Germany withdraws approval for Chinese takeover of tech group

The German government has withdrawn approval for the €670m takeover of chip equipment maker Aixtron by a group of Chinese investors, amid concern in Berlin about China’s growing appetite for German industrial companies.

Matthias Machnig, deputy economics minister, told newspaper Die Welt that the government had decided to take back the clearance certificate it had issued last month and reopen a review of the deal after receiving “previously unknown security-related information”.

By late afternoon on Monday, Aixtron’s shares had fallen 13 per cent to €5.00 in Frankfurt, less than the €6 per ordinary share takeover offer from Fujian Grand Chip Investment Fund, which is controlled by the Chinese businessman Zhendong Liu. Management has already recommended the offer and, by last week, some 65 per cent of shareholders had accepted it.


The decision reflects a growing protectionist backlash against Chinese investment in Germany. Sigmar Gabriel, the economics minister and deputy chancellor, has already backed a proposal to restrict foreign takeovers of EU companies if they involve “key technologies that are of particular importance for further industrial progress”.

However, even under current rules, the economics ministry can review any deal where non-EU investors acquire at least 25 per cent of the voting rights of a German company, and block it if it “poses a threat to Germany’s public order or security”.

Deals that involve “security of supply in the event of a crisis, telecommunications and electricity, or the provision of services of strategic importance” can come in for particular scrutiny, the ministry says on its website.

Mr Gabriel’s initiative, which would greatly expand the government’s oversight of these and other deals, is supported by Günther Oettinger, the EU’s digital economy commissioner and a close ally of Chancellor Angela Merkel.

He said in a newspaper interview earlier this month that Europe’s high-tech industry “should not just be sold off”, adding that other big EU member states such as France and Italy also backed a “stronger industrial policy” to protect homegrown tech companies.

Other countries have also grown more sceptical of Chinese investment. In January, Go Scale, a Chinese private equity firm, was blocked from buying Lumileds, Philips’ lighting business.

German concerns over Chinese takeovers have been rife since Midea, a Chinese appliance maker, bought German robotmaker Kuka — one of the country’s most innovative engineering companies — earlier this year for €4.5bn.

Ministers tried and failed to drum up an alternative bid from a European rival, while Ms Merkel complained about a lack of reciprocity on the part of the Chinese, pointing to the tough restrictions Beijing places on investments by German companies.

Germany has become the top destination for Chinese dealmaking in Europe in recent months. Transactions with a record value of $10.8bn were announced in the first half of this year, according to EY, the professional services firm. Chinese investors acquired 37 German companies in that period, compared with 39 in the whole of 2015.

A further sign of Chinese interest in German companies came earlier this month when San’an Optoelectronics announced it had held talks with Osram on a possible acquisition of the German lighting and semiconductor company. San’an is one of two potential Chinese bidders for Osram, which was spun off from Siemens in 2013. Go Scale has also held talks with Osram in the past few weeks, according to people close to the discussions.

Fonte: FT

Russia’s dark art of disinformation


Speaking at the Kremlin in December 2014, Vladimir Putin explained that bears might prefer a quiet life, eating berries and honey instead of chasing piglets, but no self-respecting bear should let its enemies rip out its claws and fangs. Among the bears for which the Russian president’s remarks were sure to have held singular resonance was Fancy Bear.
Fancy Bear is a Russian cyber­espionage group that the World Anti-Doping Agency holds responsible for hacking into its computer systems and publishing the confidential medical data of US and European athletes. Another tech-savvy denizen of the Russian forest that likes to show its claws is Cozy Bear.
According to CrowdStrike, a California-based cyber security company, the two bears were responsible for separate attacks on Democratic National Committee servers that disrupted this year’s US presidential race.
Despite Russian government denials of involvement in these two incidents, CrowdStrike suspects that Fancy Bear is affiliated with the GRU, Russia’s military intelligence agency, and that Cozy Bear may be connected with the FSB, successor to the KGB, the Soviet spy service. The two bears do not appear to co-ordinate their cyber attacks on the US and its allies. But the nature of their targets indicate that the bears dance to a powerful state’s tune.
Fancy Bear and Cozy Bear are almost certainly examples of a rich and highly distinctive tradition of Russian subversion that dates to before the first world war. This includes forged documents, false news stories planted in foreign media, front organisations and, in our times, government-backed social media trolls and fake websites.
Naturally, when it comes to hacking and related clandestine operations, other governments are no babes in the woods. For example, China and Russia tout their friendship, but Chinese hacking of Russian institutions and companies has increased this year, according to security experts in Moscow.
As for forgeries, a notorious 20th century case, the Zinoviev letter of 1924, had nothing to do with Soviet intelligence. The document purported to be a letter to the UK Communist party from Grigory Zinoviev, the Soviet international propaganda chief, encouraging subversive acts. British intelligence passed it to the Conservative party, from where it arrived at the Daily Mail. The Mail published it on the eve of the 1924 election, which the Tories proceeded to win by a landslide — although their victory owed little to the scandal.
Nowadays, historians think that the letter probably originated with anti-Soviet White Russian exiles in Berlin or Riga. However, another spectacular forgery — The Protocols of the Elders of Zion — seems to have been concocted by the Paris-based head of the foreign branch of tsarist Russia’s secret police. The Protocols, which makes wild allegations of a Jewish plot to rule the world, was first published in Russia in 1903 and nourishes global anti-Semitism to the present day.
The Soviet Communist party and KGB had a kind of colour scheme for subversive measures. The KGB’s Service A conducted “black propaganda” (forgeries and rumours); the party’s international information department handled “white propaganda” (stories in the official Soviet press); and the party’s international department took care of “grey propaganda” (clandestine radio broadcasts and front groups).
From the 1960s until the late 1980s, all sorts of lies were sown in western countries and the developing world. The KGB spread a rumour that a rightwing conspiracy was behind President John Kennedy’s assassination in 1963. In a deception codenamed Operation Infektion, a letter appeared in a pro-Soviet Indian newspaper in 1983 alleging that Aids was the result of Pentagon biological weapons programmes. In 1985 the disinformation campaign moved to Literaturnaya Gazeta, a Soviet literary weekly, from where it spread to non-Communist countries, damaging America’s image. After the Soviet Union’s collapse, Yevgeny Primakov, a former foreign intelligence chief, confirmed that the KGB had set up the whole operation.
A comparable example involving Mr Putin’s Russia is the false story in January that asylum-seekers had raped the 13-year-old daughter of a Russian immigrant family in Germany. This tissue of lies, first reported on Russian state television, stirred up ethnic Russians in Germany just when public opinion was on edge because of the tide of refugees entering the country.
Rather than pure aggression, retaliation often seems to be behind Russia’s dark arts. The hacking of Wada was probably a tit-for-tat move for the ban on Russian athletes at the Olympics that followed Wada’s disclosures of state-sponsored doping. The DNC hacking may reflect the Kremlin’s perception that the US had a hand both in the 2011 anti-Putin protests in Russian cities and in the 2014 Ukrainian uprising.
Whatever their motives, Fancy Bear and Cozy Bear seem in no mood for a diet of berries and honey.





Tony Barber




Fonte: FT

The alchemists who turn negative bond yields into profit

Why on earth would anyone buy a bond that yields a negative interest rate? That is the $12.6tn question gripping global markets as the pile of negative yielding bonds mounts. If you ask investors, they typically offer two replies: “desperation” (they cannot think of anywhere else to park their funds) or “regulation” (they have to buy bonds to comply with financial supervision rules or investment mandates).
But there is a third explanation: some investors have found ways to make those negative yields pay — and not just through traders “churning” bonds to generate commission.
The real cause is that government intervention to reinvigorate stagnant economies has left markets so peculiarly distorted that there is potential for canny alchemy — and profits.
For one example of this, look at dollar-yen cross currency swaps. This rather esoteric corner of finance normally goes unnoticed by the wider world. But right now there are two reasons it merits greater attention.
First, the Bank of Japan will publish on September 21 a hotly anticipated report about the impact of negative rates. Second, it is evident that recent developments in this swaps market have been bizarre.
The issue at stake is the spread — in effect, the cost of converting short-term yen contracts into dollars. Three decades ago, this spread was around zero, since demand for dollars and yen was evenly balanced. But when the Japanese financial crisis erupted in 1997-98 the country’s banks grew increasingly stigmatised and the one-year spread widened to minus 35 basis points, meaning in effect that anyone converting yen into dollars paid a penalty.
After 1999, the spread returned to zero. It has subsequently widened twice at points when financial crises have sparked a global dash into dollars. In 2008 it hit minus 70bp; and in 2011 during the eurozone debt crisis it touched minus 50bp.
In between, the spread shrank — as you would expect when markets are calm and functioning normally.
What is peculiar now, however, is that since 2015 that spread has widened and stayed at that level, hitting minus 70bp for one-year swaps. That is in part because Japanese institutions are keen to get hold of dollars, to enable them to buy assets that might produce a return at a time when yen rates are negative.
Another factor is that the US is reforming its money market rules, which is reducing funding to dollar markets. To make matters worse, emerging market countries want dollars in order to repay loans. The run of persistently wider spreads hurt the profits of Japanese banks and life assurance groups.
But it also creates a big opportunity for dollar-rich institutions around the world, from Pimco, one of the world’s biggest bond houses, to Chinese sovereign wealth funds.
So what many of these dollar-rich institutions are doing is cutting deals in this cross-currency swaps market, giving counterparties dollars in exchange for yen — and then using that yen to buy short-term bonds.
At first glance, it might seem like a bad idea to buy those yen bonds. After all, short-term bonds have negative yields (currently about minus 25bp). But the crucial point is this: the yen loss is more than offset by the dollar gain, meaning that there are profits to be made even by holding negative bonds. So it makes sense that foreigners are piling in. Chinese purchases of Japanese bills reached a record cumulative ¥10tn in June, according to Bloomberg .
Now, if you want to be optimistic, you might say that this tale simply shows that central bank actions are working: if Chinese and US investors keep buying short-term yen bonds, that will keep yen rates low.
This should — in theory — provide stimulus to the wider economy, by encouraging more borrowing. However, if you want to be more cynical about whether negative rates really work (as I am), you could also point out that these market dislocations have become so perverse that they are sapping confidence in a self-defeating way.
Either way, the question is what — if anything — the BoJ will do next. My own guess is nothing much; these dislocations have become so deeply ingrained in the markets that investors (and policymakers) seem almost inured.
But if you are ever tempted to wonder about those negative rates, ponder on the alchemy behind this peculiar yen-dollar tale. If nothing else, it should remind us how strange our financial system has become — and the shocks that might occur if, say, yen rates suddenly returned to normal.




Gillian Tett




Fonte: FT

The Swiss and negative rates: how is the experiment going?

The Swiss still refer to the day of the “Frankenschock”.
On January 15 last year, their stable economic lives were shattered by news the Swiss National Bank had abandoned its cap on the super-strong franc’s value against the weak euro. To deter investor inflows, the central bank instead pushed its main policy interest rate even deeper into negative territory — to minus 0.75 per cent.
But if the Swiss feared the sky over the Alps would be brought down by upside-down interest rates, dysfunctional banks and a soaring currency, they were wrong.
Almost two years later, the affluent Alpine state’s financial system still functions despite the most negative interest rates in the world; markets clear; savings are kept in bank accounts rather than under mattresses; dark-suited bankers still manage to dodge the trams rattling across Zürich’s Paradeplatz as they go about their business.
Indeed, Swiss banks’ profits are perky.
The Swiss Bankers Association last week reported their net income rose 5 per cent last year to SFr64.6bn — the highest since before the 2008 global financial crisis. Remarkably, for the first time in a decade, net income from interest-earning lending businesses overtook commission-based and service activities as the most important driver of profits.
So is Switzerland an example of how negative interest rates can work? Does it offer lessons for other financial markets, including the UK, where official interest rates may yet “go negative”? The answer to both is “yes” — but maybe only in the short term.
The SNB — which holds its latest monetary policy meeting on Thursday — can claim its policies have succeeded. After the immediate “Frankenschock”, the currency weakened and has remained within acceptable ranges, although the central bank has also intervened heavily in foreign exchange markets.
Controlling the franc was the SNB’s main objective — not providing an economic stimulus as is the case at other central banks. In Switzerland, there was no need: although annual inflation remains negative, the Frankenschock did not tip the country into recession last year. In the second quarter of this year, gross domestic product expanded 0.6 per cent — the fastest pace since late 2014.
What is more, Switzerland shows the financial system can adapt to a world below zero. Swiss banks knew imposing negative interest rates on ordinary retail customers would risk a disastrous bank run. So they looked elsewhere to compensate for the cost of providing deposit accounts — namely, the mortgage market.
Expanding mortgage loan books, increased margins on lending businesses, as well as lower refinancing costs, explain why Swiss banks remain so profitable.
But the “success” of negative interest rates in Switzerland has depended on local factors — most obviously a buoyant-yet-disciplined mortgage market. There is no talk here of “negative mortgages” — whereby banks would pay homeowners.
Swiss residential mortgage rates actually rose after the Frankenschock, before falling again. UK banks would be pilloried if they reacted to aggressive action by the Bank of England by hiking borrowing costs for homeowners.
Moreover, the equilibrium is fragile.
If the SNB pushed interest rates further into negative territory, it could quickly become unstable, especially if the mortgage market spluttered. Foreign competitors could attack the relatively juicy margins in the domestic bank market, and Swiss banks might be forced to impose charges on retail customers. Inquiries from Swiss companies about insuring cash held in safe deposits rather than in bank accounts have increased significantly, Zurich Insurance reports.
Even if the equilibrium is maintained, Switzerland has not found a way of avoiding the pernicious long-term effects of exceptionally low interest rates on the pensions and insurance industry, which worry investors worldwide.
Rather, the public debate about the creeping distortions created by negative rates grows louder. The commentary in Swiss media is about whether it really would be more damaging to the Swiss economy if the SNB returned to positive official interest rates. Worries remain that negative rates could yet cause the sky to fall in.




Ralph Atkins




Fonte: FT

US shale becomes world’s lowest-cost oil

US shale reserves are the lowest-cost option for future oil production and are likely to attract more investment than competing projects such as deepwater fields, according to a leading industry adviser.
About 60 per cent of the oil production that is economically viable at a crude price of $60 a barrel is in US shale, and only about 20 per cent is in deep water, said Wood Mackenzie, the consultancy.
Companies with US shale assets are likely to be at a competitive advantage over the next few years. Producers that rely on oilfields in higher-cost regions such as the North Sea and the deep waters off west Africa will have to cut costs or face shrinking output.
After the oil price plunge that began two years ago, production costs have been cut across the industry, but far more so in US shale.
Average costs per barrel have dropped by 30 to 40 per cent for US shale wells, but just 10 to 12 per cent for other oil projects, said Simon Flowers of Wood Mackenzie.
US shale regions that two years ago were in the middle of the cost curve for future oil supplies are now down towards the lower end.
Investments in the Eagle Ford shale of south Texas on average need a Brent crude price of $48 a barrel to break even, on Wood Mackenzie’s calculations, while projects in the Wolfcamp formation in the Permian Basin in west Texas need $39.
“There are more opportunities to invest in the US, and that’s where the investment will take place,” said Mr Flowers.
“If your investment options are in deep water, you’ve got quite a task on your hands. You might be asking: ‘Should we be getting into tight [shale] oil?’”
Brent was trading at $47.59 per barrel on Wednesday.
US companies that have shale oil reserves, including Chevron and ExxonMobil, have stressed the flexibility of those assets, which are developed with many wells costing a few million dollars each, rather than the multibillion-dollar projects often required for offshore production.
On Wood Mackenzie’s calculations, Brazil’s deepwater oilfields are so large that some will be commercially viable, but higher-cost regions could struggle to attract investment.
The number of large projects being given the go-ahead by oil and gas companies averaged 40 a year between 2007 and 2013 but dropped to just eight last year, according to Angus Rodger, also of Wood Mackenzie.
Although there has been a small flurry of investment decisions in the past few weeks, including the Chevron-led $36.8bn expansion of Tengiz in Kazakhstan, Mr Rodger expects only about 10 new big projects will go ahead this year.
While the economics of US shale are generally more attractive, Mr Flowers said the time taken to mobilise finance and workers to increase drilling and production meant that global demand could outstrip supply in a few years. That could drive oil prices to $80 to $85 per barrel in 2019-20, he added.





  

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