A renewed nationalism is stalking Europe

Nationalism is one of modern Europe’s strongest traditions, but it fell into disrepute after the second world war. Amid the avalanche of crises that have struck the EU over the past decade, of which Britain’s vote to leave the bloc is the latest example, nationalism is making a reappearance.
It takes a different form from the nationalism born in the 1789 French Revolution and buried in 1945. Today’s political and economic conditions are a world apart from those of 19th-century Europe, when many peoples rising to national consciousness had no state of their own. They are a world apart, too, from the 1918-1939 age of ideological extremes — fascism and communism — and severe economic hardship.
Contemporary Europe is, fundamentally, a peaceful and prosperous continent. The EU provides a framework for extremely close co-operation among national governments. It entrusts considerable power to supranational institutions, such as the European Commission, the European Parliament and the European Court of Justice. At a popular level, too, European societies are better acquainted with each other than ever, thanks to advances in communications, education and the ease of mass travel.
Yet nationalism, in new guises, is back on the stage. Its most obvious manifestations are, firstly, a stronger determination on the part of governments to defend their national self-interest within the EU and, secondly, the rise of rightwing populist nativism.
Both developments reflect profound political and social trends. There is a general mistrust of political elites, partly in Brussels but mainly at national level. More specifically, European voters of the moderate centre-left are losing faith in the capacity of 20th century-style social democracy to deliver economic security and protect identity.
The instinct to defend national self-interests in Brussels was never, of course, completely absent even in the heyday of EU integration in the 1980s and 1990s. However, it has soared to new heights amid the eurozone’s struggles to hold itself together and last year’s refugee and migrant emergency.
It is visible in the paralysed effort to deepen Europe’s banking union by means of a common deposit insurance scheme. It is visible in the ceaseless search by some governments to find ways of bending legally enshrined rules on fiscal discipline. And it is visible in a commission decision last week to let national parliaments have a veto over the terms of an EU-Canada trade deal. National self-defence is likely to torpedo a proposed EU-US trade accord, too.
A year ago, the EU’s “five presidents” — of the commission, European Council (which groups national leaders), European Central Bank, eurozone finance ministers’ group and Parliament — published a report on advancing economic, financial, fiscal and political union. Copies of the tepidly received report are gathering dust in the filing cabinets of national capitals.
No big push on integration is conceivable until after next year’s French presidential election and Germany’s parliamentary elections. Even then, it may not happen. France’s centre-right opposition Republicans, who are well-placed to win the presidential contest as well as the ensuing legislative elections, envisage stricter national border controls, a reduced role for the commission and more national influence over common EU policies. This stance has much in common with that of Poland’s conservative nationalist government.
The second form of nationalism in today’s Europe is radical rightwing populism. This is a more potent force than leftwing radicalism, as can be seen in the defeat of Podemos in Spain’s election last month, the increasing unpopularity of Greece’s Syriza-led government and the blind alley into which Jeremy Corbyn and his neo-Marxist allies are leading the UK’s Labour party.
The radical right, at least in western Europe, is less anti-Semitic than it was during France’s Dreyfus affair in the 1890s and under German Nazism. Rather, it is Islamophobic and anti-immigrant. In October, Austria will stage a re-run of its presidential election that may see a candidate of this type become the EU’s first such democratically chosen head of state.
Yet the radical right is more than nativist. It draws on a well of angry attitudes among sections of society that are offended not only by multiculturalism, or by losing out in a globalised economy, but by liberal values as such. Surveys of British voters in the June 23 referendum on EU membership show that one of the surest guides to whether someone would vote Leave was whether they supported a return to capital punishment.
Part of the appeal of rightwing populism is that it hammers away relentlessly on the theme that mainstream political parties, especially since the end of the Cold War, are almost indistinguishable from each other and offer no proper choice. Not without reason, the parties are depicted as corrupt and detached from everyday life. But far from everything is running in the populists’ favour.
Their chief weakness is that they have no economic policies beyond an iconoclastic rage at the euro, free trade and foreigners alleged to be parasites on the welfare state. The new nationalism, in its radical rightist colours, has no credible solutions for a modern Europe that, despite all its troubles, must pin its hopes for a better future on mutual co-operation and an open face to the world.



Tony Barber



Fonte: FT

After Brexit, the EU’s faultlines run through Rome

Europe’s faultline runs through Italy. Such was the candid opinion of one participant in a conference held last weekend by Eliamep, an Athens-based think-tank. Few other participants dissented.
By “Europe” everyone understood, primarily, the 19-nation eurozone. For the question on the minds of European policymakers is where, and to what extent, political, financial and economic contagion may spread from Britain’s June 23 vote to leave the EU.
The sharp falls in Italian banks’ share prices since the British referendum indicate where financial markets smell the danger of contagion. But Italy is the focus of attention not only because of its undercapitalised banks, colossal public debt and miserable economic growth.
Rather, EU governments and the markets sense trouble ahead in the way that Italy’s uncertain political outlook feeds into these problems, making them even harder to tackle. Their paramount concern is the referendum on far-reaching constitutional reforms that Matteo Renzi, Italy’s centre-left prime minister, plans to hold in October.
If voters reject these reforms, Mr Renzi says he will resign. Naturally, the ever-inventive, insouciant premier is free to retract his promise. However, he has staked much on this referendum, having described the reforms as essential for Italy’s reconstruction as a responsibly governed nation.
Defeat would damage Mr Renzi and risk driving Italy into prolonged political and economic instability. Confindustria, Italy’s employers’ group, predicts that defeat would cause the economy to shrink by 0.7 per cent in 2017 and 1.2 per cent in 2018.
Apart from putting Italian banks under more stress, such a recession would undo the good work of Mr Renzi’s government since 2014 in restoring a modicum of economic growth and modestly reducing unemployment. In a country that has recorded almost no growth since it became a eurozone founder-member in 1999, and whose public debt is more than 130 per cent of annual economic output, this would be a heavy blow.
Equally important, defeat for Mr Renzi might boost the fortunes of the anti-establishment Five Star Movement. This party, founded by the blogger-comedian Beppe Grillo, opposes the constitutional reforms. It is wholly inexperienced in government at national level, but it showed its strength last month by winning mayoral elections in Rome and Turin.
At present, the movement is just a few percentage points behind Mr Renzi’s Democratic party (PD) in opinion polls. Parliamentary elections are due in 2018 and only a rash forecaster would write off the Five-Star Movement’s chances. A referendum defeat for Mr Renzi may place the fate of Italy, a nation crucial to the survival of Europe’s currency union, in the hands of an idiosyncratic party that merrily talks of pulling the country out of the eurozone.
Yet a referendum victory for Mr Renzi would not eliminate all risks. The essence of his reform proposals is that Italy should dismantle its bicameral legislature, established in the 1948 constitution, and concentrate power in the lower house. Meanwhile, an electoral law passed by his government guarantees an absolute parliamentary majority for the party that wins a national election.
Mr Renzi’s advisers defend these reforms on the grounds they will cure Italy of its chronic governmental instability. More than 60 governments have come and gone since 1945, holding office, on average, for little more than a year each. Should the reforms take effect and lead to a PD victory in 2018, a five-year spell of strong government dedicated to economic reform might indeed ensue.
But if the Five-Star Movement won, it would find itself — thanks to Mr Renzi’s reforms — in firm control of a legislature reshaped to emasculate opposition to the ruling party.
Several banana skins lie in the EU’s path over the next 12 months, from a potential victory for the far right in Austria’s restaged presidential election in September to next year’s Dutch legislative and French presidential elections. But Italy’s referendum may be the most slippery banana skin of them all.



Tony Barber



Fonte: FT

Economists’ rare unity highlights peril of Brexit

Britain is a week away from its historic economic decision on EU membership. Economists have never been more united in supporting a vote to remain, yet the profession increasingly appears incapable of persuading the public of Britain’s national interest.

Economic history is clear. The UK’s growth of national income per head has been the fastest in the G7 since joining in 1973, having been the slowest between 1950 and 1973. EU membership has served Britain well and has not prevented domestic economic renewal.

A battery of evidence shows the EU creates trade rather than diverts it. All other relationships with the EU and others throw up greater tariff or non-tariff barriers. Trade enhances competition and productivity growth, the elixir of prosperity. Britain is not burdened by EU red tape; its most damaging regulations are home grown. Although EU immigration is unlikely to make the British-born much better off, there is no evidence migrants take jobs and precious little that they harm wages or public services.

The economic assessment is rounded off by the concern that the uncertainty associated with Brexit is highly likely to depress economic activity in the short term, ensuring a much greater hit to the public finances than any possible savings in membership fee sent to Brussels.

Though they do not come to precisely the same assessment of harm, the consensus is striking. While George Osborne’s warning of an immediate tax-raising Budget might be jumping the gun, economists agree higher taxes or lower spending would be necessary. Although economists stand to gain from Brexit — economics does well in a crisis — their lives will not be sweet after a Leave vote for three reasons.

First, good economists know the difference between big and small; they know what is true and fair, and they can put economic claims in the correct context. Such knowledge should be celebrated, but Michael Gove, the leading Brexiter, scorns serious economic research because “people in this country have had enough of experts”.

The Leave campaign has delighted in being the enemy of good economics and shows every sign of continuing after a victory, when it will surely get its fingers on the levers of power. Instead of addressing the arguments, the Leave campaign invariably plays the man not the ball, accuses independent research bodies of being hired hands of European funders, and incorrectly states that authors of many reports were in favour of the UK’s euro membership. A particular low was the insinuation by Steve Baker MP that Mark Carney, the Bank of England governor, was still acting as the mouthpiece of his former employer Goldman Sachs.

Second, some economic officials have been granted constrained powers to take decisions for the public good. The BoE controls interest rates. The Office for Budget Responsibility produces the official forecast that underpins tax and spending decisions. Competition authorities help arrange the playing field on which companies compete. Parliament’s ultimate sovereignty comes in the ability to remove these powers. But that is not enough for many Leave campaigners such as Jacob Rees-Mogg MP, who sought to bully the BoE into silence and called for Mr Carney’s head. Such threats will impede vital economic truth-telling after the referendum.

Third, economics itself is on the line. If leaving the EU turns out to be beneficial, the profession will enter a crisis that will dwarf its inability to see the global financial crisis coming. More likely, if economists are right but had insufficient influence, few will find satisfaction in saying, “we told you so”.

This is a pivotal moment for Britain. It is also a crucial time for economics. For once Britain’s economists have spoken with one voice. Britain should not leave the EU, they say. You have been warned.



Chris Giles



Fonte: FT

Brexit imperils the confidence of strangers

Suppose that the Leave campaign, which one might call Project Lie, wins the referendum next week. How bad might the economic consequences over the next few years be? Alas, they might be very bad indeed.

Mark Carney, governor of the Bank of England, noted when launching the May Inflation Report: “The [Monetary Policy Committee] judges that the most significant risks to its forecast concern the referendum.” Moreover, he added, “a vote to leave the EU could have material economic effects — on the exchange rate, on demand and on the economy’s supply potential — that could affect the appropriate setting of monetary policy”. The latest Inflation Report adds that the campaign has already partly caused sterling’s depreciation.

The UK Treasury has provided a thorough analysis of short-term risks. This is, inevitably, controversial. But it is important to remember that the Treasury is notoriously sceptical about the EU. Its main scenario is that gross domestic product would be 3.6 per cent lower after two years than if the UK voted to stay, unemployment 520,000 higher and the pound 12 per cent lower. Under a worse scenario, GDP would be 6 per cent lower, unemployment 820,000 higher and sterling 15 per cent lower. The Institute for Fiscal Studies has added that — instead of an improvement of £8bn a year in the fiscal position if the net contribution to the EU fell — the budget deficit might be between £20bn and £40bn higher in 2019-20 than otherwise.

Far more important than such inevitably uncertain forecasts is the analysis of the three channels through which Brexit would work in the short term. These are the “transition effect”, which would come from the perception that the UK had become permanently poorer; the “uncertainty effect”, which would come from unavoidable ignorance about the post-Brexit policy regime; and, finally, the “financial conditions effect”, which would work via the perception that the UK was a less appealing and riskier place in which to invest money.
An important question is whether modelled possibilities capture all the tail risks. The answer is that they do not.
The Treasury argues that the economy might reach a “tipping point” after which worse outcomes would occur — thus “a shock to sterling might cause a sudden contraction in foreign currency lending to UK banks”. Since about half of banks’ short-term wholesale funding is in foreign currencies, reduced access to such funding could then cause further significant financial instability.

An obvious source of fragility is the huge current account deficit. This reached 7 per cent of GDP in the last quarter of 2015. Mr Carney has stated that the UK is dependent on “the kindness of strangers” for sustaining its current standard of living. More precisely, it depends on their confidence. The current account deficit brings risks even in normal times. But the uncertainty caused by Brexit might cause a sharp turnround in capital flows. Net inward foreign direct investment might collapse, for example. The results could include a sharp decline in sterling, a fall in the prices of sterling-denominated bonds and a jump in the inflation rate.

If this were merely caused by a negative shock to demand, the MPC could respond with expansionary policy. Even so, it would be forced into unconventional policies, possibly including negative rates, given how low interest rates are. But, if Brexit were also viewed as a negative shock to supply (as it would almost certainly be), the case for monetary offsets would be weaker. The higher prices would then be a way to deliver the needed suppression of real demand. (See charts.)

A crucial source of fragility, on which the Treasury naturally says nothing, is political. After the referendum, the UK would cease to have a government in any meaningful sense. The Conservative party, with a tiny majority, would be deeply divided between its pro and anti-European wings. The opposition Labour party is already deeply divided on this and many other issues.
Out of this morass would have to come a competent government with a view of what it wants to achieve in complex negotiations with the rest of the EU and the world. It would then have to undertake these negotiations with partners that have many other concerns and would regard the UK with a poisonous blend of hostility and contempt. It would have to decide whether to keep or modify the laws created by more than four decades of EU membership and, if the latter, how to do so. It would have to manage the impact of Brexit on the coherence of the UK and its relations with Ireland. While doing all this, it would have to manage the economy, the fiscal position and the minutiae of political life. Anybody who believes the leaders of the Brexit campaign could manage all this is surely taking illegal drugs.

Moreover, the consequences of Brexit are unlikely to be limited to the UK. The direct impact of British economic instability on the world might not be large, though the eurozone is not in a good position to cope with negative shocks. But the indirect effects might be sizeable. Outsiders might view the UK’s departure as a sign that the EU is a sinking ship. Inside the EU, nationalists and xenophobes would take heart. Brexit might, in such ways, prove an important blow to the EU. At the least, it would force a huge diversion of attention and effort. Yet perhaps the most important consequence might be as a signal of the sheer power of populist forces. If the UK can choose Brexit, maybe Donald Trump will become president of the US.
Brexit, in sum, might be a big economic shock and not just for the UK. This is largely because of the fragility that precedes it and the many uncertainties that would follow it. The referendum is itself irresponsible. The outcome might well prove devastating.

Martin Wolf

Fonte: FT

Here is one export Germany should not be making

When, in April, Wolfgang Schäuble, Germany’s finance minister, sharply criticised the policies of the European Central Bank, he was expressing a distinctive macroeconomic approach which shapes the views of German economists and policymakers alike. It is based on the strong conviction that problems of aggregate demand are of secondary importance as long as prices are sufficiently flexible. This explains the German insistence on structural reform as the solution to almost all economic problems and the quasi-religious fixation on the “black zero”, the balanced fiscal budget with no red ink.

On the face of it, this German exception in macroeconomics is difficult to explain. Students in Germany read the same textbooks as their counterparts in other countries, and in advanced studies the same economic models are used. But behind the textbooks and models lies an economic philosophy called “Ordnungspolitik” which is not found outside Germany. Its guiding spirit is Walter Eucken, who taught at Freiburg university until his death in 1950. In a recent speech marking what would have been Eucken’s 125th birthday, Angela Merkel, the chancellor, insisted that the principles of the “Freiburg school” remained relevant.

There were two aspects to Eucken’s economic philosophy, one positive, the other negative. On the positive side was a commitment to freedom of contract, open markets, private property and robust antitrust policy. On the negative side was a rejection of Keynesianism.

From the experience of the Great Depression, John Maynard Keynes drew the conclusion that active demand management is necessary. Eucken, by contrast, believed that “full employment” policy of the sort advocated by Keynes would lead to a centrally planned economy. And while Keynes saw the Great Depression as the result of the inherent instability of the market economy, Eucken attributed it to an insufficient flexibility of wages and an inadequate monetary order. In his view, flexible prices and wages and an adequate monetary order were a reliable antidote to market instability.

In his aversion to the pursuit of full employment through fiscal policy, Mr Schäuble is an obvious heir to Eucken. This is also true of prominent German economists who, during the eurozone crisis, have ignored the effects of austerity on demand, out of a deep-seated belief that structural reforms can solve all problems.

How has such a narrow economic paradigm survived for so long in Germany? The answer is simple: German economic policy using this approach has been quite successful. But this is only because Germany’s economy, despite its size, is extremely open. The ratio of exports to gross domestic product is 46 per cent. In Japan, the figure is 18 per cent and 13 per cent in the US.

This openness allows Germany to pursue a passive macroeconomic policy at home and benefit from active demand-side policies pursued in other countries. About 60 per cent of the German current account surplus is with the US, the UK, France and Italy, which all have relatively high fiscal deficits. In short, Germany’s economy is supported by the demand management policies of countries that are heavily criticised by German academics and policymakers.

From a global perspective, this freeriding on the demand policies of other countries is questionable enough. But the German approach becomes positively dangerous when politicians try to apply policies which can work in isolation in a very open economy to a large and not very open currency area like the eurozone. In the present situation of chronic demand deficiency, insisting on the “black zero” for large currency areas, or even at the global level, would create a black hole in the world economy.



Peter Bofinger is professor of economics at Würzburg university and a member of the German council of economic experts



Fonte: FT

Africa has to go through its own industrial revolution

Capitalism is failing Africa. A relatively small number of entrepreneurs have prospered on the continent in the past decade, becoming the face of the “Africa Rising” narrative. But hundreds of millions more have remained poor and unemployed, and lacking electricity, good schools and access to adequate healthcare.

The collective gross domestic product of the continent’s 54 nations is roughly $1.5tn — less than that of Brazil alone, at more than $2tn. Africa, with 70 per cent of the world’s strategic minerals, has about 2 per cent of world trade and 1 per cent of global manufacturing.

Capitalism has been the greatest creator of national wealth in world history, lifting billions out of poverty from Singapore to China, and from South Korea to Brazil. But Africa stands on the cusp of a lost opportunity because its leaders — and those who assess its progress in London, Paris and Washington — are wrongly fixated on the rise and fall of GDP and foreign investment flows, mostly into resource extraction industries and modern shopping malls.

They are in thrall to orthodoxies better suited for more mature economies. African countries need to focus on creating broad-based growth across sectors and social classes in order to promote jobs and labour productivity. This is what improves GDP per capita, which has remained stagnant at less than $3,000 in most African countries. Africa must stop counting malls and measure jobs and their productivity instead.

There is no shortcut to that outcome that can ignore building industrial economies based on manufacturing. African nations must reject the misleading notion that they can join the west by becoming post-industrial societies without having first been industrial ones.

Africa should be striving for self-sufficiency and to become part of the globalised production value chain. This requires the consistent development of skilled labour, linking innovation to industrial production, as well as investment — both domestic and foreign — in infrastructure and manufacturing.

Fossil power has turned out to be a mirage in countries such as Nigeria. They need to switch to a strategy based on renewable energy that is often quicker to install and is increasingly cost-effective.

If countries across Africa are to achieve inclusive economic growth on this basis, another shibboleth must be confronted: the one which decrees that for economies to prosper and grow, governments must get out of the way of business. On the contrary, governments must lead the way, with a firm hand on the wheel and by setting policy that creates an enabling environment for market-based growth that creates jobs.

They must also keep a careful eye on market actors with regulation and oversight that has wider social objectives in view. Markets must work for society and not the other way round. That, surely, is one of the lessons of the global financial crisis.




This is not an argument for a heavy-handed statist approach that would choke productivity and stifle competition. Nevertheless, a strategic role for governments remains essential. The question is whether African governments are capable of making the right policy choices. Ethiopia and Rwanda offer hopeful examples.

African countries need to remove incentives for systemic corruption if the proceeds of growth are to be widely shared. The Nigerian government under President Muhammadu Buhari has rightly withdrawn subsidies and deregulated the importation of refined petroleum products. Next, it should review its policy of maintaining an artificially fixed exchange rate, in the face of depressed income from crude oil. This has bred corrupt arbitrage in currency markets and hurt productivity.

Another key to manufacturing-based, inclusive growth is “smart protectionism” — temporary tariffs that would protect nascent industries from the cheap imports that have rendered African economies uncompetitive on the global stage. For developing countries, such as many of those in Africa, this can be achieved within the rules of the World Trade Organisation.

For capitalism to work for Africa, just as it has for China and much of east Asia, public policymakers must shake off the shackles of orthodoxy.



Kingsley Moghalu is a former deputy governor of the Central Bank of Nigeria



Fonte: FT

Brazilian real perks up as most emerging market currencies sour

Brazil’s real defied the downbeat mood in emerging market currencies, strengthening against the dollar as the market clung on to hope that the appointment of interim president Michel Temer would herald a change in the country’s economic fortunes.

Last week’s Senate vote to impeach Dilma Rousseff from the presidency was seen by many forex strategists as the culmination of the real’s political risk-driven rally which has made it the biggest gainer this year on the currency market.

The final two days of last week saw the real fall 2.7 per cent as the reality of the task facing the new Temer administration sank in. Monday’s trading, however, suggested investors were not yet ready to call the end of the real rally, pushing the currency 0.9 per cent higher.

Poland’s zloty strengthened 1 per cent, as the country surprisingly avoided a downgrade from rating agency Moody’s, and the Russian rouble rose strongly on the back of oil nudging $50 a barrel.

Much of the rest of emerging markets looked decidedly pale, not helped by soft data out of China over the weekend.

Flows data suggested sentiment in EM has deteriorated, said Luis Costa at Citigroup, probably because momentum in commodity prices had been fading and confidence in equities was weaker.

The currency market was also on alert for US inflation data on Tuesday to maintain dollar strength following its Friday rally following better than expected retail sales data.

If the dollar continued to climb and China data softened, a further rise in the currency against the renminbi would “take its pound of flesh out of the broader markets and in particular emerging markets”, said Brad Bechtel of Jefferies International.

South Africa’s rand dropped 2 per cent to a two-month low and government bonds deteriorated after the government denied a report that finance minister Pravin Gordhan would soon be arrested over controversy surrounding the tax authority, which he previously ran.

In a year marked by strong gains across EM currencies, the rand has underperformed and a combination of weak fundamentals and rising political risk meant that was likely to continue, said Win Thin, an analyst at Brown Brothers Harriman.

Slow growth has driven unemployment towards 27 per cent, and although support for the ruling ANC was likely to drop, Mr Win said the party should hold on to power at municipal elections this summer.

“President [Jacob] Zuma’s second and final term doesn’t end until 2019, and he has so far proven impervious to various scandals,” he added





Roger Blitz


Fonte: FT

Draghi returns fire over Berlin’s ECB attacks

Mario Draghi has hit back at German criticism of the European Central Bank’s interest rate policy, saying low borrowing costs were symptomatic of a glut in global savings for which Germany was partly to blame.

The ECB president’s argument on Monday is a new line of defence against strong objections from German politicians, bankers and the media over the ECB’s decision to lower its benchmark main refinancing rate to zero.

The ECB also has a deposit rate of minus 0.4 per cent, which works as a tax on lenders’ reserves held at the central bank.

The ECB has faced a barrage of criticism in Germany, where it has been accused of fuelling the rise of the Eurosceptic right and even by one newspaper of creating a “social disaster”.

Mr Draghi conceded that official interest rates were “not innocuous”, saying they put pressure on financial companies’ business models and pensioners’ income.

However, ultra loose policy was “not the problem, but a symptom of an underlying problem” caused by a “global excess of savings” and a lack of appetite for investment.

This excess — dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman — lay behind a historical decline in interest rates in recent decades, the ECB president said.

“The right way is not to address the symptoms, but address the underlying cause,” Mr Draghi said, adding that ageing populations had led to increased competition for savings while declining productivity meant entrepreneurs were only willing to borrow at lower rates.

The only solution was for an increase in demand for capital.

While Mr Bernanke has focused on the role of Asian economies in exacerbating this trend, Mr Draghi highlighted the contribution of the eurozone — and notably, of Germany.

The single currency area was “also a protagonist”, the ECB president said, pointing to its 3 per cent current account surplus. He then singled out Germany for maintaining a surplus above 5 per cent over the past decade.

Low interest rates globally meant such surpluses could no longer be maintained. “In a world where real returns are low everywhere, there is simply not enough demand for capital elsewhere in the world to absorb that excess saving without declining returns,” Mr Draghi said.

In such an environment, low central bank interest rates were not the enemy, but exactly what was needed to boost demand for investment.

“If central banks did not do this, investing would be unattractive,” Mr Draghi said. “So the economy would stay in recession.”

He added that the interest rate on savings was ultimately the same as that of the growth of the economy as a whole. Without the ECB’s aggressive response, the permanent damage to the eurozone’s economy would have been much graver.

In an implicit criticism of Berlin’s reluctance to spend to boost growth, Mr Draghi said those who have called for higher rates — such as German finance minister Wolfgang Schäuble — “necessarily imply a larger role for fiscal policy to raise demand”.

In a swipe at the rightwing and Eurosceptic Alternative for Germany party, Mr Draghi said there was “little doubt” that question marks over the future of the eurozone and the EU were holding back investment and spending.

Institutional reform was an “essential part of the solution” to the economic conditions that lay behind low interest rates. The ECB president has been a vocal advocate of more eurozone integration.



Claire Jones



Fonte: FT 

A Escolha do STF.....

Em votações sobre temas controversos, que dificilmente seriam aprovados pelo Parlamento, o STF arrogou pra si o papel de corte constitucional em defesa de direitos de acordo com que considerou ser o espirito da constituição de 1988. Foi muito além do que se espera de uma corte constitucional e avançou no pantanoso terreno da judicialização da política. Pra varios analistas ela cumpria uma função civilizatoria em um pais extremamente conservador onde o liberalismo politico nunca floresceu.

 A questao que agora se coloca é se o STF , diante desse passado recente, podera se negar a discutir a constitucionalidade do impedimento da Presidente Dilma. Ao não se pronunciar confirmara a visão, de alguns, que a posição progressista adotada nos temas controversos eram simplesmente expressão de populismo judiciario. O pronunciamento, por outro lado, poderia ser visto como o coroamento da judicialização da política.

 É uma situação delicada, haja vista a derrota esmagadora da Presidente na Camara Baixa, mas do STF se espera a defesa da Constituição e não juntar-se a turba. Isto requer homens e mulheres virtuosas, cientes de seu papel constitucional. Ficar impassivel diante de um verdadeiro inchamento da constituição não é nada virtuoso.

Connections, not armies, make countries powerful

During the cold war, military might and economic clout were the measures of power that mattered. Today — in an increasingly interdependent world, among states where use of direct force against one another is all but unthinkable — connections are equally important. The most connected states, wielding influence and controlling information flows, are more useful for making things happen in the world than those that simply possess enormous armies.
Global flows of goods, services, finance, people and data “play an ever-larger role in determining the fate of nations, companies and individuals”, according to the McKinsey consultancy, which measures these factors in its “connectedness” index. “To be unconnected is to fall behind.” Singapore, a small, open economy at the heart of global shipping and finance flows, comes top of the list — the
Energy still plays a big part in determining connectedness. As long as specific Middle Eastern countries are at the centre of the world’s energy flows, they exercise power over other nations vastly disproportionate to their geographical size or military and economic weight. The Opec countries proved this point in the 1970s, when energy production was much more concentrated. Today, Saudi Arabia is refusing to allow a deal to freeze oil production unless its regional rival, Iran, agrees to sign up.
In the next decade, however, influence over global digital flows will grow far more important. We will see the development of sophisticated tools to impose digital sanctions, blocking some commerce, information and communication but allowing the rest.
Meanwhile, the lens of connectedness offers a useful perspective on the debate over British membership of the EU. Brexit advocates want to make Britain an island on the edge of the union once more — close enough to claim the benefits of connectedness but with sufficient autonomy to be truly sovereign. In fact, the connectedness index shows that the status quo provides highly beneficial codependence for both parties.
When the scores of all the member states are combined, the EU as a whole ranks third in the connectedness index, behind Singapore and the US. Without Britain the EU27 ranks fourth; Britain without the EU ranks third.
The reason is that so many of the EU27’s flows are within the union: 45 per cent of goods trade; 52 per cent of services trade; 62 per cent of foreign direct investment flows; 72 per cent of people flows; and 77 per cent of data flows. The UK presents almost the opposite profile: 70 per cent of UK trade flows are with the rest of the world, outside the EU; 86 per cent of services trade; 63 per cent of FDI flows; and 62 per cent of people flows. So membership allows Britain to participate fully in the intra-union flows that create the world’s largest economy; and provides the EU27 with a vital link to the rest of the world.
The picture is much the same in diplomacy. As US President Barack Obama explained in his recent interview with The Atlantic, much of his foreign policy has been aimed at substituting diplomacy for force as the principal tool for getting things done in the world. His engagement, for example, has prevented Iran acquiring nuclear weapons.
Diplomacy is social capital; it depends on the density and reach of a nation’s diplomatic contacts. The Global Diplomacy Index, just published by Australia’s Lowy Institute for International Policy, ranks nations by the number of embassies, consulates and missions they have. The US comes first, then France, China and Russia — then the UK, ahead of the other EU states.
As part of Europe, Britain has the benefit of consulates and missions in many cities where it is not now represented. Given that the Foreign Office budget has fallen by almost 20 per cent in the past five years, tapping into this network matters. Once again, however, the EU would suffer from a British exit, losing the benefit of some of the world’s most talented diplomats.
In sum, if connectedness is indeed a critical measure of 21st-century power, Britain and the EU would both lose substantially from Brexit. John Donne knew this 400 years ago. Everyone knows the line, “No man is an island”. Few remember the next words from his Devotions Upon Emergent Occasions. “Every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less.”
If British membership of the EU be washed away, the clod and the continent will both be diminished. Joined together, and connected to the rest of the world, they are mighty.



Anne-Marie Slaughter is president of New America, a think-tank, and professor emerita of politics and international affairs at Princeton

Boris Johnson, David Cameron and the day after Brexit

It is the morning of June 24. Britain has just voted narrowly to leave the EU. Jubilant pro-Brexit campaigners wave Union Jacks in Trafalgar Square.

A shattered-looking David Cameron appears outside 10 Downing Street to say that he respects the verdict of the British people and that he intends to carry on as prime minister.


The atmosphere of crisis is compounded by a stock market plunge across Europe. The French and German governments issue a joint statement saying that it is imperative that the EU now make decisive steps towards political union and promise an “economic government” for Europe.

In Edinburgh, Nicola Sturgeon, Scotland’s first minister, points out that Scots have voted to stay inside the EU — and announces that she will now press for a second referendum on Scottish independence.

In the days that follow, the Conservative government is consumed by infighting. It becomes clear that the prime minister’s authority is too badly damaged for him to carry on.

Mr Cameron announces that he will resign, and the Tories call a leadership election. On the second ballot, Boris Johnson defeats George Osborne — and is invited to form a government. On the steps of Downing Street, the new prime minister amuses the press by speaking in Latin, before entering his new home, appearing to stumble over the doorstep as he enters.

Once inside Number 10, Boris is served a cup of tea and then ushered into the Cabinet Room for a meeting with Sir Jeremy Heywood, the cabinet secretary and the head of Britain’s civil service.

Sir Jeremy, who is known to have privately opposed Brexit, is polite but firm. With the markets in turmoil, he tells the new prime minister that it is imperative that he introduce some clarity into the Brexit process.

The Leave campaign, fronted by Mr Johnson, had made two key pledges. It had promised to control immigration by withdrawing Britain from the EU’s laws on the “free movement of persons”. And it had also promised that Britain would continue to enjoy free trade with the EU.

Sir Jeremy politely points out that these two promises are incompatible. He reminds Boris that the EU’s internal market is based on the free movement of goods, capital, services and people.

Under EU law, these four freedoms are inseparable. Countries such as Switzerland and Norway — that are not part of the EU but still want unfettered access to the EU market — have had to accept free movement of labour. So which is it to be? Controls on immigration or full access to the internal market?


During the campaign, Boris has managed to shrug off this choice by repeating a favourite joke: “My policy on cake is pro having it, and pro eating it.”

As he toys with a piece of Victoria sponge in the Cabinet Room, however, the new prime minister finally has to confront the cake problem. His instinct tells him that free trade matters a lot more than immigration controls.

As mayor of London, he saw that Britain’s capital relied on the flow of labour from Europe. But he also knows that immigration was the issue that delivered victory for the Brexit campaign.

A Norwegian-style deal — in which Britain accepted all EU laws, including free movement of people, in return for access to the single market — will not be acceptable to his own party, which is demanding controls on immigration and a restoration of parliamentary sovereignty.

Looking up from his cake, Boris asks, “How about Canada?” Sir Jeremy has been expecting this. With a mixture of sorrow and sadism, he begins to lay out the limitations of the EU-Canada free-trade deal as a model for Britain.

First, there is the question of time. Once Britain triggers Article 50 of the Lisbon Treaty and announces that it intends to leave the EU, it will have just two years to negotiate a new trade deal with the EU. But negotiations on the EU-Canada deal began in 2009.

Here Sir Jeremy adopts the Wodehousian language that Boris favours, and adds: “And I’m afraid to tell you, prime minister, that the bally thing still hasn’t been ratified.”

Boris looks momentarily crestfallen, so Sir Jeremy presses on.

The second problem with the Canadian model is that while it abolishes tariffs on manufactured goods, it does not secure true free trade in services. But, Sir Jeremy murmurs, the prime minister might recall from his period as London’s mayor that services — and in particular, financial services — are rather important to the UK economy.

Boris decides that there is nothing for it. He must fly to Germany and woo the true leader of Europe. In Berlin, he is pleasantly surprised by the warmth of his reception by Angela Merkel.

The German chancellor says that while she regrets Britain’s decision she will do her best to help secure a fair deal for the UK.

The British prime minister returns to Downing Street encouraged. But for weeks, nothing further is heard from Berlin. Finally, the phone rings. It is Aunt Angela.

She sounds regretful. She says that Germany would like to give Britain enhanced access to the single market, without the need for full free movement of labour. But the European Commission says that this is illegal, the European Parliament will not hear of it, and as for the French . . . 

Boris is about to put the phone down and pour himself a stiff one, when Ms Merkel adds: “There is one thing that might help.” There is a long pause. “Would you consider accepting 200,000 Syrian refugees?”


Gideon Rachman


Fonte: FT

Panama is only one head of the tax haven Hydra

Oddly, given that it indicates the staggering reach of tax havens, from Iceland to Pyongyang, the leak of client data from a Panamanian offshore law firm has come at an opportune moment for the OECD.

The Paris-based club of mostly rich nations is developing a global transparency initiative to crack down on tax haven secrecy. Most havens have agreed to participate and from 2017 will start to share financial data automatically so that each can tax its taxpayers appropriately. But there are recalcitrants. Panama is refusing to participate seriously. Pascal Saint-Amans, the OECD tax chief, calls it a jurisdiction “that welcomes crooks and money launderers”.


The nation has for years sold secrecy. It has turned a blind eye to the laws of other jurisdictions and allowed firms such as Mossack Fonseca to flout its own weak official safeguards against financial crime. The client leaks point to links with drugs lords, Mafiosi, terrorists, arms companies and rogue states. The fact that Mossack Fonseca can state that it has never been accused or charged in connection with criminal wrongdoing shows that Panama’s financial regulators, police, judiciary and political system have been part of the system — corrupted or influenced by the lucrative flows from the dirty-money machine.

There will be intense pressure for Panama to clean up. But it is vital not to lose sight of the bigger picture. It is hard to crack down on the sprawling and many-layered system of tax havens and offshore secrecy. Any efforts will be undermined by armies of offshore enablers looking for loopholes: accounting firms, offshore company formation agents and trust companies and banks. In this case, the law firm in question has worked with some of the world’s biggest banks including HSBC, Société Générale, Credit Suisse, UBS and Commerzbank to set up thousands of offshore companies that foxed tax and law enforcement authorities worldwide.
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So action beyond the OECD’s is needed. David Cameron, UK prime minister, hosts an anti-corruption conference in May. He should announce steps to force the UK’s Overseas Territories and Crown Dependencies to create publicly accessible registries of the beneficial ownership of companies, and open trusts and foundations to scrutiny.

There are many ways to put pressure on the private infrastructure of enablers. One of the most potent brings into focus one of the biggest offshore operators: the US. America has its own anti-tax haven programme, the Foreign Account Tax Compliance Act, which does a decent job of cracking down on American tax cheats. Fatca has a big stick: it imposes a 30 per cent tax on payments originating in the US to any financial institution that does not comply. Financial institutions do not want to be shut out of US markets so they put pressure on other countries to let them share data — becoming in the process lobbyists for reform.

Though the OECD scheme is modelled on Fatca, the US will not participate directly. Instead, it promises to share data with other countries through bilateral agreements related to Fatca. However, US Congress has not approved the reciprocal promise contained in these agreements — and this means the US will in practice end up providing very little information to others. America is fast becoming a tax haven of choice. The OECD knows this but has not been brave enough to call for action.

The only other body with the clout to confront Washington is the EU. It should summon the courage to impose a withholding tax on payments originating in the union to non-compliant jurisdictions such as the US, copying Fatca’s big stick. That would unblock arguably the most powerful guardian of financial secrecy in the system.




Nicholas Shaxson is the author of ‘Treasure Islands: Tax Havens and the Men who Stole the World’




Fonte: FT

The Panama Papers and the concealed wealth of nations

“A man, a plan, a canal: Panama.” So, at least, runs the British schoolchild’s palindrome, but it is, in truth, some time since the Central American country confined itself to the trade of maritime navigation devised for it by the French engineer, Ferdinand de Lesseps.

The most lucrative of Panama’s “offshore” activities have long taken place on dry land, amid the soaring offices of its business district. The state’s willingness to play host to foreign companies and individuals on a few-taxes and nearly-no-questions-answered basis has allowed it to build an international business of enviable financial reward — if uncertain reputability. And it is some of these transactions that are now rightly coming under scrutiny following the leak of 11.5m internal records from the prominent Panamanian law firm Mossack Fonseca.


As with past leaks of the client lists of Swiss banks, the disclosures are likely to provoke red faces and furious denials. Hundreds of politicians, business and sports people, including 72 current or former heads of state, have been implicated. According to findings published by the International Consortium of Investigative Journalists, the records include at least 33 people and companies blacklisted by the US because of evidence of proscribed activities, such as dealings with Mexican drug lords, terrorist groups and sanctioned states including North Korea and Iran.

It is, of course, true that possession of a Panamanian corporate identity does not itself equate to evil intent. But the mini-state has done more than most “light touch” jurisdictions to make it easy to keep a dark secret. Not only does corporate ownership remain highly opaque; it is also the most significant financial centre to hold out against a global transparency initiative led by the OECD. Only Bahrain, Vanuatu and Nauru have similarly spurned the rules, which provide for tax data to be automatically exchanged.

The disclosures will undermine the territory’s secretive selling proposition. The tax authorities in Australia, New Zealand and the UK have said they will follow up allegations of tax evasion and money laundering resulting from the leak. Some politicians named in the files, especially those dependent for power on democratic whim, may face challenges to their positions. Iceland’s prime minister, Sigmundur David Gunnlaugsson, must fight a vote of no-confidence after disclosure of offshore holdings linked to him and his wife.

Just as the Swiss disclosures punched holes in that country’s traditions of secrecy, the Panamanian leaks should prompt further pressure on tax havens. Reputational risk may give some companies and individuals pause before entrusting their fortunes to a Panamanian intermediary. But the business of these centres, profiting by helping people move money out of high tax jurisdictions, will not be so easily stopped.

The impetus must come from investors as in the case of some tax havens such as the hedge fund friendly Cayman Islands, or from other governments. This should be forthcoming now that austerity policies have made it politically hard to tolerate tax avoidance or illegal tax evasion. The years since the financial crisis have shown that power still resides where wealth is created. US toughness towards Swiss banks forced Switzerland to lift the veils that previously shrouded its banks in legally mandated secrecy.

Until now the business and tax benefits from industries linked to the havens has seemed to nurture an unholy tolerance in some bigger states, including the UK. The more their citizens learn from disclosures such as these, the more they will ask why more is not done.




Editorial do FT

Saudi’s friendships show American influence waning

After King Salman of Saudi Arabia came to the throne in 2015 and allowed his favourite son and deputy crown prince, Mohammed bin Salman, to seize the main reins of power in the kingdom, the country has embarked on an assertive foreign and regional policy. The ageing and frail king’s son has upstaged the crown prince and next in line of succession, interior minister Mohammed bin Nayef. That much everyone agrees.

Prince Mohammed bin Salman has accumulated surprising power, in a system where the ruling family normally seeks a careful balance between factions. MbS, as he is known in diplomatic shorthand, aged only 30 in a regime long run by men in their 70s and 80s, is defence minister and economic tsar, as well as overlord of the closely tied areas of foreign and oil policy.


A linear summary of foreign and defence policy in his first year would probably highlight: the Saudi-led air war against Iran-backed Houthi rebels in Yemen launched last March; increased support for Sunni Islamist rebels fighting Bashar al-Assad’s regime in Syria, which is backed by Iran, Hizbollah, the Lebanese Shia paramilitaries and Russia; the break-off of diplomatic relations between Riyadh and Tehran; and, in recent weeks, severing ties with Saudi political, military and media allies in Lebanon.

What it might skip over is the budding detente between the kingdom and Vladimir Putin’s Russia, ally to all that Saudi Arabia most detests in the region — Iran, Hizbollah, and the Assad regime.

Alliances of convenience are hardly new to the Middle East. The will to power of entrenched regimes often coexists with pragmatism, making strange bedfellows of sworn enemies. But the present situation has reached unusual heights of visceral and violent antagonism in the proxy wars between Sunni Saudi Arabia and Shia Iran across the region, above all in Syria. But, first, what has Saudi Arabia been up to?

Riyadh is signalling a pullback from the war in Yemen. Saudi officials say they have destroyed a missile threat to the kingdom from their unruly southern neighbour. To many other eyes, it looks as if MbS bit off more than he could chew. Despite Riyadh unveiling an alliance of more than 30 Sunni nations to confront Iran’s designs, Egypt and Pakistan, which have the biggest armies, conspicuously declined to provide ground forces for the Saudi air war. In Syria, a Saudi threat to send in troops to support Sunni rebels proved empty.


The diplomatic break with Iran, and rupture with Lebanon, came after the Saudi execution in January of Sheikh Nimr al-Nimr, a dissident Shia cleric. Riyadh reacted after the Saudi embassy in Tehran and consulate in Mashhad were attacked by mobs. Lebanon’s foreign minister, a Hizbollah-aligned Christian, declined to condemn the events — acting as more papist than the Pope given that the Iranian government itself did so. The Saudis have cancelled $3bn in aid to Lebanon’s army, stopped paying local Sunni allies and associated media, and closed the Beirut office of Al Arabiya, a TV network owned by members of the royal family.

Yet, at the same time, Prince Mohammed bin Salman has forged what Arab officials describe as a “functional and substantive” relationship with President Putin, covering Syria, possible Saudi arms purchases from and investment in Russia , and joint attempts to stabilise oil prices by freezing output.

On Syria, US- and Russia-led peace efforts are still stymied by Moscow’s insistence that President Assad must be part of any transition out of war — which Washington and Riyadh are ostensibly resisting. But when MbS met Mr Putin last October at the Russian Grand Prix at Sochi, he told him: “We do not care about the Assads, we care about Iran,” according to an Arab official in contact with the deputy crown prince. Sergei Lavrov, Russia’s foreign minister, said afterwards: “We now have a much clearer vision of how to move along the path of political settlement.”

No such settlement is likely when talks on peace resume next week in Geneva. Despite Mr Putin’s partial withdrawal from Syria last month, Russia-backed Assad forces are still on the offensive — not just against Saudi-backed rebels but now also against the jihadis of Isis, from whom they recaptured the city of Palmyra last week.

Some Arab sources say the Russian leader even informed MbS about his new Syrian policy before he told Mr Assad.

Mr Putin may be signalling to Mr Assad that, unless he engages with evolving plans to end Syria’s war, Moscow could dump him. Russia, at the head of the Iran-backed axis in Syria and Iraq, is also now intersecting with the US-led coalition against Isis. Both coalitions are backing Syrian Kurdish militia fighting Isis across northern Syria. Russia’s ally Iran is de facto co-
operating with the US in Iraq.

But Saudi Arabia’s warming ties with Russia surely speak of the waning regional influence of the US, with which the kingdom has been closely allied for 70 years. After Barack Obama started a thaw in US relations with Iran through last year’s nuclear deal, and Mr Putin stormed into a Syrian war the US president has sought to avoid, the Saudis seem to have decided to work with Moscow, in the belief that it can influence Tehran. Syria, in all its gore, is the cockpit of the current Middle East.


David Gardner


Fonte: FT

Argentina’s deal with the holdouts is a mixed blessing

The Argentine government obtained an overwhelming victory in the early hours of Thursday, when senators approved the proposed agreement with recalcitrant creditors who had rejected the renegotiations of the country’s debt in 2005 and 2010. With this, the legal fight between Buenos Aires and its “holdout” creditors is almost resolved.

This battle has cast a shadow over the international sovereign debt market — and its resolution creates a paradox. While the outcome is positive for Argentina, it sets a precedent and has some alarming implications for the administration of debt renegotiations.



In the absence of a multilateral framework, what is convenient for an individual country could have negative consequences for the international system as a whole.

For example, the outcome of the Argentine dispute clearly overturns the accepted view that creditors can do little to recover their full investment in a sovereign default — a view that underpins the concept of differential “country risk”. The accord reached between Argentina and the holdouts undermines that concept since it is based on the country’s agreement to pay an amount equivalent to 100 per cent of the principal.

Moreover Thomas Griesa, the US judge in the case, made an interpretation of the pari passu clause in Argentina’s debt — a traditional feature of sovereign bonds that ranks creditors equally — that favoured the holdouts. This put unusual pressure on the country. It also encouraged a perception that it is feasible for a minority of bondholders to isolate a government from broader credit markets, leaving it with no alternative but to pay claims held by a minority of litigants in full.
In this case, inequality among creditors caused maximum economic harm. It underlines the need for a sovereign debt restructuring mechanism

The reason the legal tussle between Argentina and its creditors took so long is that the assets involved did not include “collective action clauses”, which would have required minority creditors to accept a settlement if the majority agreed. But Argentina is not an isolated case in this respect: 20 per cent of the outstanding $900bn of sovereign debt has no CACs attached. For other countries in this position, the Argentine agreement sets a dangerous precedent.

The obstinate bondholders who faced Argentina down were able to convince the judge and secure an extraordinarily high return. This has raised the likelihood that a variety of “creative” holdout strategies will be developed, reducing overall efficiency and increasing the long-term transaction costs of credit.

Buenos Aires’ drawn-out battle with its creditors reflects the incompleteness of the international financial system. There is no bankruptcy procedure in place to kick in when a government cannot meet its obligations. The Argentine experience is proof that some such arrangement is needed.

Recalcitrant creditors bought Argentine paper at rock-bottom prices and their strategy was vindicated. They profited and the creditors who settled promptly did not. This is not fair and is also inefficient. Standard bankruptcy procedures treat creditors equitably, minimising economic damage by resolving things fast. In this case, inequality among creditors caused maximum economic harm. It underlines the need for a sovereign debt restructuring mechanism.

Yet, for all this, the readmission of Argentina to the international financial market must be counted as an important success. The new reformist government of Mauricio Macri deserves credit for its focus and effective negotiating tactics.

Some credit in this saga is also due, however, to Cristina Fernández, the former president. She argued vigorously for the creation of a formal mechanism governing the restructuring of sovereign debt. Recognising this could lead to a happier and more lasting outcome.



Mario Blejer is deputy chairman of Banco Hipotecario




Fonte: FT

The welfare state is a piggy bank for life

How is the “welfare state” to be justified? The usual answer is that it is a way for the well-off to help the less well-off. But this is not its only role.It is also a “piggy bank”, as Nicholas Barr of the London School of Economics has argued. More precisely, it is a substitute for markets that the private sector does not offer.

Put aside spending on services, such as education or health; focus on benefits paid to individuals, such as housing benefits, tax credits paid to those in work and pensions. In the UK, such benefits amount to a huge sum: 33 per cent of current spending (and 12.5 per cent of gross domestic product) in 2014-15.


In the short run, spending on benefits is largely redistributive. This role of the state is undoubtedly important at all times. But it is particularly significant in the aftermath of a crisis that has left the economy as a whole far smaller than everybody had expected. The Institute for Fiscal Studies, a London-based think-tank, has concluded that changes in taxes and benefits between May 2015 and April 2019 will fall proportionately most heavily on the poorest parts the population. The relatively well-off could have borne more of this burden. The government chose otherwise. Everybody should decide for themselves whether they think this was right.

Such decisions can themselves have significant long-term implications. If, for example, a cut in benefits were to re­duce parents’ ability to support their children, the longer-term economic and social impacts could be highly damaging. But it is when one looks at the welfare state’s impact over the course of a life that something perhaps even more profound emerges: its role is, it seems, as much about distribution of income over lifetimes as among people.

Evidence for this comes from another IFS study, published last year. This examined the effects of the tax and benefit systems on people born between 1945 and 1954 — the baby boomers. It reached four big conclusions.

First, income is far less unequal over lifetimes than in any given year. This is because a big proportion of inequality is temporary, a result either of changing needs as people age or transitory shocks.

Second, largely as a result, more than half of the redistribution achieved by taxes and benefits is over lifetimes rather than among different people,

Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year.

Finally, in-work benefits are just as good as out-of-work benefits at helping people who remain poor throughout their lives but they do less damage to incentives to work. Higher rates of income tax, meanwhile, target the “lifetime rich” relatively well because mobility at the top is relatively modest.

The finding that taxes and benefits distribute incomes over individuals’ lifetimes even more than among individuals should be seen not as a bug but as a feature of the welfare state.

The argument here is that a necessary condition for economic efficiency is “complete markets”: that is, a market for every asset in all possible states. Evidently — because of pervasive uncertainty, asymmetric information, transaction costs and so forth — complete markets do not and cannot exist. This is not some theoretical curiosity. As a result of these failings, private insurance against unemployment or big temporary loss of income, and borrowing against earnings in the distant future, are difficult if not impossible.

The state is in a good position to rectify these failings, partly because it can monitor behaviour and avoid adverse selection (that is, ending up stuck with only bad risks) by insisting that everyone joins the insurance pool. Of course, the state may design such programmes very badly. Insurance also creates “moral hazard”. But one can limit such damage while helping people through temporary difficulties or the exceptional demands of some stages of life.

The 2015 IFS study suggests this is precisely what the UK’s tax and benefit system does. Publicly financed education and health services strongly reinforce such effects: people gain the biggest benefits from the former when young and from the latter when old.

In designing the structure of taxes and benefits, such lifetime effects are at least as important as those at any moment. These effects include the role of the welfare state as both insurer and bank. Government plays these roles in all high-income nations, including even the US. It is a desirable one. Yet careful design is also needed. The starting point must be with greater awareness of this truth.




Martin Wolf




Fonte: FT

Simplesmente lamentável...

Negative interest rates are a high-risk experiment

Will negative interest rates en­courage banks to lend more plentifully and cheaply and help support economic recovery? I am not convinced. I fear they are a dangerous experiment with diminishing positive impact.

Conventional thinking is that negative rates are just a natural continuation of quantitative easing, like dialling down the air conditioning. This, though, underestimates how financial intermediaries may actually respond. They erode banks’ margins. They give lenders an incentive to shrink, not grow. They encourage banks to seek out opportunities overseas rather than in their home markets. They also risk disruptions to bank funding. All go against the grain of the central banks’ desire to ease credit conditions and support financial stability.


That is not to say QE has not helped the global economy and enabled banks to repair their balance sheets. Low rates have improved the affordability of their loans, reduced bad debts and lifted the value of assets, thereby increasing collateral values. But market expectations largely incorporate this already, and persistent low rates will act as an increasingly chill wind on banks’ profitability.

One counter argument is that negative rates have so far proved fairly benign in Sweden, Denmark and Switzerland. The details are more troubling. Banks have tried hard to offset negative rates by charging more for lending — particularly for mortgages — and charging higher fees. As a result, borrowing costs have gone up not down.

The crux of the matter is this: the market is no longer sure how low rates might go in a range of countries. Peter Praet, chief economist of the European Central Bank , said last week: “As other central banks have demonstrated, we have not reached the physical lower boundary.” As long as this uncertainty remains, it is hard for banks to know whether the loans they are making are economically sensible or for investors to price banks’ securities with confidence. Beyond a further 10-20 basis point cut in the deposit rate of the ECB, the effect on banks’ earnings could start to be exponentially negative.

Denmark and Switzerland have sought to lighten the impact with tiered schemes, which seek only to tax excess deposits and dissuade foreign investors from leaving their cash in that market. The ECB is trying an alternative: a new targeted longer-term refinancing operation, which offers to pay banks to lend. But this does not fully offset the drag of negative rates. I estimate that only 5 to 15 per cent of the €1.6tn incremental in TLTRO above its predecessor will in fact be drawn, based on a poll of the eurozone’s largest banks at Morgan Stanley’s Financials conference last week. Almost no northern European banks said they would take any of these funds. Put another way, about half of TLTRO may end up simply being old funding operations rolled into this subsidised rate without new lending.

For banks, the indirect consequences of negative rates may matter more than the direct effect. There is a risk that market liquidity will be reduced, as negative rates mean financial intermediaries hoard high-yielding assets. There is also a question over how money market funds, which help many corporates to manage their finances, will navigate negative rates. In Japan all 11 companies running money-market funds have stopped accepting new investments.

Negative rates, if passed on by banks, could also start to erode consumer trust in banks as the right place for their cash. Sales of safes have risen in Germany and Japan since they were implemented.

Commercial banks and other market financial institutions are more sensitive to negative rates than central banks. If central banks fail to appreciate this, they may do more damage than good.




Huw van Steenis is a managing director at Morgan Stanley and a member of the World Economic Forum’s Global Agenda Council




Fonte: FT

African states remain at the mercy of their elites

Finance ministers the world over are given a hard time when they try to make cuts. But there cannot be too many countries where balancing the books is considered a prisonable offence. That is the case, though, in Liberia, where Amara Konneh, the finance minister, is being threatened with incarceration by outraged lawmakers who say he has overridden their constitutional authority to decide tax and spending. One does not need to be a cynic to wonder if the true cause of their anger lies closer to home: Mr Konneh wants to cut their pay.

It all began with a letter in which Mr Konneh’s office pointed out to senators that spending could not go on as before. The reasons were obvious. Liberia’s economy had been hit by twin shocks. First, in 2014, there had been a calamitous outbreak of Ebola, now thankfully over, which had killed nearly 5,000 people and brought foreign investment to a halt. Then the price of iron ore and rubber, the country’s main exports, collapsed. As a result, there was expected to be a revenue shortfall of about $70m in the $622m budget. And so Mr Konneh was asking the legislature to trim its own budget by about 10 per cent, part of across-the-board cuts he was imposing on all but non-essential items. That is when senators ordered his arrest on charges of contempt. His case is pending following a stay by the Supreme Court.


Behind the almost comical posturing lies a serious issue, one that resonates across Africa and beyond. Liberia, one of the world’s poorest states with average income per capita of $469, pays its lawmakers $13,000 a month, not counting generous allowances for housing, petrol and so on. The running costs of Liberia’s legislature soak up more than 10 per cent of government revenue.

Liberia’s lawmakers are mostly unrepentant. Senator Alphonso Gaye says compensation is modest compared with places such as Nigeria and Kenya. When he visits his rural constituency, he says, he is inundated with requests for money. One will say the village hand-pump is broken, another that he needs help with school fees or medical costs or money for his roof, he says. “These are the things they demand of lawmakers. You need some cash. Your respect in this country depends on your capacity to respond to people’s demands.”

Mr Gaye’s defence has the ring of truth. In much of Africa, elected politicians and public “servants” more generally are not expected to govern for the greater good. Rather, their duty is to help family, friends and supporters. Richard Dowden, executive director of the Royal African Society, says the pull of the extended family is gravitational. Once one member of the clan lands a good job, of which a well-paid government position is about the best, it is almost impossible to resist the clamour of those demanding assistance. That is one reason tax revenue is so low in most of Africa. Why would people pay tax if much of the money is simply stolen or distributed to others, and provision of public goods is so inadequate?

A study of public sector wage bills by the World Bank found that countries in sub-Saharan Africa spend almost 30 per cent of government revenue on public sector wages, nearly double the average in higher-income states. Yet public services, including schools and hospitals, are mostly dire. The findings support the view that poor countries suffer from what economists Daron Acemoglu and James Robinson call “extractive” institutions, which are poor at providing public goods but adept at enabling governing elites to extract income.

It can be unhelpful to blame everything on the legacy of colonialism, but it is true that African leaders inherited states whose main purpose was to extract wealth and resources. In too many cases, white colonialists have simply been replaced by black elites. (Liberia, founded by freed American slaves, is a slightly different case.)

Jared Diamond, an academic and author, says that before the rise of the first states in about 3,400BC, human societies were tribes or chiefdoms without complex institutions of government. “A long history of government doesn’t guarantee good institutions, but at least it permits them; a short history makes them very unlikely,” he writes.

Back in Liberia, Prince Johnson, once one of the country’s most notorious warlords, is in his second nine-year senatorial term. He too said legislators were not overpaid. Some, he observed, went practically bankrupt dishing out money to hangers-on. “The first law of nature is self-preservation. I have to survive before I can help someone else. I cannot be a senator in this country and live in a zinc shack,” he said, gesturing around his large compound. “I’m a big man. I’ve got to live big.”


David Pilling


Fonte: FT

North Africa is in danger of becoming the EU’s forgotten frontier

Thanks to its crippling disunity, the EU has landed itself with the task of implementing an unsavoury, possibly unenforceable deal with Turkey to stem the tide of refugees and migrants washing up on Europe’s south-eastern shores. Largely obscured amid this wretched bargaining over human souls is the sight of the EU grappling with another set of challenges on a different frontier: north Africa.

The challenges in Algeria, Libya and Morocco are more diverse and harder to overcome than the crisis in the east Mediterranean. In some respects, they promise to be more violent. Unlike with Turkey, which is a Nato ally and a candidate for EU membership, European governments will not enjoy the luxury in north Africa of papering over internal quarrels by outsourcing their problems.


The immediate priority in north Africa is not uncontrolled migration into Europe. According to Frontex, the EU’s border control agency, 157,000 migrants used the central Mediterranean route last year to cross into Italy. This may seem a high number, but it was 10 per cent down on 2014 levels. It was also far below the 885,000 people who arrived in the EU last year via the east Mediterranean.

However, it would be complacent to assume that irregular migration from north Africa is petering out. Criminal networks that enrich themselves by smuggling people into Europe are alive and well in Libya. What is more, it was not primarily Afghans, Iraqis and Syrians who made this sea journey last year. The majority were Eritreans, Nigerians and Somalis.

In other words, ending the conflicts in Afghanistan, Iraq and above all Syria — even if this were possible — would do nothing to ease migratory pressures on Europe from sub-Saharan Africa. To the extent that the EU’s deal with Turkey closes the east Mediterranean route, the smugglers and their clients may refocus their attention on Libya.

The fundamental problem in Libya, though, is the disintegration of state authority after the western-backed uprising of 2011 that ended in the murder of Muammer Gaddafi, the despotic ruler since 1969. Isis, the jihadi group, has amassed more than 5,000 fighters in Libya, mainly in the central coastal region of Sirte. The anarchy is spilling into Tunisia. Clashes between armed militants and Tunisian security forces erupted this week on the Libya-Tunisia border, killing 60 people.

Western governments, with Italy at the front, are toying with a limited military intervention to counter the Isis threat. But the Italians are loath to act unless invited to do so by a national unity government in Libya. How stable such a government might be, if ever it were formed, is anyone’s guess. From the EU’s perspective, the outlook in Libya boils down either to a long-term foothold for Islamist extremism on Europe’s borders, or a decision to use military force with unpredictable consequences. Either way, a new surge in irregular migration cannot be ruled out.
Europe’s main security partner in north Africa is Algeria, a strategy to which there is no obvious alternative, but which is fraught with risks nonetheless. Algeria is the Maghreb’s leading military power, an opponent of militant Islam and the EU’s third-largest gas supplier after Russia and Norway. But Algeria’s leaders profoundly disagreed with Nato’s intervention in Libya, predicting correctly that violent disorder would ensue. Algiers has no intention of serving tamely as the EU’s agent for fighting terrorists and illegal migrants.


The EU has grounds for concern insofar as the rule of Abdelaziz Bouteflika, Algeria’s ailing, authoritarian president, is nearing its end. The outlines of a power struggle among civilian politicians, the military and security services in the post-Bouteflika era are visible. Public discontent is simmering as low energy prices compel the government to cut the social subsidies that averted an Algerian “Arab Spring” in 2011.

Elsewhere, Morocco suspended ties with the EU last month after a lower court of the European Court of Justice invalidated an EU-Moroccan agricultural trade deal. The court did so on the grounds that the accord covered Western Sahara, a territory most of which Morocco occupied in 1975. The European Council, which groups EU governments, has lodged an appeal in the ECJ against the ruling — which, however, won applause from Algeria, at odds with Morocco over Western Sahara.

As this episode indicates, EU foreign policy often runs into obstacles in north Africa that have nothing to do with irregular migration. The region’s multiplying troubles demand a more comprehensive approach, for as each year passes they loom larger for the EU.


Tony Barber


Fonte: FT