinbergen rule, named after a Dutch economist, states that you need one policy instrument for each policy target. If you have two targets – price stability and financial stability – you need two instruments. Monetary policy deals with prices, macroprudential regulation takes care of bubbles. Problem solved.

Or is it? For a start, the instruments are not entirely separate. Monetary policy affects not only retail prices but also the prices of financial assets. If a central bank commits to keeping interest rates at zero for the foreseeable future, it sets a benchmark for the price of risk-free securities directly and other securities indirectly.

There is also a more fundamental problem. Consider Spain’s housing bubble. The country has an above- average share of brilliant economists and bankers yet hardly any of them expressed concern about pre-2007 house prices. So what would macroprudential supervision have accomplished in those years? Even if our hypothetical macroprudential regulators had correctly identified the risks, they would still have focused on the banking sector. Yet the real tragedy of post-bubble Spain occurred in the household sector. The country’s conservative bankruptcy rules meant that many mortgage holders have been saddled with huge debts for the rest of their lives. Macroprudential regulation might have saved the banks but it would not have saved Spain.

Central bankers are fooling themselves if they think macroprudential regulation is a potent independent monetary policy tool. It is a useful supplementary tool, nothing more, nothing less.

Our best hope lies in a unified framework. Unfortunately, the workhorse models used in mainstream economics do not have a concept of finance. Default cannot happen in these models because their fundamental building block is the “representative agent”, jargon for “your average Joe”. But the average Joe cannot simultaneously default and be defaulted on. You need two Joes for that – none of them is average. Specifically, you need a financial sector in those models, one that includes what we have seen in the past decade – default, credit crunches, rent-seeking, extortion of governments, antisocial behaviour, unethical behaviour, criminal behaviour – to mention just a few.

The great James Tobin, another Nobel-prize winning economist, produced a model with an explicit role for asset markets as long ago as 1969. But rather than building on his work, the economic mainstream rode off in a different direction. The financial crisis gave rise to new approaches but they are still not mainstream. Central banks do not actually use them.

I have been intrigued by some pioneering work by Markus Brunnermeier and Yuliy Sannikov at Princeton, who constructed a model in which the world has two states: one in which banks lend freely and one in which they do not. The policy prescriptions of this model are not fundamentally different from what central banks have done recently. But with the possibility of a future credit crunch integrated into the model, interest rate policy cannot be blind to asset price developments. Such a model would suggest an earlier rise in interest rates in the UK, for example, compared with standard models. For the eurozone, the model would justify aggressive policy easing because a fall in the rate of inflation or outright deflation would harm financial balance sheets and add to instability.

There are several competing approaches. Modern monetarists focus on money, as opposed to credit, as the driving force. But despite their huge differences, both ideological and practical, none of them supports the experiment that just failed in Sweden or the one that failed 10 years ago. And none is particularly keen on macroprudential regulation.




Wolfgang Münchau


Fonte: FT

Gideon Rachman: A golden moment for Germany that may not last

Germany has a habit of winning the World Cup at symbolic moments. Victory in 1954 – captured in the film, The Miracle of Bern – allowed Germans a moment of pride and redemption after defeat and disgrace in 1945. A second victory in 1974 went to a West Germany whose “economic miracle” had, by then, allowed it to regain its status as one of the world’s most advanced nations. Victory in 1990, just months after the fall of the Berlin Wall, caught the joy and potential of a soon-to-be united Germany.

Now, in 2014, Germany has won the World Cup again – and once more at a symbolic moment. The past five years have seen Germany re-emerge as the leading political power in Europe. Britain and France may have the nuclear weapons and permanent membership of the UN Security Council. But the euro-crisis has seen Germany emerge as the undisputed leader of the EU.

Even calling Germany the “dominant power” in Europe would have sounded unsettling a few years ago. But modern Germany has pulled off the unusual trick of being simultaneously powerful and popular. A BBC poll, carried out in 21 nations last year, suggested that Germany was the most admired country in the world.

While Paris feels like a beautiful museum, Rome is crumbling and London is overpriced and overcrowded, Berlin has emerged as a cool city, full of art galleries, clubs and exciting modern architecture from the Reichstag to Potsdamer Platz. It is also a city in which the young can still afford to live.

Once again, the German football team captures the mood of the moment. The sides of 1954 and 1974 were resented by some fans for defeating more stylish opponents – in the shape of Hungary and the Netherlands. The victorious German teams of 1974 and 1990 were praised for being “efficient” or “hard-working” – and lampooned for their ludicrous hairstyles. By contrast, the current German side is applauded for its flair and its sportsmanship. It is also the most multicultural team to represent the country in a World Cup final, reflecting the increasing openness of German society. Yet some of the old virtues remain. At its best, the German team does feel like a well-designed machine, with all the parts working together in harmony. It seemed fitting that Mario Götze, the scorer of the winning goal in Rio, is the son of a technology professor – and one of the two players in the team born in a united Germany.

But if all that sounds too good to be true, it probably is. Germany is undoubtedly going through a golden moment – on and off the football-field – but there are reasons for fearing that it will prove all too momentary. Political leadership in Europe involves making choices – and those choices will inevitably be unpopular in many quarters. To paraphrase Trotsky on war, while modern Germans may not be interested in power, power is interested in them. So while the country has a positive image in the world at large, where its power is not yet felt, the euro-crisis has seen Germany’s image take a battering in its own European backyard. The Merkel government’s insistence on economic austerity in southern Europe has revived old images of arrogant, unfeeling Germans. Asked which country they least wanted to see lift the World Cup, the Portuguese, Spanish, Greeks, Dutch and English all named Germany in their top two least favourite nations.

When it comes to Germany’s global role, the country itself remains deeply divided. The row over US spying on Germany has revived a latent anti-Americanism that was very visible during the Bush years. Indignation over snooping is understandable, but – among the German public – it seems to have spilled over into a refusal to choose between Russia and the west. A recent opinion poll, taken before the latest spying row, showed that more Germans think their country should maintain a policy of equal distance between Russia and the western alliance than opt for a pro-west strategy. That attitude alarms Germany’s Atlanticist foreign-policy establishment, as well as its eastern neighbours. German diplomats are worried that their government’s views are out-of-tune with the public they are meant to represent.

As long as Germany’s economy is humming along as efficiently as its football team, its EU neighbours are likely to be careful and polite about any reservations they might have about Berlin’s foreign policy. However, thoughtful observers within Germany itself are worried that the success of the economy is reliant on a number of advantages that will erode with time.

Germany has lousy demographics. Its fertility rate of just over 1.3 children per woman means that the country’s population is both ageing and on a downward trajectory. Recent moves to reduce the pension age for some workers will make this problem worse.

After years of domestic wage restraint, German workers are understandably pushing for higher pay, But that could erode Germany’s hard-won competitiveness, Meanwhile, German industry may be threatened by its reliance on exporting to austerity-stricken neighbours, even as China’s industrial firms move upmarket and attack the profitable niches that Germany has made its own.

Chancellor Angela Merkel, whose quietly impressive leadership has contributed a lot to the positive image of modern Germany, will be well aware of the challenges that lie ahead. But, along with the rest of the nation, victory in Rio allowed her a moment to pause – and relish Germany’s golden moment.

Gideon Rachman


Fonte: FT

For Brazil, it’s not the end of the world

Despite Brazil’s 7-1 thrashing by Germany, the country could have had a much worse World Cup. Early in the tournament, I took the Rio metro to a match at the Maracanã stadium. I had never been in such a packed carriage. For minutes it was hard to breathe. When we got to the stadium, everyone tumbled out alive. It could have been different.

Then there was the stairway at the Maracanã, which began wobbling when hundreds of Argentine and Bosnian fans walked up it. It held, and was later reinforced. An overpass in Belo Horizonte built for the tournament did collapse, killing two people. Still, things could have been much worse.


With some luck, Brazil pulled off the World Cup – the organisation, at least. Now comes the question: what’s the legacy? The tournament won’t make Brazilians richer, and yet it has changed the country.

Brazil’s government spent years promising that the World Cup would bring an economic bonanza. But, says Stefan Szymanski, economics professor at the University of Michigan, with whom I wrote Soccernomics, “A substantial, well-researched academic literature shows that if anything the reverse is true: hosting big sporting events is an economic burden.” Brazil spent about $11bn on new stadiums. About half of them are already white elephants. It would have been economically smarter to flush that sum down the toilet, because then at least the country wouldn’t need to spend millions maintaining pointless stadiums. Brazilians should be grateful their government was too incompetent to build most of the planned infrastructure. Projects to plonk new airport terminals in towns that didn’t need them, just for a month of football, were thankfully never executed.

Some people will benefit from the stadiums: chiefly, the construction companies that built them, and the Brazilian football clubs that will play in the more useful ones. The French economist Bastien Drut and Szymanski have shown that in the five years after a country hosts a World Cup or European Championship, league attendances typically rise by 15 to 25 per cent. You’d expect an even bigger boost in Brazil, which has leapt from having some of the world’s worst stadiums to having some of the best. At last Brazilian fans might be able to take their kids to watch matches in safety.

But the bigger off-field impact of the World Cup on Brazil lies elsewhere. Firstly, it’s political. This is probably the most politically consequential World Cup ever, because it’s being held in a big football-mad democracy three months before closely contested presidential elections. The tournament became a political item in June 2013, when anger over the money blown on stadiums helped prompt the biggest protests in Brazilian history. The demonstrators were initially angry about bus fares but the football gave the protests energy and got the media interested. The Brazilian musician and author José Miguel Wisnik explains: “The Cup became an allegory for the state’s incompetence, inability to administrate, corruption.” Before kick-off, President Dilma Rousseff’s approval ratings plunged.

When the World Cup then went unexpectedly smoothly, the allegory suddenly worked in Rousseff’s favour: perhaps Brazil wasn’t badly run after all. Her approval ratings have rebounded to 44 per cent, says the pollster IBOPE, and she’s now expected to win in October. Even the unforgettable 7-1 defeat shouldn’t hurt her. Brazilians didn’t make her responsible for winning the Cup, just for organising it well.

Yet in the longer term, the World Cup has made Brazil a tougher place for presidents. The tournament helped jerk millions of hitherto docile Brazilians into political consciousness. During the Cup, almost everybody stopped protesting and enjoyed the football, but the defiant a cappella mass singing of the national anthem before Brazil’s games was a statement – this is our country, not any politician’s. “There’s now a sort of cloud over the elite: people could take to the streets again,” says Geraldo Zahran, professor of international relations at São Paulo’s Catholic University. “So the elite feels it needs to be more responsive.”

More broadly, he adds, the World Cup helped start a national conversation about what sort of country Brazilians want. That conversation won’t die down now.

. .

The World Cup’s other legacy is – even after the 7-1 – happiness. When Szymanski and Georgios Kavetsos of the London School of Economics studied European hosts of football tournaments, they found that inhabitants’ self-reported happiness rose afterwards. Following World Cups, the gain was quite persistent: even two and four years after the tournament, every subgroup studied was still happier than before it.

The key to this happiness seems to be the communal experience. During the tournament Brazilians wear the canary yellow shirts, watch games together over barbecues, and then talk about them the next day in buses or factories. People come to feel more connected to each other. Even the communal Brazilian shame this week is a bonding experience.

In 2016 Brazil hosts the Rio Olympics. The run-up to that will prolong all these effects: wasteful spending, national political conversation and communal feeling. This sporting era won’t make Brazil a richer country – just a better one.




Simon Kuper




Fonte: FT

Depois do grande vexame...

No febeapa que tenta explicar a historica derrota do Brasil para a Alemanha, so se salva os  comentários ponderados do grande tostão. A troca de favores entre os amigos a aversão a meritocria, como ele bem lembra, é um problema nacional e que não está  restrito ao mundo esportivo, e ai encontra-se origem de boa parte dos problemas do querido bananão.
O mundo acadêmico prefere acreditar que isto está restrito a política e ao futebol. Mas, sabemos não ser o caso: concurso de cartas marcadas, proteção aos amigos, aversão total a meritocracia, assassinato de carater, estão presentes no nosso mundo de faz de conta. Neste quesito a esquerda - ou aqueles que se definem como tal - em nada diferem da direita. Alias, onde o marxismo talebã  é hegemonico a situação é ainda pior. A velha regra: aos amigos tudo, aos inimigos a lei, trasforma-se em aos amigos tudo aos inimigos a siberia acadêmica.  
Se é verdade que a derrota cria as condições políticas para uma faxina na CBF e cia ilimitada, também é verdade que esta limpeza não deveria ficar restrita ao futebol: todos deveriamos parar para pensar sobre que andamos fazendo, se de fato nossa pratica é tão diferente da dos nefastos chefões do nosso futebol.        
Pecadores, todos somos, mas nem todos reconhecem . Este deveria ser o primeiro passo.

John Gapper: US banks will pay dearly for their failure to modernise

The other day, a business in New York mailed a dollar cheque to me across the Atlantic. It was a pretty thing – multicoloured, with an anti-fraud foil hologram – and I admired it for a while before putting it into another envelope and posting it back to a friend in New York to walk up the block and deposit. After a round trip of 7,000 miles, it reached my account three weeks late.

Mine is an unusual case – few people live 3,500 miles away from their nearest bank branch – but it illustrates the antique quality of the US payments system, which is the land that time forgot. A transaction that would have been completed electronically in a minute in the UK and many other countries involved a panoply of delays, unnecessary costs and human intervention.

Admittedly, I need not have posted it back. I could have taken a photo of it instead – 17 per cent of US cheques are now deposited via an electronic image, rather than the piece of paper itself. If anything, though, that is a further problem for the US economy, for it weakens the incentive for banks to fix their technological plumbing.

Nor are cheques the only historical curiosity. Credit and debit cards embedded with chip and pin authentication are near ubiquitous in Europe and common in Asia, but almost all US cards depend on 40-year-old magnetic stripe technology. Contactless cards this week became the only permitted payment method on London buses – no cash allowed – but they remain an avant-garde concept in the US.

Some argue that this does not matter too much, given that the US payments system works securely and Americans are used to it. “I have honestly never heard any consumer express concern,” says Steve Ellis, an executive vice-president of Wells Fargo, which is one of the more technologically advanced of US retail banks, although its name evokes stagecoaches in the 19th century Californian gold rush.

But it is strange that a country that often leads the rest of the world in consumer technology lags behind badly in the basic infrastructure of retail banking. It also provides an opportunity for European banks and start-ups to build a lead in financial innovation. Europe has a superior platform on which many other services can operate.

London is already home to many financial technology start-ups such as TransferWise, a peer-to-peer foreign exchange hub in which Richard Branson, founder of Virgin Group, and Peter Thiel, co-founder of PayPal, have invested. “The most interesting things in technology are happening here,” says Kristo Käärmann, its co-founder.

Europe’s lead reminds me of the period a decade ago when it was ahead of the US in the use of mobile phones, and spawned start-ups such as Skype. Its window of opportunity shut when Apple launched the first iPhone in 2007 and Silicon Valley poured venture capital into mobile software, but the US has a big gap to make up in payments.

The widespread use of cheques is the most blatant inefficiency of the US system, although their use is in decline. American consumers and businesses wrote 18bn cheques in 2012 – four times as many per head as in the UK. Meanwhile the US has no equivalent of the rapid payment systems in the UK, Canada, Mexico, and Singapore that can make all transfers intraday.

It is especially odd because the fragmentation of US banking has in the past stimulated world-beating innovation. Bank of America offered the first credit card in 1958, later spun off into Visa, partly in order to overcome the difficulty of using out of state cheques. (Bitcoin is a modern effort to provide a faster and cheaper way of moving money.)

The looming problem is that, instead of a single rapid payments system, US consumers may have to choose among competing private payment networks such as PayPal and Popmoney. The Fed lacks the regulatory powers to impose its own system, and is now trying to cajole the banking industry, along with retailers, into agreement.

In contrast, Europe’s policy makers and regulators forced banks into co-operating to improve the efficiency of payments. The UK’s banks introduced its Faster Payments system in 2008, under regulatory pressure from the UK Office of Fair Trading and the EU payment services directive.

This is reminiscent of the differing approaches in Europe and US to mobile telephony. The EU mandated technologies for phone networks and operating software from the 1980s onward to create competition among operators on a single platform. The US allowed competing standards, now being unified with 4G.

It all worked out in the end for the US and that could happen for payments. More Americans could go abroad and notice what they are missing; banks, card companies and retailers may accept that the gains from investing collectively in better technology outweigh the short-term costs and loss of revenues; the US could move into the lead.

Currently, though, the US lags behind the rest of the world with no obvious way to solve its difficulties. In September, the Fed will present its “road map” for the introduction of a US faster payments system, but banks are under limited pressure to change their ways. For Europe’s sake, long may it continue.


The Federal Reserve which has until now confined itself to politely nudging banks on interbank payment issues, is frustrated at the lack of progress, and the fact that banks blocked an initiative two years ago to speed up electronic payments. Some feared losing the revenues from the “wire room” fees they charge to make rapid transfers.

John Gapper



Fonte: FT

Gavyn Davies: Keynesian Yellen versus Wicksellian BIS

The Bank for International Settlements (BIS) caused a splash last weekend with anannual report that spelled out in detail why it disagrees with central elements of the strategy currently being adopted by its members, the major national central banks. On Wednesday, Fed Chair Janet Yellen mounted a strident defence of that strategy in her speech on “Monetary Policy and Financial Stability”. She could have been speaking for any of the major four central banks, all of which are adopting basically the same approach [1].

Rarely will followers of macro-economics have a better opportunity to compare and contrast the two distinct intellectual strands in the subject, as explained in real time by active policy makers. Faced with exactly the same set of evidence, the difference in interpretation is stark, as is the chasm between them on monetary and fiscal policy.

Martin Wolf has already done a superb job in dissecting the BIS report. To a large extent, the dispute can be viewed as old wine in new bottles: the “Wicksellian” BIS versus the “Keynesian” Yellen [2]. But the Great Financial Crash has provided the two schools with plenty of new evidence to deploy.

Let us start with a few similarities between them. There is agreement that financial crashes that trigger “balance sheet recessions” lead to deeper and longer recessions than occur in a normal business cycle. There is also agreement that inflation is not likely to re-appear any time soon, and that the current recovery should be used to strengthen the balance sheets of the financial sector through regulatory and macro-prudential policy. That, however, is where the agreement ends.

The roots of disagreement can be traced back to the causes of the GFC. The BIS views the crash as the culmination of successive economic cycles during which the central banks adopted an asymmetric policy stance, easing monetary policy substantially during downturns, while tightening only modestly during recoveries (ie the Greenspan and Bernanke “puts”).

On this view, monetary policy has been too easy on average, leading to a long term upward trend in debt and risky financial investments. The financial cycle, which extends over much longer periods than the usual business cycle in output and inflation, eventually peaked in 2008. But, even now, the BIS says that the central banks are attempting to validate the long term rise in debt and leverage, instead of allowing it to correct itself. Excessive debt, it contends, is preventing the rise in capital investment needed for a healthy recovery. Financial and household balance sheets need to be repaired (ie debt needs to be reduced) before this can take place.

In contrast, the mainstream central bank view denies that monetary policy has been biased towards accommodation over the long term. Ms Yellen’s speech claims that higher interest rates in the mid 2000s would have done little to prevent the housing and financial bubble from developing. She certainly admits that mistakes were made, but they were in the regulatory sphere, where there was insufficient understanding of the new financial instruments that would eventually exacerbate the effects of the housing crash. Higher interest rates, she says, would have led to much worse unemployment, without doing much to reduce leverage and dangerous financial innovation.

This difference in interpretation of the past leads to a major difference in view about today’s monetary policy. The BIS argues that zero interest rates and quantitative easing are becoming increasingly ineffective in boosting GDP growth. Instead, they are artificially inflating asset prices, and blocking a necessary correction in excessive debt. Macro-prudential and regulatory policy might be helpful here, but will not be sufficient. The main risk is that the exit from these accommodative monetary policies may come too late.

The Yellen view is in sharp contrast to this. There is no admission that quantitative easing is becoming ineffective, or that excessive debt should be reversed [3]. There is an outright rejection of the view that interest rates have been too low throughout previous cycles. If anything, the “secular stagnation” argument is adopted, suggesting that real interest rates have been and remain too high, because the zero lower bound prevents them from falling as far as would be required to reach the equilibrium real rate. On this view, the danger is that the exit from accommodative monetary policies will come too early, not too late.

There are many other differences on top of this. The BIS argues that there has been a permanent loss of capacity in the developed economies following the GFC, illustrated in the graphs below. This is due to forbearance on bad loans by the banking sector, which allows moribund companies and technologies to survive, while failing to finance the next wave of productive innovation. The mainstream view, by contrast, is that there has been a temporary loss of capacity, but that this can eventually be restored, if demand recovers sufficiently. Ms Yellen’s belief that labour participation rates can rebound is a case in point.



This divergence of views on economic capacity leads in turn to a major difference on appropriate fiscal policy. The BIS implies that cyclically-adjusted fiscal policy is looser than it seems, because GDP can never return to its earlier trends. The Keynesian/Yellen view is that fiscal policy should not be tightened too soon, and perhaps not at all until output has fully recovered.

Finally, the two views are far apart on the need for international co-operation in the setting of monetary policy. The BIS says that this is essential, because the effects of easy monetary policy are felt far beyond national borders, leading to a risk of currency wars and protectionism. It sharply criticises the “own-house-in-order doctrine” followed by all of the major central banks.

Conclusion

The main purpose of this blog has not been to adjudicate between the two alternative approaches, though regular readers will know that my own view is usually fairly close to the Fed/Yellen mainstream. It has been to emphasise just how different the current central bank orthodoxy is from another, internally coherent, interpretation of the past. Claudio Borio and his colleagues at the BIS have done macro-economics a service by spelling out the policy implications of their Wicksellian framework so clearly.

Paul Krugman correctly points out that the BIS has been wrong in the past about the threat of inflation. Furthermore, their supply-led analysis of the real economy probably underestimates the pervasive importance of demand shocks during most economic cycles (see Mark Thoma). But the risk of financial instability is another matter entirely. It is optimistic to believe that macro-prudential policy alone will be able to handle this threat. The contrasting needs of the real economy and the financial sector present a very real dilemma for monetary policy.

The BIS was right about the dangers of risky financial behaviour prior to the crash. That caused the greatest demand shock for a century. Keynesians, including the Chair of the Federal Reserve, should be more ready to recognise that the same could happen again.

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Footnotes

[1] See, for example, Andy Haldane’s recent remarks at the Camp Alphaville conference.

[2] Actually, both New Keynesian models, and Wicksellian models, recognise the concept of the “equilibrium” real interest rate. One shorthand way of describing the recent differences between the two approaches is that the BIS thinks that the central banks have persistently set the actual real rate below the Wicksellian equilibrium, while the Keynesians tend to believe the opposite. A good discussion of the concept of the equilibrium rate in the two approaches appears in this 2011 BIS paper by Claudio Borio and Piti Disyatat.

[3] At least part of the long term rise in debt is viewed by many Keynesians as a natural and sustainable part of economic development, and not as a chronic problem that needs to be corrected.

Gavyn Davies

Fonte: FT