Mario Draghi's

SECRETARIA DE ESTADO DE ECONOMIA Y APOYO A LA EMPRESA

MINISTERIO DE ECONOMÍA Y DIRECCION GENERAL DE POLÍTICA ECONOMICA COMPETITIVIDAD '$' UNIDAD DE APOYO

CUADERNO DE DOCUMENTACION

Número 102.3 ANEXO XII

Alvaro Espina 24 Noviembre de 2014 Entre 6 al 20 de Noviembre ft.com/global economy EU Economy November 20, 2014 6:50 pm Italy accuses Brussels of ‘shaky’ accounting James Politi in Rome

©AFP Italy has accused the EU of using “shaky” methodology to evaluate countries’ fiscal policies, raising the stakes ahead of next week’s first verdict on the budgets of eurozone member states by the new European Commission. In an interview with the Financial Times, Pier Carlo Padoan, Italy’s economy minister, said the EU’s measure of output gaps – or the amount by which a country’s gross domestic product falls short of its potential – was outdated and underestimated the depth of the recessions which followed the financial crisis. More ON THIS TOPIC// Wine funds look to Italy for tasty returns/ Renzi and Berlusconi agree electoral deal/ Comment Italy’s Post-it premier hopes reforms stick/ Italy has ‘atomic bomb’ to revive economy IN EU ECONOMY/ Merkel ally doubts Hollande’s reforms/ Eurozone recovery slows to 16-month low/ ECB warns of ‘pessimism’ risk to recovery/ Brussels eyes €300bn investment funds “[The] decisions taken [based] on such a shaky analytical apparatus are very important,” Mr Padoan said. “This has to do with resources affecting the lives of citizens so we cannot fool around with that.” In the run-up to this year’s budget, Italy has sought to persuade Brussels to show as much flexibility as possible on its fiscal rules. This would have given Rome extra room to slash taxes and limit spending cuts to counter a bitter economic climate involving three years of declining gross domestic product. The size of Italy’s output gap is crucial because the EU uses it to calculate structural budget deficits, which take into account the impact of economic cycles. The greater the output gap, the greater the leeway conceded by the EU on fiscal matters. The EU’s measure of the Italian output gap is 3.5 per cent of GDP. Mr Padoan noted that this figure was significantly lower than the equivalent one from the Organisation for Economic Co-operation and Development, of which he has been chief economist. The Paris-based body has estimated Italy’s output gap to to be 5.1 per cent this year, with a new and possibly higher projection due next week. Mr Padoan added that if the latter number were applied, Italy “would be in structural surplus now and . . . for a long time”. “We would be in a different world, [with] no requests for additional resources, we would have to do nothing. It would change a lot,” he added.

On Thursday, the European Commission defended its methodology, which was agreed by all member states at the height of the eurozone crisis and is regularly assessed by experts from national finance ministries. The rules are due to be formally reviewed next year and Mr Padoan said he believed there was “broad consensus” among EU members for making a change. But commission officials denied there was any appetite to reopen the issue. The EU had originally asked Italy to reduce its structural budget deficit by as much as 0.7 per cent of GDP. The budget proposed last month by Matteo Renzi, the prime minister, made savings for only 0.1 per cent of GDP, but Rome avoided an outright rejection by finding additional measures that cut it by 0.3 per cent. The new commission led by Jean-Claude Juncker will deliver its verdict next week. Mr Padoan said he expected Mr Jucker and his colleagues would give Italy the green light. “I expect the commission will understand and appreciate the overall philosophy of the economic policy followed by the [Italian] government which is based on growth-

friendly fiscal consolidation,” Mr Padoan said. “The bottom line is I think the commission is appreciating and approving this approach,” he added, citing progress towards “fiscal targets” and an “unprecedented” effort on economic reforms. Speaking in his office in Rome, Mr Padoan offered a gloomy outlook for the European economy. “We need to realise that we are running a big risk of slowing down again. It’s not obvious that Europe will come out of this very low-growth environment quickly and successfully,” he added. This applied to Germany as well, with Berlin “beginning to realise that they are not immune to the possible negative impact of a new slowdown,” Mr Padoan said. The European Central Bank led by Mario Draghi, former governor of the Bank of Italy, should, he said, move to lift inflation across the eurozone, amid speculation that a round of sovereign bond purchases, or quantitative easing, could be on the cards in Frankfurt.

“I would certainly recommend to try to do as much as can be done to accelerate the speed towards 2 per cent,” Mr Padoan said, referring to the ECB’s inflation target. Mr Padoan spoke as tensions were rising in Italy ahead of a key vote in the lower house of parliament next week on reform of the labour market, one of the government’s key priorities to reboot the economy. Mr Padoan said he expected the measure to pass in spite of heavy opposition from trade unions who have called a general strike for December 12. “Usually if there is a protest against reforms it means the reforms will have an impact, otherwise there is no protest – this is very strong evidence of that,” Mr Padoan said. He added that the government was “very determined” to have the new law in place by the start of next year. http://www.ft.com/intl/cms/s/0/86d522c8-70d5-11e4-85d5- 00144feabdc0.html#axzz3JX0xCI6o

Europe : Berlin hausse le ton contre Paris, Sapin défend le choix de la croissance FREDERIC SCHAEFFER / JOURNALISTE |LE 20/11 A 19:29, MIS A JOUR A 19:43

Le ministre des Finances, Michel Sapin, doit se rendre à Lisbonne et à Madrid pour rencontrer ses homologues portugais et espagnol - AFP Le commissaire allemand, Günther Oettinger, exige des « contreparties très concrètes » à la demande de délai de Paris.Michel Sapin se rend à Lisbonne et à Madrid pour souligner l’urgence d’une relance économique de la zone euro.

Il y a de l’électricité dans l’air à l’approche de la publication, lundi, de l’avis de Bruxelles sur le projet de budget de la France. Dans la dernière ligne droite, Berlin a décidé de hausser le ton par la voix de son commissaire à l’Economie numérique, Günther Oettinger. Passablement irrité de voir la France repousser encore de deux ans son objectif de retour du déficit à 3 % de PIB, « nous perdrions toute crédibilité si nous prolongions pour la troisième fois le délai accordé sans exiger des contreparties très concrètes et précises », prévient-il dans une tribune publiée par « Les Echos ». Et d’exhorter la Commission de traiter avec « rigueur » la France « en tant que pays déficitaire récidiviste ».

Embarrassée par le report à 2017 de l’objectif des 3 %, la Commission s’apprête à demander à la France de faire plus d’économies pour crédibiliser cet objectif et éviter un nouveau dérapage. A Berlin, on rappelle aussi qu’une procédure de sanction peut être engagée si la Commission arrive à la conclusion que la France ne fait pas assez d’efforts et n’a pas pris les mesures appropriées. Une menace balayée d’un revers de main jeudi par Michel Sapin, jugeant la question d’éventuelles amendes « sans intérêt et sans consistance ». « Chacun ne doit pas se prendre pour une pervenche […], équipée de carnets à souches », a réagi le ministre des Finances. « Sanctionner, c’est toujours un

échec », avait déclaré, la semaine dernière, le nouveau commissaire aux Affaires économiques, Pierre Moscovici, semblant écarter l’hypothèse d’une sanction. Très lourds sacrifices C’est dans ce contexte que Michel Sapin se rend vendredi à Lisbonne et à Madrid pour rencontrer ses homologues portugais et espagnol. Deux pays qui, eux, ont concédé de très lourds sacrifices au cours des dernières années. « L’exemple de l’Espagne montre que la politique d’austérité fonctionne », juge le ministre espagnol des Finances, Cristobal Montoro. Décidé à défendre ses choix budgétaires, Michel Sapin compte, plus globalement, expliquer la position de la France en faveur d’une relance économique de la zone euro. « La situation de trop faible croissance et de trop faible inflation dans la zone euro nécessite d’ouvrir un large débat avec nos partenaires européens, plaide-t-on dans l’entourage du ministre. Il y a urgence à agir en utilisant tous les leviers possibles pour ne pas que cette situation s’installe dans la durée. » Le ministre a également prévu de se rendre à Berlin et à Rome d’ici au Conseil européen des chefs d’Etat des 18 et 19 décembre où sera notamment discuté le plan Juncker sur l’investissement en Europe. LIRE AUSSI : Pierre Moscovici : « Il faut combler le plus vite possible le fossé sur l’investissement qui fragilise l’Europe » http://www.lesechos.fr/monde/europe/0203955125344-europe-berlin-hausse-le-ton- contre-paris-sapin-defend-le-choix-de-la-croissance- 1066556.php?4xbxCcyqQO81rIfs.99

ft.com Comment Opinion November 20, 2014 7:09 pm Europe’s economic future depends on French reforms Günther Oettinger Paris has already taken some steps. But these have been too few, writes Günther Oettinger

©AFP EU energy commissioner Günther Oettinger The crisis of confidence in the euro – when millions of citizens feared for their savings and virtually the entire economic system was at risk – is over. This is largely due to the tremendous efforts of EU member states, and European institutions in Brussels and Frankfurt that worked well together to avert disaster. That we have mastered this crisis together is undoubtedly a success. But questions remain. As the EU’s autumn economic forecasts showed, growth prospects remain weak. There is talk of stagnation and a possible risk of a return to the crisis. If we are to avoid this, and really put the threat behind us, we need to chart a credible course in economic and financial policy. Our work on bolstering confidence in the euro must continue. And, to achieve this goal, structural reform will play a critical role. More ON THIS STORY//Eurozone recovery slows to 16-month low/Editorial Eurozone stagnation demands real solutions/ Brussels eyes €300bn investment funds/Wolfgang Münchau Berlin’s parallel world/Editorial Europe’s unbalanced answer to weak growth ON THIS TOPIC//Brussels slams Dutch over Starbucks tax deal/Germany shares UK migration concerns/Police to share DNA with Europe’s forces/Osborne wins more time to pay EU bill IN OPINION//Ariane Tabatabai West must not let Iran turn to Russia/Japan’s stimulus plan is foolhardy/Thane Gustafson Russia cannot escape Europe/Bendor Grosvenor Art is judged by price not aesthetics In this regard, the role of eurozone heavyweights such as France and Germany will be decisive. But so too will be the more immediate question of how strict the European Commission is in addressing the issue of France and its high budget deficit. Next week the new commission is set to take probably the hardest and most serious decision since taking office this month. It must decide whether Paris should for the third 6

time be granted extra time to bring its budget deficit below the limit of 3 per cent of gross domestic product set out in the stability and growth pact, the rules underpinning the single currency. France last managed to stay beneath that limit in 2009. The commission has twice granted an extension, most recently until 2015. Yet the autumn official forecasts show even this will not be met. On the contrary: without additional efforts France’s deficit will rise further – to 4.5 per cent of GDP in 2015 and 4.7 per cent the following year. For 2014 it is forecast at 4.4 per cent. This raises the question of the willingness to act and whether to go further in tackling the deficit; and of how the commission should respond. It would not be credible to extend the deadline without asking for clear, concrete steps in return. France must commit to policy goals that can solve its economic and fiscal problems in the long term. This should not be seen as a decision taken against France but rather as a measure for, and with, France. It is not just about one country. Without an economically strong France, the eurozone as a whole will not recover. Paris has already shown a possible way out of this situation. At the EU summit in June, it endorsed recommendations on economic and budgetary policy aimed at, among other things, tackling deficits, reducing labour costs and slashing red tape. France has taken a number of steps with regard to some of these points but it has not gone far enough. For example, it has introduced a pension reform. Yet as it stands, this reform appears unlikely to meet the objective of ending the deficit in the pension system any time soon. With regard to high labour costs, the government has relied on additional public spending rather than improvements in wage-setting. Similarly, a cut in corporate tax has been announced but is set to take place only in a few years. This means the biggest, most urgent challenge facing France remains the need to implement deep structural reforms. Only these will increase investment, create jobs and boost growth. Structural reforms are also the best way to rebuild the trust needed to provide the economy with effective credit once more. For this reason any extension of the deadline by which France must correct its excessive deficit and comply with the stability pact is acceptable only if Paris makes a clear and credible commitment to reform. Yes, some steps have already been taken. But these have been too few and not sufficiently ambitious. More is needed. That is in the interest of France but also of the eurozone as a whole. Therefore the commission should link any extension of the deadline to concrete, measurable policy steps; and it should also set the timeline for their implementation. The Lisbon treaty that underpins the EU offers ways to do this. We should use these. For the sake of France – and for Europe. The writer, a member of Germany’s Christian Democratic Union, is EU commissioner for the digital economy and society http://www.ft.com/intl/cms/s/0/472ba7ea-70b8-11e4-8113- 00144feabdc0.html#axzz3JX0xCI6o

ft.com/global economy EU Economy November 20, 2014 6:42 pm Germany’s EU commissioner doubts Hollande’s reforms Peter Spiegel in Brussels

©Getty Günther Oettinger Germany’s European commissioner has questioned whether President François Hollande has the “willingness to act” to reform the French economy in a blunt warning set to add to tensions between Berlin and Paris. Günther Oettinger, a political ally of Angela Merkel, chancellor, said France must live up to commitments made last year to cut its budget deficit, and said its new spending plan does not reform the pension system, cut labour costs or lower corporate taxes enough. Mr Oettinger’s remarks, made in an article for the Financial Times, come on the eve of the commission’s final ruling on the French budget, which could emerge as early as Tuesday. They will put added pressure on Jean-Claude Juncker, the new commission president, to take a hard line against Paris. More ON THIS STORY// Eurozone recovery slows to 16-month low/ Günther Oettinger French reform/ Italy challenges Brussels on accounting/ The Short View Another day, another eurozone let-down/ Editorial Europe’s unbalanced answer to weak growth ON THIS TOPIC// Sarkozy moves right with gay marriage vow/ Fast FT French economy grows 0.3% in third quarter/ Alleged Sarkozy plot rocks French politics/ Massif opportunity in Chamonix IN EU ECONOMY// ECB warns of ‘pessimism’ risk to recovery/ Brussels eyes €300bn investment funds/ Eurozone economy returns to growth/ Greece is eurozone’s top Q3 performer They could also raise tensions between Berlin and Paris, which are already on edge over whether France is flouting the budget rules Ms Merkel fought so hard for during the bloc’s debt crisis. When Paris unveiled its budget last month, it insisted it would “not be asked to make an additional effort”.

Although Mr Oettinger is a member of Ms Merkel’s Christian Democratic Union, the chancellery has been careful not publicly to criticise Paris since it submitted its 2015 budget last month. But it has privately pushed Brussels to enforce the rules to the letter. The dispute comes amid further signs that the eurozone economy is slowing to a halt, with a measure of manufacturing in the currency area, the purchasing managers’ index, falling to 51.4 this month, just above the 50 level that marks an expansion. France’s economy and public finances have been a particular source of concern. Upon taking office, Mr Hollande committed to bring France’s deficit below the EU-mandated limit of 3 per cent of economic output by next year. But his new 2015 budget extends that deadline to 2017, forcing Mr Juncker to decide whether to grant Paris another extension – or begin sanction proceedings that could lead to a fine. “It would not be credible to extend the deadline without asking for very clear, concrete steps in return,” Mr Oettinger writes. “Yes, some steps have already been taken. But these have been too few and not ambitious enough. More is needed.” In depth Euro in crisis

News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness Further reading Mr Oettinger, a senior member of the commission, is in charge of internet and digital issues. Fiscal matters are the responsibility of his French counterpart, Pierre Moscovici, Mr Hollande’s former finance minister. A Commission spokesman said a decision on eurozone budgets will be made collectively. Still, the commission came close to rejecting the French budget outright last month and only relented when Michel Sapin, French finance minister, agreed to additional measures that closed its deficit by another €3.6bn. But according to people briefed on the commission’s thinking, those measures – which included a promise to crack down on tax evasion and savings through lower borrowing rates – are not widely seen as credible long-term structural changes. Brussels is likely to demand that Paris find new savings of the same amount or face sanctions. “Both the quality and quantity of France’s additional measures have raised eyebrows in Brussels and among finance ministers,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “The French don’t realise the rules of the game have changed and that they will have to do more.” Italy’s budget also risked rejection by Brussels last month. But Pier Carlo Padoan, Italian finance minister, told the FT he expects a green light after having made revisions. “I expect the commission will understand and appreciate the overall philosophy of the economic policy followed by the [Italian government],” Mr Padoan said. Additional reporting by James Politi in Rome

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BCE : priorité à la relance de l'inflation, annonce Draghi LES ECHOS |LE 21/11 A 10:04, MIS A JOUR A 10:21

Le président de la BCE, Mario Draghi, a annoncé vendredi qu'il voulait relancer rapidement l'inflation dans la zone euro. - Yves Logghe/AP/SIPA

La priorité de la BCE est de faire repartir l'inflation. A cette fin, ce sont désormais les "changements de la taille et de la composition de notre bilan" qui détermineront la conduite de la politique monétaire , a déclaré vendredi son président, Mario Draghi. Devant la menace de déflation qui obère de plus en plus toute perspective de relance au sein de la zone euro, le président de la Banque centrale européenne, Mario Draghi, a pris le taureau par les cornes. "Ce sont désormais les changements de la taille et de la composition de notre bilan qui détermineront la conduite de notre politique monétaire", a-t-il annoncé vendredi lors d'un congrès bancaire à Francfort. Et pour enfoncer le clou, Mario Draghi a ajouté : "Nous ferons ce que nous devons faire pour augmenter l'inflation et les perspectives d'inflation aussi rapidement que possible". Jusqu'ici en effet, la lutte contre l'inflation était, la priorité des priorités de l'institution basée à Francfort. Ceci, avec le soutien et sous l'oiel très vigilant de l'Allemagne. Augmenter les rachats d'actifs si nécessaire La BCE est prête à agir de façon plus agressive si la chute des cours du pétrole entraîne la zone euro vers la déflation ou si ses projets actuels ne suffisent pas à accroître son bilan de 1.000 milliards d'euros, avait déclaré lundi l'économiste en chef de l'institution de Francfort, Peter Praet. "Nous sommes prêt à recalibrer l'ampleur, le rythme et la composition de nos achats (d'actifs) si nécessaire pour remplir notre mandat" et ce "sans délai indu", a renchéri Mario Draghi lors d'un congrès bancaire à Francfort, ajoutant qu'''il était "essentiel de rapprocher l'inflation (en zone euro, NDLR) de son objectif et ce sans délai". Le cours du baril de Brent a en effet chuté de 30% depuis juin pour atteindre son plus bas niveau en quatre ans, ce qui exerce des pressions à la baisse sur les prix. http://www.lesechos.fr/finance-marches/marches-financiers/0203956361559-politique- monetaire-draghi-change-de-boussole-1066844.php?mhgkOQ6fpODjgpVH.99 10

http://www.eurointelligence.com/rss.xml Sense of crisis returns to Greece

Ayer, 20 de noviembre de 2014, 8:23:24 There is once again a sense of crisis in Greece, after the stalled talks with the troika. As there is a clear possibility of early general elections, coalition members started to lay blame on each other. On Tuesday, ND parliamentary spokesman Adonis Georgiadis publicly blamed Pasok for holding up negotiations with the troika because of its opposition towards reforms. Pasok’s spokesman Dimitris Karydis responded by accusing Georgiadis of acting like a troika representative. “Mr Georgiadis is asking us to pull down our trousers in the face of absurd demands.” Never before has there been a public spat with this level of intensity, writes Macropolis. This is how they analyse the situation: "New Democracy and Pasok find themselves in a tricky balancing act between completing negotiations with the troika and preparing themselves for the possibility of early elections… Should the troika review not be completed on time and an agreement with the eurozone on a precautionary credit line not be reached, the government will suffer serious political damage. It is likely at that point that each of the two governing parties will try to limit the impact by placing the blame on the other, especially as the probability of the coalition failing to secure the election of a new president in February will grow." There are other signs of concern: Gikas Hardouvelis took the unusual step of meeting President Karolos Papoulias on Tuesday. Upon exiting the talks, he told reporters that talks with the troika are at a sensitive stage and that now is not the time for populist or rash decisions. He said that Grexit is still an option that cannot be excluded and that they will "keep Greece in the European family,” a statement hinting at some serious concerns that have been expressed behind closed doors. Also, there are reports that Antonis Samaras and Evangelos Venizelos may call Alexis Tsipras in for talks. There are discussions about this, writes Kathimerini, but no decision has been taken. Tsipras recently proposed a meeting of party leaders to agree on a date for general elections, on a presidential candidate and a common strategy for debt relief. Hardouvelis is now to table the final draft of the 2015 budget in parliament on Friday without having secured the approval of the troika. Kathimerini quotes sources as saying the troika has insisted on last-minute changes to guarantee that the 3% primary surplus target is attained, which the government clearly rejects as unnecessary on the grounds that the troika had been over-pessimistic in the past. The coalition might now opt for a wait-and-see strategy like last time, to see which side was right about their estimates. If the troika turns out to be correct with its forecast of a fiscal gap of up to €3.6bn for next year, the government would then have a choice between two options, either to revise its estimates in the next midterm fiscal plan in February/March 2015 or to table a supplementary budget. Our other stories We also have more stories containing details on Juncker’s CDO; on Brussels pressing France for more fiscal efforts; on a general strike in Italy and an unusually humourous response by the Confindustria; on another outspoken central banker, this time from Italy; on what the eurozone’s current account really means; and on Andrew Ball’s comparison between the BoJ and the ECB.

ft.com Markets Commodities

November 20, 2014 6:20 pm Banks hit back over commodities risks Gina Chon in Washington

©Bloomberg Senator Carl Levin Goldman Sachs, Morgan Stanley and JPMorgan emphasised the sale or wind down of their physical commodity businesses as they disputed US Senate claims that the banks reaped trading profits from insider knowledge of those markets. Executives from each of the investment banks testified on Thursday before the Senate permanent subcommittee on investigations, which this week said the banks were at risk to environmental disasters and possible market manipulation by owning aluminium warehouses, oil storage facilities and power plants. More ON THIS STORY// Report blasts US banks’ physical commodities operations/ Catastrophes could cost banks $15bn/ JPMorgan ‘still in physical commodities’/ Morgan Stanley mulls sale of gas business/ Oil price swings come too late for banks who made desk cutbacks ON THIS TOPIC// Lazard’s Weiss set to join US Treasury/ Lex Bank regulation – no presents yet/ On Wall Street Reasons to be bearish on US banks/ US risk-retention rule given US approval IN COMMODITIES// China ends world’s oldest monopoly/ Oil ETF defies crude slide/ US report details metal warehouse issues/ China releases first estimate of oil reserves “In light of changing market conditions and evolving regulatory expectations, we are seeking to focus our commodities business on its core strengths,” said Simon Greenshields, global co-head of commodities at Morgan Stanley. “One outgrowth of our focus is our decision to sell our global physical oil merchanting business.” A 2012 review by the Federal Reserve Bank of New York, cited by the subcommittee, found that the three banks and another unnamed financial institution faced shortfalls of up to $15bn in insurance coverage if there was an oil spill, a nuclear disaster, or another remote but extreme catastrophe. John Anderson, JPMorgan’s co-head of global commodities, said the bank allocated additional capital and changed its forecasting model after the Fed contacted the bank about those concerns.

The Fed had found that JPMorgan’s projected loss in the event of a disaster would be $497m, while the bank estimated that amount at $50m, noted subcommittee chairman Carl Levin. “Since that report, our operational capital has quadrupled,” said Mr Anderson, who added that JPMorgan had sold all but three of 31 power plants it owned. Last year, JPMorgan had to pay a $410m penalty to settle with the Federal Energy Regulatory Commission, which accused the bank of manipulating energy markets through the power plants it owned. The first part of the hearing focused on Goldman’s unit, Detroit-based Metro International Trade Services, which operates a network of metals warehouses. The subcommittee said Metro purposely moved aluminium from one warehouse to another in what critics call “merry-go-round” deals, which caused long queues to take delivery of aluminium and raised prices for consumers and companies. In testy exchanges, Mr Levin pressed Goldman executives about how Metro gave incentives to aluminium owners, including Deutsche Bank, to use its warehouses and cancel warrants. The cancellation would cause longer queues, which then increased the price of aluminium, Mr Levin said. “I want to get a straight answer from you if I can,” Mr Levin said to Metro chief executive Christopher Wibbelman. “You are telling us under oath that you didn’t care whether they cancelled or not?” Mr Wibbelman said Metro moved aluminium from one warehouse to another under the direction of its customers. He added that aluminium owners were not forced to move the metal or to cancel warrants, and the owners had the option not to live up to their contracts with Metro. I want to get a straight answer from you if I can//- Carl Levin, investigations subcommittee chairman// Tweet this quote Goldman has also contended that Metro’s operations did not have an impact on aluminium prices, and the bank has strict policies against conflicts of interest that separate its various business units. Metro, which was acquired by Goldman in 2010, was put up for sale a year ago. Jacques Gabillon, a Goldman commodities executive, said Metro had drawn interest from possible buyers in Europe, Russia and China. Republican senator Rob Portman questioned whether a new owner, which could be a less regulated trading company, would be under the rules of the London Metals Exchange, of which Metro is a member. Non-LME warehouses operate under fewer regulations. “They won’t have all the banking restrictions,” said Mr Wibbelman, who added that having a non-bank owner could increase the potential for market manipulation or other risks. On Friday, the subcommittee will hear from Fed Governor Dan Tarullo. The Fed has been criticised for not doing enough to rein in bank physical commodity activities

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Business Day|NYT Now Falling Wages at Factories Squeeze the Middle Class

By NELSON D. SCHWARTZ and PATRICIA COHENNOV. 20, 2014 For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.” Even as the White House and leaders on Capitol Hill and in Fortune 500 boardrooms all agree that expanding the country’s manufacturing base is a key to prosperity, evidence is growing that the pay of many blue-collar jobs is shrinking to the point where they can no longer support a middle-class life. A new study by the National Employment Law Project, to be released on Friday, reveals that many factory jobs nowadays pay far less than what workers in almost identical positions earned in the past. Photo

Darrell Eberhardt, 49, an assembly line worker in Ohio, has seen his wages drop from $18.50 an hour to $10.50 an hour.Credit Peter Larson for The New York Times Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions. 14

Pressured by temporary hiring practices and a sharp decrease in salaries in the auto parts sector, real wages for manufacturing workers fell by 4.4 percent from 2003 to 2013, NELP researchers found, nearly three times the decline for workers as a whole. Despite that widening gap, Washington still paints the manufacturing sector as a gateway to the middle class, even if the gate is closing.

The White House earmarked $100 million in grants last month to encourage manufacturing innovation, part of President Obama’s goal of adding one million American manufacturing jobs by the end of his second term. After losing more than six million factory jobs from 2000 to 2010, the sector has rebounded a bit in recent years, with more than 700,000 positions created since early 2010. A total of 12.2 million Americans work in manufacturing, according to the Bureau of Labor Statistics. “While they are rebounding in numbers, which is good news, they are not delivering on the wages front,” said Catherine Ruckelshaus, general counsel and program director at NELP. She argued that if federal, state and local governments continued to promote manufacturing jobs with tax breaks and credits, employers should be encouraged to pay higher starting salaries and provide good benefits. “If you are getting a tax break or a subsidy, we should make sure Source: National Employment Law those jobs are good jobs,” Ms. Ruckelshaus Project said

Based in New York, NELP is a research and advocacy group for low-wage and unemployed workers. It receives some financial support from organized labor, including unions like the United Steelworkers and the United Food and Commercial Workers, as well as the A.F.L.-C.I.O. The data in the study were drawn mostly from government sources like the Bureau of Labor Statistics and the Census Bureau, and independent experts confirm many of the trends NELP cites in the report. “We are not going to back to Detroit in the 1950s or Akron in the 1900s,” said Lawrence Katz, a professor of economics at Harvard. “There still are many manufacturing jobs that are high-paying, but they tend to be more senior or require a lot more education than entry-level jobs do. And their numbers are shrinking, too.”

Laboring for Less Since 2007, the average wage for workers in manufacturing jobs has been lower than the average wage for all private-sector positions. Even if it does not continue to be a mass employer or a ticket to the middle class, Mr. Katz said, manufacturing remains vital to the economy because it spurs innovation and leads to higher-paying, value-added jobs like design, marketing and other support services. It is also a major source of productivity gains, as well as a generator of profits and exports for American companies. But most of those gains are not going to the workers on the factory floor. One major factor in the downward pressure on overall manufacturing wages has been a particularly sharp fall in hourly pay earned by workers like Mr. Eberhardt who make parts that supply the big automakers. Parts workers make about one-third less than assembly-line workers who put together cars and trucks, but parts jobs account for 72 percent of all auto sector employment. From 2003 to 2013, median wages for parts workers fell to $15.83 an hour from $18.35. The auto industry in the United States, both parts makers and large auto companies like General Motors, have staged an impressive recovery since G.M. filed for bankruptcy in 2009 and required a federal bailout. Lower salaries and efficiency gains, along with less debt, have helped make Detroit more globally competitive. At the same time, one of the most important reasons for lower pay is the increased use of temporary workers. Some manufacturers have turned to staffing agencies for hiring rather than employing workers directly on their own payroll. For the first half of 2014, these agencies supplied one out of seven workers employed by auto parts manufacturers. The increased use of these lower-paid workers, particularly on the assembly line, not only eats into the number of industry jobs available, but also has a ripple effect on full- time, regular workers. Even veteran full-time auto parts workers who have managed to work their way up the assembly-line chain of command have eked out only modest gains. When Timothy Shelly first started working at the Faurecia Automotive Seating plant in Cleveland, Miss., he was earning $8 an hour. Nearly 10 years later, with a promotion that moved him up to managing three other workers, he earns $12.72, not much more than the rise in the cost of living over the same period. “The work is very strenuous. It’ll wear you down,” said Mr. Shelly, who loads 35- pound tubs of parts on pushcarts and then walks miles every day delivering them. Mr. Shelly can supplement his paychecks with overtime, which pays 50 percent more, but, he said, “it’s not easy at all to get those extra shifts.” Instead, according to Mr. Shelly, his plant regularly uses a service to hire temp workers who are paid $7.50 an hour and do not receive health insurance or other benefits. In Ohio, Mr. Eberhardt, who works a 10 p.m. to 6:30 a.m. shift, is due for a raise of 50 cents an hour, having just completed his first year in the job. “Once in a while we get a Saturday or a Sunday shift, and that helps,” he said. “It’s time and a half.” http://www.nytimes.com/2014/11/21/business/falling-wages-at-factories-squeeze- the-middle-class.html?partner=rss&emc=rss&_r=1 16

ft.com Comment The Big Read November 20, 2014 7:16 pm Food supply: Uncharted waters Emiko Terazono Consumption of farmed seafood grows amid sustainability concerns

U nder drizzly skies on the west coast of Norway, Thor Halvor Nygaard surveys the fish in the pens floating in the country’s largest fjord. “It’s a good place for the fish,” says Mr Nygaard, the site manager on the Skredstivik farm for the past 15 years, pointing to the fiord’s strong current, which provides oxygen and helps disperse waste. The Sognefjord is best known for its breathtaking scenery, with steep mountains plunging into a flooded valley. But the fjord is also one of the best examples of the rise in fish farming, or aquaculture. Norway’s Marine Harvest, the world’s largest producer of salmon and trout, owns the farm. In a few months, the salmon in Skredstivik’s nine pens will be shipped to supermarkets and grocery freezers in the US and Europe. In the process, they will contribute to a turning point in the global food supply: for the first time, consumption of farmed fish and seafood this year is set to exceed that of wild fish, according to the UN’s Food and Agriculture Organisation. Three decades ago, only 11 per cent of the fish and seafood consumed was cultivated. This shift ensures a more stable supply of fish for a growing world population, but it also has environmental risks. More ON THIS STORY// Fishmeal price tips scales against diners/ Google develops site to track illegal fishing/ Lex Marine Harvest – more fish than foul/ Mitsubishi bids $1.4bn for Norway’s Cermaq IN THE BIG READ// Central banks Stockholm syndrome/ Lex in-depth European telecoms/ Bonds Anatomy of a market meltdown/ Net neutrality Strife in the fast lane

“The agricultural revolution meant that people no longer needed to hunt,” says Alf- Helge Aarskog, chief executive of Marine Harvest. “That is the same as we are doing [in fishing].” Fish cultivation spans centuries – manuscripts show that the Chinese grew carp around the 5th century BC. The ancient Egyptians also attempted farming fish, and there are indications that Mediterranean civilisations cultivated oysters. But it has been over the past half century that aquaculture developed into an industry. Farmed fish production has grown by 13 times since 1980, with the industry producing $144bn worth of salmon, shrimp, trout, scallops and many other species in 2012. The amount of captured wild fish has remained stagnant since the 1990s at around 90m tonnes a year as a result of the depletion of key grounds and the introduction of quotas. The steady rise in demand for seafood catapulted farmed fish production above global beef output in volume terms in 2010. Shrimp and salmon, species where farming has boosted production, top the list for the total global seafood trade, which was worth $136bn in 2013. Industry executives say farming has brought two crucial changes that have underpinned growth: consistency of supply and much lower consumer prices. The buoyant outlook has attracted new investors. Mitsubishi, the Japanese trading house, recently bought Norwegian salmon farmer Cermaq for $1.4bn, suggesting that multinationals have woken up to the financial potential of the sector.

But after two decades of strong performance, the seafood farming industry is facing growing pains. Dubbed the “blue revolution” in the mid-20th century, fish farming was initially seen as an environmentally friendly way to produce food using limited resources and agricultural waste. No longer. In the 1980s, it came under pressure for the overuse of antibiotics in fishfeed and environmental issues such as destruction of mangroves and pollution from wastewater.

Thousands of miles from the fjords of Norway, a flight over Surat Thani, in the southern part of Thailand, reveals the most acute challenges facing the farming industry. In the South China Sea, the devastating impact of the so-called early mortality syndrome hitting shrimp is clear. The disease has ravaged Thailand’s shrimp industry since 2012. But it is only a sign of a much bigger problem: high-intensity farming pollutes and can foster the spread of disease.

Audun Lem, a seafood expert at the FAO in Rome, says that while farming has worked hard to improve its environmental record, “the problems from the 1980s and 1990s still stain the industry”. Once the largest producer of shrimp in the world, Thailand’s production is set to drop by a third to about 200,000 tonnes. The disease has also hit neighbouring Malaysia, Vietnam and China and has spread as far as Mexico. The result is a sharp fall in shrimp supplies, which have pushed up prices by 35 per cent over the past five years.

“Since the disease hit, survival has fallen by half,” says Daniel Gruenberg, a consultant in Thailand. 19

This epidemic, along with the white spot disease that hit shrimp farms in the 1990s and the salmon anaemia that devastated Chile’s salmon industry four years ago, has helped make fish health a priority. But while the challenge of disease has grown, veterinary science – still in its infancy in the fish industry compared with agriculture – has struggled to cope. Frank Asche, a marine economist and professor at Norway’s University of Stavanger, argues that the fish farming industry is still learning ways to deal with disease. “Like agriculture, we need to prevent and cure.” Science is starting to help. In Japan, genetic information and classic breeding methods are being combined to develop strains of fish less susceptible to disease. Takashi Sakamoto, a researcher at the Tokyo University of Marine Science and Technology, has developed a flounder immune to some viral infections. “Using genetic information we can create more disease-resistant fish,” he says. “That is where the world is going.” Aaron McNevin, director of aquaculture at the World Wildlife Fund, says efforts to fight disease have eased pollution because healthy fish require fewer chemicals. “Pollution is still ubiquitous but improving. Biosecurity has facilitated lower pollution loads,” he says. Industry executives and conservationists worry that a move to countries where there is less regulation could hurt the industry. Myanmar has become a new production centre for shrimp. India’s industry is expanding fast, while farmed tilapia, a firm freshwater fish, has proved popular in Brazil and several African countries.

Along with disease and pollution, the other big problem facing the seafood industry is rising costs. Rick Barrows, a researcher at the US agriculture department, has been studying alternative fish feeds to move away from the traditional, and increasingly expensive, feed: other fish. Farmed fish typically are fed the wild variety – mainly anchovies caught off the coasts of Chile, Peru and elsewhere. Salmon farmers, for example, use 1.4kg of fishmeal to

produce a single kilogramme of salmon, which has come down from a 3:1 ratio in 2000. Mr Barrows’ trial diets include organisms such as yeast, bacteria and algae. When the sector was in its infancy, supplies of fishmeal were abundant and prices relatively low. But in recent years, as aquaculture consumption jumped, the price of fishmeal in producers such as Peru has also hit record highs. The sharp price increase has accelerated efforts to replace proteins from fish with plants, such as soyabean and sunflower seeds. But there is a catch. While companies have managed to lower the fish content to about a quarter of the total used in the feed, they still rely on wild fish for the Omega-3 fatty acids that are beneficial to human health. Mr Barrows calls a substitute for fish oil “the holy grail” for the industry. The experience of the agriculture and livestock sectors shows that the challenges are solvable. But the easy years of growth, when output boomed and prices declined, are firmly behind the seafood industry. The sector has entered uncharted waters. HTTP://WWW.FT.COM/INTL/CMS/S/2/8AECF716-6E49-11E4-AFE5- 00144FEABDC0.HTML#AXZZ3JX0XCI6O

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EXPANSIÓN.COM THE WALL STREET JOURNAL Las aplicaciones están matando a la red 20.11.2014 Christopher Mims0 La red —ese delgado revestimiento de diseño que recubre el murmullo técnico que constituye Internet— está muriendo. Y la forma en la que lo está muriendo tiene implicaciones más trascendentales que prácticamente cualquier otro asunto tecnológico en la actualidad. Piensen en sus teléfonos móviles. Todos esos pequeños íconos en la pantalla son aplicaciones, no páginas de Internet, y funcionan de un forma muy distinta a como lo hace la red. Montañas de datos nos dicen que dedicamos a las aplicaciones el tiempo que en su momento dedicábamos a navegar por Internet. Estamos enamorados de las aplicaciones, y éstas se han impuesto. En los teléfonos, el 86% de nuestro tiempo lo dedicamos a las aplicaciones, y sólo el 14% a la red, según la empresa de análisis móvil Flurry. Todo lo referente a las aplicaciones parece una ventaja para los usuarios: son más rápidas y más fáciles de usar que lo anterior. Pero debajo de toda esa conveniencia hay algo siniestro: el fin de la misma apertura que permitió que las empresas de Internet crecieran para convertirse en unas de las firmas más poderosas o importantes del siglo XXI. Por ejemplo, pensemos en la actividad más para el comercio electrónico: aceptar tarjetas de crédito. Cuando Amazon.com debutó en Internet, tenía que pagar varios puntos porcentuales en comisiones por transacciones. Pero Apple se queda con 30% de cada operación que se realiza dentro de una aplicación vendida a través de su App Store, y “muy pocas empresas en el mundo pueden soportar ceder esa tajada”, dice Chris Dixon, un inversor de capital de riesgo de Andreessen Horowitz. Las tiendas de aplicaciones, que están ligadas a sistemas operativos y dispositivos particulares, son jardines enrejados donde Apple, Google, Microsoft y Amazon fijan las reglas. Durante un tiempo, eso permitió a Apple prohibir bitcoin, una moneda alternativa que para muchos especialistas en tecnología es el desarrollo más revolucionario en Internet desde el hipervínculo. Apple prohíbe habitualmente aplicaciones que violan sus políticas o sus gustos, o que compiten con su propio software y servicios. Pero el problema con las aplicaciones es mucho más profundo que el control que pueden ejercer sobre ellas organismos centralizados. La red fue inventada por académicos cuya meta era compartir información. Ninguno de los implicados sabía que estaban dando forma al mayor creador y destructor de riqueza que se haya conocido. Así que, a diferencia de las tiendas de aplicaciones, no había forma de controlar la primera red. Surgieron organismos que fijan reglas, como Naciones Unidas pero para el lenguaje de programación. Empresas que hubieran querido eliminarse mutuamente del mapa se vieron obligadas, por la misma naturaleza de Internet, a acordar revisiones del lenguaje común para páginas.

El resultado: cualquiera podía crear una página de Internet o lanzar un servicio nuevo, y cualquiera podía acceder a él. Google nació en un garaje. Facebook nació en la residencia estudiantil de Mark Zuckerberg. Pero las tiendas de aplicaciones no funcionan así. En la actualidad, las listas de aplicaciones más descargadas incitan a los consumidores a adoptar esas aplicaciones. La búsqueda en las tiendas de aplicaciones no funciona bien. La red está compuesta de enlaces, pero las aplicaciones no tienen un equivalente funcional. Facebook y Google intentan solucionarlo al crear un estándar llamado “enlace profundo”, pero hay barreras técnicas fundamentales para lograr que las aplicaciones se comporten como páginas de Internet. Internet quería exponer información. Estaba tan dedicada a compartir por encima de todo que no incorporaba un medio para pagar por cosas, algo que algunos de sus primeros arquitectos lamentan hoy en día, ya que obligó a la red a sobrevivir con un modelo basado en la publicidad. Internet no era perfecto, pero creó espacios comunes donde la gente podía intercambiar información y bienes. Obligó a las empresas a desarrollar tecnología que estaba diseñada explícitamente para ser compatible con la tecnología de la competencia. Hoy en día, que las aplicaciones se imponen, los arquitectos de la red la están abandonando. El experimento más reciente de Google para el correo electrónico, Inbox, está disponible para los sistemas operativos de Android y Apple, pero en la red no funciona en ningún navegador a excepción de Chrome. El proceso de creación de nuevos estándares de Internet se ha estancado. Entre tanto, las empresas con tiendas de aplicaciones se esfuerzan para que las suyas sean mejores que las de sus competidores—y completamente incompatibles. Muchos observadores de la industria creen que esto es lógico. Ben Thompson, un analista independiente de tecnología, piensa que el dominio de las aplicaciones es el “estado natural” del software. Lamentablemente, debo coincidir. La historia de la informática la conforman empresas que intentan usar su poder de mercado para dejar fuera rivales, aunque esto sea negativo para la innovación y para el consumidor. Eso no significa que la red vaya a desaparecer. Facebook y Google aún dependen de ella para ofrecer un flujo de contenidos al que se pueda acceder desde las aplicaciones. Pero incluso la red de documentos y noticias podría desaparecer. Facebook anunció planes para albergar el trabajo de las editoriales dentro del propio Facebook, convirtiendo a la red en una mera curiosidad, en una reliquia. Creo que Internet fue un accidente histórico, una instancia anómala de una poderosa tecnología nueva que pasó casi directamente de ser un laboratorio de investigación financiado por el Estado al público. Cogió desprevenidos a gigantes como Microsoft, y provocó el tipo de revolución que las empresas de tecnología más poderosas actualmente preferirían evitar. No es que los reyes actuales del mundo de las aplicaciones quieran aplastar la innovación. Lo que ocurre es que en la transición a un mundo donde los servicios se proporcionan a través de aplicaciones, más que en Internet, estamos entrando en un sistema que dificulta mucho más la innovación, los descubrimientos imprevistos y la experimentación para quienes desarrollan cosas que dependen de Internet. Y hoy, eso significa prácticamente todo el mundo. http://www.expansion.com/2014/11/20/empresas/tecnologia/1416512333.html 23

Senado de Estados Unidos. Foto: Europa Press/Archivo

Enlaces relacionados/ Multa por manipular el mercado de divisas EEUU acusa a tres bancos de manipular las materias primas

J. G. Jorrín / V. B. Moro 8:12 - 21/11/2014 Podrían haber empleado su posición dominante para manejar los precios

No ha pasado una semana desde que las autoridades de EEUU multaran a una serie de bancos internacionales por manipulación de las divisas, cuando vuelve a surgir un escándalo en el mercado, esta vez afecta a las materias primas. El Senado de EEUU ha abierto una investigación a Goldman Sachs, JPMorgan y Morgan Stanley por emplear sus reservas para manipular los precios y asumir riesgos financieros en los mercados de petróleo y metales. Según un informe publicado en la madrugada del miércoles, las tres entidades pusieron en riesgo su solidez en detrimento de sus clientes con las operaciones financieras en este mercado. Carl Levin, el senador que preside el Subcomité Permanente de Investigaciones de la Cámara Alta, denunció ayer que "el mercado de materias primas está dominado por especuladores". Ejecutivos de los tres bancos defenderán hoy sus decisiones ante los miembros de esta comisión. Un riesgo de 15 billones El Subcomité destaca que estos tres grandes bancos se han expuesto a riesgos financieros que pueden ser catastróficos, colocándose en una situación vulnerable similar a la de la petrolera BP en el pasado. En este sentido, un informe del equipo de revisión del mercado de materias primas de la Reserva Federal de Nueva York destaca que estas compañías asumen riesgos que podrían suponer pérdidas de hasta 15 billones por encima de lo que pueden cubrir. Hay que tener en cuenta que, debido a su tamaño e importancia, una caída de estas entidades podría suponer una debacle financiera en todo el país. Los bancos alegan que ellos no son responsables de los desastres medioambientales, destacando que son los operadores de las instalaciones y de los recursos los que responderían ante la ley. EEUU acusa a tres bancos de manipular las materias primas - elEconomista.es http://www.eleconomista.es/mercados-cotizaciones/noticias/6262993/11/14/EEUU- acusa-a-tres-bancos-de-manipular-las-materias-primas.html#Kku8xPWTP2bHIkJx

ft.com Comment Opinion November 20, 2014 6:11 am Japan’s plan for further stimulus is not courageous but foolhardy William White It carries risks that could seriously affect the global economy, writes William White

©Bloomberg I n a world of unprecedented expansionary actions by central banks, the Bank of Japan is set to outdo them all. Its plans to expand significantly the scale of its asset purchases imply that the size of its balance sheet relative to gross domestic product will far outstrip that of others. Some suggest such courage is to be emulated, not least by the European Central Bank. Others – rightly – suggest the plan is not so much courageous as foolhardy. It is not needed and it will not succeed in stimulating the economy. Moreover, it carries risks that could seriously affect the global economy. More ON THIS STORY// BoJ governor quashes easing rebellion/ Global Market Overview Wall St stalls after Fed minutes/ Yen drop lifts Japan current account surplus/ BoJ raises bar for European Central Bank/ Editorial Kuroda sticks to inflationary promises IN OPINION// Thane Gustafson Russia cannot escape Europe/ Bendor Grosvenor Art is judged by price not aesthetics/ Jacob Weisberg Obama’s executive power/ Peter Bazalgette Arts can revive UK cities First, the reason it is not needed. Japan’s recent slow growth has been largely driven by demographic trends. Since 2000 growth in GDP per person of working age has been significantly above that in the US. As for persistent deflation, the level of Japanese consumer prices has fallen less than 4 per cent in the past 15 years. There is no evidence of an accelerating deflationary trend, nor of consumers delaying spending in anticipation of lower prices. Indeed, the household saving rate has fallen since the 1990s from a traditionally high level to zero today. Finally, the BoJ itself estimates that the amount of spare production capacity is also close to zero. Second, why it will not work. The underlying intention is to induce businesses to stimulate investment and exports. Neither seems likely to happen. Japan’s smaller companies export little and face higher costs of imported inputs as a result of a lower yen. Its bigger ones have long had the advantage of favourable financing conditions and

large cash balances. They have not responded with more domestic investment. Why should they do so now in the absence of significant structural reform? The lower yen has increased corporate profits but exports have responded sluggishly. All this suggests policies aimed at raising consumer spending would have been more effective. The BoJ’s policy of announcing a higher inflation target assumes inflationary expectations will ratchet up accordingly. Even if it works, the policy could easily backfire. Indeed, recent weakness in the economy might partially reflect this. Consumers have long faced falling nominal wages. If they expect this to continue, while believing that inflation will rise, it implies lower real wages and likely lower consumption. This likelihood will be increased, given terms of trade losses because of a lower yen and fears of higher sales taxes. As for capital markets, expectations of higher inflation should normally result in higher nominal interest rates on government debt. Investors might believe this effect could be offset by central bank purchases of government bonds; it also points to the associated risks. Rates on government bonds have been very low for a long time but things might be changing. Low bond rates and a relatively strong yen – taken together, a low risk premium – were initially supported by high household saving, a strong bias to investing in yen denominated assets and a large current account surplus. All three of these supports have now disappeared. With the yen already markedly weaker, any rise in the risk premium for yen denominated assets could push bond rates higher. This could trigger a sequence of events leading to much higher inflation. Japan’s fiscal deficit is about 8 per cent of GDP and its stock of gross debt about 230 per cent of GDP. Were the average rate on government bonds to increase to 2 per cent, and should potential nominal growth fail to rise, the deficit would rise above 10 per cent of GDP. Recourse to financing from the BoJ, already almost twice the size of the general government deficit, would then have to rise further. Fears of still more monetisation and sharp price rises would put more upward pressure on bond rates, and downward pressure on the yen, in a self-fulfilling spiral that could quickly take inflation to very high levels. Such processes have been seen many times in the last century, not least in Latin America. Nor would this vicious circle be easy to end. Higher central bank rates to support the yen would increase debt service, sending bond rates even higher. A failure to raise rates would result in the yen weakening, exacerbating “currency war” tensions. Sales of foreign exchange reserves to support the yen might be effective but could have serious effects on the market for US Treasuries and elsewhere. Confidence everywhere would be seriously affected should it become apparent that Japan’s authorities were losing control of events. It is therefore imperative that Tokyo quickly take steps to lower its deficit to prevent this vicious circle. The risks of not doing so are just too great – for all of us. The writer is a former economic adviser at the Bank for International Settlements http://www.ft.com/intl/cms/s/0/5dfdcf52-6e56-11e4-afe5- 00144feabdc0.html#axzz3JX0xCI6o

Fiscal Responsibility Claims Another Victim November 19, 2014 10:09 amNovember 19, 2014 10:09 am55Comments A few more thoughts on Japan. The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument — which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want — really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation? Beyond that, the Japanese story is another example of the damage wrought by the rhetoric of fiscal responsibility in a depressed economy. Leave on one side the expansionary austerity nonsense. Even among relatively sensible people, you often encounter calls for a strategy that couples loose fiscal policy, maybe even stimulus, in the short run with measures to address long-run sustainability. So, let’s spend on public works now while also addressing entitlement and/or tax reform to stabilize the budget picture over the next few decades. This sounds reasonable; in a better world it actually would be reasonable. But in this world it ends up producing very bad results. Why? In practice, political systems (and politicians) have limited ability to focus. If you give them a mixed message about stimulus now but long-run cuts, the urgency of the stimulus part gets lost, and in fact the practical result is generally austerity even in depression. So it was with Japan. The IMF advised Japan to go ahead with consumption tax hikes, while also endorsing monetary and fiscal stimulus. But as I’ve pointed out already, putting fiscal sustainability up near the front of a report on a country engaged in a very difficult attempt to escape deflation undermined the message, and led to a tax hike that was not effectively offset. One way to say this is that when people come out with a message along the lines of “We must address fiscal sustainability while supporting short-term recovery,” the message that actually comes across is more like Photo

Credit So why blur things this way? The usual answer is still that unless you address the long- term issues, you might have a loss of confidence that undermines recovery. This is, 27

however, unlikely — both because the fiscal consequences of a delay are small and because losing confidence would actually be a good thing in this situation. I have to admit that the Fund’s role here somewhat surprises me. The IMF is in general making a lot of sense on macro issues these days, and is well aware of the dangers of deflation. So I had hoped it would be more sensitive to the risks of responsibility rhetoric in this case. But anyway, another lesson from Japan — the country that has offered many useful lessons to the West, none of which our policymakers have been willing to learn. http://krugman.blogs.nytimes.com/2014/11/19/fiscal-responsibility-claims-another- victim/?_r=0

ft.com Comment FT View November 19, 2014 7:05 pm Eurozone stagnation demands real solutions Juncker’s EU investment plan is noble – but much more will be needed

©EPA After three years of near stagnation and with unemployment stuck at double digit levels, it is increasingly clear that the eurozone’s political and economic crisis will intensify if there is no boost to growth. Any proposal that seeks to revive demand across the currency union therefore deserves to be examined closely. Next week, Jean-Claude Juncker, the European Commission president, is expected to unveil such a plan, setting out details of a €300bn investment programme aimed at boosting EU growth over the next three years. Mr Juncker is flagging this as the first big initiative of his presidency. But it is unlikely to have the effect he desires. More ON THIS STORY// Wolfgang Münchau Berlin’s parallel world/ Cameron warns of global economic risk/ Eurozone economy returns to growth/ Video Eurozone - lost in stagnation/ Editorial Europe’s unbalanced answer to weak growth ON THIS TOPIC// The A-List Juncker must steer recovery/ Slideshow Barroso’s decade leading the commission/ Weak currency fails to benefit eurozone/ Lorenzo Bini Smaghi Euro’s low inflation riddle EDITORIAL// Little guy gets last drink on House/ China emerges from US dollar’s shadow/ Juncker should step back on tax avoidance issues/ Bank pay is everyone’s business This is not the first time that the European Commission has launched a programme to stimulate the EU economy. Two years ago, during the depths of the eurozone crisis, Mr Juncker’s predecessor José Manuel Barroso managed to secure support for a similar €180bn investment plan. It has had no discernible effect. Now the commission is trying again. According to a proposal described to the Financial Times, Brussels is considering the creation of investment funds seeded with cash from either the EU budget or the European Investment Bank as the centrepiece of a new growth plan. The commission would seek to entice private investors to finance European infrastructure projects, with Brussels assuming most of the downside risk. Your opinion 29

Are "red warning lights" flashing again for the global economy, as Britain's David Cameron has warned? Yes 66.67% // No 33.33% Europe needs this kind of initiative. An injection of €300bn of investment would, if fully effective, be equivalent to 0.8 per cent of the EU’s GDP. But the early signs are that Mr Juncker has raised expectations too high. The main reason for concern is that his plan looks set to avoid creating any new public debt. As a result, the amount of fresh public funding coming into the programme will be limited – and certainly well below the €60bn to €80bn demanded by Paris. It is far from certain how much private capital such a narrowly-financed scheme would leverage. Emmanuel Macron, the French economy minister, could be forgiven for arguing this week that the plan will end up being “disappointing” and needs to be funded with “real money.” Mr Juncker’s proposal is noble in its intentions. But it should not distract from the more fundamental steps that need to be taken to revive growth. Berlin should stop obsessing about having a balanced budget and move to a more expansionary fiscal policy. Mr Macron is right to argue that if France cuts its budget by €50bn, Germany should respond by increasing its own spending by the same number. The German government should also allow the European Central Bank to play its part in the recovery, giving it the necessary political cover to move to full-blown quantitative easing in order to rescue the bloc from the brink of deflation. With both fiscal and monetary policy pointing in a more accommodative direction, France and Italy would have more breathing space to implement painful but necessary structural economic reforms, such as overhauling their labour markets. Germany’s unwillingness to change course on fiscal and monetary policy risks prolonging the eurozone’s economic travails and widening Berlin’s divisions with Paris, traditionally its main EU partner. Here, Mr Juncker has a significant role to play. As a commission president who was backed by chancellor Angela Merkel, he should seek to persuade Germany to change its economic policy and reconcile its differences with France. It is on this issue – more than on any other – that his presidency will ultimately be judged. http://www.ft.com/intl/cms/s/0/d3ed1dce-6fed-11e4-a0c4- 00144feabdc0.html#axzz3JX0xCI6o

ft.com Comment The Big Read November 19, 2014 7:25 pm Sweden’s central bank: Stockholm syndrome Richard Milne in Stockholm Swedish experience puts the Riksbank at the fore on crisis-fighting measures

© Reuters/Bloomberg/FT montage Stefan Ingves (left), the governor of the Riksbank, clashed with Lars Svensson (right) over monetary policy When the global financial crisis broke in 2008, Sweden’s central bank seemed to be one of the best-equipped to fight it. The Riksbank was led by Stefan Ingves, a former senior official at the International Monetary Fund whose expertise lay in financial crises and how to avoid them. One of its deputy governors was Lars Svensson, an expert on Japan’s long battle against deflation and a top thinker on monetary policy. With these credentials, the two men seemed ideally suited to guide the Riksbank’s policy through the turmoil, says Christian Odendahl, chief economist at the Centre for European Reform. The aftermath of the crisis “was exactly made for these two people on what should be done”, he says. More ON THIS STORY// Editorial Tactic of ‘lean against the wind’ has failed Sweden/ Swedes cut rates to zero in deflation battle/ Letter Swedish economy has developed quite well since the crisis ON THIS TOPIC// Trading Post Krona takes currency wooden spoon/ Rate cut dents Scandinavian currencies/ Scandinavian policy makers test resolve/ Swedish krona slides after rate cut

IN THE BIG READ// Lex in-depth European telecoms/ Bonds Anatomy of a market meltdown/ Net neutrality Strife in the fast lane/ ‘Hollywood good but Rosetta better’ At first, they found common ground as the Riksbank cut interest rates in 2009 to 0.25 per cent, their lowest level since its founding in 1668. But for the next two years, the duo clashed bitterly over monetary policy. Their debate – about when an economy is healthy enough to stop crisis-fighting measures – is still resonating at central banks from the US Federal Reserve to the European Central Bank and the Bank of England. The Riksbank’s decision in 2010 to start raising rates – an idea Mr Svensson firmly opposed – has transformed the Swedish central bank from a small but respected institution to a cautionary tale for central banks worldwide. “Sweden has done an experiment the whole world is interested in,” Mr Odendahl says. “What should we do when monetary policy should be accommodative but there are financial risks? The Swedish lesson is that tightening policy prematurely isn’t the answer.” Paul Krugman goes further, calling the policy “sadomonetarist”. The winner of the Sveriges Riksbank Prize in Economic Sciences, commonly known as the Nobel Prize in economics, calls the Riksbank’s rate rises “possibly the most gratuitous” policy error of the crisis. “In terms of really having no obvious justification in terms of macro indicators, you would find that hard to match anywhere in the crisis. It is the most out- of-thin-air tightening policy out there,” Mr Krugman told the Financial Times. Mr Svensson feared that the rate rises could push Sweden closer to deflation, the toxic bout of falling prices that he had observed in Japan. Last year, he resigned from the Riksbank in frustration just as his fears were coming true. Sweden’s headline inflation was minus 0.1 per cent in October and has only been positive in eight of the past 24 months. After raising rates to 2 per cent in 2011, the Riksbank woke up to the risk of deflation and began to reverse course. Rates were cut to a record low of zero last month.

Throughout this, the Swedish economy has held up, unlike in Japan, with growth in gross domestic product of 1.6 per cent in 2013 and government forecasts of 2.1 and 3 per cent for this and next year. Unemployment remains stubbornly high by Swedish standards at 7.9 per cent, although that is lower than in many European countries.

The Riksbank’s preferred core inflation measure – which excludes the impact of its own rate cuts – was 0.6 per cent in October, a long way from its 2 per cent target. Policy makers remain on edge. “Deflation is definitely a worry. We cannot see that there is an immediate risk that we are very close to it but it is a risk. If inflation is too low, all of a sudden you are there and it’s very dangerous. Just look at Japan,” says Stefan Löfven, Sweden’s prime ministerMr Svensson’s association with the Riksbank began during another extreme moment. At the start of the 1990s, he was an adviser to the central bank just as the Nordic financial crisis hit Sweden. The Riksbank briefly – and boldly – raised interest rates to 500 per cent. It also became one of the first central banks to introduce inflation targeting. Mr Svensson left Sweden at the turn of the century to become a professor at Princeton, where he became friendly with Ben Bernanke, the former Fed chairman, as well as Mr Krugman. When the Riksbank asked him in 2007 to return as a deputy governor, it was seen as a coup for the central bank. “I could not decline to see how it could be implemented in practice,” Mr Svensson says. Almost immediately, he was plunged into Sweden’s battle with the financial crisis – but not before he joined Mr Ingves in pushing through an ill-fated interest rate rise just two weeks before the collapse of Lehman Brothers. Weeks later they were cutting rates, including one of the biggest reductions of any western central banks, a 1.75 percentage- point drop in December 2008. Mr Svensson started expressing dissent soon after. He thought the rate cuts should go faster and then that rates should be reduced all the way to zero rather than the 0.25 per cent where the Riksbank stopped. A year later came a far more serious disagreement. In June 2010, the Riksbank decided to start raising rates again. Some governors saw the booming economy – growth was 6.6 per cent that year – and began to fret about rising house prices and high household debt. But Mr Svensson, and another deputy, Karolina Ekholm, wanted to keep rates low because inflation was still below the 2 per cent forecast and unemployment near its post-crisis high at 9.6 per cent. The Riksbank is almost alone among the main western central banks in releasing detailed minutes of its monetary policy meetings that include the specific comments of each committee member. In the June 2010 minutes, Mr Svensson started by saying: “The risks associated with breaking off the expansionary monetary policy too early are still much greater than the risks of continuing to pursue it for too long.” But Mr Ingves talked of a rate rise helping “a normalisation of monetary policy”. With household debt at a record high of about 170 per cent of disposable income, he added: “A low interest rate for too long could lead to a troublesome situation beyond the forecast horizon as a result of a credit expansion.” For Mr Krugman, this is symptomatic of a divide between policy makers – typically between those in the US and those in Europe – over the merits of low interest rates. “The Riksbank is representative of a current of opinion that thinks there must be something wrong with an extended period of cheap money even if the inflation numbers are below target. They got one of the world’s leading scholars [in Svensson] and then put him in the corner,” he says. Mr Svensson himself says that had he been at the US Fed he probably would have been seen as a “boring mainstream person” while in Sweden he was an “outlier”. He says the 33

Riksbank’s forecasts in 2010 showed inflation would remain below target until 2013 while unemployment was well above pre-crisis levels. “I wanted to focus on stabilising inflation and unemployment. The forecasts were very similar to those in the US but the policies were very different.” The majority at the Riksbank and many economists at Swedish banks saw a different world. Sweden seemed to be bouncing back strongly from the crisis, and while there were troubling signs in Greece in the summer of 2010, normal monetary policy rules suggested they should tighten policy. “If you have a combination of a strong economic rebound, inflation in the area of the target and a policy rate of 0.25 per cent, it is very easy to say that conventional monetary policy analysis should imply a higher policy rate and a beginning of a normalisation in the policy rate,” says Cecilia Skingsley, who has been a deputy governor at the Riksbank since last year and before that was an economist at Swedbank, a local lender. Others urge critics not to use the benefit of hindsight to beat up the Riksbank. “If anybody had told us that inflation would be zero, we would not have believed it. It is so easy to look back now. You can’t blame Ingves for observing some asset inflation and some fairly good fuel in the Swedish economy,” says Christian Clausen, chief executive of Nordea, the biggest Nordic bank. Whatever the merits of the debate at the time, the outcome appears to have vindicated Mr Svensson. “With the benefit of hindsight, maybe they should have started to cut somewhat earlier. Faster, quicker, stronger – all that,” says Ms Skingsley, the closest the central bank has come to an admission of error.

Household debt: How much is too much? Perhaps unsurprisingly, Mr Svensson thinks the Riksbank should go further still, by trying out negative interest rates as inflation is so low. “The Riksbank naively thinks inflation will quite quickly come back to target,” he adds. The central bank indeed thinks zero rates should suffice to improve the inflation outlook. But Ms Skingsley hints at other options if inflation remains too low. First up is likely to be a commitment to keep rates at zero for longer than the current

forecast of a first rise in mid-2016. A currency floor, quantitative easing or negative rates are also possibilities. The lessons for other central banks from the Riksbank’s actions fall into two broad categories. First, there is the difficulty of using monetary policy not to guide inflation but instead to try to rein in household debt or asset bubbles – what economists call “leaning against the wind”. The ECB is also battling against deflation while some of its members worry about the impact of low interest rates on financial stability. Mr Svensson’s advice is not to confuse objectives: “There is really no evidence that monetary policy has a systematic effect on financial stability.” Ms Skingsley says she believes the “leaning against the wind argument was blown out of proportion” as it was not crucial for the rate rises. But the Swedish central bank has largely conceded defeat and now says financial regulators should take the lead in tackling debt. A second lesson for central banks is to be cautious when raising rates after a crisis. “I can assure you that people at the Fed have heard about this and are thinking about it,” Mr Krugman says. Both he and Mr Svensson invoke the Fed’s decision to tighten in 1937 – which is blamed for tipping the US back into recession. So where does this leave Sweden? Some have sought to compare the country to Japan but Mr Svensson does not agree. “I don’t see it as out of control yet,” he says. “It’s not like Japan where the Bank of Japan did not have control.” Sweden’s mix of zero rates, no inflation, some growth and expanding credit means its policy makers are set to be in the spotlight for some time. “The Riksbank may have done a great disservice to its own economy but it may have done a service to the global economy,” he says. *** The Scandinavian economies top many polls on happiness and living standards. But they also have the worrying distinction of leading the developed world in household debt. Denmark has the highest household debt-to-disposable income ratio among the world’s richest countries at 310 per cent. Norway and Sweden are not far behind with ratios of 200 and 170 per cent respectively, according to the Organisation for Economic Cooperation and Development. Policy makers have taken different approaches in each country. In Denmark, officials seem relaxed, arguing that Danes have lots of assets and are able to withstand rising interest rates “The threat to financial stability from [household debt] is therefore not serious in the current situation,” Lars Rohde, governor of the central bank, told Bloomberg this year. But the Riksbank in Sweden has long worried about rising house prices and household debt levels. The central bank sought (and failed) to gain control over macroprudential policy – measures designed to ensure financial stability, such as capping the amount home buyers can borrow for a mortgage. Instead, macroprudential policy was given to Sweden’s Financial Supervisory Authority, which is already tightening mortgage rules. Today, Swedes only have to repay the interest on mortgages, meaning some loans take as many as 140 years to repay.

The FSA this month proposed that new mortgage holders would have to pay down half of their loans. The impact of such measures is hotly disputed. Distortions persist in the Swedish and Norwegian housing markets, where there is far greater demand than supply in the biggest cities. Borrowers in both countries are also able to claim tax relief on mortgage interest. Some argue that reforming these distortions would be the most important change authorities could make. Christian Clausen, chief executive of Nordea, says politicians need to take responsibility for helping create asset bubbles. On Sweden’s tax incentives to own a house, he adds: “You have a screwed system that wants to over-leverage in principle in an asset that you don’t want to over- leverage on.” http://www.ft.com/intl/cms/s/0/638e830a-6e68-11e4-bffb- 00144feabdc0.html#axzz3JX0xCI6o

New Era estate scandal: families at the mercy of international speculators Homes across the capital have turned into international assets and their residents now merely live in financial instruments

New Era estate: how US pension fund manager fuels London rent rises

Aditya Chakrabortty The Guardian, Wednesday 19 November 2014 21.33 GMT

Danielle Molinari and her two-year- old son Frankie face eviction from the New Era estate. Photograph: David Levene for the Guardian Danielle Molinari and her two-year-old Frankie face being put out on the street. So does her 70-year-old neighbour Mary White, along with her adult son (and father of two) Bill. The same goes for the rest of the 93 households on London’s New Era estate. The question is why? The obvious place to start is with American fund manager Westbrook, which bought an entire community’s homes up from underneath them and plans to jack up rents sky- high, forcing residents into homelessness. Then there’s Richard Benyon, the Tory MP whose multimillion-pound family estate partnered on the deal – until public shaming forced him last week to pull out. Got blame to spare? Then take your pick from an entire deck of weak-chinned politicians, starting with London’s mayor, Boris Johnson, all of whom have done so little to help so late in the day. But something bigger is playing out in this little redbrick square on the fringes of the City – and it makes what happens next not just lifechanging for the people who live in it, but important for the rest of us, too. Because the real reason why Danielle and her neighbours must now fight like mad just to keep a roof over their heads is because their homes, and homes across the capital, have turned into an international asset class, to be bought and sold by speculators from across the world.

Britons jostling up the housing ladder is a tradition at least as old as the dinner party. Wealthy foreigners from dicey places stowing their cash in safe and stucco-fronted London postcodes: we know all about that. But, as New Era illustrates, much bigger, far more restless, forces are now at work. Consider the purchaser: Westbrook, headquartered on Madison Avenue, New York. Set up in the mid-90s, the investment firm came of age just as businesses were coming round to the idea that owning their premises was fuddy-duddy and that the future lay in renting. Westbrook has made millions from that fashion – buying, letting and selling trophy- office development in London and around the world. And it’s not been alone: in 2011 Cambridge academics found that 52% of the City’s offices were now owned by foreign investors, up from 8% in 1980. That trend is now migrating to London homes. By buying New Era, Westbrook has become a giant absentee landlord. No one from that firm will set foot on the Hoxton estate, of course. Indeed, since the Benyons’ exit, tenants report they have not heard a word from the Americans who now own their homes. Instead, it’s been the council who’s conveyed messages back and forth. This relationship is extreme, but it’s hardly anomalous. Rather, it’s the inevitable result of property developers and estate agents renting out hotel ballrooms in Asia to sell flats off-plan to Singaporean dentists and the like.

Households on London’s New Era estate face being put out on the street.Photograph: Graham Turner/Guardian Earlier this year a colleague and I spent months visiting a huge private development on the other side of the borough from New Era. Called Woodberry Down, it was a huge overhaul of an old council estate. In the showroom, the saleswoman pointed at the reservoir outside and said: “That water outside: very attractive to Asian buyers.” One of the new private tenants, Paul O’Neill, told us that he’d never met the man to whom he paid his rent, because he lived in Singapore. He added: “All of my neighbours rent from foreign absentee landlords.” Going through the Land Registry, we traced O’Neill’s invisible landlord. He did indeed live in Singapore – in a public-housing block, in an area carpeted with public housing. That’s hardly unusual for the island state: about 85% of all Singaporeans live in public housing. So O’Neill, who desperately wanted to buy somewhere in London but could barely afford even the remotest suburbs, was paying rent to a landlord who lived in public housing. Moreover, since 2009, the Singapore government had done everything possible to clamp down on speculation in its own housing market: clamping down on loans, raising

taxes and punishing flippers of property. Most notably, it had imposed punitive levies on foreigners buying homes in Singapore. All of these options and more have been urged on politicians in Britain. None of them have been taken up. The opposite: we’ve had a £1bn build to rent scheme alongside other housing guarantees, the encouragement of banks and building societies to lend. And the result of all these schemes in a national economy as lopsided as has been to further encourage hot money to flow into just one corner of a small country. The cliche is that Britain has a housing crisis. It doesn’t: rather it has a whole series of different housing crises. In Northern Ireland huge swaths of homeowners remain in negative equity after the credit crunch. In Liverpool the problem isn’t of expensive housing, but of residents in Anfield and Granby fighting to maintain some say in what happens to their neighbourhoods. And in London the problem is that it is now almost impossible for anyone coming to the city to buy here, or increasingly to rent somewhere decent, either. Contrast that with the founding ethos of New Era: built by a charitable trust in the 1930s in order to offer working-class residents affordable private rented accommodation. Even when the blocks were sold this spring, residents say they were assured that the old tenets would apply. Within weeks, new owners told them that rents would rise to market values: spiralling from £600 a month for a two-bed flat to something closer to £2,400. That was meant to happen by summer 2016. After Benyon’s firm pulled out of the deal last week, residents were told that Westbrook would accelerate the process. Westbrook has form in rough treatment of those people who pay it rent. Earlier this year the New York attorney general ordered it and a business partner to make up for thousands of building violations and to pay $1m to tenants, to make up for illegal fees and overcharging. Foreign money has long flowed into and out of London in volumes – but it’s no longer going into business or other investments up and down the country; it’s been diverted into the Shard, countless private high-rises (somehow so much better than the council equivalents) and all the other new developments turning the capital into a new and unaffordable zone off-limits to the people who’ve lived there for decades. Academics call this process financialisation: the sudden creation of new financial markets and instruments. Molinari and the other residents of New Era used to have homes: now they merely live in financial instruments. I can think of one other aspect of everyday life where this has happened recently: food. Over the past 10 years, wheat and other staples have become a financial asset class, to be speculated in by Goldman Sachs and Barclays. The result has been misery and even starvation for the poor of the Third World. For the poor of London, the financialisation of property spells homelessness. http://www.theguardian.com/society/2014/nov/19/new-era-estate-scandal-london- families-international-speculators?CMP=EMCNEWEML6619I2

Vicious circle(s) 2.0 - while trying to sever the sovereign-banking link, we may be disregarding vulnerabilities from banks’ mutual interconnectedness by Silvia Merler on 20th November 2014

gulserinak1955 Since the beginning of the crisis – and more so since 2010 – Europeans have been looking at the sovereign-banking “vicious circle”, tying the dismal fates of States and banks together. This has emerged as a characteristic disease during the euro crisis, and one of the stated objective of the European Banking Union project was precisely to remedy it. The idea was basically to achieve this goal in a twofold way, ex ante and ex post. On one hand, by imposing stronger and harmonised supervisory requirements (e.g. on capital) and by empowering a third-party, independent and hopefully high-quality, supervisor to oversee their fulfillment, thus rebuilding trust in supervision and in the financial sector’s health. On the other hand, if a crisis turned out to be unavoidable, the second principle consisted in limiting recourse to taxpayers’ money as much as possible therefore preventing doubts about the damage that bank rescue would inflict to the state of public finances. The first principle was translated into practice by the creation of a Single Supervisory Mechanism (SSM) under which, on the 4th of November, the ECB took over supervisory responsibility for banks in the euro area. The second principle concretized by the introduction of the Bank Recovery and Resolution Directive (BRRD) which gives a framework for resolution of troubled banks, and by the creation of a Single Resolution Mechanism (SRM), who should ensure consistent and homogeneous application of it. Among the other provision, the BRRD contains a set of rules for the application of bail-in in bank resolution, strengthening the involvement of private creditor that de facto is already introduced by the amended State Aid framework.

ECB / Author calculations Hence, there has been a remarkable shift in the European mindset about banking crisis, from a first phase in which bail-in was a taboo, to a second one in which it is considered as a new normal and welcome practice. And there is in principle nothing bad about this idea, but the question is whether in rapidly overturning the approach, European

policymakers have not overlooked important weaknesses that still exists in the system and could have important consequences in the perspective of applying these new rules. One such point of weakness could be the fact that banks are actually very substantial creditors to other banks, via cross-holdings of share as well as bank bonds. In its latest Financial Stability and Integration Report (April 2014), the European Commission reported that between 2008 and June 2013, out of the €630 bn of banks’ capital increase in aggregate terms, €400 bn correspond to increases in interbank positions and only €230 bn represent fresh capital injected from outside the banking system. Despite declining since the pre-crisis peaks, interconnectedness across banks remains high, and as of December 2013 “the counterparty for 24 percent of Euro area banking assets (or €7,400 bn) is another Euro area bank”. Figure 1 - originally published in this Bruegel post - shows how serious the situation is in the case of Italian banks, who appear to be strongly tied together in a network of cross-holdings. Figure 2 - compiled by the Financial Times back in 2013 - shows that the Spanish system was not immune to the problem either, although less striking. In the case of Italian banks, I pointed out that strong cross holding structure (with political interference) could impede the post-stress test needed reform, but that is not the only problem it raises. As a matter of fact, we could already witness an example of possible implications at the time when the Portuguese Banco Espirito Santo was resolved, last August. The second largest shareholder of BES was in fact another bank, i.e. Credit Agricole, which on the occasion of BES restructuring ended up taking a 708 mn euro hit from its stake in BES, nearly wiping out its second-quarter net profit, which fell 97.5 percent to 17 million euros.

Bloomberg; FT research Banks’ bond holdings also represent a possible risk in view of resolution. Almost 40% of securities other than shares issued by banks in the euro area are held by other banks

in the euro area at the aggregate level, according to ECB data, and holdings are also affected by home bias. The charts below show Italian and Portuguese banks’ holdings of bonds issued respectively by domestic government, other domestic banks and other domestic sectors. As a comparison, holdings of bonds issued by the corresponding sectors in other euro area countries (i.e. cross border rather than domestic holdings) are also reported. it is clear (and not new) that holdings by banks of bonds issued by the domestic government have increased a lot during the crisis, in same cases reaching back to the level of the 1990s. But what is even more noteworthy is the strong increase of holdings of bonds issued by other fellow domestic banks, which seem to have been traditionally very low but are now between 7 and 9% of total assets in these two countries.

ECB / Author calculations

ECB / Author calculations Figure 4 shows that this is not the case for French and German banks, which not only reduced (or at least did not increase significantly) their exposure to the domestic government, but which also decreased their holdings of bonds issued by other domestic banks as percentage of total assets.

ECB / Author calculations

It should therefore be clear that this strong interconnectedness makes the European financial system vulnerable in the context of bank resolution and rises concerns for the application of bail-in, which would become very difficult due to the possible systemic implications. In fact, as in the BES case, the creditors targeted by bail in would include to a large extent other banks, which would as a consequence fall in trouble as well. It follows naturally as a conclusion that one of the first priority for the ECB in its brand new role as supervisor should be to weigh possible measures to mitigate these problems. The ECB in its prudential exercise is including a capital add-on of 1 percent to take into account the systemic relevance of banks. This is in line with CRD IV rules, which include mandatory systemic risk buffer of between 1 and 3.5 percent CET 1 of RWAs for banks that are identified by the relevant authority as globally systemically important and also gives the supervisor an option to set a buffer on 'other' systemically important institutions, including domestically important institutions and EU-important institutions. On top of imposing a capital buffer to limit the effect of interconnectedness once it has built up, one possible way to go would be to act on its underlying drivers to foster more diversification ex ante. There has been a lot of talk over the last years about the need to change the framework for the risk-weighting of government bonds in banks’ assets, in order to better reflect their actual degree of risk (which certainly was way above zero, during the crisis). Reports suggest that stricter rules on banks’ exposure to single counterparties could trigger a sovereign debt portfolio rebalancing in the order of €1tn across the region. The data presented here suggest that weakening the drivers of bank- bank national interconnectedness (e.g. by means of risk weights) and fostering portfolio diversification should also rank high on the priorities, in order to foster financial stability in Europe. Otherwise, we might sooner or later discover that by trying to fix the sovereign-bank vicious cycle we have instead fuelled a bank-bank one, no less dangerous. http://www.bruegel.org/nc/blog/detail/article/1484-vicious-circles-20/

Brain drain, gain, or circulation? - Spain and the UK seemed the best placed to attract high-quality scientists, while France and Germany were broadly breaking even in terms of quality by Alessio Terzi on 19th November 2014 4191652

OECD Science, Technology and Industry Scoreboard (2013), Bruegel calculations This chart benchmarks the median quality1 of scientists leaving or moving (for the first time) to a country between 1996-2011. The size of the bubble corresponds to total flows (inflows plus outflows). Countries in red are net contributors to the international market for scientists, those in blue net recipients2. Ideally, a country should want to be below or on the 45-degree line, indicating that the quality of the newcomers is just as high (or higher) as that of the leavers. Conditional on this, a country should also prefer a larger rather than smaller bubble, representing a sizeable flow of scientists and indicating a full exploitation of synergies gained from international cooperation. Finally, countries should aim to land in the top-right quadrant, indicating higher quality of both incoming and outgoing researchers. Over the long-term (pre-crisis) period analysed, Spain and the UK seemed the best placed at attracting high-quality scientists. France and Germany were broadly breaking even in terms of quality, although we note that they were facing significant net outflows of scientists, as was the UK. 46

All in all, in the sample here presented, while the US (unsurprisingly) comes out as the top performer in terms of net inflow of quality researchers, Italy ranks quite poorly. Not only the country is a net contributor of scientists, it also trades high quality researchers for lower quality ones. Time for a reform of the university system? 1 For each author and mobility profile, the median across the relevant journals’ Source- Normalized Impact per Paper (SNIP) over the entire period is calculated. A SNIP impact value that is higher than one means that the median attributed SNIP for authors of that country/category is above average. 2 International mobility of scientific researchers is inferred from authors listed in the Scopus Custom database of peer-reviewed scientific publications, with at least two documents during the reference period, based on changes in the location of their institutional affiliation. Outflows are defined on the basis of their first affiliation. Inflows are defined on the basis of the final affiliation and exclude individual authors who "return" to their original country of affiliation. http://www.bruegel.org/nc/blog/detail/article/1483-brain-drain-gain-or- circulation/?utm_source=Chart&utm_campaign=0965be7c28- Bruegel+Chart&utm_medium=email&utm_term=0_b714cebcba-0965be7c28- 278164957&goal=0_b714cebcba-0965be7c28-278164957

ft.com comment Columnists November 18, 2014 5:43 pm The curse of weak global demand

Martin Wolf Feeble economic performance has occurred despite the most aggressive monetary policies

David Cameron, the UK prime minister, states that “red warning lights are once again flashing on the dashboard of the global economy”. The lights are not as red as in 2008. Nevertheless, the difficulties caused by the fiscal austerity that his government recommends have become particularly evident in Japan and the eurozone. These stagnant high-income economies are the weakest links in the world economy. To understand why, one needs to analyse today’s most important economic illness: chronic demand deficiency syndrome. More ON THIS STORY// IMF and World Bank warn of ‘peak trade’/ UK inflation edges up to 1.3%/ Low oil prices hit US inflation outlook/ Cameron changes tack on economy/ ECB warns of ‘pessimism’ risk to recovery ON THIS TOPIC// John Gapper A plan for fixing the next crisis/ Comment The policy of money printing and rates/Markets Insight Currency wars fail to spark global growth/ Focus on Europe’s flash GDP estimates MARTIN WOLF// Hope for the best on productivity, but prepare for the worst/ An unethical bet in the climate casino/ Japan warning for eurozone/ The challenge of public finances Jack Lew, US Treasury secretary, provided a sobering overview in a speech delivered in Seattle, en route to last weekend’s summit of the group of 20 leading high-income economies in Australia. As he noted, the world is far from achieving the “strong, sustainable, and balanced” growth, promised at the 2009 summit in Pittsburgh.

Global recovery has been “uneven, with sharply different trajectories,” he said. “In the US, domestic demand surpassed pre-crisis levels in the first quarter of 2012 and is now about 6 per cent higher than before the crisis. Domestic demand in both Japan and the UK is about 2 per cent higher,” he added. “But demand in the eurozone has yet to recover the ground lost during the crisis, remaining more than 4 per cent below its pre- crisis level.” What Mr Lew did not add is that this feeble performance – even the 6 per cent rise in real demand in the US over more than six years is pathetic by historical standards – occurred despite the most aggressive monetary policies in history. The official intervention rates of the US Federal Reserve, the European Central Bank and the Bank of England have been not far above zero since late 2008. The ECB struggled to raise rates above 1 per cent in 2011, but then succumbed to the pull of near zero. The Bank of Japan has been offering near zero rates for two decades. Yet this has not been nearly enough. All these central banks have increased their balance sheets sharply. In the US and UK, the balance sheet expansion has stabilised. In the eurozone, the contraction since 2012 is being reversed, while the Bank of Japan’s balance sheet is heading towards the economic stratosphere, at 80 per cent of gross domestic product and counting.

How do we explain such weak demand, particularly in the eurozone and Japan? Only if we understand this do we have any hope of deciding on the right remedies. One can identify three sets of underlying explanations. The first set stresses the post-crisis overhang of private debt and the damage to confidence caused by the sudden disintegration of the financial system. The by-now canonical response consists of cleaning up balance sheets and forced injection of capital into the banking system, supported by stress tests, to convince the public that the financial system is again creditworthy. To this should be added fiscal and monetary support for demand. In this view, a return to growth should be swift. The second set of explanations denies this last proposition. It argues that the pre- crisis demand was unsustainable because it relied on huge accumulations of private and public debt – the former associated with bubbles in property prices. Japan suffered such a post-bubble reversal in private debt accumulation after 1990; the 49

US, UK and Spain after 2008. The implication of this is that economies suffer not just from a post-crisis balance-sheet recession, but from an inability to generate credit-driven demand on the pre-crisis scale. Behind the unsustainability of pre- crisis demand lie global imbalances, shifts in income distribution and structurally weak investment. A symptom is a chronic financial surplus (excess of income over spending) in the private sector, as in Japan and the eurozone.

The third set of explanations points to a slowdown in potential growth, due to some combination of demographic changes, slowing rises in productivity and weak investment. But this last set of explanations feeds directly into the second. If growth of potential supply is expected to slow, consumption and investment will be weak. That will generate feeble growth in demand. If central banks fight this, they get bubbles. If they accept it, weak growth of supply turns into a self-fulfilling prophecy. The high-income economies suffer from all three sets of ailments, to a greater or lesser extent: the US less, Japan and the eurozone more. Even China, albeit enjoying a much

higher prospective rate of growth, also suffers from the second and third sets of concerns – even if it has not suffered a financial crisis. Its growth of recent years was driven by unsustainably rapid accumulations of debt and unsustainably high rates of investment, given the deceleration in its underlying growth. The reason that extreme policy has been so ineffective is that the economies suffer from such deep-seated ailments. It is not just about weak supply. But it is also not just about weak demand. Nor is it just about the debt overhang or financial shocks. Each economy also has a different combination of ailments. As a more demographically dynamic and more innovative economy, with low rates of private saving, the chances of escape into normal policy settings are better for the US than for the eurozone or Japan. Similarly, as an economy with catch-up potential, China ought to have a manageable adjustment. But the eurozone and Japan face far bigger challenges in restoring healthy growth. This is because their private sectors are unable to use the savings they wish to generate. This leaves them with unconventional policy choices, probably even more unconventional than those they have tried. The consequences of going further could be politically devastating, particularly in the eurozone. What those possibilities are and why they are so painful will be the topic of my next column. http://www.ft.com/intl/cms/s/0/3e4be7f8-6e4b-11e4-afe5- 00144feabdc0.html#axzz3JVp3en6D

ft.com/markets MARKETS INSIGHT November 19, 2014 5:18 am Andrew Balls ECB inflation target fails credibility test Andrew Balls Japan shows costs of acting too late on deflation risk

©AFP Here is a thought experiment. What do you think inflation is going to be in the US or the UK seven years from now? While we believe it is not possible, in any serious way, to forecast annual inflation that far ahead, the most sensible answer is 2 per cent: the Federal Reserve’s and the Bank of England’s inflation targets. These are credible central banks. What about the eurozone? Is the European Central Bank’s inflation target of close-to- but-below 2 per cent credible? That is not so clear. Mario Draghi (pictured), ECB president, is right to highlight the decline in longer-term inflation expectations in the eurozone as a worrying development that demands action. More ON THIS TOPIC// Transcript top ECB economist interviewed/ ECB warns of ‘pessimism’ risk to recovery/ Asset backed securities rise on ECB plans/Euro money fund yields set to go negative MARKETS INSIGHT// China on debt watch as property values hit/ Don’t fear the dollar’s ‘orderly rise’/ Hopes for eurozone bank lending misguided/ Japan actions risk igniting currency war To the extent that the eurozone has a growth strategy, it is to hope for external demand to propel exports. But Asian demand has weakened. The Ukraine-Russia crisis will affect eurozone growth. Eurozone domestic demand growth is depressed. Fiscal policy is less of a drag, but countries with room for fiscal expansion are reluctant to use it. While the eurozone may avoid a third technical recession, in practical terms it has not emerged from the recession that started in 2008. If you apply the same criteria to the eurozone that the US National Bureau of Economic Research uses for judging US business cycles, then this realisation is very clear. In this context, it should be no surprise that the eurozone is so close to deflation.

In the year to October, eurozone headline inflation came in at 0.4 per cent. In December, the ECB is going to have to revise down its inflation forecasts again – something that has become a quarterly ritual. It will be interesting to see if the ECB has enough confidence to forecast inflation at 2 per cent in 2017, when it adds the third year to its forecast. This is not just a matter of adjustments needed in peripheral countries: inflation is dangerously low in the core, too. Nor is it just a matter of lower energy prices. Core inflation, excluding food and energy, was just 0.7 per cent in the year to October. While certainly not complacent about the ECB’s inflation target, Mr Draghi is constrained by eurozone co-ordination problems and a recalcitrant Bundesbank. Still, he has been able to build a strong case for action, based on the risk to medium-term inflation expectations and explained in terms of the size of the ECB balance sheet. In depth Euro in crisis

News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness Further reading The ECB is already engaged in quantitative easing (QE) via its covered bond purchases and the planned purchases of asset-backed securities. But these are likely to be small programmes, and the same would apply if the ECB bought corporate credit. The most practical way to expand its balance sheets via asset purchases is by buying government bonds, just as the Fed and BoE did. QE would certainly be more powerful if combined with fiscal expansion, where possible. And structural reform is needed to promote higher potential growth rates in the medium term to ensure long-term eurozone stability. These are important matters. But the ECB consists of unelected officials with a mandate based on inflation. It should act in the area it controls. One of Mr Draghi’s signal achievements has been to demonstrate that the ECB is indeed Europe’s central bank, and that its decisions are not subject to any one country’s or regional central bank’s veto. The ECB reportedly started the latest covered bond buying programme without the vote of the Bundesbank. It may do the same if it starts sovereign QE. FT Video QE and the ECB – risks and rewards

Claire Jones on ECB plans to stave off stagnation Mr Draghi’s July 2012 pledge to do “whatever it takes” to prevent a rolling eurozone sovereign debt crisis worked without the ECB having to do much other than make clear that it will act in the interests of the eurozone as a whole. We expect continued eurozone

stability in the next 12 months and see peripherals, notably the liquid Spanish and Italian markets, as offering an attractive source of credit risk. But sustainable debt dynamics in the medium term will require healthy nominal GDP growth. Returning to the initial thought experiment, ask yourself: what do you expect for Japanese inflation seven years forward? Even with the Bank of Japan’s clear resolve in recent years – and recent huge increase in its QE programme – it is not at all clear. Years of neglect allowed a deflationary public mindset to become entrenched. The eurozone is one shock away from sinking into deflation. There are real costs of acting too late. Andrew Balls is chief investment officer of global fixed income at Pimco http://www.ft.com/intl/cms/s/0/da6ccfb2-6e4b-11e4-bffb- 00144feabdc0.html#axzz3JVp3en6D ft.com World Europe> Brussels November 18, 2014 6:34 pm Jean-Claude Juncker faces vote calling for his resignation Peter Spiegel in Brussels

©EPAEuropean Commission president Jean-Claude Juncker The European Parliament will vote next week on whether Jean-Claude Juncker should resign as European Commission president, following revelations that Luxembourg facilitated large-scale tax avoidancewhen he was prime minister. The move came after 76 populist MEPs, led by Britain’s anti-EU UK Independence party and France’s rightwing National Front, signed a “motion of censure”, which forces a parliamentary vote on the commission’s resignation. “President Juncker, in his political life, has always acted to enrich his country behind its European partners, in defiance of the union and the community spirit he hopes to represent,” said Marco Zanni, an MEP from Italy’s populist Five Star Movement. More ON THIS STORY// Editorial Juncker should step back on tax avoidance issues/ Juncker fends off attacks over tax deals/The Big Picture Complacency over tax avoidance wanes/ Jean-Claude Juncker related news ON THIS TOPIC// Tories admit far-right MEPs to group/ Nikolaus Blome Decide on Europe, Mr Cameron/ Socialists back Juncker for top EU job/ Editorial Stark warning from Europe’s voters IN BRUSSELS// EU’s top drugs regulator steps aside/ Brussels slams Dutch over Starbucks tax deal/ Dutch and Starbucks in tax deal storm/ EU energy chief to push for power union Mr Juncker has denied any wrongdoing, saying he was not the “architect” of Luxembourg’s tax system and the tax deals were signed off by an independent authority. The parliamentary motion, which requires a two-thirds majority to pass, is unlikely to succeed. The parliament’s two biggest blocs – Mr Juncker’s centre-right Christian 54

Democrat group, the biggest in the assembly, and the centre-left Socialists – are standing behind the commission president. Nonetheless, the move is the first sign that anti-EU populists elected in May could start wreaking havoc with the inner workings of the bloc. The vote is likely to take place during next week’s parliamentary meeting in Strasbourg – the same session where Mr Juncker is expected to unveil his much-heralded €300bn investment plan to resuscitate the EU economy. The signatories include MEPs from most of the major rightwing anti-EU populist parties. In addition to those from Ukip, led by Nigel Farage, and the National Front, led by Marine Le Pen, signatories came from Five Star, the Dutch far-right Freedom Party, Italy’s Northern League, Flemish nationalists Vlaams Belang, Austria’s far-right Freedom party, and Sweden’s far right Democrats. Although the far left group in the European Parliament also tried to gather enough signatures for a motion of censure on Mr Juncker last week – at least 10 per cent of the 751 MEPs must sign for a motion to go to a vote – they were unable to reach the threshold and vowed not to join an effort by their far right opponents. The parliament’s centrist Liberals, who have been among the most critical of Mr Juncker’s handling of Luxembourg tax issues, signalled that they would support Mr Juncker and criticised Mr Farage for joining with the National Front in the motion. “Nigel Farage promised Ukip would not ‘get into bed’ with Marine Le Pen and the French National Front,” said Catherine Bearder, a British Liberal Democrat and a member of the centrist group. “That is exactly what Ukip have done by co-signing this motion with them.” Mr Juncker has seen little political fallout from the tax avoidance revelations – contained in thousands of documents leaked to the International Consortium of Investigative Journalists. Centre-left MEPs, after initially being highly critical, quickly fell in line after Socialist leaders insisted that they did not want to damage Mr Juncker, who was nominated for the job through a system backed by the parliament. However, some mainstream opposition parties, including Germany’s Social Democrats, are considering whether to take a harder line, given the outrage generated by tax dodging at a time of economic hardship. Additional reporting by Alex Barker http://www.ft.com/intl/cms/s/0/d3aa2e72-6f4a-11e4-b50f- 00144feabdc0.html#axzz3JX0xCI6o

ft. com World Europe November 18, 2014 1:07 pm France warns EU investment fund will flop without ‘real money’ Hugh Carnegy and Anne-Sylvaine Chassany – London

©AP France's economy minister, Emmanuel Macron France says the EU must inject up to €80bn of “real money” into the flagging European economy, warning that a big investment plan being drawn up in Brussels risks flopping if enough hard cash is not used to stimulate demand. Jean-Claude Juncker, the new head of the European Commission, is next week expected to unveil a €300bn investment programme for the next three years aimed at boosting growth through infrastructure and other projects. More ON THIS TOPIC// Wolfgang Münchau Left is right about Europe’s debt/ Eurozone recovery slows to 16-month low/ Eurozone economy returns to growth/ Wolfgang Münchau Euro is in peril IN EUROPE// Regional elections deliver Renzi warning/ Portugal’s ex-PM faces further questioning/ Shadow trading signals financial crisis in Ukraine/ Europe-US trade talks delay upsets Italy “I fear that [the plan] could end up being disappointing. I don’t have any evidence of that, but I am worried,” said Emmanuel Macron, France’s youthful economy minister and a key figure in President François Hollande’s efforts to fire up the country’s faltering economic performance. “I am not pessimistic, but the natural tendency of a tired ecosystem is to under-deliver,” the former Rothschild banker told the Financial Times during a visit to London. “We can’t afford to under-deliver. The political and economic situation demands some sort of shock.” Mr Macron said France wanted the EU to come up with €60bn-€80bn in cash as part of the overall plan – far more than is currently under consideration – to directly finance investments or provide equity capital for projects. “I’m convinced we need real money and we need to use it in an effective way,” he said. He proposed a new independent entity to oversee what some are calling a “New Deal”. The overseer would increase the fund’s firepower by raising debt on the markets to fund investments in projects such as fibre optic networks and renewable energy. It would also set up panels of European experts to select projects after a competitive process. But EU officials briefed on Mr Juncker’s plan said there was unlikely to be any new money. Instead, only existing public resources will be used, with the hope that this will attract private capital to bolster the fund.

Although the commission is touting a €300bn investment plan, officials say this refers to its expected impact on the overall economy – not the amount of public and private money that will be raised. Mr Macron, who sought British chancellor George Osborne’s backing in a meeting on Tuesday, said current plans risked being too reliant on “fake money”. He said a 2012 EU growth plan based on soft loans – strongly backed by Mr Hollande at the time – had not been fully effective. Mr Macron, 36, is the main figure spearheading Mr Hollande’s belated reform effort, along with Prime Minister Manuel Valls. Formerly the president’s top economic adviser at the Elysée Palace, Mr Macron was moved to the economy ministry in late August following the ouster of his predecessor, the fiery leftist Arnaud Montebourg. Firmly on the liberal wing of the ruling Socialist party, he is preparing legislation to loosen restrictions in areas of the economy ranging from retail opening hours to labour market rigidities. These will complement Mr Hollande’s three-year plan for €40bn in business tax relief and €50bn in public spending cuts. A relentlessly cheerful figure – whose self-confidence tends to infuriate rebels on the Socialist left who oppose the reforms – Mr Macron insists the changes will win parliamentary approval. “We have 10 per cent unemployment, 25 per cent youth unemployment. What is the alternative solution? Spend more money that we don’t have? It’s not conceivable. It’s a real leftwing package, it’s a package for the outsiders, it is aimed at restoring equal opportunities.” Mr Macron spoke frankly of past “fake” reforms in France. He says “real” reforms are now the pre-requisite for a matching stimulus from European partners. “It is our job to create a momentum [for the stimulus package]. And our reform package is key because this is how we can be demanding in return.” Germany, reluctant to embrace a big demand stimulus, should do more to boost investment, he argued, but believes Berlin is coming around. “In 2012 and 2013, the German economy relied more on markets outside of the eurozone. This year, it relies more on the eurozone and suffers like us. We now have the conditions for this New Deal to happen.” He compared Europe’s current woes with those the continent faced in the 1930s, when social discontent and populism were rife: “If political leaders do not take more risks, we will get bogged down in economic stagnation and it will have political consequences.” The problem plaguing those European countries that have endured tough structural reforms is that the benefits – in terms of growth – only appear in the medium term. “It takes time. This is also why we want to accelerate the pace of reforms. But to ensure they are accepted politically, we need positive news flow from Europe. If we miss this chance, the window will shut.” Additional reporting by Peter Spiegel in Brussels http://www.ft.com/intl/cms/s/0/82749556-6eff-11e4-b060- 00144feabdc0.html#axzz3JyQmQ36f

11/18/2014 06:36 PM Stripping Neighbors of Money Pressure Mounts for EU Crackdown on Tax Havens By SPIEGEL Staff Corporations pay low taxes in Luxembourg. As prime minister, Jean-Claude Juncker carried partial blame for this policy. Politicians in Brussels have maneuvered to save him from the scandal, but the case has cast light on Europe's tax-dumping problem. Jean-Claude Juncker peers to the right. It's where the hope lays, Juncker's hope that he will get through this crisis in one piece. In this instance, hope has a name as well: Frans Timmermans, the Dutch first vice-president of the European Commission. Last Wednesday, the two held a joint press conference in Brussels. Juncker wanted to explain himself following the Luxembourg Leaks exposé by an international consortium of investigative journalists nearly two weeks ago detailing mass tax avoidance schemes in Luxembourg, where Juncker served as prime minister for 24 years, many of them as finance minister as well, and played a role in steering the country's fiscal policies. The reports raised new questions about Luxembourg's tax loopholes, which are used to attract multinational corporations, but also about whether Juncker is the right man for Europe's top job. Juncker began the press conference by talking about himself. Then he looked to the right and started speaking about Timmermans and casually mentioned a European Commission investigation into dodgy tax practices in the Netherlands, where the commission is conducting a probe into whether the Dutch authorities cut a sweetheart deal with US coffee store chain Starbucks. Timmermans had previously served as the Netherlands' foreign minister. It was a way of deflecting attention from allegations cast at Juncker himself and releasing some of the pressure by placing a bit of it on the shoulders of others. It's not a very nice thing to do, but it is pretty common tactic among leaders of countries that offer tax avoidance measures. The message they like to convey is: "We're not the only ones doing this, so don't get so worked up." This still seems to be Juncker's modus operandi as well. Whether he is still fit to serve as the commission president is a question that could be heard in European capital cities last week and one that is likely to linger for some time to come. In Luxembourg, corporate income taxes are as low as 1 percent for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn't joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1 percent, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. 58

Anything But Fair That's why it came across as obscene to many when Juncker defended Luxembourg's tax arrangements on Wednesday as "legal". They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis -- that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes. But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries' national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU's interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg's neighbors of tax money, is supposed to be the main face representing the EU. It's also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future. Its unlikely Juncker will be forced to step down. The center-left and the conservatives working together in the European Parliament combined with a fair amount of backroom maneuvering enabled Juncker to keep his job last week. Juncker's response to the disclosures began the week before last when he retreated home to Luxembourg. His advisors on the European Commission had suggested he should step out of the limelight for a while. Juncker did, but he didn't find much peace and quiet there. He got one call from Martin Schulz, the president of the European Parliament and a Social Democrat, and another from Manfred Weber, the chairman of the parliamentary group of the conservative European People's Party (EPP), which also represents Juncker's Christian Democrats. Juncker seemed caught off guard by the impact of the criticism. "Everyone was aware of this," he said. His callers then reminded him that he had defined the European Commission he was to lead as a kind of "European Government." They then called on him to address the criticism -- a step Juncker wasn't initially prepared to make. Unfit To Serve? The pressure began to mount a week ago Monday. The leftist GUE/NGL parliamentary group started gathering signatures for a "motion of censure," or no confidence vote, against Juncker. "A person who is responsible for and defends aggressive tax evasion policies, which stands in stark contradiction to the aims of the Council and Commission, has no place at the highest level of EU leadership," it reads. The group "therefore considers Mr. Juncker unfit to serve as president of the European Commission." On Tuesday night, Juncker, Schulz, Weber, Gianni Pitella, the head of the Social Democrats' group in parliament, and Frans Timmermans met at 8 p.m. at the restaurant Stirwen in Brussels. The politicians are all members of the new "coalition committee," the informal power center of the current majority held by the center-left and the conservatives in European Parliament and in the Commission's leadership. They developed a plan of attack and persuaded Juncker to go on the offensive in

defending himself. First he would meet with fellow members of the Commission, then he would talk to the press before later addressing the European Parliament. His colleagues on the Commission advised him to speak more candidly about his role in tax policy as prime minister of Luxembourg. They argued he could say that everything had happened in accordance with EU law. They also expressed their belief people would understand that he had simply been representing his country's interests as its leader. But Juncker didn't take that advice when he appeared before journalists around lunchtime on Wednesday. As EU Commission president, he claimed, he could not talk about his time as prime minister of Luxembourg. Juncker argued vaguely that tax rates for corporations were in some cases very low because of the "interaction between divergent national" laws. He then cast his gaze toward Timmermans again. 'A Shadow Hanging over the Commission' In European Parliament, Guy Verhofstadt, the head of the business-friendly liberal ALDE group, later spoke of a "shadow hanging over the Commission." "We already have one lame duck in Washington," he said in reference to US President Barack Obama. "It's not necessary to make a lame duck here." So far, the leftists haven't gotten 10 percent support necessary for a parliamentary vote of no confidence, the minimum amount that would be needed to force a debate on the issue in parliament. Indeed, Juncker is being shored up by the broad conservative and Social Democratic majority in parliament as well as the backroom wheelings and dealings of leaders in parliament and the heads of the European Commission. With a dearth of strong opposition in parliament, the current majority can get away with quite a bit it seems. Nonetheless, there has been some movement on the issue of taxes. "The question of fair taxation isn't just an issue for Luxembourg -- it is pan-European," says EPP party group head Weber. "Just take the example of the new discussion about the EU state aid investigation in the Netherlands. The member states need to get off their soap boxes and finally take action against unfair tax savings. There needs to be more transparency in particular. The ball is in the court of the European Council (the body that represents the leaders and ministers of the 28 member states). We will be following closely what the finance ministers deliver." Financial War? Not everyone is pleased by developments. Take Christian Rollmann, a man whose anger is growing. The Luxembourg citizen believes a financial war is brewing. When he reads the news these days he says he can feel the anger in his stomach. The target of his rage is not Juncker and the tax policies -- it's the foreign media and politicians, especially in Germany, whom he accuses of trying to sully Luxembourg's reputation with what he calls "financial war propaganda." Rollmann, 54, worked for 13 years for Luxembourg's tax administration, with 10 of those spent in Sociétés 6, the unit permitted to reach deals on behalf of the treasury with multinational companies. Today Rollmann works as a lawyer. He sees the whole debate as being a question of honor -- including his own. Rollmann says he spent his time at the tax authority "reading and calculating" agreements that his department reached with tax lawyers at companies like Amazon, 60

IKEA and Fiat. Rollmann claims the office acted strictly legally. "Our tax law is exactly the same as Germany's, did you know that?" he asks. His voice grows more indignant with each word. "Did you know that we were forced to adopt German tax law in 1944? It is still in effect today." Still, Rollmann claims, every law must be interpreted at the discretion of officials, "according to fairness and expedience." When companies inquired in Luxembourg how they would be taxed in the country for the billions of revenues they generated in Germany or Spain, for example, officials would answer that these sums were considered to be "capital contributions" and that the tax rate for these would be much lower than for income. "That's in line with common sense," Rollmann says. He says that his division didn't agree on special tax rates with companies. Instead, he says, in individual instances the assessment basis was pruned in order to reach an attractive result. The lawyer claims it was all legal. And yet his apparent need to point out that, "I never signed an assessment myself," also seems important. Rollmann claims that German tax authorities could have stopped these practices at any time within their territory. "But there was no political will to do so." He alleges that other countries now want to destroy Luxembourg in order to get access to the coffers themselves. "But I can only warn them: The whole traveling circus (of multinationals) won't be moving to Germany -- it will go to Hong Kong or Dubai." Rollmann says he never encountered Juncker in the hallways of the tax authority. "You don't really believe that the man had time to look after companies' fiscal and economic details do you?" When asked how much responsibility Juncker had for the whole tax system, he says: "He greatly helped Luxembourg and he is now suffering a great deal of anxiety as a result. I don't want to say anything else about it." That's the mentality in Luxembourg, with its unique tax system, one which Juncker had both a part in and also oversaw as its leader. In 1989 he became finance minister and then served as prime minister from 1995 to 2013. The 'Dutch Sandwich' and other Tax Treats Already as early as 1989, the OECD, the club of industrialized nations, expressed praise for Luxembourg for "developing into one of the world's most attractive financial centers" over the past two decades. The same year, German electric utility RWE made headlines because the company used leasing contracts with its Mülheim- Kärlich nuclear power plant in order to stream its profits past German fiscal authorities into a Luxembourg-based subsidiary that then paid taxes on those profits in the Grand Duchy. It's the same kind of construct for which Luxembourg is being criticized today. The fall of the Berlin Wall and the end of the Cold War in 1989 heralded an even greater globalization of the world economy. Today companies can quickly shift their capital, jobs and knowledge around the world. There are certainly advantages to doing this, but it also means that governments, particularly those in countries that are home to large multinational corporations, pay a high price when profits are shifted in ways that result in unfair tax savings. Countries lacking a strong industrial base are often keen to cash in on this opportunity.

For over 20 years now, the EU and the OECD have been seeking to dry up these tax havens. It's tedius work, because perceptions of where legitimate tax competition ends and unfair competition begins diverge greatly in the fight for international capital and jobs. At the start of the 1990s, the European Commission proposed a Europe-wide tax on all capital yields. The plan had been for a withholding tax -- in other words, the levy would be paid by the bank directly to the tax office. The debate over the proposal dragged on for a decade, with objections coming from all directions. It resulted in a weak compromise in 2005. Luxembourg, Belgium and Austria refused to allow a requirement that their banks report the interest earnings on their customers' accounts to the tax authorities in their country of origin. The procedure would have meant the de facto end of banking secrecy on those earnings. "We will not permit a cross-border snatching of bank data," Juncker said in 1998. The sentence no longer holds true today. In 2017, Luxembourg and 50 other nations are set to introduce the automatic global exchange of tax data. It's the product of years of pressure applied to tax havens by the United States and other countries and not any kind of mutual understanding. Juncker Paints Luxembourg in Positive Light "Every time we made progress on tax harmonization in Europe was under the presidency of Luxembourg," Juncker stated last Wednesday before the European Parliament. Indeed, the EU finance ministers did work out a "code of good conduct" in 1997 aimed at "containing damaging tax measures, a time when Luxembourg held the rotating EU presidency. But while Juncker may have proposed it, the codex remains non-binding today. Juncker said at his press conference on Wednesday that he hadn't been "the architect" of the Luxembourg model. Nevertheless, as the country's leader, he certainly promoted Luxembourg's development as a tax haven. In 2003, he personally campaigned for Internet giants AOL and Amazon to set up operations in Luxembourg. He reportedly enthusiasticallyl at the time that it would deliver "a lot of money" into the national treasury. "The fact that AOL and Amazon are coming to Luxembourg," Juncker told his national parliament, is the result of having the right tax policies. Juncker led the negotiations along with others. Juncker also used the revenues to help finance his generous social policies. Among them was a pension system reform that credits time taken off by mothers to raise children towards their overall retirement benefits. The policies did wonders for Juncker's popularity and helped secure his re-election as prime minister. It's a temptation for any politician, and other countries have also sought to take advantage of tax loopholes. Belgium actively promotes itself to foreign investors with its "simple, fast and efficient" preliminary agreements with tax authorities. Belgium- based subsidiaries of multinational corporations can deduct interest on their equity capital and thus dramatically reduce their tax burden with the tax office. The Netherlands has also made itself attractive to international corporations with its low taxes on dividends, interest payments and license fees. The country is famous for its "Dutch Sandwich," a tax savings model used by Google and other companies in order to strip down their profits and escape paying higher taxes. The Internet company books revenues for its European business operations to Google Ireland Ltd. But its surpluses 62

are then eaten up by personnel, advertising and promotion costs, but above all through obscenely high license fees. Google Ireland reported revenues of €10 billion in 2010 and transferred €7.2 billion of that to a Dutch subsidiary. Meanwhile, Google Netherlands Holdings B.V. in Amsterdam, which collects the license fees from Dublin, paid only €2.7 million in corporate income taxes in the Holland in 2010. The reason behind this is that the company returned the lion's share of its earnings back to Google Ireland in the form of yet another license fee. Because Google Ireland's administrative headquarters are in Bermuda, the company is able to funnel its billions in revenues outside of Europe almost tax-free. Patience Runs Out Dutch finance minister and Euro Group President Jeroen Dijsselbloem is already preparing for the possibility that his country may soon become the subject of the same kind of investigative reporting seen in the recent Luxembourg exposés. "You're next," Dijsselbloem was reportedly warned several times last week. It is already happening. On Friday, the EU Commission went public with its concerns about a favorable tax deal the Dutch made with US coffee chain Starbucks. "It's very striking that major US companies in the Netherlands have twice the turnover as in Luxembourg," says Markus Ferber, the budget expert in the European Parliament for the Christian Social Union, the Bavarian sister party to German Chancellor Angela Merkel's Christian Democrats. "Besides, in contrast to Luxembourg, the country recently blocked initiatives aimed at eliminating tax evasion models again. Yet it is very clear that both Timmermans and Dijsselbloem, who also happens to be the Dutch finance minister, need to clean up their country's lax tax practices." Patience is running out in Europe for tax evasion, and the pressure to stop these dumping practices is mounting. With its BEPS project, the OECD has been crafting rules since 2013 intended to put an end to the arbitrary shifting of profits by corporations at the expense of national treasuries. Even Juncker is getting in on the act now. He is proposing that tax offices be required to forward to the EU any tax agreements with companies like those done in Luxembourg that could have important implications for another country. Endorse it as he might, though, it's not his idea. One day earlier, in a letter written to European Commissioner for Economic and Financial Affairs Pierre Moscovici, German Finance Minister Wolfgang Schäuble called on the EU to adopt the same model, which originates from a proposal made by the BEPS project. And though Schäuble may be giving a public show of solidarity with Juncker, behind the scenes at the Finance Ministry in Berlin officials are gratified by the fact that the former Luxembourg leader is finally being taken to task after years of blocking measures to stop tax evasion. In terms of fiscal policy, officials in the ministry have for some time been fond of using pejoratives to describe neighboring Luxembourg. Juncker as Judge and Defendant Given that Juncker is likely to remain at the helm of the European Commission -- at least for now -- he will also be the de facto leader of the Directorate-General responsible for investigating whether the tax practices used by Luxembourg during Juncker's time as its leader constituted illegal state aid under EU law. For any decision by the EU competition authority to become legally binding, it must also be adopted by the College

of Commissioners, which Juncker chairs. Put this all together and the EU and Juncker now have a serious credibility problem. During elections for the European Parliament this spring, a promise was made to make Europe more democratic and transparent, but it appears that leading politicians have now scrapped that pledge during its first important test. Previously, it had been the European Council that had had a reputation for backroom dealing. It now also applies to the European Parliament and the EU Commission, which jointly conspired during last spring's election to ensure that the leading candidate would also become president of the EU's executive. Despite all this, the German government in Berlin doesn't really have any interest in letting Juncker fall. Although Merkel harbored reservations about the idea of "leading candidates" during the European election from the very beginning and continues to hold doubts about Juncker's fitness for the EU's top post, her real interest is in having a functioning European Commission. Indeed, the German chancellor doesn't want to risk a paralyzing fight over resignations and successors. It's a calculation that government sources aren't shy about admitting. If Juncker's high- flying ambitions claiming that his commission is "Europe's last chance," were to be clipped a little, they argue, that might also serve working relations well. Merkel, after all, has always had a soft spot for weaker commission presidents. By Melanie Amann, Nikolaus Blome, Markus Dettmer, Dirk Kurbjuweit, Gregor Peter Schmitz and Christoph Schult URL: • http://www.spiegel.de/international/europe/eu-debates-new-rules-to-curb- luxembourg-style-tax-loopholes-a-1003402.html Related SPIEGEL ONLINE links: • Mr. Europe? The Ghosts of Juncker's Past Come Back to Haunt Him (11/10/2014) http://www.spiegel.de/international/germany/juncker-faces-uncertain-future-amid- tax-loophole-investigations-a-1002062.html • Democratic Deficit: It's Time to Put Juncker on the Hot Seat (11/10/2014) http://www.spiegel.de/international/europe/editorial-on-tax-problems-of-eu- commission-president-juncker-a-1002075.html • The Democratic Deficit: Europeans Vote, Merkel Decides (06/02/2014) http://www.spiegel.de/international/germany/power-struggle-europts-between- european-parliament-and-eu-leaders-a-972870.html • From the Archive: Tango with the Tax Man (11/14/2012) http://www.spiegel.de/international/business/effort-to-close-multinationaltax- loopholes-gaining-steam-a-866989.html Related internet links • Eine Arbeit des internationalen Recherche-Netzwerks ICIJ (International Consortium of Investigative Journalists) http://www.icij.org/project/luxembourg-leaks

ft.com Comment The Big Read November 18, 2014 8:22 pm Lex in-depth: European telecoms Alan Livsey and Robert Armstrong

The door is open. Europe’s telecoms need only step through it. Jean-Claude Juncker, the president of the European Commission, wants a single market in digital communications to spark growth in employment and output. This cannot happen without increased investment from the telecoms industry. So the commission, with support from German Chancellor Angela Merkel, is looking favourably on consolidation of the sector. The idea is to increase the returns on, and therefore the incentive to invest in, infrastructure. This regulatory regime change could set off 65

economically transformative events if the industry’s leaders show imagination, initiative and flexibility.

The first domino fell this summer, when the third and fourth largest players in the German market, Telefónica’s O2 and KPN’s E-Plus, received approval for a merger. In an unusual move, the commission declared itself the proper authority to determine whether the merger was anti-competitive and pushed the deal through over the objections of the country’s anti-monopoly authority. More ON THIS STORY// Comment European telecoms – hold the line please/ Inside Business Telecoms eye end to cold spell for deals/ Telefónica’s €8.6bn E-Plus bid approved IN THE BIG READ// Bonds Anatomy of a market meltdown/ Net neutrality Strife in the fast lane/ Regulation Banks count the risks and rewards

Previous image The industry has endured vicious competition, particularly in mobile, for several years. Consumers have enjoyed low tariffs but mobile revenues in the markets have fallen by 18 per cent since 2008. Profits (at the level of earnings before interest, taxes, depreciation and amortisation) have been even worse, down 22 per cent. Return on capital employed in mobile has been cut almost in half in the same period, according to New Street Research. Service quality also lags behind. The commission’s digital agenda, set in 2010, targets high-speed broadband penetration of 100 per cent across the EU by 2020. France and Italy, to cite two prominent examples, have trailed other countries in the chase for the target. As of January 2014, fewer than 3 per cent of Italians had broadband with speeds of 30 megabytes per second – the EU average is nine times higher than that. It may not be coincidental shares in the incumbent carriers in those markets, Orange and Telecom Italia, have underperformed European stocks. There is potential for consolidation. Seven of the largest European markets have more than three large players in mobile – the threshold beyond which competition tends to become irrational. France, Italy and the UK stand out as intensely competitive markets in which deals are likely to occur. France: Bouygues + Iliad France has four major telecom groups. In April, the Altice holding company bought mobile operator SFR from Vivendi for €17bn, in order to merge SFR’s 22m mobile subscribers with the 1.7m fixed line subscribers at its cable subsidiary, Numericable. Despite this fixed-mobile merger, the market remains wickedly competitive, in mobile especially. French mobile operators offer consumers some of the cheapest packages available in big European markets, according to Tarifica, a consultancy. The flip side is that French mobile operators have some of the worst returns on capital employed – about 8 per cent – on the continent, according to New Street.

Four could shrink to three in the months ahead. The pieces on the chessboard are Orange, Bouygues Telecom, Iliad and SFR-Numericable. Bouygues bid for SFR in March. Now the aggressor is pursued; the poor profitability of Bouygues’ telecom division makes it look like a juicy target for the others. Its ebitda margin is 15 per cent, roughly half that of Orange and Iliad. But it holds a big chunk of radio spectrum in the band most useful for 4G. Iliad has the balance sheet to make an offer and could use its own spectrum. It reportedly made an offer of €5bn last spring, but Bouygues is unlikely to sell its telecoms division for much less than €8bn, which would recoup the family group’s infrastructure investment. The deal makes sense but the two sides seem to be far apart on the little matter of price. Another possibility: SFR-Numericable buys Bouygues and then sells its infrastructure – towers and so forth – as well as a chunk of spectrum to Iliad. SFR-Numericable would then keep Bouygues’ 11m mobile and 2m broadband customers tied to its network. The infrastructure-spectrum sale should help appease regulators by turning Iliad from a mobile virtual network operator or MVNO, dependant on others’ infrastructure, into a proper carrier. While it would be hasty to rule out any combination in this market, Orange is unlikely to be a consolidator. It purchased Jazztel, the Spanish fixed broadband company, for €3.4bn in September. Orange is already in a strong position with 44 and 71 per cent, respectively, of the mobile and fixed markets, by revenue. It can wait while the other parties come to terms, then benefit from consolidation without paying for it. Italy: Wind + 3 Italia In Italy, fixed and mobile revenues have fallen every year since 2009. According to Citi the latter have dropped 13 per cent year on year in the first half of 2014. Not only is high speed broadband penetration lowTelecom Italia (with a third of the mobile market) trails in 4G with just 2 per cent of its subscribers on the fastest wireless standard. Even in economically beleaguered France, Orange manages 7 per cent. Telecom Italia and Vodafone account for more than half of broadband subscribers. If consolidation occurs, then, it will be between the two smaller players in this four player market: Wind and 3 Italia. Wind is highly leveraged at five times net debt to ebitda. The stronger balance sheet at 3 Italia (owned by Hutchison) would help here. Meanwhile, 3 Italia must covet Wind’s spectrum. One hurdle could be the company’s Russian owner Vimplecom, which may want non-rouble income. More than one-third of Vimplecom’s operating cash flow comes from Wind. Another possibility: Wind could reduce its leverage by selling its fixed line broadband business, Infostrada, to Vodafone Italia. Citi thinks Infostrada has more than a seventh of the broadband market in Italy. A sale could bring in up to €4bn on the basis of previous deal valuations in the sector, enough to wipe out nearly half of Wind’s debt. UK: BT + EE The UK market is unlike that of its continental neighbours but is just as messy in its own way. Until recently the mobile companies had little or no fixed line exposure and vice versa. There are four mobile operators: Vodafone, O2 (owned by Spain’s Telefónica), 3 (owned by Hutchison) and EE (owned jointly by Orange and T-Mobile). They compete, along with a Virgin-branded MVNO owned by Liberty Global. Mobile revenues in the UK have not grown on an annual basis since 2011.

In broadband, the market is also fractured with four big competitors: BT, BSkyB, Virgin and TalkTalk. BT and BSkyB control more than half the market and have captured most of the subscriber additions in the past few years. BT may be the company that upsets this uneasy balance. It has decided to upgrade its MVNO service by using its customers’ home routers as mini wireless masts, carrying mobile telephony signals through to the BT broadband network. Supplementing these with mobile hotspots in office buildings and shops, BT hopes to minimise its use of EE’s network and its own investment, keeping costs and therefore customers’ tariffs low. Vodafone, in turn, has announced plans to take the fight to BT by providing its wireless customers with broadband using the fibre network it acquired from Cable & Wireless Worldwide in 2012. Adding another competitor to each sector could create chaos. Consolidation would provide relief. Orange and T-Mobile, itself owned by Deutsche Telekom, have voiced interest in selling EE. BT might be the right buyer. Based on its results so far this year, EE could be valued at £12bn, or about eight times ebitda. Vodafone could also buy Liberty Global’s Virgin business, giving it an optical fibre network with a fifth of the UK broadband market. Price is no object How should investors position themselves to take advantage of a changing European market? The obvious risk is buying a company on the assumption that it is a target, only to wake up one morning and find it is a buyer – and has paid a fat cash premium, whacking its own stock price in the process. The hope is that the companies involved do deals largely or entirely in shares, protecting their balance sheets while giving investors on both sides a chance to enjoy the fruits of consolidation. Share deals could have a regulatory benefit as well: if incumbent “national champions” are involved, regulators will not want to see them take on excessive leverage. It is up to the company boards to look past not only the usual points of conflict but to find deal structures that make sense. Valuations should not be a barrier. Share prices and valuations of European telecom groups have moved up, reflecting hopes of further consolidation. The price to earnings multiple for the sector is at a decade high of 17 times, reflecting persistently weak earnings. But using the ratio of enterprise value to ebitda, valuations look about average, at six times. Enterprise value, which includes net debt, provides a better sense of potential acquisition prices. The sector overall does not look expensive. Consolidation within European countries, by improving the returns on infrastructure investment, should bring Mr Juncker’s dream of better 4G and broadband access closer to reality: a single European telecom market that ignores borders. Groups operating in Europe, such as Vodafone, are effectively holding companies that operate in different markets. A true pan-European telecoms market requires a regulatory rethink. Meanwhile, Europe’s telecoms companies must do their part and consolidate. http://www.ft.com/intl/cms/s/0/c7f6f716-6b5f-11e4-ae52-00144feabdc0.html#slide0

Macron wants Juncker to put more cash into his CDO

Hoy, 19 de noviembre de 2014 , Hace 4 horas Jean-Claude Juncker’s collateralised debt obligation (CDO) proposal appears to us like a ruse. It pretends to be something that it is not, and we are now at the stage where everybody feels they have to keep up appearances. What started off as an idea for a €300bn programme is now effectively being reduced to a tenth of size with the rest coming from the private sector. The structure is very much reminiscent of the subprime CDO’s in the US, including a first loss tranche. One of the main reasons why CDOs were so successful before the crisis was because they managed to deflect from an underlying truth – in that case an unsustainable real estate market. A similar thing is happening here. The Commission will not be able to raise €300bn in money for investments. What they want to do instead is to raise only a tenth of the sum and lever the rest. The FT reported yesterday that France wants the Commission to put up between €60- 80bn in real money into such a fund – as otherwise the vehicle may flop badly. The paper cites the new economics minister Emmanuel Macron as saying: “I fear that [the plan] could end up being disappointing. I don’t have any evidence of that, but I am worried…I am not pessimistic, but the natural tendency of a tired ecosystem is to under-deliver… We can’t afford to under-deliver. The political and economic situation demands some sort of shock.” Macron also proposed a new independent entity to oversee the investments of the fund, and to raise the additional tranches of capital. The FT quotes an EU official as saying that there will be no new money at all. It will all come from existing public resources – and the hope is that this vehicle would attract enough private capital. Our other stories We also have stories on how the G20 managed to repackage existing commitments into a new programme – for the sake of appearances; on the gridlock between troika and Greek government and Hardouvelis appeal for calm; comments on Podemos debt restructuring plan; on a Greek court ruling about property values that could impact tax revenues negatively; on Finland and Estonia finally agreeing on a gas pipeline to reduce dependence from Russia; on the Irish government set to present a new water charge bill in response to public anger;on the latest rise in the German ZEW indictor, a gloomy forecast for Russia, and how German economic commentators are twisting the fall in Japanese GDP for their own purposes.

Opinión TRIBUNA Puede haber cambio, pero hay que ganarlo Podemos está todavía lejos de conquistar la amplia mayoría electoral que necesita para poder gobernar CAROLINA BESCANSA18 NOV 2014 - 00:00 CET Leyendo las portadas de los diarios publicadas estos días pareciera que Podemos supera hoy los 202 diputados y su llegada al Gobierno es un destino inexorable al que solo resta esperar. Desde la prensa de la derecha y la izquierda, desde Barcelona a Coruña y desde Bilbao a Sevilla corren ríos de tinta destinados a explicar este hecho incontestable, el sinfín de catástrofes que sobrevendrán ese aciago día y la irresponsabilidad de los millones de españoles que movidos por la ira o la ignorancia decidieron estrellar su país contra las rocas. Sin embargo, la más simple lectura de los datos del CIS desmiente estos titulares y deja claro que, si las elecciones fuesen mañana, las ganaría el PP. Con independencia de las variaciones porcentuales entre unas y otras encuestas, todos los expertos saben que, a fecha de hoy, esto sería así. Se están produciendo cambios importantes en el espacio electoral español y Podemos se construye sobre cimientos sociales sólidos, pero todavía estamos lejos de haber conformado la amplia mayoría política y electoral que será necesaria para comenzar el cambio democrático en España. Si las elecciones fuesen mañana, el PP volvería a imponerse como fuerza más votada y, aunque en un escenario distinto, con toda probabilidad lideraría —con éxito— una negociación con el PSOE para formar Gobierno. Que no nos engañe nadie. Por el momento, esto es lo que hay y, aunque el rumbo es favorable, falta camino para que haya otra cosa. La gente ha ido convirtiendo al PSOE en un partido conservador ¿Significa esto que no está pasando nada? No, en absoluto. Se están produciendo realineamientos significativos, cambios cualitativa y cuantitativamente importantes, pero todavía insuficientes para lograr transformar el espacio institucional. Incluso con encuestas tan incompletas como las que ahora realiza el CIS, es posible encontrar muchas de las claves sociológicas para entender lo que está pasando. Los partidos del régimen del 78 atraviesan la crisis electoral más grave de su historia. La tabla de transferencias, es decir, la tabla que cruza el recuerdo de voto en 2011 por la intención de voto en unas eventuales elecciones generales nos dice que tanto el PP como el PSOE pierden el apoyo de más de la mitad de los votantes que les respaldaron hace tres años. Esto es muy grave para ambos y ellos lo saben, pero conviene no perder de vista dos diferencias de calado. En el caso del PP hay que recordar que en 2011 obtuvo los mejores resultados de su historia, lo que significa que, aun perdiendo en términos porcentuales casi el mismo 53% que el PSOE, en términos absolutos la caída es sustancialmente menor. Para el PSOE, el mismo 53% de pérdida se produce sobre los peores resultados de su historia. Sin duda una cuestión de orden mayor. A esta primera diferencia hay que añadir una segunda: la mayoría de los votantes del PP en 2011 que ahora mismo no apoyan al partido dicen que no saben a quién votarán o que se abstendrán, pero no se han ido a otra formación. Es decir, la mayoría de los que votaron al PP y que ahora dicen que no les volverían a votar no se han ido del PP, simplemente le están dando la espalda. Pero ese no es el caso del electorado del PSOE de 2011. Hoy, 71

la mayoría de los que no le apoyan se han ido a Podemos, posiblemente por entender que no se trataba de cambiar las caras sino las propuestas y las formas organizativas. El CIS de octubre revela que la gran apuesta socialista no ha logrado los resultados esperados. Tras la intensiva y extensiva presentación del nuevo secretario general, Pedro Sánchez cosecha hoy un 68% de desconfianza entre la ciudadanía y, lo que es más grave, un 46% entre los votantes del PSOE. El análisis de los rasgos sociológicos del actual electorado del PSOE nos explica cómo, a lo largo de los meses y los años, la gente lo ha venido orillando hacia los márgenes del sistema, convirtiéndolo en un partido conservador en el sentido sociológico del término. Si algo resulta inverosímil en la estimación del CIS es que el PSOE sea hoy la segunda fuerza política, nadie puede creerse que una crisis de este calibre se frena echando mano únicamente de nuevos rostros. Hay buenas razones sociológicas para creer que el PP volvería a ganar Por el contrario, en este momento de agónica descomposición del régimen, hay buenas razones sociológicas para creer que, como sostiene el CIS, el PP volvería a ganar. Por mayoría simple, debilitado, con golpes, pero ganaría. No es poca cosa, pero sí insuficiente para garantizar la reproducción del sistema con los actuales niveles de impunidad. Los que mandan en Génova lo saben y, por eso, tras una sucesión de movimientos erráticos, por fin han dado con una estrategia capaz de hacer frente a su caída sin tener que hablar de los 1.900.000 empleos destruidos entre 2011 y 2013, la troika, los recortes, el 30% de niños en situación de pobreza, la reforma laboral, las tasas judiciales, la Gürtel, Güemes y Lamela, Granados, el comisionista Aznar, la financiación de los partidos, las prescripciones, los sobres, el jaguar en el garaje, las tarjetas black, la lencería fina y los puros. La élite en el poder del PP ha encontrado un camino para salir del estercolero, algo que parecía casi imposible hace seis meses. La táctica es sencilla y esa es una de sus grandes fortalezas. Primero deben activar tanto miedo como sean capaces y convencer a cuantos puedan de que las próximas elecciones son las más trascendentales de nuestra historia, más incluso que las de 1977. Después tienen que lograr que los medios de comunicación solo hablen de las encuestas para discutir quién va ganando y olviden mencionar los problemas de la gente, las condiciones de vida de las grandes mayorías o las valoraciones de la gestión del Gobierno. Finalmente, deben convencer a los periodistas y a la sociedad de que Podemos va ganando y, entonces, sacar su capa de superhéroes del orden y ofrecerse como única alternativa con garantías para salvar el país. Ya han empezado y, a tenor de lo ocurrido esta semana, puede ser más fácil de lo que parecería a primera vista. De hecho, casi han logrado que nadie se dé cuenta de lo que ha dicho el CIS y la práctica totalidad de las portadas incluyen el nombre de Podemos. Una táctica arriesgada, impropia de Mariano Rajoy, pero muy propia de una situación desesperada. Pero, bien mirado, ¿cómo si no? Carolina Bescansa Hernández es responsable de la Secretaría de Análisis Político y Social de Podemos. http://elpais.com/elpais/2014/11/17/opinion/1416237940_360641.html

RICARDO FORSTER SOBRE PODEMOS » “Es un momento único para Podemos. O lo aprovecha o lo pierde” El filósofo argentino, una de las voces de Sudamérica a quien más escucha Podemos Podemos pone en marcha un programa que parte de cero F. PEREGIL / J. CRUZ BUENOS AIRES17 NOV 2014 - 20:56 CET434

El filosofo argentino Ricardo Foster. / Ricardo Ceppi El filósofo Ricardo Forster, de 57 años, es uno de los intelectuales argentinos más relevantes del kirchnerismo. Y es también una de las voces en Sudamérica a quienes los dirigentes de la formación española Podemos escuchan con mayor atención. El Gobierno le nombró en junio secretario de Coordinación Estratégica para el Pensamiento Nacional. Ese nombre generó mucho recelo en los medios de información más críticos con el Gobierno. Forster asegura, sin embargo, que desde su secretaría intenta “generar las condiciones para un diálogo que no eluda las diferencias”.

MÁS INFORMACIÓN// Iglesias no despeja sus contradicciones sobre Venezuela y los medios/ Podemos se fija la economía y el debate territorial como prioridades/ El círculo de confianza de Iglesias/ ¿Hacia dónde camina Podemos?/ El populismo arraiga en Europa Da muestras de estar muy al tanto de la actualidad española y del vertiginoso ascenso de Podemos. “Yo tenía una relación con Germán Cano, filósofo. Pero no conocía a Íñigo Errejón, ni a Juan Carlos Monedero ni a Pablo Iglesias. A Monedero y a Errejón los conocí cuando ellos vinieron este año. Ahí tuvimos una larga conversación. Hicimos un encuentro que se llamó Democracia, hegemonía y medios. Errejón me pareció una persona muy formada: leyó con mucho interés la obra de Ernesto Laclau [gran referente intelectual del kirchnerismo, fallecido este año]. Me parece que es un grupo que ha 73

encontrado una facilidad llamativa para descodificar un lenguaje muy complejo que es el de los medios [de comunicación]. Les dije: ‘Cuidado con los medios, cuidado con la fascinación, cuidado con la espectacularización, cuidado con el riesgo de que la política de nuevo sea formateada y estetizada por los medios”. Forster está muy familiarizado con la cultura y política europea. Sus filósofos de cabecera son Benjamin y Adorno. Ahora acaba de publicar con la editorial Fondo de Cultura el libro La travesía del abismo. Mal y Modernidad en Walter Benjamin. Durante mucho tiempo viajó casi todos los años a España. Cree que Podemos apela al populismo como “un acto de provocación”, para diferenciarse de las otras formaciones políticas. “Y la forma que encontraron para diferenciarse es su lectura de algunas de las formas de populismo sudamericano y, sobre todo, de la última generación de populismo. Creo que son profundamente democráticos en su lectura de la sociedad española. Ellos representan a una generación joven, pero disconforme con el pacto que llevó a una despolitización y a una profunda crisis económica, institucional y social. Sacan la política del encorsetamiento”. Pregunta. ¿Qué enseñanzas puede extraer Podemos de la experiencia argentina? Respuesta. Una es que no hay nada más saludable para la democracia que la politización. Otra, que es posible salir de paradigmas que parecen intocables. En la Argentina del final de los noventa la idea de la globalización, el achicamiento del Estado, las privatizaciones y el reinado absoluto del mercado parecían intocables para progresistas y liberales. Pero fue posible cambiarlo, reconstruir un rol importante del Estado en la esfera de la economía. Fue posible disputar una hegemonía. Y de ahí también la búsqueda de una nueva geopolítica regional que tiene como momento clave la alianza estratégica con Brasil, Mercosur y Unasur. Ellos han leído esa experiencia. Y les importa mucho sostener una política que no quede asfixiada por un euro dominado fundamentalmente por Alemania. No hay nada más saludable para la democracia que la politización P. ¿Les ha dado consejos? R. Más que consejos han sido conversaciones. Pero creo que tienen que seguir confiando en que la única alternativa es la politización de la sociedad. Es posible tomar riesgos, es necesario tomar riesgos. Hay que terminar con la política del miedo. Porque en la Argentina funcionó en los años 90. Es posible repensar el rol de la sociedad civil, el rol del Estado. Es posible cambiar la estructura jurídica, el orden financiero internacional. Este es un punto central: lo que hoy está sucediendo en el conflicto con los fondos buitre es clave no solo para la sociedad argentina sino para sociedades que tienen un alto índice de endeudamiento. Hay que poner en debate las recetas de la ortodoxia económica y volver a bajar de los estantes más lejanos de nuestras bibliotecas libros que dejamos de leer. No estoy hablando de El Capital, de Marx. Estoy hablando de Keynes. P. ¿Es inevitable la demagogia para alcanzar el poder? R. Muchas veces se ha intentado reducir el populismo a la demagogia. Pero las democracias sudamericanas se han expandido mucho en términos de derechos civiles. Millones de hombres y mujeres con ciudadanía precaria han devenido ciudadanos. Brasil es un ejemplo clarísimo. El caso boliviano es ejemplar. El caso argentino… construyó la primera ciudadanía con el peronismo. Se anticipó a otros proyectos políticos. Yo no vengo del peronismo, pero he aprendido a comprender su complejidad 74

en la historia. Hay que poner en debate la cuestión de la demagogia. Porque siempre está el peligro de la demagogia, siempre está el peligro de confiar en que el otro, con un plan social o una dádiva, va a estar acompañándome eternamente. Yo creo que eso es subestimar a los que yo llamo los incontables de la historia. Yo prefiero un Gobierno que mejora los índices de acceso a la salud, a la vida digna, que un Gobierno que aparece con toda la parafernalia del hiperliberalismo republicano y que lo que hace es seguir manteniendo la invisibilidad [de los más desfavorecidos] y la carencia de derechos. A Monedero y Errejón les dije: cuidado con la espectacularización P. ¿Qué le parece la estrategia electoral de Podemos? R. Ellos perciben, y yo estoy de acuerdo, que hay momentos en que se disloca un cierto orden. Y es un momento único. O se aprovecha o se lo pierde. Si Néstor Kirchner, por el azar de la historia, no hubiera llegado al poder en 2003, seguramente los dolores argentinos habrían sido muy complejos en los años siguientes. Ellos piensan que este es el momento en que se puede romper el bipartidismo y el sistema de las élites políticas españolas. Saben de los peligros. Saben que entre el núcleo duro de Podemos y las decenas de miles de jóvenes que se han incorporado hay una distancia muy grande que implica una distancia de formación significativa. P. ¿Cuál debería ser el papel de la prensa si llegan al poder? R. Lo ideal me pareció siempre la tripartición de la ley: 33% de los medios para empresas privadas, 33% para los públicos y 33% para la sociedad civil. Los medios públicos tienen que ser diversos. Hay medios públicos que representan más la mirada del Gobierno y medios públicos que tienen otras posibilidades. Pero yo creo que los Gobiernos, si no tienen una capacidad de intervenir a través de los medios en la disputa social me parece que no encuentran la manera de interpelar a la sociedad. Se puede hablar de casta. En política siempre ha habido una tendencia corporativa P. ¿Oyó hablar de la casta? R. Claro. Podemos considera que hay una casta política. Yo creo que ha habido siempre una tendencia corporativa de la política. El problema es cuando esa tendencia se convierte en un fraude, en un negocio. Pero hay un deslizamiento complicado entre decir la clase política, la casta política a liberar la idea misma de política. Hay que tener mucho cuidado. En Argentina la frase [durante la crisis económica de 2001-2002] era "que se vayan todos". ¿Para qué sirve que se vayan todos? ¿Quién viene? ¿El dueño de una empresa, el tecnócrata, el barrendero de la esquina? No. Me parece que hay momentos en que una sociedad está cansada de la forma de representación y pronuncia un tipo de frase más radicalizada. Pero de esa frase, si se la sigue hasta su extenuación me parece que no vamos a un lugar interesante. En cambio, si eso sirve para poner en cuestión una forma de representación que a su vez rehabilite lo mejor de las tradiciones políticas democráticas, ahí vamos por otro camino. Y creo que eso es lo que ha sucedido en gran medida en los países sudamericanos. No se expulsó a la política. P. ¿Le aconsejaría paciencia a Podemos? R. No. Porque hay momentos en los que hay que percibir que está llegando el tren y, si uno no se sube en el momento adecuado, el tren pasa. http://elpais.com/elpais/2014/11/17/opinion/1416237940_360641.html

Nov 18 1:11 pmNov 18 1:11 pm688 The Structure of Obamacare The big revelation of this week has been how many political pundits have spent six years of the Obama administration opining furiously about the administration’s signature policy without making the slightest effort to understand how it works. They’re amazed and in denial at the suggestion that it has the same structure as Romneycare, which has been obvious and explicit all along; they are shocked, shocked to learn that it uses the mandate as an alternative to taxing and spending, which has always been completely obvious and open. Let me expand on the second point, by referring to my own publicly available class notes from 2012. To explain Obamacare, I started with a schematic representation of how single-payer health care works: Photo

Credit Then I showed a schematic of ObamaRomneycare — it calls it that right on the slide — and showed that to a first approximation it delivered the same results, but with a much smaller amount of money flowing through the federal budget: Photo

Credit So the community rating/mandate/subsidy system is in effect a way of simulating single payer, but with lower headline taxing and spending. It’s important to be clear what this does NOT mean — it doesn’t mean that there is a huge hidden burden on the public. For the most part, people buying health insurance would have bought it anyway. Under single-payer, they would have stopped doing that, and paid taxes instead; under the ACA, they continue to pay premiums but don’t pay the extra taxes. There’s no secret extra cost. So, why was Obamacare set up this way? It’s mainly about politics, but nothing that should shock you. Partly it was about getting buy-in from the insurance industry; a switch to single payer would have destroyed a powerful industry, and realistically that wasn’t going to happen. Partly it was about leaving most people unaffected: employment-based coverage, which was the great bulk of private insurance, remained pretty much as it was. This made sense: even if single-payer would have been better than what people already had, it would have been very hard to sell them on such a big change. And yes, avoiding a huge increase in on-budget spending was a consideration, but not central. The main point was to make the plan incremental, supplementing the existing structure rather than creating massive changes. And all of this was completely upfront; I know I wrote about it many times. Look, I understand why the hired guns of the right have to act ignorant and profess outrage. But I really am shocked at centrists who apparently thought they could opine on the politics of health reform, year after year, without taking a hour or two to learn how the darn thing was supposed to work. Nov 17 4:41 pmNov 17 4:41 pm644 77

A Pundit Explains What’s Wrong With Washington Or, actually, demonstrates by example what’s wrong with Washington. Matt Yglesias finds Ron Fournier saying this about health reform: On health care, we needed a market-driven plan that decreases the percentage of uninsured Americans without convoluting the U.S. health care system. Just such a plan sprang out of conservative think tanks and was tested by a GOP governor in Massachusetts, Mitt Romney. Instead of a bipartisan agreement to bring that plan to scale, we got more partisan warfare. The GOP resisted, Obama surrendered his mantle of bipartisanship, and Democrats muscled through a one-sided law that has never been popular with a majority of the public. The mind reels. How is it possible for anyone who has been following politics and, presumably, policy for the past six years not to know that Obamacare is, in all important respects, identical to Romneycare? It has the same three key provisions — nondiscrimination by insurers, a mandate for individuals, and subsidies to make the mandate workable. It was developed by the same people. I and many others have frequently referred to ObamaRomneycare. Well, I’ve know for years that many political pundits don’t think that understanding policy is part of their job. But this is still extreme. And I’m sorry to go after an individual here — but for God’s sake, don’t you have to know something about the actual content of a policy you critique? And what’s actually going on here is worse than ignorance. It’s pretty clear that we’re watching a rule of thumb according to which if Republicans are against a proposal, that means it must be leftist and extreme, and the burden on the White House is to find a way to make the GOP happy. Needless to say, this rewards obstructionism — there is literally nothing Obama can do to convince some (many) pundits that he’s making a good faith effort, because they don’t pay any attention to what he does, only to the Republican reaction. Awesome. Nov 17 7:13 amNov 17 7:13 am 640 Contractionary Policies Are Contractionary Terrible numbers from Japan. Probably the drop was overstated — I don’t have any special knowledge here, but other indicators didn’t look quite this bad. But still, no question that the ill-considered sales tax hike of the spring is still doing major damage. Fairly clear now that Abe won’t go through with round two, which is good news. So contractionary policy is contractionary. I could have told you that, and in fact have told you that again and again. But some people still don’t get the message. In Germany, the Bundesbank president opposes expansionary monetary policy because it might reduce the pressure for fiscal austerity: “Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries,” he cautioned.

Translation: if EB purchases of debt keep interest rates down (as the implied promise to do “whatever it takes” has already been doing), deeply depressed economies might not feel the need to keep slashing spending to eliminate budget deficits. That’s actually quite an awesome concern to express at this moment. European recovery has stalled, largely thanks to fiscal contraction; inflation is far below target, and outright deflation looms; and the political basis for the European project is coming apart at the seams. And Weidmann worries that monetary expansion might make life too easy for debtors. But as Wolfgang Munchau says in a terrific column today, German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. Wish I’d written that! Although it’s not so much Keynes as the whole notion that inadequate demand can ever be a problem that they don’t get. Munchau tells us something I didn’t know, that Ludwig Erhard “once tried to explain the Great Depression in terms of cartels.” In the German economics mindset, there is only microeconomic distortion; macro problems, even in the middle of Europe’s second Great Depression, don’t exist. How does this end? We have to keep pounding on the issues, and I’m reasonably sure that Draghi and co get it. But with the largest player on the European scene living in a fantasy world, the best guess has to be that nothing much is done until there is complete political crisis, with anti-European nationalists taking over one or more major nations. http://krugman.blogs.nytimes.com/2014/11/18/the-structure-of- obamacare/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body&g wh=7DF71B66BB54F17FFBB0EA815991676C&gwt=pay&assetType=opinion

Business Insider Germany Doesn't Seem To Care That Europe Is On The Brink Of A Continent- Wide Recession

Mike Bird Nov. 17, 2014, 6:21 AM

BUNDESBANK/ REUTERS/Kai Pfaffenbach Bundesbank boss Jens Weidmann, the man most closely associated with Germany's opposition to easier monetary policy, is slamming the brakes on expectations that the European Central Bank will finally go for quantitative easing (QE). The European economy is slowing down, and there is a danger of both a new recession and deflation across the continent. The ECB has already made money as cheap as possible for investors to borrow by holding interest rates down close to zero. QE would be the next step — a programme in which the ECB buys various assets from banks largely to inject new cash into the system. Germany, once the economic powerhouse of the continent, is itself teetering on the brink of contraction — and yet the Germans don't seem to want to do anything about it. Weidmann, speaking to Handelsblatt, a German business newspaper, said the Germans would prefer to be debt-free: "Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries," he cautioned. Nor was there any guarantee

that quantitative easing would indeed have the intended impact on the economy, Weidmann pointed out. He added that Germany shouldn't offer Europe a stimulatory boost with fiscal policy — i.e. government spending — either. Germany could easily boost its government spending and stay within the reasonable debt cap of 3% of GDP. But that ain't happening: Calls for Germany to increase its investment to help its partners amounted to nothing more than a plea for a common fiscal policy, he asserted. For another thing, Weidmann pointed out, such expenditure would do little to help countries on Europe's periphery. ECB president Mario Draghi has hinted that the ECB will go for QE. BNP Paribas, Deutsche Bank, and Bank of America expect that the purchases of government debt will start in 2015. Draghi's continued insistence that the ECB will add about €1 trillion ($1.25 trillion) to its balance sheet would probably need full QE. The bank is already buying some bonds and securities, but the markets in those assets are probably too small to reach such a big goal. The ECB could push for QE without Weidmann, but it's previously been keen to get unanimous decisions, so as not to alienate big European economies like Germany. These sort of comments might make some analysts rethink the likelihood of QE for Europe.

Read more: http://www.businessinsider.com/german-bundesbank-president-jens- weidmann-warns-about-qe-2014-11#ixzz3JVjvWBaZ

ft.com Comment Blogs Andrew McAfee Capital, labour, and technology in the 21st century Andrew McAfee Nov 18 06:00CommentShare

Thomas Piketty’s book Capital in the 21st Century was named the FT/McKinsey Business Book of the Year last week. It’s a hard decision to argue with (even though our book The Second Machine Age was also on the shortlist!) Piketty’s contribution is fundamental; he showed us how wealth and income have been distributed over hundreds of years in several countries, and showed how similar the patterns and trends are. We simply didn’t have this level of knowledge before he and his colleagues did their painstaking work. We can and should debate whether he’s discovered the essential laws of capitalism, how worried we should be about the rise of the 1 per cent (and the even more rarified reaches of wealth and income — the .01 per cent — that Piketty seems almost obsessed with), and many other topics raised by Capital, but there’s no longer much debate that high inequality has been the historical norm, and that it’s on the rise again around the world. I think it’s going to keep rising. I say that not because I’m on board with Piketty’s “law” of r > g, but rather because of the commonplace insight that as industrial capital can do more and more, companies need labour less and less. If this is in fact what’s happening, then around the world the labour share of income — essentially the percentage of GDP that gets paid out in wages — should be decreasing. And it is. Loukas Karabarbounis and Brent Neiman document this trend clearly in their 2013 paper “The Global Decline of the Labor Share.” As they write: Of the 59 countries with at least 15 years of data between 1975 and 2012, 42 exhibited downward trends in their labor shares. Of the trend estimates that are statistically significant, 37 are negative while only 9 are positive… the fact that labor-abundant countries such as China, India, and Mexico also experienced significant declines in their labor shares, argues against a simple role for international trade or outsourcing in explaining labor share declines in capital-abundant countries such as the United States. Karabarbounis and Neiman are clear on what’s causing this large shift: “We show that the decrease in the relative price of investment goods, often attributed to advances

in information technology and the computer age, induced firms to shift away from labor and toward capital.” In short, progress with digital technologies is driving this sea change. The same technologies are helping companies become more productive and profitable. This is great news for their shareholders, whose capital is doing quite well these days. The divergence in the returns to capital and labour is strikingly clear in this graph, which plots US corporate profits and total nonfarm wages, both expressed as a percentage of GDP, over virtually the entire post-war period.

I expect the red line to continue to fall as robots, artificial intelligence, 3D printing, autonomous vehicles, and the many other technologies that until recently were the stuff of science fiction, permeate industry after industry. Policies intended to keep these advances out of a country might halt the decline of the labour share for a while, but they’d also halt competitiveness pretty quickly, thus leaving both capital and labour worse off. I think the continued decline of the labour share, brought on by tech progress, will be a central dynamic, if not the central dynamic, of the world’s economies and societies in the 21st century. It’s a story much more about what will happen to the livelihood of the 50th percentile worker than to the wealth of the 1 per cent. And a much more important story. http://blogs.ft.com/andrew-mcafee/2014/11/18/capital-labour-and-technology-in- the-21st-century/ Pero solo explican la mitad de la caida: http://www.eco.uc3m.es/~mkredler/ReadGr/MartinezToledanoOnKarabarbounis Neiman13.pdf.La ¿otra mitad es China? Acemoglu piensa que todo. Salada-dulce

It's the leverage, stupid! November 17, 2014 In the 30 months following the 2000 stock market peak, the S&P 500 fell by about 45%. Yet the U.S. recession that followed was brief and shallow. In the 21 months following the 2007 stock market peak, the equity market fell by a comparable 52%. This time was different: the recession that began in December 2007 was the deepest and longest since the 1930s. The contrast between these two episodes of bursting asset price bubbles ought to make you wonder. When should we really worry about asset price bubbles? In fact, the biggest concern is not bubbles per se; it is leverage. And, surprisingly, there remain serious holes in our knowledge about who is leveraged and who is not. We’ve known for generations that the stock market can go up and down without upsetting the economy too much. As Paul Samuelson quipped in the 1960s, “Wall Street Indexes have predicted nine of the past five recessions.” The following chart of the four-quarter growth rate in the S&P 500 and U.S. real GDP makes the point. Note two things. First, there is a dramatic difference in the scales: the change in the stock price index ranges from -45% to +50% (with a standard deviation of 16 percentage points), while real growth ranges from -4% to +9% (with a standard deviation of around 2½ percentage points). And second, the stock market “overpredicts” business cycle downturns: over the past half century, there were 8 recessions, but the S&P 500 dropped below year-ago levels 14 times. S&P 500 and U.S. Real GDP (Percent Change from Four Quarters Earlier)

/> Sources: FRED and Yahoo Finance.

So the stock market matters for growth, but not all that much. Rising stock prices do raise household wealth and lower the cost of new capital, but several factors mute the impact on the aggregate economy. First, the consumption of people who own equity is not very sensitive to stock price fluctuations because the owners are generally wealthy and can easily smooth their spending in the face of transitory disturbances. Second, the holders of U.S. equities typically do not borrow to finance these assets. This highlights the key point: it is leverage that matters most. Several years prior to the crisis, one of us examined data on equity and housing booms and concluded that the latter worsen growth prospects and create outsized risks of very bad outcomes while the former did not. The recent crisis confirms this pattern, as the collapse of U.S. housing prices brought down the related House of Debt and the financial system with it (see this earlier post). A notable exception proves the point. When the equity bubble in Japan burst in 1990, the largest Japanese banks were among the biggest equity holders. Their leveraged equity losses (combined with the leveraged losses on their real estate-related lending) turned a number of leading banks into financial zombies. So when we see asset price booms, the real question is how leveraged are the owners, and how leveraged are the intermediaries. Looking at the specifics of the 2007-09 crisis, the issue is the sensitivity of the balance sheets of U.S. large banks to changes in real estate prices. To get some sense of this, we have plotted the ratio of real estate loans to equity for U.S. domestically-charted banks in the following chart. The blue line represents the 25 largest banks, while the red line is for all banks. [Because of regulatory changes in the early 1990s, we start in 1994.] In the years prior to the crisis, the ratios were below 3 for large banks and greater than 3 for all banks (implying that smaller banks had a ratio around 4). U.S. Commercial Bank Real Estate Exposure (as a ratio of equity)

Source: Federal Reserve Board, H.8 release.

We need to emphasize that the ratios plotted in this chart understate the exposure – at least on the part of large banks, who were able to game the regulatory system by increasing their off-balance sheet exposure. A classic example of such regulatory arbitrage was the expansion of special investment vehicles (SIVs) in the years before the crisis. To reduce their regulatory capital needs, bank holding companies moved mortgage-backed securities (MBS) off their balance sheets into SIVs that issued asset-backed commercial paper (ABCP) to finance these assets. Such aggressive maturity transformation – financing long-term assets with short- term liabilities – is inherently risky. When mortgage defaults began and the value of the MBS fell, SIVs could no longer roll over their ABCP. At this point, banks had to make good on the back-up lines of credit they had extended to their SIVS. These contingent credit lines were off-balance sheet exposures to real estate. Derivative instruments provide an additional avenue by which a financial intermediary can create leveraged real estate exposure without a regulatory capital charge. The classic pre-crisis example was American International Group (AIG), originally an insurance company. Through its Financial Products Group, headquartered in London, AIG managed to amass $446 billion in notional exposure as a seller of credit risk protection via credit default swaps (CDS) on MBS. In essence, they were selling insurance on mortgages. Another way to highlight the role of leverage is to ask how the relatively small asset class of subprime mortgages could have triggered a crisis like that of 2007-2009. In 2007, outstanding subprime debt was less than $2 trillion, or only about 3% of all financial liabilities. Even if all subprime mortgages had become worthless – they didn’t – the loss of wealth would have been equivalent to a stock market decline of less than 8%. The reason that subprime debt mattered so greatly is that the losses sat on the balance sheets of leveraged intermediaries (including AIG, which required a nearly $200-billion government rescue). Post-crisis changes in regulation have made it more difficult for banks and other intermediaries to amass off-balance sheet exposures, so the recent numbers in the chart probably are less understated than before the crisis. Put differently, the decline in U.S. commercial bank real estate exposure likely is greater than we are able to measure. Disturbingly, however, we know of no source that reports the aggregate off-balance sheet exposure of banks (or other financial intermediaries) to real estate. We can only hope that regulators and governments are acting to fill this enormous and serious gap in our knowledge. All of this leads us to draw two simple conclusions. First, investors and regulators need to be on the lookout for leverage; that’s the biggest villain. In the United States and many other countries, mortgage borrowing has been at the heart of financial instability, and it may be so again in the future. But we should not be lulled into a sense of security just because banks’ real estate exposure has declined. If leverage starts rising in real estate or elsewhere – on or off balance sheet – then we should be paying attention. http://www.moneyandbanking.com/commentary/2014/11/17/its-the-leverage-stupid

Introductory remarks at the EP’s Economic and Monetary Affairs Committee Speech by Mario Draghi, President of the ECB, 17 November 2014 Mr Chairman, Honourable Members of the Economic and Monetary Affairs Committee, Ladies and Gentlemen, It is a pleasure for me to be back again in this committee for the last hearing of 2014. This year has once again been a year of profound change for the euro area and for the Union as a whole. It was a year of legislative and institutional progress on many fronts, as 2014 saw the birth of banking union with the agreement of the Single Resolution Mechanism, the start of the Single Supervisory Mechanism and the successful conclusion of the comprehensive assessment of banks’ balance sheets. And it was indeed a challenging year for monetary policy, which saw the ECB take a wide range of measures to respond to the risks emanating from an increasingly sobering economic outlook. You have chosen two topics for today’s hearing, the relationship of financial fragmentation and monetary policy as well as the Eurosystem’s collateral framework. I will touch on both these issues, but let me first run you through our current assessment of the economic outlook. Economic and monetary developments The euro area growth momentum has weakened over the summer months and most recent forecasts have been revised downwards. At the same time, our expectation for a moderate recovery in 2015 and 2016 remains in place. Demand should be supported by a number of factors. Among them are our monetary policy measures and progress made in fiscal consolidation and structural reforms in some countries. At the same time, high unemployment, sizeable unutilised capacity, and the still ongoing and necessary balance sheet adjustments are likely to dampen the recovery. Risks to the economic outlook continue to be on the downside. In particular, the weakening in the euro area’s growth momentum, alongside heightened geopolitical risks, could dampen confidence and, in particular, private investment. In addition, insufficient progress in structural reforms in euro area countries constitutes a key downward risk to the economic outlook. Inflation in the euro area remains very low. In October, it stood at 0.4%. We expect it to remain at around current low levels over the coming months, before increasing gradually during 2015 and 2016. Looking forward, we closely monitor risks to price developments. The latest monetary data point to subdued underlying growth in broad money. Its annual growth rate has increased moderately over recent months. It appears that the turning point in credit growth is now behind us, and credit growth rates, while remaining negative, are gradually improving. 87

Monetary policy and financial fragmentation Let me turn to financial fragmentation, the first topic you suggested for today’s hearing. Fragmentation in various segments of the financial market has been a major obstacle to the smooth conduct and transmission of monetary policy, and ultimately to our ability to deliver on our mandate. Also owing to determined actions the ECB has taken, fragmentation has receded significantly since the height of the financial crisis. Unsecured money market rates are trading again at reasonable spreads over their secured counterparts. Sovereign bond spreads in the euro area decreased significantly from their peaks in 2012. Together, these developments reflect the gradual return of confidence among investors in the euro area. Yet, we still face a situation where our very accommodative monetary policy stance does not sufficiently reach some final borrowers in the euro area. This is because credit markets in some parts of the euro area are still impaired and show only timid signs of recovery. As a result, credit growth continues to contract and credit conditions - while having eased recently - remain overall tight from a historical perspective. Importantly, costs of bank funding have improved, but are still relatively high in some Member States. Where they are lower, they are not passed on in full to the real economy. The monetary policy measures decided in June and September this year, the Targeted Longer-term Refinancing Operations and the purchase programmes for asset-backed securities and covered bonds, are designed to overcome these obstacles. They will enhance the transmission of monetary policy, support the provision of credit to the euro area economy and, as a result, provide further monetary policy accommodation. We see early indications that our credit easing package is delivering tangible benefits. Since the beginning of June, forward money market rates have shown steep declines across the maturity spectrum. Now, the forward curve consistently lies below zero over a two-year horizon. EONIA is not expected to exceed 25bps before well into 2018. The 3-month EURIBOR rate, which is an important conduit of monetary policy impulses to lending rates, dropped to all-time lows and now stands close to zero. And the policy decisions, in particular those announced in September, triggered a compression of spreads across other asset classes, including ABS, covered bonds and sovereign bonds. But more time is needed for the full materialisation of the positive effects of the most recent set of measures. In this context, let me emphasise that we are committed to scale the total magnitude of our measures – lending operations as well as outright purchases – up to a size that can deliver the intended support to inflation and the recovery of the euro area economy. All these measures will have a sizeable impact on our balance sheet, which we expect to move towards its early 2012 dimension. This will ensure that our accommodative monetary policy stance will contribute to a gradual recovery and a return of inflation rates in the medium term to levels closer to our aim of below but close to 2%. Nonetheless, we need to remain alert to possible downside risks to our outlook for inflation, in particular against the background of a weakening growth momentum and continued subdued monetary and credit dynamics. We therefore need to closely monitor and continuously assess the appropriateness of our monetary policy stance. If necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate. In this context, we have also tasked relevant ECB staff and Eurosystem committees with the timely preparation of further measures to be 88

implemented, if needed. Such measures could include further changes to the size and composition of the Eurosystem balance sheet, if warranted to achieve price stability over the medium term. Monetary policy alone – however – cannot overcome financial fragmentation in the euro area. Fragmentation across national borders also reflects underlying national imbalances and institutional deficiencies. Overcoming these require determined structural reforms on the side of national governments to improve the business environment and setting incentives to invest, with the aim to boost productivity, create new jobs and raise the growth potential of the economy. Reducing financial fragmentation also requires tackling remaining shortcomings in economic and financial integration. As already mentioned, substantial progress has been made this year. Banking union should now be completed following the finalisation of the Comprehensive Assessment and the SSM taking on supervisory responsibility. This means in particular completing the SRM, enhancing the borrowing capacity of the Single Resolution Fund and thereby delivering on the commitment to establish a credible backstop. Moreover, looking forward, a greater integration of financial markets – also referred to as a Capital Markets Union (CMU) – would be warranted to further reduce fragmentation of financial markets, improve funding to SMEs, enhance the transmission of the ECB’s monetary policy, and overall benefit economic growth. We look forward to the detailed elements that the Commission will announce in the course of 2015 and I have no doubt that the European Parliament as co-legislator will again play a decisive role in this regard. The collateral framework of the Eurosystem Let me now say a few words on the second topic you have chosen, our collateral framework. Since the very beginning, the Eurosystem collateral framework had been designed to achieve two goals at the same time: First to protect the Eurosystem from incurring losses, as it is explicitly required by the Statute of the ECB/ESCB; second to ensure that Eurosystem credit operations can be carried out smoothly by making sufficient collateral available. The past and recent experience has shown that such a dual set-up of the Eurosystem collateral framework has been indeed very effective. So far, the Eurosystem has never had to recognise a loss stemming from the Eurosystem credit operations. In the few cases where counterparties have defaulted, for instance in the case of a subsidiary of Lehman Brothers, the Eurosystem was able to fully cover its exposure by seizing the posted collateral. At the same time, the collateral framework ensured that banks were able to obtain sufficient amounts of central bank liquidity throughout the crisis. This became most visible in the context of the two Very Long Term Refinancing Operations that the ECB conducted in 2011 and 2012. In these operations banks obtained collateralised central bank liquidity in the order of EUR 524 billion within only 10 weeks. This basic set-up of the collateral framework has remained the same since the beginning of monetary union; the three constituent parts of the Eurosystem collateral framework, i.e. (i) the counterparty framework, (ii) the basic eligibility criteria for underlying assets and (iii) the risk control measures, have remained largely unchanged. The Eurosystem 89

maintains a broad counterparty framework and its eligibility criteria are still based on the same principles as at the beginning. This shows that the design of the Eurosystem collateral framework is in general very robust. However, some changes were necessary to guarantee a smooth implementation of monetary policy at times of financial market stress that led to a general reduction in access to market funding. A collateral framework must never act in a pro-cyclical manner: Restricting banks’ access to liquidity in a crisis – for instance, by introducing more restrictive criteria for collateral – might pose a risk not to only to the most vulnerable banks, but to the whole financial system. Ultimately, this would increase the risk for the central bank’s balance sheet rather than protecting it. Hence, in order to enable that a wide range of the counterparties could continue participating in the refinancing operations, the Eurosystem temporarily relaxed some of the eligibility criteria for underlying assets. This was done on several occasions. For instance, from 2008 to 2011 and again as of 2012, we accepted foreign denominated marketable assets. In 2012 we created the Additional Credit Claims framework. Credit standards have been changed by accepting lower rated assets compared to those accepted at the beginning, notably for ABS that fulfill certain criteria. However, these accommodative measures were coupled with a stronger-scrutinised counterparty framework and with more stringent risk control measures. As a result, the total amount of eligible collateral increased. Thus, an enhanced participation of counterparties in the refinancing operations was enabled, while at the same time the risks for the Eurosystem expanded only moderately. The Eurosystem collateral framework has been quite complex from the very beginning, not the least because of the variety of national frameworks preceding it. With the onset of the monetary union, the goal was to provide access to Eurosystem credit operations to a broad range of counterparties, in contrast to some other central banks which rely on a few counterparties. Therefore, the collateral framework had to take into account the various national banking systems and financial markets. Some national central banks, for example, accepted credit claims as collateral, while others did not. Some countries had developed covered bond markets, while others only started to set up a respective covered bonds law later, and the same could be said for ABS. For a collateral framework, a common standard had to be found which embraces these national characteristics, while at the same time ensuring that sufficient collateral is available. Several of the measures taken in the crisis have added to this complexity. Therefore a challenge going forward is to make the collateral framework simpler and more transparent, without impacting the ability of counterparties to access our refinancing operations. I am confident that we will achieve this. Conclusion Ladies and gentlemen, 2014 has been a year of profound change. But what has been achieved so far is not enough. 2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track. Monetary policy alone will not be able to achieve this. This is why there is an urgent need to agree on concrete short-term commitments for structural reforms in the Member States, on a consequent application of the Stability and Growth Pact, on the aggregate fiscal stance for the euro area, on a

strategy for investment, and to launch work on a long-term vision to further share sovereignty ensuring the sustainable and smooth functioning of EMU. On that note, I am looking forward to our discussion. http://www.ecb.europa.eu/press/key/date/2014/html/sp141117_2.en.html

Actuales retos de la política monetaria Discurso de Yves Mersch, miembro del Comité Ejecutivo del BCE, en la 17ª Semana de la Euro Finanzas, Frankfurt, 17 de noviembre 2014 Conclusiones Permítanme resumir: El punto de referencia de todas nuestras acciones es cumplir con el mandato principal del BCE, es decir, para garantizar la estabilidad de precios. En períodos de inflación inusualmente baja en las tasas de interés cercanas a cero, es necesario tomar medidas no convencionales. Nuestros inyecciones de liquidez y programas de compra se utilizan para resolver la obstrucción del canal del crédito ( credit easing ). Los riesgos que tratan en lo posible de mantener y limitarnos a la compra de valores muy seguros. El objetivo no es, el sector bancario para disminuir los riesgos de crédito malo y se hunda en el balance del banco central. Ese no es nuestro trabajo. Que nuestro balance durante su prolongado, no es ni un fin en sí mismo ni un fetiche. La presión asociada sobre los tipos de interés es en el mejor de un beneficio colateral. El exceso de liquidez, que permanece atascado en el sector bancario, pero no ayuda a reactivar la economía real, pero sólo puede actuar en el canal de la cartera y el tipo de cambio. Estas medidas, que deben primero dejar actuar. Si no nos bastan, pero sus manos no están atadas. Podemos, si debe ser importante para, hacemos más. Cualquier nueva medida debe llevarse a fondo las luces de antemano sobre la eficacia y la eficiencia y la conformidad con nuestro mandato. Al mismo tiempo, somos conscientes de los posibles efectos secundarios y riesgos a largo plazo, así como las características institucionales y económicas de la zona del euro, así como de los límites de nuestro mandato. http://www.ecb.europa.eu/press/key/date/2014/html/sp141117.de.htmlhttp://www.e cb.europa.eu/press/key/date/2014/html/sp141117.de.html

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Structural reforms is all that’s left – a seriously depressing G20

17 de noviembre de 2014, 8:32:38 Another mostly pointless G20 summit ending with big promises on structural reforms. The only difference is that this time they put on a number on how much the reforms would yield in terms of added GDP – if implemented in full, which is not going to happen, of course. We also have doubts about the calculations, as they undoubtedly presume the presence of a robust economic recovery. Angel Gurria from the OECD summed up the minimalist policy consensus: “With fiscal and monetary policy room nearly exhausted, structural reforms are the best choices, sometimes the only choice.” This the key paragraph of the official declaration: “This year we set an ambitious goal to lift the G20’s GDP by at least an additional two per cent by 2018. Analysis by the IMF-OECD indicates that our commitments, if fully implemented, will deliver 2.1%. This will add more than $2tr to the global economy and create millions of jobs. Our measures to lift investment, increase trade and competition, and boost employment, along with our macroeconomic policies, will support development and inclusive growth, and help to reduce inequality and poverty.” Please note that this proposition can neither be verified nor falsified. No matter what happens by 2018, we will not know to which extent the measures will have contributed to that outcome. Behind the scenes, the US expressed its indignation at German economic policies. In its coverage, the FT wrote that US officials were sceptical of Germany's recent announcement of a stimulus plan – of 0.1% of GDP for a period of three years from 2016. As expected, Merkel dodged the various bullets fired at her, calling on German to raise investment. Most of the attention of the summit focused on how Vladimir Putin would get on with fellow world leaders. This summit did not bridge the gap. Putin gave an interview to German ARD TV saying the Ukraine would suffer the most if the west start to cut off Russian banks from the international financial system. This morning’s Spiegel magazine has a story that the German government was seriously alarmed by Russia’s attempt to deepen its influence on south-western Europe, notably in Serbia. The paper quotes an internal document from the foreign ministry, according to which it is Putin’s goal to enter into a strategic partnership with Serbia through military co-operation and gas deals with the goal to keep Serbia out of the EU. The article quotes various CDU foreign policy experts warning about an increase in Russian influence in the Balkans. Elmar Brok is quoted as saying that Putin is trying a dual track

approach to dissuade countries like Serbia from joining the EU, and others to influence EU decisions in a pro-Russian direction if they are member states. Our other stories We also have stories on the Q3 GDP numbers, and what they mean; on Portugal's interior minister resigning over the "golden visa" probe; on bad loans to become a thorny issue for Greece in upcoming troika talks; comments on the Greek recovery , Spain's capacity to reform and on Belgium's debt trap; on a proposal that would turn Juncker’s €300bn investment fund into a CDO; on another CDO-proposal – a proposal to create an artificial instruments for QE; and ruminations about ordoliberalism. 11/17/2014 05:41 PM Putin's Reach Merkel Concerned about Russian Influence in the Balkans By SPIEGEL Staff Berlin has begun to see Moscow as an adversary rather than as a potential partner. The German government is concerned about efforts by Russian President Vladimir Putin to increase his influence in the Balkans. Stopping him, however, could prove difficult. It is a fundamental principle of German foreign policy that talks are the best way to solve diplomatic problems. Such was the rationale behind Gernot Erler's recent trip to Moscow to speak with Russian parliamentarians about the ongoing Ukraine-related difficulties. Erler is the German government's Russia liaison and he has spent much of his political career working towards better relations between Germany and Russia. But his recent trip to the Russia capital was a painful one. There was no one in parliament who was willing to speak with him. For Erler, the message was clear: Russia is no longer particularly interested in dialogue. That is true for simple parliamentarians just as it is for Vladimir Putin. The Russian president still, to be sure, speaks regularly with Angela Merkel. But the chancellor believes that what Putin says and what Putin does have long since diverged. Russian policy, says Erler, is currently following the "principle of organized unpredictability." Foreign Minister Frank-Walter Steinmeier, who sought to establish a "positive agenda" with Moscow when he took office, is particularly frustrated. In recent weeks, Steinmeier has complained several times of significant breaches of trust perpetrated by the Russians and says he doesn't foresee relations with Moscow normalizing any time soon. Merkel is of the same opinion. From the perspective of Berlin, Russia has gone from being a difficult partner to being an adversary within just one year. The effort launched in 2008 to tighten cooperation on a number of issues, one in which German leaders placed a great deal of hope, would seem to have come to an irrevocable end. Instead, Berlin is now discussing ways in which it might be able to slow down Russia's expansionary drive -- particularly in the Balkans, a region in which some states are not entirely stable. Elmar Brock, a member

of Merkel's conservative Christian Democrats (CDU) and the chairman of the European Parliament's Foreign Policy Committee, is also concerned about the region. "It is part of a broad strategic approach by Russia to 'infiltrate' the countries politically but mostly economically," he says. Cold War recipes are coming back into fashion. It is time to begin thinking about a new "containment strategy," says one high-ranking diplomat. The reference is to the concept for curbing Soviet power that was first sketched out in a famous telegram sent in February 1946 by then-US Ambassador to Moscow George Kennan. It went on to become the foundation for Western policy in relations with the Soviet Union. The Birth of 'Putinology' Stefan Meister, a Russia expert at the German Council on Foreign Relations, agrees, saying that the West needs to focus on self-defense to a greater degree than it has thus far. One official at Merkel's Chancellery says that in some ways the situation is even more difficult than it was during the latter phases of the Soviet Union. Back then, the official says, Moscow at least adhered to agreements. During the Cold War, Kremlinology was the word used to describe efforts to determine the true intentions of the Soviet leadership. That discipline has now been replaced by "Putinology," but the emphasis on speculation has remained. Even the chancellor, despite dozens of conversations with Putin, doesn't know how far the Russian president is willing to go in the current conflict with the West, or even whether he knows himself. She has spoken to Putin at least 35 times by phone since the beginning of the Ukraine crisis. She also requested a transcript of a speech given by Putin at the Valdai Club in Sochi four weeks ago. In it, the Russian president laid out his world view before journalists and political science experts. It is not a view that made Merkel more optimistic. According to Putin's thinking, the US destroyed the international legal system and is attempting to establish a unipolar global order. He said that the so-called victor of the Cold War is trying to reorganize the world according to its own interests. Putin said that Washington is responsible for the rise of Islamist terrorism as well as the conflicts in Iraq, Syria and Libya. Whereas the US cavalierly intervenes around the world, Washington reproaches Russia for doing exactly that, Putin said with a view toward Ukraine. "What Jupiter is allowed, the Ox is not," he said, referring to the Latin phrase often used to indicate a double standard. But the bear, he continued, "will not even bother to ask for permission." The bear, he said, is the "master of the taiga" and will not cede it to anyone. Putin then said that he doesn't intend to advance into other climactic zones. The taiga refers to the forested region stretching all the way across Russia, and the sentence from Putin's speech has now led Berlin officials to wonder where the taiga ends for Putin and where other climactic zones might begin. Observers have been keeping close track of the Russian president's comments in this regard, but a complete picture has yet to emerge. Merkel would seem to have drawn her own conclusions. At a Monday lecture held by the German chancellor at the Lowy Institute for International Policy in Sydney, where she was following the G-20 summit in Brisbane, Merkel was clear about her view of Russia. "Truly, the Ukraine crisis is in no way a regional issue," she said. "It affects all of us." During the following discussion, she warned that the EU will not yield to Moscow like East Germany once did. "Otherwise, one would have to say: We are too 94

weak, be careful, we can't accept any others, we have to first ask Moscow if it is possible. That's how things were for 40 years; I never really wanted to return to that situation." She then made a particularly notable comment: "And that doesn't just apply to Ukraine. It applies to Moldova, it applies to Georgia. If the situation continues ... we'd have to ask about Serbia, we'd have to ask about the western Balkan countries." Tit-for-Tat Reprisals Her concerns about the Balkans are justified. Last Wednesday in the United Nations Security Council, Russia surprisingly refrained from voting in favor of extending the EURFOR mission in Bosnia-Herzegovina. It was the first time it has abstained in such a vote. The reason Moscow gave was that the resolution contained language referring to the country's prospective accession to the European Union. At the same time, Russia expressed reservations about Germany's announced candidacy for the 2016 presidency of the Organization for Security and Cooperation in Europe (OSCE). Over the weekend, Putin also left the G-20 summit before its official conclusion, though he claimed that his premature departure was related to the long flight back home to Moscow. What's more, the Kremlin last week expelled Sabine Stöhr, a long-time employee of the German Embassy in Moscow. In a statement confirming the expulsion of the German diplomat, the Foreign Ministry in Berlin said: "An employee of the German Embassy in Moscow has left the country due to a reprisal measure taken by Russian authorities. We regret this unjust course of action and have expressed our displeasure to the Russian government." The reprisal was apparently taken in response to the case of a Russian diplomat in the general consulate in Bonn who was accused of spying. German domestic intelligence agents had been observing the diplomat for months and ultimately expelled him from the country. In similar cases in the past, Russia has abstained from retaliation. "This is a policy of pinpricks," said a source in the Foreign Ministry. "We don't know where it is leading." On Monday, the Russian Foreign Ministry announced that several Polish diplomats have likewise been expelled, a move that also came in retaliation for the expulsion of Russian diplomats from Warsaw. The Russian Foreign Ministry said in a statement that "the Polish authorities have taken an unfriendly and unfounded step. In connection with that, Russia has undertaken adequate measures in response." Apart from such tit-for-tat pettiness, Berlin has observed a broad new approach by the Kremlin in the Balkans. The focus, officials believe, is an attempt to prevent the region's further rapprochement with, or even accession to, the European Union. "RUS attaches great strategic importance to the Western Balkans," reads a Foreign Ministry analysis entitled: "Russia's Influence in Serbia." The paper, which is classified as confidential, describes Moscow's efforts to link Belgrade closer to Russia. The endeavor goes beyond military cooperation and Russian deliveries of natural gas. Moscow, the paper indicates, is engaging in "public diplomacy with clear pan-Slavic rhetoric" and enjoys high esteem in the population, not least because of its approach to the Kosovo issue. "Putin's goal is to exert so much pressure on Balkan states that they either back away from EU membership or that, once they become members, influence EU resolutions in a pro-Russian manner," says EU parliamentarian Brok. Russian Soft Power 95

The same holds true for Serbia's neighbor, Bosnia-Herzegovina. "One gets the impression that Russia is trying to gain influence over all of Bosnia-Herzegovina via the Serbian partial republic Srpska," says German Agricultural Minister Christian Schmidt, who recently made a visit to the region at the behest of Merkel. "That also makes the path of neighboring Serbia into the EU more difficult," he says. The accuracy of Schmidt's assessment is demonstrated by a paper on "Russia's soft- power strategy" in the Balkans that was drafted for Putin by the influential Council on Foreign Relations in Moscow. The paper notes that: "In this region, which is traditionally tied to Russia, we cannot limit ourselves to investing in companies. We must spend money on infrastructure, and for the people there who see Russia as an alternative to Western power." Putin would seem to have taken the advice to heart. The Russian Railways company, headed by Putin-ally Vladimir Yakunin, is currently refurbishing a 350-kilometer (217 mile) stretch of track in Serbia at a cost of three-quarters of a billion euros. Furthermore, the Moscow-based oil multinational Lukoil now owns 79.5 percent of the local service- station chain Beopetrol while Gazprom holds majority ownership of the country's largest natural gas supplier. "Russian investments have improved the prospects of regions that were heavily damaged by the NATO bombardment in 1999," the paper reads. In Montenegro, Russia is the largest foreign investor, with Russians controlling one-third of all companies in the country. The German government believes that Russia's approach in the region has been largely successful. The Foreign Ministry analysis notes that October's 70th anniversary celebration of Belgrade's liberation from the Nazis was moved up by four days to coincide with Putin's visit there. It was also accompanied by a large military parade for the first time in 30 years. The paper doesn't fail to mention that Serbian President Tomislav Nikoli awarded Putin the country's highest decoration during the visit. "Images of tight srb.-rus. bond (are) from our perspective (an) inappropriate signal at a moment when SRB should be emphasizing its EU orientation," the German Foreign Ministry paper pointedly notes. One particularly odd meeting underscores the methods Putin uses to expand his influence in Serbia. One year ago, Nikoli received the head of the Moscow motorcycle club Night Wolves, Alexander Zaldostanov. Putin refers to Zaldostanov (alias: The Surgeon) as his "brother." The gang has made repeated headlines for its outspoken anti- Semitism and homophobia, stances that are consistent with attitudes widely held in Serbia. Exerting Pressure Where Necessary It is not easy for the German government to counteract the Russian offensive. "We can't become party to a bidding war," says Michael Roth, a state minister in the Foreign Ministry. "We have to continually make it clear to the Balkan states that accession to the EU is in their interests." Angela Merkel has also sought to thwart Putin's efforts diplomatically. At a Balkans conference in the Chancellery at the end of August, she encouraged the gathered heads of state and government to commit to a pro-EU path. She has even shown a willingness to exert pressure as necessary. Moscow's effort to grant diplomatic status to a disaster control center Russia established in the Serbian city of Niš is one example. Merkel called Serbian Prime Minister Aleksander Vuči to urge him not to sign the agreement. 96

Berlin was worried that the center might develop into a permanent center of Russian espionage. Putin's efforts to expand his influence do not stop at EU borders. The German government believes Putin was surprised that Europe was able to come to a consensus on Ukraine-related sanctions -- particularly the fact that even an accession candidate like Montenegro backed the penalties. Now he is doing his best on influence policymaking in individual EU member states, particularly in Bulgaria. The country has traditionally been closely allied with Russia and is almost completely dependent on Russian natural gas and oil. An internal report from the German Foreign Ministry notes that around 300,000 Russians have bought property in Bulgaria. Officials in the Chancellery are concerned that Putin could seek to instrumentalize the alleged interests of the Russian minority there. Berlin and Brussels are likewise worried that the Bulgarian government could succumb to Russian pressure and block future EU foreign policy initiatives even more often than it has done in the past. The fundamental problem from a Western standpoint is the fact that the desire for escalation and the ability to do so is not divided equally. Putin appears prepared to promote Russian interests in his neighborhood economically, politically and, if necessary, militarily. The West doesn't have much to offer in response -- and it is completely unwilling to go to war for Ukraine or Moldova. Even the economic sanctions against Russia are controversial in Germany and elsewhere in the EU. Bolting the Door Critics of Moscow, such as Andreas Schockenhoff, the deputy head of Merkel's conservatives in German parliament, believe that the sanctions must be maintained until the costs become too great for Putin. But even during the last round of EU sanctions, Merkel had difficulty convincing skeptics, such as Italian Prime Minister Matteo Renzi and Hungarian Premier Viktor Orban to agree to the penalties. She was thus particularly upset by recent comments by the EU's new foreign policy chief, Federica Mogherini, calling the effectiveness of sanctions into question. During a recent meeting of current and former state ministers in the Foreign Ministry, several participants likewise criticized Berlin's strategy, saying that more concessions must be made to the Russians. Social Democrat politician Klaus von Dohnanyi, for example, argued that Russia must be allowed a zone of influence in its immediate neighborhood. The resulting image these days is of a Berlin that is at once impotent, alarmed and perplexed -- perhaps one reason that Germany's frustrated foreign minister, for lack of better alternatives, has committed to staying the current course. "Even if you have been frustrated and unsuccessful 100 times," Steinmeier recently told a confidant, "diplomacy means that you still have to open the door the 101st time." The question, however, is whether the other side hasn't already long since bolted the door. By Nikolaus Blome, Susanne Koelbl, Peter Müller, Ralf Neukirch, Matthias Schepp and Gerald Traufetter URL:

• http://www.spiegel.de/international/europe/germany-worried-about-russian- influence-in-the-balkans-a-1003427.html Related SPIEGEL ONLINE links: • Interview with Henry Kissinger: 'Do We Achieve World Order Through Chaos or Insight?' (11/13/2014) http://www.spiegel.de/international/world/interview-with-henry-kissinger-on-state-of- global-politics-a-1002073.html • The Chaos Republics: Stagnation and Infighting Take Hold in Eastern Ukraine (11/06/2014) http://www.spiegel.de/international/europe/votes-do-little-to-clarify-status-of- ukrainian-breakaway-regions-a-1001128.html • Eve of Election: A Fractured Ukraine, United in Uncertainty (10/22/2014) http://www.spiegel.de/international/europe/journey-through-ukraine-as-october- election-approaches-a-998366.html Related internet links • Transcript of Putin's Speech to the Valdai International Discussion Club in Sochi http://eng.kremlin.ru/transcripts/23137

ft.com Comment The Big Read November 17, 2014 7:34 pm Bonds: anatomy of a market meltdown Tracy Alloway and Michael MacKenzie Fall in Treasury bond yields has left investors asking if world’s safe haven needs shoring up

©Getty Legend has it that a young man once asked the financier J Pierpont Morgan what the stock market was going to do. “It will fluctuate,” Mr Pierpont is said to have replied. Had the young man asked Mr Pierpont about today’s US Treasury market – where the US government sells trillions of dollars worth of bonds to a wide range of investors – he may have received a very different response. More ON THIS STORY// The Last Word The mystery of the ‘fall fall’ lingers/ The Last Word No Blofeld behind bond (market) avalanche/ John Authers Fear returns with bond yield plunge/ Wild price swings are flashback to crisis ON THIS TOPIC// Mexico’s move set to shake up bond market/ Touch of fear fails to damp Nordic appeal/ IFC issues Rs10bn ‘masala bond’/ German borrowing costs fall to record low IN THE BIG READ// Strife in the fast lane// ‘Hollywood good but Rosetta better’/ Regulation Banks count the risks and rewards/ Italy’s Post-it premier hopes reforms stick For decades, the US Treasury market has been a bedrock of global finance. While stock markets are prone to sudden price swings, such episodes in the vast and easily-

transacted world of Treasuries have been far rarer – giving the market an exceptional reputation for orderly trading. That reputation took a big hit last month. On October 15, the yield on the benchmark 10-year US government bond, which moves inversely to price, plunged 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent. While that may not seem like much, analysts say the move was seven standard deviations away from its intraday norm – meaning it might be expected to occur once every 1.6bn years. For several minutes, Wall Street stood still as traders watched their screens in disbelief. Electronic pricing machines, which now play a bigger role than ever in the trading of Treasuries, were halted and orders cancelled by nervous dealers as prices see-sawed. The events have sparked a financial “whodunnit” as investors, traders and regulators seek to understand what happened – and to determine whether October 15 was a unique event or a harbinger of further perilous trading conditions to come. “We’re all looking for a chief reason because clients want to understand the impetus behind market volatility,” says Reggie Brown, head of exchange-traded fund trading at Cantor Fitzgerald. Among US regulators’ concerns is whether a tougher regulatory climate for big banks, coupled with the inexorable rise of electronic trading, has fundamentally altered how the $12.4tn government bond market functions. The answer has profound consequences for the conduct of Federal Reserve policy and how the US funds its national debt. For the Fed, the resilience of the Treasury market will be a consideration as it begins to raise interest rates. Analysts say the risk of a highly volatile market reaction suggests the central bank will move in measured steps when it begins to raise borrowing costs, which many expect to begin next year. One worry is that the US Treasury market might have suffered a pronounced loss of support for prices – or “liquidity” in financial parlance – due to changes that have swept over Wall Street including the rise of computer-driven trading. Some draw parallels with the “flash crash” that hit stock markets in May 2010, which eventually spurred efforts to reform the wider equity market. James Angel, associate professor at Georgetown University, says the US Treasury market should be regulated in a different way now that it has embraced electronic trading. “When people use computers to provide prices across markets it [liquidity] can be withdrawn in a heartbeat,” he says. “How much market liquidity really exists under this type of market structure and what changes should be made are the questions for regulators.” Unlike other bond markets, US Treasuries are viewed as being open for business for the entire global trading day. They also enjoy safe-haven status during times of tension. The immense size of the market means investors can easily express opposing views about the direction of interest rates by buying or selling the government debt. Any indication that the market can suddenly shut down with little warning raises troubling questions about how the nature of trading has changed in recent years. Electronic systems are more visible to the whole market, so trades tend to be smaller 100

than those that take place in private telephone conversations between dealers and investors. A recent gathering of US Treasury officials and key representatives of dealers and investors, known as the Treasury Borrowing Advisory Committee, held in a Washington hotel, revealed “a wide variety of views regarding the potential drivers of the intraday volatility” on October 15. Members of the TBAC include JPMorgan Chase, RBS, Morgan Stanley, BlackRock, Pimco, Citadel, Brevan Howard and other major players in the Treasury market.

A number of US regulatory agencies are looking at last month’s Treasury market mayhem. An official at the Federal Reserve Bank of New York told the Financial Times: “In the course of our normal market monitoring we regularly explore and assess market developments.” Timothy Massad, chairman of the US Commodity Futures Trading Commission, which regulates interest rate futures trading at the Chicago Mercantile Exchange, said that the

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agency’s initial view was that the market had functioned reasonably well given the high number of trades. “Let me just add, that’s based on our preliminary look. New evidence might come to our attention that suggests otherwise.” When dawn broke on a grey October 15 in New York, traders and investors had plenty of reasons to be nervous. Concerns over the spread of Ebola and weakening economic activity in Europe and China were weighing heavily – helping to push bond yields lower as investors sought the refuge of US Treasuries. The scuppering of AbbVie’s £32bn deal to acquire Shire left many big hedge funds nursing heavy equity losses and may have contributed to the rapid repositioning that would eventually engulf markets. Once volatility shows up, you don’t want to make a mistake in a fast market . . . so dealers pull back from providing prices When US retail sales for September flashed across news screens at 8:30am and confirmed the first monthly decline since January, concern mounted among investors that the US economy could well be softening. For investors who had positioned themselves for a strengthening economy that would propel the Fed to raise interest rates before 2017, it was a painful reversal of sentiment. Many had placed record bets on interest rates moving higher via futures contracts listed on the CME. With many hedge funds and money managers already suffering a poor year, their offside wagers on interest rates and other failing trades now required emergency action. What subsequently unfolded, according to traders, was a series of massive positions being liquidated and dumped on to the market. One hedge fund manager recalls being bewildered by subsequent events: “What on earth was charging through the market to want volume at such a price and why, in response to that catalyst, did the electronic marketplace just take any and all liquidity away?” By 8:45am, liquidity began noticeably deteriorating, and the process accelerated after 9:30am, according to data from Nanex, a market research firm. By 9:33am, the yield on the 10-year Treasury had sliced through the critical 2 per cent level, causing many who had bet on rising yields finally to capitulate and close out their negative bets by buying back US government debt and various interest rate futures contracts. In September, hedge funds had established a record net “short” position in interest rate futures according to CFTC weekly data. Between the end of September and the week ending October 21, this big bet shrunk from 1.27m contracts to just 217,000, reflecting more than $1tn of notional exposure being cut. “The elephant tried to squeeze through the keyhole,” says John Brady, managing director at RJ O’Brien, a futures broker in Chicago. Eric Hunsader, Nanex chief executive, says the scale of the shift in US Treasury prices may have prompted the “market-makers” who usually support trading of the debt to retreat: “The speed of the move was abnormal and trading systems lack historical data for such episodes that can provide them with some guidance.” When the day drew to a close nearly $1tn worth of cash Treasuries had changed hands, illustrating the intensity of the rush for the exit. Such huge volumes also show liquidity 102

was available, but was possibly difficult to obtain at prices deemed reasonable by investors on the day and amid rapidly fluctuating markets.

The head of trading at a major dealer-bank says: “Once volatility shows up, you don’t want to make a mistake in a fast market and so you always see dealers pull back from providing prices.” Compounding such pressures are changes that have transformed Wall Street since the financial crisis, with the big banks who once dominated Treasury trading now under tougher balance sheet constraints thanks to regulation and a newfound aversion to risk. This trend has encouraged greater electronic trading and a migration of experienced traders from dealers to hedge funds and asset managers, leaving a younger generation of traders manning Treasury desks at big banks. Many of these have never experienced the gung-ho pre- crisis days when banks were more willing to make bets on the market. “The appetite to take on a position is lower than it was pre- new regulation,” says Greg Gurevich, managing partner at Maritime Capital Partners, adding that compensation structures “do not reward the trader to take risk that may ultimately cost the trader his or her job”. The two main electronic trading venues for US Treasuries are run by Nasdaq’s eSpeed and Icap’s BrokerTec. In recent years these platforms have opened up to a range of broker-dealers and high- frequency traders. These firms do not underwrite US Treasury debt sales and are often viewed as opportunistic – providing prices when they spot a quick profit and then retreating when trading turns tricky.

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Customer orders are now transacted and almost instantaneously hedged, or offset, by computer systems – a type of automation that works well when trading is orderly but rapidly breaks down when the situation changes. At such moments, turning off the machines becomes a necessity. This contributed to the downdraft in liquidity on October 15. “Dealer-banks don’t really position in bonds,” said one head trader at a large US bank. “They basically act as a pass-through to places like BrokerTec and eSpeed or match off their client flow. The market-makers in this new market are not obligated to be there when everyone’s selling.” The worry is that even the highly dependable US Treasury market may suffer from sudden droughts in liquidity because big banks have been barred from “proprietary” trading. The “prop traders” could take the other side of huge customer demand to buy or sell bonds. “If the Street – for balance sheet, risk appetite and regulatory reasons – can’t provide a speed bump between buyers and sellers such as hedge funds and asset managers, then the Treasury market will experience a lot more jumps in trading,” says one trader. As the market becomes increasingly driven by electronic trading, more rules may be required to help deal with sudden violent swings, similar to the adoption of circuit breakers in stock markets. Prof Angel says: “The Treasury market is a freewheeling world where trading is not formalised like that of an exchange and where the use of circuit breakers can help steady activity.” These kind of curbs matter for markets that increasingly trade electronically and also influence other financial areas, such as derivatives and futures. A broader consequence of last month’s turmoil may be that Fed rate rises will be more likely to take the form of a series of slow steps, rather than big moves that run the risk of sparking turmoil in the bond markets, according to analysts. For the US Treasury, which is responsible for making sure budget deficits and maturing debt are refinanced smoothly, further episodes of turmoil could well impair the market’s ability to underwrite government debt efficiently, says Michael Cloherty, analyst at RBC Capital Markets. Mr Cloherty says the US Treasury market has altered structurally and lacks the depth to absorb easily surprises in Fed policy and changes in market sentiment. This trend has gathered pace as the central bank has become a major owner of Treasury debt through its emergency bond-buying programme, further limiting liquidity. He adds that any sign that the Treasury market’s liquidity has declined would cast a shadow over investor confidence – and may ultimately raise the cost of selling government debt. Says Mr Cloherty: “Investors know they can trade large amounts of Treasuries and any erosion of confidence in the market’s liquidity has long-term consequences.” Additional reporting by Gregory Meyer Investors fear fresh ‘value at risk shock’ The backbone of Wall Street’s risk management is a dauntingly complex mathematical model with the deceivingly banal name of “value-at-risk,” writes Tracy Alloway.

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VaR models have been a key component of the risk management toolboxes of big banks and funds for decades – despite being criticised for failing to predict the large losses incurred during the recent financial crisis. The models attempt to forecast how much money firms could lose from trading – within a certain timeframe and probability – by overlaying historic market movements with statistical analysis. Firms typically place internal trading limits based on their VaR estimates, meaning that if they breach the figure they may have to curb trading and, in extreme cases, sell off positions. With the shockwaves of late 2008 now gradually receding, and a period of low market volatility taking its place, these VaR models have been indicating that the risk of investors sustaining large losses is very low. That means investors may be subject to a so-called “VaR shock” in the event that volatility returns to markets. Some market participants say this is exactly what happened on October 15, when an abrupt repositioning across Wall Street resulted in dramatic swing in the price of US Treasuries. As yields dropped, the models deployed by active traders and the computer algorithms used by automated market-making machines – both of which tolerate far less volatility than in the past – began buying more Treasuries in order to stem their losses. Lower risk appetites at the biggest banks have “created the effect of reducing liquidity in trading securities . . . particularly during periods of stress,” Fitch Ratings said in a report on the day’s events. “This was demonstrated by the inability to trade fixed- income.” The rating agency estimates that the trading VaR of the major US banks had fallen about 66 per cent between the end of 2010 and mid-2014. While post-crisis reform efforts have encouraged banks to factor in “stressed VaR” models that incorporate more turbulent events into their capital requirements, concerns remain that the risk management tools could end up having the perverse effect of sparking market mayhem rather than helping to prevent it. “VaR-based analysis leads to self-reinforcing loops,” a group of banks warned in a presentation to the US Treasury weeks before October 15. “An unexpected increase in volatility might come from broad-based selling of assets wanting to de-risk in front of a turn of policy.” http://www.ft.com/intl/cms/s/0/cac64efe-6b34-11e4-ae52- 00144feabdc0.html#axzz3JJhkSkv5

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The spillovers of fiscal and monetary policies - it remains unclear whether emerging economies possess the tools to limit undue fluctuations by Jérémie Cohen-Setton on 18th November 2014 1147

OliOpi What’s at stake: Policymakers in emerging economies have repeatedly complained over the spillover effects of advanced economies’ policies in the Great Recession. As the Federal Reserve normalizes its policy, while the Bank of Japan and the ECB contemplate further easing, it remains unclear whether emerging economies possess the tools to limit undue fluctuations associated with these adjustments. Spillovers and coordination Olivier Blanchard, Luc Laeven and Esteban Vesperoni write that the understanding of transmission channels of spillovers has become essential, not only from an academic perspective, but also policymaking. Tweet This In a globally integrated economy, national economic policies generate international spillover effects Anton Korinek writes that in a globally integrated economy, national economic policies generate international spillover effects. In a theoretical paper, Korinek finds that the first theorem of welfare applies and that spillovers are efficient if three conditions are met: (i) national policymakers act as price-takers in the international market, (ii) national policymakers possess a sufficient set of policy instruments, and (iii) there are no imperfections in international markets. If any of the three conditions is violated, spillover effects generally lead to inefficiency, and global cooperation among national policymakers can generally improve welfare.

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David Wessel writes that if the central bank is pursuing policies that are demand- augmenting, it’s kosher. If these policies are demand-diverting, it is not. Although it’s an easy question conceptually, it’s a tougher question in practice. And it’s not only about looking at whether a government is intervening in the currency markets. When fiscal authorities are excessively tight fisted, there’s a temptation to cheer a depreciating currency and perhaps see it as a substitute for expansionary domestic policies. One might describe the recent behavior for ECB, unable to move fiscal policy and unable to move quickly on QE, as relying heavily on rhetoric to push down the euro. Spillovers from asynchronous exit strategies In its 2014 Spillover report, the IMF writes that normalization proceeding at different times in different advanced economies can have wider implications for interest and exchange rate movements. More-synchronized tightening cycles in the past were characterized by higher global interest rates and risk aversion, as well as modestly higher stress in sovereign bond and stock markets in emerging market economies. A less-synchronized tightening cycle this time would partly counteract the impact of higher interest rates from normalization elsewhere. Asynchronous adjustment may result in larger swings in exchange rates of major currencies that could cause problems for some economies with balance sheet vulnerabilities and foreign exchange exposures. Tweet This Normalization proceeding at different times in different advanced economies can have wider implications Barry Eichengreen and Poonam Gupta write that the ‘tapering talk’, which started in May 2013, had a sharp negative impact on economic and financial conditions in emerging markets. Based on a cross-country empirical exercise, the authors find that there is little evidence that countries with stronger macroeconomic fundamentals (smaller budget deficits, lower debts, more reserves, and stronger growth rates in the immediately prior period) were rewarded with smaller falls in exchange rates, foreign reserves, and stock prices starting in May. Variant perception writes that the BOJ is putting pressure on other Asian central banks. Their trade openness coupled with a strong appreciation of their currency is going to drag heavily on their growth prospects. Other Asian countries may soon start intervening more aggressively in managing their own exchange rates as a response. The macroprudential view of capital controls Julien Bengui and Javier Bianchi write that central banks in emerging markets have responded to the recent surge in capital inflows by pursuing active capital flow management policies. The hope is that current efforts to curb capital in flows will reduce the vulnerability of the economy to sudden reversals in capital flows. While this macroprudential view of capital controls has gained considerable ground in academic and policy circles, the debate about their effectiveness remains unsettled. In fact, a growing empirical literature argues that there are important leakages in the implementation of capital controls, casting doubt on the effectiveness of such policies in fostering macroeconomic and financial stability. Their analysis indicates that while leakages create risk-shifting in the unregulated sphere, a planner may, nonetheless, find it optimal to tighten regulation on the regulated sphere in order to achieve higher stabilization effects.

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Tweet This The magnitude of fiscal spillovers is likely to depend heavily on how exchange rates respond to fiscal shocks Barry Eichengreen and Andrew Rose write that we have little empirical knowledge of how the economy will operate if capital controls are adjusted at high frequency, since controls have historically been adjusted infrequently. Governments have rarely imposed or removed capital controls in response to short-term fluctuations in output, the terms of trade, or financial-stability considerations. Once imposed, controls stay in place for long periods. Once removed, they are rarely restored. Rather than fluctuating at a business cycle frequency, the intensity of controls tends to evolve over long periods in line with variables like domestic financial depth and development, the strength of democratic checks and balances, and the quality of regulatory institutions, which similarly evolve slowly over time. The exchange rate response to fiscal shocks Alan J. Auerbach and Yuriy Gorodnichenko write that the magnitude of fiscal spillovers is likely to depend heavily on how exchange rates respond to fiscal shocks. Using daily data on U.S. government military spending, they find hat unanticipated shocks to announced military spending, rather than actual outlays on military programs, lead to an immediate and tangible appreciation of the U.S. dollar. This finding is broadly consistent with a variety of workhorse models in international economics and it suggests that fiscal shocks can have considerable spillovers into foreign economies. At the same time, this finding contrasts sharply with the results reported in previous studies. Specifically, the earlier work routinely documented that the domestic currency depreciates in response to government spending shocks, which is hard to square with the predictions of classic and modern open-economy models. We argue that this difference in results is likely to arise from the mis-timing of shocks in previous papers and their use of actual spending rather than news about spending. http://www.bruegel.org/nc/blog/detail/article/1481-the-spillovers-of-fiscal-and- monetary-policies/

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Monetary vs. fiscal credibility in Japan - several commentators believe that backtracking on the consumption tax could cause a fatal loss in Japan’s fiscal credibility by Jérémie Cohen-Setton on 10th November 2014 12162448

Seita What’s at stake: The damage inflicted by the introduction in April of the first major tax increase in 17 years has led to calls for postponing the next scheduled raise in the consumption tax for fear that it would, otherwise, affect the credibility of the monetary regime change. But with a debt load that exceeds 240% of GDP, several commentators believe that backtracking on the consumption tax could cause a fatal loss in Japan’s fiscal credibility. Tweet This The funny thing is that both sides of this debate believe that it’s about credibility; but they differ on what kind of credibility Paul Krugman writes that the funny thing is that both sides of this debate believe that it’s about credibility; but they differ on what kind of credibility is crucial at this moment. Right now, Japan is struggling to escape from a deflationary trap; it desperately needs to convince the private sector that from here on out prices will rise, so that sitting on cash is a bad idea and debt won’t be so much of a burden. The pro-tax- hike side worries that if Japan doesn’t go through with the increase, it will lose fiscal credibility and that this will endanger the economy right now. The credibility of the monetary regime change Jacob Schlesinger writes that the anti-deflation quest would be easier if the government focused solely on that goal. It isn’t. The Finance Ministry’s top priority is curbing Japan’s outsize sovereign debt, prompting it to push through a sales-tax increase this past spring and seek another next year—even though the first set back the anti-deflation drive by depressing growth. Paul Krugman writes that Japan should be very, very afraid of losing momentum in the fight against deflation. Suppose that a second tax hike causes another downturn in real GDP, and that all the progress made against inflation so far evaporates. How likely is it that the Bank of Japan could come back after that, saying “Trust us — this time we really will get inflation up to 2 percent in two years, no, really” — and be believed? Stalling the current drive would cause a fatal loss of credibility on the deflation front. Jay Shambaugh believes the value-added tax is problematic because it makes the inflation data difficult to read.

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Kevin Drum writes that all three of the biggest central banks on the planet apparently are having trouble hitting even the modest target of 2% inflation. Are they unwilling or unable? Either way, the longer this goes on, the more their credibility gets shredded. In the past it's been mostly taken for granted that "credibility" for central banks was related to their ability to keep inflation low. Today, though, we have the opposite problem. Fiscal credibility: then and now Tweet This There is more art than science in determining what is fiscally sustainable for a large economy with its own currency Adam Posen writes that there is more art than science in determining what is fiscally sustainable for a large economy with its own currency. Takatoshi Ito has argued that a major reason there has not been a breakdown in or market attack on JGB trading up till now is because everybody knows you could eventually raise taxes. There is this room to raise taxes, in terms of the limited share of tax revenue in national GDP for Japan. But we are reaching the point where it is no longer a question of the Japanese government could do that when needed, but that the government should do that starting now. I do think that there is now a true market risk - not so much in the JGB market but in the Japanese equities market and in the yen exchange rate. Were the Abe government to hesitate too much or fail to commit this fall to raising the tax in 2015 as scheduled, much of the asset price gains seen in Japan since December 2012 would disappear, and credit would be disrupted. Adam Posen writes that Japan was able to get away with such unremittingly high deficits without an overt crisis for four reasons. First, Japan's banks were induced to buy huge amounts of government bonds on a recurrent basis. Second, Japan's households accepted the persistently low returns on their savings caused by such bank purchases. Third, market pressures were limited by the combination of few foreign holders of JGBs (less than 8 percent of the total) and the threat that the Bank of Japan (BoJ) could purchase unwanted bonds. Fourth, the share of taxation and government spending in total Japanese income was low. An experiment in fiscal consolidation with full monetary offset Brad DeLong understands the argument if what is being advocated is not just an increase in taxes but an increase in taxes coupled with full monetary offset in the form of additional monetary goosing. Gavyn Davies writes that under such a scenario the devaluation and monetary easing would compensate for the second leg of the sales tax increase from 8 to 10 per cent due next autumn, so nominal GDP would grow at least at a 3 per cent rate and the public debt to GDP ratio would start to decline. Tweet This Mr Abe should instead announce legislation for the tax to go up by one percentage point a year, for 12 years The Economist writes that Kuroda’s stimulus was intended to make it easier for the prime minister both to carry out structural reforms and also to raise the consumption tax. But private consumption is too weak for the economy to bear a tax rise right now. So Mr Abe should instead announce legislation for the tax to go up by one percentage point a year, for 12 years. The increases should start when the economy can bear it. That will not be next year. Gavyn Davies writes that following its most recent announcements the BoJ will now increase its balance sheet by 15 percent of GDP per annum, and will extend the average

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duration of its bond purchases from 7 years to 10 years. This is an open-ended programme of bond purchases that in dollar terms is about 70 percent as large as the peak rate of bond purchases under QE3 in the US.

Gavyn Davies http://www.bruegel.org/nc/blog/detail/article/1478-monetary-vs-fiscal-credibility- in-japan/

ft.com comment Columnists November 16, 2014 1:57 pm The wacky economics of Germany’s parallel universe

Wolfgang Münchau The Council of Economic Experts says nothing about investment. It wants Merkel to be tougher

©Bloomberg Scaling down: assembling a gas turbine propeller for a power plant at a Siemens factory in Berlin German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point. There are some overlaps with the various neoclassical or neoconservative schools in the US and elsewhere. But as compelling as

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a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny. German orthodoxy straddles the centre-left and the centre-right. The only party with some Keynesian leanings are the former communists. A good example of orthodox dogma was last week’s annual report of the Council of Economic Experts, an official body that advises the government. They did not criticise a lack of investment, excessive current account surpluses or overzealous fiscal rectitude. Instead they criticised the minimum wage and some minor relaxation to the retirement age. In other words: they want the government of Angela Merkel, chancellor, to be even tougher. More ON THIS STORY// Cameron warns of global economic risk/ Eurozone economy returns to growth/ Video Eurozone - lost in stagnation/ Editorial Europe’s unbalanced answer to weak growth/ The A-List Juncker must steer recovery ON THIS TOPIC// The Short View Germany’s post-Berlin Wall performance/ Germany may dodge recession data suggest/ Chemnitz’s journey back from the brink/ Lorenzo Bini Smaghi Germany needs to spend WOLFGANG MÜNCHAU// Euro is in peril/ Eurozone stagnation/ Germany’s weak point/ Europe’s recovery dream The Germans have a name for their unique economic framework: ordoliberalism. Its origins are perfectly legitimate – a response of Germany’s liberal elites to the breakdown of liberal democracy in 1933. It was born out of the observation that unfettered liberal systems are inherently unstable, and require rules and government intervention to sustain themselves. The job of the government was not to correct market failures but to set and enforce rules. After 1945, ordoliberalism became the dominant economic doctrine of the centre-right. In the 1990s, the Social Democrats started to embrace it, culminating in Gerhard Schröder’s labour and welfare reforms in 2003. Today the government is ordoliberal. The opposition is ordoliberal. The universities teach ordoliberal economics. In the meantime, macroeconomics in Germany and elsewhere are tantamount to parallel universes. In practice, German macroeconomic exceptionalism did not really matter all that much – until recently, when it started to matter a lot. When you have your own currency and engage with the rest of the world mainly through trade, a wacky ideology is your problem. That changes when you enter a monetary union, which is when policy makers have to work together. Nobody had paid much attention to this issue. Much of the early theoretical discussion about the eurozone centred on the notion of an optimal currency area: which countries are fit to join a monetary union? What turned out to be far more important is a common understanding that allows people to communicate and act with one another. For example, German ordoliberals simply refuse to acknowledge the presence of a liquidity trap where the central bank becomes powerless in affecting market interest rates. Ludwig Erhard, Germany’s revered economics minister in the 1950s, once tried to explain the Great Depression in terms of cartels. It was an ordoliberal attempt to bring something into their mental framework for which they have no obvious explanations. Erhard’s successors repeated the mistake in the eurozone crisis, which they see as a story of fiscal indiscipline.

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Right now there are three fundamental issues with ordoliberalism that are of wider importance. First, ordoliberals have no coherent policy to deal with depressions – once or twice in a century disasters. Whenever I ask one of them what one should do in a depression, the answer usually includes some reference to “creative destruction”. Second, ordoliberals lack their own coherent monetary policy framework. They used to be Monetarists. Their position today is mostly inconsistent. My third criticism is more fundamental. It is far from clear whether ordoliberal dogma translates from a relatively small open economy like Germany to a large closed one like the eurozone. The ordoliberal world view is asymmetric. Current account surpluses are considered more acceptable than deficits. Since the rules are based on national law, ordoliberals do not care about their impact on the rest of the world. When they adopted the euro, the rest of the world suddenly did start to matter. The ordoliberal doctrine may even have worked well for Germany, though I suspect that the country’s economic success is due mostly to technology, high skills and the presence of some excellent companies, rather than to economic policy. Through its dominance of the euro system, Germany is exporting ordoliberal ideology to the rest of the single currency bloc. It is hard to think of a doctrine that is more ill suited to a monetary union with such diverse legal traditions, political system and economic conditions than this one. And it is equally hard to see Germany ever giving up on this. As a result the economic costs of crisis resolution will be extremely large. http://www.ft.com/intl/cms/s/0/e257ed96-6b2c-11e4-be68-00144feabdc0.html#axzz3JJhkSkv5

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ANTONIO FATAS ON THE GLOBAL ECONOMY SUNDAY, NOVEMBER 16, 2014 German economic policy and chameleons Wolfgang Munchau's FT article today is one of the most complete explanations I have seen about the origin and contradictions of the German economic orthodox dogma. The only issue that he does not address is how these economic views have survived over time despite the increasing evidence that their advice does not deliver the expected results.

Here is my guess from what I have learned from many heated discussions over the last years about economic policy in Europe: the resilience (stubbornness) of this view on economic policy comes from a combination of faith and the inability of the economic profession to apply enough real world filters to models. Faith in a certain economic model comes from many years of being trained about the beauty of markets and all the inefficiencies that governments generate. But faith also comes from the belief that only through (individual) hard work and sacrifice (saving) one can achieve any economic progress. In this world (what Wolfgang Munchau refers to as Germany's parallel universe) there is no room for an economic crisis caused by lack of demand. Recessions only take place as a result of misbehavior, debt and lack of willingness to work hard (and reform). The only way to get out is to behave. But faith alone might not be enough, policy makers and their advisors are required to look at the data and check how their priors allow them to understand economic outcomes. Here is where the economics profession and its ability to hide under economic models that have little empirical relevance provide the necessary support. A recent paper by Paul Pfleiderer about the misuse of theoretical models in finance and economics explains this logic very well. Many economic models are used in ways that make them "chameleons", they do not go through any real world filter and they fight back their criticisms with the argument that "the empirical-test jury is still out". In other words, we start with unrealistic assumptions, we generate a result that fits what we are looking for, we do not find evidence to support it but we can always claim that the evidence cannot conclusively reject the model either and we continue using the model for our economic policy advice. So it is faith and the use of "chameleon" models that keeps the stubbornness of the German economic policy advice alive in Europe. And while this is going on, the Euro fatigue and discontent in many European countries keeps growing and polarizing the political landscape. The next round of elections will be an interesting test for the Euro/EU project. http://fatasmihov.blogspot.com.es/2014/11/german-economic-policy-and- chameleons.html

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November 16, 2014 David Warsh, Proprietor

The Fourth Generation in Chicago

CHICAGO — A remarkable conjunction occurred here last spring, somewhere between a concatenation and coincidence. Gary Becker, of the University of Chicago, died unexpectedly, in May, at 83, from complications following ulcer surgery.

In June, Glen Weyl, 29, anointed Becker’s successor as expositor of Chicago’s most distinctive tradition, published a prospectus for “A Short Summary of Price Theory.”

That same month, the Department of Economics moved from hand-me-down quarters to a newly refurbished building of its own, complete with cloud-capped tower, nevertheless dwarfed by the gleaming Booth Graduate School of Business kitty-corner across the street.

Price Theory is Dead! Long Live Price Theory!

At a two-day conference last month convened to celebrate Becker’s life and work, the emotional tumult of the moment was on full display. It is hard to exaggerate the extent to which Becker was admired as an exemplar of the Chicago style. Not only had he converted the world to his point of view; he had stayed the course.

Others had died or moved away; Becker conducted a successful battle against cancer and, when Business Week shut down a popular monthly column he had written for nearly twenty years, he effortlessly moved to the Web and conducted an even more successful weekly colloquy, the Becker-Posner Blog, with his friend and neighbor US Seventh Circuit Court Judge Richard Posner. His physician had told him on the eve of surgery to expect to live another decade.

Papers, panels, a downtown dinner, a distinguished lecture and a memorial service in Rockefeller Chapel testified to Becker’s personal qualities and professional influence. He arrived in Hyde Park from Princeton as a graduate student in 1951, and returned, from Columbia University, as a full professor, in 1970.

“Gary Becker is the greatest social scientist who has lived and worked in the last half century,” Milton Friedman declared when he introduced Becker at a university award ceremony in 2001. George Stigler, who knew the history of economics better than Friedman, is said to have agreed, adding only that it wasn’t much of a century. James

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Heckman, conference co-organizer (with Edward Lazear, of Stanford University), went further in a talk a couple of years ago, comparing Becker to Sir Isaac Newton. (More of that in a moment.) Friedman, Stigler, Becker and Heckman all received the Nobel Prize in economics.

Becker was leader of the third distinct generation of Chicago price theorists, “price theory” being a proud Chicago term. Microeconomists, as they are known in the more widely-used parlance of the profession, are those who study why particular prices and particular markets are what they are, as opposed to macroeconomists, who concern themselves with the overall performance of the whole. Robert Lucas, Chicago’s preeminent macroeconomist? He’s another story.

The first generation of Chicagoans, dating from the 1920s and ’30s, was dominated by price theorists Frank Knight (1885-1972) and Jacob Viner (1892-1970), legends of the university whose Chicago years are all but lost to living memory Separately, they sought to sort through the contradictions in Alfred Marshall’s Principles of Economics, the great Victorian text that dominated economics for THE fifty years after 1890. The cantankerous Knight assigned a central role in economic life to entrepreneurs; the erudite Viner emphasized the smooth interplay of the forces of supply and demand.

The second generation, from the ’50s and ’60s, featured Friedman and Stigler. Friedman enlarged the profession’s appreciation of the role of money. Stigler developed an extensive theory of regulation that highlighted the tendency of the regulated to “capture” their regulators and bend them to their will. From the Chicago Law School, Ronald Coase, another Nobel laureate, devised (and Aaron Director taught) a parallax perspective that was proved influential in bringing economic analysis into law. .

The third generation, represented by Becker and Sherwin Rosen, who died, at 62, in 2001, extended Chicago’s influence deeper into labor markets and the nooks and crannies of everyday life. Beginning in 1957, with a landmark study of the economics of racial discrimination, Becker pursued the logic of choice into many non-market areas: the study of schooling (and what came to be called human capital; marriage; the family; crime and punishment; the role of preferences; and religion. He taught sociology as well as economics. The Economist called him the Great Trailblazer.

Meanwhile, his colleagues Heckman and Robert Fogel (also a Nobel laureate) plunged deeper into cognitive psychology, physiology and medicine, building out Chicago’s well-established taste for empiricism. Economists will be passing through the newly- created (and well-funded) Becker-Friedman Institute in growing numbers. Becker, never averse to speaking plainly about the Chicago perspective, often used to put it this way: free markets do a good job.

What about the fourth generation? In addition to Weyl, representatives include Kevin Murphy, an all-rounder who co-taught with Becker for many years; Steven Levitt, author of Freakonomics, and John List, a pioneer in the new art of field experiments, carefully designed investigations of various interventions in the real world. But it is

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Weyl, a prodigy Chicago hired out of Harvard University’s Society of Fellows, who is expected to have the greatest impact on price theory itself.

How? There’s neither time nor space for that here. Besides, that working paper Weyl put up on the Social Science Research Network is little more than a summary of an article five times as long that he is preparing at the request of the Journal of Economic Literature. But here’s a taste of how he proposes to unify price theory by showing how Chicago-style empiricist methods and game-theoretic “reductionist” methods amount, in the end, to the same thing.

This emphasis on simplification through aggregation is familiar from other sciences, particularly thermodynamics in physics. While the “reductionist” classical mechanics developed by Newton (1687) are widely acknowledged to have revealed the mechanisms exploited productively during the industrial revolution, his techniques were only capable of analyzing the behavior of one- or two-body systems. To optimize the extraction of power from bodies with many interacting particles, like the steam engines discovered through “empiricist” experimentation in the 18th century by James Watt, Carnot (1824) devised thermodynamics. This field summarized many of the detailed “micro-states” of such systems into a small number of “macro-states” sufficient for determining the energy that could be extracted by such a heat engine. Price theory originates in the work of Jules Dupuit, a schoolmate of Carnot’s. Dupuit (1844) defined similarly parsimonious summaries (such as consumer surplus and deadweight loss) sufficient to determine the maximum social value that could be achieved by placing the bridges over which railroads powered by Carnot’s engines would travel.

The mathematics of thermodynamics, as devised by Willard Gibbs and others in the late nineteenth century, has been a staple of economics as practiced at the Massachusetts Institute of Technology (and, soon thereafter, by most everywhere else but price-theoretic Chicago) for nearly 75 years. And set theory, as applied by John von Neumann to describe quantum mechanics, was adapted by John Nash in 1951 to illuminate the sorts of choices that interested Becker, albeit at a very high level of abstraction. (Oskar Morgenstern, von Neumann’s collaborator on their 1944 Theory of Games and Economic Behavior, was among Becker’s Princeton teachers.) So fasten your seat belts. The history of economics – and the history of Chicago economics, in particular – is about to take another turn.

What will it look like when it has been worked through and boiled down to columns in newspapers and magazines? Chances are it will still resemble the Chicago that we know. In a recent issue of The New Republic, Weyl and Chicago law professor Eric Posner (yes, he is the judge’s son) propound A Radical Solution to Global Inequality: Make the US More Like Qatar.

Open immigration seems unlikely to take the US by storm any time soon. But then they all laughed at Gary Becker, too.

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. xxx

Robert Solow, of the Massachusetts Institute of Technology, was chosen by President Barack Obama to receive the Presidential Medal of Freedom, the United States highest civilian honor – along with actress Meryl Streep, singer Stevie Wonder, and sixteen other worthies. Becker received the same award, from George Bush in 2007, with novelist Harper Lee and molecular biologist Francis Collins, among others. Both Solow and Becker graduated, eight years (and worlds) apart, from Brooklyn’s extraordinary James Madison High School.

http://www.economicprincipals.com/issues/2014.11.16/1664.html

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VOX CEPR's Policy Portal Research-based policy analysis and commentary from leading economists

TTIP is about regulatory coherence Lionel Fontagné, Sébastien Jean16 November 2014 The TransAtlantic Trade and Investment Partnership (TTIP) has become a full-blown political issue as the two largest economic entities in the world are negotiating a deep integration agreement, going beyond what has been done previously in any agreement except the EU’s Single Market. This column estimates that a phasing-out of tariffs accompanied by a 25% cut in the trade restrictiveness of non-tariff measures would increase trade in goods and services between the two regions by 50%. The TransAtlantic Trade and Investment Partnership (TTIP) negotiations have become a full-blown political issue. This is understandable. The two largest economic entities in the world – already highly integrated – are negotiating a deep integration agreement, going beyond what has been done previously in any agreement except the EU’s Single Market programme. This makes TTIP different. Can economists say anything about the likely economic impact of such an agreement? Size is not what you think Much has been said about the size of the two economies which together account for almost half of world GDP and a third of world trade. However, the TTIP is to some extent a desperate attempt by both the EU and the US to retain as much as possible their leadership in world trade. • Strictly speaking, TTIP would only affect bilateral trade between the EU and the US, which in 2011 represented 4.4% of world trade. Indeed, the EU-US share in world trade has declined sharply in this century. This is to be compared with the corresponding figure for the ASEAN+6 countries of 16%. • On current trends, the EU and the US would jointly account for only 22% of world trade in 2035, compared to 37% for ASEAN+6, and trade between ASEAN+6 members (17%) would dwarf that between transatlantic partners (2.4%). TTIP will not reverse this, but it may allow the signatories to continue to play leading roles in world trade through the setting of norms, standards, and other rules. This is precisely what the TTIP is about – establishing coherence among existing rules and finding ways of defining new rules in common. Note that the TTIP should be thought of as a continuation of a long-standing – although less visible – effort to progress on the regulatory front. Several targeted agreements have been signed, including the US-EC Mutual Recognition Agreement and its six sector annexes in 1998, the US-EC understanding on Safe Harbor Principles for Data Privacy Protection in 2000, and many other examples. A number of institutions have been built to foster dialogue and cooperation including the Transatlantic Business Dialogue, the Transatlantic Consumer Dialogue, and the Transatlantic Economic Council set up in 2007, in the wake of what has come to be known as the “Merkel initiative” for a new transatlantic partnership. 119

A new type of negotiations challenging economists Tariffs applied to partner exports are low (on average) on both sides, i.e. 2% in the US and 3% in the EU. Some tariff peaks for sensitive products persist (mainly among dairy products, clothing, footwear, and steel items for the US, and meat products in the EU). Phasing out those tariffs will meet internal resistance but is not a big deal at the macroeconomic level. More important are the non-tariff measures that must be negotiated, such as regulation of services, transport, public procurement, geographical indications, and investment. Two emblematic issues – chlorine-rinsed chicken and investor-state dispute settlement – are raising fears in Europe of a downgrading of standards, or even worse, the possibility of foreign influence being imposed on domestic constituencies. Not to speak of public services, audio-visual services, communications and data security which were excluded from the beginning. Non-tariff measures include import bans, certification requirements for a variety of products ranging from toys to cars to pacemakers, information on the properties of chemical substances, labelling and packaging requirements, upper limits on the concentrations of pesticide residues, and meat traceability requirements. In most cases, the corresponding regulation has a legitimate purpose, such as ensuring consumer information, improving product safety, or preserving the environment. However, cross- country differences related to these measures can deliberately or not, impose additional costs on exporters. Some of these costs may be caused by substantial differences, others may be the result of different application modalities, whether certification methods, labelling requirements, or ways of measuring technical characteristics. There are different ways to address these regulatory issues. Differences in technical standards to an extent can be resolved by mutual recognition. There are already mutual recognition agreements in place for seven areas (e.g. medical devices), that is, certification provided on one side of the Atlantic is valid on the other side. This prudent approach has not proved entirely satisfactory, and the private sector is eager to embark on a real mutual recognition of standards. Mutual recognition becomes especially problematic in the area of sanitary and phytosanitary measures, which often mirror collective preferences. In fact, even the conservative approach of mutual recognition of accreditation bodies is not part of the existing agreement on food products. In the case of food products, the simple formula “what’s good for us is good for you” does not apply between Europe and the US. Quantitative assessment Such a multifaceted negotiating agenda includes a number of areas that are not easily quantified. Economic modelling can be used to evaluate the economic consequences of an agreement in relation to both tariffs and the provisions related to non-tariff measures, including regulation of the services sectors (see Baldwin and Francois 1997 for a pioneering evaluation). Fontagné et al. (2013) conduct an assessment using MIRAGE, a Computable General Equilibrium model of the world economy developed by CEPII. While the TTIP’s beyond-tariff changes are complex and varied, this wide-ranging exercise relies upon strong simplifying assumptions about these measures and their trade consequences, as reflected in econometric estimates of their trade restrictiveness. Our central scenario combines a progressive but complete phasing-out of tariff protection accompanied by an across-the-board 25% cut in the trade restrictiveness of 120

non-tariff measures, for both the product and service sectors but excluding public and audio-visual services. The simulations suggest that trade in goods and services between the two signatory regions would increase by half as a result of the agreement, with an even larger impact on agriculture. We detect little trade diversion induced by the TTIP (Table 1). Table 1. Reference scenario - Long term impact on TTIP on bilateral exports (%)

Note: trade in volume, percentage deviation from baseline in 2025. Source: Fontagné et al. (2013). Overall, the EU and the US would achieve similar GDP gains (+0.3%). These figures are more conservative than but not qualitatively different from those in the European Commission study published in March 2013 (resp. 0.5% and 0.4%, see CEPR 2013). The main conclusion lies elsewhere. Eighty percent of trade expansion, and more than 90% of real income gains, would come from non-tariff measure cuts. Regulatory coherence is the central issue. Regulatory coherence is what matters The effect of non-tariff measures on trade flows can be assessed econometrically and we can infer from this a fictitious import tariff rate that would reduce imports by the same amount as the non-tariff measure. Our baseline assessment makes use of two sources, Kee et al. (2009) for trade in goods, and Fontagné et al. (2011) for cross-border trade in services. We refer here to protection levels ranging from 30% to 50%. Ad- valorem equivalents based on a large-scale business survey compiled by Ecorys (2009) for the European Commission, point to higher levels in agriculture, lower levels in

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manufacturing, and significantly lower levels in services. The estimated impact changes when alternative measures of the trade restrictiveness of non-tariff measures are used (Table 2). In fact, much more research is needed for a better understanding of the economic impacts of non-tariff measures. However, existing studies suggest that the trade and welfare impacts of non-tariff measures are large and generally outweigh the impacts of tariffs. Table 2. Alternative scenarios – Impact on total exports

Note: trade in volume, percentage deviation from baseline in 2025. Alternative non-tariff measures as in CEPR (2013). Source: Fontagné et al. (2013). Trade policy has no legitimacy to modify regulation choices regarding food safety, financial stability, or air pollution, for instance. Accordingly, policymakers, so far, have been very clear that such choices will not be affected by the agreement. Thus, regulatory systems on both sides of the Atlantic must be made more cooperative and consistent, while avoiding undue interference with collective choices born out of well-established institutional systems. This will be challenging. But the potential reward may be worth the negotiating pain. References Baldwin R. & Francois J. (1997), Preferential Trade Liberalization in the North Atlantic, CEPR Discussion Paper 1611. CEPR (2013), Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment, Report for DG Trade, March. Ecorys (2009), Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis, Study for the European Commission, DG Trade. Fontagné L., Gourdon J. & Jean S. (2013) Transatlantic Trade: Whither Partnership, Which Economic Consequences? CEPII Policy Brief, 2013-01. Fontagné L., Guillin A. & Mitaritonna C. (2011), “Estimations of Tariff Equivalents for the Services Sectors”, CEPII Working Paper 2011-24. Kee H., Nicita A. & Olarreaga M. (2009), Estimating Trade Restrictiveness Indices, Economic Journal 119: 172-199. http://www.voxeu.org/article/ttip-about-regulatory-coherence

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mainly macro Comment on macroeconomic issues Sunday, 16 November 2014 Can we have our instrument back? This is a rather long post about how one of the instruments of macroeconomic policy has been taken away, and replaced by a fetish about government deficits. It is not technical. The latest Bank of England forecast has inflation returning to the 2% target by the end of 2017, which is in three years time. That is an unusually long time to be away from target. So what is the MPC proposing to do about this long lapse from target? Absolutely nothing. Tony Yates goes through all the detail, but remains mildly shocked. Much the same thing is happening in the US. In both countries the main discussion point is not what to do about this prolonged target undershoot, but instead when interest rates will rise. Two members of the MPC are voting to raise rates now! [1] Cue endless discussion about whether the Bank or Fed think Quantitative Easing does not work anymore, or has become too dangerous to use, or whether the target is really asymmetric - 1% is not as bad as 3%. [2] All this is watched by a huge elephant in the room. We have a tried and tested alternative means of getting output and inflation up besides monetary policy, and that is called fiscal policy. We teach students of economics all about it - at length. But in public it has become like the family’s guilty secret that no one wants to talk about. Once upon a time (in the 1950s, 60s and 70s) governments in the US, UK and elsewhere routinely used both monetary and fiscal policy to manage the economy. Governments did not stop using fiscal policy for this end because it did not work. Instead they found, and economists generally agreed, that when exchange rates were not fixed monetary policy was a rather more practical (and probably more efficient) instrument to use. They certainly did not stop using it because it caused the rise in inflation in the 1970s. That rise in inflation was the result of oil price shocks, combined with in many countries real wage resistance by powerful trade unions, and policy misjudgements involving both monetary and fiscal policy. When, in the previous paragraph, I wrote ‘economists generally agreed’, I am talking about what could be described as the academic mainstream. However there were also two important minority groups. One, and the less influential, argued that the mainstream was wrong, and fiscal policy was better than monetary policy at stabilising demand. The other, often among those labelled monetarist, not only took the opposite view, but had a deep dislike of using fiscal policy. For example, many believed its use would be abused by politicians to increase the size of the state (and almost all in this group wanted a smaller state). For some there was the ultimate fear that politicians would run amok with their spending, which would force central banks to print money, leading to hyperinflation - we can call this fear of fiscal dominance. However, as I noted above, the rise in global inflation in the 1970s was not an example of fiscal dominance. I shall use the label ultra-monetarist for this second group: ultra, because it is not clear Friedman himself would be among this group. These minorities aside, the mainstream consensus was that monetary policy was the instrument of choice for managing demand and inflation, but that fiscal policy was always there as a backstop. So, when Japan suffered a major financial crisis and entered a liquidity 123

trap (interest rates fell to their Zero Lower Bound (ZLB)), the government used expansionary fiscal policy as a means of moderating the recession’s impact. At the time the results seemed disappointing, but following the experience of the Great Recession Japan’s performance in the 1990s does not look so bad. The key event that would eventually change things was the creation of the Euro. For countries within the Eurozone, monetary policy was set at the union level, so to control demand within each country fiscal policy was the only instrument left. Unfortunately the influence of ultra-monetarists within Germany had always been very strong, and for various reasons the architecture of the Eurozone was heavily influenced by Germany. This architecture essentially ignored the potential use of the fiscal instrument. Instead the influence of monetarism led to what can best be described as deficit fetishism - an insistence that budget deficits should be constrained whatever the circumstances. Within the Eurozone individual governments no longer had their own central banks who could in extremis print money. The worry among the ultra-monetarists who helped design the Eurozone architecture was that some rogue union members would force fiscal dominance on the union as a whole, so they put together fiscal rules that limited the size of budget deficits. This was both unnecessary, and a mistake. It was unnecessary because the Eurozone set up a completely independent central bank, and made fiscal dominance of that Bank illegal. It was a mistake because it completely ignored the issue of demand stabilisation for countries within the Eurozone - in practice it either took away the fiscal instrument (in a recession) or discouraged its use (in a boom [3]). While the design of the Eurozone reflected the obsessions of ultra-monetarists within Germany, in the rest of the world the academic mainstream prevailed. So when the financial crisis hit, and interest rates fell to the ZLB across the globe, governments in the UK and US again used fiscal stimulus as a backup instrument to moderate the recession. The IMF, normally advocates of fiscal rectitude, concurred. The policy worked. But two groups were not happy. The ultra-monetarists of course, but also many politicians on the right, whose main aim was to see a smaller state, and who saw deficit reduction as a means to achieve that goal. Both groups began to warn of the dangers of rising government debt, which was rising mainly because of the recession, but also because of fiscal stimulus where that had been enacted. What happened next was that the Eurozone struck back, although not in a calculated way. It turned out that it did contain just the kind of rogue state the architects had worried about: Greece. The fiscal rules failed to prevent excessive Greek government borrowing. Did this lead to fiscal dominance and hyperinflation in the Eurozone? - of course not, for reasons I have already given. But it did lead governments in the Eurozone to make a fatal mistake. What should have happened, and always does happen to governments that borrow too much in a currency they cannot print, is that Greece should have immediately defaulted on its debt. But instead Greece was initially encouraged to borrow from other Eurozone governments, perhaps because some countries worried that default might lead to contagion (the market would turn on other countries), but perhaps also because default would have hit commercial banks in the larger Eurozone countries who owned this Greek debt. Eventually contagion happened anyway, and Greece was forced into partial default, although not until it had taken the poison of loans from other Eurozone countries which were conditional on crippling austerity. Equally important was the impact that Greece had on the use of fiscal policy in the rest of the world. Those ultra-monetarists and right wing politicians that had been warning of a government debt crisis used the example of the Eurozone to say that this proved them right. Many (but not all) economists in the mainstream began to believe it was time to reverse the fiscal stimulus, as did the IMF. 124

From that point on, the idea that you could - and when monetary policy became ineffective should - use fiscal policy to stimulate the economy became lost. Even in 2009 it had been a difficult policy to sell publicly: why should government be increasing debt at a time that consumers and firms had to reduce their own debt? For those who had not done an undergraduate economics course (which included most political journalists), politicians of the right who said that governments should act like prudent housewives appeared to be talking sense. Greece and the subsequent Eurozone crisis just seemed to confirm this view. Deficit fetishism became pervasive. Of course this about turn was just what both ultra-monetarists and politicians on the right wanted. The focus on government debt had an additional advantage in certain influential quarters. What had started out as a crisis caused by inadequate regulation of the financial sector began to appear as a crisis of the government’s making, which if you worked in the financial sector which had just benefited from a massive public subsidy was a bit of a relief. You could be really cynical, and say that austerity made room for another big financial bailout when the next financial crisis hit. But those with a more objective perspective watched the years after 2010 unfold with growing concern. There were no government debt crises in the major economies outside the Eurozone - instead interest rates on government debt fell to record lows. The market appeared desperate to lend governments money. The debt crisis was confined to the Eurozone. However austerity within the Eurozone, undertaken across the board and not just in the crisis economies, did nothing to end the crisis. The crisis only ended when the ECB offered to back the debt of the crisis countries. The offer alone was enough to halt the crisis, and interest rates on periphery country debt started to fall substantially. But austerity’s damage had been done, creatinga second Eurozone recession. The fiscal policy instrument works, even when you use it in the wrong direction! Austerity delayed the UK’s recovery, and while growth was solid in the US, austerity there too meant that the ground lost as a result of the recession was not regained. So those with a more objective perspective, including many in the IMF, began to realise the fiscal policy reversal in 2010 had been a big mistake. The world had been unduly influenced by the rather special circumstances of the Eurozone. Furthermore within the Eurozone the crisis that austerity had meant to solve had actually been solved by the actions of the ECB. It began to look as if austerity - in perhaps a milder form - had only been required in a few periphery Eurozone countries. All this should have meant another policy switch, at least to end fiscal austerity and perhaps to return to fiscal stimulus. But deficit fetishism had taken hold. This was partly because it suited powerful political interests, but it was also because it had become the pervasive view within the media, a media that liked a simple story that ‘made sense’ to ordinary people. Politicians who appeared to deviate from the new ‘mediamacro consensus’ of deficit fetishism suffered as a consequence. So as 2014 ends, we have at best an incomplete recovery and inflation below targets, yet central banks are either not doing enough, or have given up doing anything at all. A huge amount of ink is spilt about this. But if central banks really do believe there is nothing much they can do, with a very few exceptions they fail to say the obvious, which is that it is time to use that other instrument, or at least to stop using it in the wrong direction. Perhaps they think to say this would be ‘too political’. The media in the UK and US continue to obsess about government deficits, even though it is now clear to almost everyone with any expertise that there is no chance of a government funding crisis, so the obsession is completely misplaced. Within the Eurozone deficit fetishism has achieved the status of law!

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There are some who say we cannot use the fiscal instrument to help the recovery, and get inflation on target, because debt will become a problem in 30 years time. It is as if a runner, who normally gets their fuel from eating carbohydrates but has run out of energy in mid- race, is denied a food with sugar (HT Peter Dorman) because a high sugar diet is bad for you in the long term. Others in the Eurozone say we must stick to the rules, because rules must be kept. But rules that create recessions with no compensating benefits are bad rules, and should be changed. Rule makers can make mistakes, and should learn from these mistakes. [4] It is perfectly possible to design rules that both ensure long term fiscal discipline, but which do not throw away the fiscal instrument when it is needed. So every time someone writes something about what monetary policy could or should do to get inflation back to target, they should say at the outset that this goal could be achieved - in a more assured way - by a more expansionary fiscal policy. Political journalists who presume that more borrowing must be bad should get a severe telling off from their economist colleagues. For one thing that should now be clear is that rising debt since the recession has done no harm, but austerity policies that tried to tackle rising debt have done considerable damage. The 2010 Eurozone crisis was a false alarm. Macroeconomics needs to get its fiscal instrument back, and deficit fetishism has to end, but this is being prevented by an alliance between the political right, the ultra-monetarists, and I’m afraid the media itself.

[1] In the UK there is a certain irony here. When inflation was above target in 2010-13, most of the MPC was brave enough to avoid raising rates. Although they forecast that inflation would come back to 2% within two years, this forecast was met with considerable skepticism. Three members of the MPC in 2011 voted to follow their ECB colleagues and raise rates. Perhaps as a result, the Treasury wrote a paper in 2013 which said that on occasions like that (when inflation was above target in a recession) the MPC could be a little more relaxed about the speed at which inflation returned to target. The irony is that this latitude is being used (abused?) now, when inflation is below target and we are still recovering from a recession. [2] Maybe in the US the target is asymmetrical - but shouldn’t be - but in the UK it is symmetric by law. [3] In a boom, when fiscal policy should have been contractionary, budget deficits were low as a result of the boom, so the rules suggested no action was required. [4] Equally those that lent money when they should not have lent money have to accept that they made a mistake. http://mainlymacro.blogspot.in/2014/11/can-we-have-our-instrument-back.html

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Letting the Data Speak Frank de Libero When the Gini Index Is Redundant Posted on November 14, 2014 by Frank de Libero The Gini Index as a measure of income inequality is redundant when using U.S. Census Bureau’s household income statistics, at least at the national and state levels. That Gini index is fully determined and can be replaced by the household income share of the fifth centile. The Census Bureau has measured household income since 1967. Over those 47 years it has calculated the Gini index, a widely used measure of income inequality. Here’s a graph of that Gini index from the beginning to the most current data.

You’ve probably already seen a similar graph. But for emphasis, income inequality measured by the Gini index has been increasing on average since 1969. Also note that a step occurred between 1992 and 1993 because of a change in survey methodology related to top-coding.1 Regardless, except for variability the trend is upward, income inequality is getting worse over time. In spite of its wide use, among the problems with the Gini index is that it’s not readily interpretable. It’s a synthetic index, Thomas Piketty’s designation in Capital in the Twenty-First Century. It’s just a number. You can use it to compare to similarly derived numbers or observe that it’s trending but beyond that (partitioning for example) will most likely require learning new quantitative skills. We can easily do better than that. Among the Census Bureau’s yearly income statistics are percentage shares of household income by quintiles plus the top five percent. It turns out that over those same 47 years, the percentage share of the top or fifth quintile determines the Gini index. The R-square value for this relationship is 0.9994 (where 1.0 is perfect determination). In short, the percentage share of the fifth quintile is equivalent to the Gini index. And it’s readily interpretable! For example, in 2013 the fifth quintile was 51.0, that is the top 20% of the income distribution took in 51% of all income for that year. I also looked at the same relationship but over the 50 states for the year 2013. That relationship was similar but with a bit more variability; the R-square was 0.987. I’d expect that kind of relationship to hold for other years as well. I didn’t try it at the county level but except for a further increase in variability due to smaller populations, I’d expect the association 127

to continue to be robust. On the other hand, I have no idea how a similar relationship would perform in other countries that use the Gini (many don’t). However in the U.S., the Census Bureau is the main source of income data including the Gini index and share of income so substituting the top quintile for the Gini is useful because it’s readily available, makes sense, and lends itself to interpretation. In 2013, the mean income for the top quintile was $185K, compared to average income for the fourth quintile of $84K, a significant difference of $101K. Also, the fifth quintile averaged over the last few years captured 51% of total income compared to a 43% average income share in the beginning of the timeline. As an inequality measure, the percentage share of the highest quintile is accessible and understandable. And it makes sense. The following graph shows the rise of the fifth quintile while the other four quintiles declined, the four being combined in the graph for visual clarity.

O nce graphed you can readily see what’s happening. And of course if you want to, you can use the Census tables to break it down further.2 The Gini index is commonly used so you can’t just ignore it. But if you use U.S. income data and need to discern inequality and why it is what it is, you are better served using the percentage income share of the fifth quintile and related data. Notes 1. See Daniel H. Weinberg, “A Brief Look at Postwar U.S. Income Inequality,” June 1996, http://www.census.gov/prod/1/pop/p60-191.pdf. Also of interest, the first page shows family income inequality (instead of household) which begins with 1947: from 1947 to circa 1968 inequality declines. 2. The data used for the three graphs are avilable here as an Excel spreadsheet. ↩ Search terms, what precedes the parentheses, for the original Census tables are: H02AR 2013 (share aggregate income by fifths), H03AR 2013 (mean HH income by fifths), Census H04 2013 (Gini index). State data can be obtained via FactFinder, tables B19081 (mean income) and B19083 (Gini). http://www.lettingthedataspeak.com/when-gini-is-redundant/ ↩

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Del cabreo ciudadano y el futuro de Podemos ¿El electorado de Podemos formará un grupo durable en el tiempo o puede ser fugaz? Un examen del perfil de opinión pública de sus potenciales votantes muestra que puede ser un electorado para más allá de la crisis. Sandra León 17/11/2014 - 23:39h Las últimas encuestas sobre intención de voto indican que Podemos puede acabar entrando por la puerta grande en el Congreso de los Diputados en las próximas elecciones generales. Este anunciado terremoto electoral puede ser interpretado por algunos como la prueba definitiva de que el fenómeno Podemos ha llegado para quedarse. Sin duda, la cuestión acerca de la supervivencia o no de este partido a lo largo del tiempo es uno de los asuntos a los que se ha dedicado más atención desde la irrupción de esta formación política. Sin embargo, la respuesta a la pregunta sobre si Podemos ha llegado o no para quedarse no puede formularse únicamente atendiendo a la magnitud del hueco electoral que las encuestas parecen otorgarle. Un repaso a la historia de los partidos muestra que, en la rapidez de los tiempos políticos, el descalabro electoral puede fácilmente suceder al triunfo en las urnas o a las grandes expectativas de voto. Una manera de valorar la supervivencia de Podemos más allá de la magnitud de sus apoyos es estudiar el perfil de sus potenciales votantes, como por ejemplo su edad. Distintos análisis en este blog ( aquí y aquí) muestran que Podemos triunfa entre los sectores más jóvenes de la población. La juventud de sus votantes puede blindar la supervivencia de Podemos en el futuro, pues las lealtades políticas que los votantes generen en su juventud condicionan en gran medida el comportamiento electoral a lo largo de su vida. Hay una segunda característica de los votantes que también puede ser relevante a la hora de reflexionar sobre la longevidad del músculo electoral de Podemos. Se trata del tipo de problemas que parecen preocupar a quienes simpatizan con esta formación o, dicho en román paladino, el tipo de cabreo ciudadano en el que se aúpa su éxito. Una manera de clasificar el tipo de malestar de los votantes es según los asuntos que identifican como principal problema del país. Como ya expliqué en otra entrada de este blog, aunque la opinión pública española considera el paro, la corrupción y la clase política como los principales problemas, la intensidad de esa preferencia varía según la clase social o el nivel de estudios. Los datos del último barómetro del CIS (octubre) muestran que quienes más preocupados están por la corrupción y la clase política no son los grupos más afectados por la crisis, sino que son aquellos ciudadanos que poseen más formación. Dicho de otra manera, y siguiendo el criterio de la clasificación socioeconómica, los más cabreados con la corrupción y la política son las clases altas y 129

las viejas clases medias. Por el contrario, a la clase obrera cualificada y, sobre todo, a los menos formados - el sector más afectado por la crisis económica, representado por los obreros no cualificados - les parece preocupar menos la corrupción y, en cambio, señalan en mayor medida el paro como principal problema (ver Gráficos 1 y 2).

Gráfico 1. Paro como principal problema según estatus socioeconómico

Gráfico 2. Corrupción como principal problema según estatus socioeconómico Si pensamos que la base de la insatisfacción ciudadana con sus representantes políticos es aquella cuestión que señalan como principal problema del país, entonces cabría definir dos tipos de cabreados: por un lado, los grupos más vulnerables ante la crisis, a quienes les preocupa fundamentalmente las cuestiones relacionadas con la situación económica y el paro; y, por otro lado, un grupo más formado y con una posición socioeconómica más favorable cuyos niveles de preocupación por la corrupción y la clase política son mayores que en el resto de la ciudadanía. El análisis de la intención de voto y la simpatía hacia Podemos con los microdatos del barómetro del CIS de Julio (últmos disponibles) muestra que los más propensos a

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apoyar a este partido son precisamente quienes forman parte de ese segundo grupo: los individuos de más formación, los más críticos con la situación política y aquellos que señalan en mayor medida la corrupción y la clase política como principal problema del país (ver Gráficos 3, 4 y 5)[1]. En cambio, ni la valoración de la situación económica ni señalar el paro como principal problema del país es relevante para comprender el apoyo hacia Podemos (ver Gráfico 6). Dicho de otra manera, se trata de ciudadanos cabreados pero no quienes más directamente sufren las consecuencias de la la crisis.

Gráfico 3. Probabilidad de voto+simpatía a Podemos (frente a

otro s partidos) entre quienes mencionan la corrupción como principal problema. Resultados de regresión logística controlando por estatus socioeconómico, estudios, edad, ideología, principal problema, valoración situación económica y política

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Gráfico 4. Probabilidad de voto+simpatía a Podemos (frente a otros partidos) entre quienes mencionan a los políticos como principal problema. Resultados de regresión logística controlando por estatus socioeconómico, estudios, edad, ideología, principal problema, valoración situación económica y política.

Gráfico 5. Probabilidad de voto+simpatía a Podemos (frente a otros partidos) según la distinta valoración de la situación política. Resultados de regresión logística controlando por estatus socioeconómico, estudios, edad, ideología, principal problema, valoración situación económica y política

Gráfico 6. Probabilidad de voto+simpatía a Podemos (frente a otros partidos) entre quienes mencionan al paro como principal problema. Resultados de regresión logística 132

controlando por estatus socioeconómico, estudios, edad, ideología, principal problema, valoración situación económica y política Podemos se ha convertido en la promesa para aquellos ciudadanos más desencantados con el sistema político en general y con la clase política en particular. Su desencanto seguramente es resistente a la mejora de la situación económica, pues mientras las expectativas económicas de la opinión pública han ido mejorado desde septiembre de 2013, no ha ocurrido lo mismo con las expectativas sobre la situación política. Esto sugiere que la insatisfacción ciudadana sobre la que el auge electoral de Podemos se sostiene no tiene visos de reducirse con la mejora de la situación económica, algo que puede favorecer la resistencia electoral de los apoyos a este partido. En definitiva, la intención de voto o la simpatía hacia Podemos se concentra en los sectores más críticos con el sistema político y con la corrupción cuyo desencanto parece impermeable a la mejora de las expectativas económicas. Ello puede contribuir a sostener el músculo electoral de este partido a medio plazo y a reforzar el argumento de que es una formación que ha llegado para quedarse más allá de la crisis económica. No obstante, quizás el tipo de demandas que formula este electorado también constituyen un reto mayor para quien se presente como valedor de las reformas que den respuesta a las mismas. Con un electorado impaciente por ver cambios de calado en la forma de hacer política, las grandes expectativas generadas por Podemos puede convertirse en la medida de la desilusión de sus actuales votantes si su integración en el mapa político no se traduce en profundas reformas. [1] Todas las diferencias mostradas son estadísticamente significativas http://www.eldiario.es/piedrasdepapel/cabreo-ciudadano-futuro- Podemos_6_325527471.html

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¿Es Podemos como el PSOE de los 80? ¿En qué se parecen y en qué se diferencian sus electores? Ignacio Jurado 10/11/2014 - 00:26h La semana pasada conocimos los resultados del último barómetro del CIS. Más allá de discusiones sobre la cocina de la encuesta y la estimación de voto de los distintos partidos, es indudable que en muy poco tiempo Podemos ha emergido con una fuerza inédita, situándose con autoridad en el tablero político. Entre los muchos comentarios y comparaciones que hemos podido oír los últimos días y semanas, no ha sido raro escuchar que Podemos simboliza lo que supuso el PSOE en los primeros años 80. El símil creo que es sugerente y merece la pena ser explorado. Más allá de la comparación programática, en este post miro los apoyos electorales tanto del PSOE actual como de Podemos y los comparo con los apoyos electorales que tenía el PSOE en los primeros 80. Más en concreto, utilizo el barómetro del CIS de enero de 1984 porque teniendo una serie de variables con medidas homologables a las que se utilizan en el último barómetro, es el más cercano a la victoria de octubre de 1982. Es decir, los datos que aquí muestro son de apoyo electoral al PSOE cuando éste ya llevaba un año en el gobierno, pero creo que son bastante representativos del perfil demoscópico que aupó a González al gobierno. Por otro lado, en este post utilizo intención de voto en 1984 (no hay pregunta sobre simpatía en este barómetro) y lo comparo con el dato de voto+simpatía del último CIS. El primer elemento de comparación es el perfil de edad de los votantes. Desde mi punto de vista, aquí es donde Podemos más se parece con el primer PSOE de González. Si por algo destacan ambos partidos, es por su éxito entre los sectores más jóvenes del electorado. Frente a partidos que simbolizaban algo viejo (y en los que probablemente muchos votantes ya situaban al PCE en los 80), el electorado joven se decantó entonces y lo hace ahora por un partido que simboliza algo nuevo. Como se puede comprobar en el siguiente gráfico, el paralelismo entre Podemos y el PSOE de los 80 es evidente (y solo se diferencian en el gran pinchazo de Podemos entre los mayores de 65). Por el contrario, el PSOE actual presenta una tendencia totalmente contraria, aumentando su electorado cuanto mayor es la edad. En parte, el PSOE todavía cuenta hoy con aquellos votantes jóvenes de los primeros 80 para los que sigue siendo su primeraopción electoral. Su problema es que a medida que estos votantes se han hecho mayores, el partido no ha conseguido reeditar esos niveles de fidelización del voto en las nuevas cohortes, resultando en poco atractivo en la actualidad entre los votantes menores de 34. Así, en términos de edad, el PSOE de hoy es su propio antagonista con el PSOE de 1984. Este elemento me parece fundamental. Si algo sabemos en ciencia política es que las lealtades políticas que los votantes generan en su juventud y en sus primeras

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participaciones electorales suelen ofrecer una fuerte resistencia. Que Podemos conquiste el electorado joven puede suponer que consolide apoyos que sigan dando réditos a largo plazo.

Gráfico 1: Relación entre edad y apoyo electoral Un segundo elemento de comparación es el nivel educativo de los votantes. El siguiente gráfico muestra que las semejanzas entre el PSOE de los 80 y Podemos son mayores que las similitudes ente el viejo PSOE y el PSOE actual. El PSOE de los 80 destacaba por ser muy transversal en términos de la educación de sus votantes y cosechaba votos en todos los segmentos. Podemos todavía está lejos de esta transversalidad, pero quitando aquellos votantes de menor educación, que son en gran parte los de mayor edad del gráfico anterior, sus niveles de apoyo entre los grupos de mayor educación son bastante amplios y muy equivalentes a los del PSOE en 1984. De nuevo el PSOE actual refleja una composición muy distinta de la que el partido tenía en los 80. La tendencia es muy clara. El PSOE actual es muy exitoso en los sectores menos educados (que, como decíamos, correlacionan con la edad) y en cambio su éxito se desvanece cuanto mayor es el nivel de estudios.

Gráfico 2: Relación entre estudios y apoyo electoral El tercer y cuarto gráfico nos permiten hilar un poco mas fino y comparar utilizando las categorías socioeconómicas del INE. Esto nos proporciona un dibujo algo más preciso de qué sectores de la población se decantan por cada partido y en qué medida se parecen 135

a los que auparon a González a la presidencia. Sin ánimo de ser muy exhaustivo, diría que el PSOE de los 80 comparte cosas con ambos. El PSOE actual se asemeja con su antecesor de hace treinta años en su éxito dentro de los obreros cualificados, los pensionistas y las personas que realizan trabajo doméstico no remunerado. Entre Podemos y el PSOE del 84 existen tal vez más grupos donde los niveles de apoyo son más equivalentes. En concreto, donde encontramos una semejanza muy fuerte entre Podemos y el PSOE de principios de los 80 es en lo que podemos calificar como profesionales de rango medio: comerciantes y pequeños empresarios, personal de administración y servicios y profesionales y técnicos por cuenta ajena. Podemos es sorprendentemente más exitoso que el PSOE de los 80 en la primera categoría del tercer gráfico (mi impresión es que esto se debe principalmente a funcionarios y profesionales y no tanto a los empresarios). Finalmente, aunque Podemos parece hacerlo bien entre parados y estudiantes, tal y como ocurrió con el PSOE de 1984, las cotas de apoyo de estos sectores a este último eran algo más altas.

Gráfico 3: Relación entre condición socioeconómica y apoyo electoral (I)

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Gráfico 4: Relación entre condición socioeconómica y apoyo electoral (II) La última comparación que podemos hacer con los pocos datos disponibles en el último barómetro es analizar los apoyos según ideología. En los tres apartados anteriores (edad, educación y categoría profesional) las semejanzas entre Podemos y el PSOE de los 80 me parecen claras, aunque no definitivas. En cambio, en la ideología de los votantes creo que es donde radica la principal diferencia entre Podemos y el PSOE de González. Igualmente es donde el PSOE actual sigue siendo muy parecido a lo que era. El PSOE de los 80 consiguió acceder al poder con apoyos en la izquierda, pero sobre todo arrasando en el centro-izquierda (del 3 al 5 en la escala del CIS). El PSOE actual sigue basando sus apoyos en este segmento del electorado. En cambio, Podemos emerge como una fuerza con un éxito abrumador en las posiciones más de izquierda, decayendo notablemente a partir del 4 en el eje ideológico.

Gráfico 5: Relación entre ideología y apoyo electoral (1, extrema izquierda – 10 extrema derecha) Con todo lo anterior, creo que no es descabellado trazar una similitud, aunque con obvios matices, entre el PSOE de los 80 y Podemos. Este paralelismo es una buena radiografía de lo que está ocurriendo. En primer lugar, tanto en los 80 como en la actualidad un sector muy importante de votantes jóvenes no se identifica con los viejos partidos y busca opciones nuevas. En segundo lugar, el apoyo de entonces al PSOE o el de ahora a Podemos viene en gran medida espoleado por votantes de estudios altos y una condición económica no necesariamente desfavorecida, lo cual refleja que los desencantados por la crisis no son solo los votantes que económicamente están peor. No obstante, el panorama que he mostrado es obviamente una simplificación y un retrato provisional. Podemos es un nuevo actor político y el mapa de sus apoyos todavía se está dibujando. Solo el tiempo dirá si los consigue consolidar para obtener los éxitos electorales que obtuvo el PSOE en los 80. ------NOTA: Los barómetros del CIS utilizados son el estudio 1390 de enero de 1984 y el estudio 3041 de octubre de 2014. La razón para utilizar el barómetro de enero de 1984 es la de facilitar la comparación, dado que los anteriores no incluyen la pregunta de ideología con diez categorías, sino únicamente con siete. http://www.eldiario.es/piedrasdepapel/Podemos-PSOE_6_322727750.html 137

EDITORIAL Paisajes calcinados Pablo Iglesias propone acabar con el sistema de la Constitución sin explicar qué quiere construir EL PAÍS17 NOV 2014 - 00:00 CET Con la elección de Pablo Iglesias como secretario general y su equipo al frente de Podemos se acelera la conversión de un movimiento de perfil asambleario y antijerárquico en una organización ya muy parecida a un partido clásico. La estructura fuerte y centralizada que han adoptado se compadece mal con la transversalidad y modernidad pregonadas. Pero más allá de esa contradicción, lo relevante del primer discurso del líder indiscutido de Podemos ha sido su denuncia del “candado del 78”, en referencia al sistema político creado por la Constitución. Editoriales anteriores// Renovación obligada (06/11/2014)/ Podemos se organiza (19/10/2014)/ El recién llegado (30/05/2014) Pablo Iglesias hace del desprecio a los demás una de sus armas políticas, sea hacia “la casta” o los “viejos de corazón”. Parece deseoso de tirar a la papelera el sistema construido tras la dictadura, precisamente el que reconoció y protegió las libertades y el que trasladó la soberanía desde las manos de un caudillo a las del pueblo, que desde entonces la ha ejercido de forma continuada en elecciones libres. Podemos intenta atacar los fundamentos de este sistema sin explicar lo que pretende construir en su lugar o con qué quiere reemplazarlo. Y esto plantea un interrogante bastante serio acerca de los dirigentes de una fuerza que, según los sondeos de opinión, cuenta con expectativas de ocupar un espacio considerable en el futuro tablero político. Lo que Iglesias llama “régimen” en España no es un sistema totalitario, ni un mundo regresivo, inviable y decrépito. Cuestión distinta es la crisis que sufre esta democracia, y que desde luego necesita caminos de salida. Casi todas las instituciones han perdido la iniciativa y los partidos que las dirigen muestran un alarmante grado de agarrotamiento. Lo que tiene que cambiar es el miedo a abordar las reformas necesarias, que deben plasmarse en la Constitución misma, en la regeneración ética de la vida pública y en corregir el excesivo grado de desigualdad que se está produciendo entre los ciudadanos. Hay ansias evidentes de cambio en amplias capas de la sociedad, porque la crisis deja la impresión de que muchas personas se han quedado sin capacidad de influencia sobre las decisiones políticas. Lo que era una crisis económica y social se ha trasladado de lleno a la política al verse afectada por una corrupción sistémica: el combustible para el incendio. Pero no hay que confundir los deseos de reformar el sistema con los de destruirlo, ni convocar al electorado a tender una suerte de cordón sanitario sobre todo el sistema político. Frente a la acometida de Pablo Iglesias contra el consenso del 78 y la de Artur Mas para desbordarlo, los dirigentes del PSOE en fase de renovación, Pedro Sánchez y Susana Díaz, lanzan una propuesta de reforma de la Constitución sin renegar de la existente y señalan al Parlamento como el espacio institucional que debe acoger el debate. Podemos hará bien en precisar sus propuestas, en vez de refugiarse en ensoñaciones de paisajes calcinados sobre los que empezar desde cero.// http://elpais.com/elpais/2014/11/16/opinion/1416163492_526496.html

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PODEMOS » Iglesias no despeja sus contradicciones sobre Venezuela y los medios El líder de Podemos deja sin contestar varias preguntas en una entrevista en La Sexta • El primer discurso de Pablo Iglesias como líder, en sus frases clave • AUDIO CADENASER Directo: Pablo Iglesias, entrevistado en Cadena SER EL PAÍS MADRID17 NOV 2014 - 00:23 CET1217 La periodista Ana Pastor entrevista a Pablo Iglesias. / LA SEXTA El secretario general de Podemos, Pablo Iglesias, ha evitado despejar este domingo las contradicciones de varios mensajes y sus propuestas y ha dejado sin responder un largo número de preguntas en una entrevista con Ana Pastor en La Sexta. El líder de la formación que pretende convertirse en una alternativa al bipartidismo no ha aclarado sus pronunciamientos sobre si "los medios de comunicación privados son una amenaza para la libertad de expresión", como afirmó hace meses; sobre la “envidia” que dice sentir por algunas medidas implantadas en Venezuela; sobre la liberación de los presos de ETA; sobre la relación entre Ana Patricia Botín, presidenta del Santander, y “la casta” con la que Podemos quiere acabar; sobre un referéndum acerca del modelo de Estado o la consulta en Cataluña; sobre cómo pagará las medidas que plantea su programa, que aún está indefinido; y sobre sus propuestas relacionadas con las expropiaciones.

MÁS INFORMACIÓN/ El círculo de confianza de Iglesias/ Editorial | 'Paisajes calcinados'/ Pablo Iglesias promete acabar con el “régimen” de la Transición/ La infraestructura de Podemos vive en Internet/ Las cuatro esquinas de Podemos En relación con la gestión de los medios de comunicación, Pablo Iglesias ha afirmado que lo que pretende Podemos “no es controlar”, sino “proteger la libertad de los periodistas” y frenar de alguna manera los oligopolios. “No se puede permitir que haya llamadas que impidan hacer ciertas cosas en los medios. Que a nosotros no nos entrevisten en TVE es una vergüenza”, ha manifestado. Preguntado por algunas polémicas declaraciones del líder de la formación sobre Venezuela, ha mantenido: “Venezuela tiene algunas cosas que yo envidio, como la revocabilidad del presidente. Hugo Chávez se presentó a un referéndum revocatorio, y a mí me gustaría que el presidente que tenemos y que se enfrenta a ruedas de prensa con pantallas de plasma hiciera lo mismo”. La figura del revocatorio está contemplada por los estatutos de Podemos. Tampoco ha aclarado unas declaraciones realizadas en el pasado sobre la liberación de los presos de ETA. Se ha limitado a afirmar que el jueves su partido apoyó junto al PP en la Eurocámara una resolución sobre la liberación progresiva de los presos del IRA en Irlanda, un país que atraviesa otra fase del proceso de paz. "En un proceso de paz las políticas penitenciarias son el principal instrumento de un Gobierno. Todos los gobiernos se han sentado a hablar con ETA, todos han usado la política penitenciaria, que es lo que haríamos nosotros", se ha justificado.

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"A los bancos me enfrentaré con la ley. La Constitución dice que hay intereses sociales que deben estar por encima de los de los grandes propietarios. Es más importante el derecho de una familia que sus derechos de propiedad sobre las viviendas vacías", ha defendido, evitando pronunciarse sobre si la presidenta del Santander, Ana Patricia Botín, pertenece a “la casta”. “Nos sentaremos con los banqueros para decirles que no son diferentes del resto de ciudadanos y tendrán que aceptar la legalidad”, ha agregado. Sobre el modelo de Estado ha contestado Iglesias: "Yo no haría la pregunta de Monarquía o República, sino si en una democracia normal al jefe de Estado se le debe elegir por razones de sangre, o en las urnas, por mayoría democrática”. La postura oficial de Podemos es la de respaldar en Cataluña un referéndum sobre la independencia como el de Escocia. Este domingo Iglesias ha afirmado: "Yo no quiero que Cataluña se vaya; quiero que España sea un país de países, pero lo que quiero es que decidamos juntos". El líder de Podemos ha prometido que si gobierna “preguntará a la gente muchas veces”. Pero de momento no dice cómo piensa financiar muchas de sus medidas, como la renta básica. “La forma de recaudar más no es haciendo a la gente más pobre, sino que la economía sea más próspera”, ha sido su respuesta. Podemos, que se ha constituido este fin de semana como formación política organizada, todavía carece de un programa político con el que concurrir a las elecciones. Iglesias asegura que convocará a “los mejores” para elaborarlo, pero este domingo no ha logrado despejar las contradicciones de sus propuestas. Medidas Al ser preguntado por sus primeras medidas si llegara a gobernar, Iglesias ha mantenido que terminaría con los desahucios, "aplicando la ley europea", y acabaría con las "puertas giratorias". Iglesias ha defendido el aforamiento para los políticos durante el ejercicio de su cargo, ha prometido que explusaría a los integrantes de Podemos si estos son objeto de imputación en un caso de corrupción y ha considerado que "el problema es la impunidad". También ha analizado la figura del indulto que, en su opinión, "permite en situaciones excepcionales, de manera siempre pública, restituir una situación de justicia". Otra de las medidas que impulsará su formación sería una derogación de la reforma laboral aprobada por el PP y ha afirmado que se reuniría con los agentes sociales y los empresarios para hacer otra "en la que se acabe con la posibilidad de que alguien sea despedido de manera injusta". En otro orden de cosas, no ha detallado su propuesta sobre la creación de una renta básica universal y ha defendido que la cantidad se fijaría en función de las circunstancias de cada persona, puesto que no es lo mismo una mujer de más de 40 años con hijos que una joven de 24 años sin hijos. ¿Cómo se financiaría? "Haciendo que la presión fiscal a las grandes fortunas se acerque a la media europea y persiguiendo el fraude fiscal, que es escandaloso". Preguntado por el pago de la deuda contraída por España, ha reiterado que no defiende un impago de la deuda, "sino de una auditoría pública y ciudadana para establecer qué partes son ilegítimas para no pagarlas". "Lo que nos corresponde, sí lo queremos pagar", ha asegurado. En materia de educación, ha abogado por reducir la concertada, y que no se financie con dinero público métodos educativos privados que, entre otras cosas, "segregan a niños y niñas". 140

http://politica.elpais.com/politica/2014/11/17/actualidad/1416180224_560231.html

Poco tiempo para un largo camino A favor de Podemos juega el hecho de que la sociedad española está agotada por la crisis económica, desesperada con la corrupción y harta del deterioro de las instituciones • Últimas noticias de Podemos JOSÉ IGNACIO TORREBLANCA 16 NOV 2014 - 00:49 CET82 “Lo más difícil comienza ahora”, ha dicho Pablo Iglesias al celebrar su elección como secretario general de Podemos. Y, aunque es verdad que la tarea que le queda por delante es inmensa, hay que reconocer que haber llegado hasta aquí y haberlo hecho tan rápido y con unos apoyos tan amplios, tanto en votos recibidos en las elecciones europeas como en intención de voto en las encuestas, representa un logro importantísimo en un país dominado por un bipartidismo correoso al que hasta ahora nadie ha logrado hincarle el diente. Sin duda alguna, los secretarios generales del resto de fuerzas políticas encajarán con envidia poco sana los más de 95.000 votos recibidos por Pablo Iglesias. Pero si lo logrado hasta aquí es innegable, lo que queda por delante es todo cuesta arriba. Porque a lo que Podemos aspira es nada menos que a la cuadratura de ese círculo morado que ha elegido como emblema. ¿Por qué? Porque va a tener que ingeniárselas para encajar una oferta ideológicamente minoritaria, cuyo origen se sitúa en la izquierda no parlamentaria y muy alejada de las preferencias medias de la ciudadanía, en un electorado donde la demanda de cambio político, económico y social es transversal a prácticamente todas las capas de la sociedad. A favor de Podemos juega el hecho de que la sociedad española está agotada por la crisis económica, desesperada con la corrupción y harta del deterioro de las instituciones. Pero en su contra juega tanto la radicalidad de sus propuestas, cuando las plantean, como su indefinición, cuando por razones tácticas deciden esconderlas para no asustar a sus potenciales votantes. También les perjudica su maximalismo: su renuncia a competir en las municipales significa que no quieren construir una alternativa desde abajo, como hicieron los Verdes alemanes, a los que desprecian por haberse acomodado en las instituciones, sino llegar al poder de golpe aprovechando la ventana de oportunidad abierta por la crisis. En última instancia, ese órdago puede volverse en su contra y acabar situándolos en su justo lugar: como una tercera fuerza política a la izquierda de la socialdemocracia, que es lo que, retórica populista y anticasta aparte, realmente son, como demuestra su día a día en el Parlamento Europeo: fielmente integrados en la Izquierda Unida Europea, con la que votan disciplinadamente en todas las cuestiones. Paradójicamente, su primera víctima será (ya lo es) Izquierda Unida, a quien mandan al desván de los trastos viejos por, con propuestas prácticamente idénticas, no haber logrado capitalizar la crisis. Y, paradójicamente, en la medida en la que el PSOE sepa responder a Podemos y convencer a la ciudadanía de que para hacer una sociedad más justa y acabar con la corrupción no hace falta acabar con el régimen del 78 sino 141

reformarlo en profundidad, el PSOE podría recoger los frutos del ascenso de Podemos y situarse en el centro del espectro como árbitro de la política española. Pareciera pues que la última palabra sobre el éxito de Podemos no la tuviera Pablo Iglesias, sino el partido que fundara Pablo Iglesias. http://politica.elpais.com/politica/2014/11/16/actualidad/1416095250_866481.html

Economía CUMBRE DEL G-20 Rajoy pide al G20 una política “más equilibrada” contra la crisis Guindos: “España ha dejado de ser una rémora, ahora necesitamos viento de cola” • La cumbre del G20 arranca en Australia para “relanzar la economía” CARLOS E. CUÉ BRISBANE15 NOV 2014 - 10:18 CET112

El presidente del Gobierno, Mariano Rajoy, ha sido el primero en hablar en la cumbre del G20 tras la presentación del anfitrión, el australiano Tony Abbott, y lo ha hecho para reclamar un cambio de política económica para evitar que se frene la incipiente recuperación. Abbott, que ha querido que Rajoy hablara el primero como un gesto de reconocimiento hacia las reformas realizadas en España, le ha presentado con una frase que resume su visión: “España ha sufrido mucho pero ha hecho un gran trabajo”. Siempre en tono moderado, como es habitual, Rajoy ha lanzado el mensaje de que España no puede crecer si sus socios europeos y mundiales no lo hacen. Por eso ha pedido a los primeros ministros y presidentes que apuesten por “una combinación de políticas económicas, tanto monetaria y cambiaria como fiscal, más equilibrada que permita impulsar la recuperación económica de nuestros países”.

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MÁS INFORMACIÓN/// Rajoy busca en el G-20 aire político frente a las tensiones en España/ Guindos advierte de que España no es inmune a la desaceleración de la eurozona/ La eurozona sortea la recesión pero sigue anclada en el estancamiento Rajoy abrió la sesión a puerta cerrada, habló antes que el presidente chino, Xi Jinping. Fue Luis de Guindos quien se encargó de lanzar un mensaje similar al del presidente pero ya frente a las cámaras, siempre con la vista puesta en la evolución española desde el G20 de Los Cabos (México) en 2012, con la prima en 600, a la situación actual. “En dos años España ha pasado de ser una de las rémoras de Europa a una de las economías de la eurozona que más crecen”, explicó Guindos, que confió en que la depreciación del euro y la bajada del precio del petróleo sirvan ahora para los otros grandes de Europa crezcan más. “Sería mucho mejor tener el viento de cola de nuestros socios comunitarios que enfrentarnos al viento de cara de estos momentos, porque Europa crece poco. No hemos entrado en la tercera recaída que se temía. Pero Europa todavía no sale de la crisis”, señaló el ministro de Economía. Guindos cree que España va a seguir creciendo al mismo ritmo y no teme que la situación en Cataluña o el ascenso de Podemos pueda generar miedo entre los inversores. “Acabo de venir de Singapur, una plaza financiera importante. Los inversores creen que en España va a haber estabilidad política y que Cataluña va a continuar siendo parte de España, como no puede ser de otra manera”, ha asegurado. Rajoy también ha lanzado ante el plenario del G20 un mensaje sobre el coste político que tiene las medidas duras que él y otros presidentes han tomado. “La estrategia de reformas estructurales en España tiene una ventaja indudable: se gana terreno de forma sólida y continua frente a las tradicionales devaluaciones que tenían solo un efecto temporal”, ha explicado comparando los recortes de los últimos años con las devaluaciones de los 90. Y ahí ha añadido el mensaje sobre el coste que estos recortes han supuesto, sobre todo a un presidente en el que confían poco o nada el 86,6% de los españoles, según el CIS: “Esta estrategia también exige un enorme esfuerzo de gestión política que, en todo caso, vale la pena”. El frenazo de la eurozona es una de las preocupaciones que recorren la cumbre del G-20 Rajoy ha aprovechado su presencia en el G20, en un ambiente mucho más cómodo del que vive últimamente en España, acosado por escándalos, por la crisis catalana y las críticas en su propio partido, para explicar las reformas que ha llevado a cabo, en especial la laboral, la del sistema financiero y los recortes del gasto público. El jefe del Ejecutivo participará este domingo en una cita entre los cinco grandes países de Europa y el presidente de EE UU, Barack Obama, al que ha saludado hoy brevemente en la cumbre. El frenazo de la eurozona es una de las preocupaciones que recorren la cumbre del G20, aunque Rajoy ha aprovechado su discurso para diferenciarse, sin citarlos, de otros países grandes de la UE que crecen menos que España. El presidente ha aprovechado su visita a Australia, la primera que realiza un primer ministro español, para intentar rematar aquí contratos para grandes compañías españolas. Navantia ya ha logrado un contrato para una fragata y está pendiente de cerrar otro gran contrato para la armada australiana de dos buques logísticos con un coste de unos 700 millones de euros. Rajoy trató de impulsar el cierre de este contrato en su reunión con Abbott, el primer ministro australiano.

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El presidente también se reunió con el líder de la oposición, el laborista Bill Shorten, con la intención precisamente de reforzar los lazos y garantizar contratos de largo plazo como los militares. Australia es uno de los muchos países donde las grandes empresas españolas de obra pública están intentando expandirse ante el frenazo en España. http://economia.elpais.com/economia/2014/11/15/actualidad/1416042292_389160.html

Economía CRISIS ECONÓMICA » La deuda atenaza la recuperación El recorte del endeudamiento acumulado agravó la crisis y lastra ahora la mejora ALEJANDRO BOLAÑOS MADRID16 NOV 2014 - 00:00 CET48

LUIS TINOCO Como tantas otras palabras de la jerga económica, apalancamiento es una traducción directa del inglés, el idioma rey en los mercados. El término, usado frecuentemente en la crisis, ha logrado llegar a las páginas de la última edición del Diccionario de la Real Academia Española. En la definición académica, “apalancar” es “elevar el grado de endeudamiento de una empresa”, aunque lo que ocupa ahora a gobernantes, empresarios y familias es lo contrario, cómo desapalancarse. Así, los analistas que describieron el colapso de los países avanzados como la Gran Recesión, vuelen a las mayúsculas para calificar esta nueva etapa como el Gran Desapalancamiento. Y España, antes y ahora, se lleva la peor parte. Cuando la Gran Recesión arrancó el velo al milagro económico español, los mercados empezaron a cuestionar el acelerado endeudamiento de hogares y empresas. En la década que abrió el siglo, en paralelo al boom inmobiliario y la relajación de las condiciones financieras, el peso de los préstamos (casi siempre hipotecarios) contraídos por las familias pasó de suponer el 41% del PIB a rondar el 83%. Y los títulos de deuda y créditos en el pasivo de empresas no financieras, también por la globalización de las grandes compañías, más que se duplicó, hasta superar el 130% del PIB. En la zona euro, solo Irlanda (empresas), Holanda (familias) y Portugal (ambos) experimentaron un aumento equiparable al español.

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El interrogante se agigantó con la escalada de la deuda pública que siguió a la crisis: el endeudamiento de las Administraciones, que encogió en los años de bonanza hasta el 35% del PIB, enfila ya el 100%, como corroboran los datos publicados este viernes, que marcan nuevo récord (1,02 billones de euros). Son desequilibrios que los mercados hicieron pagar en lo peor de la crisis, solo esquivada tras el rescate europeo a la banca y la intervención del Banco Central Europeo, en 2012. “Ahora soy algo más optimista”, apunta Joaquín Maudos, catedrático de Economía en la Universidad de Valencia, que coordinó un seminario del Instituto Valenciano de Investigaciones Económicas (IVIE) y la Fundación BBVA sobre el endeudamiento de la economía española, celebrado a finales de octubre. Maudos hizo referencia a los datos que revelan que la deuda de las empresas se ha reducido en los últimos tres años. Al otro lado del espejo, eso supone un tijeretazo al crédito: el préstamo a las empresas ha caído un 30% desde 2008, lo que ha comprometido la actividad, cuando no la existencia de miles de compañías, con drásticas implicaciones en el empleo. “Pero la situación ha mejorado, crecen las nuevas operaciones de crédito a pymes, las grandes empresas vuelven a emitir deuda, y el acceso a la financiación bancaria, tanto en coste como en exigencia de garantías, también es mejor”, acota.

MÁS INFORMACIÓN// Bruselas rebaja las previsiones para España por el frenazo de la eurozona/ La renta financiera de las familias toca nuevos récords por los mercados/ Los millonarios en España crecen un 24% hasta junio gracias a la Bolsa/ España sufre la crisis más desigual/ España, más barata para comer, beber y fumar que la media de la UE

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Los datos más recientes, revisados esta misma semana por Bruselas, avalan que el desapalancamiento del sector privado está en marcha. A ello contribuye también la aplicación de las nuevas reglas contables —las mismas que ampliaron un 2,5% el valor del PIB—, de la que España sale bien parada. Así, los títulos de deuda y los préstamos de las empresas no financieras habían alcanzado el 108% del PIB el pasado mes de junio (frente al 133% de 2010). En el caso de los créditos de las familias, la reducción es del 84% al 74% del PIB en cuatro años. El desapalancamiento del sector privado ha

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permitido por primera vez compensar la escalada de la deuda pública, de modo que, en conjunto, el endeudamiento (excluida la banca) está en el 278% del PIB, diez puntos porcentuales menos que en 2012. Aun así, la comparación con el promedio de la zona euro, o con el propio nivel de deuda español al principio de la crisis (250%) da una idea de la envergadura del desafío. Con un crecimiento leve, en el mejor de los casos, y sin la muleta de la inflación —el alza de precios suele ir en paralelo a un incremento nominal de salarios y márgenes empresariales con los que pagar la deuda, cuyo valor no varía—, el desapalancamiento ha sido, y será, perjudicial para la recuperación. “De hecho, en los primeros años de la crisis, el PIB retrocedió por el ajuste de deuda, no al revés”, señala José García Montalvo. El catedrático de la Universidad Pompeu Fabra explica el acusado descenso de la deuda empresarial entre 2010 y 2013 por “el cierre del grifo del crédito”, pero también por las significativas reestructuraciones negociadas con la banca —que implican aplazamiento y quitas de las deudas—, facilitadas por sucesivas modificaciones legales. No es un proceso neutral: la liquidación de empresas es la manera más radical de reducir deuda, pero implica destrucción de empleo y actividad, además de pérdidas bancarias. En las reestructuraciones, se apuesta por la viabilidad futura de los negocios, pero también pasan una factura muy cara a la economía, aunque sea algo más limitada. “El aspecto positivo se podría bautizar como una destrucción creativa de crédito, se deja sitio a la posibilidad de prestar a actividades más viables”, matiza García Montalvo. El flanco débil de la dependencia exterior sigue sin cerrarse Entre las muchas cosas que cambió la crisis, está la percepción de qué significa la deuda exterior en una economía del euro. Antes de la Gran Recesión se minimizaba el impacto del acelerado endeudamiento de España con el resto del mundo porque el área monetaria seguía en equilibrio. Pero los titubeos de los responsables europeos tras la crisis fiscal griega llevaron a los mercados a diferenciar entre países, lo que castigó severamente a España. La deuda exterior neta, que descuenta el valor de los activos en el extranjero del global de pasivos frente al resto del mundo, se duplicó al tiempo que los intercambios de mercancías y servicios acumulaban un déficit tras otro. Entre 2000 y 2007 pasó del 35% al 80% del PIB. Pero es que, a diferencia de algunos indicadores de deuda interna, no ha menguado un ápice desde que estalló la crisis: a principios de este año, rondaba el 100%. “Esto se aguanta por la intervención del BCE, que ha puesto los tipos de interés bajo mínimos. Pero estamos sentados encima de una bomba de relojería, los tipos de interés no seguirán así siempre, tenemos una ventana de oportunidad de dos o tres años que estamos obligados a aprovechar”, advierte el catedrático Josep Oliver. Tras un intenso ajuste importador, y la diversificación de las exportaciones a mercados emergentes, la balanza exterior se apuntó en 2013 un primer superávit, equivalente al 1,5% del PIB. Pero este año será mucho menor. “El Gobierno tiene que hacer mucho más por apoyar a las empresas que exportan, debería ser una obsesión”, insiste Oliver, quien calcula que se tardará una década en devolver la deuda externa al 35% del PIB. Y solo si el crecimiento es compatible con saldos exteriores positivos. En este aspecto incide también Josep Oliver, catedrático de la Universidad Autónoma de Barcelona. “La reducción de deuda se concentra donde hubo más excesos, en el 148

sector inmobiliario y la construcción, que han perdido dos tercios del crédito vivo”, señala Oliver, quien también alerta del impacto en las estadísticas del traspaso de más de 50.000 millones en activos tóxicos desde las cuentas de la banca al banco malo. Oliver saluda como “buena noticia” que la banca también se haya desapalancado, disminuyendo su dependencia de la financiación exterior, pero opone que la reciente reducción de deuda en empresas y familias es solo el principio. “Nada está hecho aún, queda un duro camino”. En el seminario sobre deuda, Vicente Salas, catedrático de la Universidad de Zaragoza, defendió que la percepción del ajuste de deuda hecho por las empresas y las ganancias de rentabilidad, están distorsionadas por el volumen de recursos financieros que las grandes corporaciones captaron en España para costear inversión internacional, que por tanto no generan valor añadido aquí ni aumentan el PIB español. “Los márgenes se han recuperado gracias a la reducción de costes laborales tras las políticas de devaluación interna, la rentabilidad de los activos de operaciones en España es ya del 8%, suficientemente atractivo para hacer viables nuevas inversiones”, explica Salas, quien estima en más de 30.000 millones los beneficios retenidos por las sociedades no financieras españolas. Esos fondos propios permitirían financiar inversiones rentables con un menor recurso al crédito, lo que redundaría en un desapalancamiento progresivo gracias al aumento de ingresos. Para Joaquín Maudos la pregunta clave ahora es “cómo hacer compatible la reducción del endeudamiento con un aumento selectivo del crédito a actividades viables”, que alimenten la recuperación. En su respuesta, Maudos partió de un análisis detallado de la estructura financiera de la empresa española, elaborado junto a Juan Fernández de Vegara, cuyos resultados acaban de ser publicados. El catedrático señaló que en 2011 un 36% de la deuda estaba en manos de empresas que ni tan siquiera generaban ingresos suficientes para pagar los costes financieros. Y que solo en Grecia esa proporción era mayor. “Ahí está el problema, aunque en los dos últimos años el porcentaje de empresas vulnerables ha bajado”. El mayor peso de esa deuda en riesgo en pequeñas y medianas empresas (50%) y en el ladrillo (55%) da una pista sólida de dónde se seguirá produciendo el desapalancamiento empresarial. La reducción de deuda acumulada por los hogares, por su propia naturaleza (mayoría de préstamos hipotecarios), es más progresiva. Por su propia naturaleza y por la insuficiencia de las normas legales para permitir a las familias reducir o aplazar lo que deben, como sí hacen las empresas, matiza García Montalvo. En la inmensa mayoría de los casos —se han arbitrado excepciones para familias de ingresos muy bajos—, la solución sigue siendo binaria: o se paga la hipoteca, o se acaba, al poco tiempo, con la casa embargada. Según los datos publicados esta semana por el Banco de España, a partir de información de los propios bancos, en el primer semestre de este año aún se embargaron unas 20.000 viviendas, y solo en una cuarta parte, los bancos aceptaron que la entrega permitía amortizar toda la deuda pendiente (dación en pago). En 1.200 casos, la ejecución hipotecaria acabó en desahucio. La rapidez y contundencia del proceso de ejecución hipotecaria en caso de impago no sólo dificulta un desapalancamiento de los hogares más compatible con la recuperación económica, sino que, además, es un factor esencial para explicar porqué las familias españolas tienen una propensión mucho mayor que otros hogares europeos a hipotecarse para tener una vivienda —o porqué los bancos españoles conceden más fácilmente ese préstamo—. En una completa investigación del Banco Central Europeo, detallada por 149

Olympia Bover, del Banco de España, se precisa que el hogar de referencia (pareja de ingresos medios, con trabajo y entre 35 y 44 años), tiene un 65% de probabilidad de tener deuda hipotecaria, la más alta de la zona euro, cuando en Italia, la más baja, apenas es del 10%. En España, la ejecución hipotecaria lleva, de promedio, ocho meses; en Italia llega a cinco años. La conclusión no es solo que hay más hogares españoles endeudados (casi el 50% si se tienen en cuenta todo tipo de créditos) que en el promedio de la zona euro, sino que los menores de 35 años, o las familias con ingresos más bajos, tienen que afrontar deudas (de media, más que triplican toda su renta anual) mucho mayores que en otros países europeos, lo que minimiza su capacidad de consumo. Sobre la tercera pata del endeudamiento de la economía española (y de la mayoría de países avanzados) se asienta el sector público. “Tras las crisis, más aún si son financieras, la deuda pública crece muy rápido, pero luego suele reducirse muy lentamente”, señala Rafael Doménech, responsable de Economías Desarrolladas en BBVA, quien considera que el alto nivel de endeudamiento público ya alcanzado “es un lastre para la recuperación, pero no necesariamente una losa”. “Si la deuda pública es alta hay un impacto en el crecimiento económico, aunque no hay un número mágico”, coreó Paulo Medas, economista del Fondo Monetario Internacional, en referencia al polémico estudio de Kenneth Rogoff y Carmen Reinhart que situaba en el 90% del PIB ese umbral. Medas, que participó en la misión del Fondo para supervisar a España tras el rescate a la banca, sí enfatizó que el impacto es mayor cuando el alto nivel de deuda se experimenta, a la vez, en el sector público, las empresas y las familias, situación en la que se encuentran España, Portugal o Irlanda. Una investigación del FMI sostiene que, en este caso, el efecto combinado del endeudamiento —menos consumo familiar, menos inversión empresarial, menos gasto público— puede llevar a detraer más de un punto porcentual al crecimiento anual del PIB durante un lustro. El Fondo ha estudiado 26 episodios de reducción de deuda en países avanzados durante las tres últimas décadas y sostiene que hubo experiencias “exitosas” incluso “en las circunstancias más adversas”. Como las de ahora: bajo crecimiento y nula inflación. En el estudio del Fondo no hay cabida a la reestructuración de la deuda pública, opción que defienden partidos de nuevo cuño como Syriza, en Grecia, o Podemos, en España. “La intervención de la UE y el BCE nos lo evitó y esos nos ha permitido hacer un ajuste más gradual del déficit” replica Doménech, quien sostiene que una quita o refinanciación de la deuda pública, de ser posible, tendría como contrapartida un ajuste fiscal más drástico. “Y los mercados encarecerían el coste de financiar la deuda española durante años”, añade. La receta de Doménech —reformas para bajar el desempleo, ajuste fiscal paulatino pero sostenido—, coincide con la que expuso Diego Rodríguez, del Banco Central Europeo: “Hay un riesgo muy alto de que el nivel de deuda ralentice la recuperación, evitarlo requiere seguir haciendo reformas para elevar el potencial de crecimiento de la economía española”. “Claramente sí, la deuda seguirá frenando la recuperación, sobre todo frenará el consumo de las familias”, coincide García Montalvo, que discrepa en la solución. “Además del cansancio social que generan siete años de reformas, el problema ya no está tanto en la eficiencia del sistema productivo como en la falta de demanda”, plantea el catedrático de la Pompeu Fabra. “En Europa, hay que insistir en que Alemania incentive su demanda. Aquí, lo mejor que se puede hacer por el consumo 150

mientras la recuperación se fortalece es garantizar de forma automática la continuidad de los subsidios de desempleo”, concluye. El ‘milagro chino’ pone en alerta al mundo “Desapalancamiento, ¿qué desapalancamiento?”. La última edición del informe Ginebra, referencia internacional en este ámbito es explícito: “Contrariamente a lo que se sostiene, la economía mundial todavía no ha empezado a desapalancarse, la proporción de deuda respecto al PIB todavía sigue creciendo, en 2013 marcó otro récord”. El conjunto de préstamos y títulos de deuda en los balances de hogares, empresas (excluida la banca) y Administraciones Públicas ronda el 212% del PIB mundial, 38 puntos porcentuales más que cinco años atrás. El informe, elaborado por el centro internacional de estudios bancarios y monetarios (con base en Ginebra) y el centro de investigaciones de política económica (Londres) identifica varias tendencias en los últimos años: el repunte de la deuda pública ha compensado la incipiente reducción del endeudamiento privado en los países avanzados, con las sonoras excepciones de EE UU y Reino Unido. En Estados Unidos, a la pronta recapitalización de la banca y la decidida intervención de la Reserva Federal para catapultar el crecimiento se le une un sistema legal que facilitó la reestructuración de la abultada deuda hipotecaria de los hogares, incluida la dación en pago. En Reino Unido, a los dos primeros factores, se les suma una inflación apreciable, que facilita el pago de la deuda. En la zona euro, ni hubo una recapitalización temprana de la banca, ni la intervención del BCE fue tan decidida. Tampoco son mejores las expectativas de crecimiento e inflación. Resultado: países como España, Irlanda o Portugal, con una abultada deuda, herencia de los tiempos de vacas gordas, “ven amenazada la recuperación”. Pero, para amenaza global, el “milagro chino”. “En el último medio siglo, la palabra milagro se ha empleado para describir etapas de alto crecimiento, impulsadas primero por innovaciones genuinas, pero sostenidas después con más deuda. Hubo un milagro latinoamericano, un milagro japonés, y más recientemente, un milagro estadounidense, español o irlandés. Y todos sabemos como acabaron”. Los expertos sostienen que hasta 2008, el crecimiento chino se basó en la apertura comercial, notables avances en la productividad y el impulso demográfico. “Pero China respondió al frenazo en las exportaciones a países avanzados tras la crisis con un notable aumento del endeudamiento”, advierte el informe. En apenas un lustro, la deuda ha pasado de 145% al 215% del PIB. Las autoridades chinas presionan ahora a la banca (oficial y en la sombra) para vigilar la concesión de crédito, pero al mismo tiempo deben evitar un enfriamiento económico en un país que bordea ya el avance mínimo (7% anual) para seguir con la reducción de la pobreza. http://economia.elpais.com/economia/2014/11/14/actualidad/1415994659_768247.html

Opinión PUNTO DE OBSERVACIÓN Un trío que podría ser memorable

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Bruselas y Fráncfort van a ser escenario de batallas formidables si existe realmente un plan para revitalizar las instituciones comunitarias y regular lo que nunca debió dejarse sin control SOLEDAD GALLEGO-DÍAZ16 NOV 2014 - 00:00 CET Frans Timmermans, primer vicepresidente de la Comisión Europea, holandés, socialdemócrata y mano derecha de Jean-Claude Juncker, cuenta que un viejo armenio, huido en 1915, le hizo la pregunta que llevaba décadas sin formular: “Dígame, ¿sienten los turcos de hoy la ausencia de los armenios?”. La respuesta, dice Timmermans, se la envió la joven escritora de origen turco Elif Shafak: “Desde que usted se fue, mi país se secó. Se hizo estéril, cultural y moralmente”. Timmermans, que tiene 53 años, es licenciado en Literatura Francesa y en realidad se llama Franciscus Cornelis. Fue ministro de Asuntos Exteriores y luce buen sentido del humor y grandes dotes negociadoras. Cree que lo peor que existe es el miedo, el miedo al otro, que se extiende como una mancha por Europa, y el miedo al futuro, que atenaza a jóvenes y mayores. Vivir así, atemorizados, recuerda a menudo, es vivir como perros. Juncker, su buen amigo, le ha encomendado las relaciones interinstitucionales, la mejora de las leyes, el imperio del derecho y la Carta de Derechos Fundamentales. Podrían hacer una pareja memorable para el futuro de la Unión Europea porque, en el fondo, son dos tipos con grandes capacidades y proceden de un mundo en el que el europeísmo fue auténtico. De hecho, podrían formar un buen trío con otro personaje tan resabiado como ellos, pero, dicen, incluso más brillante: el italiano Mario Draghi, del Banco Central Europeo (BCE). La primera escaramuza se está librando ya en el Banco Central Europeo Es posible que los tres (cuatro, si se suma al presidente de la otra institución comunitaria, el Parlamento Europeo, el alemán, también socialdemócrata, Martin Schulz) sean capaces de hacer sentir su sombra en Europa. Quizás ellos sean capaces de recuperar para las instituciones comunitarias el carácter y la iniciativa que nunca debieron perder y que quedaron hechas trizas con la crisis. Quizás ellos sepan luchar contra el miedo y ayuden a que no vivamos como perros. Es verdad que Juncker arrastra historias oscuras que pueden terminar por inutilizarle. El sistema tributario luxemburgués, diseñado para que las multinacionales dejen de pagar impuestos en los países donde realmente mantienen sus actividades, es un tema grave. Juncker asegura que se mantendrá al margen de la investigación, pero la pregunta no es si lo hará (faltaría más), sino si es cierta su promesa de ayudar a acabar con esos sistemas fiscales. ¿Será verdad, como dicen sus defensores, que Juncker, un antiguo socialcristiano, busca dejar su huella en la Comisión? Si se leen sus discursos más recientes, así lo parece, para disgusto de Berlín, comodísimo con su aplastante hegemonía. Quizás ellos sean capaces de recuperar para las instituciones comunitarias el carácter y la iniciativa que nunca debieron perder Si existe realmente ese plan para revitalizar las instituciones comunitarias, y para regular lo que nunca debió dejarse sin control, habrá que estar atentos, porque Bruselas y Fráncfort van a ser escenarios de batallas formidables, en las que los ciudadanos, casi sin saberlo, nos jugaremos mucho.

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La primera escaramuza se está librando ya en el Banco Central Europeo. El discurso que pronunció Mario Draghi en agosto, en la llamada reunión de Jackson Hole, explicando su intención de movilizar recursos para ayudar a la recuperación económica europea, se interpretó como un excesivo protagonismo. Todo el mundo sabe ya que el gobernador del Bundesbank, Jens Weidmann, le exige que actúe de manera colegiada, que se apoye más en los gobernadores de los bancos nacionales de países euro, es decir, en el propio Weidmann. No se trata solo de una cuestión personal porque Weidmann defiende una posición ultraortodoxa, mientras que Draghi deja abierta la puerta a nuevas intervenciones del BCE para impedir una nueva recesión. “Los planes del BCE de inyectar más crédito barato pueden perjudicar la salud de la eurozona a largo plazo”, protestó esta misma semana el Consejo Alemán de Expertos Económicos. El consejo quiere, incluso, arrebatar al BCE la capacidad de supervisar a los grandes bancos y entregársela a una autoridad separada. La batalla va muy en serio. Harán falta todas las capacidades, todos los colmillos retorcidos, de Draghi, Juncker, Timmermans y Schulz para impedir que los profetas del templo nos tundan a palos una vez más. http://elpais.com/elpais/2014/11/14/opinion/1415979449_326936.html

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VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Why Keynes is important today

Peter Temin, David Vines14 November 2014

The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus. Related// The failed policy response to the Global Crisis Richard Wood/ What does ‘Keynesian’ really mean? Jonathan Portes// Against European fiscal stimulus Volker Wieland Macroeconomists have largely failed in explaining and recommending policies since the Global Financial Crisis of 2008. Today when thinking about fiscal policy they cite Ricardian Equivalence to deny the efficacy of Keynesian analysis (which was abandoned in the turbulent 1970s that signaled the end of rapid growth). They seem unaware that they have revived the views of Montagu Norman, Governor of the Bank of England, in 1930. Ricardian Equivalence is a theory that concludes that any expansion of public spending will be offset by an equal and opposite decline in private spending. The theory is based on a few important assumptions. It assumes forward-looking consumers who adjust their current spending in anticipation of future taxes to pay for the spending. Under these conditions, any increase in current spending leads consumers to anticipate a rise in future taxes and decrease their current spending to save for this. This theory dominates current macroeconomic discussion. It fits into the form of current macroeconomics that assumes not just forward-looking consumers, but flexible prices as well. And if a Keynesian suggests fiscal policy in current conditions, a modern economist is likely to invoke Ricardian Equivalence. Remembering the past Keynes faced exactly this opposition in 1930. He was a member of the Macmillan Committee convened by the British government to analyse the worsening economic conditions of that time. His recommendation for increased government spending – what we now call expansive fiscal policy – was opposed by Norman and other representatives from the Bank of England. They did not invoke Ricardian Equivalence because it had not yet been formulated; instead they simply denied that increased government spending would have any beneficial effect. Keynes opposed this view, but he did not have an alternate theory with which to refute it. The result was confusion in which Keynes was unable to convince a single other 154

member of the Macmillan Committee to support his conclusions. It took five years for Keynes to formulate what we now call Keynesian economics and publish it in what he called The General Theory. He based his new theory on several assumptions, two of which are relevant here. He assumed that consumers are only forward-looking part of the time, being restrained by a lack of income at other times, and that many prices are not flexible in the short run wages in particular are ‘sticky’. These assumptions give rise to involuntary (Keynesian) unemployment which expansive fiscal policy can decrease. Which theory is relevant today? We know that wages are sticky – countries in Southern Europe have found it impossible to implement requests from their creditors that they reduce wages swiftly. And we know that not all private actors in the economy are forward-looking. Before the crisis, borrowing and spending increased in ways that could not be sustained; now consumers are not spending and business firms are not investing even though interest rates are close to zero. Those are the conditions described by Keynes in which expansive fiscal policy works well. They also are the conditions in which monetary policy does not, even though modern macroeconomic policymakers came to rely entirely on monetary policy for stabilisation. There is a disconnect between the needs of current economies and theories of current macroeconomists. Doomed to repeat it? What to do? In many applied disciplines, like medicine, practitioners go back to basics when the facts change. If their current practice fails to produce the desired result, they search their armamentarium for others. If their assumptions prove wrong, they look for more appropriate ones. But not modern macroeconomists – they say we must simply endure what they call secular stagnation. This is an unhappy prediction. Monetary policy does not work today; instead, this is the perfect time for fiscal policy. There are immediate needs to repair roads and bridges, rebuild energy grids, and modernise other means of travel. Expansive Keynesian fiscal policy will benefit the economy in both the short and long run. We argue in our new book, Keynes, Useful Economics for the World Economy, that these recommendations can be seen as inferences from a simple and effective model of the short-run economy. We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies – and even for the economy as a whole in the long run – to define the short run in which we all live. We also stress Keynes’ interest in the world economy, not just in isolated economies. After all, the IMF is perhaps the most enduring remnant of Keynesian thought left today. Editor's note: Temin and Vines are coauthors of "The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It". References Lucas, R (2009), “Why a Second Look Matters”, Council on Foreign Relations, March 30. Krugman, P (2011), “A Note on the Ricardian Equivalence Argument Against the Stimulus (Slightly Wonkish)”, Krugman blog, The New York Times, December 26. Barro, R (1974), “Are Government Bonds Net Wealth?”, Journal of Political Economy. 155

Barro, R “On the Determinants of the Public Debt”, Journal of Political Economy. Poterba, J M and L H Summers (1987), “Finite Lifetimes and the Effects of Budget Deficits on National Savings”, Journal of Monetary Economics. Carroll C and L H Summers (1987), “Why Have the Private Savings Rates in the United States and Canada Diverged?”, Journal of Monetary Economics. http://www.voxeu.org/article/why-keynes-important-today 'The Unwisdom of Crowding Out' Posted: 15 Nov 2014 11:40 AM PST Here's Paul Krugman's response to the Vox EU piece by Peter Temin and David Vines that I posted yesterday: The Unwisdom of Crowding Out (Wonkish): I am, to my own surprise, not too happy with the defense of Keynes by Peter Temin and David Vines in VoxEU. Peter and David are of course right that Keynes has a lot to teach us, and are also right that the anti-Keynesians aren’t just making really bad arguments; they’re making the very same really bad arguments Keynes refuted 80 years ago. But the Temin-Vines piece seems to conflate several different bad arguments under the heading of “Ricardian equivalence”, and in so doing understates the badness. The anti-Keynesian proposition is that government spending to boost a depressed economy will fail, because it will lead to an equal or greater fall in private spending — it will crowd out investment and maybe consumption, and therefore accomplish nothing except a shift in who spends. But why do the AKs claim this will happen? I actually see five arguments out there — two (including the actual Ricardian equivalence argument) completely and embarrassingly wrong on logical grounds, three more that aren’t logical nonsense but fly in the face of the evidence. Here they are...[explains all five]... He ends with: My point is that you do a disservice to the debate by calling all of these things Ricardian equivalence; and the nature of that disservice is that you end up making the really, really bad arguments sound more respectable than they are. We do not want to lose sight of the fact that many influential people, including economists with impressive CVs, responded to macroeconomic crisis with crude logical fallacies that reflected not just sloppy thinking but ignorance of history. http://economistsview.typepad.com/economistsview/2014/11/links-for-11-16- 14.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+EconomistsView+% 28Economist%27s+View%29

The Unwisdom of Crowding Out (Wonkish) November 15, 2014 1:48 pmNovember 15, 2014 1:48 pm87Comments I am, to my own surprise, not too happy with the defense of Keynes by Peter Temin and David Vines in VoxEU. Peter and David are of course right that Keynes has a lot to teach us, and are

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also right that the anti-Keynesians aren’t just making really bad arguments; they’re making the very same really bad arguments Keynes refuted 80 years ago. But the Temin-Vines piece seems to conflate several different bad arguments under the heading of “Ricardian equivalence”, and in so doing understates the badness. The anti-Keynesian proposition is that government spending to boost a depressed economy will fail, because it will lead to an equal or greater fall in private spending — it will crowd out investment and maybe consumption, and therefore accomplish nothing except a shift in who spends. But why do the AKs claim this will happen? I actually see five arguments out there — two (including the actual Ricardian equivalence argument) completely and embarrassingly wrong on logical grounds, three more that aren’t logical nonsense but fly in the face of the evidence. Here they are: First, there’s the Say’s Law argument: because spending must equal income, any increase in government spending must be matched by a fall in private spending. “This is just accounting,” declared John Cochrane. No, it isn’t — and it was the remarkable fact that prominent economists were saying things like this, as if none of the debates of the 1930s had happened, that led me to proclaim a Dark Age of macroeconomics. Second, there’s the misuse of Ricardian Equivalence. It’s important to understand that we’re not debating about whether Ricardian equivalence is right; even if it were (it isn’t), what the anti- Keynesians were saying was wrong, as I tried to explain a number of times. It’s crucial, I’d argue, to realize that what the people invoking Ricardo were saying was wrong even in terms of their own model. If you don’t get that, you don’t appreciate the depths to which all too many economists sank. Third, there’s the standard textbook crowding out story, in which increased government spending in the face of a fixed money supply, or maybe a nominal income target, causes interest rates to rise and private investment to fall. The money supply argument doesn’t work when we’re at the zero lower bound, which is after all why we’re talking about fiscal policy in the first place; but there is a school of thought that insists that the Fed and the ECB and the BoJ could achieve full employment if only they wanted to. I disagree, and I think this is mostly wishful thinking, but at least it’s not the kind of raw nonsense involved in arguments #1 and #2. Fourth, there’s the claim that we’re at full employment, or maybe always at full employment, that demand-side economics is wrong, so any government use of resources must divert them from other uses. I think this is empirically silly for the US and Europe in recent years, but again it’s not the kind of raw nonsense of the first two arguments. Finally, there’s the confidence fairy: demand-side economics is valid, but business hates big government so much that any attempt to use fiscal policy will backfire. Oh, kay. My point is that you do a disservice to the debate by calling all of these things Ricardian equivalence; and the nature of that disservice is that you end up making the really, really bad arguments sound more respectable than they are. We do not want to lose sight of the fact that many influential people, including economists with impressive CVs, responded to macroeconomic crisis with crude logical fallacies that reflected not just sloppy thinking but ignorance of history. http://krugman.blogs.nytimes.com/2014/11/15/the-unwisdom-of-crowding-out- wonkish/?_r=0

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Eurointelligence RSS Feed viernes, 14 de noviembre de 2014, 8:07:42 Honey, I just shrunk the labour reforms

viernes, 14 de noviembre de 2014, 8:07:42 This story fits very well with our observation yesterday that Matteo Renzi prioritises political reform over economic reform. The big news yesterday was the agreement between Renzi and the rebels inside the Partito Democratico over labour market reform. The government conceded another important point to the rebels, and has gone a large distance to overcome the internal party split. The downside of the attempt by the PD to heal its internal wounds is that the new dismissal legislation is not going to be all that different in practice from the current law. Right now, Italian courts can (and usually do) reinstate dismissed workers. The original plan by the government had been to scrap Article 18 of the 1970 Labour Law altogether, and replace the concept of reinstatement with compensation. Subsequently, the government introduced an amendment to its own legislation to make reinstatement possible in cases of discrimination. Yesterday’s agreement added another exemption, in which the courts can reinstate workers in case of unjust disciplinary measures – which is a rather broad catch-all type concept. Since the courts themselves decide what constitutes just and unjust, this new legislation is not going to take away the uncertainty to employers. Why invest in Italy if you get lower wage costs and much clearer labour market rules in Poland? The Italian government is now determined to push this truncated jobs act through the Italian parliament. The act now goes to the chamber of deputies today where the labour committee will decide which of the 500 or so amendments are eligible for a vote. The voting on the bill itself will start Sunday and be concluded by Thursday. Renzi yesterday declared the debate over, and said Italy will have a reformed labour market from January onwards. Politicians from the New Centre Right gave a sceptical response, saying if the media reports were true, they would not accept them. It was their leader, Angelino Alfano, who triggered the debate on Article 18 this summer. Our other stories We also have stories on the latest PR disaster for the French government; on Noyer's nod on government bond purchase; on the narrowing of the Greek primary surplus; on Ireland getting the final blessing for its early repayment of its IMF loans; on the latest downward revision for GDP and inflation in the survey of professional forecasters; on the Council of Economic Experts take on the German current account, and how Alan Meltzer see the Eurozone.

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ft.com/global economy EU Economy Last updated:November 14, 2014 12:02 pm Eurozone economy returns to growth Claire Jones in Frankfurt, Stefan Wagstyl in Berlin and Adam Thomson in Paris

The eurozone’s economy expanded only slightly between the second and third quarters, keeping the pressure on policy makers to take further steps to revive a region that remains mired in stagnation. Output in the currency bloc expanded 0.2 per cent over the three months to September after failing to grow at all over the previous quarter. The official figure, published by Eurostat on Friday, narrowly beat analysts’ expectations. France’s economy grew for the first time this year during the third quarter and Germany, the eurozone’s powerhouse, narrowly avoided sliding into recession, a better outcome than many economists had feared. More ON THIS STORY/ Lew warns of European ‘lost decade’/ Philipp Hildebrand Juncker must steer recovery/ Global Insight G20 is forum for world economy impotence ON THIS TOPIC// Fast FT French economy grows 0.3% in third quarter/ Alleged Sarkozy plot rocks French politics/ Massif opportunity in Chamonix/ Drones fly into French nuclear debate Figures from Italy confirmed expectations of a 0.1 per cent fall in gross domestic product in the third quarter, showing that the eurozone’s third-largest economy remains a laggard that is struggling to recover. Italian output has failed to register a quarter of growth since 2011.

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Other parts of the currency area’s periphery performed well, however. Greece’s economy expanded 0.7 per cent. Spain, the area’s fourth-largest economy, has already reported growth of 0.5 per cent for the quarter, making it among the strongest performing economies in the region. “There’s evidence that reforms in the periphery are starting to pay off,” said Christian Schulz, economist at Berenberg Economics. “That shows the eurozone’s response to the crisis wasn’t a complete disaster.” The sluggish performance of the single currency bloc’s three biggest economies will, however, reinforce calls for radical monetary measures from the European Central Bank, reform from Paris and Rome and for a fiscal stimulus from Berlin. The figures could strengthen the hand of Mario Draghi, ECB president, if he decides to expand his controversial €1tn plan to swell the ECB’s balance sheet to include purchases of corporate bonds and sovereign debt. Government borrowing costs slipped down across Europe on Friday, as investors kept faith that the growth figures would do little to ease pressure on the central bank. European stocks were flat and the euro continued to skirt around two-year lows against the dollar. The yield on benchmark 10-year debt issued by Germany, the region’s largest bond market, fell from 0.80 per cent at the end of Thursday to 0.78 per cent by mid-Friday morning. Italian 10-year bond yields dropped from 2.38 per cent to 2.35 per cent. Germany saw GDP rise 0.1 per cent in the three months to September compared with the previous quarter – and thereby avoided the ignominy of recession, defined as two successive quarterly declines. The second-quarter figure was revised from a 0.2 per cent decline in output to a 0.1 per cent fall. France’s official statistics institute recorded growth of 0.3 per cent in the three months to the end of September, compared with zero growth during the first quarter and a 0.1 per cent contraction during the second.

Economists were surprised by the positive result, though they warned that the latest figures did not necessarily spell the beginning of a return to economic health.

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The better than expected French figures will, however, provide socialist president François Hollande with a brief respite as he struggles to lift the country from its malaise. Philippe Waechter, chief economist at Natixis Asset Management, pointed out that the two main drivers of the growth were government spending, which expanded 0.8 per cent during the quarter compared with 0.5 per cent in the second, and a jump in inventories. In Italy, Matteo Renzi, who became prime minister in February, has set in motion an agenda of sweeping reforms to tackle some of the country’s biggest economic problems, and sought some leeway from EU budget rules to revive the economy. But it is unclear whether he will be successful. The region’s economy remains more than 2 per cent smaller than in the autumn of 2008, when the collapse of US investment bank Lehman Brothers sparked a global financial crisis and sent trade volumes plunging. Both the US and the UK have surpassed their pre-crisis peaks, and officials from both those economies have over the past week called on eurozone leaders to embark on more aggressive monetary and fiscal easing. This week, Jack Lew, the US Treasury secretary, warned the currency bloc faced the threat of a Japanese-style lost decade of low growth and falling prices, in an unusually blunt attack on an ally’s economic policies. Mark Carney, Bank of England governor, said a spectre of stagnation was “haunting” the region. “I don’t think Mr Lew will be convinced by this. He has gone in the direction of saying German growth is strong enough, complaining particularly about the lack of investment,” Mr Schulz said. “But some of the criticism is misguided. Consumption in Germany, a pillar of eurozone growth, looks strong.”

Germany’s statistical office said “positive impulses” came from household consumption and from exports, which are at strong levels in Germany despite the political crises in eastern Europe and the Middle East, and a slowdown in China. Emphasising the stability of the German economy, the statistical office pointed out that employment stood 0.9 per cent up on the same period last year, hitting a record high of 42.9m. 161

The 0.1 per cent rise in output was in line with forecasts. Economists welcomed the fact that fears of recession, which surfaced during the second quarter, seem to have been comprehensively dispelled. Carsten Brzeski, of ING Bank, said: “The German economy is nowhere near any abyss. With low unemployment rates, record-high employment and a highly competitive industry, it seems as if Germans can manufacture even stagnations better than the rest of the world. “However, complacency or any trace of high-handedness would be misplaced. The trend of the last quarters also signals that the German economy could use a new reform impulse rather sooner than later.” The numbers will give a fresh incentive for France, Italy and other weaker eurozone economies to repeat their calls for Berlin to relax its public purse. But Germany has made clear that it remains committed to its debt-cutting programme and pledge of a zero-deficit 2015 budget. The €10bn infrastructure spending boost announced last week for 2016-18 is as far as Berlin wants to go, even though the measures amount to only 0.1 per cent of GDP annually. Additional reporting by James Politi in Rome and Elaine Moore http://www.ft.com/intl/cms/s/0/7257bc3e-6bcb-11e4-b1e6- 00144feabdc0.html#axzz3J2uexbmb

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ft.com Comment The A-List

Philipp Hildebrand November 14, 2014 G20 summit: Leaders must urge Juncker to steer Europe back on the road to recovery On the eve of this year’s Group of 20 summit, Europe is once again at the forefront of risks to the global economy. Uncertainty over the future of the eurozone and the fever of the euro crisis in 2012 have given way to stability. But this stabilisation has now virtually morphed into quasi-stagnation. While third quarter GDP data in France surprised somewhat on the upside, Germany narrowly avoided sliding into a recession. From there things could easily get worse as debt overhangs keep growing, the global environment becomes less forgiving and radical political forces gain ground within the EU. Monetary policy alone cannot be the answer. The European Central Bank is already “all-in”, in intention if not yet fully in practice, and has been creatively deploying one new instrument after another. Arguably, at this point monetary policy is overburdened and it is not at all clear how full-blown quantitative easing would support a European recovery. Something more must be done. But what? Since the International Monetary Fund/World Bank annual meetings in October, a lot of fingers have been pointed at Germany. Narratives include Germany’s selfish refusal to embark on demand stimulus even though it has the space and Berlin’s unwillingness to let the ECB provide more aggressive monetary stimulus, all following the same broad argument, oblivious to what policies make sense for the country itself. A stand-off between the European Commission and two of the eurozone’s largest members was narrowly avoided last month, as both Italy and France pretended to make additional adjustment efforts and Brussels pretended to believe the efforts were meaningful. This is a better outcome than a highly charged confrontation to be sure, but it has left a sense that the EU’s fiscal rules are, once again, in shambles. These developments are symptomatic of the blinders policy makers and commentators alike have been wearing when thinking about fiscal policy in the eurozone: it is considered strictly a country-level issue with the misguided focus that Germany is the solution to all problems; misguided both because of what its own macroeconomic conditions require and because higher demand in Germany has limited spillover effects on the eurozone periphery. True enough, there is no such thing as a fiscal union yet. But monetary co-operation started well before the European single currency and co-operation in the supervision of banks and systemic risk well before the single supervisory mechanism. The same

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paradigm shift is needed for fiscal policy. Of course economic conditions and fundamentals prevailing at the national level remain essential, but they need to be supplemented by an eurozone-wide perspective. The thought is not as radical or new as it may sound. In effect it is already present in the stability and growth pact in the form of the systemic escape clause, which recognises that there are times when the situation in the eurozone as a whole is bad enough to justify a temporary override of rules. It is not difficult to make the case that the eurozone is facing such a situation today: - It has one of the largest output gaps in the Group of Seven leading economies, and by far the highest unemployment and lowest inflation, well below the 2 per cent target (see charts);

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- It has fiscal space, with gross public debt among the lowest in the G7. Despite that, the eurozone has the most conservative structural balance of the G7 and the second most conservative overall fiscal balance, behind Canada where the output gap is closing fast; - Monetary policy, as noted, can only do so much more with the bullets that have not yet left the gun and even then not without risks of collateral damage. And structural reforms, while desperately needed throughout the eurozone, are not known for boosting aggregate demand in the near-term, they take time to create the desired output effect and may even be contractionary in the short term; - Any economy in this situation would be prescribed a good dose of fiscal expansion – perhaps to the tune of 2 per cent of gross domestic product – by most doctors instead of running a broadly balanced fiscal policy in 2014 and 2015 as is the case in the eurozone. It would be infinitely better for the health of the eurozone, and for the global economy, to not browbeat Germany to adopt policies that would not serve its own interests and would make for bad economics, in addition to destroying the credibility of Europe’s fiscal rules by pretending to enforce them when they do not fit. Instead of pussy-footing with manifestly too small investment projects, it would be better if the eurozone adopted a systemic vision of fiscal policy and invoked the SGP escape clause. Of course, this does not mean the time has come for a free for all. Taking on more debt is always risky. It should only be done at this juncture against a commitment to undertake the structural reforms that can deliver a much-needed boost to potential growth, particularly in France and Italy, thereby making the extra debt affordable. Further, the stimulus should be carefully designed and focus on high-impact spending: high yield shovel-ready infrastructure investment, cuts in payroll taxes (which are too high almost everywhere in the eurozone), active labour market policies to tackle areas where structural unemployment is the highest and so forth. This weekend’s G20 summit in Brisbane would be a perfect opportunity for Jean- Claude Juncker, the freshly-minted president of the European Commission, to make bold proposals along those lines that all European countries could support because they would truly embody public good for the eurozone. This would also help achieve the commitment the G20 made by the finance ministers and central bank governors in Sydney earlier this year to boost global GDP by 2 per cent over the next five years. As they say, cometh the hour cometh the man. Mr Juncker, it is time you show your fellow world leaders that the eurozone exists and that you are indeed the man. The writer is vice-chairman of BlackRock and a member of the company’s global executive committee. Previously he served as chairman of the governing board of the Swiss National Bank and was a member of the Financial Stability Board http://blogs.ft.com/the-a-list/2014/11/14/juncker-must-steer-europe-back-on-road- to-recovery/

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ft. com World Europe Brussels November 13, 2014 1:39 pm New EU energy chief shifts focus to building common power market Christian Oliver in Brussels

©EPA Miguel Arias Cañete, the EU energy commissioner Brussels will press European countries to harmonise their widely divergent tax rates on electricity as a step towards building a single energy market. In his first interview since taking over as the EU’s energy commissioner, Miguel Arias Cañete argued that smoothing regulatory disparities across the 28-member bloc – and not just laying billions of euros of pipes and pylons – was essential to make progress on a long-sought policy goal. More ON THIS TOPIC/ Nick Butler Time to start again on EU energy policy/ Q&A EU’s challenging energy targets/ EU seeks alternative energy suppliers/ Editorial Europe needs energy union IN BRUSSELS/ EU’s top drugs regulator resigns/ EU confronts Dutch over Starbucks tax deal/ Dutch and Starbucks in tax deal storm/ MEPs call for probe into EU tax havens “Completing the internal energy market is not just a matter of building interconnections and infrastructure, it also needs new rules. When I say rules – very specifically – we are having problems with network tariffs,” Mr Arias Cañete told the Financial Times. “The composition of tariffs should be transparent and based on common rules. We have a very complex system of tariffs at the moment.” The construction of an “energy union” is one of the EU’s top priorities for the next five years. In theory, a common internal energy market would unite Europe’s inefficient patchwork of competing national energy grids and make prices converge. The hope is that this would address two of the EU’s biggest strategic weaknesses: dependence on imports from Russia and uncompetitive power prices in relation to the US. The consultancy Strategy& estimates Europe could save €40bn a year by 2030 if it integrates its energy networks. After years of frustration and false starts, one of the new commission’s vice-presidents, Maros Sefcovic, has been tapped to accelerate the project, and is expected to launch a detailed investment plan early next year. Mr Arias Cañete, who will be charged with 167

implementing the plan, admitted that an energy union would not be “a fast-track kind of thing”. One of the biggest – and frequently overlooked – obstacles to sharing power across borders is the sharp disparity in prices and market rules across the EU. While electricity costs about €30 per 100 kilowatt hour in Denmark and Germany, for example, it costs about €9 in Bulgaria. This stems, in part, from differing national tax laws. In Denmark, 57 per cent of the final price of power is made up of taxes; in Germany, 49 per cent is based on levies. In Malta and Britain, the proportion is only 5 per cent. The discrepancies are similar in the gas market.

Asked why EU countries would agree to harmonise their energy tax regimes – something many may view as an encroachment on their sovereignty – Mr Arias Cañete cited the urgency to respond to Europe’s flagging competitiveness. “We have to make the economic case as we are fighting in a global market with more expensive energy prices than our competitors . . . We have gas prices for industry three or four times those of the United States; we have retail electricity prices double the United States,” he said. In spite of Mr Arias Cañete’s emphasis on taxes and regulations, heavy investment in infrastructure remains a challenge. One of the EU’s most glaring inefficiencies is that it cannot harness surplus electricity – particularly from renewables – and export it from Spain, Italy, Scandinavia and the Balkans to parts of the continent where it is needed. Surplus power from Spanish wind turbines or Nordic hydropower, for example, is often wasted or unused because it cannot be transmitted to areas of high demand.

The commission admits the €5.8bn in EU funds dedicated to connecting power networks represents barely 3 per cent of what is needed. Mr Arias Cañete said the success of the energy union would therefore require private investment. To whet investors’ appetite, Brussels would have to help develop a new form of financing package in its energy union plan. “Huge amounts of money are needed. I think the traditional system of lending will not work,” he said. “We need something new.” 168

The most controversial aspect of the EU’s energy union may be a plan for eastern European companies to band together to negotiate gas prices jointly when buying from Russia. Mr Arias Cañete’s predecessor, Günther Oettinger, was sceptical about “common gas purchasing” and worried that it could contravene the bloc’s competition law. However, Mr Arias Cañete said Brussels would not drop the gas purchasing plan as companies needed “leverage” in negotiations with Russia. Moscow currently charges far higher prices to Baltic states with no energy sources other than Russia than to the Czech Republic, which buys a third of its gas from Norway. Mr Arias Cañete said that he would work with Margrethe Vestager, the competition commissioner, to draw up a system for companies to co-operate in ensuring a level playing field in talks with Russia. “We are not discussing the idea of the commission buying on behalf of nation states. Not at all,” he said. “The question is whether we could generate interest among private companies to consider the possibility of working together.” http://www.ft.com/intl/cms/s/0/d1444394-6a71-11e4-8fca- 00144feabdc0.html#axzz3J2uexbmb

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ft.com Comment The Big Read

November 13, 2014 6:47 pm Regulation: Banks count the risks and rewards Martin Arnold and Sam Fleming Crackdown on money laundering and terrorist funding hits flow of cash to developing world

©Reuters A worker counts US dollars as he serves a customer at a Dahabshiil money transfer office in Mogadishu E very week, roughly $1bn is sent out of the US by people helping to support their families in other countries – mostly in Latin America and Africa. And every week, armoured vans pick up millions of dollars worth of these cash “remittances” and drive hundreds of miles to deposit the money at the nearest branches of the US Federal Reserve. When the vans reach the Fed branches, the funds are wired to a tiny West Coast bank called Merchants Bank of California, the last US lender still doing business with many of the small companies that handle remittances. More ON THIS STORY// Lombard Nomura / UBM / Electra/ Branson backs money transfer start-up/ Africans face $2bn ‘remittance supertax’/ Financial technology sector complains of lack of bank services

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ON THIS TOPIC// Lombard StanChart / C&WC / Hess’s toys/ Banks agree to new crisis derivatives rules/ Banks face fresh curbs on leveraged loans/ BoE wants US consultation on bank fines IN THE BIG READ// Italy’s Post-it premier hopes reforms stick/ Chinese tech Selling to the next billion/ Battle for Iraq the Iranian connection/ Westminster malaise Aden Hassan, an executive at Minnesota-based Kaah Express, says remittance companies like his are forced into this time-consuming and costly process because they have been almost completely excluded from the banking system. “Since 2004 and 2005, major US banks have started dropping money services businesses, so they became reliant on smaller state-based banks until they also started closing accounts and it was only Merchants Bank of California left,” he says. As regulators have cracked down on money laundering and terrorist finance, banks have severed their ties with many clients in developing nations in an attempt to limit the risk of being hit by massive fines. The banks and other critics say this carries an unintended humanitarian cost by adding charities and non-governmental organisations to the ranks of the “de-banked”. The issue has shot up the agenda after a number of high-profile cases highlighted the impact of the banks’ increased risk aversion, notably on the flow of remittances to poor countries such as Somalia. This issue is likely to be discussed at meetings of G20 countries this week in Brisbane, Australia, where ministers will also tackle the problem of lenders that are “too big to fail”. The debate comes after another bruising year for global banks marked by large fines – the latest of which is the $4.3bn punishment by regulators this week against six banks for their role in foreign exchange rate-rigging. The scandals have blunted the banks’ arguments that post-crisis rulemaking is hurting vital segments of the economy, such as mortgage lending in the US.

Yet the banks, and sometimes governments, have accused regulators – particularly in the US – of zealous over-reach. Earlier this year BNP Paribas paid $8.9bn in penalties for breaching sanctions on Sudan, Iran and Cuba over many years, prompting French president François Hollande to complain to US President Barack Obama about the treatment of his country’s biggest bank. HSBC and Standard Chartered have also paid 171

large fines as part of settlements with the US authorities over money laundering allegations. Douglas Flint, chairman of HSBC, warned earlier this year that there was “an observable and growing danger of disproportionate risk aversion creeping into decision- making” at Europe’s biggest bank by assets. Two years ago, HSBC began withdrawing from several countries and activities it considered too risky after paying $1.9bn in fines to US authorities and admitting that it processed drug-trafficking proceeds through Mexico and transmitted funds from sanctioned countries such as Iran. The cost of the regulatory demands being placed on big banks was laid bare by Jamie Dimon, chief executive of JPMorgan Chase, who said in a letter to shareholders this year that the bank had spent $2bn and hired 13,000 staff to beef up its handling of regulatory issues and compliance after paying more than $20bn in legal penalties last year.

JPMorgan has severed its links with vast numbers of clients considered to be high-risk, including dozens of correspondent banks in developing countries. This has caused some awkward moments: Colombia’s former foreign minister José Antonio Ocampo was dropped as a client as it moved to close the accounts of current and former non-US diplomats, and even porn stars including Teagan Presley and Veronica Avluv started a Twitter campaign with the “BoycottChase” hashtag to protest their treatment. Given the rising costs of complying with new regulations and the risk of big fines if anything goes wrong, bankers argue the risk-reward balance is skewed against providing services for less lucrative clients. Banks are reluctant to handle payments for organisations such as African remittances companies or Muslim charities, for example, because of the risk the money could end up in the wrong hands, such as terrorist groups al-Shabaab in Somalia or the Islamic State of Iraq and the Levant (Isis). “From my point of view, there is an orange suit sitting in the US and the regulator is saying it’s there waiting for me,” says one European banking chief executive. 172

The “de-risking” phenomenon has triggered concerns at the highest level of regulatory policy making. Mark Carney, the Bank of England governor, said in Basel on Monday that the topic was due to be discussed at G20 level as he warned of the possibility of “parts of the world being unbanked or less actively banked” and called for better coordination between regulators.

Sir Sherard Cowper-Coles, senior adviser to HSBC, said at a recent conference that banks were engaged in a “pre-emptive cringe in front of regulators” that may leave parts of the world cut off from the global banking system. “While there may be a public interest benefit in these withdrawals, there may also be cost,” he says. A survey of 17 clearing banks in a report by organisations including the British Bankers’ Association says thousands of correspondent banking relationships have been closed since 2011. The average decline in the number of relationships was 7.5 per cent, with two banks severing a fifth of their links, according to the findings presented at meetings of the Financial Action Task Force in October. Research from the International Chamber of Commerce suggests a major impact on trade finance. Drawing on the responses of 298 banks in 127 countries, it found that anti-money laundering and “know-your-customer” requirements had led to 68 per cent of surveyed banks declining transactions in 2013. Africa was the hardest hit, and small and medium-sized businesses were the most acutely affected sector. Some of the highest-profile problems have been in the field of remittances, with countries such as Somalia suffering from banks’ unwillingness to expose themselves to the danger of illicit flows of finance. Remittance payments are critical to poorer countries – comprising up to a third of their GDP – and are on track to reach $436bn this year, according to the World Bank. Daniel Glaser, the assistant secretary for terrorist financing at the US Treasury, says: “We take seriously concerns that some money transmitters are having difficulty obtaining or maintaining bank accounts and that some banks are no longer providing banking services to money transmitters, regardless of risk.”

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This week the US Financial Crimes Enforcement Network warned that banks were “indiscriminately terminating” accounts of money transmitters. The UK Money Transmitters Association estimates nearly 85 per cent of UK-based authorised payment institutions focused on money remittance across borders have either no access or limited access to a bank account. “It’s a real problem and we are not making any progress on this,” says Dominic Thorncroft, UKMTA chairman. The cause célèbre of the UK remittance industry is Dahabshiil, a leader in transmitting money to Africa, which mounted a successful legal challenge against Barclays’ decision to close its account last year. Barclays was the last big UK lender to deal with many remittance companies and faced a campaign to reverse its decision led by Somalia-born British athlete Mo Farah. Yet Dahabshiil eventually agreed an out-of-court settlement with the bank and made alternative banking arrangements. Scott Paul, senior humanitarian policy adviser at Oxfam America, says similar problems to those in Somalia are likely to grow in other developing countries. For banks, “it is a case of non-negligible risk and negligible reward”. Charities are also being hit. Abdurahman Sharif of the Muslim Charities Forum in the UK says his members are on alert after several had their accounts closed by HSBC and other lenders. “People don’t want to talk publicly about it because the agents the banks use will see they had their accounts closed and flag it up as risky,” he says. Mr Sharif warns that if Muslim charities are seen as being excluded from the banking system it will drive money underground, citing the example of people carrying cash to Syria and Gaza. “We have gone from making suggestions to needing solutions on this otherwise the situation is going to become dramatic.” Regulatory officials stress the need for caution in interpreting the noise from the banking sector. While there is a welter of anecdotal evidence of banks severing relationships, it is not clear how much of this is because companies are suffering low profits and are seeking to cut out less remunerative business lines. Roger Wilkins, president of the Financial Action Task Force, argues de-risking is a “fig leaf” for banks that are seeking to ditch uneconomic clients. Jean Pesme, who manages the World Bank’s financial market integrity unit, says: “We are concerned there may be a little bit of overreaction and risk avoidance, rather than risk management.” And some banks’ losses may be other companies’ gain. Hank Uberoi, chief executive of payments company Earthport, says the traditional correspondent banking model is “complicated and incredibly expensive” as well as prone to error when it comes to moving small sums of money across borders. His company offers big banks a service transferring large volumes of payments between 63 countries, cutting out the need for chains of correspondent banks. Another company sidestepping the banks is TransferWise, a British low-cost money transfer start-up founded by two Estonians in 2011. It matches people seeking to send money in different currencies – keeping the transaction outside the official clearing system. One day these innovators may find ways to fill all the gaps left by risk-averse banks. But until then governments are looking at ways to help.

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The UK Treasury is working with the World Bank to create a “safer corridor” to ease the flow of remittances to Somalia by establishing robust checks to trace the funds. Sir Brian Pomeroy, chairman of the UK’s Action Group on Cross-Border Remittances, says the safer corridor to Somalia is expected to launch early next year and could be rolled out to other countries if successful. In the meantime, banks keep retrenching. Australia’s Westpac caused a storm in the country’s Somali communities after the bank said it would this month stop being the last lender to handle transfers to the east African country. Back in Minnesota, Mr Hassan says US remittance companies are also on edge after Merchants Bank of California threatened to close their accounts. “We’re having to downscale operations in entire states because of the lack of banking options,” says Mr Hassan, adding that regulators put pressure on the few banks still dealing with Kaah Express by increasing their contribution to a Federal deposit insurance fund and doing more frequent inspections. “Every day it gets tougher.” *** UK: Curbs hold back start-ups in alternative finance Julia Groves is trying to stay calm. The chairwoman of the UK Crowdfunding Association is explaining the many ways that banks obstruct the growth of start-ups in the UK’s fast-growing financial technology sector, writes Martin Arnold. As well as closing the bank accounts of crowdfunding companies and digital currency operators, lenders are also refusing to grant them merchant identification to allow them to take direct debit payments, says Ms Groves. “The reality is that banks have little incentive to support these small, innovative new forms of finance that are coming to market,” she says. Her own company, Trillion Fund, a crowdfunding platform for renewable energy projects, is in the final stages of a protracted negotiation to gain a merchant ID from Barclays that she says is a crucial step in its development. The financial technology industry raised the issue at a round table event with the government earlier this year, which Ms Groves attended, urging action to force the banks to cater for them. Dozens of fintech businesses have told the FT they had experienced difficulties, particularly with HSBC and Barclays, and they said the problems had worsened this year. The actions of the banks seem at odds with chancellor George Osborne’s aim to make the UK a “fintech hub”. Mr Osborne has promised legislation to force banks that reject loan applications from small and medium-sized companies to refer them online to alternative sources of funding, such as peer-to-peer lenders and crowdfunding platforms. “The fundamental challenge – if you take the hysteria out of it – is that we are regulated and have to do compliance and anti-money laundering checks, and yet the banks feel they have to be responsible for doing the same checks,” says Ms Groves. The UK alternative finance market has grown to £1.74bn this year, a 161 per cent increase on 2013, according to a report from Nesta, the think-tank, and the University of Cambridge last week.

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Restrictions at RBS and HSBC on doing business with the money services sector do not include crowdfunding companies. http://www.ft.com/intl/cms/s/0/9df378a2-66bb-11e4-91ab- 00144feabdc0.html#axzz3J2uexbmb

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fastFT VIEW LATEST POSTS ECONOMY Treasury's Lew warns Europe faces 'lost decade'

18 hours ago Nov. 13 2014 Jack Lew has taken a shot at his counterparts across the Atlantic. The US Treasury secretary warned Europe that it risks a "lost decade" and bluntly criticised its economic policy ahead of this weekend's G20 summit in Brisbane, US economics editor Robin Harding writes. Mr Lew directed his complaints at national governments more than the European Central Bank, telling the World Affairs Council in Seattle that Europe has failed to restore healthy growth, and risks falling into a deeper slump. The unusually sharp public critique reflects deep US frustration that it is once again expected to be the main engine for global growth as misfiring economies around the world lean on US consumers as a source of demand. "In short, status quo policies in Europe have not achieved our common G20 objective of strong, sustainable, and balanced growth," said Mr Lew. "Resolute action by national authorities and other European bodies is needed to reduce the risk that the region could fall into a deeper slump. The world cannot afford a European lost decade." http://www.ft.com/intl/fastft/235472/us-treasurys-lew-warns-europe-faces-lost- decade Defining Europe's Capital Markets Union by Nicolas Véron on 13th November 2014

1528 The new European Commission has signalled that it will work to create a ‘capital markets union’. This is understood as an agenda to expand the non-bank part of Europe’s financial system, which is currently underdeveloped. The aim in the short term is to unlock credit provision as banks are deleveraging, and in the longer term, to favour a more diverse, competitive and resilient financial system.

Direct regulation of individual non-bank market segments (such as securitisation, private placements or private equity) might be useful at the margin, but will not per se lead to significant capital markets development or the rebalancing of Europe’s financial system away from the current dominance by banks. To reach these goals, the capital markets union agenda must be broadened to address the framework conditions for the development of individual market segments.

Six possible areas for policy initiative are, in increasing order of potential impact and political difficulty: 177

1. regulation of securities and specific forms of intermediation; 2. prudential regulation, especially of insurance companies and pension funds; 3. regulation of accounting, auditing and financial transparency requirements that apply to companies that seek external finance; 4. a supervisory framework for financial infrastructure firms, such as central counterparties, that supports market integration; 5. partial harmonisation and improvement of insolvency and corporate restructuring frameworks;and 6. partial harmonisation or convergence of tax policies that specifically affect financial investment.

http://www.bruegel.org/publications/publication-detail/publication/855-defining- europes-capital-markets- union/?utm_source=Bruegel+publication+alert&utm_campaign=569d1c850e- Publication+Alert&utm_medium=email&utm_term=0_1f233d52bd-569d1c850e- 277483465

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ft.com Comment The Big Read November 12, 2014 7:07 pm Italy’s Post-it premier hopes reforms stick James Politi in Rome A stalling economy could thwart Renzi’s efforts to tackle the decades-old problems that beset the country

©Reuters Matteo Renzi, Italy’s youthful and reform-minded prime minister, has been dubbed il rottamatore or “the scrapper”, for the way he has gone about transforming the country’s staid economic system and gridlocked political institutions. But nine months into his job, he has taken on another moniker for himself. “Sometimes I feel like a Post-it note,” he explained to a group of business people in Brescia this month, “because my job is to remind Italy of who we are.” More ON THIS STORY// Italy targets legal profession for reform/ Italy has ‘atomic bomb’ to revive economy/ Italy rules out public money for banks that failed stress tests/ Row between Rome and Brussels heats up ON THIS TOPIC// Renzi and Berlusconi agree electoral deal/ Brussels Blog It’s Renzi vs Barroso over EU’s budget letter/ Italian budget close to defying EU rules/ Italy poised for property renaissance IN THE BIG READ// Chinese tech Selling to the next billion/ Battle for Iraq the Iranian connection/ Westminster malaise/ How low can the price of crude oil go? As he seeks to awaken Italians from decades of political and economic stupor, Mr Renzi has set out to overhaul the country’s sclerotic labour laws, its clunky civil justice system and its expensive public administration. His prescriptions have earned him widespread support among Italians yearning for a radical transformation – and a few enemies fearful of what it might entail. They have also raised hopes, from Brussels to Berlin, that Rome finally has a leader with both the political will and the popular backing needed to enact policies they have long demanded. However, the eurozone’s third-largest economy has failed to take off under his watch, taking some of the shine off the 39-year-old former mayor of Florence and heaping pressure on him to translate his lofty goals into concrete legislative victories – and quickly. 179

“My sense is that Renzi is giving a dynamism to Italy that it didn’t have before and moving things in the right direction. But that’s not enough and when you look at the [economic] numbers they tell us that the results aren’t there,” says Andrea Montanino, director of global business and economics at the Atlantic Council in Washington, and former executive director for Italy at the International Monetary Fund. When Mr Renzi gained power in February, replacing Enrico Letta through a coup within his Democratic party, he was expected to ride a wave of improving economic performance that would help build support for his reforms. The government had projected that, after two consecutive years of contraction, Italy would return to 0.8 per cent gross domestic product growth in 2014. But by the summer it was apparent that those expectations were wildly optimistic, as the global economy slowed and the Ukraine crisis hurt Italy’s export-heavy economy.

Now, it seems Mr Renzi will have to settle for a decline in GDP of about 0.4 per cent this year – which at best means the Italian economy is shrinking more slowly than in previous years. Third-quarter GDP figures will be released tomorrow, offering the latest verdict on the country’s economic performance. It would have been unfair to expect Mr Renzi to engineer an immediate turnround. His aides warn the impact of his policies should be judged over years, given the depth of Italy’s decades-old economic problems. They also insist the Renzi agenda has not been derailed by recent poor growth. “We are not happy that the outlook has worsened,” says Marco Simoni, one of Mr Renzi’s top economic advisers and a professor at the London School of Economics. “We would much prefer a positive number. But these differences are not meaningful from the point of view of policy making.” There are, however, signs that the absence of an Italian economic recovery is changing the equation for Mr Renzi. It has certainly increased the pressure on him to accelerate his reforms – both domestically and internationally. At home, he has the backing of the Italian business community. “[He] has taken on the heavy burden of leading Italy away from outdated rules and cultures that would lead us

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to an unstoppable decline,” says Giorgio Squinzi, president of Confindustria, Italy’s most influential business group. “We need to be grateful for this hard work.” But this support could change if there is no tangible improvement and there have already been some signs of impatience.

Labour pains In September, as the outlook soured, Mr Renzi launched his push for labour market reform designed to make it easier for companies to hire and fire workers, even at the cost of taking on the trade unions and the leftwing of his own party. But the sluggish economy may make it tougher for him to close the deal, or could lead to a watered- down version of the legislation, if his opponents sense he is in a weaker position. “It makes everything more difficult. To impose tough changes you often need a crisis but it is easier to reform in the context of positive prospects,” says Riccardo Barbieri, chief European economist at Mizuho International in London. Mr Renzi notched up a big win last month when the framework of the new labour law was approved by the Italian senate, but it has yet to receive a green light from the lower house of parliament. Even if it passes by the end of the year as predicted by Mr Renzi, all the crucial details of the plan will need to be filled in by implementing legislation, which could take months. “The labour reform was initially put on hold and the framework law introduced is too vague. If Renzi wanted to give a sense of real change, he should have moved sooner,” says Mr Barbieri. Italy’s poor economic performance has also worsened the country’s fiscal position. Its indebtedness as a share of GDP has continued to rise to 133 per cent, leaving Mr Renzi with limited options to stimulate the economy.

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His latest budget – which offered more tax cuts than spending cuts – only narrowly passed muster with the outgoing EU commission and awaits a verdict as early as this month from the newly appointed one led by Jean-Claude Juncker. As part of the deal, Italy agreed to a small 0.3 per cent decrease in its structural budget deficit that was not as much as Brussels wanted, but more than Italy desired. As Mr Renzi has tried to fight austerity and create more fiscal flexibility he has clashed publicly with Angela Merkel, the German chancellor, most notably last month after her quip that European economies should do their “homework”. Mr Renzi responded that Italy was not a “schoolboy”. Earlier this month, he traded barbs with Mr Juncker after saying that even the EU’s founding fathers would “become eurosceptic” in the face of the bloc’s bureaucrats. Bargaining with Brussels Even so, European observers of Mr Renzi say that so far he has been fairly adept at getting his way with Brussels, alternating the tough rhetoric designed for a domestic audience with quiet behind-the-scenes negotiating on the numbers. But his standing in Europe could also suffer if the economy fails to grow and reforms falter. “He has managed the relationship with the EU skilfully,” says Olli Rehn, a Finnish member of the European parliament and former EU commissioner for economic and financial affairs. “But I’m not sure that fighting for a few decimal points on the budget is the right battle instead of intensifying reforms.” If Italy’s economic difficulties persist or worsen, there is speculation it could tip Mr Renzi into making a bet on new elections, possibly next year. The current Italian parliament is scheduled to stay in power until 2018, but its composition is unfavourable to the prime minister, who is governing with a slim majority. Moreover, new elections could plunge Italy back into political instability, which Mr Renzi is reluctant to do. But if his support begins to fade on the back of a weaker economy, and he feels his reform agenda is being stymied in parliament, he might try to capitalise on his strong position to forge a more friendly legislature for the next five years.

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Speculation about an early poll has been stoked by negotiations between Mr Renzi and Silvio Berlusconi, the former prime minister and leader of the centre-right Forza Italia party, over a new electoral law that would give more seats to winning parties and coalitions. The two reached a deal late on Wednesday, and if approved by parliament it would make it make it easier for Mr Renzi to govern if he prevailed in an election.

Mr Renzi remains personally popular, while his Democratic party is polling close to its record highs. There is no credible challenger to his power emerging on the centre-right, and the populist Five Star Movement led by former comedian Beppe Grillo has lost steam. “Renzi’s opponents can slow him down but they cannot stop him,” says Roberto d’Alimonte, a political science professor at Luiss, a university in Rome. “He has widespread popular support and there is no alternative.” While it has slipped since February, his personal approval rating remains at a healthy 54 per cent. But recent polls suggest the lack of an economic recovery is beginning to hit home. One Ipsos poll found that just 16 per cent of Italians believe the economy has improved since he took power, with 25 per cent saying it has worsened. Investing in the PM “There was a big investment in Renzi by the Italian people – based on hope,” says Luca Comodo, a director of political and social polling at Ipsos in Milan. “But things have changed a little this autumn – they expected a minimal amount of recovery, yet the outlook got worse, the condition of many families remains difficult and faith in Renzi has dropped.” Mr Renzi’s allies seem unfazed, however. “Italy has been in a context of extremely slow growth for such a long time that it is debilitating,” says Mr Simoni. “The awareness of the need for change is so high that I don’t think we have a short window. This exercise is what the population is asking for.” As he faced the business owners and managers in Brescia last week, Mr Renzi betrayed no sense of political fragility and continued to feed them expressions of optimism despite his country’s ailing economy and anxious spirit.

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“If we do what we are capable of doing, Italy will be a locomotive in Europe over the next few years,” he said, offering the audience a prospect that seems far off today. “This is an insane opportunity, and to not grab it would be a huge mistake for us and our children.” *** Opponents: Unions pose threat to reform programme For all his popular support, Matteo Renzi has managed to make plenty of enemies in his nine months as prime minister. Among the most ardent and aggressive is Maurizio Landini, head of the Fiom metalworkers’ union. Most recently he clashed with Mr Renzi after union activists were beaten by police during an anti-austerity protest outside the German embassy in Rome. The 53-year-old union leader’s biggest criticism of Mr Renzi is over his plans to reform the labour market to remove big protections for permanent workers, making it easier for companies to lay them off. Fiom has called for a general strike tomorrow and again on November 21, with rallies in Milan and Naples. “The demonstrations . . . are against Renzi’s programme as a whole,” Mr Landini yesterday told journalists. “We offer different solutions to Italy’s severe problems,” he says. Mr Landini says Italy’s poor economy “is not only Renzi’s responsibility” but the result of a lack of “clear industrial policy” over the past 20 years. Mr Renzi is refusing to negotiate with the unions over the details of the sweeping reform, calling them an outdated force in Italian politics. “It is like putting a token into an iPhone, or a roll of film in to a digital camera,” he told supporters last month. The unions – who are losing support especially among younger workers – are not the only opponents of Mr Renzi’s reform agenda. Many judges are unhappy with his overhaul of the justice system, while public sector workers are fearful of plans to cut government spending programmes. So far, however, Mr Renzi appears to be winning the fight against his opponents. Most in his Democratic party continue to support him, despite the pressure from organised labour. Giulia Segreti http://www.ft.com/intl/cms/s/0/9761eb88-698e-11e4-8f4f- 00144feabdc0.html#axzz3IkgrX5IL

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ft. com World Europe November 12, 2014 6:58 pm Berlin takes aim at Luxembourg tax deals Duncan Robinson and Stefan Wagstyl in Berlin

©Bloomberg Wolfgang Schaeuble, Germany's finance minister Berlin has taken a swipe at the new head of the European Commission by questioning the fairness of hundreds of controversial tax deals struck while Jean-Claude Juncker was still Luxembourg’s prime minister. The criticism from Wolfgang Schäuble, Germany’s powerful finance minister, came as Mr Juncker – who served as Luxembourg’s prime minister for 18 years until 2013 – took his first public steps to stem a rising furore that is overshadowing his early days as commission president. More ON THIS TOPIC// Juncker denies he was tax haven architect/ MEPs call for probe into EU tax havens/ Luxembourg vows to end banking secrecy/ Governments sign tax evasion deal IN EUROPE// Renzi and Berlusconi agree electoral deal/ Serb war crimes suspect freed by UN court/ Moscow ‘helping rebels form viable state’/ ESA is a serious player that can take on Nasa Mr Juncker was met with a mixture of applause, boos and shouts of “resign” when he appeared before the European parliament on Wednesday, just two weeks into his new role. He made his first public remarks on the affair since it erupted a week ago with the leak of 28,000 pages of confidential tax documents, saying he was not responsible for Luxembourg’s tax regime despite his long tenure at the head of its government. For many of those years, Mr Juncker also served as finance minister. He has agreed to draw up rules that would require countries including Luxembourg to share details of corporate tax deals with other EU governments – something Mr Schäuble has been seeking. “I am not the architect of the Luxembourgish model,” he said, adding that the Grand Duchy’s tax authority had acted on an “autonomous basis” with little oversight from the government. But he conceded he was “politically” responsible for the affair. The disclosure of arrangements in Luxembourg that saw more than 340 companies cut their tax bills to as little as 1 per cent has threatened to create a political storm, with 185

some MEPs demanding a special committee to investigate EU tax havens and others gathering signatures for a motion to censure the commission president. Although Mr Schäuble did not criticise the commission president by name, the German finance minister took issue with the Grand Duchy’s tax policies over decades. “Not everything that is legally possible corresponds to the need for fairness,” Mr Schäuble said. Luxembourg is already being investigated by the commission over alleged sweetheart tax deals with Fiat, the Italian car group, and online retailer Amazon. Investigators are not questioning Luxembourg’s tax laws, but rulings that selectively applied the law in a manner that allegedly amounted to an illegal state subsidy for certain companies. Tax rulings for both companies were issued during Mr Juncker’s tenure as prime minister. Mr Juncker’s insistence that Luxembourg’s tax authorities acted autonomously in approving such schemes could be undermined by Pierre Gramegna, the current finance minister who took office after Mr Juncker’s government lost national elections last year. Mr Gramegna said he decided to overhaul the tax approval process after examining how it worked under Mr Juncker. The Juncker-era administration has been criticised for relying on one official to grant “comfort letters” or advance approvals of tax structures for international corporations seeking to base themselves in Luxembourg. Some argue this process allowed for an inappropriately cozy relationship between the regulator and corporate tax consultants. Even as some MEPs criticised the commission president on Wednesday, others pointed out that Luxembourg’s tax treatment had been brought up repeatedly before Mr Juncker’s selection and that other countries have similar systems. Philippe Lamberts, leader of the Greens, said: “I was not surprised, but I am still disgusted.” At a hastily arranged press appearance on Wednesday, Mr Juncker was asked if he would have still been selected as commission president had the revelations come to light earlier. “Yes, I would,” he replied, and then marched off the stage. Additional reporting by Peter Spiegel in Brussels http://www.ft.com/intl/cms/s/0/2e194acc-6a88-11e4-a038- 00144feabdc0.html#axzz3IkgrX5IL

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ft.com comment Columnists November 12, 2014 5:12 pm An imperfect plan for fixing the next crisis

John Gapper In a serious crunch, it would be every bank regulator for itself

After the spectacular chaos of the last time that regulators and governments scrambled to rescue banks in the US and Europe, they have hammered out a plan for the next time. It is better than the absence of one in 2008 but who knows if it will work? The authorities can run all kinds of stress tests on the capital structures of the world’s largest banks, trying to predict how well they would bear losses in a future crisis. The stress test they really need to run is on themselves – whether they will stick to their promise to work nicely with each other or will revert to self-interest. More ON THIS STORY// Philip Augar scandal taints forex market/ Banks brace for new regulatory hurdle/ In depth Forex trading probes/ Lombard Bank bailouts / rouble trouble / Renishaw/ Inside London Banks have become too complex to grasp ON THIS TOPIC// Comment The policy of money printing and rates/ Markets Insight Currency wars fail to spark global growth/ Focus on Europe’s flash GDP estimates/ Editorial A world still reeling from fiscal errors JOHN GAPPER// A Swift reply to Spotify/ Two sides of Virgin/ ‘The Copyright Wars’, by Peter Baldwin/ John Gapper TV loosens the bundle In a truly serious crisis – the kind that only tends to come along every few decades – I suspect it would still be every bank regulator for itself. That is not to rubbish the efforts of the Financial Stability Board, which this week unveiled a plan to deal with troubled banks. It is merely to point out a reality that no amount of goodwill can erase. Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board that meets in Basel to plan such things, declared that the system had reached a “watershed” after years of regulators trying to fix the problem. Banks would have deeper reserves of capital, and officials would be better prepared. But while central banks and regulators will have superior tools to rescue banks next time, they will have far less freedom of manoeuvre. In 2008, they could act first and 187

face questions later. Next time, they will be under severe pressure – and in the US, a legal obligation – not to spend a penny of public money on the task. If there is clearly enough private capital available – which the FSB’s plan is meant to ensure – everyone may behave nicely. But if there is even a tiny risk of it running out, every country will try to grab as much as it can. Any supervisor who let it be diverted to a foreign part of a troubled bank would be in trouble. It happened before when, for example, Lehman Brothers was carved up into parts and sold off separately. If it happens again, it could force the end of global banks, the complex, cross-border businesses that still dominate capital markets and lending despite being highly unpopular since the 2008 crisis. Few tears might be shed. The failure of regulators to impose limits on the scope of 28 “global systemically important banks”, apart from the ringfencing of retail deposits in the UK, and the Volcker rule that restricts US banks from making some kinds of speculative investments, means they remain too large for comfort. The best we can hope for is that they are no longer too big to fail. They are still behaving badly. The $4.3bn fines imposed yesterday on five banks including Royal Bank of Scotland and UBS for rigging foreign exchange markets, show how hard it is to improve their conduct. This activity took place not in the investment banking casino but in operations that are part of every large bank. They are still behaving badly. The $4.3bn fines imposed yesterday on five banks, show how hard it is to improve their conduct Yet dividing banks by nationality, to match the structure of central banks and regulators, would not solve this and it would hurt global finance and trade. That is why the FSB tried to get the US, Europe and Asia to agree on a common approach. It managed it, despite inevitable compromises – the European exception, the Japanese exception and the Chinese exception (the last is that banks from emerging markets can ignore the most important part). As well as the higher, although still not high enough, equity ratios of Basel III, big banks must hold long-term bonds that can be forcibly “bailed-in”. The heart of the deal is the “single point of entry” – the idea that a crisis-hit bank’s national regulator would secure enough capital to keep it going while writing down its assets and replacing its executives. The US would be confident enough in a German-led resolution of a global bank not to seize its Wall Street operation. That would probably work if only one bank were in trouble and the rest of them were stable. Everyone would be on good behaviour and the bail-in bonds, positioned to reassure every regulator of the solidity of each of its divisions, would suffice. In a broader crisis, however, everything would be under stress. In a public bailout, a strong sovereign can spend as much as it takes to prop the system up. No private bail-in can match that – even if a bank holds capital equivalent to 20 per cent of its risk- weighted assets, the resources available for its rescue are limited. A mass bail-in of bank capital could also create distress in other parts of the financial system, among insurers and asset managers holding bonds that are swapped into equity. Randall Kroszner, a former Federal Reserve governor who is a professor at University of Chicago, points out that moving losses around does not make them disappear. 188

Regulators would be acting amid uncertainty, knowing they could not risk their own banks weakening to the point at which public money would be needed. It would require a great deal of discipline to stick with the FSB plan, and trust in a foreign regulator to ensure their banking systems survive the turmoil intact. It is a step forward that banks will be better capitalised and regulators have a common plan. But it will be tested only in a crisis, when risk adversity will be at its height. It may not be enough. http://www.ft.com/intl/cms/s/0/9d7113e6-69a2-11e4-8f4f- 00144feabdc0.html#axzz3IkgrX5IL

ft. com World Europe November 12, 2014 1:53 pm Juncker denies he was the architect of Luxembourg tax regime Duncan Robinson in Brussels

©EPA Jean-Claude Juncker said that he was “not the architect” of Luxembourg's controversial tax regime as the new European Commission president attempted to head off questions about how the Grand Duchy became a hub for tax avoidance during his long tenure as prime minister. Mr Juncker, who took office as commission president this month, has come under fire after a vast document leak revealed the details of special tax arrangements between Luxembourg and 340 of the world’s largest corporations, including Pepsi, Ikea and JPMorgan. More ON THIS TOPIC// Berlin takes aim at Luxembourg tax deals/ MEPs call for probe into EU tax havens/ Luxembourg vows to end banking secrecy/ Governments sign tax evasion deal IN EUROPE// Renzi and Berlusconi agree electoral deal/ Serb war crimes suspect freed by UN court/ Moscow ‘helping rebels form viable state’/ ESA is a serious player that can take on Nasa These tax arrangements, many of which were sealed while Mr Juncker was prime minister of Luxembourg from 1995 to 2013, led to some companies in effect paying a tax rate of less than 1 per cent. The disclosure has threatened to create a political storm, with MEPs from the liberal ALDE group this week demanding a special committee to investigate EU tax havens. 189

Mr Juncker addressed the issue for the first time on Wednesday in a hastily arranged press appearance at the commission headquarters in Brussels. “I am not the architect of the Luxembourgish model,” he told reporters, adding that the Grand Duchy’s tax authority had acted on an “autonomous basis”, with little oversight from the finance minister – a job he also held for much of his time as prime minister. The commission president did concede he was “politically” responsible for the affair. More broadly, Mr Juncker pointed to a lack of “tax harmonisation” within the EU for contributing to the situation and called for the introduction of a “common tax base” across the economic bloc to address this. A “common tax base”, he explained, would help reduce the differences between member states’ tax codes, which companies can exploit to cut their overall tax bills. “If we can reach agreement on that, then many problems disappear,” said Mr Juncker. The leak included 28,000 pages of documents from financial services group PwC, shedding light on its clients’ arrangements with the Grand Duchy. Their contents were featured in a recent report by the International Consortium of Investigative Journalists. At Tuesday’s press conference, Mr Juncker was asked if he would have still been selected as commission president had the revelations come to light earlier. “Yes, I would,” he replied, and marched off the stage. http://www.ft.com/intl/cms/s/0/4ffb68a4-6a66-11e4-8fca- 00144feabdc0.html#axzz3IkgrX5IL

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ft.com/markets MARKETS INSIGHT November 13, 2014 5:02 am Hopes for eurozone bank lending misguided Erik Nielsen Austerity policies have been administered in unprecedented doses

©Bloomberg As the European recovery continues to struggle, a surprising number of policy makers and analysts keep expressing hope – or even expectations – that bank lending will soon pick up and fuel an investment-led recovery in the eurozone. Such hopes are misguided. First, recall that the eurozone’s miserable recovery is caused primarily by a policy choice that prioritises urgent public sector and bank balance sheet repairs over a quick recovery. More ON THIS TOPIC// UniCredit and Intesa see mixed results/ Bad bank investors target Italian loans/ Party mood eludes Europe’s debt bankers/ EU banks’ risky debt deals nearly double MARKETS INSIGHT// Japan actions risk igniting currency war/ Eurozone stagnation is inevitable/ Currency wars fail to spark global growth/ Fed has built a thorny central bank divide Austerity policies have been administered in unprecedented doses. On International Monetary Fund numbers, the eurozone’s cyclically adjusted primary fiscal account has been tightened by 2.3 percentage points of potential GDP since 2011. The comparable number for the UK, for example, is 0.9 percentage points, which explains a good part of the present stronger UK growth. Structural reforms – predominantly of labour markets and the financial sector – have added further short-term pain to the eurozone. Only now, almost three years after liberalisation of the Spanish labour market began, is Spanish job creation about to exceed job destruction. And, as European banks were busy dealing with the normal impact on the loan book of recession, further capital requirements and an onslaught of supervision were added – while banks were trying to generate a competitive return on capital, so that further equity can be raised. Normally, changes to the financial system, which adds cost to the monetary transmission, should be timed with monetary policy easing to cushion the blow to the real sector. But not this time. The European Central Bank struggles with zero-bound 191

rates and a financial system in which more than 85 per cent of credits flow through the banking system, thereby limiting the effectiveness of balance sheet expansion. In a flatlining economy with little prospect of effective policy stimulus, and the external world in questionable shape, businesses naturally hesitate to invest. And, without investment plans, there is no meaningful demand for additional credit. In depth Euro in crisis

News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness Further reading In Europe, lending to the corporate sector never leads GDP. Rather, with very little variation, such lending lags behind GDP by typically six to nine months. And the more policy makers try to push banks to lend in such an environment, the greater the risk to the non-performing loan account down the road. Looking ahead, the important question is whether the banking system will be ready to meet the demand for credit at reasonable interest rates once demand eventually picks up. The answer hinges on two issues. First, how will the single supervisory mechanism work in practice, and particularly how will the co-operation between the ECB and the still existing national supervisors proceed? The SSM was meant to improve national supervision and, as part of the banking union, end the national ringfencing of liquidity, which has caused such trouble for the effectiveness of monetary policy. But things look less than clear. It is not too much to say that national supervisors’ past record is uneven. Good bank supervision prevents banks from becoming a burden for taxpayers. According to the IMF, financial sector support by taxpayers has amounted to 21-33 per cent of GDP in Ireland, Greece and Cyprus and to 8-12 per cent of GDP in Germany and Slovenia. In the rest of the eurozone, the number is less than 5 per cent of GDP; in France and Italy the bill is virtually nil. In depthAusterity Europe

Europeans are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits Further reading As we head into the new SSM world, it is easy to get a bit overwhelmed by the roaring silence from the supervisory community on what went right and what went wrong in these countries. And without that debate, one might fear that the response from the new supervisory community comes in the form of an increase in the quantity of supervision, rather than a boost in the quality of supervision.

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Second, as the G20 heads to Brisbane, the prospect of still higher capital requirements has emerged on the horizon again. There seems to be plans to require at least 16 per cent total loss absorbing capacity for banks. This would be particularly troublesome for European banks because of their capital structure, compared with Anglo-Saxon banks – let alone Chinese banks, which will be exempted. If this progresses as indicated, eurozone banks might well end up spending another few years chopping away at their balance sheets while trying to raise capital, rather than return to their normal business of lending money to their clients for investment and future growth. Erik Nielsen is global chief economist at UniCredit http://www.ft.com/intl/cms/s/0/2c5aa302-68cb-11e4-af00- 00144feabdc0.html#axzz3IkgrX5IL

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Eurointelligence RSS Feed Jueves, 13, de noviembre de 2014, 8:25:20 A big step towards electoral reform in Italy This is the reform that interests Matteo Renzi the most because it could be the most critical determinant of whether and how he can seek re-election, or rather election, as he has never been elected himself. And for Berlusconi, the main motivation is to pass a system that eliminates the smaller parties on the right. Using economic terminology, the Renzi- Berlusconi pact is a classic cartel. The two had a meeting yesterday, in which they agree some aspects of the new electoral law. The “Italicum” is, however, not yet a fully worked-out plan. A lot of important gaps have to be filled in committee stage. The main change to their original agreement from January is an increase in the majority threshold from 37% in the previous proposal to 40% now. Whoever gets beyond this number, will get additional MPs to make a majority in parliament. It is, however, not clear yet whether this threshold applies to parties or coalitions of parties. In any case, if it is missed, there will be a run-off between the two largest parties/groups to determine the winner. Since the Senate will be reduced in status, the new system should help remove political gridlock to the extent that such gridlock is caused by the system itself. The two have not reached agreement on the minimum threshold needed to gain parliamentary representation. Berlusconi wanted to set this number high, as did Renzi, but Renzi is under pressure from his coalition partners, who might be threatened by such a law. The original Italicum negotiated in January, had thresholds of 4.5% for individual parties inside coalition, 8% for parties without coalitions, and 12% for the coalition itself. At a meeting with his own coalition, Renzi agreed to bring this number down, but this is something Berlusconi has not conceded. As Ansa reports, there was also agreement on the so-called blocked lists, name lists of candidates, which voters could either accept or reject in total. Under this agreement, the principle of a blocked list remains, but only in respect of the first candidate in each of Italy’s 100 constituencies. Again, critical details need to be worked out. La Stampa reports that the agreement between Berlusconi and Renzi has given rise to some disquiet within the PD, again with Pier Luigi Bersani and Massimo D’Alema in opposition to Renzi. The PD minority is opposed to the whole notion of blocked lists, and also complained yesterday of not having been given enough time. Renzi, meanwhile, wants to push all this through a tight timetable –Senate this year plus final ratification in January. Our other stories We also have stories on Jean Claude Juncker confronting claims of 'unethical' tax regimes; on Greek coalition leaders agreeing to amend tax arrears law to comply with troika demands; on Rajoy's wait-and-see attitude towards Catalan's straw poll; on yields of European market funds about to turn negative; on plummeting deposit yields in Spain; on the IMF's warning of downside risks for the eurozone; and comments on the inconsistency of the ECB and secular stagnation.

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VOX CEPR's Policy Portal Research-based policy analysis and commentary from leading economists Four principles for an effective state Jean Tirole13 October 2014 This column by the 2014 Nobelist Jean Tirole was originally posted on 16 July 2007. It gives his views on reforms that are as necessary today as they were in 2007. Meeting the expectations of its citizens will require the French state to become more effective. A four-pronged approach is required: restructuring, competition, evaluation and accountability. High quality public services, infrastructure that facilitates “economic dynamism”, a reduction in the debt left to our children. These expectations of the French people cannot be met unless the state becomes effective. Reforms are urgent, but difficult. To achieve them, a four-pronged approach is required: restructuring, competition, evaluation and accountability. Restructuring Many countries have undertaken fundamental governmental reforms based on a consensus between political parties and unions. In the 1990s, the Swedish Social Democrats government made large cuts in the civil service. Ministers, who formulate overall strategy and make decisions on resource allocation, have to rely on a small number of civil servants. Operational details must therefore be delegated to a large number of independent agencies, each of which can recruit and remunerate their employees as they choose. These independent agencies operate under strict budgetary limits that ensure the sustained delivery of public services. Around the same time, Canada cut government expenditure by 18.9% without social turmoil – and without greatly reducing health, justice, or housing programmes. They did this while maintaining tax levies, so the result was a reduced public deficit and falling public debt. Spending that could not be clearly justified in terms of the resulting service to the public was pruned. Subsidies for entrepreneurial projects and privatisation facilitated the elimination of one in six positions in the civil service. Indeed the sort of government reorganisation undertaken in Canada could only be dreamed of in France with its often nightmarish collection of laws and fiscal regulations. The Canadians have a single service for the calculation and collection of taxes and a one-stop-shop for government-business relations. Competition Contrary to common beliefs in France, head-on competition can produce high quality public services. In telecommunications, most countries, including France, have put a universal service obligation fund in place, which is compatible with competition between providers. It protects the smallest firms while ensuring that services are available in all regions of the country or to poor consumers. When it comes to education, several countries (Belgium, the UK, Sweden) have tried voucher systems that give everyone access to education but create competition among schools for students. Such a system must be accompanied by clear and 195

openly available information on schools so parents can make informed choices and “insider-ism” can be avoided (something that arose from the competition among the tracks in the French education system). Competition can also be created via standardisation. In the healthcare realm, using more systematic comparisons between hospitals, or between the private and public sectors could help control costs. Sometimes the cost of treatment for a given disease varies by a factor of 2.5 with the variation having nothing to do with patient selection. Evaluation Every action of the State must be subject to a double independent evaluation. The first should be before the action: Is public intervention necessary? What are the costs and benefits? The second is after. Did it work? Was it cost effective? On this point, it would be necessary to require that the audit recommendations (for example, those of the Audit Court) be either followed according to a strict schedule, or rejected with a convincing justification. Accountability The 2001 Law (LOLF), adopted on the basis of a left-right consensus, is a small revolution in a country accustomed to the logic of budgetary processes. Embracing the logic of effectiveness, the law aims to transform public sector managers into true owners where their obligation to produce results goes hand in hand with the freedom to manage. Putting this principle into practice is certainly difficult. First of all, the objectives need to be clear and easily verifiable. Then, “accountability” must be introduced. For that, the objectives can’t be collective (as the failure of control of health expenses has shown), but must be the subject of rewards or sanctions. Lastly, one should be wary of the pernicious effects of “multi-tasking”. Incentives that are related to an easily measured objective (for example, the cost per student for a university, which can be easily reduced by teaching large numbers of students in large lecture halls) can cause one to ignore equally important objectives that one has neglected to measure (such as the quality of teaching or research). In other words, to construct good incentives, one has to evaluate actions comprehensively. That way, it’s clear that giving regulated enterprises more responsibility should go hand in hand with stricter safety and quality controls. The need for such controls is clear from the experience of British telecoms in 1984 and more recently, of British railways. Finally, it should be possible to have a state that serves the French better at lower cost, allowing more jobs to be created and increasing the productivity of our economy. But the experiences of other countries suggest that lasting reform can only be achieved on the basis of a political and social consensus. Editor's note: Originally published in French in L'Expansion, www lexpansion.com http://www.voxeu.org/article/four-principles-effective-state

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How can Europe avoid secular stagnation?

- three central policy measures to deal with stagnation in the euro area by Guntram B. Wolff on 12th November 2014

Stmool Larry Summers crystallized an important question in a recent speech: Has the world economy entered a period of “secular stagnation”? The slow recovery in the United States since the financial crisis is his starting point and he argues that secular stagnation could also retrospectively explain features of previous decades, such as low inflation. Professor Summers had picked up an old term first coined by Alvin Hanson (1939), in his Presidential Address of the American Economic Association in 1938. Back then, Hanson focussed on the importance of (public) investment expenditure to achieve full employment. His argument was that for such investment to happen, the economy needs new inventions, the discovery of new territory and new resources, and finally, population growth. Summers’ argument is centered on the fact that inflation rates have been falling for the past two decades and have often been lower than expected. Is a permanent fall in the equilibrium real interest rates needed to achieve full employment? Olivier Blanchard (2013) argued that it is advisable to have higher inflation rates in normal times as this makes it possible to drive down nominal interest rates more substantially so that real interest rates fall even further in crisis times. Krugman (2013) goes one step further, and even argues that the new normal may be a permanent liquidity trap, so it would therefore not be advisable to have low inflation rates in the eurozone2 and the inflation rate should be increased.

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So how can we summarize the situation today in the eurozone and what policy measures can be envisaged to improve the situation? I would identify three fundamental issues facing the eurozone currently. The first issue is a lack of aggregate demand and a corresponding fall in inflation rates. The economic recovery in the eurozone has been weak and recent data show that it may slide back into a full recession again. Correspondingly, unemployment remains very high, in particular for the young. In addition, inflation rates have been falling since late 2011, and forward-looking indicators now suggest that inflation expectations have become disanchored from the close-but-below 2 percent goal. The second important issue is the combination of significant divergences in unit labor cost with the build-up of large levels of debt, in both the private and public sector in the eurozone periphery. The gap in unit labor costs that has opened between Italy and Germany since the beginning of the euro amounts to more than 20 percent, while the gap between France and Germany is similarly around 20 percent. At the same time, debt to GPD ratios have increased prior to the crisis mostly in the private sector while since the beginning of the crisis, high deficits have added to a substantial increase in public debt to GDP ratios, for example by more than 60 percent of GDP in Spain. The third problem is the remaining uncertainty around the state of the banking system as well as doubts about the profitability of the system. While the European Central Bank’s (ECB) asset quality review (AQR) and stress test should remove uncertainty, the assessment by the IMF is quite clear that more restructuring may be pending.3 Non- performing loans remain high in a number of countries. It is against these three central issues that any policy response for the eurozone has to be formulated. Partial proposals aimed at addressing only some of the above problems are unlikely to deliver results that will satisfactorily create stable and robust growth and new employment opportunities. The solution must be found in the current context of a monetary union operating without a fiscal union, and thus there are limits on what monetary policy is allowed to do. Dealing with the problems of the eurozone therefore goes beyond the risk of secular stagnation. In fact, some of the fundamental issues may not be solvable without further steps towards fiscal union. Three central policy measures to deal with stagnation in the euro area First, policies need to be designed to address the demand shortage. U.S.-based Keynesians typically suggest that eurozone periphery countries should increase their deficits in response to the recession. However, this argument fails to acknowledge that debt levels have already increased substantially due to high deficits and that in a monetary union, sub-federal debt is inherently less stable. In fact, the eurozone has already used substantial fiscal resources to lessen the impact of the shock. Unless one is willing to accept the ECB as an unconditional lender of last resort, a policy recommendation to increase periphery deficits could quickly lead to renewed market stress with very harmful consequences for financial stability, which would in turn deteriorate the economic situation substantially. While one can argue that the ECB should automatically act as a lender of last resort to governments and buy governments bonds without conditions even in countries under stress, the legality of this arrangement is heatedly debated. While I would argue that the Outright Monetary Transactions (OMT) program is economically justified and legal, it certainly cannot be misread as an 198

automatic policy to buy debt under all conditions. In fact, only a clear political consensus on the sustainability of debt in the context of a European Stability Mechanism (ESM) program would allow the activation of bond purchases from distressed countries. 4 Claeys et al (2014) Consequently, the best way to increase eurozone demand will be by a combination of more fiscal measures in countries with strong fiscal positions and a build-up of a eurozone fiscal capacity, together with more aggressive monetary policy. Germany in particular could use its fiscal space to increase borrowing to fund public investment as well as reduce taxes on low-income households. A eurozone fiscal capacity could be built up by using existing instruments, such as the European Investment Bank (EIB), much more forcefully, for example by increasing the EIB’s leverage. Such European funds could be used to fund European investment projects as well as to support national budgets where public investment has been cut substantially recently. Monetary policy could be more aggressive by buying more bonds issued by the EIB, asset-backed securities, covered bonds as well as corporate bonds.4 5 Ruscher and Wolff (2012) 6 http://www.imf.org/external/POS_Meetings/Seminar-Details.aspx?SeminarId=19 Second, bold measures are needed to address the substantial unit labor cost divergence and substantial debt overhang. The empirical literature is clear that countries with high unit labor costs will find it difficult to attract new and productive industry, especially if their tax levels are high.The debt overhang in the private sector in some periphery countries is holding back new investments and can lead to a negative feedback-loop between corporate debt and a weak banking system, as has been seen in Japan.5 At the same time, it needs to be made clear that unit labor costs require an adjustment in both the deficit and the surplus countries in order to be politically feasible and economically effective. I would therefore advocate for bold structural reforms such as increases in annual working hours and increases in retirement ages to address the unit labor cost problem in the deficit countries. In the surplus countries, reforms that open up professions and lead to the creation of new industries are paramount in order to achieve adjustment. The introduction of minimum wages is a riskier policy measure, but the public sector and its wage-setting can be part of the answer to support rebalancing. To deal with the high private debt levels, restructuring and reorganization in the banking system are important. One should also consider reviewing insolvency regimes and restructuring frameworks for the corporate and household sector, as has recently been argued by the IMF’s legal counsel Sean Hagan.6 Policies such as non-recourse loans for mortgages have greatly helped to reduce the debt overhang in the household sector of the U.S. Third, the remaining banking sector problems need to be addressed. It is obvious that the ECB needs to be ambitious in its stress tests and AQR. The way the exercise has been designed largely prevents the deleveraging pressure to result in a reduction in lending. Rather, the logic of the exercise should lead to deleveraging through strengthening the capital base, and there is some evidence of such an increase having happened in the euro-zone banking system. An important question is about the right interplay between monetary policies and the ongoing bank restructuring process. Some of the ECB’s recent measures, such as the TLTRO (targeted longer-term refinancing operations) measure may delay some bank restructuring while adding little to ease 199

monetary conditions. It would be useful to reconsider the balance between active management of the balance sheet of the ECB through unconventional measures and the policies directly aimed at supporting liquidity in the banking system. This overall mix of policies should deliver results in terms of addressing the underlying weaknesses of the eurozone and revitalizing growth. While a lot can be done within the framework of the current institutions, this policy mix also points to the need to upgrade the European policy framework and move towards the creation of a eurozone fiscal capacity. Some have argued that the eurozone needs a change in its inflation target to overcome the crisis and to be better equipped to deal with secular stagnation. However, I fail to see how an increase in the inflation target can be achieved in normal times without generating significant risks to the economy. One of the important features of the pre- crisis global economy was that inflation rates were falling despite loose monetary policy and arguably overly optimistic asset markets. In fact, more demand generated by monetary policy prior to the crisis would have led to even more substantial distortions in the asset markets and in the real economy. This could have triggered an even more substantial crisis than the one we are seeing currently. Perhaps more important than this rather theoretical consideration of normal times is an assessment of a potential change in the inflation target within the current situation. A change in the inflation target by the ECB from 2 to 4 percent, for example, would undermine the credibility of the ECB in many respects. On the one hand, it would undermine trust in the institution by all those who have relied on the ECB to keep inflation at close but below 2 percent. On the other hand, even now the ECB’s credibility is endangered by the fall of inflation expectations below 2 percent. Market participants fear that the ECB will not be able to push inflation up to the target level with its existing policy instruments. Instead of changing the target, the ECB would therefore be well advised to deliver bolder policies to convince markets that it is serious about achieving its current target. To summarize, like Hansen, I believe in the importance of the structural factors that actually provide the conditions for new investment opportunities. Fundamentally, we need to know why the equilibrium interest rate has been falling globally and why the global economy has entered “secular stagnation”. Is it global demographics? Is it the lack of good investment opportunities? Certainly, these challenges need to be addressed. Also the eurozone needs to see more substantial structural policy actions to increase its long-term growth potential and to tackle the very substantial divergences between the different member states of the eurozone. But macroeconomic policies will also have to play a larger role. One of the big problems in the eurozone has been the weakness in public investment in the last few years, in contrast to the U.S., where public investment actually increased. More European level investment in European public goods such as new and better energy and digital networks should also be undertaken. But the EU will also need a boost in domestic investment at the member state level. Monetary policy needs to be bolder and arguably the ECB has the instruments available. Overall, President Draghi’s Jackson Hole speech points the way in the right direction.7 The euro area needs bolder fiscal and structural policies, and the ECB must also play its part. This article was republished from Brookings' Think Tank 20: http://www.brookings.edu/~/media/Research/Files/Interactives/2014/thinktank20/chapters/TT 20%20Nov%207%20FINAL%20Web%20v2.pdf

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1 This article is based in part on commentary published by the author on August 19, 2014, titled “Monetary Policy Cannot Solve Secular Stagnation Alone.” References Blanchard, Olivier. 2013. “Monetary Policy Will Never Be the Same.” Voxeu Blog. 27 November 2013. Claeys, Darvas, Merler and Wolff. 2014. “Addressing Low Inflation: the ECB’s Shopping List.” Bruegel policy contribution. Draghi, Mario. 2014. “Unemployment in the Euro Area.” speech at the Annual European Central Bank Symposium. 22 August 2014. ECB. 2014. ECB press conference. Hagan, Sean. 2014. “Resolving the Private Sector Debt Overhang in Europe.” Remarks as Panelist at IMF Seminar. 11 October 2014. Hansen, Alvin. 1939. Economic Progress and Declining Population Growth. American Economic Review. IMF. 2014. “Global Financial Stability Report: Risk Taking Liquidity and Shadow Banking: Curbing Excess While Promoting Growth.” King, Stephen. 2013. “There is No Easy Escape from Secular Stagnation.” FT blog. 25 November 2013. Krugman, Paul. 2013a. “Three charts on secular stagnation.” New York Times. Krugman, Paul. 2013b. “Secular Stagnation in the Euro Area.” New York Times. Ruscher, Eric and Guntram Wolff. 2012. “Balance Sheet Adjustment: Stylized Facts, Causes and Consequences.” Bruegel Working Paper. 2012 (03). Summers, Lawrence H. 2013. “Crises Yesterday and Today.” speech at the 14th Jacques Polak Annual Research Conference. November. Wolff, Guntram. 2014. “Monetary Policy Cannot Solve Secular Stagnation Alone.” commentary 19 August, 2014 2 Krugman (2013b) 3 See the latest IMF (2014), Global Financial Stability Report, “Risk Taking, Liquidity and Shadow Banking: curbing excess while promoting growth”, October 2014 4 Claeys et al (2014) 5 Ruscher and Wolff (2012) 6 http://www.imf.org/external/POS_Meetings/Seminar-Details.aspx?SeminarId=19 7 www.ecb.europa.eu/press/key/date/2014/html/sp140822.en.html http://www.bruegel.org/nc/blog/detail/article/1480-how-can-europe-avoid-secular- stagnation/

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VOX CEPR's Policy Portal

Research-based policy analysis and commentary from leading economists Contagion in the European sovereign debt crisis Brent Glover, Seth Richards-Shubik12 November 2014 Understanding the probability and magnitude of financial contagion is essential for policymaking. This column applies a framework for modelling financial contagion to data on the cross-holding and credit risk of sovereign debt in Europe. Credit markets perceived little risk of contagion from these spillovers following a sovereign default. It is important for policy to assess other possible channels for contagion that could generate even bigger losses. Related// A tale of two overhangs: The nexus of financial sector and sovereign credit risks Viral Acharya, Philipp Schnabl, Itamar Drechsler// The ECB’s trillion euro bet Charles Wyplosz Fear of financial contagion was a major motivation behind the bailouts and other interventions provided during the recent sovereign debt crisis in Europe. Given the interconnected network of financial relationships among European nations, the potential for contagion seemed self-evident. But what really was – and is – the magnitude of the risk of sovereign contagion in Europe? While the direct losses to creditors from a sovereign default can generally be observed, quantifying the spillover losses that would result from such a default is less straightforward. Understanding the potential magnitude of these spillovers is essential for evaluating the net benefits (or costs) of bailouts and other interventions designed to prevent or mitigate the impact of a default. Modelling contagion Measuring the potential spillovers from a sovereign default requires a modelling framework that can distinguish the effect of a default (or risk of default) on the credit risk of other sovereigns, separately from comovement in country-specific factors. Moreover, one must account for the fact that credit risk is jointly determined among financially interconnected sovereigns – as it would be in any network of financial entities. Recently, a number of economists have developed theoretical models of contagion in financial networks (see Acemoglu et al. 2014, Elliott et al. 2014, and Glasserman and Young 2014). These models define contagion based on the direct financial losses that occur when an entity defaults, or more generally loses value. Contagion emerges if any creditors to the defaulting entity experience large enough losses so that they in turn become insolvent. These models show how, in an interconnected network, the default of one entity can cause increased borrowing costs and even trigger a cascade of defaults among the other entities. 202

In recent work, we have applied such a network model to evaluate credit market perceptions of the potential spillovers from a sovereign default in Europe (Glover and Richards-Shubik 2014). Data from the Bank for International Settlements (BIS) and International Monetary Fund (IMF) can be used to construct a network of sovereign debt holdings among European countries.1 Credit default swap (CDS) spreads on sovereign debt provide a measure of credit market expectations about the risk of default.2 The model of contagion then determines the extent to which this risk should correlate among countries, based on the cross-holdings of sovereign debt. Default simulations – the example of Greece The estimated model can be used to simulate the impact of the default of one sovereign on the credit risk of other sovereigns in the network. Figure 1 presents the results of these simulations for a Greek default. For each quarter, it shows the increase in risk- neutral default probabilities for other selected sovereigns, given a hypothetical Greek default in that quarter. (These are the short-run impacts, as each quarter is considered separately.) We see that the predicted spillovers onto the default risk of other sovereigns are quite minimal, less than 10 basis points, except for Ireland and Portugal. For Portugal, the predicted impact of a Greek default rises to 60 basis points by 2011- Q1. This is the simulated increase in the risk-neutral probability of default per quarter. However, the baseline quarterly default probability inferred from the CDS spreads on Portugal’s debt was 7.5% (750 basis points) at that time. Thus, the potential spillover from Greece was not large, relative to the overall risk of a Portugal default. Similarly, the baseline quarterly default probability for Ireland was 5.3% in 2010-Q3, and so the potential spillover from Greece accounted for less than 8% of the total risk of an Ireland’s default.3 Potential spillovers account for small portion of overall risk A measure of the expected losses due to this channel for contagion can be constructed by combining the results from the default simulations for each sovereign, weighted by their baseline probabilities of default.4 For comparison, we can also consider the total expected losses that are implied by the CDS spreads on sovereign debt.5 Figure 2 shows the results of these calculations. The total expected losses and the expected spillover losses are negligible for the first three years in our data, then rise with the 2009 recession and the emergence and escalation of the sovereign debt crisis. The expected spillover losses due to possible contagion of defaults reaches over $4 billion by 2011-Q3. At the same time, however, the total expected losses from sovereign defaults reaches $400 billion. Thus, the predicted losses due to contagion account for only 1% of the total losses that were implied by sovereign CDS spreads at that time. This indicates the spillovers from this channel for contagion accounted for a relatively negligible portion of total sovereign credit risk during the recent crisis. Similar calculations indicate there was very little impact on the cost of borrowing for European sovereigns, at least from this channel for contagion. The most affected country, according to our estimates, was Portugal. The potential for contagion from Greece and other sovereigns could account for only 2% (not two percentage points) of the total interest rate spread on Portugal’s sovereign bonds, at most. Figure 1. Simulated change in credit risk from Greece default

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Figure 2. Expected losses from contagion and total expected losses

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Measuring the contagion risk from each sovereign In addition to quantifying the aggregate potential for losses, this analysis provides some insight into how the network of sovereign debt holdings distributes risk throughout Europe. In particular, the model can be used to quantify the contagion risk associated with each sovereign’s debt. The measure expresses the expected spillover losses following the default of a sovereign, per dollar of its debt. This could be understood as the per-dollar ‘contagiousness’ of each sovereign’s debt, in the event of its default. A surprising result from this analysis is that Austria has the most potentially ‘contagious’ debt. This reflects its position in the network, not its aggregate amount of external debt or probability of default. Much of Austria’s debt is held by Italy, a financially vulnerable sovereign with a large debt load. Triggering the default of Italy would greatly multiply any direct losses from Austria. Thus, while Austria’s probability of default is low, the model predicts higher than average spillovers in the event of an Austrian default. Still, however, the absolute magnitude of the expected spillovers is small. At most, each dollar lost directly from a default of the Austrian sovereign is predicted to generate an additional 2.5 cents in spillover losses. Conclusion Politicians and policymakers have invoked the possibility of financial contagion as a central motivation for providing bailouts. Understanding the probability and magnitude of these spillover effects is therefore essential for economic policymaking. We apply a recently developed framework for modelling contagion in financial networks to data on the cross-holdings and credit risk of sovereign debt in Europe. Our analysis indicates that credit markets perceived little risk of contagion from these spillovers following a sovereign default. It is important to note that the economics literature has suggested other possible channels for contagion that could generate additional, and perhaps more substantial, losses. Changes in risk aversion, or an updating of creditors’ beliefs about the likelihood of a sovereign default, are such factors that could lead to further spillovers across sovereigns in their cost of borrowing.6 It will be important to assess these other channels so that policymakers are fully informed about the potential externalities from a sovereign default.7 References Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), “Systemic Risk and Stability in Financial networks”, American Economic Review, forthcoming. Aizenman, J, M Binici, and M M Hutchison (2013), “Credit Ratings and the Pricing of Sovereign Debt during the Euro Crisis”, National Bureau of Economic Research Working Paper 19125. Arellano, C, and Y Bai (2013), “Linkages Across Sovereign Debt Markets”, National Bureau of Economic Research Working Paper 19548. Benzoni, L, P Collin-Dufresne, R S Goldstein, and J Helwege (2012), “Modeling Credit Contagion via the Updating of Fragile Beliefs”, Federal Reserve Bank of Chicago Working Paper 2012-04. Elliott, M, B Golub, and M O Jackson (2014), “Financial Networks and Contagion”, American Economic Review, 104(10): 3115-53.

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Gande, A, and D C Parsley (2005), “News Spillovers in the Sovereign Debt Market”, Journal of Financial Economics, 75(3): 691-734. Glasserman, P, and H P Young (2014), “How Likely is Contagion in Financial Networks?” Journal of Banking & Finance, forthcoming. Glover, B, and S Richards-Shubik (2014), “Contagion in the European Sovereign Debt Crisis”, National Bureau of Economic Research Working Paper 20567. Kodres, L E, and M Pritsker (2002), “A Rational Expectations Model of Financial Contagion”, Journal of Finance 57(2): 769-799. Footnotes 1 Our analysis uses Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the UK. Other countries are omitted due to the lack of complete data on foreign financial claims from the BIS or on CDS spreads over our study period, 2005-2011. 2 The relationship between the quarterly default probability and the five-year CDS spread is constructed assuming a risk-free discount factor and a constant hazard rate for default. 3 The potential spillover to Ireland drops in the last two quarters because our data indicate the exposure of Irish banks to Greek debt decreased substantially at that time.

4 More precisely, the formula is as follows. Let Djt be the total external debt of sovereign j in period t. Let p̂ jt be the baseline solvency probability for sovereign j from the estimated model. Let pjt̃ (i) be the simulated solvency probability if sovereign i defaults. The expected spillovers from the default of i are Ʃj≠i (p̂ jt – p̃jt (i)). Then, the total expected spillovers from all possible sovereign defaults in period t, weighted by their baseline probabilities of default, is Ʃi(1 – p̂ it) Ʃj≠i (p̂ jt – p̃jt(i))Djt.

5 Using the same notation, this is simply Ʃi(1 – p̂ it)Dit. 6 See for example Kodres and Pritsker (2002), Benzoni et al. (2012), and Arellano and Bai (2013). 7 One line of research considers the informational impact of changes in credit ratings. See, for example, Gande and Parsley (2005) and Aizenman et al. (2013). http://www.voxeu.org/article/contagion-european-sovereign-debt-crisis

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Al Jazeera America A ray of sunlight on secretive corporate welfare Tell the Government Accounting Standards Board you want full disclosure on tax subsidies for corporations November 12, 20142:00AM ET by David Cay Johnston@DavidCayJ Each year billions of your local tax dollars get diverted from public coffers for corporate subsidies. Just how much you are forced to pay for corporate welfare could soon move from the darkness of official secrecy into the light — but only if you act now. A proposed rule requiring local governments to disclose the total amount of property tax abatements in any year is being considered by the little-known private rule-making body known as the Government Accounting Standards Board (GASB). In 44 states, laws let county, city and other local officials grant property tax reductions or exemptions to companies, often with little disclosure and no accountability. Exemptions from property taxes benefit thousands of companies, from online retailer Amazon to shampoo maker Zotos International. The proposal is tepid and narrow, but far better to let in a ray of light than to allow these deals the cover of total darkness in which they are typically carried out. Picking your pocket Just how many billions of property tax dollars corporations escape paying is a mystery. The reason: Everyone responsible for picking your pocket — the politicians who grant the subsidies, the companies that get them and the brokers who charge fees to arrange them — prefer to hide in the dark. Every dollar of property tax not collected from these companies is a dollar you must make up through higher property taxes, fewer government services or more government debt. Nationwide, property taxes provide three-fourths of local government tax revenues. From 2000 to 2011, as wages stagnated and job growth slowed, the burden of local property taxes soared to $443 billion. Adjusted for inflation over those years, property taxes soared 30 percent, to $1,423 per American, Census Bureau data show. People know little about the myriad local and state subsidies to corporations because governments report welfare costs using two systems, separate and unequal: a fully transparent one for individuals and an opaque one for companies. Governments at every level publish finely detailed reports on how much taxpayer money is spent to help children, the chronically sick, the disabled, the elderly and the poor. But virtually no statistics exist on welfare for the rich and the corporations they

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own, as those of us whose who report on these matters know from years of painstaking work to extract limited facts from the public record. The best estimate is that corporate welfare costs state and local governments more than $70 billion per year. That works out to $900 annually for a family of four, which is more than a week’s take-home pay for the typical family. All these corporate welfare programs operate on the assumption that the lucky companies will create jobs. Good Jobs First, a research organization based in Washington, D.C., and various tax watchdog groups have shown that often far fewer jobs were created than promised. Sometimes jobs are destroyed despite massive corporate welfare. The jobs that are created are too expensive; subsidies of more than $1 million per job are becoming common. A modest rule change The proposed rule addresses only one narrow segment of local government welfare for corporations: property taxes that are reduced or waived entirely on new or refurbished factories, hotels, office buildings and other business real estate. It would not apply to retail stores such as Walmart, Lowe’s and Home Depot, which in many towns legally keep the sales taxes collected at the cash register — money not made available for schools, police and libraries. Nor would it apply to interest-free loans, some of which never need be repaid, free land and buildings or job training at local government expense. The proposed rule is about disclosure regarding rules under which you are forced to pay your taxes in full while others get a free ride. Greg Leroy of Good Jobs First said the rule also appears to exclude the growing practice of corporations covertly taxing their workers. Nearly 3,000 companies in 20 states have deals to pocket state income taxes withheld from paychecks. The workers are in the dark because the state treats them as having paid their taxes even though government never receives the money. GASB records show the issue has been under internal discussion during the past quarter century, when local corporate welfare systems ballooned. The board’s use of the opaque term “abatement” in reference to companies’ being excused from property taxes indicates how gingerly it is dealing with the politicians, corporations and subsidy brokers that want to obfuscate these deals so they can continue to enjoy the benefits of picking your pocket. Simply put, this proposed rule is about disclosure regarding rules under which you are forced to pay your taxes in full while others get a free ride. It is about corruption, which in our time has become sophisticated and institutional. Instead of cash bribes, which come with a risk of prison, today money flows as campaign contributions, cushy jobs for friends and family of the politicians who approve these deals and other harder-to- track payoffs. Politicians who give your money to corporations also get to crow about jobs they brought to town. Never mind that often these giveaways just shuffle jobs away from businesses that must pay their taxes in full and toward firms showered with tax favors. Never mind that this means politicians, rather than the competitive market, determines economic winners and losers.

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Comments welcome The proposed rule is very limited in scope. It would require disclosure of only the net total of tax abatements and perhaps only for a single year rather than the full cost over the years when the giveaways are in effect. The disclosures would appear as footnotes to local government financial reports, the GASB report suggests. In addition, the rule would not require naming companies. Contrast this limited disclosure regime with property tax records generally. The price you paid for your house, the current assessment of its value, the property tax owed and whether you paid are all public record. What justifies any less disclosure for exemptions from property taxes? Why does the GASB address only property tax abatements? I’d love to tell you what the GASB and its staffers think, but the private organization’s publicist said they were too busy to talk. I got no response to an emailed suggestion that I delay my column for a few days so I could conduct interviews. Still, even though the proposed rule would lift the window shades just a little, any sunlight is an improvement. That’s where you come in. The GASB is inviting comment on the proposed rule from now through January. This is your chance to not just support the rule as proposed but also demand a much broader one. Tell the board you want disclosure of all state and local subsidies to businesses, that you want the recipients and their brokers fully identified along with any fees paid, any campaign contributions by the companies and brokers and a rigorous accounting of how many jobs were added, if any. And tell the GASB that you want disclosures to cover the entire period of each deal as well as annual snapshots. Send your comments to [email protected] or mail them to Governmental Accounting Standards Board, PO Box 5116, Norwalk, CT 06856-5116 and mention project 19-20E. David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and editor of the new anthology “Divided: The Perils of Our Growing Inequality.” The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy. http://world.einnews.com/article/234189735/2QTzj4CUIfUv80VW

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ft.com Markets FTTradingRoom Markets Regulation November 11, 2014 9:08 pm Europe pulls back on research cost revamp Philip Stafford

©Bloomberg The UK markets regulator is set to fail in its attempt to introduce a Europe-wide ban on brokers bundling the cost of research with trading, according to a senior European politician. The Financial Conduct Authority is seeking to put an end to banks charging investors for research out of share-dealing commissions, and hoped to have a tougher regulatory approach included in Europe’s review of its securities markets legislation, known as Mifid II. More ON THIS STORY// Europe delays FX derivatives reporting/ FSB backs derivatives crisis-clause/ Swaps reform aims to prevent next Lehman/ Quick View Forex industry creates its own lobby group/ Centralised OTC plan ‘a dream’, says Isda ON THIS TOPIC// The Big Picture Regulatory ‘typhoon’ on course for Europe/ The European market data debate/ Bats to launch ETF reporting service/ Europe details markets overhaul IN MARKETS REGULATION// Comment Flawed US rules fragment swaps market/ Iosco warns on systemic risk challenge/ Tougher shadow bank rules ‘only the start’/ Hargreaves Lansdown rejects applying for banking licence The regulator wants to separate these payments to reduce conflicts of interest, clarify the costs being incurred and ensure investors get a better deal. Its move has been opposed by many banks and some large institutional investors. The proposed reforms have triggered warnings that London’s competitiveness as a financial centre could be put at risk by the changes, squeezing the profits of smaller asset managers and putting some small brokers out of business. The European Securities and Markets Authority (Esma), the pan-European regulator, has been assessing the proposals. However, it has rejected the FCA proposals in favour of more transparency from brokers, according to Kay Swinburne MEP, Conservative co-ordinator for Economic and Monetary Affairs.

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“The banning of dealing commissions was discussed in meetings and there was a clear decision taken to not ban the use of commissions,” she told the audience at a Financial Times event in London. “MEPs have subsequently made it very clear to Esma that disclosure of the use of commissions is sufficient and banning of commissions should be off the table,” she added. Ms Swinburne added that some national regulators were able to be stricter than Esma. “The FCA, however, has the flexibility to go further under investor protection if they choose to do so, and we need to make sure they do not deviate too far away from the Esma rules,” she said. Separating costs could hurt the research market and efforts to bring companies to the market, she warned. Separating costs would encourage greater competition and more transparency over the price of research, the FCA said in May. The regulator has estimated commission payments to be worth around £3bn per year. The FCA also said earlier this year that institutions should only be paying for services directly related to executing a trade or substantive research out of dealing commission. “EU reform under Mifid II represents a unique opportunity to deliver significant structural change on a pan-European basis,” it said as part of its market consultation in July. In a response two weeks ago, BlackRock, the asset manager, called for change to be coordinated globally by the International Organization of Securities Commissions (Iosco), an umbrella organisation of the world’s securities regulators. “Reform in the UK or the EU alone will not of itself drive change in other major markets unless there is strong global consensus and commitment to change,” it said. It added that widescale adoption of commission-sharing arrangements would also benefit end investors. CSAs are regarded as a middle ground as they make it easier for institutional investors as they are able to route payments to alternative research providers. http://www.ft.com/intl/cms/s/0/2818519c-69dc-11e4-9f65- 00144feabdc0.html#axzz3IkgrX5IL

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ft.com Comment Opinion November 11, 2014 7:00 pm Irrational fear risks depriving Europe of the benefits of trade Katinka Barysch For many, TTIP serves as a pressure valve for expressing other suspicions, says Katinka Barysch

©Getty The Transatlantic Trade and Investment Partnership now being hammered out between the US and the EU is shaping up to be one of the boldest free trade agreements in recent history. It is designed to remove remaining tariffs between the world’s two richest economic blocs and to lower barriers to trade and investment. Given the eurozone’s mediocre growth prospects, one might expect the Europeans to embrace this opportunity. But opposition is growing. Curiously, nowhere are TTIP- related fears stronger than in Europe’s biggest exporter. Countless “stop TTIP” advocacy groups are warning the Germans against it. In the election campaign for the European Parliament in May 2014, the trade agreement was often the only issue the Germans wanted to discuss. Even Germany’s often staid public broadcasters can get into a tizzy over TTIP. More ON THIS STORY// Obama urged to include currency in pact/ Obama seeks political solace in Asia/ Edward Luce Bell tolls for Obama/ Republican triumph may boost trade deals/ Gillian Tett Midterm rational exuberance ON THIS TOPIC// China and US agree IT trade deal/ China trade area plans meet Apec resistance/ Pascal Lamy Transparency will revive trade talks/ Pacific Rim ministers positive after talks IN OPINION// We play with fire if we skimp on public health// Jacob Heilbrunn US neocons surge back/ The policy of money printing and rates/ Joe Zhang Flood of stimulus for China’s economy When Pew, a pollster, asked the Germans about the pact earlier this year, a small majority thought it would be good for their country. But when it comes to the specifics – lower tariffs, harmonisation of regulatory standards and removing barriers to investment – most Germans are opposed. The uproar has taken Berlin and Brussels aback. If politicians want to turn public opinion, they need to understand why the public is upset. Here are three possible reasons.

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First, for many Germans, TTIP serves as a pressure valve for the expression of deeper suspicions – that globalisation will undermine cherished local standards; that the EU no longer serves German interests; and that the US cannot be trusted. Few Germans are willing to articulate such fears openly. Second, it is not the bigger implications of TTIP that animate the Germans – growth, jobs, the future of the world trading order. Instead it is a set of relatively obscure issues, notably food standards and investment protection. Germans would be prepared to jettison the economic benefits of TTIP if it allowed US companies to sell genetically modified soy or chlorine-washed chicken to European supermarkets. They also fear that the so-called investor-state dispute settlement mechanism – which allows foreign investors to sue governments before special panels if local laws threaten their investments – could allow American multinationals to undermine German environmental, food or labour standards. The underlying issues – whether genetically modified food is indeed a health risk or how to reconcile investors’ need for legal certainty with governments’ prerogative to change policies – are barely discussed. Amorphous fears rather than rational arguments rule the debate. Germans would jettison the pact if it meant allowing chlorine-washed chicken or genetically modified soy Tweet this quote Third, these fears can spread because the TTIP negotiations are not public. Trade negotiations have always been conducted behind closed doors, because the participating nations are loath to disclose their offers and requests before a final deal is done. This simply will not do in an age that is suspicious of secrecy and expects government to be transparent. Some in the German media claim that the secrecy surrounding the TTIP talks allows corporate lobbyists to unduly influence outcomes – and Brussels bureaucrats to sell out the interests of the German people. The European Commission has released scores of TTIP-related material, including its own negotiating mandate. It has reassured the Germans time and again that safety standards are not at risk. None of this has made much difference to the German debate, since trust in Brussels is low. German politicians and opinion leaders need to address the underlying issues, drop their defensive attitudes and come out loud and clear in favour of this historic opportunity to deepen transatlantic trade. The writer is director of political relations of Allianz and strategic adviser to the Munich Security Conference http://www.ft.com/intl/cms/s/0/53563c12-5b9e-11e4-a674- 00144feab7de.html#axzz3IkgrX5IL

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ft. com World Europe Brussels November 11, 2014 6:30 pm MEPs call for EU tax haven probe as Luxembourg furore grows Duncan Robinson in Brussels

The city of Luxembourg MEPs have called for an investigation into tax evasion in the EU, threatening greater scrutiny of the new European Commission president, Jean-Claude Juncker, and his long tenure as Luxembourg’s prime minister. Alde, the liberals’ grouping in the European parliament, requested a temporary committee to investigate tax havens after the recent disclosure of hundreds of special tax deals between Luxembourg and many of the world’s largest companies. The deals allowed companies such as Procter & Gamble and JPMorgan to make use of Luxembourg’s law to pay little tax on their earnings. They are now stirring outrage across a continent still reeling from austerity, where many feel the burden of the economic crisis has not been shared equally. More ON THIS TOPIC// Luxembourg vows to end banking secrecy/ Governments sign tax evasion deal/ UK shell company law could be sidestepped/ HMRC demands £250m of unpaid tax IN BRUSSELS// Draghi ‘autocratic’ style stays off menu/ ECB threatened to end Irish bank funding/ Almost €7bn of EU budget paid out in error/ Brussels seeks compromise in budget row The deals have also prompted questions about how much Mr Juncker, who this month became leader of the EU’s executive arm, knew of the arrangements. He served as the

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Grand Duchy’s prime minister from 1995 to 2013, and was also the finance minister for much of that period. Alde, the parliament’s fourth-largest group, would have to win support from the economic and monetary affairs committee for the investigation to go forward. The probe would seek “clarity” on existing rules and delve into the methods used by large companies to limit their tax bill rather than focus directly on Mr Juncker’s role, according to one person familiar with the plans. During a committee meeting on Tuesday, Michael Theurer, a German Alde MEP, said: “In view of the recently published Luxembourg leaks, we have the duty to investigate the legality and the legitimacy of tax avoidance. If a co-operation between governments and big enterprises leads to tax avoidance, this has to be addressed in a broader context which goes beyond just Luxembourg.” Luxembourg has since tried to quell criticism by promising to reform its tax code to bring it into line with others in the EU, and make its tax process more transparent. Pierre Gramegna, Luxembourg finance minister, said last week: “If you want to develop an international financial centre, you need to be a transparent financial centre.” The leaks – about 28,000 pages – contained files from PwC, the financial services firm, and revealed how companies in effect reduced their tax to as little as 1 per cent through complicated corporate structures registered in the Grand Duchy. They were detailed in a report published by the International Consortium of Investigative Journalists. Cora van Nieuwenhuizen, an Alde MEP from the Netherlands, said: “Just like small and medium-sized enterprises, multinationals have to pay their taxes.” Luxembourg is already facing an investigation into whether tax deals reached with Fiat Finance and Trade, the financial arm of the Italian car company, and ecommerce group Amazon amounted to improper state aid. Speaking before the European parliament, Margrethe Vestager, the EU competition commissioner, said that she would take note of the Luxembourg leaks but played down expectations that it would trigger a host of new investigations. She said her focus was to close the existing state aid probes before “deciding what to do next”. Some results could come as soon as the second quarter of 2015, she added. http://www.ft.com/cms/s/0/3efc5a02-69be-11e4-9f65- 00144feabdc0.html#axzz3IkgrX5IL

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Asia Pacific| NYT Now U.S. and China Reach Climate Deal After Months of Talks

By MARK LANDLERNOV. 11, 2014

President Obama and President Xi Jinping of China attended a ceremony inside the Great Hall of the People in Beijing on Wednesday.Credit Greg Baker/Agence France- BEIJING — China and the United States made common cause on Wednesday against the threat of climate change, staking out an ambitious joint plan to curb carbon emissions as a way to spur nations around the world to make their own cuts in greenhouse gases. The landmark agreement, jointly announced here by President Obama and President Xi Jinping, includes new targets for carbon emissions reductions by the United States and a first-ever commitment by China to stop its emissions from growing by 2030. Administration officials said the agreement, which was worked out quietly between the United States and China over nine months and included a letter from Mr. Obama to Mr. Xi proposing a joint approach, could galvanize efforts to negotiate a new global climate agreement by 2015. Related in Opinion// Op-Ed Contributor: John Kerry: Our Historic Agreement With China on Climate ChangeNOV. 11, 2014

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It was the signature achievement of an unexpectedly productive two days of meetings between the leaders. Mr. Obama and Mr. Xi also agreed to a military accord designed to avert clashes between Chinese and American planes and warships in the tense waters off the Chinese coast, as well as an understanding to cut tariffs for technology products. A climate deal between China and the United States, the world’s No. 1 and No. 2 carbon polluters, is viewed as essential to concluding a new global accord. Unless Beijing and Washington can resolve their differences, climate experts say, few other countries will agree to mandatory cuts in emissions, and any meaningful worldwide pact will be likely to founder. “The United States and China have often been seen as antagonists,” said a senior official, speaking in advance of Mr. Obama’s remarks. “We hope that this announcement can usher in a new day in which China and the U.S. can act much more as partners.” As part of the agreement, Mr. Obama announced that the United States would emit 26 percent to 28 percent less carbon in 2025 than it did in 2005. That is double the pace of reduction it targeted for the period from 2005 to 2020. China’s pledge to reach peak carbon emissions by 2030, if not sooner, is even more remarkable. To reach that goal, Mr. Xi pledged that so-called clean energy sources, like solar power and windmills, would account for 20 percent of China’s total energy production by 2030. Administration officials acknowledged that Mr. Obama could face opposition to his plans from a Republican-controlled Congress. While the agreement with China needs no congressional ratification, lawmakers could try to roll back Mr. Obama’s initiatives, undermining the United States’ ability to meet the new reduction targets. Still, Mr. Obama’s visit, which came days after a setback in the midterm elections, allowed him to reclaim some of the momentum he lost at home. As the campaign was turning against the Democrats last month, Mr. Obama quietly dispatched John Podesta, a senior adviser who oversees climate policy, to Beijing to try to finalize a deal. For all the talk of collaboration, the United States and China also displayed why they are still fierce rivals for global economic primacy, promoting competing free-trade blocs for the Asian region even as they reached climate and security deals. The maneuvering came during a conference of Pacific Rim economies held in Beijing that has showcased China’s growing dominance in Asia, but also the determination of the United States, riding a resurgent economy, to reclaim its historical role as a Pacific power. Adding to the historic nature of the visit, Mr. Obama and Mr. Xi were scheduled to give a joint news conference on Wednesday that will include questions from reporters — a rare concession by the Chinese leader to a visiting American president. On Tuesday evening, Mr. Xi invited Mr. Obama to dinner at his official residence, telling his guest he hoped they had laid the foundation for a collaborative relationship — or, as he more metaphorically put it, “A pool begins with many drops of water.” Greeting Mr. Obama at the gate of the walled leadership compound next to the Forbidden City, Mr. Xi squired him across a brightly lighted stone bridge and into the

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residence. Mr. Obama told the Chinese president that he wanted to take the relationship “to a new level.” “When the U.S. and China are able to work together effectively,” he added, “the whole world benefits.” But as the world witnessed this week, it is more complicated than that. Mr. Xi won approval Tuesday from the 21 countries of the Asia-Pacific Economic Cooperation forum to study the creation of a China-led free-trade zone that would be an alternative to Mr. Obama’s Trans-Pacific Partnership, a 12-nation trading bloc that excludes China. On Monday, Mr. Obama met with members of that group here and claimed progress in negotiating the partnership, a centerpiece of his strategic shift to Asia. Negotiations for the Trans-Pacific Partnership are much further along than those for the nascent Chinese plan, known as the Free Trade Area of Asia Pacific, and some analysts said the approval by the Pacific Rim nations of a two-year study was mainly a gesture to the Chinese hosts to give them something to announce at the meeting. For all the jockeying, the biggest trade headline was a breakthrough in negotiations with China to eliminate tariffs on information technology products, from video-game consoles and computer software to medical equipment and semiconductors. The understanding, American officials said, opens the door to expanding a World Trade Organization agreement on these products, assuming other countries can be persuaded to accept the same terms. With China on board, officials predicted a broader deal would be reached swiftly. “We’re going to take what’s been achieved here in Beijing back to Geneva to work with our W.T.O. partners,” said Michael B. Froman, the United States trade representative. “While we don’t take anything for granted, we’re hopeful that we’ll be able to work quickly” to conclude an expansion of the agreement, known as the Information Technology Agreement. On Wednesday morning, Mr. Xi formally welcomed Mr. Obama at a ceremony in the Great Hall of the People; they later toasted each other at a state banquet. Administration officials said Mr. Obama had pressed Mr. Xi to resume a United States- China working group on cybersecurity issues, which abruptly stopped its discussions after the United States charged several Chinese military officers with hacking. “We did see a chill in the cyber dialogue,” said Benjamin J. Rhodes, the deputy national security adviser. “We do believe it’s better if there’s a mechanism for dialogue.” On Tuesday, Mr. Obama credited APEC with originating the work on reducing tariffs, saying, “The United States and China have reached an understanding that we hope will contribute to a rapid conclusion of the broader negotiations in Geneva.” Talks with China over expanding the 1997 accord on information technology broke down last year over the scope of the products covered by the agreement. But after intensive negotiations leading up to Mr. Obama’s visit, Mr. Froman said, the Americans and the Chinese agreed Monday evening to eliminate more than 200 categories of tariffs. While the United States still exports many high-technology goods, China is the world’s dominant exporter of electronics and has much to gain from an elimination of tariffs.

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Taiwan, South Korea and Japan increasingly find themselves supplying China’s huge electronics industry, deepening their dependence on decisions made in Beijing. The administration estimated that expanding the Information Technology Agreement would create up to 60,000 jobs in the United States by eliminating tariffs on goods that generate $1 trillion in sales a year. About $100 billion of those products are American- made. The administration faces a longer path on the Trans-Pacific Partnership, including whether Mr. Obama will obtain fast-track trade authority from Congress. That could make it easier for the United States to extract concessions from other countries, since they would have more confidence that the treaty would be ratified by Congress. While Mr. Froman conceded that sticking points remained, he said, “It’s become clearer and clearer what the landing zones are.” He said that Mr. Obama would seek fast-track authority, but that the best way for him to win congressional passage of the Trans- Pacific Partnership would be to negotiate the best deal. http://www.nytimes.com/2014/11/12/world/asia/china-us-xi-obama- apec.html?partner=rss&emc=rss&_r=0

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The Upshot| Incomes and Outcomes |NYT Now The Great Wage Slowdown, Looming Over Politics NOV. 11, 2014 David Leonhardt A quiz: How does the Democratic Party plan to lift stagnant middle-class incomes? I realize that liberal-leaning economists can give a long, substantive answer to this question, touching on health care costs, education and infrastructure. But most Americans would not be able to give a clear answer — which helps explain why the party took such a drubbing last week. The Democratic Party’s short-term plan to help the middle class just isn’t very clear. Some of the policies that Democrats favor, such as broader access to good education, take years to pay off. Others, like reducing medical costs or building new roads, have an indirect, unnoticed effect on middle-class incomes. The fact remains that incomes for most Americans aren’t growing very fast and haven’t been for years. Median inflation-adjusted income last year was still $2,100 lower than when President Obama took office in 2009 — and $3,600 lower than when President George W. Bush took office in 2001. That’s not just because of the financial crisis, either: Last month was another solid one for job growth and another weak one for average wage growth, the latest jobs report showed. Photo

Barack Obama campaigning in September 2008.Credit Damon Winter/The New York Times We’re living through the great wage slowdown of the 21st century, and nothing presents a larger threat to the Democrats’ electoral fortunes than that slowdown. The Democratic Party fashions itself as the defender of working families, and low- and middle-income voters are indeed more favorably disposed to Democrats than to Republicans. Those voters have helped the party win the popular vote in five of the last six presidential elections. But if Democrats can’t deliver rising living standards, many 220

voters aren’t going to remain loyal. They’ll skip voting or give a chance to Republicans who offer an alternative, even a vague alternative. As the 2016 presidential campaign begins to stir, the central question will be how both parties respond to the great wage slowdown. Neither has offered a persuasive answer so far — let alone a solution — which is why the public mood is so sour and American politics has been so tumultuous lately. The partisan makeup of the Senate has seesawed more over the past decade than in any time since just after World War II. The Republicans won big victories in 2004, 2010 and 2014, the Democrats in 2006, 2008 and 2012. Continue reading the main story All the while, incomes keep stagnating, and nothing influences the national zeitgeist quite so much as income trends, for understandable reasons. What can Washington do? The answers are very different for the short term and the long. Over years and decades, nothing matters more than economic growth. The last period of strong income gains — the late 1990s — was also the last period of strong economic growth. Continue reading the main story The Great Wage Stagnation of the 21st Century Income peaked in 2000.

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Source: Census Bureau Washington could definitely do more to help growth: better infrastructure, a less burdensome tax code, a less wasteful health care system, more bargaining power for workers and, above all, stronger schools and colleges, to lift the skills of the nation’s work force. Countries that have made more educational progress over the last generation have experienced bigger income gains than the United States, and even here the pay gap between college graduates and everyone else has reached a record high. Yet no mix of these policies is likely to end the great wage slowdown anytime soon. “This is not a silver-bullet issue,” says Gene Sperling, a longtime adviser to Bill and Hillary Clinton and Mr. Obama, “and that’s part of what’s frustrating to people.” In fact, the country is making good progress on several of these issues, starting with health costs, but incomes are still stuck.

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Politicians often like to boast that they’ve come up with bold ideas to solve economic problems and then package those ideas as new — a new deal, a new frontier, a new covenant. But most aren’t really new. That’s O.K., too. Truly new ideas don’t come along very often in any field, including economics. So it goes with lifting middle-class incomes. The best hope for doing so, in the immediate future, is probably the oldest and most obvious play in the book: a tax cut. A few years ago, a middle-class tax cut would have seemed a silly idea. Both Mr. Bush and Mr. Obama had already cut taxes, and the federal budget deficit was enormous. But the deficit has since fallen sharply, thanks in part to lower health costs. Meanwhile, middle- and lower-income families are reaping a disproportionately small share of economic growth. Having the government try to rectify the situation doesn’t sound so silly now — and probably won’t in the 2016 presidential campaign. Tumult in Congress The partisan balance in the Senate has seesawed more over the past decade than at any other time since the early 1950s, while the House balance has changed more since the 1970s. Average percent change in party makeup over previous five election cycles %

Obviously, a tax cut doesn’t need to be a Democratic idea. If anything, it’s traditionally been more of a Republican one. But Republicans’ first priority tends to be cutting the top marginal tax rate or the corporate tax rate, changes that mostly benefit the affluent households already doing pretty well. (And history is clear that such tax cuts rarely bring the economic benefits their advocates claim.) Any presidential candidate — from either party — who can claim the mantle of middle- class tax cutter is likely to benefit from it. For that matter, you could imagine Mr. Obama or reform-minded Republicans in Congress proposing such a tax cut sooner. The details could be straightforward. The cut could be temporary or permanent. It could involve a decline in marginal tax rates for the middle class or an expansion of tax credits. Mr. Sperling, for example, has suggested giving middle-class and poor families

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some of the same tax incentives to save for retirement that wealthy people have. Any one of these plans would raise people’s effective income in a tangible way. Because the long-term budget deficit remains a problem, any such tax cut could be paired with a tax increase for top earners, who — even after the expiration of some Bush-era tax cuts — still face lower rates than they have for most of recent history. “Taxes for high-earning Americans are too low,” argues Roger Altman, the Wall Street executive and Democratic adviser. Most Americans favor tax increases on the well-off, polls show. The model for such a combination, and for winning the political debate over it, is Mr. Obama’s 2008 presidential campaign. He proposed higher taxes on top earners along with a larger middle-class tax cut than Senator John McCain, his opponent, did. By the campaign’s end, polls showed that many voters understood this fact — and viewed the Democrats as the party of tax cuts. Continue reading the main storyWrite A Comment A middle-class tax cut would not solve all of the country’s economic problems. To be honest, it would worsen some of them — particularly the widespread notion that my taxes are too high and your government benefits are too high. In truth, federal taxes are still low from a historical perspective. But after 15 years of disappointing income growth, many voters are skeptical of sophisticated economic plans with uncertain, long-term payoffs. They’re looking for simple ideas that can help people immediately. The popularity of minimum-wage increases makes the point: Even as Democrats were going down to defeat nationwide, voters in five states handily approved such increases. The challenge for the next election will be coming up with a version of the minimum-wage increase that applies to the middle class as well. The Upshot provides news, analysis and graphics about politics, policy and everyday life. Follow us on Facebook and Twitter. Sign up for our weekly newsletter here. http://www.nytimes.com/2014/11/11/upshot/the-great-wage-slowdown-looming-over- politics.html?rref=upshot

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The Atlantic Progressives Lost the Election, but Their Ideas Are Winning Cheer up, liberals. RICHARD V. REEVESNOV 10 2014, 3:00 PM ET

JD Hancock/Flickr Progressives, these days, are a gloomy bunch, and it's not just because of the outcomes of last week's election. As they see it, there's much to be gloomy about: Poverty levels are stuck, they say, with little improvements made in recent decades. What's more, according to the standard progressive line, income inequality is soaring, and back to levels last seen in the roaring '20s. And, to top it all off, middle class incomes are flat, or even falling. But here's the thing: Each of these claims is a significant overstatement. In fact: Progressives have every reason to be celebrating right now. Why? Because by and large, things aren't so bad as progressives claim, and the reason things aren't so bad is because progressive policies are working. Medicare and Medicaid, Earned Income Tax Credits, tax cuts favoring the working poor, expansion of health coverage, and so on— all of these policies are making Americans better off than they would otherwise be. Poverty: Down

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The official poverty measure is next to useless, given that it was set in the 1960s, and fails to take account of real incomes. If we use a more robust measure, one that includes the value of government benefits and transfers and treats income taxes (and tax credits) in a plausible way, poverty has actually fallen quite sharply in recent decades:

Percent of People Living in Poverty

* Counts cash income only and uses the official poverty line ** Counts cash income plus non-cash benefits, reflects the net impact of the tax system, subtracts certain expenses from income, and uses a poverty line based on today's cost of certain necessities adjusted back for inflation. (Center on Budget and Policy Priorities)

That decline is the consequence of successive government interventions to improve living standards for lower-income Americans. Today, government transfers and credits keep around 40 million Americans out of poverty. Seven out of eight of these people would be poor today if the safety net were only as effective as it was in 1964, according to calculations by Arloc Sherman at the Center on Budget and Policy Priorities. Social Security alone slashes 8.6 percentage points off the poverty rate, according to the Congressional Budget Office. Poverty? Government cut that. Inequality: Mostly in Check One of the staple progressive mantras is that income inequality is soaring, with the minority at the top vacuuming up most of the national income. But the picture is much more complex, and more positive, than that. Critically, the most dramatic figures for inequality are generated by looking at "market income"—i.e. before any taxes and transfers. Between 2000 and 2010, the biggest gains in real after-tax income were actually at the bottom of the ladder:

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Change in After-Tax Income by Household Position in the Income Distribution, 2000-2010

Each household's position in the income distribution is determined by its rank in the before-tax income distribution. (Data: CBO Chart: Gary Burtless/Brookings)

The maintenance of incomes at the bottom of distribution is the result of strenuous government efforts to mitigate the effects of inequality, especially by cutting taxes and/or providing tax credits to lower-income Americans. Without this government action, inequality almost certainly would have risen quite sharply in the bottom 90 percent. Having said this, there was a clear a rise in overall inequality in the 1980s, and there has been a pulling-away of the very richest in the top 5 percent or even 1 percent of the distribution in more recent years (see graph below). There may be reasons to worry about the income growth at the very top, particularly in relation to political power. It may be that the redistributive capacity of the government is reaching its political or fiscal limits. And there is good reason to worry about the growth of wealth, as opposed to income, inequality. But in terms of income, the real story of the last few decades is that rising market inequality has by and large not translated into final inequality, largely because of government action. Inequality? Government curbed that.

Middle Class Income: Supported The state of the middle class is also a point of distress for many progressives, and there are causes for concern. But the panicked tone of some political rhetoric is misplaced. Certainly the golden years of income growth enjoyed after World War II are behind us. But it is simply false to imagine that the American middle class is sinking. People at the

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top of the income distribution have done much better than most. But it is also clear that real incomes have risen across the board in the last three decades:

Change in After-Tax Income by Household Position in the Income Distribution, 1979-2010

Each household's position in the income distribution is determined by its rank in the before-tax income distribution. (Data: CBO Chart: Gary Burtless/Brookings)

This graph, produced by my Brookings colleague Gary Burtless using CBO data, comes as a surprise to many. The first point to make is that the top fifth of households have enjoyed much bigger gains. As discussed above, the 1980s were good decade for them, and in more recent years those at the very top have also done very well. But the picture for the majority is not particularly gloomy either. Why? Well, one important point is that the condition of middle-income households should not be conflated with the state of middle-income men, since most of those households also contain women, who have been doing much better, seeing sharp rises in employment, relative educational attainment, and wages over the past three decades. Of course, a family may be worse off in some important ways if both parents need to work to get the same income, and so the "saving" of household income by working women is not always seen as a success, but if that is the problem, we should be more explicit about it. Again, a good deal is owed to state action. First, by using legislation to combat workplace sexism, the government helped pave the way for the transformation in women’s incomes and jobs. Second, tax credits have played a significant role in lifting incomes for working families. Third, the value of in-kind benefits from employers and the government—above all, on health insurance—has risen significantly for middle- income Americans, particularly since the passage of the Affordable Care Act. For

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households in the middle fifth of the distribution, these benefits accounted for 17 percent after-tax income in 2010, up from 6 percent in 1980, according to Burtless. Middle-class incomes? Government boosted those too. * * * Caveats are needed here. The war on poverty has been much more successful than either side cares to admit, but it is far from over. Inequality is still be too high, even if it hasn’t widened for most of the population. Living standards in the American middle-class life are not ‘stagnant’—but the de-coupling of median earnings and growth is a real worry. Market incomes and inequality matter. The truth is this: Most Things Are Getting Better for Most People, Even If a Bit More Slowly Than in the Past, and There are Plenty of Things that Can, and Should, Be Better Still. (Not a great bumper sticker, I admit.) So why are progressives such Eeyores? Here’s one theory: In order to justify government action, they overdramatize the scale of the problem at hand. Unless you can convince voters there is a real problem, what hope is there of gaining support for a solution? Progressives want to redistribute further, so they must declaim the shocking, soaring levels of inequality. To win the battle for a higher minimum wage, they lament the collapse of middle-class incomes. (And note that four states did vote to raise their minimum wage, while simultaneously electing Republicans.) To gain support for anti- poverty measures, they highlight an unchanging record on American poverty. For progressives, doom and gloom will be a self-defeating political strategy, since it adds steadily to the sense that government doesn’t work. This will be especially true in 2016 after occupying the White House for two terms. The subtext of downbeat progressive rhetoric is, by implication: "Yes, we have already done all these things (the Great Society, tax credits, welfare reform, food stamps), but honestly, nothing has really worked, look how terrible things are becoming." What they should be saying instead is: "Look at all these government initiatives that have really worked to reduce poverty, improve workplaces, lessen inequality, weaken racism, boost women’s chances, and improve wellbeing. So let’s do more of it! What’s the next problem that we can help to solve?" http://world.einnews.com/article/234193013/vn12Expnu0pzZNUB

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ft.com World UK Politics & Policy November 11, 2014 7:02 pm Appetite for austerity evaporates George Parker, Political Editor

The appetite among British voters for more austerity is evaporating, polling for the Financial Times shows, in findings that present a big political problem for the winner of the next election. The Populus poll shows that only two in five voters now believe that more austerity and cuts will be needed in the five years after the 2015 election, even though the budget deficit is forecast by the OBR to be £75.2bn in 2015-16. More ON THIS STORY// FT Series Britain and the cuts/ Britain and the cuts Business wish list/ Britain and the cuts Business in support/ Britain and the cuts Civil servant who reflects times/ Britain and the cuts Grand architecture ON THIS TOPIC// Britain and the cuts Formula protects Scotland/ Britain and the cuts Is there an architecture of austerity?/ Britain and the cuts Win for legal firm/ Britain and the cuts Recruiter loses out IN UK POLITICS & POLICY// Fare caps to benefit London’s part-timers/ Perils of Heathrow U-turn weigh on parties/ Second wave of enterprise zones planned/ Commons chaos caps bad day for PM The survey also found that most voters think that any remaining deficit reduction can be achieved by an efficient government cutting waste – without having any serious impact on the lives of ordinary people. The findings come as businesses want the next government to raise spending on infrastructure and deepen cuts in welfare,separate research for the Financial Times has found. Company bosses want deficit reduction to be complete by 2018-19, while making room to invest in areas that can support long-term growth, according to a sample of 172 members of the CBI, the business lobby group, polled for the FT. The public’s waning appetite for austerity will worry both Labour and Conservatives, since it marks a breakdown of a widespread acceptance of the need for cuts after the coalition took power in 2010. “This just shows the need to get on and do things while the public are still with you,” said one Treasury official.“That’s what they did in Ireland.”

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George Osborne had hoped to eliminate the deficit before next May’s election, but whoever occupies the Treasury in 2015 will have to impose further big cuts on a public that is showing signs of austerity fatigue. The Populus poll shows just 41 per cent of people agree “we will need to continue with austerity and cuts in government spending over the next five years”, while 28 per cent said further cuts would not be needed and 18 per cent said they were not necessary in the first place. Furthermore, some 48 per cent of people thought “an efficient government” should fairly easily be able to achieve the necessary savings by cutting waste “so there should be no need for cuts in the areas that really affect people”. Only 33 per cent of voters accepted any government would have to implement savings that had a direct impact on people. The Populus polling finds that voters are predictably more likely to support cuts that sounded least painful for them – suggesting bankers and owners of expensive homes could find themselves being asked to pay more. FT series Britain and the cuts Britain is exactly at the halfway point of a planned nine-year programme of cuts, and the second half promises to be more difficult than the first, whichever party wins the next general election.// Further reading It finds that 80 per cent favour a further crackdown on tax avoidance, 79 per cent another tax on bank bonuses, 65 per cent support a so-called “mansion tax” and 63 per cent back a tax on excess profits on utility companies, broadly Labour policies. Meanwhile the least popular measures for tackling the deficit included the further sale of publicly owned assets (29 per cent) and means-testing pensioner benefits (31 per cent). Populus also asked Labour and Conservative candidates at the next election to list their “top 10 deficit-cutting measures” and found a sharp contrast between the two parties – confirming the high political stakes. Prospective Labour MPs expect Ed Miliband to focus on tax avoidance, higher taxation of bankers, a mansion tax, a windfall tax on utilities including energy companies, and an increase in the top rate of income tax to 50p. Tory MPs are likely to press David Cameron to privatise remaining state assets and land, cut the number of government departments, cut the budgets of most departments except the NHS and to cut the welfare bill. http://www.ft.com/intl/cms/s/0/e05843de-6423-11e4-bac8- 00144feabdc0.html#axzz3IkgrX5IL

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Era un ‘plum cake’, no un ‘soufflé’, de Fernando Rey en El País el 12 noviembre, 2014 en Derechos, Libertades, Nacionalismo, Política, Sociedad, Sociología LA CUARTA PÁGINA El número de personas con ideas independentistas es más un bizcocho compacto de cierto grosor que algo frágil y pasajero. Y aumentará si no se actúa con más inteligencia que la exhibida hasta el momento He tenido la sorprendente oportunidad de vivir el 9-N en Cataluña, participando en un programa de la TV-3 de tanta solera como es 30 minuts. Estuve en el acto que cerraba la campaña proconsulta; dialogué en el Ateneo de Barcelona con Santiago Vidal, el magistrado que ha estado a punto de ser expedientado por el Consejo del Poder Judicial a raíz de su participación en la elaboración del proyecto de Constitución catalana (por fortuna no lo fue, del mismo modo que finalmente la Universidad de Girona no retiró el doctorado honoris causa a la magistrada Encarna Roca); asistí al acto de participación ciudadana en Barcelona, Berga y Rubí. En definitiva, pude escuchar a muchas personas, la mayoría de orientación independentista. Para un profesor de Derecho Constitucional de la Castilla más vieja como yo, ha sido una experiencia estimulante, pero al mismo tiempo difícil, ya que siendo partidario sin ambages de la unidad de España (me gusta el refrán catalán “cuantos más seamos, más reiremos”), he podido comprobar en directo la creciente desafección del sentido nacional español de muchas personas en aquellas latitudes. Evidentemente, mis sensaciones personales no tienen valor sociológico alguno. Tampoco mi misión en el programa era convencer a nadie de nada, entre otras razones, porque las ideas se tienen pero en las creencias se está y el nacionalismo (el propio y el ajeno) es una de las creencias más difíciles de modular o limitar con argumentos. He participado en el programa por curiosidad (que es la lujuria del pensamiento) y para intentar comprender mejor qué está sucediendo en Cataluña. Pues bien, mi impresión fundamental es que para poder enfocar adecuadamente el denominado proceso catalán es preciso distinguir, lo que no es frecuente, tres planos diferentes de análisis, aunque relacionados entre sí. Estos planos son el social, el político y el jurídico. De este último ya me he ocupado en otros momentos así que me detendré en los dos primeros. El primero es el social. Lo más importante de todo este proceso es el significativo y creciente número de personas que, con diferentes edades, preferencias políticas y trayectorias personales, están uniéndose a la causa independentista. No se puede minimizar fuera de Cataluña el impresionante esfuerzo organizativo de la consulta realizada, que es fruto de la musculosa sociedad civil catalana. Tampoco se puede obviar la participación sostenida, desinteresada, incluso alegre, de tantas miles de personas. Un gran número de ellas está viviendo ahora mismo un momento de enorme ilusión política, comparable tan solo al de la Transición. No ignoro que numerosas personas han intentado superar en el momento de la votación viejas frustraciones históricas (independentistas clásicos y republicanos), pero quizá sean más las que han querido expresar con ese gesto, hacia el futuro, su deseo de hacer 231

otra política diferente a la tradicional, que se juzga cínica y corrupta. En este sentido, el 9-N se emparenta con el mismo deseo que explica el fenómeno de Podemos. La ilusión política que muchos catalanes han vivido está tejida, a mi juicio, de interpretaciones históricas tergiversadas (el valor de 1714 como precedente, por ejemplo), y opiniones sobre cómo hacer política un tanto naif. Se vive, en cierta medida, un momento adanista, de invención, y en general el independentismo se presenta en su modalidad más buenista (como si la independencia de una parte del territorio no fuera, objetivamente, el acto político más radical y agresivo). En Cataluña se respira política; el proceso se vive obsesivamente. Hay un estallido de conversaciones, un deseo de participar y de ser escuchado. Quizá sea, en este sentido, un laboratorio de experiencias de probable generalización, tras décadas de un sistema constitucional que desconfía de los instrumentos de participación ciudadana. Muchos catalanes creen que la independencia arreglaría todos los problemas. Me ha parecido percibir, por eso, que la independencia es el opio (para una parte) del pueblo catalán. Impresiona, particularmente, la falta de afecto hacia lo español de algunos jóvenes con los que hablé. Todo esto es algo que hay que afrontar porque, en realidad, la munición ideológica de mayor calibre del independentismo es la identificación de lo español con el Gobierno central de turno, con “Madrid”. Si esto fuera así, yo también querría a menudo independizarme a título personal de España, sintiéndome, no sé por qué, español hasta la médula. El llamativo movimiento social pro-independencia tiene un componente no desdeñable de enfado con el Gobierno estatal, considera que no es respetado por este, pero también cuenta con elementos de psicología social más gratificantes, como el orgullo de haber sido capaces de crear un entramado social de esta magnitud y por supuesto, el sentimiento de fraternidad política derivado de lo anterior. Cuando sus líderes hablan del éxito del proceso creo que apuntan precisamente a eso. Y tienen razón: es un éxito para ellos. Si esto es así, con sus luces y sombras, algo que tiene que cuidar quien esté en el Gobierno central es el respeto a las cientos de miles de personas que mantienen esta postura. Cada vez que no se hace, crece geométricamente el número de independentistas. Se falta el respeto, en mi opinión, cuando se ignora como interlocutores a todas esas personas, a las que se da políticamente por perdidas e incluso hostiles. No existe un derecho a la autoderminación en el ordenamiento jurídico interno, y desde luego no es, en contra de lo que afirma el presidente Mas, un derecho natural. No se puede tolerar la vulneración del marco legal, aunque creo que finalmente la celebración del 9-N no es la que quería ninguna de las partes, pero puede ser aceptada por todas. Un referéndum de autodeterminación tendría, además, el efecto no simplemente de conocer la voluntad del sujeto político catalán, sino sobre todo, la de reconocerlo jurídicamente, una especie de soberanía durmiente, esto es un paso decisivo. Pero lo que no debe hacerse es, creo, abordar este asunto desde la clave político-partidista, ignorando las claves sociales. El presidente del Gobierno de España es también el presidente de esos catalanes que quieren independizarse. De ahí que no sea suficiente el mensaje político dirigido a la élite política catalana y el recordatorio ritual de la invalidez jurídica de todo el proceso. Este no es un problema de diálogo entre caciques de tribus. El Gobierno central debe aspirar a convencer socialmente, y no solo a vencer política y jurídicamente. Porque no hay un soufflé catalán a punto de desinflarse, como se dice cuando se quiere minimizar la cuestión, sino que el creciente arraigo social de las ideas independentistas

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evoca más bien a un bizcocho compacto de cierto grosor y densidad que no va a reducirse. Se equivocan quienes leen los resultados del 9-N interpretando que solo un tercio de los catalanes quiere la independencia. Esa cifra no es el techo electoral, es su suelo electoral: irá creciendo si no se actúa con más inteligencia que la exhibida hasta el momento. Muchos actores políticos en Madrid y en Barcelona han venido haciendo muy mal las cosas desde hace tiempo (por cierto con escasas autocríticas). No han sabido leer las claves de evolución de la sociedad catalana, no han sabido ni querido argumentar a favor de la unidad del Estado. Carecemos todavía de datos más o menos objetivos e imparciales sobre el impacto social, económico y político de una eventual independencia. Se ha venido optando por la solución más fácil, más pobre y más equivocada: el lenguaje oficial y burocrático, que hay que tener en cuenta, pero que no será el que arregle este entuerto. Ni siquiera se ha logrado insinuar alguna salida creíble a este fenomenal atasco en el que estamos, en el marco de una reforma a fondo de la Constitución que nos dé estabilidad para una buena decena de años. En todo el proceso catalán solo ha intentado argumentar o persuadir políticamente una de las partes, mientras que la otra ha sido incapaz de comprender por qué un número creciente de catalanes está abrazando la causa independentista. Frente a esto, solo han ido echando balones fuera y culpando de todos los males al resto de fuerzas políticas. Como si la cuestión catalana fuera solo un problema político partidista y no social. Hay riesgo de victoria de la tesis de la independencia por incomparecencia irrespetuosa del adversario. Fernando Rey es catedrático de Derecho Constitucional en la Universidad de Valladolid. http://www.caffereggio.net/2014/11/12/era-un-plum-cake-un-souffle-de-fernando- rey-en-el-pais/ Cataluña oficial y Cataluña real, de Francesc de Carreras en El País el 12 noviembre, 2014 en Derechos, Libertades, Nacionalismo, Política, Sociedad, Sociología COLUMNA Tras el recuento, a los independentistas se les heló la sonrisa: son un escaso 30% del censo El pasado domingo fue una jornada de júbilo para los independentistas catalanes. Las largas colas matutinas en muchos improvisados colegios electorales —por llamarlos de alguna manera— daban la sensación de una gran afluencia de votantes, previsiblemente partidarios del sí-sí a la confusa doble pregunta formulada, es decir, presuntos votantes a favor de una Cataluña independiente. Además, por las radios y televisiones catalanas, oficiales y privadas, iban desfilando eufóricos partidarios de este sí-sí y habían hecho pública esta opción personajes populares, con Guardiola y Xavi a la cabeza. Todo parecía ir viento en popa. Pero en ocasiones no coinciden la impresión que suscita a primera vista el gentío en las calles, las afinadas corales en los medios de comunicación o el ejemplo de los famosos 233

con el recuento de votos depositados en las urnas por los ciudadanos con la conciencia individual como único testigo. Y, sobre todo en este caso, lo más significativo ha sido el alto número de abstencionistas que se han comportado así no por descreer de la democracia sino, precisamente, por creer en ella y decidir su incomparecencia para no colaborar en una convocatoria ilegal sin las garantías propias de un Estado de derecho. Tras el recuento, a los independentistas se les heló la sonrisa. Se supone que todos ellos fueron a votar, ninguno podía faltar en una jornada histórica, una más. También hay que suponer que se les añadieron unos cuantos más, todos aquellos que quieren separarse de España para aprovecharse de la crisis que se originaría y recomponer así sobre nuevas bases toda la estructura constitucional, económica y social. Sin embargo, si damos por buenos los resultados, el balance indica que el número de partidarios de la independencia es un escaso 30% del censo, no llega ni a una tercera parte de la población con derecho a voto. Un fiasco. Además, si repasamos los resultados del 9-N comprobamos que las diferencias entre las diversas zonas del territorio catalán son muy grandes: una amplia zona costera con un bajo porcentaje independentista, unas áreas industriales donde este porcentaje es irrisorio y una Cataluña interior en la que el independentismo avanza más pero que solo alcanza la mayoría, por muy poco, en ocho comarcas de las 41 existentes. La Cataluña oficial y la Cataluña real, la vieja idea orteguiana. En este caso, la Cataluña de los sondeos oficiales, de los medios de comunicación y de los intelectuales apesebrados y la Cataluña de la calle, la que apenas tiene voz pero puede tener voto. Los catalanes no son un problema; los nacionalistas que se han apropiado desde hace años de la Generalitat sí lo son. Esto es quizás lo que no se entiende bien desde el resto de España. http://www.caffereggio.net/2014/11/12/cataluna-oficial-y-cataluna-real-de- francesc-de-carreras-en-el-pais/

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Hoy lo revolucionario es llegar a acuerdos, de Antón Losada en Zona Crítica de el diario.es el 12 noviembre, 2014 en Derechos, Libertades, Nacionalismo, Política, Sociedad, Sociología OPINIÓN Si alguno ahora tuviera el coraje de proponer un consenso viable y sensato, no solo lo petaría ante la mayoría de la opinión publica, sino que dejaría descolocados a todos los demás. Ahora que va quedando claro que la causa principal de casi todos nuestros problemas es que medio país quiere meter en la cárcel a la otra mitad, ha llegado el momento de hacer algo realmente revolucionario y llegar a algún acuerdo con alguien sobre algo. Hoy un acuerdo sería algo tan sedicioso que seguramente la fiscalía también se querellaría contra su autor intelectual, mientras el comando de patriotas que se ha hecho fuerte en la mayoría de los medios de Madrid pediría que fuera embreado en la Plaza Mayor como escarmiento. Aún así merecería la pena. Seria histórico. Artur Mas se pasea por Barcelona como si fuera Gladiator rodeado de una corte de convergentes que le aplauden cada vez que respira, Oriol Junqueras reclama elecciones con el entusiasmo de quien pide hora en el dentista, Rosa Diez hace de viuda de España y se desgarra las carnes por la patria por todas las televisiones, en Podemos están ocupados eligiéndose a si mismos, Pedro Sanchez bastante tiene con ir haciendo apostolado federalista entre los suyos sin que se le reboten y Mariano Rajoy guarda silencio seguramente por miedo a que si dice algo, lo que sea, los suyos lo metan también en la cárcel. Resulta todo tan previsible que da miedo. Si alguno ahora tuviera el coraje de proponer un consenso viable y sensato, no solo lo petaría ante la mayoría de la opinión publica, sino que dejaría tan descolocados a los demás que seguramente hasta podría tomar ventaja para eso que parece ser lo único que importa de verdad: la elecciones. ¿Y cómo se llega a acuerdos? Habitualmente no es fácil y en este país se ha perdido mucha practica. Llegar a acuerdos se ha convertido en algo sospechoso, síntoma inequívoco de alguna oscura corrupción o apaño inconfesable. Pero la política no consiste en tener razón. La política sirve para alcanzar consensos entre gente que maneja razones diferentes. Para llegar a acuerdos suelen resultar imprescindibles tres condiciones. La primera es tener voluntad. La segunda es comportarse con lealtad durante las negociaciones y renunciar a sacar ventaja con el engaño a corto. La tercera es no pedir cosas imposibles. Por ejemplo. No se le puede pedir a Más que le diga a los catalanes que lo siente mucho, pero que eso que llevan años pidiendo en la calle no puede ser porque dice el gobierno que es ilegal. No se le puede pedir a Rajoy que negocie un referéndum que media España ni entiende ni acepta. A partir de ahí, todo se vuelve mucho más fácil. http://www.caffereggio.net/2014/11/12/hoy-lo-revolucionario-es-llegar-acuerdos-de-anton-losada-en- zona-critica-de-el-diario-es/

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Eurointelligence RSS Feed Miércoles, 12, de noviembre de 2014, 8:48:21 The incredible conservatism of German economists We have seen a number of recent comments in the UK especially, criticising German attutudes and Germany's role in the crisis. The critics of Germany wonder why does Germany not see that we are in a liquidity trap? Or as Simon Tilford of the CER put it: the Germans are still caught in a pre-Keynesian world. German economists, in their vast majority, like to think of themselves as post-Keynsesian, and there is absolutely no way that they will ever buy into Keynesian thinking that is so predominant in the UK and the US, not only among economists, policy analysts and commentators. Yesterday's media coverage presented us a very good example about the kind of economic advice the German government receives at home - from the official body of experts whose job it is to produce such advice. The Council of Economic Experts has severely criticised the Merkel government's policy, according to Frankfurter Allgemeine, which has obtained a pre-release of the council's annual report. Their arguments are the exact opposite of what you hear in the UK. They are livid about the minimum wage and the early retirement programme as these would impede Germany's competitiveness. The advisers consider the foreign criticism of insufficient investment in Germany as misleading and exaggerated. And they are critical of whatever the ECB does, arguing that low interest rates and asset purchase would bring financial stability risks. They also published their annual GDP forecast, which at 1% for 2015 is a touch more pessimistic than that of the government or the joint forecast by the economic institutes. If you consider yourself on the Keynesian side of the argument, you will find this report depressingly typical of prevailing attitudes. But this commentary by Philip Plickert in Frankfurter Allgemeine will get your blood boiling. He calls QE "the last stage of escalation" in European monetary policy, and criticises the ECB for not paying closer attention to the wise analysts of the BIS, who have warned about the collateral damage from such a policy. Plickert writes that if monetary policy no longer works, there is a temptation to increase the dosis. The headline of his article is thus: Monetary Policy for Junckies. He writes that a large asset purchase programme would trigger distortions and bubbles. And it would discourage eurozone governments to undertake structural reforms. He concludes that Mario Draghi is simply not credible with his assertion that member states should undertake structural reforms. The ECB actively discourages such behaviour through its monetary policy. Our other stories We also have stories on the right-wing backlash against Rajoy for not stopping the consultative referendum on Catalan independence; on the Greek government resisting five of the 19 prior measures of the current programme; we have stories on the enhanced conditions credit line, and what it means; on the Geithner papers; on a proposal from Slovakia to focus a QE programme on EIB bonds; on why the ECB is not a bad bank; and on why secular stagnation is very probable now.

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CONVERSABLE ECONOMIST Life Expectancy Risk and Annuities Timothy Taylor Tuesday, November 11, 2014 In a series of television ads for Ameriprise, spokeman Tommy Lee Jones asks some version of the question: "Retirement. Will You Outlive Your Money?" Katharine G. Abraham and Benjamin H. Harris tackle various aspects of this question in a November 6 research paper from the Economic Studies group at the Brookings Institution: "Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities."

If everyone knew precisely how long they were going to live, along with what expenses needed to be incurred along the way, retirement planning would be considerably easier. But a lot of Americans seem underestimate how long they will live. A survey done back in 1991-92 asked Americans who at that time were aged 58-61 what percentage chance they had of living to age 75. Enough time has now passed that we know how many actually lived to age 75. For example, the table below shows that of those who said they had a 0% chance of living to age 75, 49.2% did actually live to age 75, as did 59.9% of those who thought they had a 10% chance of reaching 75, and 64.6% of those who thought they had a 20% chance of reaching 75. Again, this survey wasn't asking 20 year-olds or 30 year-old, but was asking people who were around age 60--and who presumably knew something about their health status.

Indeed, the table does suggest that people do know something about their health status. Those who thought they had a better chance of living to age 75 mostly do live longer. But those who were presumably in poorer or average health or more pessimistic for other reasons, and who said that they had a 70% or less chance of living to age 75, seem 237

to systematically underestimate how long they are likely to live. At the other end, those who are in the best of health or more optimistic, who thought they had a 90 or 100% chance of living to age 75, tend to overestimate their chances. Annuities are the straightforward financial tool that provides insurance against running out of money before the end of life: basically, you pay for the annuity up front, and then the company guarantees you a stream of payments for the rest of your life. But many people don't like the idea of annuities, for a variety of reasons. Many people don't like the idea that they will buy an annuity and then die sooner than expected, thus "losing money" on the annuity. (Of course, it is an unavoidable reality of insurance that people should be happy if they pay for the insurance year after year, but end up never needing to use it because they don't have the accident or problem for which they bought insurance in the first place. But most people dislike this aspect of insurance.) Other people fear that they might need to make a large expense in the future, perhaps for health care or to help a family member, and if they have annuitized a large share of their retirement wealth they would lose that flexibility. Some may figure that they already have an life-long annuity, in the form of Social Security, so they don't wish to put any more of their wealth into annuity form. Some people fear, with reason, that the markets for annuities in the past didn't always offer that good a deal in terms of what it cost to guarantee a certain stream of income in the future, so that they would rather sit down with a financial adviser and plan their own path for spending. For an in-depth discussion of these issues, I recommend an essay on "Annuitization Puzzles" by Shlomo Benartzi, Alessandro Previtero and Richard H. Thaler in the Fall 2011 issue of the Journal of Economic Perspectives. (Full disclosure: I've been Managing Editor of the JEP since 1987, so I am predisposed to think the articles are of consuming interest.) These authors argue that many people do very much like annuities. For example, Social Security is an annuity program, and it is quite popular. Most of the people who are currently receiving a "defined benefit" pension plan that pays a steady amount for the rest of their lives are not eager to switch over to a "defined contribution" plan where they would need to manage their own wealth. They argue that the lack of annuity purchasing is due more to the decision-making hurdles that face people who are thinking about buying annuities. They write: "An annuity should be viewed as a risk- reducing strategy, but it is instead often considered a gamble: “Will I live long enough for this to pay off?”" However, those who believe that many people have a pent-up demand for annuities do face a difficult empirical puzzle. The decision about what age to claim Social Security can be viewed as a decision about implicitly buying an annuity. Consider a person who retires at age 62 or 65, but lives off their saving for several years and doesn't claim Social Security until age 70. In effect, that person is "buying" an annuity by not receiving Social Security payments sooner, and in exchange will receive a larger monthly Social Security check because of deferring the start of payments until age 70. For many people, this "Retire Now, Social Security Later" option would make them better off over their lifetime. But again, many people worry that if they don't start collecting Social Security as soon as possible, they will die in the near future and thus would have "wasted" their Social Security benefits.

The specific focus for Abraham and Harris are so-called "longevity annuities." With a standard annuity, you pay a big chunk of money up front, and then receive a stream of 238

payments for the rest of your life. With a longevity annuity, you pay a big chunk of money up front, wait 10 or 20 years, and then receive a stream of payments for the rest of your life. Of course, the benefit is that if you pay now and wait to receive the payments until later, the payments can be larger--even considerably larger. Here's a table showing the payoffs for a man or woman buying an annuity at age 60. If the man starts receiving payments immediately, he gets $534 per month. If the man waits for 15 years, his monthly payments would be about three times as much.

The potential benefit of longevity annuities is that they are truly insurance against outliving your assets, by offering a relatively large payoff if you live to a longer age than you expect. For example, a person could buy a longevity annuity that is set to kick in at age 80 or 85, and then figure that they can pretty much spend the rest of their wealth before that age, secure in the knowledge that they have a backstop in place if they live longer than expected. The tradeoff, like all insurance policies, is that if you don't reach the age where the longevity annuity kicks in, your money ends up being paid to someone else who lived longer than expected. The market for longevity annuities is growing, but is still small. Abraham and Harris write: "While the market for deferred-income annuities (DIAs) has blossomed in recent years, many DIAs are sold to individuals in their 50s and almost all are sold with deferral periods of less than 15 years. The current market for true longevity annuities remains very thin. ... After managing just $50 million in sales a few years earlier, deferred income annuities reached $2 billion in sales in 2013. ... One risk that a standard longevity annuity contract does not address is inflation risk. ... [W]e are not aware of any currently offered longevity annuity product that includes an inflation protection option ..." With the spread of 401(k) and IRA and other tax-deferred retirement accounts in recent decades, more and more people are going to face the question of whether to buy annuities in the future. Abraham and Harris look at the distribution of funds that people have in these kinds of accounts. They find that the bottom half or so little or nothing 239

saved in a defined contribution account--in part becasue many of them don't have such an account in the first place. But among those in the 55-64 age bracket, the top 25% have $143,000 or more in such an account, and the top 10% have $463,000 or more in such an account. Annuities may turn out to be one of those products that people don't like to buy, but after they have taken the plunge, they are glad that they brought. One can imagine an option where some degree of annuitization of wealth could be built into 401(k) and IRA accounts. For example, it might be that the default option is that 30% of what goes into your 401(k) or IRA goes to a regular annuity that kicks in when you retire, another 20% goes to a longevity annuity that kicks in at age 80, and the other 50% is treated like a current retirement account, where you can access the money pretty much as you desire after retirement. If you wanted to alter those defaults, you could do so. But experience teaches that many people would stick with the default options, just out of sheer inertia-- and that many of them would be glad to have some additional annuity income after retirement. http://conversableeconomist.blogspot.com.es/2014/11/life-expectancy-risk-and- annuities.html

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VOX CEPR's Policy Portal Research-based policy analysis and commentary from leading economists WHat caused the great recession in the Eurozone? What could have avoided it? Philippe Martin, Thomas Philippon11 November 2014 Economists disagree over the origin of the Eurozone Crisis. This column uses a quantitative framework to sort through the various channels and policy impacts. It argues that fiscal and macroprudential policies are complements, not substitutes. Prudent fiscal policy is helpful but cannot by itself undo private leverage booms. Both prudent fiscal policies and macroprudential policies are required to stabilise the economy and make the Eurozone a viable monetary union. Related// The global financial crisis: What caused the build-up?/ Erlend W Nier, Ouarda Merrouche/ The Eurozone crisis: What needs to be done/ Guido Tabellini/ Eurozone crisis: What Vox columnists said Richard Baldwin/ Greece: The start of a systemic crisis of the Eurozone? Paul De Grauwe There is a wide disagreement about the nature and cause of the Eurozone crisis. Some see it as driven by fiscal indiscipline, some emphasise excessive private leverage, while others focus on external imbalances, sudden stops, or competitiveness divergence due to fixed exchange rates, as these quotes illustrate: • Paul de Grauwe (2012): “The situation of Spain is reminiscent of the situation of emerging economies that have to borrow in a foreign currency...they can suddenly be confronted with a ‘sudden stop’ when capital inflows suddenly stop leading to a liquidity crisis”. • Lorenzo Bini Smaghi (2013): “… countries which lost competitiveness prior to the crisis experienced the lowest growth after the crisis”. • Hans Werner Sinn (2010): “The lesson to be learned from the crisis is that a currency union needs ironclad budget discipline to avert a boom-and-bust cycle in the first place”. • Paul Krugman (2012): “… on the eve of the crisis (Spain) had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts”. Most observers understand that all these ‘usual suspects’ have played a role and may be interrelated, but do not offer a way to quantify their respective importance. In this context, it is difficult to frame policy prescriptions on macroeconomic policies and on reforms in the Eurozone. Given the scale of the crisis, understanding the dynamics of the Eurozone is a major challenge for macroeconomics today. We argue that we need a quantitative framework to identify these various mechanisms, their relations and, ultimately, to run counterfactual experiments. This is what we do in a recent paper (Martin and Philippon 2014). 241

The US and the Eurozone experiences We start from the observation that up to 2010, the boom and bust cycles were very similar in the US and the Eurozone. To illustrate this, take the example of Arizona and Ireland because in both cases, the increase in household debt to income ratio during the boom years was very large. Figure 1 shows the evolutions of the employment rates, normalised to zero in 2005. The employment boom and bust are almost identical up to 2010 but diverge afterwards. This suggests that the fundamental mechanisms at work in both regions were similar up to 2010 but different in later years. We argue that the key difference between Ireland and Arizona is that Arizona did not experience a sudden stop after 2010. Figure 1. Employment rates in Ireland and Arizona.

More generally, a salient feature of the great recession in both the US and the Eurozone is that regions that experienced the largest swings in household borrowing, also experienced the largest declines in employment and output.1 Figure 2 illustrates this feature of the data by plotting the change in employment during the credit crunch (2007- 2010) against the change in household debt-to-income ratios during the preceding boom (2003-2007) for the largest States and Eurozone countries. Figure 2. First stage of the Great Recession: Household borrowing predicts employment bust in the US and the Eurozone

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The American and European cross-sectional experiences look strikingly similar in this respect in the period 2007-2010. This similarity of experience in the two monetary zones suggests that the shocks they faced were similar in nature, and that the structural parameters that govern the way the economy reacts to a deleveraging shock may also be similar. The key difference between the US and the Eurozone experience is the sudden stop in capital flows and the surge in spreads, starting in 2010 and later. There was no concern about the public debt in the States, let alone on their remaining in the dollar zone. Hence, we use the US as a control group to predict private deleveraging in the period 2008-2012 in the Eurozone in the absence of the sudden stop shock. We call this the ‘structural’ private leverage shock. New counterfactual evidence on the periphery countries To analyse the role of household leverage, fiscal policy, interest rate spreads, and exports during the Eurozone crisis, we build a quantitative model with borrowers and lenders – as in Eggertsson and Krugman (2012) and Midrigan and Philippon (2010) – where the linkages between these usual suspects are taken into account. In particular, fiscal policy is constrained by borrowing costs, such as the surge in spreads in the periphery after 2010, and spreads themselves are affected by past private and public borrowing, as well as bank recapitalisation needs. This model is able to reproduce very well the boom and bust dynamics of Spain, Ireland, Greece, and Portugal – the four periphery countries that were hit hardest in the crisis. In order to fit the macro and public debt dynamics during the boom (2002-2008), we find that a drift in spending and in social transfers must have characterised the fiscal rule of Greece. This political economy bias in fiscal policy was also present, but to a lower extent, in Ireland and Spain. However, this was not the case in Portugal.

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Our model allows us to run counterfactual experiments on the four periphery countries and answer the following four ‘what if’ questions: • What if they had followed more conservative fiscal policies during the boom than they actually pursued? This entails eliminating the political economy drifts in public spending and transfers that characterised their fiscal rules in the boom. For Greece and Ireland, such policies would have stabilised or reduced public debt in the boom as shown by the difference between the observed data (in blue) and the counterfactual (in dashed green) in the top panel of Figure 3. In turn, it would have reduced spreads and fiscal austerity during the bust, helping in terms of employment, especially in Greece (see bottom panel of Figure 3). Ireland would not have avoided most of the employment slump from private deleveraging in 2008 but would have experienced an earlier exit. However, the conservative fiscal policy necessary to achieve this looks implausible in Ireland – it would have entailed entering the bust with no public debt. This suggests that fiscal policy alone cannot act as a stabilisation tool in presence of a massive private credit boom. Figure 3. Public debt and employment in data and fiscal counterfactual: Greece and Ireland Public debt

Employment

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Note: Public in % of GDP and employment normalised to one in 2002. • What if the periphery countries had successfully conducted macroprudential policies to limit private leverage during the boom? This would have reduced the boom-bust cycle of employment in Ireland (see bottom right panel in Figure 4 below). It would have entailed lower bank recapitalisation and lower spreads during the bust, and would have allowed for a more countercyclical fiscal policy during the bust. In Spain (Figure 4, bottom left panel), such macroprudential policy would not have been very successful in stabilising the employment. Given the existing spending bias in the fiscal rule, public debt would have been substituted to private debt (see top panel of Figure 4), and employment would still have experienced a boom-bust cycle, although less pronounced than in the data. This suggests that in presence of a spending bias in the fiscal rule, macroprudential policy alone would not have successfully stabilised the employment. Figure 4. Public debt and employment in data and macroprudential counterfactual: Spain and Ireland Public debt

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Employment

Note: Public in % of GDP, and employment normalised to one in 2002. • What if Mario Draghi’s declaration of ‘whatever it takes’ and the OMT programme had come in 2008 rather than 2012, and had been successful in reducing the spreads? The four countries would then have been able to avoid the latest part of the slump because lower borrowing costs would have helped to limit fiscal austerity. With an earlier response of the ECB to the sudden stop, Irish employment, in particular, would 246

have looked very much like Arizona’s one in Figure 1, with a rebound in 2011-2012. Spanish employment would have stopped deteriorating in 2010. In this counterfactual, the Eurozone and the US are both monetary unions where central banks are successful in eliminating the risk of exit. This policy would not have avoided the large build-up of public debt but would not have exacerbated it either. • What if these countries had been able to regain in the bust the competitiveness they had lost in the boom? One can think of this counterfactual as close to a situation of flexible exchange rates where the exchange rate can depreciate quickly during a recession. In this counterfactual, we assume that export prices fall in the bust years (2008 to 2012) by the amount that prices increased relative to the Eurozone in the boom years (2002 to 2007). We find that because of the increase in exports after 2008, the periphery countries – especially those more open, such as Ireland – would have experienced a shorter and milder bust and a much smaller build-up in public debt. Concluding remarks One lesson we take from our exercise is that fiscal and macroprudential policies are complements not substitutes in stabilising the Eurozone economy. A prudent fiscal policy, although helpful, cannot by itself undo the consequences of a private leverage boom, and the reverse is also true. Both prudent fiscal policies and macroprudential policies are required to stabilise the economy and to make the Eurozone a viable monetary union. References Bini Smaghi, L (2013), “Austerity and stupidity”, VoxEU.org, 6 November. Eggertsson, G and P Krugman (2012), “Debt, deleveraging, and the liquidity trap: a Fisher- Minsky-Koo Approach”, Quarterly Journal of Economics, 127(3), 1469–1513. Krugman, P (2012), “Europe's Economic Suicide”, The New York Times, April De Grauwe P (2012), “The Governance of a Fragile Eurozone”, Australian Economic Review, vol. 45, issue 3, pages 255-268 Martin, P and T Philippon (2014), “Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone”, CEPR DP 10189 and NBER WP 20572. Mian A and S Amir (forthcoming), “What Explains the 2007-2009 Drop in Employment?” Econometrica. Midrigan, V and T Philippon (2010), “Household leverage and the recession”, NYU Working Paper Sinn, H W (2010), “Reining in Europe’s Debtor Nations”, Project Syndicate, April Footnote/ 1 Consistent with this observation, Mian and Sufi (2012) show that differences in the debt overhang of households across US counties partly explain why unemployment is higher in some regions than others./ http://www.voxeu.org/article/what-caused-eurozone-s-crisis

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11/10/2014 05:34 PM Mr. Europe? The Ghosts of Juncker's Past Come Back to Haunt Him By Nikolaus Blome, Christoph Pauly, Gregor Peter Schmitz and Christoph Schult He only recently took office as European Commission president, but now, Jean- Claude Juncker is under pressure due to potentially illegal tax deals forged in Luxembourg during his stint as the country's prime minister. Some believe he may have to resign.

Ezequiel Scagnetti/ DER SPIEGEL European Commission President Jean-Claude Juncker faces questions regarding his country's taxation practices. Jean-Claude Juncker's first public appearance as the new European Commission president was a symbolic one. Early this month, he traveled to Frankfurt to present former German Chancellor Helmut Kohl's new book in the luxury hotel Villa Kennedy. Called "Aus Sorge um Europa" -- "Out of Concern for Europe" -- the book warns that the pursuit of national interests represents a danger to the European ideal. And Juncker is quick to endorse Kohl, a man he calls "a friend and role model." "Kohl is right in deploring the fact that we are increasingly sliding down the slope toward reflexive regionalism and nationalism," Juncker said. It is certainly not the first time Juncker has uttered such a sentence. Indeed, his delivery of the message has often been even more direct. "I've had it," he erupted during an EU

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summit in December of 2012, for example. "Eighty percent of the time, only national interests are being presented. We can't go on like this!" Such sentiments have served Juncker well throughout his career and have helped transform the politician from tiny Luxembourg into a well-known defender of Europe. Now, though, at the apex of his European career, Juncker and his beloved European Union are facing a significant problem. And it is one that has led even advisors close to Juncker to wonder whether he may soon have to step down from his new position, despite having taken office only recently. Last week, several media outlets, including the Munich-based Süddeutsche Zeitung, published the most detailed accounts yet of the tricks used -- and the eagerness brought to bear -- by Luxembourg officials to help companies avoid paying taxes. The strategies were often developed together with company leaders and served to entice multinationals to set up shop in Luxembourg. The tiny country on Germany's western border, for its part, benefited from tax revenues it wouldn't otherwise have seen. It was, in short, a reciprocal relationship. But it was also a relationship that was disadvantageous for Luxembourg's EU partners -- and for European cooperation itself. Many of the companies that set up shop in Luxembourg, after all, no longer paid taxes in their home countries where they produced or sold the lion's share of their products.´ 'Artistically Expand' Jean-Claude Juncker served for 19 years as prime minister of Luxembourg, and his country's tax system was very much one of those "national interests" that he so often complained about. Still, his reputation as "Mr. Euro" did not suffer as a result. The revelations, to be sure, are nothing new. Indeed, as a German minister said on the sidelines of one of last week's many events scheduled to commemorate the 25th anniversary of the fall of the Berlin Wall: "Everybody knew about it." The minister added that the Luxembourgian tax schemes were consistent with the legal framework, even if they managed to "artistically expand" that framework. "What is the big news?" That, though, is perhaps the wrong question. The correct one is: Should a politician representing his country's national interests be held to different standards than the European Commission president charged with upholding EU treaties? The answer is clearly "yes". And therein lies the political problem that is currently facing Jean-Claude Juncker. As the head of his country's government, Juncker -- who concurrently served as finance minister for several years -- helped develop Luxembourg into a tax paradise and blocked outside attempts to investigate its tax system. In 2004, after the Social Democrats joined Juncker as a coalition partner, the government agreed to establish a working group to compare the Luxembourgian tax code with international standards. But the working group never actually came to fruition. Even back in 1997, Juncker displayed certain alacrity when it came to defending his country's tax laws. At the time, he held the rotating presidency of the European Council as Luxembourg's prime minister. Under his stewardship, the EU passed a Code of Conduct for business taxation rules aimed at "tackling harmful tax competition in the European Union." The code, though, is not legally binding -- a fact for which Juncker is also largely responsible. The European Commission may only penalize country's tax

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system if the savings it offers to companies are determined to be forbidden state subsidies and thus contrary to EU free trade rules. Laughably Small Sum The European Commission's competition authorities, it soon became clear, would receive no help from Juncker when they began investigating his country's complicated tax code. It was only after December 2013, when Juncker was voted out of office at home, that Competition Commissioner Joaquín Almunia received information pertaining to a total of 22 questionable tax deals. Thus far, the Commission is reasonably certain that it can prove Luxembourg granted impermissible state aid in two cases and has opened investigations into both the Luxembourg branch of Amazon and into the automobile multi Fiat Chrysler. Both companies, officials believe, received precise pledges regarding the future tax burdens faced by their Luxembourg-based operations. In a 30-page letter to the Luxembourg government, Almunia laid out the Commission's suspicions for why Fiat has spent years channeling financial transactions through Luxembourg. The country's tax authorities allegedly accepted a tax savings model developed for Fiat Finance and Trade Ltd. by the financial auditing firm KPMG. Fiat Finance and Trade lends money to other companies within the Fiat group and has a small office on Boulevard Royal not far from the Luxembourg government quarter. The Commission believes that, on Sept. 3, 2012, Fiat Finance and Trade received confirmation of a tax deal that was to run from 2012 to 2016. The result was that Fiat knew precisely how large its tax bill would be each year. According to Commission calculations, Fiat Finance and Trade was assigned annual taxable income of between €2.3 billion and €2.8 billion, regardless of the company's economic performance. The resulting tax bill on such income translates to the laughably small sum of €732,000. Almunia's verdict in the letter is harsh. Luxembourg finance officials ignored the company's "economic reality," the document reads, and notes that the deal with Fiat Finance and Trade is not based on "financial logic." The measures had the effect of "lowering the tax burden of the undertakings concerned as compared to undertakings in a similar legal and factual situation," the letter reads. In other words, Luxembourg granted Fiat an unfair competitive advantage. Fiat Finance and Trade is contesting the allegation. Margrethe Verstager from Denmark has taken over from Almunia as Competition Commissioner and is likely to continue on the course charted by her predecessor. And there are several other possible investigations looming -- such as tax deals initiated by auditing giant PricewaterhouseCoopers for clients such as German energy utility E.on, Deutsche Bank and the US food conglomerate Heinz. Could such deals have been made without Juncker's involvement or approval? It is a question that will dog him for as long as the investigations are underway.

Low Profile Juncker is not known for being particularly good at handling such situations. During the European election campaign in March, he joined EU Parliament President Martin Schulz for a joint SPIEGEL interview and reacted peevishly when his center-left interlocutor suggested that Luxembourg had become a tax haven under his leadership.

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"The allegation … that I actively promoted tax evasion is an outrageous attack on my country and my person. I will not accept that," he snapped. There were other incidents on the campaign trail as well, including a lack of overt support from German conservatives and some personal attacks perpetrated by the British press -- to the point that a rumor began making the rounds that Juncker had wanted to withdraw his candidacy but was talked out of it by friends. Following last week's reports, his first reaction was to keep a low profile, cancelling a planned podium discussion at the last minute. Chief Commission Spokesperson Margaritis Schinas insisted that Juncker was "very serene" about the revelations. Few have jumped to his defense. "The revelations are a blow that will hit Luxembourg's reputation hard," said the country's foreign minister, Jean Asselborn, who served as Juncker's deputy prime minister. He promised that the new government would make his country's tax code more transparent and noted that the country had already lifted its opposition to EU financial data sharing rules. "Luxembourg cannot become a place that welcomes companies that don't want to pay taxes," Asselborn says. "We will no longer be a part of such tricks." The revelations have been met with concern in European Parliament, with President Schulz calling for more information. The United Left group in parliament has demanded that Juncker appear before the lawmaking body this week and plans to instigate a vote of confidence against him. Such a vote must be held if supported by 10 percent of parliamentarians. Euro Crisis "Someone who ensured the existence of large-scale tax dodging and the creation of an unjust system within the EU cannot lead the European Commission," says Gabi Zimmer, chair of the United Left group. Liberals, the majority of whom voted for Juncker when he was confirmed by European Parliament, have also distanced themselves. "When it comes to Jean-Claude Juncker and the EU battle against tax dodging, it would seem that the fox has been enlisted to guard the henhouse," says Alexander Graf Lambsdorff, a Liberal parliamentarian. Thus far, it seems unlikely that Juncker will lose his position, but that could change. Were it proven that Luxembourg provided illegal state aid to the companies in question, he would stand exposed for having spent years breaking EU law. "Then, it would get tight," says a political colleague, echoing the sentiments of others. "He would hardly be able to endure." EU lawyers are already researching the question as to whether the resignation of a Commission president would force the other 27 commissioners to forfeit their portfolios as well. Many are now wondering if Juncker will be able to withstand this kind of pressure for the several months the investigations will take. Some political allies and party colleagues doubt that he can. Still, he is likely anxious to avoid an overly hasty response, if only out of concern that his resignation could trigger a leadership crisis in Brussels -- particularly at a time when the euro crisis seems to be once again rearing its ugly head. Juncker's widely praised renewal of the European Commission could also be derailed. That renewal was instigated on the basis of years of service as prime minister of an EU country. Now though, it is exactly that experience that could prove his downfall.

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URL: • http://www.spiegel.de/international/germany/juncker-faces-uncertain-future- amid-tax-loophole-investigations-a-1002062.html Related SPIEGEL ONLINE links: • Democratic Deficit: It's Time to Put Juncker on the Hot Seat (11/10/2014) http://www.spiegel.de/international/europe/editorial-on-tax-problems-of-eu- commission-president-juncker-a-1002075.html • German Central Bank Head Weidmann: 'The Euro Crisis Is Not Yet Behind Us' (09/24/2014) http://www.spiegel.de/international/business/interview-with-bundesbank-head-jens- weidmann-on-euro-crisis-and-ecb-a-993409.html • Approaching Brexit? Merkel Fears Britain Crossing a Red Line on Immigration (11/03/2014) http://www.spiegel.de/international/europe/merkel-fears-cameron-crossing-red-line- on-immigration-a-1000743.html • The Zombie System: How Capitalism Has Gone Off the Rails (10/23/2014) http://www.spiegel.de/international/business/capitalism-in-crisis-amid-slow-growth- and-growing-inequality-a-998598.html • 'Poets and Alchemists': Berlin and Paris Undermine Euro Stability (10/20/2014) http://www.spiegel.de/international/europe/euro-stability-threatened-if-france-flouts- stability-rules-a-997995.html • Leading Candidates Square Off: The Race for Europe's Top Job (03/19/2014) http://www.spiegel.de/international/europe/european-commission-candidates-square- off-in-spiegel-debate-a-959565.html

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11/10/2014 05:46 PM Democratic Deficit It's Time to Put Juncker on the Hot Seat Can the European Commission be led by a man who transformed his own country into a tax oasis? The debate is long overdue and Jean-Claude Juncker can no longer afford to shirk the question. The European Union has a problem -- and a serious one at that. On the surface, the issue is about the tax avoidance schemes in Luxembourg that were engineered during former Prime Minister Jean-Claude Juncker's tenure. And about the billions of euros in revenues lost by other EU countries as a result. But the true problem in this affair actually runs a lot deeper. At issue is just how seriously we take the new European democracy that Juncker himself often touts. The criticism of Juncker came less than a week after he took office. Leaked tax documents released last Wednesday by the International Consortium of Investigative Journalists showed how large corporations have taken advantage of loose policies in Luxembourg to evade paying taxes. At a time of slow economic growth and tight national budgets, sensitivity has grown in large parts of the EU over countries that facilitate legal tax evasion. Juncker is fond of pointing out proudly that he was Europe's first "leading candidate," and the first to be more-or-less directly elected as president of the European Commission. Across Europe, many celebrated it as the moment when more democracy came to the EU. Unfortunately, optimism blinded people to one salient fact: European politicians themselves never took this newfound democracy particularly seriously. Cunning and Self-Interest In contrast to the United States, where getting to know the candidates is a matter of course, the EU never had any intent of truly introducing its leading politicians to the people. This has created a situation in which a person like Juncker can effectively lead two lives. One as an (honest) proponent of the EU and the other as a cunning former leader of an EU member state who promoted Luxembourg's self-interest by blocking treaties that would have forced the country to adopt stricter tax policies. During the election campaign, Juncker was never really explained how these seemingly divergent personalities might fit together. Nor was he forced to. Early on, his Social Democratic challenger Martin Schulz decided to form an alliance with the conservative Juncker. So has not to endanger their own power, Schulz and co. avoided asking uncomfortable questions. We EU correspondents share some of the blame as well by going too easy on Juncker. Our American counterparts would have been left scratching their heads in confusion. For as unappetizing as America's media-driven democracy can be at times, its core principle is a good one. The media there is charged with closely examining each political candidate who wants to exercise power -- even if that scrutiny is painful. Democracy is not meant only for fair-weather. Overly personal details -- like who is sleeping with whom or how much a person drinks and when -- do not necessarily have to be part of such reporting. But it should surely

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include an analysis of the tax dealings of the politician's country of origin and how that official might respond if the Commission is forced to open an investigation into his or her own country. It would have been nice to hear answers to such questions from the candidate Juncker during the campaign. Now, we must demand them from the Commission President Juncker. His comments thus far -- to the effect that he is "very serene" in the face of the allegations and his insistence that he would not interfere in the investigation -- are not enough. This time, he cannot be allowed to duck the question. URL: • http://www.spiegel.de/international/europe/editorial-on-tax-problems-of-eu- commission-president-juncker-a-1002075.html Related SPIEGEL ONLINE links: • Mr. Europe? The Ghosts of Juncker's Past Come Back to Haunt Him (11/10/2014) http://www.spiegel.de/international/germany/juncker-faces-uncertain-future-amid- tax-loophole-investigations-a-1002062.html • Opinion: Europe's Juncker Bond (06/05/2014) http://www.spiegel.de/international/europe/opinion-why-germany-should-say-no-to- juncker-a-973540.html • Corporate Tricks: EU Faces Tough Battle to Close Tax Loopholes (05/21/2013) http://www.spiegel.de/international/europe/eu-faces-tough-battle-to-curb-tax- avoidance-and-evasion-a-900900.html

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lunes, 10 de noviembre de 2014, 8:48:21 The run on the rouble and its ramifications

lunes, 10 de noviembre de 2014, 8:48:21 It was a mercifully quiet weekend in the eurozone. Germany celebrated 25 years of reunication, and the rail strike just ended in time for this. Meanwhile, the real action is happening in the east. Russia is clearly outside our reservation. But a financial crisis there is clearly one of those shocks that we need to pay close attention to, especially given the slowdown in China. The FT has the details about the run on the rouble on Thursday and Friday, which fell by 8% over the week, and 40% over the year. What prompted the sell-off was the announcement by the central bank on Wednesday that it would limit forex support to $350m a day, a decision the FT said was immediately stress-tested in the markets. There were also reports that dozens of Russian tanks and troops had re-entered the eastern provinces of Ukraine, which was clearly another factor in the sell-off, as the markets had previously naively bought into the ceasefire agreement. The FT article also raises the spectre of debt default, with $30bn for redemption due by corporates and a further $10bn by banks before the end of this year. The corporates are mostly state- owned companies with a steady stream of foreign currency income from oil and gas, so they should, in principle, be solvent, though some of the banks might find it more difficult. At 10.3%, the yield on ten-year sovereign debt was the highest since 2009, shortly after the most recent rouble crisis. The big question right now is to which extent this crisis is temporary, similar to those in 1998 and 2008, or not. Our own view is that this crisis is going to be different, much more protracted, as Putin is not going to give ground over the Ukraine, and as the west gradually steps up the sanctions. We do not see any return to normality for a very long time. Our other stories We also have stories on the Catalan referendum, on the rebound in German industrial production during September; on a Catalan informal consultation about independence; on weak Spanish growth; the reluctance of French companies to invest; on ‘Fillongate’, the latest French political scandal; on the troika asking Greece to withdraw a politically sensitive tax arrears law; a comment comparing the Greek government’s dilemma with the one in 2009; on Giorgio Napolitano; on the probability of QE, plus comments on German real devaluation, a comment on German hypocrisy, and on why the euro is more in danger now than two years ago.

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CONVERSABLE ECONOMIST The Two New Tools of Monetary Policy Timothy Taylor Monday, November 10, 2014 Every basic exposition of how monetary policy is conducted before about 2008 is soon to become obsolete. The three basic monetary policy tools that used to be taught in almost every introductory economics course were changing reserve requirements, changing the discount rate, and conducting open market operations. Because of the way in which monetary policy was conducted during the Great Recession, all three tools have become essentially irrelevant. In the future, The Federal Reserve will mainly influence interest rates through two quite different tools that didn't even exist before 2008: primarily by using the rate of interest that it chooses to pay on bank reserves, and secondarily using its new reverse repo facility. There's no secret about these new tools. For example, here's an explanation from September 16-17 meeting of Federal Open Market Committee: • When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate. • During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. • During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate. Let's do a quick review of the old monetary policy tools, explain why they no longer work, and then introduce the new monetary policy tools. In the old days before 2008, monetary policy worked because banks were required to hold reserves with the central bank, but baanks typically tried not to hold extra reserves, because it used to be that money being held with the central bank earned no return. The requirement that banks hold reserves gave the central bank leverage over how much credit banks were willing to offer, and led to what used to be considered the three main tools of monetary policy. 1) The central bank could alter the reserve requirement, which meant that banks had either more or less to lend than before. 2) If a bank reached the end of a business day and found that the last round of transactions had left it a little short of what it needed to be holding, one option was to borrow the additional funds from the central bank. When doing so, the bank would need to pay an interest rate called the discount rate. So by raising or lowering the discount rate, the central bank could influence whether a bank kept a fairly small or fairly large cushion of reserves over and above the required amount--and thus affect the bank's willingness to lend.

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3) However, banks usually preferred not to borrow from the central bank, because doing so was often viewed as a danger signal that no other private bank was willing to lend to you. Instead, banks that were running a little short of reserves at the end of the day's transactions borrowed overnight from other banks and paid the so-called "federal funds interest rate." The Federal Reserve treated this federal fund interest rate as a target for monetary policy. It would buy or sell government bonds to set the federal funds interest rate at a desired level.

For example, here's a figure (from the ever-useful FRED website run by the Federal Reserve Bank of St. Louis) showing the federal funds rate over time. You can tell the history of monetary policy back a half-century by the Fed reducing this federal funds rate in recessions (the gray bars) and increasing it when recessions were over and inflation seemed at least a potential threat. You can also see how the Fed took this interst rate to near-zero during the Great Recession, and has held it there ever since, which is why there has been a need to use quantitative easing and forward guidance as tools of monetary policy since then. Notice that all three of these traditional tools of monetary policy rely in one way or another on banks being fairly close to the level of required reserves. However, as part of its "quantitative easing" response to the financial crisis, the Fed started buying large quantities of government debt and mortgage-backed securities. Instead of holding these bonds and securities, banks found that they were holding very large quantities of cash reserves, far above the legally required level. To be specific, U.S. banks were legally required to be holding $101 billion in reserves as of October 29, but they were actually holding $2,557 billion in reserves--about 25 times the required amount.

But when banks are holding large quantities of extra reserves, the old-style monetary policies don't work. Change the reserve requirement? Reducing it won't matter, and unless the central bank raises it by a multiple of 25, raising doesn't matter either. Also, no one wants to try to lock up these excess bank reserves, because the hope is that banks will find ways to lend this money. Altering the discount rate has no effect if banks don't need to borrow from the central bank, because there is no danger they will run short of reserves. And banks don't need to borrow much from each other at the federal funds interest rate, either, again because they are holding such high levels of reserves. Indeed, the quantity loaned and borrowed at the federal funds interest rate has dropped dramatically in recent years, as shown in this figure from economists at the Federal Reserve Bank of New York.

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The situation of banks holding vastly more reserves than legally required, as a result of the quantitative easing policies of the Fed, seems likely to persist for years to come. So when the Federal Reserve decides that it wishes to raise the federal funds interest rate, what monetary policy tools will work in this situation? The main monetary policy tool of the future is likely to be the amount of interest that the Fed pays on these bank reserves. Traditionally, the Fed paid zero percent interest on bank reserves. But a law passed in 2006 authorized the Fed to start paying interest on reserves as of 2011, and the Emergency Economic Stabilization Act of 2008 allowed the Fed to start paying interest on bank reserves as of October 1, 2008. The current interest rate paid by the Federal Reserve to banks on their excess reserves is 0.25 percent. By altering this interest rate, the Federal Reserve has a tool that can directly affect how much banks want to hold in reserves and how much they are willing to lend and at what interest rates. For example, say that the Fed gradually raised the interest rate it is paying on bank excess reserves. In that case, banks would be more likely to hold funds in the form of reserves with the central bank and less likely to make loans, including making overnight loans to each other in the federal funds market, which should tend to push up interest rates. In short, when the Fed decides that it's time to raise interest rates, the policy tool you should be watching is the interest rate charged on bank reserves. What if this new policy tool doesn't work well? The back-up monetary policy tool, as the Fed said in the quotation above, is the "overnight reverse repurchase agreement facility," which will be used "only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate." 258

Some definition of terms for those uninitiated in repurchase markets may be useful here. In a "repurchase agreement," one party sells a security to another, while simultaneously agreeing to repurchase it at a slightly higher price in the near future--often the next day. For the other party, the one which is agreeing to buy a security and then sell it back the next day, this is called a "reverse repurchase" or reverse repo agreement. The Fed is has been testing its ability to operate in the repurchase market since September 2013, first selling and then buying back Treasury securities. Here's a description of reverse repurchase agreements from the Federal Reserve Bank of New York, which would be conducting these operations. A reverse repurchase agreement, also called a “reverse repo” or “RRP,” is an open market operation in which the Desk [the New York Fed trading desk] sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. The difference between the sale price and the repurchase price, together with the length of time between the sale and purchase, implies a rate of interest paid by the Federal Reserve on the cash invested by the RRP counterparty. For policy purposes, the key point here is the last sentence: a repurchase agreement is really a form of very short-term lending and borrowing. Investors who have a lot of cash are always looking for a chance to earn a return, even a small return. When an investor with cash buys a Treasury bond from the Fed, and then sells it back to the Fed the next day, that investor has received, in effect, an interest payment on their cash. Thus, when the Fed conducts its repurchase operations, it is in effect setting the level of interest rates for very short-term overnight borrowing. Such overnight borrowing using Treasury bonds as collateral is very similar to the overnight borrowing that banks do with each other at the federal funds interest rate. Jeremy Stein, who left the Federal Reserve Board of Governers in May, spells out how this will work in an interview last July with Ylan Q. Mui in the Washington Post. Basically, the notion is that the interest rate paid on reserves will establish a ceiling for the federal funds interest rate, while the interest rate embedded in the reverse repo facility will set a floor under that rate. But how much space there will be between the ceiling and the floor, and just how these tools will be used in setting monetary policy, is still very much a work in progress, waiting for when the Fed decides it is actually time to raise the federal funds interest rate. For purely pedagogical reasons, I'm hoping the use of reverse repos doesn't come up too frequently and can largely ignored, because explaining that tool of monetary policy to an intro-level economics class will be just no fun at all. http://conversableeconomist.blogspot.com.es/2014/11/the-two-new-tools-of- monetary-policy.html

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Comment on macroeconomic issues Getting the Germany argument right Simon Wren-Lewis Monday, 10 November 2014 As the Eurozone experiences a prolonged demand-deficient recession, and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right. It seems to me there are two wrong directions to take here. The first is to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’, to use a phrase the IMF use a lot which I dislike. The second is to argue that Germany needs to expand to help its Eurozone neighbours. The problem with the first argument is that it legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties. If we look at the Eurozone as a whole, its fiscal policy is tighter than in the UK and US. As Fraser Nelson notes, the UK has a larger structural deficit than any other EU country. With interest rates at their zero lower bound, this shows that UK policy - while far from appropriate - is not quite as inappropriate as in the rest of the EU. The right policy when you are in a liquidity trap is to have a fiscal stimulus large enough to get you out of that trap. Within the Eurozone, the only countries that mightbe exempted from this fiscal expansion are those on the periphery. Otherwise we need a fiscal expansion in France, Italy, Spain, the Netherlands etc, as well as Germany. The problem with the second argument is twofold. First, it tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours. Second, it implicitly suggests that the current German macroeconomic position is appropriate, but that Germany must move away from this position for the sake of the Eurozone as a whole. The obvious German response is to list all the reasons why their economy is currently on track (see, for example, Otmar Issing in the FT recently), and suggest therefore that other countries should look at their own policies for salvation. This is how we end up needlessly discussing structural reforms in France, Italy and so on. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%. The current competitiveness misalignment is a result of low nominal wage growth in Germany over the 2000 to 2007 period, which was in effect (and perhaps unintentionally) a beggar my neighbour policy with respect to the rest of the Eurozone. Germany’s current position is unsustainable, as its huge current account surplus and relative cyclical position shows. It will be corrected by undoing what happened from 2000 to 2007. Over the next five or ten years, German inflation will exceed the Eurozone average until its long term relative competitive position is restored.[1] The only choice is how this happens. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere. That is what would happen if the ECB was able to do its job, and Germany would get no choice in the matter. Normally above 2% inflation in Germany would 260

require a boom (a positive output gap), but if it can be achieved without that fine, although I would note that current German inflation is only 0.8%. Arguments that point to currently low unemployment and a zero output gap in Germany are therefore irrelevant while German inflation is so low. The inefficient alternative solution is for 2% or less inflation in Germany, and actual or near deflation outside. Why is this solution inefficient? Because to get inflation that low outside Germany requires the Eurozone recession we are now experiencing. This is where structural reforms enter. Many German commentators say ‘why cannot other countries do what we did from 2000 to 2007’? But low nominal wage growth in Germany from 2000 to 2007 was accompanied by a recession in Germany! Furthermore, that recession was not so bad as the current Eurozone position, because the ECB was able to do its job and cut interest rates, so inflation outside Germany was above 2%. So from 2000 to 2007 many countries had to experience above target inflation because of low nominal wage growth in Germany, [2] yet many in Germany want to avoid above target inflation while imbalances are corrected. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But as I have argued before, and which comments on my recent posts and readings confirm, I think the German position is more about ignorance than greed. I also suspect there is a great deal of macroeconomic ignorance outside Germany as well, which is why Germany has been able to impose a recession on the rest of the Eurozone. Take for example this paper by Michael Miebach, who speaks from the left of centre in Germany. Miebach presents a wide range of macroeconomic fallacies or irrelevant arguments. Germany’s fiscal position is not good (irrelevant in a liquidity trap), its macroeconomic position is not too bad (when it should have above 2% inflation, which probably requires a boom), fiscal expansion in Germany would have only a small impact on the periphery (but what we should be talking about is fiscal expansion in all the main Eurozone economies, which this paper confirms would help the periphery as well as France, Italy etc, and expansion in Germany would benefit countries like the Netherlands), and the old canard about how focusing on demand distracts attention from dealing with structural weaknesses in the Eurozone. But most revealingly we have this: “Also, how can Germany demand fiscal discipline from other countries if it strips away its own principles at the first opportunity?” You can only write this if you just do not get the idea of a liquidity trap, when demanding fiscal discipline from other countries is the source of the problem! What makes Germany’s current position unforgivable is not that it is refusing to undertake a significant fiscal stimulus of its own. It is that it is doing what it can to make other countries persist with austerity, and at the same time making it difficult for the ECB to do what it can to offset this. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm. The best one can say in mitigation is that, in a sort of collective stockholm syndrome, too many in these other countries also mistake nonsense for virtue.

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[1] Economists would naturally talk about real exchange rates here, rather than use the term competitiveness, because the latter invites a confusion between firms and nations. The first point to note is that if Germany had its own exchange rate, the impact of low nominal wage growth on competitiveness would be undone through a nominal appreciation. (There are no benefits of a nominal appreciation if everything real is unchanged.) The second point is that a competitive market is beneficial when it encourages improvements in productivity. For a single nation to gain a competitive advantage in a currency union by cutting nominal wages just causes problems. [2] Looking at consumer prices tends to mask national differences, because of imported goods. Over the 2000-2007 period average Euro consumer price inflation was 2.2%, and in Germany it was 1.7%. However if we look at output prices (the GDP deflator) we get a clearer picture: average Eurozone inflation was just above 2%, but inflation in Germany was 0.8%. Posted by Mainly Macro at07:40 http://mainlymacro.blogspot.com.es/2014/11/getting-germany-argument-right.html

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The Opinion Pages| Op-Ed Columnist |NYT Now Death by Typo The Latest Frivolous Attack on Obamacare NOV. 9, 2014

Paul Krugman My parents used to own a small house with a large backyard, in which my mother cultivated a beautiful garden. At some point, however — I don’t remember why — my father looked at the official deed defining their property, and received a shock. According to the text, the Krugman lot wasn’t a rough rectangle; it was a triangle more than a hundred feet long but only around a yard wide at the base. On examination, it was clear what had happened: Whoever wrote down the lot’s description had somehow skipped a clause. And of course the town clerk fixed the language. After all, it would have been ludicrous and cruel to take away most of my parents’ property on the basis of sloppy drafting, when the drafters’ intention was perfectly clear. But it now appears possible that the Supreme Court may be willing to deprive millions of Americans of health care on the basis of an equally obvious typo. And if you think this possibility has anything to do with serious legal reasoning, as opposed to rabid partisanship, I have a long, skinny, unbuildable piece of land you might want to buy. Last week the court shocked many observers by saying that it was willing to hear a case claiming that the wording of one clause in the Affordable Care Act sets drastic limits on subsidies to Americans who buy health insurance. It’s a ridiculous claim; not only is it clear from everything else in the act that there was no intention to set such limits, you can ask the people who drafted the law what they intended, and it wasn’t what the plaintiffs claim. But the fact that the suit is ridiculous is no guarantee that it won’t succeed — not in an environment in which all too many Republican judges have made it clear that partisan loyalty trumps respect for the rule of law. To understand the issue, you need to understand the structure of health reform. The Affordable Care Act tries to establish more-or-less universal coverage through a “three- legged stool” of policies, all of which are needed to make the system work. First, insurance companies are no longer allowed to discriminate against Americans based on their medical history, so that they can’t deny coverage or impose exorbitant premiums on people with pre-existing conditions. Second, everyone is required to buy insurance,

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to ensure that the healthy don’t wait until they get sick to join up. Finally, there are subsidies to lower-income Americans to make the insurance they’re required to buy affordable. Just as an aside, so far this system seems to be working very well. Enrollment is running above expectations, premiums well below, and more insurance companies are flocking to the market. So what’s the problem? To receive subsidies, Americans must buy insurance through so-called exchanges, government-run marketplaces. These exchanges, in turn, take two forms. Many states have chosen to run their own exchanges, like Covered California or Kentucky’s Kynect. Other states, however — mainly those under G.O.P. control — have refused to take an active role in insuring the uninsured, and defaulted to exchanges run by the federal government (which are working well now that the original software problems have been resolved). But if you look at the specific language authorizing those subsidies, it could be taken — by an incredibly hostile reader — to say that they’re available only to Americans using state-run exchanges, not to those using the federal exchanges. NYHuguenot 19 hours ago// This is about more than a typo. We have at least two videos of Jonathon Gruber, the person who wrote that part of the law bragging about how... As I said, everything else in the act makes it clear that this was not the drafters’ intention, and in any case you can ask them directly, and they’ll tell you that this was nothing but sloppy language. Furthermore, the consequences if the suit were to prevail would be grotesque. States like California that run their own exchanges would be unaffected. But in places like New Jersey, where G.O.P. politicians refused to take a role, premiums would soar, healthy individuals would drop out, and health reform would go into a death spiral. (And since many people would lose crucial, lifesaving coverage, the deaths wouldn’t be just a metaphor.) Now, states could avoid this death spiral by establishing exchanges — which might involve nothing more than setting up links to the federal exchange. But how did we get to this point? Once upon a time, this lawsuit would have been literally laughed out of court. Instead, however, it has actually been upheld in some lower courts, on straight party-line votes — and the willingness of the Supremes to hear it is a bad omen. So let’s be clear about what’s happening here. Judges who support this cruel absurdity aren’t stupid; they know what they’re doing. What they are, instead, is corrupt, willing to pervert the law to serve political masters. And what we’ll find out in the months ahead is how deep the corruption goes. http://www.nytimes.com/2014/11/10/opinion/paul-krugman-the-latest-frivolous- attack-on-obamacare.html?_r=0

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ROBERT B. REICH The Choice of the Century Monday, November 10, 2014 The President blames himself for the Democrat’s big losses Election Day. “We have not been successful in going out there and letting people know what it is that we’re trying to do and why this is the right direction,” he said Sunday. In other words, he didn’t sufficiently tout the Administration’s accomplishments. I respectfully disagree. If you want a single reason for why Democrats lost big on Election Day 2014 it’s this: Median household income continues to drop. This is the first “recovery” in memory when this has happened. Jobs are coming back but wages aren’t. Every month the job numbers grow but the wage numbers go nowhere. Most new jobs are in part-time or low-paying positions. They pay less than the jobs lost in the Great Recession. This wageless recovery has been made all the worse because pay is less predictable than ever. Most Americans don’t know what they’ll be earning next year or even next month. Two-thirds are now living paycheck to paycheck. So why is this called a “recovery” at all? Because, technically, the economy is growing. But almost all the gains from that growth are going to a small minority at the top. In fact, 100 percent of the gains have gone to the best-off 10 percent. Ninety-five percent have gone to the top 1 percent. The stock market has boomed. Corporate profits are through the roof. CEO pay, in the stratosphere. Yet most Americans feel like they’re still in a recession. And they’re convinced the game is rigged against them. Fifty years ago, just 29 percent of voters believed government is “run by a few big interests looking out for themselves.” Now, 79 percent think so. According to Pew, the percentage of Americans who believe most people who want to get ahead can do so through hard work has plummeted 14 points since 2000. What the President and other Democrats failed to communicate wasn’t their accomplishments. It was their understanding that the economy is failing most Americans and big money is overrunning our democracy. And they failed to convey their commitment to an economy and a democracy that serve the vast majority rather than a minority at the top.

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Some Democrats even ran on not being Barack Obama. That’s no way to win. Americans want someone fighting for them, not running away from the President. The midterm elections should have been about jobs and wages, and how to reform a system where nearly all the gains go to the top. It was an opportunity for Democrats to shine. Instead, they hid. Consider that in four “red” states — South Dakota, Arkansas, Alaska, and Nebraska — the same voters who sent Republicans to the Senate voted by wide margins to raise their state’s minimum wage. Democratic candidates in these states barely mentioned the minimum wage. So what now? Republicans, soon to be in charge of Congress, will push their same old supply-side, trickle-down, austerity economics. They’ll want policies that further enrich those who are already rich. That lower taxes on big corporations and deliver trade agreements written in secret by big corporations. That further water down Wall Street regulations so the big banks can become even bigger – too big to fail, or jail, or curtail. They’ll exploit the public’s prevailing cynicism by delivering just what the cynics expect. And the Democrats? They have a choice. They can refill their campaign coffers for 2016 by trying to raise even more money from big corporations, Wall Street, and wealthy individuals. And hold their tongues about the economic slide of the majority, and the drowning of our democracy. Or they can come out swinging. Not just for a higher minimum wage but also for better schools, paid family and medical leave, and child care for working families. For resurrecting the Glass-Steagall Act and limiting the size of Wall Street banks. For saving Social Security by lifting the cap on income subject to payroll taxes. For rebuilding the nation’s roads, bridges, and ports. For increasing taxes on corporations with high ratios of CEO pay to the pay of average workers. And for getting big money out of politics, and thereby saving our democracy. It’s the choice of the century. Democrats have less than two years to make it. http://robertreich.org/post/102314408470

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ft.com Comment Opinion November 10, 2014 4:46 pm Printing money to fund deficit is the fastest way to raise rates By Adair Turner No technical reasons exist for rejecting this, only the fear of breaking a taboo, writes Adair Turner

©Bloomberg W hat is the right course for monetary policy? The International Monetary Fund seems to answer with forked tongue. Its latest World Economic Outlook urges that monetary policy should stay loose to stimulate growth. Yet its Global Financial Stability Review warns that loose monetary policy risks creating financial instability, which could crimp growth. In fact the best policy is to print money and raise interest rates. That sounds contradictory, but it is not. The global economy is suffering the hangover from many decades of excessive private sector credit growth. In 1950 private credit in advanced economies was 50 per cent of gross domestic product; by 2007 it was 170 per cent. More ON THIS STORY// Blow for Cameron as UK faces deeper cuts/ Gideon Rachman Russia problem trumps Isis/ Editorial A world still reeling from fiscal errors/Wolfgang Münchau Euro is in peril / Joe Zhang Flood of stimulus for China’s economy ON THIS TOPIC// Markets Insight Currency wars fail to spark global growth/ Focus on Europe’s flash GDP estimates/ Central bank divergence drives dollar up/ Draghi ‘autocratic’ style stays off menu IN OPINION// A space mission may prove vital/ Richard Vinen Lest we remember/ A cosy pact with the spies is no substitute for the rule of law/ Britain should not rock the EU boat After the 2008 crisis, households and companies began trying to pay back what they owed. This depressed consumption and investment, generating large fiscal deficits as tax revenues fell and social expenditure rose. It then seemed essential to balance public sector accounts, which has depressed growth further and made deleveraging harder.

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Debt owed by the public and private sectors has actually increased as a proportion of GDP, from 170 per cent five years ago to 200 per cent today. Weak demand has led to below-target inflation in all major economies. Economists agree that this is how we got into the current mess, but they disagree about how to get out of it. Some, such as Paul Krugman and Lawrence Summers, argue for more relaxed fiscal policies. Cutting taxes or increasing public expenditure is the most certain way to stimulate demand. In Milton Friedman’s words it is an injection directly “into the income stream”. But this route out of recession would increase public debt even further. It seems blocked. Instead, most countries have opted to combine fiscal tightening with ultra-loose monetary policy, setting short-term interest rates close to zero and using quantitative easing to reduce long-term rates and boost asset prices. There are no technical reasons to reject such measures, only the fear of breaking a taboo Tweet this quote But there are dangers. Sustained low interest rates create incentives for highly leveraged financial engineering. They make it easier for uncompetitive companies to survive, which could stymie productivity growth. And they work by restarting growth in private credit – which is what led to our current predicament. The Bank for International Settlements therefore argues that monetary policy should be tightened as well as fiscal, but that would depress demand yet further. We should indeed seek a swift return to higher interest rates, to remove the dangerous subsidy to high leverage. But paradoxically, the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply. Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly. True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements. FT VideoIMF casts gloomy cloud

Oct 9, 2014: The outlook for the global economy has darkened, according to the International Monetary Fund. Ralph Atkins, capital markets editor, and Ferdinando Giugliano, global economy news editor, discuss why the forecasts are so negative There are no technical reasons to reject this option, only the fear that once we break the taboo, money-financed deficits will be used on too large a scale. Despite that fear, de facto monetisation is inevitable in some countries, even if policy makers deny it. 268

Japan’s official policy involves using sales tax increases to make government debts sustainable, while massive monetary stimulus spurs inflation and growth. In fact there is no believable scenario in which Japan will generate fiscal surpluses sufficient to pay back its debts, nor one in which the Bank of Japan will sell all its holdings of government debt back to the market. All the same, the pretence undermines the effectiveness of the policy. Japan should either delay the next sales tax increase, or announce a temporary fiscal stimulus financed with new money. It should make clear that the debt the government owes the central bank will never need to be repaid, dispelling fears of a massive future fiscal tightening. Orthodox theory sees helicopter money as risky. But current quantitative easing policies are at least as risky, and have produced adverse side effects. In the UK the Bank of England has bought £375bn of government bonds to try to stimulate the economy through swollen asset prices and rock-bottom interest rates. It could instead have created new money to finance a smaller one-off increase in the fiscal deficit. If it had done so, a return to normal interest rate disciplines would now be nearer. The writer is senior fellow at the Institute for New Economic Thinking http://www.ft.com/cms/s/0/8e3ec518-68cf-11e4-9eeb- 00144feabdc0.html#axzz3IkgrX5IL

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longandvariable Helicopter drops: A dare from Turner Posted on November 11, 2014 by Tony Yates Adair Turner’s FT piece urges the central bank/government to finance future debt with helicopter money. Leaving aside the merits of helicopter money, I found his argumentation unusual. It’s a piece worth taking seriously, because one presumes there must be a high chance still that he gets a post on the MPC in some capacity in the not too distant future. One of his reasons is that helicopter money, unlike QE, would not affect asset prices. Three problems with this. i) People should not take it as axiomatic that QE had a greatly material effect on asset prices. The research is much less clear-cut. For example, Vissing-Jorgensen and Krishnamurthy find that the Fed’s QE just pushed up spreads between government and private sector yields. ii) Helicopter money-financed debt is fiscal policy but depriving the market of long dated securities, and giving instead reserves. ie, it’s like the first leg of QE. [Joining up the DMO debt issue and the declared temporary debt purchase by the BoE into one operation]. The BoE have said that QE will be reversed, so at some point the two policies will become different when the promise is kept. But right now, they aren’t. And maybe – HMT’s 2012 asset purchase facility profits grab is indicative – they won’t ever be. In which case how is QE supposed to bloat asset prices but HM not? iii) Affecting asset prices is not all bad! That could be the price to pay for encouraging spending, increasing demand and employment. Turner also says that helicopter money would lead to rates being higher than otherwise more quickly. I can see that one might argue that HM might stimulate more strongly, and so lead to the MPC later choosing, naturally, to raise rates back to normal. But he doesn’t seem to mean that. Other things equal [they aren't, but never mind] dropping reserves out there means lower interest rates to clear the money market, initially. As an aside, Turner says nothing about interest on reserves. Charlie Bean mentions this in a recent speech. As I see it, [and 2 others I chatted this through who have to remain anonymous] HM requires us to drop paying interest on reserves, to avoid creating an ever-increasing reserves ‘liability’ [the corollary of the bonds and their interest that are retired]. Not paying IOR is ok by me. But it means accepting lower interest rates for a while. That is also ok. But, to repeat, that means interest rates would not be higher [now at least] than under QE. There are other reasons why Turner’s is a strange piece which I’ve mentioned before. He doesn’t say why we should do HM now, when we can simply do a conventional fiscal loosening without taking risks with the framework. And why we could not do more credit easing for that matter. Perhaps eventually there might come a time to contemplate HM. But not now. http://longandvariable.wordpress.com/2014/11/11/helicopter-drops-a-dare-from-turner/

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ft. com World Europe Last updated:November 10, 2014 6:49 pm Unity of Catalan independence campaign faces political test Tobias Buck in Barcelona

©GettyPro-Independence Catalans gather in Barcelona last month ahead of the unofficial referendum The voting in Catalonia is over. Now watch the political scheming begin. Almost one in three Catalans – 2.3m according to the final result – took part in an informal poll on Sunday to say whether the northern Spanish region should be an independent country or not. The consultation went ahead in the face of protests from Madrid, and despite a ruling by Spain’s constitutional court to formally suspend the vote. With virtually all pro-union Catalans choosing to stay at home, it came as no surprise that more than 80 per cent of voters supported a break with Spain. More ON THIS STORY// Big turnout for symbolic Catalan vote/ Catalan leader relishes fight over vote/ Catalonia news/ Catalans to defy Spanish court/ Opinion Catalonia needs Spain ON THIS TOPIC// Catalan leader calls off referendum/ Doubts over Catalan independence vote// Editorial Spain must steer away from a collision course// Catalan leaders vow to press on with referendum IN EUROPE// Young rebels upset east Europe politics/ Markets welcome Hungary’s forex loan plan/ Putin snubs Europe with China gas deal/ Germany plans early-warning cyber defence The days and weeks ahead are now likely to offer a distinct shift in tone inside the Catalan independence camp. Until now, political leaders in Barcelona have managed to largely paper over their differences, setting aside old rivalries in an effort to maintain a united front against Madrid. But with crucial decisions looming about where the campaign goes next, the ties that have held together an unusually disparate coalition will face perhaps their toughest test yet. Artur Mas, the Catalan president, appeared to be aware of the political risks that lie ahead. Amid the triumphant boasts on Sunday night (he hailed the poll as a “total success”), Mr Mas urged the independence campaign to remain united. “When we are together, we can go farther. That is the message we must keep in mind.” The political tussle in Barcelona will be dominated by two protagonists: Mr Mas, who heads the conservative, moderately nationalist Convergència i Unió movement (CiU), and Oriol Junqueras, leader of Esquerra Republicana, a leftwing pro-independence

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party. Both agree that the next logical step for the Catalan campaign is an early regional election, but they differ sharply on how. Josep Rull, secretary-general of CiU, outlined the party’s strategy ahead of Sunday’s poll: “We will use an ordinary election, supervised by the state with all the democratic guarantees, and we will transform this into a referendum. How? Our proposal is to form a grand national list of candidates that has the capacity to win an absolute majority and with one electoral programme: If you vote for us, we have the mandate to achieve independence.” In Madrid the government talks about legality. In Barcelona, they talk about the right to decide their own future. What is lacking is the political courage and skill to bring these two discourses together - Ángel Pascual-Ramsay, Esade business school Esquerra leaders, however, argue that a joint list uniting CiU and Esquerra risks diluting rather than boosting support for independence. Anna Simó, leader of the Esquerra parliamentary group, said: “It is not clear that a list led by Artur Mas will win more support than if we stand separately – especially in areas like metropolitan Barcelona. We believe that, a priori, diversification is good”. The disagreement may appear tactical – but at heart it is over who should be at the helm of the Catalan independence campaign. CiU wants a joint pro-independence list to be headed by Mr Mas, a move that would allow him to remain de-facto leader of the movement and effectively hand the Catalan president another term in office. Should Esquerra and CiU stand separately, however, there is a strong chance that the leftwing party – and Mr Junqueras – will come out on top. Maintaining unity in the independence camp, however, is not the only challenge for Mr Mas. On Sunday evening, he again appealed for negotiations with Madrid – but the political fallout from the poll may make such a process even more distant. Mariano Rajoy, Spain’s prime minister, is weakened from a series of corruption scandals that have rocked his party. He also faces accusations from all sides that he has mismanaged the Catalan vote: despite voicing firm opposition to the process, Mr Rajoy ultimately failed to stop it from happening – a worst-of-all-worlds stance that upset supporters and opponents of Catalan independence alike. Prospects for a political settlement between the Spanish government and the Catalan parties appear slim. “The two sides are like ships passing in the night,” said Ángel Pascual-Ramsay, of Esade business school. “Here in Madrid the government talks about legality. In Barcelona, they talk about the right to decide their own future. What is lacking at the moment is the political courage and skill to bring these two discourses together.” http://www.ft.com/intl/cms/s/0/06569434-68b4-11e4-9eeb- 00144feabdc0.html#axzz3IkgrX5IL

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ft.com/markets MARKETS INSIGHT November 11, 2014 8:41 am ECB impotency makes eurozone stagnation inevitable John Plender QE to have limited potency and there is little in monetary locker

©EPA Yields in the eurozone sovereign debt markets have fallen to such low levels that they are, in effect, predicting recession and the incipient Japanification of the eurozone. At the same time yields on eurozone corporate bonds have slavishly followed sovereign bond yields downwards this year despite the fact that recession would normally imply increased credit risk, more corporate defaults, falling corporate bond prices and rising yields. How can this apparent contradiction be rationalised? One explanation might be that because many market observers expect the European Central Bank to expand its asset buying to include corporate bonds, or even sovereign bonds, investors believe that the central bank is about to turn into a buyer of last resort for overpriced IOUs. In that case credit risk in the corporate sector becomes irrelevant. We would be moving into a Japanese-style world of zombie companies that are insolvent but on permanent life support from the ECB and where banks unlearn the discipline of credit risk. On that scenario the sovereign and corporate debt markets are marching in tune. MoreON THIS TOPIC // ECB ready to inject €1tn extra liquidity/ BoJ raises bar for European Central Bank/ ECB moves house after three-year delay/ Eurozone lending conditions improve MARKETS INSIGHT// Currency wars fail to spark global growth/ Fed has built a thorny central bank divide/ Why innovation matters to investors/ Japan cannot rely on corporate governance It is possible, though, to assume too much sophistication in market behaviour. A more likely story is that investors have simply been chasing yield regardless of risk and that the possibility of ECB corporate bond purchases comes as a serendipitous bonus. Either way, it would be unwise to assume that the proposed expansion of the ECB’s balance sheet necessarily implies a move to full US-style quantitative easing or that the governing council’s statement that it is “unanimous in its commitment to using

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additional unconventional instruments within its mandate” automatically implies corporate bond buying. In reality the extent of the ECB’s future asset purchasing programmes remains uncertain. While Mario Draghi, the ECB president, has indicated that he would like to expand the balance sheet by €1tn no one yet knows how that number will be attained. And there remain legal questions about whether the purchase of corporate and sovereign bonds are within the mandate. The ECB is, after all, modelled on the Bundesbank. If Bundesbank president Jens Weidmann felt able to sign up to the statement on additional unconventional buying, it must be because he does not want or expect purchases to include anything that would have potentially big fiscal implications, of which more in a moment. Equally important, QE would work very differently in the eurozone. In the US growth was substantially fostered through a wealth effect resulting from the rise in both bonds and equities. In the eurozone, bond markets play a much smaller role in financial intermediation. While the rise in US equity markets was closely correlated with the expansion of the Federal Reserve’s balance sheet under QE, no such correlation is apparent in Europe. The Institute of International Finance, a club of leading global banks, points out that the Euro Stoxx index lost nearly 20 per cent as the ECB balance sheet grew 60 per cent between July 2011 and mid-2012. Since then the stock market index has risen 35 per cent while the ECB balance sheet shrank more than €1tn. In fact the eurozone has already had a wealth effect on the basis of a spillover from the US: there is a much closer correlation between the Euro Stoxx and the S&P 500 index than with the ECB. The question then is how on earth QE would impart stimulus when bond yields are so low and equities have already boomed in the face of a stagnant eurozone economy and how precisely would further inflating the ECB’s targeted securities markets boost lending? The likelihood is, as many on the ECB’s governing council believe, that QE will have limited potency and that there is not much left in the monetary locker. The key to addressing deficient eurozone demand lies in fiscal policy. Of course, the ECB can do something. Asset purchases are quasi-fiscal to the extent that they expose European taxpayers to the risk of capital loss and default. At today’s historically low yield levels capital losses look a near certainty. That is a central plank in the case for scepticism about full-blown QE. In the end the eurozone’s problem is political. Until Germany is driven to consider a more expansionary fiscal policy, stagnation is inevitable. It may take a slump, with even higher levels of eurozone unemployment, to bring that about. The writer is an FT columnist http://www.ft.com/intl/cms/s/0/397eda3a-697a-11e4-8f4f- 00144feabdc0.html#axzz3IkgrX5IL

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The Guardian view on Spain’s mishandling of the referendum movement in Catalonia The lesson from Britain is that Spain will be a changed country if Catalonia stays

Editorial The Guardian, Tuesday 11 November 2014

Catalan separatists wave estelada flags symbolising Catalonia's independence, Barcelona, Spain, 11 September 2014. Photograph: Manu Fernandez/AP Did Britain, by agreeing that Scots had the right to leave the United Kingdom, pursue a wiser course than Spain, where the government has laid down that a formal vote on Catalan independence is unconstitutional and that Sunday’s informal poll has no legal significance? The answer must be yes. Yet the ultimate outcome may not be so different. Once independence movements achieve a certain momentum in multinational states, they change political sensibilities and understanding, whether obstructed or not, and whether they succeed in breaking away or not. If the big state survives, it will do so in a looser, weaker form. It will contain, by definition, many citizens whose loyalty will be lukewarm or conditional. If it survives in cut-down form, it will also be weaker, while the new polity that has made it out on to the international landscape will have to try to make up for its relatively small size and inexperience in what is becoming a harsh 275

world. It too will contain many citizens who wish things had gone the other way. The price for staying together and the price for parting company are, in other words, not equal or identical, but they are rather similar. That would in theory be an argument almost everywhere for the status quo. But the big national projects that make up Europe are nearly all in trouble. Loss of empire, loss of economic sovereignty, loss of morale – the reasons why are clear enough. But governments cannot ordain loyalty or restore allegiance where it has been eroded. A month ago hundreds of thousands of Catalans assembled in a seven-mile-long V-shaped formation in Barcelona, the V standing for votar (voting) and voluntat (will) . They may well have been visible from space, but they were apparently not visible from Madrid. Now, after Sunday’s poll, which showed an overwhelming majority for independence on a turnout of about 2.2 million, or approximately 35% of the electorate, there is really no other option for Mariano Rajoy, the Spanish prime minister, but to adopt the British approach. In a democratic Europe, there can be no argument over that. It is the principle by which we judge the Chinese over Tibet or the Russians in Crimea, the one for denying self-determination, the other for manipulating it. In Spain, earlier, concessions on autonomy, tax and language might have been sufficient to head off a vote. Not now. The Catalans, including some who wish to stay in Spain, want their vote, and they are going to get it. The well over half of registered voters who did not take part in Sunday’s poll presumably include many who did not want a break and many who were undecided, but probably few who didn’t think they should have a vote if they wanted one. Forecasts of how a real vote would go point to a narrow win for separatists, but to a defeat if a better economic deal for Catalonia were on the table. So if Mr Rajoy swiftly changes his strategy and works to amend the constitution to permit a vote, and if Catalans are ready for a fair debate among themselves and with others in the country, he has a chance of persuading Catalonia to remain part of Spain. But, just as with Britain, it will not be the same Spain. http://www.theguardian.com/commentisfree/2014/nov/11/guardian-view-catalan- referendum-movement-spain-mishandling

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Caffe Reggio Periodismo de opinión Navigation Virtudes y peligros del populismo, de José Álvarez Junco en El País el 11 noviembre, 2014 en Derechos, Ética, Libertades, Política, Sociedad, Sociología, Valores LA CUARTA PÁGINA Invocar la voluntad del pueblo para saltarse el respeto a la ley es uno de sus recursos habituales. Movilizan así a los apáticos, pero su afán por eliminar las cortapisas democráticas abre un peligroso camino a la tiranía Se habla mucho de populismo últimamente. En Europa se aplica a la derecha xenófoba francesa, británica u holandesa; en América Latina, al eje chavista venezolano, ecuatoriano o boliviano. Pero el término sigue teniendo difícil acceso al mundo académico. El diccionario de la RAE, por ejemplo, no incluye el sustantivo “populismo”; y define el adjetivo “populista” como lo “perteneciente o relativo al pueblo”, idea que en castellano actual correspondería más bien al adjetivo “popular”. El populismo no es, la verdad, fácil de definir. Muy frecuentemente se usa en sentido denigratorio, atribuyéndolo a fenómenos que, como mínimo, carecen de contenido serio. Una politóloga propuso, hace años, el abandono del término, por indefinible. La obstinación con que se sigue utilizando indica, sin embargo, que algo deben de tener en común los dispares fenómenos a los que aplicamos ese nombre como para que valga la pena intentar ponernos de acuerdo sobre su significado. Lo primero indiscutible es que los movimientos o personajes políticos a quienes se llama “populistas” basan su discurso en la dicotomía Pueblo / Anti-pueblo. El primero, no hace falta aclararlo, representa el súmmum de las virtudes; el pueblo es desinteresado, honrado, inocente y está dotado de un instinto político infalible; mucho mejor nos iría si le dejáramos actuar, o al menos le escucháramos. Su antítesis, en cambio, el anti-pueblo, es la causa de todos los males; y puede tomar cuerpo, según los populismos, en entes internos o externos: la oligarquía, la plutocracia, los extranjeros, el clero, los judíos, la monarquía…; en el discurso dominante hoy, en España, sería la “casta política” o “el régimen del 78”, a quienes se oponen “los ciudadanos” o “la gente (decente)”. Por “pueblo” no debe entenderse, desde luego, el proletariado o las clases trabajadoras. De nada sirven aquí las descripciones sociológicas, ni los análisis de clase. “Pueblo” es una mera referencia retórica, una invocación fantasmal. Lo que importa, la clave de todo, es que el Pueblo, la Voluntad del Pueblo, es el principio supremo de la legitimidad. Invocar la voluntad popular, como los dictados divinos para los creyentes, permite saltarse la exigencia del respeto a la ley. Un segundo rasgo común a los populismos es la ausencia de programas concretos. Lo reconoció como nadie José Antonio Primo de Rivera, aspirante a populista, cuando dijo aquello de que sus ideas eran demasiado ambiciosas como para intentar apresarlas en un programa. Fue típico también declarar que no eran de derechas ni de izquierdas. De los proyectos de los dirigentes populistas sabemos que están inspirados por los deseos más

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grandiosos (“salvar al país”, establecer una “democracia real”), pero no cómo piensan hacerlo; no conocemos sus planes en el terreno institucional, en el económico ni en el internacional. Quiero cambiar todo, decía el Lerroux juvenil. Estoy en contra de todo lo que está mal, declaró una vez el inefable Ruiz Mateos. Una vaguedad que les permite actuar como revolucionarios o como realistas según requieran las circunstancias. Para sus seguidores, lo que importa es que su acción se verá guiada por unos principios políticos y morales intachables, anclados en el interés popular. Tercer rasgo: en su discurso dominan los llamamientos emocionales dominan sobre los planteamientos racionales. Apelan a la acción, la juventud, la moralidad, la audacia, la honradez. Uno de sus mantras preferidos es que hacen falta “menos palabras y más acción”; es decir, hay que superar la ineficaz verborrea que domina la política actual. El objetivo de estas invocaciones es claro: no se trata de hacer pensar a sus oyentes sino de movilizarlos, de que entren en la arena política grupos hasta hoy indiferentes o marginados. Una movilización que suele ser extra-institucional, por cauces ajenos a los previstos por el “sistema”. Cuarto: a juzgar por sus proclamas, nadie puede llamarles anti-demócratas; al revés, el gobierno del pueblo es justamente lo que anhelan. Pero democracia es un concepto que admite al menos dos significados: como conjunto institucional, unas reglas de juego, que garantizan la participación de las distintas fuerzas y opciones políticas en términos de igualdad; y como “gobierno para el pueblo”, sistema político cuyo objetivo es establecer la igualdad social, favorecer a los más débiles. Desde esta segunda perspectiva, muchas dictaduras pueden declararse “democráticas”; la Cuba de los Castro, por ejemplo, un régimen que no convoca elecciones libres y plurales pero que presume de grandes logros educativos o médicos para las clases populares. También es típico de cualquier populismo la formación de redes clientelares, dado que la función principal del líder debe ser la protección de los débiles. Y esta, la existencia de un líder dotado de cualidades redentoristas, es otra peculiaridad de muchos de estos fenómenos. El movimiento está dirigido por un Jefe, un Caudillo, un Cirujano de Hierro, que aúna honradez, fuerza, desinterés y, sobre todo, identificación con el pueblo, con el que tiene una conexión especial, una especie de línea directa, sin necesidad de urnas ni sondeos. Obsérvese que entre sus virtudes no está el saber, la capacidad técnica. El anti-elitismo populista comporta una importante dosis de anti-intelectualismo y anti-tecnicismo. Más que un rasgo modernizador, este elemento clave parece un resto del mesianismo religioso o del paternalismo monárquico del Antiguo Régimen. Una última característica común, que no corresponde al movimiento en sí sino al entorno en el que florece, es que todos los populismos prosperan en un contexto institucional muy deteriorado, en el que los partidos tradicionales y los cauces legales de participación política, por corrupción o por falta de representatividad, están desprestigiados hasta niveles escandalosos. Esta enumeración de rasgos —no todos aplicables al caso español actual, pero sí algunos— nos lleva a ciertas conclusiones. La primera sería que los populistas tienen la virtud de denunciar sistemas políticos anquilosados, lo cual es de agradecer y obliga a abrir, a flexibilizar, a modernizar las instituciones democráticas. Al ser capaces de movilizar a los hasta hoy apáticos, abren cauces institucionales a los antes excluidos, les permiten intervenir en la toma de decisiones colectivas. Son, desde este punto de vista,

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revitalizadores de la política; y suscitan simpatía: difícilmente serán tan malos como los que tenemos, piensa uno instintivamente. Pero no hay que equivocarse. Aunque los dirigentes populistas se proclamen anti- políticos y exijan que el poder —hoy en manos de políticos profesionales— retorne al pueblo, ellos también son políticos. Quieren gobernar, quieren el poder. Y cuando llegan a él, les molestan las cortapisas: no son de su agrado ni la división y el control mutuo entre poderes, propio de las democracias liberales, ni la existencia de una oposición crítica ni el que su mandato se termine a fecha fija. Su lógica es, la verdad, impecable: si el poder es ahora del pueblo, ¿por qué limitarlo? ¿quién y en nombre de qué puede oponerse a la voluntad del pueblo? Es decir, que su vínculo privilegiado con el pueblo exige eliminar todo límite a su capacidad de acción. Lo cual abre un peligroso camino hacia la tiranía. Por otra parte, al no establecer ni reconocer normas, tienden a recurrir a la acción directa, lo que suele significar prácticas coactivas contra los discrepantes. Movimientos políticos que carecen de programa y no cuidan las instituciones no son fiables. Es imposible, en resumen, saber adónde puede llevar un movimiento de este tipo: su carencia de programa le permite seguir cualquier línea política. El peronismo, siempre el mejor ejemplo, fue intervencionista y expansivo en economía en los años cuarenta- cincuenta y liberal en los tiempos de Menem. El lerrouxismo representó a la izquierda incendiaria en 1909 y al republicanismo de orden en 1934. Al final, para saber lo que nos espera cuando un movimiento de este tipo asoma por el horizonte lo más práctico es echar una ojeada a los regímenes alabados por ellos o de quienes han recibido apoyo: si se trata de la Venezuela bolivariana, sus votantes deberían considerar qué harán cuando el Gobierno aupado por ellos acapare los medios de comunicación públicos, hostigue a la prensa independiente o amedrente a sus adversarios. Afortunadamente, la sociedad española actual parece poco dispuesta a tolerar ese tipo de cosas. José Álvarez Junco es historiador. Su último libro es Las historias de España (Pons / Crítica).

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Caffe Reggio Periodismo de opinión

Navigation ¿Un auténtico problema?, de Alfredo Pastor en La Vanguardia el 11 noviembre, 2014 en Derechos, Laboral, Libertades, Política, Sociedad, Sociología OPINIÓN Alfredo Pastor. Profesor de Economía del Iese Durante los meses anteriores al 9-N, “No podemos esperar más”, decía una parte; “Esto lo arregla el tiempo”, pensaba la otra. Quisiera hoy hablar de nuestro peor problema, uno que ni puede esperar ni se arreglará con el tiempo, y que todos hemos de procurar tomarnos como algo que a todos nos afecta: el paro. España tiene hoy casi cinco millones y medio de parados, una tasa próxima al 25 por ciento. El ligero descenso con respecto al año pasado se debe en gran parte a que casi un cuarto de millón de inmigrantes regresaron a sus países de origen. Sólo algo más de la mitad (el 59 por ciento) de la población entre 20 y 64 años está empleada, y no se cree factible elevar esa cifra hasta el 75 por ciento en 2020, objetivo propuesto por la Unión Europea. En esos cinco millones hay gente de todas las edades, pero el colectivo más numeroso -la mitad- está entre los 20 y los 44 años; muchos (casi un millón) tendrán familias a su cargo. Muchos llevan en el paro más de dos años. La mayoría tiene una formación media, muchos en el sector de la construcción. Esas cifras explican casi por sí solas la pobreza que se ha extendido por toda nuestra sociedad, y también la exclusión, un término tan de moda: porque los pobres lo son en su gran mayoría por haber perdido el trabajo, y la pérdida de trabajo suele ser el primer paso del camino que lleva a la exclusión social, como saben todos los que de ella se ocupan; es también causa indirecta de otros aspectos de la pobreza como la malnutrición infantil. El daño que la pérdida del trabajo produce en la persona, por otra parte, no se mide ni aproximadamente por el sueldo, como hacemos los economistas. Produce no sólo la pérdida de las habilidades adquiridas o en la formación o en un trabajo anterior, sino también daños psicológicos bien conocidos. Una y otros se producen casi irremediablemente al cabo de uno o dos años: es por eso que el problema no puede esperar, porque, si se tarda diez años en reducir el paro a la media europea, los que hoy tienen treinta años llegarán a los cuarenta, edad en que encontrar un empleo es mucho más difícil, sin haber trabajado nunca; sus hijos se habrán criado en una familia cuyos padres no habrán trabajado y que habrá vivido de expedientes. Es difícil imaginar que puedan formar parte de una sociedad feliz. El problema no lo arreglará el tiempo, la marcha normal de las cosas. Primero, porque por razones de sobra conocidas esa marcha normal promete ser lentísima, incluso si la eurozona recupera algo de su crecimiento, mucho más lenta de lo necesario: un estudio reciente del BBVA estima que incluso durante el periodo de bonanza de 1995 a 2007 la 280

tasa de empleo creció en 1,5 puntos anuales en promedio: harían falta diez años, hasta 2024, para cumplir el objetivo de la UE. Ni siquiera se arreglará si las cosas se hacen bien sin cambiar el marco de referencia: un informe reciente del CEC, el think tank de las grandes empresas españolas, asegura que pueden crearse 300.000 puestos de empleo en cinco años, eso sí, si se hacen las reformas necesarias lo antes posible. Una cifra respetable, pero que sólo representa el cinco y medio por ciento del stock de parados actual. Segundo, porque sólo una parte de nuestro paro mejorará con la coyuntura; el resto, ese que se llama estructural porque sigue ahí aunque las cosas vayan bien, es altísimo: el BBVA lo cifra en el 18 por ciento, igual que en 1993. Reducirlo llevará tiempo, aunque nos pongamos a ello con más entusiasmo del habitual. La respuesta ciudadana a la crisis ha sido extraordinaria, y su recuerdo es un buen legado que nos deja; pero las organizaciones asistenciales, si bien atienden algunas de las necesidades básicas de la persona (comida, vestido, alojamiento, enseñanza), no llegan a dar empleo más que ocasionalmente. Las llamadas empresas de inserción sí lo hacen, en algunos casos con notable éxito, pero no bastan a abordar un problema de la magnitud del nuestro. Quizá baste con esto para ver que estamos ante una circunstancia excepcional que requiere medidas excepcionales. La creación de trabajo, de cualquier trabajo, ha de ser el primer objetivo de empresarios, sindicatos y Gobierno. Los empresarios han de recordar que hasta ahora la recuperación de la competitividad de las empresas ha corrido a cargo de los salarios, mientras que los márgenes apenas sí se han ajustado; los sindicatos deben dejar de hablar de trabajos basura, porque peor es el paro. El Gobierno debe mostrar su preocupación no sólo mediante reformas del mercado de trabajo que si bien son necesarias no crean mucho empleo a corto plazo, sino sobre todo facilitando las cosas a iniciativas singulares en actividades creadoras de empleo. Esas iniciativas existen. Hasta el ciudadano corriente, además de rascarse el bolsillo, debe romperse la cabeza a ratos para imaginar vías de dar trabajo. El que un problema como el paro sea de muy difícil solución no quiere decir que no sea un problema.

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La Comisión Europa cree que el recorte salarial en España fue "lento, ineficaz e injusto" EL HUFFINGTON POST / AGENCIAS Publicado: 11/11/2014 08:26 CET Actualizado: hace 1 hora

PHOTOS.COM ¿Recuerdan cuando el vicepresidente económico de la Comisión Europea, Olli Rehn, exigía a España que bajase los salarios al menos en un 10% para salir de la crisis? Este lunes la misma institución ha vuelto al mismo tema para denunciar que el recorte de salarios que se ha producido en España durante la crisis ha sido "lento, ineficaz e injusto", ya que ha perjudicado especialmente a los trabajadores temporales en beneficio de los fijos. El Ejecutivo comunitario ha vuelto a reclamar al Gobierno de Mariano Rajoy una reforma laboral que reduzca las diferencias entre los contratos indefinidos y temporales. En realidad Bruselas no pone tanto en duda la caída de los sueldos, sino que esta no se haya aplicado también a los trabajadores fijos: "Estos resultados exigen una reforma de la legislación del mercado laboral que reduzca la diferencia entre los trabajadores fijos y los temporales y facilite la capacidad de respuesta de los salarios también en el caso de los trabajadores fijos", destaca un informe publicado por el departamento de Asuntos Económicos de la Comisión. Entre 2008 y 2013, la crisis económica y financiera se saldó con la destrucción de casi 3,5 millones de puestos de trabajo, cifra que representa una caída del empleo del 16%. Además, los salarios reales agregados cayeron alrededor del 4,5%, según destaca el estudio.

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Sin embargo, el Ejecutivo comunitario alerta de que estas cifras agregadas esconden importantes diferencias entre el impacto en los trabajadores fijos y los temporales. "El proceso de ajuste salarial en España, que empezó en serio sólo en 2010, ha sido lento e ineficaz y ha golpeado a los trabajadores temporales de forma desproporcionadamente dura", resalta el estudio. LOS TRABAJADORES FIJOS, EN EL PUNTO DE MIRA El tamaño del ajuste salarial ha sido "tres veces más grande para los trabajadores temporales que para los fijos". "Esto no es sorprendente considerando la posibilidad de renegociar los salarios cuando expiran los contratos fijos. También sugiere que los trabajadores temporales han sido penalizados dos veces: quedando expuestos a un mayor riesgo de despido y sujetos a un ajuste (salarial) más fuerte", apunta Bruselas. La Comisión Europea denuncia además que "el relativamente elevado grado de protección en el empleo que la legislación española concede a los trabajadores con contratos indefinidos" distorsionó las decisiones de las empresas sobre despidos. "Como las decisiones de las empresas sobre despidos están afectadas por los costes, es posible que factores que no tienen nada que ver con el rendimiento, como la antigüedad, hayan influido en las decisiones de las compañías sobre a cuáles de sus trabajadores fijos debían despedir", resalta el estudio. "Al mismo tiempo, entre los trabajadores temporales, prevaleció la racionalidad económica y los empresarios pudieron retener a la fuerza laboral más productiva", señala el Ejecutivo comunitario. El resultado es que la mejora en la calidad media de la fuerza laboral "ha sido el doble de importante" en el caso de los trabajadores temporales que en el de los fijos. "Considerándolo todo, estos resultados respaldan la evidencia de que la elevada dualidad en el mercado laboral puede conducir a un proceso de ajuste lento e ineficiente, que penaliza de manera desproporcionada a los trabajadores temporales", concluye el informe. http://www.huffingtonpost.es/2014/11/11/recorte-salarial- ue_n_6137482.html?utm_hp_ref=spain

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Understanding and Overcoming America's Plutocracy Posted: 11/06/2014 7:47 am EST Updated: 11/06/2014 8:59 am EST

Pity the American people for imagining that they have just elected the new Congress. In a formal way, they of course have. The public did vote. But in a substantive way, it's not true that they have chosen their government. This was the billionaires' election, billionaires of both parties. And while the Republican and Democratic Party billionaires have some differences, what unites them is much stronger than what divides them, a few exceptions aside. Indeed, many of the richest individual and corporate donors give to both parties. The much-discussed left-right polarization is not polarization at all. The political system is actually relatively united and working very effectively for the richest of the rich. There has never been a better time for the top 1%. The stock market is soaring, profits are high, interest rates are near zero, and taxes are low. The main countervailing forces - - unions, antitrust authorities, and financial regulators -- have been clobbered. Think of it this way. If government were turned over to the CEOs of ExxonMobil, Goldman Sachs, Bechtel, and Health Corporation of America, they would have very little to change of current policies, which already cater to the four mega-lobbies: Big Oil, Wall Street, defense contractors, and medical care giants. This week's election swing to the Republicans will likely give these lobbies the few added perks that they seek: lower corporate and personal tax rates, stronger management powers vis-à-vis labor, and even weaker environmental and financial regulation. The richest of the rich pay for the political system -- putting in billions of dollars in campaign and lobbying funds -- and garner trillions of dollars of benefits in return. Those are benefits for the corporate sector -- financial bailouts, cheap loans, tax breaks, lucrative federal contracts, and a blind eye to environmental damages -- not for society as a whole. The rich reap their outsized incomes and wealth in large part by imposing costs on the rest of society. We can't actually tote up the total spending on this campaign by the richest donors because, thanks to the Supreme Court, much of the spending is anonymous and unreported. Still, we know that the Koch Brothers, through their complex web of shell

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groups, put in at least $100 million and probably much more. Many other billionaires and corporate contributions helped to raise the total kitty to more than $3.6 billion. The evidence is overwhelming that politicians vote the interests of their donors, not of society at large. This has now been demonstrated rigorously by many researchers, most notably Princeton Professor Martin Gilens. Whether the Republicans or Democrats are in office, the results are little different. The interests at the top of the income distribution will prevail. Why does the actual vote count for so little? People vote for individuals, not directly for policies. They may elect a politician running on a platform for change, but the politician once elected will then vote for the positions of the big campaign donors. The political outcomes are therefore oriented toward great wealth rather than to mainstream public opinion, the point that Gilens and others have been finding in their detailed research. (See also the study by Page, Bartels, and Seawright). It's not easy for the politicians to shun the campaign funds even if they want to. Money works in election campaigns. It pays for attack ads that flood the media, and it pays for elaborate and sophisticated get-out-the-vote efforts that target households at the micro level to manipulate who does and does not go to the polls. Campaigning without big money is like unilateral disarmament. It's noble; it works once in a while; and it is extremely risky. On the other hand, taking big campaign money is a Faustian bargain: you may win power but lose your political soul. Yes, yes, yes, of course there are modest differences between the parties, and there is a wonderful, truly progressive wing of the Democratic Party organized in the Congressional Progressive Caucus, but it's marginalized and in the minority of the party. So many Democrats have their hand in the fossil-fuel cookie jar of Big Oil and Big Coal that the Obama administration couldn't get even the Democrats, much less the Republicans, to line up for climate-change action during the first year of the administration. And how do Wall Street money managers keep their tax privileges despite the public glare? Their success in lobbying is due at least as much to Democratic Party Senators beholden to Wall Street as it is to Republican Senators. Is there a way out? Yes, but it's a very tough path. Plutocracy has a way of spreading like an epidemic until democracy itself is abandoned. History shows the wreckage of democracies killed from within. And yet America has rallied in the past to push democratic reforms, notably in the Progressive Era from 1890-1914, the New Deal from 1933-1940, and the Great Society from 1961-1969. All of these transformative successes required grass-roots activism, public protests and demonstrations, and eventually bold leaders, indeed drawn from the rich but with their hearts with the people: Teddy Roosevelt, Franklin Roosevelt, and John F. Kennedy. Yet in all of those cases, the mass public led and the great leaders followed the cause. This is our time and responsibility to help save democracy. The Occupy Movement and the 400,000 New Yorkers who marched for climate-change control in September are pointing the way. http://www.huffingtonpost.com/jeffrey-sachs/understanding-and- overcom_b_6113618.html

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ft.com comment Columnists November 9, 2014 2:11 pm The euro is in greater peril today than at the height of the crisis

Wolfgang Münchau The eurozone has no mechanism to defend itself against a drawn-out depression

©Bloomberg I f there is one thing European policy makers agree on, it is that the survival of the euro is no longer in doubt. The economy is not doing great, but at least the crisis is over. I would challenge that consensus. European policy makers tend to judge danger in terms of the number of late-night meetings in the Justus Lipsius building in Brussels. There are definitely fewer of those. But that is a bad metric. More ON THIS STORY// The World Where is the government action? policymakers ask/ Wolfgang Münchau Eurozone stagnation/ Eurozone manufacturing still sluggish/ EU leaders weigh Greek exit from bailout/Wolfgang Münchau Europe’s recovery dream ON THIS TOPIC// Wolfgang Münchau Left is right about Europe’s debt/ Eurozone recovery slows to 16-month low/ France urges ‘real money’ for EU/ Eurozone economy returns to growth WOLFGANG MÜNCHAU// Berlin’s parallel world/ Germany’s weak point/ Germany’s eurosceptics/ Italian debt I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat. Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism. As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements. 286

In France Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President François Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias. The question for voters in the crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favourable as the economy sinks deeper into depression. Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s “stimulus programme”, announced last week, is as good as it gets: 0.1 per cent of gross domestic product in extra spending, not starting until 2016. Enjoy! What about monetary policy? Mario Draghi said he expected the balance sheet of the European Central Bank to increase by about €1tn. The president of the ECB did not set this number as a formal target, but as an expectation – whatever that means. The most optimistic interpretation is that this implies a small programme of quantitative easing (purchases of government debt). A more pessimistic view is that nothing will happen and that the ECB will miss the €1tn just as it keeps on missing its inflation target. My expectation is that the ECB will meet the number – and that it will not make much difference. And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another. Two months ago Mr Draghi suggested the eurozone fire in three directions simultaneously – looser monetary policies, an increase in public sector investments and structural reforms. I called this the economic equivalent of carpet-bombing. The response looks more like an economic equivalent of the Charge of the Light Brigade. These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure. http://www.ft.com/intl/cms/s/0/f626669a-6528-11e4-91b1- 00144feabdc0.html#axzz3JyQmQ36f

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Tim Duy's Fed Watch Tuesday, May 20, 2014 Dudley Revisits Exit Strategy Today New York Federal Reserve President William Dudley gave what was both an interesting and depressing speech. Interesting in that he provides some new thoughts on the exit strategy. Depressing in that he outlines a case for persistently low interest rates. One wonders why, given such an outlook, the Fed is so firmly focused on the exit strategy to begin with, rather than accelerating the pace of the recovery. Dudley tries to sound an optimistic note regarding the outlook, including dismissing the first quarter GDP report, but his optimism is tempered, very tempered: With the fundamentals of the economy improving and fiscal drag abating, I expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015. But, there remains considerable uncertainty about that forecast and, given the persistent over- optimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch. Three percent growth is not exactly anything to write home about; the only thing exciting about 3 percent is that we just can't seem to get there. Dudley specifically notes weak capital spending and housing markets as key concerns. He senses that the capital spending issue is transitory, but housing less so: I think housing has been weaker than anticipated because several significant headwinds persist for this sector. First, mortgage credit is still not readily available to households with lower credit scores. Second, some people are coping with higher student loan debt burdens that have delayed their entry into the housing market as first-time homebuyers. This, in turn, makes it more difficult for existing homeowners to sell and trade-up. Third, there may be some ongoing difficulties increasing housing supply. The housing downturn was very deep and protracted. It takes time to shift resources back into this area. Also, in some markets house prices still appear to be below the cost of building a new home. Thus, in those markets, it remains uneconomic to undertake new home construction. Although I expect that the housing recovery will resume, the pace will likely be slow, especially relative to past economic recoveries. Notice that he does not mention the mortgage rate increase over the past year, instead focusing on issues largely outside the control of the Federal Reserve. In other words, housing is a problem that they can't fix and thus will simply contribute to weak growth. Regarding inflation, Dudley is optimistic that the trajectory will prove to be in the right direction, but sees little reason to expect any sharp increases. There is simply too much slack in the labor market, evidenced by low wage growth. Here he paints a bleak picture and lays down some markers: ...the trend of labor compensation is running at only about a 2 percent annualized pace. This is far below the roughly 3½ percent pace that would be consistent with trend productivity growth of 1 to 1½ percent and the FOMC’s 2 percent inflation objective.

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Trend productivity growth of just 1 to 1.5 percent is very, very low and feeds into the Fed's belief that potential growth is in the 2.2 to 2.3 percent range. Dudley's expected 3 percent growth thus hardly eats into excess capacity. Still surprises me that the Fed remains focused on policy firming when arguably conditions require a delay in the tapering process. On that inflation target, Dudley argues against the "2 percent is a ceiling" hypothesis: ...once we reach 2 percent, I would expect that we would spend as much time slightly above 2 percent as below it, recognizing that we will hardly ever be exactly at 2 percent because of the inherent volatility in prices. If inflation were to drift above 2 percent, all else equal, then we would tend to resist such a rise. But, if inflation were slightly above 2 percent even as unemployment remained far above levels consistent with maximum employment, then the unemployment consideration would dominate because we would be further from the unemployment objective than we are from the inflation objective. This should not surprise anyone. This is what our “balanced approach” implies. The operative word here is "slightly." What is "slightly" above 2 percent? My guess is that as long as inflation remains below 2.25 percent and employment outcomes remain subpar, the Fed will remain on a low-interest rate path (though not a zero rate path). Above 2.25 would be more disconcerting but, realistically, it is unlikely that the US economy would experience higher inflation in the absence of clear evidence that labor market slack had evaporated. In other words, I suspect that if inflation were above 2.25 percent, the Fed would not need to choose between the elements of the dual mandate; the case for a higher rate trajectory would be clear. Dudley anticipates that the tapering process will continue, and thus turns his attention to the lift-off from the zero bound. Here he admits the reality of the situation. They really have no idea when the first rate increase will occur: Turning first to the timing of lift-off, how the outlook evolves matters. We currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off, but precisely how long is difficult to say given the inherent uncertainties surrounding the outlook. I would congratulate him for avoiding the use of a date, but then he includes a footnote pointing to the March Summary of Economic Projections and the embedded anticipation that rates will rise in the middle of next year. Fed officials simply can't decide whether those projections are meaningful or not. As far as the pace of timing, that too is data dependent, although given the current forecasts Dudley anticipates a tame trajectory: With respect to the trajectory of rates after lift-off, this also is highly dependent on how the economy evolves. My current thinking is that the pace of tightening will probably be relatively slow. This depends, however, in large part, not only on the economy’s performance, but also on how financial conditions respond to tightening. And he too expects rates will be subdued over the longer term, laying out three reasons: First, economic headwinds seem likely to persist for several more years...Second, slower growth of the labor force due to the aging of the population and moderate productivity growth imply a lower potential real GDP growth rate as compared to the 1990s and 2000s. Because the level of real equilibrium interest rates appears to 289

be positively related to potential real GDP growth, this slower trend implies lower real equilibrium interest rates even after all the current headwinds fully dissipate...Third, changes in bank regulation may also imply a somewhat lower long-term equilibrium rate. When it comes to the Fed's exit from extraordinary monetary policy, Dudley throws in a new twist. Conventional wisdom is that the Fed would stop reinvesting the principal payments on assets held by the Fed prior to raising rates. Dudley suggests this might not be a wise decision. First, he argues that this might send the wrong signal to financial markets: Ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions as this might foreshadow the impending lift-off date for rates in a manner inconsistent with the Committee’s intention. Second - which seems to be in contradiction to the first - it that he prefers lifting rates to enhance policy flexibility: Second, when conditions permit, it would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility. This goal would argue for lift-off occurring first followed by the end of reinvestment, rather than vice versa. Delaying the end of reinvestment puts the emphasis where it needs to be—getting off the zero lower bound for interest rates. In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer. Dudley is saying that the Fed can reduce accommodation via raising rates or reducing the balance sheet, and they should should begin with the former to normalize policy. This reveals his confidence in being able to manage the balance sheet while raising rates, the topic of which takes up the remainder of his speech. Note the qualifier "when conditions permit." This is not about tightening policy simply in order to get rates higher; it is about how to tighten policy - what mix of tools to use - when the time to tighten comes. I don't quite see the communications challenges Dudley describes. In order to prevent expectations of an earlier rate hike we should hike rates rather than end reinvestments? Not sure this makes much sense. Maybe better to just say that they will reduce accommodation further when appropriate, and that process will involve some mix of rate hikes and balance sheet reduction, the exact mix to be determined by evolving economic and financial conditions. Bottom Line: Dudley reinforces expectations that the low rate environment will persist long into the future. The data flow is not providing reason to think otherwise at this point; we would need to see higher inflation numbers coupled with real reason to believe labor market slack was rapidly evaporating, probably in the form of stronger wage growth. It remains interesting that the Fed does not view their own outlook as reason to accelerate the pace of activity. They seem relatively content to accept what they themselves acknowledge is an ongoing disappointment. PS: Still in light blogging mode. Preoccupied with teaching this term. http://economistsview.typepad.com/timduy/2014/05/dudley-revisits-exit-strategy.html

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To the G-20: It Is Demand Deficiency, Not Supply Author: Richard Wood · November 7th, 2014 · The Eurozone countries and Japan are now falling back into recession/depression and deflation, and their public debt levels are grossly excessive, and still rising. The deepening economic crisis in these two large economic blocks could have serious implications for other G-20 countries, as aggregate demand is already weak globally. Nonetheless, based on the advice of their officials, G-20 Leaders will soon begin arriving at this month’s G-20 meeting in Australia believing that all monetary and fiscal policy options have been exhausted. Based on that understanding, they will announce around 1000 supply-side structural and infrastructure policies: a display ─ like fireworks ─ that will greatly impress the public. However, while microeconomic reform and infrastructure spending have their place, such policies cannot possibly provide the locomotive power needed to sufficiently lift aggregate demand and steer troubled economies to safety. Supply Side: Structural and Infrastructure Policies It has long been accepted that structural reform policies play a vital role in improving productivity and competitiveness. These policies have traditionally been regarded as ‘supply-side’ measures which have their main effects over the medium and longer terms. Early benefits may take several years to materialise. However, when demand is deficient and unemployment is high, increasing supply potential could be deflationary and counterproductive. The OECD (‘Pursuing strong, sustainable and balanced growth: taking stock of structural reform commitments’, OECD, July 2011 and April 2012; and ‘Economic Policy Reforms, 2012, ‘Going for Growth’, OECD) identified various types of policies that may potentially increase short-term demand and growth: • Reforms to unemployment benefits were claimed by the OECD to be able to increase employment and participation relatively quickly and have positive effects on investment and output growth. Importantly, however, the OECD acknowledged that reducing unemployment benefits can have negative short- run effects when an economy is very weak. This acknowledgment suggests that reforms to unemployment benefits are unlikely to raise aggregate demand in troubled countries in the short-term. • Product market reforms and removing barriers to entry. Again there was an important qualification. The OECD acknowledged that these policies would work when there is pent-up demand. An unlikely situation in troubled countries at this time. • Reforms that raise productivity, business profitability and create expectations of higher future incomes. The OECD acknowledged that with financial markets 291

in crisis, and financial institutions with impaired balance sheets, such policies are unlikely to be effective in providing positive short-term demand effects. • Reforms that reduce inefficiencies in firms and industries can have favourable short-term effects on productivity (possibly at the expense of unemployment). There are, of course, other structural reforms that one can think of that may potentially have positive, but most likely limited, short-term effects on demand: • some reforms that improve the flexibility of labour markets ― for example, increasing freedom to hire and fire and outsourcing of contract workers; • reducing business regulations and the administrative burdens of business start- ups and barriers to entrepreneurship; • the opening-up of closed professions and reductions in licencing costs; • reforms aimed at limiting widespread poverty. But, in countries where public debt is already excessive, the financing and fiscal impacts of new structural reforms and additional infrastructure spending must be carefully weighed, greatly limiting the room for action in many cases. And if the public sector is unable to finance additional infrastructure spending who would in countries where demand is weak, and where the cost/benefit ratios are being dragged-down as a consequence, becoming negative in some cases. The private sector is not about to commit suicide on the altar-of-infrastructure, an area where in the best of times financial returns are precariously balanced. Of course, a number of potential structural reforms could worsen demand, output and employment in the short-term. Such reforms could include: • cuts to transfer payments and certain labour market reforms (of unemployment benefit systems and job protection, in particular); • reforms directed to achieve greater trade openness could dampen, or reverse, any positive demand effect on the domestic economy to the extent the increase in imports exceeds any increase in exports; • reforms that have negative confidence effects (say, due to households’ perceptions of higher income insecurity in the wake of certain reforms, or due to greater job insecurity) could lead to higher precautionary savings and lower aggregate demand, particularly in the short-term; • job protection reforms, and even some product market liberalisation reforms, are likely to increase lay-offs more quickly than they provide for new firms to develop to generate job creation, adversely impacting demand and unemployment. In summary, structural reforms and new infrastructure spending will be very difficult to implement in current circumstances, particularly where the shorter-term net benefits of individual reforms are uncertain, reform and austerity fatigue has already set in, where governments have been toppled because of their earlier attempts at structural reform, and where political instability is threatening. The limited ability of Eurozone countries and Japan (the third arrow) to deliver on structural reform in recent years is telling: a fact that seems to have been completely overlooked by those officials who planned this year’s G-20 agenda. 292

It will be interesting, indeed, to see how the G-20 Communique deals with the many question-marks that surround the effectiveness and financing of structural reforms and additional infrastructure spending. These issues will have a major bearing on ‘confidence’. The OECD, the IMF, Germany, the ECB and Australia among others have arguably created unrealistic expectations in relation to the prospects that structural reforms could lift demand and economic activity in troubled countries in the near-term. By creating a hope and expectation that structural reforms may provide ‘the panacea’, those who planned the G-20 meeting have spawned complacency, and that has created a major distraction from the search for appropriate macroeconomic policy combinations. Demand Side: Macroeconomic Management Policies Rather than focus exclusively on supply-side policies, the G-20 focus should instead be on developing demand-side policies and a new macroeconomic policy framework. Current discordant and inconsistent macroeconomic frameworks are in need of urgent repair and redesign: they have failed. Aggregate demand has been deficient for the past 5 years. The deflation tendency is spreading: a sign that aggregate demand not aggregate supply is deficient. Business profitability is high (there are no supply-side wage or interest cost constraints) but real wage incomes and consumption demand are in decline. For troubled countries, macroeconomic policies are everywhere in disarray. Austerity has failed, and fiscal stimulus is urgently required. Officials from the United States have rightly been urging Germany, and the Europeans more generally, to reflate their economies. Following those urgings, Mr Schaeuble is reported by the BBC news (19 October, 2014) to have said that; a) Criticism that the (German) government was not spending enough was justified and, b) Any improvement in spending would not be made at the expense of a balanced budget and increased public debt. Mr Shaeuble understands that there are only two ways to achieve his objectives. First, to provide increased spending and finance it from future taxation. Second, to provide increased spending and to finance it by creating new money. The Japanese have recently implemented the first method, and Japanese domestic demand and output are falling as a consequence. The second method was implemented successfully by Hjalmar Schacht in Germany the 1930s, leading to full employment without inflation. Certainly Mr Schaeuble agrees that increased spending can no longer be financed in the Eurozone by issuing new government bonds, as that would further increase public debt. It is the subject of speculation that the European Central Bank is embarking on large- scale bond and asset purchases (a form of quantitative easing, QE). This would be a colossal strategic blunder: not only would it involve a waste of precious time, but also a waste of a precious resource (new money).

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QE has been tried and failed in Japan on a number of occasions already. Incredibly, however, the Central Bank of Japan has, in recent days, greatly expanded the scale of its QE program. This inexplicable development flies in the face of all the accumulating evidence pointing to the ineffectiveness and dangers associated with this form of monetary policy. Previous rounds of QE did not lead to increased investment in plant and equipment in Japan or in the United States, or significantly raise consumer price inflation. And the full effects of QE cannot be known until the perilous ‘exit’ is completed. QE and ultra- low interest rates are, in the meantime, distorting risk-taking and exchange rates, leading to asset price bubbles and benefiting mainly high wealth individuals and banks (sentiments expressed recently by the Bank of International Settlements and the Financial Stability Board). Those officials who advised their Ministers to support QE over recent years should stand condemned for exercising such poor strategic judgement. There are, of course, other combinations of monetary and fiscal policies that should be examined. A new macroeconomic policy paradigm is required urgently for countries with high and still rising public debt, declining demand, the deflation tendency, stagnation and high unemployment. The new macroeconomic framework could include, in appropriate cases, the creation of new money to finance increased spending or tax cuts. This suggested approach has been advocated by Abba Lerner, Henry Simon, Irving Fisher, Milton Friedman, Maynard Keynes and Ben Bernanke. New money financing of budget deficits is the most powerful possible combination of monetary and fiscal policies. The new money required under this approach would be small relative to the massive injections into the banking sector under QE. Not only does the new money financing approach raise consumer demand without increasing public debt, but it will be relatively quick in countering the deflationary tendency. G-20 Credibility The G-20 structural reform proposals will fall far short of the locomotive effort needed to reflate troubled economies. Fortunately, however, the advice provided by official to their G-20 Leaders that all monetary and fiscal policy options have been exhausted is fundamentally flawed. There is, thus, still a last minute opportunity for officials and their Leaders to re- establish the credibility of the G-20 process. The G-20 Leaders could insert a sentence in their Communique requiring that the IMF urgently develop advice for the G-20 countries on the fiscal and monetary policies needed to boost consumer and aggregate demand without raising public debt. A single sentence of this nature would prepare the way for the development of new medium-term macroeconomic policy paradigms aimed at restoring full employment and price stability while lowering public debt burdens. Such an approach would complement any supply-side reforms that get enacted during the years ahead, making them far more effective. Should G-20 Leaders not address demand deficiency directly, they, and their advisers, should never be forgiven.

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Richard Wood, a former Australian Treasury official, is a guest lecturer at the University of Queensland, Australia. - See more at: http://www.economonitor.com/blog/2014/11/to-the-g-20-it-is-demand- deficiency-not- supply/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+eco nomonitor%2FOUen+%28EconoMonitor%29#sthash.0Crmykqe.dpuf

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ft. com World Europe Last updated:November 7, 2014 11:43 am Sharp Russian rouble fall stokes currency crisis worries Kathrin Hille in MoscowAuthor alerts

A dramatic drop in the rouble to record lows triggered fears of a Russian currency crisis on Friday, putting the country’s new quasi free-float exchange regime through a stress test. Russia in 10 numbers

48% - The rouble’s year-to-date decline against the dollar 13% - Rouble’s drop in past week 10.3% - Yields on 10-year sovereign debt 2009 - The last time the RTS stock market index was this low 0% - 2015 GDP growth estimates from the OECD. The worst of the G20 8.4% - Inflation 9.5% - Interest rates 29% - Fall in Brent crude oil price from its June closing high to Friday’s intraday low 296

$30bn - Russian corporate external debt due this year $68bn - The amount Russia’s central bank has spent defending the currency this year The rouble fell 2.2 per cent in early trading, with as many as Rbs48.60 required to buy a single dollar and breaching the threshold of 60 to the euro for the first time. By noon, the currency’s value had recovered to 47.25 to the dollar, but trading remained highly volatile, and it is down 13 per cent over the week and 48 per cent lower so far this year. The sharp declines prompted warnings that the central bank’s move to end unlimited interventions to support the currency might have contributed to dollar hoarding and bets against the local currency, rather than ending it as intended. The Bank of Russia said on Wednesday it would from now on sell no more than US$350m a day to support the rouble, arguing that from now on market forces would be key in determining the exchange rate. It did, however, stick to its commitment of unlimited one-off interventions if financial stability was at risk. Some analysts said the central bank was likely to resort to such moves very soon. “The continued slide in the rouble is likely to force the Central Bank of Russia into making a one-off intervention in the currency market, permitted under its new exchange rate policy, rather more quickly than it had initially hoped,” said Neil Shearing, chief emerging markets economist at Capital Economics. The extreme volatility drove many analysts as well as ordinary Russians to compare the situation with the country’s recent financial crises both in 2008-09 and in 1998 – a scenario which could threaten the grip president Vladimir Putin has on power in the long term. According to the latest Russian polls, Mr Putin’s popular support is at all-time highs of over 80 per cent on the back of his annexation of Crimea in March and his subsequent assertive stance towards the west. While the public has appeared indifferent towards stagnating growth, real incomes have started sliding in the wake of western sanctions against Russia. The last drop in real incomes in 2001 preceded large-scale protests by the Moscow middle class against Mr Putin. “My guess is that the bank will likely need to hike rates to at least 15 per cent and undertake large scale forceful intervention, in order to reintroduce two-way risk in the currency. This was the level required in the 2008 crisis to stabilise the currency,” said Nicholas Ferres, at East Spring Investments. More ON THIS STORY// Global Market Overview Rouble slides to new lows/ Hard choices facing rouble’s defenders/ Tensions rise as Putin defends Nazi pact/ Sergei Guriev Russia and low oil prices/ Inside Business Russia begins to feel sanctions impact ON THIS TOPIC/ Fast FT Rouble falls for sixth day amid intervention talk/ Speculators force rouble to extend slide/ Fast FT Rouble resumes its slide despite rate hike/ Court rules Sistema must return Bashneft stake to Russia At Credit Europe Bank, a midsize lender in Moscow, customers were queueing at lunchtime to withdraw foreign currency or buy dollars, while the branch manager went around trying to persuade them to open rouble deposits instead. This and many other smaller Russian banks have started requiring customers to order at least one day in advance if they want to buy dollars.

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The rout raises concerns over whether Russian companies and banks can service their external debt as US$30bn are due for redemption before the end of the year by Russian corporates and about US$10bn by Russian banks. In total, Russia’s corporate sector has US$422bn in foreign currency debt, and the country’s banks have US$192bn, according to the central bank. The corporate borrowers due to make big repayments by the end of the year are mostly state companies with a steady stream of foreign currency revenues from exports of oil and gas, and analysts are therefore not concerned that the rouble volatility will affect their ability to service their debt in the near term. “The big resources exporters have been sitting on their export revenues in dollars, which has been one of the reasons for the rouble weakness,” said Vladimir Tikhomirov, chief economist at BCS Prime, the brokerage. The big resources exporters have been sitting on their export revenues in dollars, which has been one of the reasons for the rouble weakness - Vladimir Tikhomirov, chief economist at brokerage BCS Prime An executive at a foreign investment bank in Moscow said: “The picture is more worrying for the banks.” For Russia’s fiscal situation, the cheaper rouble against the dollar is less worrying as it helps mitigate the steady slide in the oil price, which makes oil and gas-based revenues dwindle. Moscow equities markets were also under heavy pressure. The dollar-denominated RTS stock index hit its lowest level since 2009, falling below 1,000 points. Russia’s 10-year sovereign debt yields rose 15 basis points to 10.3 per cent, making its borrowing the most expensive since November 2009. The cost of insuring Russian debt against default returned to its highest level of the year. Credit default swaps for Russia were up 9 basis points to 286 basis points. http://www.ft.com/intl/cms/s/0/6c059328-666d-11e4-9c0c- 00144feabdc0.html#axzz3IHL81cjm

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ft. com World Europe Brussels Last updated:November 6, 2014 7:04 pm European Central Bank united on €1tn liquidity injection Claire Jones in Frankfurt and Ferdinando Giugliano in London

©Bloomberg Mario Draghi secured unanimous support from the European Central Bank’s governing council for his plan to inject €1tn to rescue the eurozone economy from stagnation, as he sought to dispel concerns over growing divisions within the central bank. All 23 policy makers backed the president’s idea to bring back the ECB’s balance sheet to levels last seen in 2012, a pledge that Mr Draghi first floated two months ago but subsequently softened. More ON THIS STORY// Draghi ‘autocratic’ style stays off menu/ The World Draghi press conference/ ECB threatened to end Irish bank funding/ European Central Bank news/ Global Market Overview Euro at 2-year low after Draghi comments ON THIS TOPIC// BoJ raises bar for European Central Bank/ ECB moves house after three-year delay/ Eurozone lending conditions improve/ Lex European banks – life after the AQR IN EU ECONOMY// Germany plans €10bn extra public spending/ Italy has ‘atomic bomb’ to revive economy/ Brussels slashes 2015 eurozone forecasts/ Brussels slashes 2015 eurozone forecasts A harmonious council could pave the way for more aggressive action, including large- scale government bond-buying, should the threat of Japanese-style deflation continue. The euro fell 0.6 per cent to $1.239, its lowest since late 2012, on the back of the unanimous policy statement. Equities indices rose, with Frankfurt’s Xetra Dax 30 up 1 per cent and the FTSE Eurofirst 300 up 0.6 per cent. The ECB president insisted the council remained unanimous in its commitment to use further unconventional tools, including quantitative easing, should conditions deteriorate. He also revealed ECB staff had stepped up their work on additional ways to expand the central bank’s balance sheet, beyond the announced purchases of covered bonds and asset-backed securities. Analysts have voiced concern that the markets for these assets are far too small to swell the ECB’s balance sheet from its current level of about €2tn to the heights reached in March 2012, when it peaked just above €3tn.

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Mr Draghi said in September that private-sector asset purchases and a scheme of cheap four-year loans to eurozone lenders would increase the size of the ECB’s balance sheet to levels last seen in early 2012. He appeared to backtrack on this claim after last month’s policy meeting in Naples, before strengthening the message on Thursday that the balance sheet will keep expanding “under all universes”. Policy makers will hope that message is strong enough to convince the public they are united in their commitment to raise inflation from 0.4 per cent to the ECB’s target of just below 2 per cent. Concerns over divisions within the ECB’s top body had emerged following reports that some of the governors of national central bank’s were prepared to challenge the president over a leadership style that was less collegial than that of his predecessor, Jean-Claude Trichet. The showdown, set for Wednesday evening’s pre-meeting dinner, never happened, it seems, with Mr Draghi declaring the dinner a success. “It was a very rich and interesting discussion, and very candid. But these concerns [over my leadership style] were not raised as far as I know,” the ECB president said. Policy makers have been irked over Mr Draghi’s tactic of making off-the-cuff remarks without telling them first. The most recent instance of the ECB president deciding to go it alone was in September, when the balance sheet goal was revealed without the consent of other council members.

Mr Draghi played down the discord, saying it was “fairly normal to disagree about things.” He added: “The best answer to this is given by the fact that the introductory statement, which contains some important news compared to the past, has been underwritten unanimously. When we differ in our views and our policies, there is no drawing line between north and south, there is no coalition . . . people are there in their personal capacity and they are independent.”

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Jörg Krämer, chief economist at Commerzbank, said the display of unity over the balance sheet target showed Mr Draghi “is the boss”. “Before today’s meeting, press agencies had been talking of a palace revolution against the allegedly autocratic leadership approach,” Mr Krämer said. “There was no sign of this at the press conference, however.”

Others thought trickier days could follow. “No doubt Draghi won the battle of the balance sheet target, whether he has won the war remains to be seen,” said Richard Barwell, of Royal Bank of Scotland. “I doubt the hawks offered an unconditional surrender on sovereign purchases. And there is an important difference between a target you promise to hit and a target you expect to move towards,” he added. The ECB started to buy private-sector assets in late October and has since purchased €4.8bn-worth of covered bonds. It has also announced that four private-sector asset managers will begin buying asset-backed securities on its behalf starting this month. On Thursday Mr Draghi indicated national central banks will also be able to buy securities, a move which will appease some of the national central bank governors, including Christian Noyer, head of the Banque de France. “We now try to see which central banks are going to be ready, in how long a time, and adapt the framework that we have today,” the ECB president said. If the existing policy mix proved insufficient, or if the outlook for inflation worsened, the council would act. “We know the risks are on the downside and we know we need to be prepared,” Mr Draghi said. The governing council held its main refinancing rate at its record low of 0.05 per cent and continued to charge banks 0.2 per cent on a portion of their deposits parked with the central bank.// Additional reporting by Michael Hunter in London/ /http://www.ft.com/intl/cms/s/0/2a6a4896-65aa-11e4-aba7-00144feabdc0.html#axzz3IHL81cjm

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ft. com World Europe Brussels November 6, 2014 7:01 pm Mario Draghi’s ‘autocratic’ style stays off the menu Claire Jones in Frankfurt

©EPA ECB president Mario Draghi It had not been an easy week for Mario Draghi, European Central Bank president. Concerns over divisions within the central bank’s governing council emerged amid reports that some national central banks’ governors were prepared to challenge the ECB president over a leadership style that is less collegial than that of his predecessor, Jean- Claude Trichet. But the showdown, predicted for Wednesday evening’s pre-meeting dinner, never happened. On Thursday, at the usual press conference which follows the governing council’s decision on interest rates, Mr Draghi declared the dinner a success. “It was a very rich and interesting discussion and very candid. But these concerns [over my leadership style] were not raised as far as I know,” the central bank president said. “I’m not ubiquitous. I don’t know what the others might say. I haven’t seen anything.” More ON THIS STORY// ECB ready to inject €1tn extra liquidity/ The World Draghi press conference/ ECB threatened to end Irish bank funding/ European Central Bank news/ Global Market Overview Euro at 2-year low after Draghi comments ON THIS TOPIC// Comment Trichet played tough man/ Comment A dark past, handled sensitively/ Global Market Overview Wall Street rally fades/ Markets Insight How to read the Dow’s ups and downs IN BRUSSELS// Almost €7bn of EU budget paid out in error/ Brussels seeks compromise in budget row/ EU energy deal to hurt Putin, says Davey/ Q&A Why is Brussels demanding back-payment? Policy makers have long been irked over Mr Draghi’s tactic of making off the cuff remarks without warning them. The most recent instance of the ECB president deciding to go it alone was in September, when he revealed, without the consent of other council members, a goal of expanding the central bank’s balance sheet to levels last seen in 2012. Mr Draghi played down the discord, saying it was “fairly normal to disagree about things”.

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He then referred to the governing council’s policy statement, where all 23 members of the central bank’s top body agreed to Mr Draghi’s plan to expand the ECB’s balance sheet. “The best answer to [these rumours] is given by the fact that the introductory statement, which contains some important news compared to the past, has been underwritten unanimously,” he said. “When we differ in our views and our policies, there is no drawing line between north and south, there is no coalition . . . people are there in their personal capacity and they are independent,” he added. Jörg Krämer, chief economist at Commerzbank, said the display of unity over the balance sheet target showed Mr Draghi “is the boss. “Before today’s meeting, press agencies had been talking of a palace revolution against the allegedly autocratic leadership approach,” Mr Krämer said. “There was no sign of this at the press conference, however.” Others thought trickier days could follow. “No doubt Draghi won the battle of the balance sheet target, whether he has won the war remains to be seen,” said Richard Barwell, of Royal Bank of Scotland. “I doubt the hawks offered an unconditional surrender on sovereign purchases. And there is an important difference between a target you promise to hit and a target you expect to move towards,” he added. The ECB started to buy private sector assets in late October and has since purchased €4.8bn worth of covered bonds. It has also announced that four private sector asset managers will begin buying asset backed securities on its behalf starting this month. Mr Draghi indicated on Thursday that national central banks will also be able to buy securities, a move which will appease some governors, including Christian Noyer, head of the Banque de France. “We now try to see which central banks are going to be ready, in how long a time, and adapt the framework that we have today,” Mr Draghi said. If the existing policy mix proved insufficient, or if the outlook for inflation worsened, the council would act. “We know the risks are on the downside and we know we need to be prepared,” Mr Draghi said. Additional reporting by Michael Hunter in London http://www.ft.com/intl/cms/s/0/a3dde322-65dc-11e4-898f- 00144feabdc0.html#axzz3IHL81cjm

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ft.com Companies Financials Financial Services

Last updated:November 6, 2014 8:17 pm State aid probes set to intensify in wake of leaks Vanessa Houlder

Luxembourg Multinationals are bracing themselves for more state aid investigations, following the publication of a massive cache of leaked corporate tax documents from Luxembourg. The tax affairs of more than 300 multinationals were dragged into the open when the International Consortium of Investigative Journalists, a global network based in the US, partly published a stash of nearly 28,000 pages of leaked files. These businesses include corporations such as PepsiCo, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JPMorgan, FedEx, Abbott Laboratories and Macquarie. More ON THIS STORY// Luxembourg vows to end banking secrecy/ Ikea franchise arm rearranged financing/ Leak details Luxembourg tax deals/ EU agrees laws to end banking secrecy/ In depth Great tax race IN FINANCIAL SERVICES// Experian boosted by consumer confidence/ Fleming Family to merge with Stonehage/ TPG swallows Prezzo restaurant chain/ Ex-Goldman star Thornton joins PineBridge The revelations have lifted the lid on practices that are regarded as normal in the corporate world, where most big businesses use Luxembourg as part of their financial structures. But tax experts said that the documents may provide more examples of cases

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where allegedly favourable tax ‘rulings’ – comfort letters concerning a company’s future tax treatment – amounted to illicit state aid, breaching EU rules. Caroline Ramsay, a state aid lawyer at Pinsent Masons, an international law firm, said: “The commission is now very likely going to scrutinise this dossier of papers in great detail – and several more companies could join the ranks of Fiat, Apple and Starbucks and find themselves in the state aid firing line.” The commission is currently probing rulings agreed by the Luxembourg tax authority with car group Fiat and Amazon, the ecommerce company. The government and companies subject to the state aid probes reject any improper arrangements or wrongdoing. The ICIJ also stressed that it was not suggesting any irregularity in any of the documents it had examined. However, the release of the documents is likely to give renewed momentum to the international crackdown on international tax avoidance that is set to be discussed at this month’s G20 leaders’ meeting in Brisbane. Given Luxembourg’s importance in international tax planning, the publicity around its tax arrangements will focus attention on the effort to rewrite the global tax rules, which is about half way through. The ICIJ – which worked with 80 journalists and outlets including The Guardian, Le Monde and Germany’s Süddeutsche Zeitung – said that its findings illustrated how companies saved billions of dollars in taxes. It said: “In some instances, the leaked records indicate companies have enjoyed effective tax rates of less than 1 per cent on the profits they’ve shuffled into Luxembourg.” Although it has long been known that companies achieve the very low tax rates in Luxembourg, the cache of data provides insights into the complex mechanisms used to achieve them. Luxembourg is not overtly a low-tax country for businesses: more than two-thirds of OECD countries have corporate tax rates lower than its 29.2 per cent. But the documents show that there are numerous deductions and exemptions that lower the rate by creating profits that escape tax altogether.

Ikea franchise arm rearranged financing/ Leaked PwC documents reveal how the franchising arm of Ikea rearranged its financing, with the help of a Luxembourg-based structure and a low-tax Swiss branch, writes Vanessa Houlder.// Read more The documents reveal myriad strategies, including arrangements such as low-tax Swiss branches, “hybrid” financial instruments and “hidden capital contributions”. They also outline details of sprawling structures, often involving companies and branches in business-friendly countries such as the Netherlands that allow companies to arbitrage the difference between countries’ tax rules. The exposure is likely to be particularly unnerving for some companies because it contrasts with a tradition of secrecy in Luxembourg. Foreign tax inspectors trying to understand their multinationals’ tax planning often struggled to make sense of the

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sparse details in the companies’ Luxembourg accounts, and found it hard to obtain legal documents. Campaigners said that the latest “Luxembourg leaks” underlined the need for G20 leaders to go further in their crackdown on corporate tax avoidance. Murray Worthy, a campaign manager at ActionAid, a development group, said: “This exposure of the industrial scale of global tax avoidance involving Luxembourg clearly highlights the need for global action.” Nicolas Mackel, chief executive of Luxembourg for Finance, an inward investment agency said that Luxembourg had been aware that the details would be published, although he had not anticipated the scale of the publication. He said: “The criticism that Luxembourg helps companies evade taxes on an industrial scale is rubbish. This does not show that Luxembourg has any scheme that helps companies. Rulings are a normal tax technique. They exist in multiple countries.” The documents referred to date back a number of years – we cannot comment on individual cases - PwC Tweet this quote Mr Mackel also hit out at reports that the publication features “secret deals”, saying that the rulings were merely confidential. He said he believed the data had been leaked by a ‘disgruntled employee” from an archive. The confidential documents mostly concern clients of PwC, the professional services group. ICIJ said it had helped multinational companies obtain at least 548 tax rulings or “Advance Tax Agreements”, from 2002 to 2010. PwC said: “The documents referred to date back a number of years – we cannot comment on individual cases.” At a time when businesses are increasingly aware of reputational risk, the public scrutiny of their tax plans is likely to hasten the restructuring of their global tax planning. Fears of a state aid investigation will further add to concerns, according to Ms Ramsay. “The companies that are on this list should immediately consider how they can restructure their global tax planning in a way that the European Commission will not find offensive.” http://www.ft.com/intl/cms/s/0/ec213dac-65da-11e4-a454- 00144feabdc0.html?siteedition=intl#axzz3IHL81cjm

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ft. com World Europe November 6, 2014 6:35 pm Luxembourg vows to end banking secrecy amid tax allegations Christian Oliver and Peter Spiegel in BrusselsAuthor alerts

©EPA Jean-Claude Juncker: claims could prove highly embarrassing Luxembourg has pledged to overhaul its culture of financial secrecy, and has fought back against accusations that it helped leading multinationals avoid billions of dollars of tax. The claims could prove highly embarrassing to Jean-Claude Juncker, the new president of the European Commission, who was prime minister of Luxembourg when the corporate tax deals were allegedly struck. More ON THIS STORY// Tax leaks set to spur state aid probes/ Ikea franchise arm rearranged financing/ Leak details Luxembourg tax deals/ EU agrees laws to end banking secrecy/ In depth Great tax race ON THIS TOPIC// Governments sign tax evasion deal/ UK shell company law could be sidestepped/ HMRC demands £250m of unpaid tax/ Clawback - the taxman’s growing reach IN EUROPE// Rouble fall stokes currency crisis fears/ Drones fly into French nuclear debate/ Germany may dodge recession data suggest/ When the Wall came down Officials were responding to a report that more than 340 multinationals, including such global names as Pepsi, Procter & Gamble and JPMorgan, made secret deals with the Grand Duchy between 2002 and 2010 that saved them billions of dollars in taxes. The commission is already investigating whether rulings agreed by the Luxembourg tax authority with Fiat Finance and Trade, the financial arm of the car company, and Amazon, the ecommerce company, which were also issued during Mr Juncker’s premiership, amounted to improper state aid. Pierre Gramegna, Luxembourg’s finance minister, refused to blame Mr Juncker on Thursday for past practices, but insisted that his own government was now forging a new culture of financial transparency.

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Gianni Pittella, the Italian head of the Socialist group in the European Parliament, said Mr Juncker’s credibility was on the line. “He must show whose side he is on. Is he on the side of European citizens or corporate tax dodgers?” he said. On Wednesday, the International Consortium of Investigative Journalists published leaked documents which, it said, showed how hundreds of companies had funnelled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes. The documents are mainly Advance Tax Agreements, so-called comfort letters that map out how companies will be taxed. When repeatedly asked whether Mr Juncker was responsible for this culture of tax breaks, Mr Gramegna said that it would not be “correct” to blame one person. “It is not a politician or a government that does these rulings – it is an administrative procedure,” he told reporters in Brussels. However, he said that Luxembourg was now ending banking secrecy, which had been one of the “cornerstones” of its national policy. Only last month, Luxembourg dropped its long resistance to EU transparency rules and said it would allow European depositors’ data to be sent back to their home countries. Mr Gramegna insisted the tax deals were legal, but also agreed that it was “unsatisfactory” and “untenable” that companies should use Luxembourg as a tax haven to pay little or no tax. Still, he regretted the leaks, which he described as illegal and insisted that this problem could not be solved by Luxembourg alone, but only as part of a European and broader international effort. After the ICIJ’s report, Wolfgang Schäuble, the German finance minister, said: “There remains a lot to do [in Luxembourg].” Mr Gramegna agreed, but added: “We have already done a lot.” The Luxembourg minister also said he did not doubt Mr Juncker’s ability to act as an impartial broker in a series of cases involving Luxembourg. Mr Juncker said this week that he would not interfere in the inquiries into the Fiat and Amazon tax deals, which are being overseen by Margrethe Vestager, his competition commissioner. Margaritis Schinas, commission spokeswoman, said Mr Juncker was unmoved by the focus on his premiership of Luxembourg. “I can tell you that Mr Juncker is very serene. If I were a teenager, I could use the word ‘cool’. But let’s stay with ‘serene’.” http://www.ft.com/intl/cms/s/0/c8de6734-65d0-11e4-898f- 00144feabdc0.html#axzz3IHL81cjm

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ft.com comment Columnists November 6, 2014 4:15 pm Midterm rational exuberance is not just for US Republicans

Gillian Tett If a few tangible policy changes emerge from Capitol Hill, it is possible animal spirits will return

©Getty Mitch McCOnnell and his wife Elaine Chao celebrate after the Kentucky primary in May The Republicans are feeling exuberant. But before they become too carried away about their victories in the US midterm elections, they should look at a survey recently released by Harvard Business School that will bring them back to earth. HBS alumni were asked to explain why America’s economic growth has been so dismal in recent years. The executives cited the usual structural suspects: a faltering education system, poor regulation, a distorted tax code and woeful infrastructure. But the most hated culprit was the political machine. Half of those surveyed declared the US political process worse than that of any other leading nation – and 80 per cent fear it is deteriorating. That is a vote of no-confidence in Republicans and Democrats alike from top executives. More ON THIS STORY// Republican push for pro-business reform/ Republican triumph may boost trade deals/ Obama seeks $6.2bn to battle Ebola/ Angry losers blame unpopular Obama/ Democrats fail to get out the vote ON THIS TOPIC// Obama and Republicans vow to co-operate/ Empowered Republicans wary of Iran talks/ Jurek Martin Republicans in Cruz control/ McConnell to push big business agenda GILLIAN TETT// Political apathy – who cares?/ Sound of recovery/ The quiet heroes of wartime Italy/ Markets parched for liquidity Can the midterms change the mood? At first, it looks unlikely. The campaigns cost about $4bn but less than 40 per cent of voters participated, few tangible policy plans were tossed around and an embattled – and seemingly unbowed – President Barack Obama is now opposed by a Republican Congress. 309

Yet there is a glimmer of hope. One reason is tactical and practical: with the Republicans controlling Congress, they finally have an incentive to enact some legislative change to show voters in 2016 that they can actually get things done. And the sheer scale of Democratic defeat, coupled with Mr Obama’s desire for legacy, might make the White House willing to push through legislation, too. But the other reason for a touch of optimism is that there are a few policy issues where the White House and Republicans may find common ground. Trade is one obvious arena: Mitch McConnell, the new Senate majority leader, has indicated his party is likely to back the trade deals Mr Obama’s administration is crafting with Asia and Europe. Indeed, the Republican side is more supportive than Democrats. Infrastructure is another area to watch: irrespective of congressional battles over the national debt, there is bipartisan support for action here. And corporate tax reform might – possibly – produce pleasant surprises too. The parties are bitterly divided on issues such as social security reform and personal taxation, particularly of the rich. But on both sides there are groups that champion the idea of cutting corporate taxes rates in exchange for closing loopholes. And while it will be extremely hard to turn this support into a tangible plan – given that vested interests will be trying to preserve every tax loophole, and exploit partisan splits – it is worth remembering that the last time Congress enacted corporate tax reform was during the Reagan era of the mid-1980s, when Washington was also divided. The precedent is distant – but it is there. It is also painfully easy to imagine another scenario: Republicans spend two years pushing partisan issues (such as the repeal of the Affordable Health Care act); and Mr Obama infuriates Republicans by using executive powers to push favoured causes, such as immigration reform. If that happens, partisan battles, and business despair, will remain intense. But perhaps the best reason for a twinge of optimism is to be found in that grumpy mood. Cynicism about Washington is so extreme that there is also room for “upside surprises”, as a trader might say. If the new Congress delivers even a few tangible pro- business reforms, this will be a pleasant surprise. This matters. Many company executives have been sitting frozen in recent years, reluctant to invest, because of uncertainty about policy and economic turmoil. An estimated $2tn of spare cash is sitting on US corporate balance sheets, for example. The banks have another $2.8tn of funds sitting idly at the Federal Reserves, too. It will take more than politics to unlock the cash – but if just a tiny proportion can be deployed, the economic impact could be significant. And if a few tangible policy changes emerge from Congress, it is possible animal spirits will return. Even amid the business elite, from Harvard and elsewhere, who have been trained to be so cynical about politicians’ ability to do anything at all. http://www.ft.com/intl/cms/s/0/f6c53480-5e9f-11e4-b81d- 00144feabdc0.html#axzz3IHL81cjm

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ft.com World Europe Brussels Last updated:November 6, 2014 6:05 pm ECB threatened to end funding unless Ireland sought bailout Vincent Boland in Dublin and Peter Spiegel in Brussels

©AFP Former ECB president Jean-Claude Trichet Ireland’s banking crisis returned to centre stage after the European Central Bank released letters showing that its president threatened to cut off emergency funding unless Dublin agreed to apply for a bailout. There has been a widespread view in Ireland that Jean-Claude Trichet, in effect, forced Dublin to seek a bailout in late 2010 when he was ECB president. The central bank on Thursday published an exchange of letters between Brian Lenihan, Ireland’s finance minister at the time, and Mr Trichet. More ON THIS STORY// Comment Trichet played tough man/ FT Alphaville The Irish letters/ FT Alphaville Dear Ireland, take bailout/ Ireland news headlines/ European Central Bank news ON THIS TOPIC// Irish unemployment rate falls to 12.1%/ Irish support for Europe fails to dim/ Ireland’s economic health looks mixed/ Dublin poised to exit EU bailout IN BRUSSELS// Draghi ‘autocratic’ style stays off menu/ Almost €7bn of EU budget paid out in error/ Brussels seeks compromise in budget row/ EU energy deal to hurt Putin, says Davey In the crucial letter, written on November 19 2010, Mr Trichet said the ECB would extend more emergency lending to the Irish banks only if “the Irish government shall send a request for financial support to the eurogroup [eurozone finance ministers]”. Two days later, Dublin formally applied for a bailout – a €67bn package funded by the International Monetary Fund, the European Commission and the ECB. The letter states: “It is the position of the governing council [of the ECB] that it is only if we receive in writing a commitment from the Irish government . . . on the following four points that we can authorise further provisions of ELA [emergency liquidity assistance] to Irish financial institutions.”

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Alongside the demand that Dublin apply for a bailout, the ECB wanted the government to start fiscal consolidation and structural reform, recapitalise and restructure the banks, and guarantee the repayment of the ELA. Mr Lenihan, who died in 2011, responded two days later that Ireland had decided “to seek access to external support from the European and international support mechanisms”. In other words, it had agreed to apply for the bailout. The decision led to several years of economic austerity, tax rises, pay cuts and public spending cuts. The letters are expected to form an important piece of evidence in an inquiry set up by the Irish parliament to investigate the spectacular collapse between 2008 and 2010 of the Irish banking and property sectors, which cost the country’s taxpayers €64bn. Mario Draghi, the ECB president, was asked about the letters at a press conference on Thursday after the central bank decided to keep interest rates on hold. In depth Euro in crisis// ews, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness// Further reading He said: “It’s a very big mistake to look at past events with today’s eyes. You should go back and consider what was the situation at that time.” Enda Kenny, Ireland’s prime minister, said the letters would remind people of “the cold dark place Ireland was in” at the time. Although the letter was unprecedented at the time, such demands from the ECB became almost commonplace as the eurozone crisis worsened in the following months. In August 2011, Mr Trichet sent similar letters to Silvio Berlusconi, the Italian prime minister, and José Luis Rodríguez Zapatero, the Spanish premier, demanding similar economic reforms as a condition of the central bank rescuing both countries by buying their sovereign bonds on the open market. In March 2013, Jörg Asmussen, who handled Brussels issues under then ECB president Mario Draghi, made a similar demand to Cyprus’s president, Nicos Anastasaiades, in person during a high-stakes meeting in Brussels. Mr Asmussen warned the president that the central bank would cut off ELA funding for Cypriot lenders unless he accepted tough bailout conditions. The practice was not only controversial in national capitals that received the letters. Within the ECB board, a handful of members were strongly opposed, arguing that it was improper for central bankers to be dictating economic and fiscal policy to sovereign governments. After the August 2011 letters were sent to Rome and Madrid, Jürgen Stark, then a member of the ECB’s executive board, informed Mr Trichet that he intended to resign over the practice. http://www.ft.com/intl/cms/s/0/1f4ed1fa-65ac-11e4-aba7- 00144feabdc0.html#axzz3IHL81cjm

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ft.com Comment The Big Read November 6, 2014 7:36 pm China and Japan: Eyes on a compromise Demetri Sevastopulo and Jamil Anderlini Relations are at a 40 year low but, with the leaders set to meet, can they do anything to ease tensions?

©AFP At loggerheads: Xi Jinping, left, and Shinzo Abe W hen Xi Jinping visited Japan in 2009 as Chinese vice-president, he asked on short notice to meet Japanese Emperor Akihito. In a rare move reflecting his importance as the future Chinese leader and a desire to capitalise on warming ties, Tokyo broke protocol and granted an audience, despite an imperial household rule requiring requests to be made one month in advance. Five years on, relations between the two countries are so poor that Japanese diplomats are still desperately trying to secure a first meeting between Prime Minister Shinzo Abe and Mr Xi when Beijing hosts the Asia-Pacific Economic Cooperation summit next week. With strong, nationalistic leaders running both countries, the Asian powers are at loggerheads over many issues – most dangerously over the disputed Senkaku Islands in the East China Sea. More ON THIS STORY// Japan presses China over coral poachers/ Japanese lawmakers visit Yasukuni shrine/ Comment The party and politics of popular protest/ China and Vietnam to resume military ties ON THIS TOPIC// ‘Chinese Rules’, by Tim Clissold/ China’s carmakers stuck in reverse, despite upgrades/ China hails moon orbiter success/ Nickel rebounds as China supplies tighten 313

IN THE BIG READ// Virgin group Brand it like Branson/ Barroso ‘Not everything I did was right’/ Norway Braced for a new wave of investment/ South Korea Sparks fly over the chaebol Signs are emerging that a meeting might happen, including a recent toning down of anti-Japan rhetoric in China. Some experts say Mr Xi does not want to tarnish Apec – the marquee international event in China this year – by refusing to meet Mr Abe. Pessimists warn the meeting might add up to little more than a courtesy handshake. But others hope the leaders can look beyond their deep-seated divisions after two tense years in which Japan has boosted military spending and enhanced alliances with India and Australia to counter the rise of China. “The Chinese are making a strategic mistake by isolating themselves,” says Kunihiko Miyake, a former Japanese diplomat who knows Mr Abe well. “We are transforming. We are more inclined to collective and multilateral alliance networks than before. We believe the US-Japan alliance is not enough.” China has been engaged in a campaign to paint Mr Abe as a revisionist who wants to deny Japan’s military past. Meanwhile, Mr Abe has been visiting countries in southeast Asia and offering help as they tackle their own maritime disputes with China. The US worries about the potential for conflict that could drag it into dispute with China. Yoichi Funabashi, former editor-in-chief of Japan’s Asahi newspaper, says Asia is witnessing a “tectonic shift” similar in nature to when Japan defeated China in the Sino- Japanese war of 1894-95. That victory, and another over Russia 10 years later, set Japan on course for a century of dominance in Asia. But China, powered by three decades of unparalleled growth, is regaining its footing and returning to the position that it traditionally held in the region. “It is so difficult for Japan to adjust to this new power shift, psychologically and politically,” says Mr Funabashi. “Japan has never believed in ‘Japan as number one’, but it has believed in ‘Japan as number one in Asia’ . . . this is a crude awakening for Japan.” For roughly two years, communication between the governments has been minimal, preventing the countries from tackling a host of important issues from security to trade. Anti-Japan protests in China in 2012 sparked a big decline in Japanese foreign investment in China which has fallen 33 per cent this year. Yukio Okamoto, a foreign policy expert who advised Junichiro Koizumi, the former Japanese prime minister who enraged China by frequently visiting the controversial Yasukuni shrine, says Sino-Japanese ties are “the worst since normalisation in 1972”. In a speech in September marking the 69th anniversary of the end of the second world war, Chinese President Xi Jinping railed against “militarist” Japanese people who denied wartime atrocities and “beautified invasion and colonialism”, writes Jamil Anderlini in Beijing.

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Xi Jinping: Domestic pressures mean he has little leeway to change stance “Chinese people have hearts that are bigger than the oceans or the sky but we definitely cannot tolerate sand in our eyes,” Mr Xi said. A couple of weeks later, just in case anyone had missed the message, the president exhorted the Chinese military to prepare itself to “fight and win a regional war”. Since he took over as paramount leader in late 2012, Mr Xi has made unabashed nationalism and animosity toward Japan central tenets of his foreign policy. While former Chinese premier Wen Jiabao posed for pictures playing baseball with his Japanese counterpart, Mr Xi has tried his best to never be seen in the same room as Mr Abe. Chinese leaders govern partly through slogans and the president explicitly defines his “China Dream” theory as the “great rejuvenation of the Chinese nation”, meant to erase the humiliation inflicted by former imperialist invaders like Japan. “Under Xi’s leadership China has become much tougher in the way it deals with Japan, particularly when it comes to maritime [territorial] disputes,” says Feng Wei, a history professor at Fudan University in Shanghai. At first glance, this hostility appears to be personal. Mr Xi is a “princeling” whose father was a prominent Communist commander in the “Chinese people’s war of resistance against Japanese aggression” (as the second world war is known in China). He grew up surrounded by the battle-hardened Communist elite and their children who were indoctrinated with a hatred of the “dwarf pirate” invaders who conquered most of China in the 1930s and 1940s. Chinese policy makers and diplomats complain that Mr Xi rarely consults other leaders or party elders on foreign affairs, including the stance on Japan. But the evidence on his personal attitudes is contradictory. Before he was elevated to the top job, he was renowned in Japanese diplomatic circles for his deep understanding of Japan. He has visited the country on at least four official trips, most recently in 2009. “Initially many Japanese officials and diplomats were very pleased that Xi was going to be top leader – many of them had a very good experience working with him,” says one Japanese diplomat. “Many believe Xi’s current antagonism to Japan is a nationalistic performance for a domestic Chinese audience.” The president began his tenure in the midst of huge government-sanctioned anti- Japanese protests over the territorial dispute in the East China Sea. Chinese political analysts say he has used the issue as a political tool to consolidate his own power. In the last two years, China has unveiled dozens of war memorials, announced new holidays to mark important anti-Japanese battles and flooded cinemas and television with violent anti-Japanese war dramas.

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More dangerous moves include sending regular naval and paramilitary patrols to contested waters around uninhabited islands in the East China Sea and unilaterally declaring an air defence zone in the same area. Mr Xi has laid out a far more assertive foreign policy that some analysts have interpreted as an attempt to exclude the US from East Asia and relegate Tokyo to minor power status. Xi has laid out an assertive foreign policy that some see as an attempt to relegate Tokyo to minor power status “China hasn’t thought out a concrete policy of forcing other countries to submit to it but the leadership certainly feels China should be recognised as number one in Asia,” says Shi Yinhong, director of the Center for American Studies at Renmin University. “In practical terms that means China has to show it is more powerful than Japan and it also needs Washington to recognise its supremacy in the region.” While Mr Xi’s administration has stoked anti-Japanese sentiment as a way to build nationalism there is also an element of appeasement. In the wake of the 1989 Tiananmen massacre China introduced a“patriotic education” curriculum that emphasised the “100 years of humiliation” suffered at the hands of foreign invaders, particularly focused on Japan. Today, as most countries in the region nervously eye growing Chinese assertiveness and strident territorial claims, domestic propaganda portrays Beijing as responding in solidarity with the rest of Asia to a Japan that is reviving its militarist past. As a result, particularly among younger Chinese, voicing pro-Japanese sentiment is often perceived in the same way virulently racist or anti-Semitic views would be viewed in western countries. In this context, even Japanese officials acknowledge Mr Xi has very little leeway to improve ties. “His administration is quite stable and he has set himself up as a kind of emperor but he can’t just do whatever he likes and there are some areas where he has no room for

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manoeuvre,” says the Japanese diplomat. “Japan is one of those areas – if he was soft on Japan it could destabilise his administration.” Shinzo Abe: Inflexibility on key issues threatens effort to boost relations

©AFP Shinzo Abe, Japan’s prime minister, sent his national security adviser to China on Thursday as Tokyo’s efforts to reset relations between the two most important nations in Asia gathered pace, writes Demetri Sevastopulo in Tokyo. Dispatching Shotaro Yachi, a veteran diplomat who helped engineer Mr Abe’s landmark trip to China as prime minister in 2006, is part of an effort to secure a meeting with President Xi Jinping at the Apec summit. Experts say even a public handshake would thaw relations, and send a message to officials on both sides that they can resume discussions about crucial issues from diplomacy to trade. Some in Japan argue there is no time to lose. “It is very important for Xi Jinping and Mr Abe to meet because of the vector pointing towards deterioration next year,” says Yukio Okamoto, a former Japanese diplomat. “China is looking to mount a campaign focusing on . . . the 70th anniversary of the victory over Japanese imperialism.” When Mr Abe began his second stint as prime minister in 2012, experts were worried about a possible confrontation between the Asian powers over the disputed Senkaku Islands – which China calls the Diaoyu. Months earlier, violent anti-Japan protests had broken out in China over Tokyo’s decision to buy some of the islands from their private owner. The dispute left diplomatic relations in cold storage and ruled out any meeting with the Chinese leader. The mood could not have been more different from 2006 when Mr Abe as a newly minted nationalist prime minister impressed his critics by making big efforts to mend ties with China. People close to him say he would have liked to pick up relations with Beijing where he had left off, but that China’s behaviour over the Senkaku made that impossible. Japan had defended the purchase of the islands, saying it was to prevent Shintaro Ishihara, the rightwing, anti-China Tokyo governor, from changing the status quo by buying them and erecting buildings. But Beijing lambasted Japan and started sending ships to the Senkaku, where they increasingly began to enter Japanese territorial waters. In a thinly veiled speech to Asian and US defence officials in Singapore in May, Mr Abe criticised China by saying that countries should “not use force or coercion” to press their territorial claims. He also hinted to southeast Asian nations that Japan would help face down bullies.

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Officials in Beijing, however, saw Mr Abe as a revisionist leader who had enraged China in December 2013 by visiting the Yasukuni shrine, a memorial to Japan’s 2.4m war dead that remains controversial because it includes the “souls” of 14 convicted Class A war criminals. In 2006 Mr Abe maintained a policy of “strategic ambiguity” that allowed China and Japan to paper over differences – particularly over Yasukuni – by not referring to them. In the months before his December 2013 shrine visit, relations with China had begun to thaw and Chinese officials once again opened talks with Japanese counterparts. But Mr Abe’s Yasukuni trip slammed the door on any rapprochement. The Obama administration, which mainly welcomes the presence of a strong Japanese leader, was livid because it felt Mr Abe was jeopardising efforts to ensure that the US and Japan – helped by South Korea – could counter China. Abe confidants say he felt he had sacrificed his desire to visit Yasukuni as leader in 2006, and that he was unwilling to do so again because China itself was raising tensions in the Senkaku. His visit was celebrated by Japanese nationalists, but critics felt he should once again have set aside his own desire for the sake of Japan’s national interest. Mr Okamoto says that while Yasukuni is not a war shrine, Mr Abe should have foregone the visit for “tactical reasons”. Yoichi Funabashi, former editor of the Asahi newspaper, says the decision was “mind- boggling”, since Mr Abe had been applauded for mending ties with China back in 2006, and because he already has “impeccable credentials with the conservatives”. Abe has criticised China by saying that countries should ‘not use force or coercion’ to press their territorial claims But Yasukuni was not the only incident to sour relations. Earlier in 2013, Mr Abe had posed in the cockpit of a fighter jet with the number “731” painted on it. China thought it was a move to rub salt in war wounds, as the number was the name of an infamous Japanese army group that performed biological and chemical experiments on Chinese

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people. Japanese experts say it was just a bungled photo opportunity, but it raised the spectre of Mr Abe’s sympathy for historical revisionists. China has attached two conditions to any meeting between the leaders – that Japan concede there is a dispute over the Senkaku and that Mr Abe assure Beijing he will not visit Yasukuni this year – but Tokyo has hinted that they go too far. Yasuhiro Matsuda, a China expert at Tokyo University, says both sides need to find a solution by returning to the agreements of the past, since it will be very hard to reach a new agreement in the current climate. A person familiar with Mr Abe’s thinking says Japan is trying to engineer a situation that allows both sides to maintain their stance on the Senkaku. China has changed the status quo by sending ships to the area, but Japan has refused to accept there is a dispute and so will not negotiate over the island’s future. “The Chinese can now say our mission is complete and the Japanese can say we have given nothing away,” the person says about such an arrangement. “Both sides can say what they want . . . which is a curious equilibrium.” http://www.ft.com/intl/cms/s/0/23d132ae-64d5-11e4-ab2d- 00144feabdc0.html#axzz3IHL81cjm

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France and Germany: a moment of truth - To break out of the current economic impasse, a bold, coordinated Franco-German strategy is needed by Agnès Bénassy-Quéré and Guntram B. Wolff on 6th November 2014 1332441 France and Germany, which together account for half of euro-area GDP, are rightly considered the key to the euro area’s exit from the current impasse of low growth, falling inflation and increasingly dangerous debt trajectories. But more importantly, the German-French couple is a clear example of the need for a coordinated strategy. Their unit labour costs have diverged by some 20% since the introduction of the single currency. This would not necessarily be worrying, but the world market share of French exports has fallen by more than twice that of Germany, and the current account gap has increased by more than 8% of GDP. France has not compensated for its rising costs by higher non-price competitiveness, while the German low-cost strategy has made the country more and more dependent on foreign markets. The steady decline in inflation and the increase in the euro area’s current-account surplus are an indication that aggregate demand is too low in the euro area and in France and Germany. The stagnation of total factor productivity since the mid-2000s in several euro-area countries (including France) is an indication that deep reforms are needed for long-term growth to restart, and therefore for the sustainability of social systems. To break out of the current economic impasse, a bold, coordinated Franco-German strategy is needed. It requires simultaneous implementation of measures in both countries. Currently, there is no political consensus in France for far-reaching reforms that would encompass structural spending cuts and changes to some services market regulations, and would also improving the functioning of the labour market. This could be done, for example, by reconsidering the labour contract in order to incentivise long-term hiring, or averaging working time across the year, rather than week by week, which would be a smooth way of reducing unit labour costs. There is also, so far, no consensus in France on the need for education system reform. Such reforms would boost French productivity growth, stimulate innovation and also help to narrow the unit labour cost gap with Germany. Tweet This// Germany should gear its efforts to boosting its own economic activity. Boosting domestic demand is part of the answer Before the full gain from productivity can be reaped, wages and other costs such as housing will need to grow more slowly in France than in Germany, so that the former

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can regain competitiveness and the latter can alleviate its excess dependence on external demand. Germany should gear its efforts to boosting its own economic activity. Boosting domestic demand is part of the answer and could be quickly achieved through lower taxes on low-income households and a credible strategy for public investment. For this, accepting that the “black-zero” balanced budget must be given up is essential. But structural reform to develop the non-traded goods sectors, for example IT services, is also essential. The introduction of a minimum wage next year increases the need to focus on such high value-added sectors. The education system should support a shift to the new growth sectors of the 21st century, where Germany is lagging behind. This renewed economic dynamism needs eventually to lead to an inflation rate of above 2 percent, which is required to support the rebalancing. Tweet This With the prospect of an increase in inflation in Germany, France would have more leeway to cut social contributions and social spending With the prospect of an increase in demand and inflation in Germany, the French government would have more leeway to cut social contributions and social spending, and to implement far-reaching structural reforms. The French government’s recent announcements of reforms to protected sectors, although going in the right direction, will not be sufficient. Aggregate demand is not only a question of fiscal stance. France needs to reduce the uncertainty surrounding future policies, which is currently a powerful drag on private investment. Clarifying the future path of tax rates and energy and carbon prices is one issue. Agreeing on a number of medium-term fundamental objectives covering issues such as vocational training, tertiary education, lifetime working hours, the health system and housing subsidies, are needed to anchor expectations. Credibility, through political agreement on medium-term objectives is needed to trigger private investments. Tweet This The success of such a joint strategy will of course depend on what happens at euro-area level The success of such a joint strategy will of course depend on what happens at euro-area level: on the ability to finance European Commission president Jean-Claude Juncker's €300 billion investment project with fresh money, on the willingness of the European Central Bank to do what it considers necessary to meet its target of an inflation rate “below but close to 2 percent”, and on the ability of the European Commission and the European Council to enforce the fiscal rules without suffocating the economy. France and Germany have a major responsibility as shareholders in the European Investment Bank and as direct participants in the European Council. But, equally importantly, they have a responsibility to reduce the structural divergence between them by introducing coordinated deep economic reforms at national level. http://www.bruegel.org/nc/blog/detail/article/1476-france-and-germany-a-moment-of-truth/

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Eurointelligence RSS Feed Ayer, 06 de noviembre de 2014, 8:40:27 The troika vs Portugal - why are they fighting in public? Ayer, 06 de noviembre de 2014, 8:40:27 The troika openly attacked Portugal yesterday, saying that its reform efforts slackened since it exited the bailout programme. The IMF’s forecast is pessimistic, projecting that GDP would increase by just 0.8% in 2014, and only edge up to 1.2% and 1.3% in 2015 and 2016 respectively. The official statement of the ECB summarised the risk Portugal is facing like this: “Economic recovery is constrained by high levels of debt in the public and private sector and by an increasingly weak external environment which highlights the need for further competitiveness gains. The pace of budgetary consolidation has been adversely affected by a series of one-off factors, despite strong revenue performance. Moreover, efforts to reduce the underlying structural budget deficit have clearly slackened. Progress in structural reforms has lost momentum, with an uneven pace of implementation across policy areas.” The mission expects Portugal’s deficit to reach 3.3% rather than 2.7% envisaged by the Portuguese government, which is already higher than the 2.5% agreed under the Excessive Deficit Procedure. Passos Coelho said Portugal was willing to adjust its budget strategy to ensure that the country exits the excessive deficit procedure next year but was also confident that there was no reason for the government to change its forecasts just now, Jornal de Negocios reports. He said “forecasts are forecasts, whether they come from the government or the European Commission, and that these will be adjusted over time.” Maria Luís Albuquerque said earlier that Lisbon had “taken note of the risks” highlighted by the troika, but also noted that Lisbon was no longer required to negotiate with its lenders. She insisted that the budget measures planned for 2015 were adequate to meet the government’s fiscal targets. The warning comes as Portugal is moving towards elections in October 2015, with the anti- austerity Socialists leading the polls, points out the FT. The article also notes that almost one in three Portuguese companies are overdue in their bank loan payments and that the total debt burden of the corporate sector is equivalent to 156% of GDP. Our other stories We also have stories on Germany's Winter of Discontent; on another poll show Podemos in front, and a discussion of how to read those polls; on Spanish bank supervision post-SSM; on how to fund a Greek precautionary credit line; on a French R&D tax credit, on an unintended consequence of Moscovici's departure to Brussels; on opposition to Renzi over reforms; on today's GC meeting in Frankfurt; and on a banker who tells the truth.

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Inicio / Economía Luxemburgo, refugio fiscal para grandes fortunas españolas y empresas del Ibex En 2012, las empresas del Ibex tenían allí 37 filiales. El grupo Villar Mir acaba de abrir tres nuevas Alberto Cortina y su hijo Pelayo, el empresario Blas Herrero y un hermano del fallecido Isidoro Álvarez, entre los españoles que han recalado recientemente en ese territorio El país está en la picota por los pactos secretos con 340 multinacionales para permitirles minimizar el pago de impuestos

Antonio M. Vélez 06/11/2014 - 21:11h

Panorámica del Chemin de la Corniche, en el casco histórico de Luxemburgo. CC Dennis Jarvis vía Flickr MÁS INFO// Juncker, acorralado por acuerdos secretos entre Luxemburgo y grandes empresas para no pagar impuestos // ETIQUETAS:Luxemburgo, Ibex, impuestos, grandes fortunas Luxemburgo, ese coladero fiscal en pleno corazón de la UE, ha vuelto a la palestra tras las revelaciones del Consorcio Internacional de Periodistas de Investigación, que en una amplia investigación ha desvelado la existencia de 548 acuerdos secretos entre las autoridades luxemburguesas y al menos 340 grandes empresas para pagar menos impuestos. En esos pactos secretos, que han colocado en una comprometida situación al nuevo presidente de la Comisión Europea, Jean-Claude Juncker (era el primer ministro de ese país cuando se firmaron) no ha participado ninguna empresa española, aunque, de por 323

sí, Luxemburgo es uno de los destinos predilectos para lo que el antiguo presidente de la Organización de Inspectores de Hacienda José María Peláez denomina "planificación fiscal internacional: Vas haciendo operaciones sucesivamente y al final nada es ilegal, pero si lo ves en su conjunto y el objetivo que persiguen... No se trata de pagar impuestos en dos países, sino de no pagar en ninguno, forzando la legislación y buscando las ventajas de uno y otro". El diminuto país, que tiene apenas 550.000 habitantes y disfruta de la renta per cápita más alta del mundo, es un destino habitual para grandes empresas españolas que utilizan subsidiarias domiciliadas allí ("Normalmente son despachos con un representante, una secretaria y un teléfono, poco más", dice Peláez) para, "por ejemplo, recibir dividendos, conceder préstamos o transmitir empresas filiales sin que tributen las plusvalías, como ocurre en España por la venta de esas acciones", explica este experto. En el Ibex, el mayor índice bursátil español, Luxemburgo es un destino recurrente. Según el último informe sobre “ La Responsabilidad Social Corporativa en las memorias anuales de las empresas del IBEX35”, que el Observatorio de RSC presentó en mayo pasado, al cierre de 2012 el 94% de las empresas del Ibex, 33 sobre un total de 35, tenían filiales en territorios a los que consideraba "paraísos fiscales". Luxemburgo (país al que incluía en esa categorización, por mucho que la Agencia Tributaria no lo considere así), con 37 sociedades (frente a las 29 de 2010), era el tercer destino más solicitado, sólo por detrás de Holanda y Delaware (EEUU). El trasiego de empresas nacionales que abren nuevas oficinas en el Gran Ducado es constante. De entre las del Ibex, una de las últimas que lo ha hecho es el Grupo Villar Mir, el hólding empresarial fundado y presidido por el exministro Juan Miguel Villar Mir. El pasado septiembre, creó dos nuevas filiales en Luxemburgo, GVM Debentures Lux 2 y 3, que se suman a GVM Debentures Lux 1, creada en enero de 2013 y que utiliza para emitir bonos (colocar deuda entre inversores) y para canalizar parte de la participación de la hólding en la filial de construcción, OHL, que cotiza en el Ibex. Está última también constituyó en julio pasado OHL Investments 1407, participada al 100% por su filial de Concesiones, que ya tiene otra filial en ese país, OHL Investments, utilizada para realizar emisiones de bonos como las que llevó el año pasado por importe de 397 millones de euros. Hay muchos más casos. Uno de los más llamativos es el de Dakar Financial Group, sociedad luxemburguesa creada en julio pasado y vinculada a cuatro empresarios españoles con cierta raigambre: Alberto Cortina, su hijo Pelayo Cortina Koplowitz (vástago de aquel y de Alicia Koplowitz), César Álvarez (hermano del fallecido Isidoro Álvarez y tío del nuevo presidente de El Corte Inglés, Dimas Gimeno) y el empresario asturiano Blas Herrero (dueño de Kiss FM). Todos ellos (salvo Alberto Cortina, que sólo es accionista) son desde septiembre administradores de esa sociedad junto con, entre otros socios, dos empresarios venezolanos, Alejandro Betancourt y Francisco D'Agostino (cuñado del aristócrata Luis Alfonso de Borbón, bisnieto del dictador Francisco Franco), recientemente absueltos por un juez de Nueva York de las acusaciones de corrupción que había formulado un ex alto diplomático estadounidense contra ellos. La sociedad fue constituida en mayo pasado por una sociedad portuguesa que comparte su dirección en Lisboa con la de la firma de inversiones 3anglecapital, que se dedica, según su web, a "facilitar y promover los flujos de inversión transfronterizos y 324

estrategias industriales que involucran países del CCG (Consejo de Cooperación del Golfo), América Latina (Brasil, Colombia) y algunos países africanos". Dakar comenzó con un capital inicial de 50.000 euros que en julio aumentó hasta los 20 millones de euros mediante una ampliación de capital que suscribieron trece socios, algunos de ellos domiciliados en parajes tan exóticos (y opacos desde el punto fiscal) como Singapur. De esa cifra, la mayor parte (5,98 millones) la aportó Cinainvest Holding, una sociedad domiciliada en Suiza y vinculada a Alberto Cortina (con ella vehicula parte de su participación en la constructora de Florentino Pérez, ACS), que hasta mayo de 2012 tuvo como administrador al banquero Arturo Fasana, imputado por ocultar en una cuenta opaca el dinero del extesorero del PP Francisco Correa y otros defraudadores españoles. ¿A qué responden estas operaciones? Difícil saberlo, aunque, como dice el expresidente de la Organización de Inspectores de Hacienda, "no es mero capricho; la pregunta, efectivamente, es esa, para qué; unas veces es la preparación para una operación a corto plazo y se ve enseguida, pero otras no". Peláez cita el ejemplo de "alguien con mucho patrimonio en España que crea una sociedad en Luxemburgo y aporta unas acciones prácticamente a lo que le costaron; si las vende con una plusvalía impresionante, en lugar de pagar un 30%, como aquí, no se pagan impuestos", resume. El de Dakar Financial Group es sólo uno de los últimos casos de empresarios españoles que 'apuestan' por Luxemburgo, aunque a veces este país es sólo un destino de paso. Por ejemplo, la familia Valls Biosca, propietaria del grupo textil Punto Blanco, utilizó en diciembre pasado ese territorio como plataforma para repatriar una sociedad radicada hasta entonces en Panamá, Inversiones Sigma, S.A., cuyas acciones finalmente transfirieron a Fisin SL, radicada en Igualada (Barcelona). Algo parecido hicieron los Castañer, dueños del fabricante de alpargatas del mismo nombre, que por esas mismas fechas, diciembre de 2013, aprobaron el traslado a una nave en el polígono industrial La Farga, en Banyoles (Girona), de la sociedad luxemburguesa con la que controlaban el 20% de su principal empresa, que había sido constituida en 2006 y cuyos accionistas eran dos sociedades panameñas. Lo curioso de este caso es que, en la documentación disponible en los registros luxemburgueses, la firma (Digamma International Société Anonyme) reconocía que se había acogido a la declaración tributaria especial que estableció la Disposición Adicional Primera del Real Decreto 12/2012. En otras palabras: a la amnistía fiscal por la que el ministro de Hacienda, Cristóbal Montoro, permitió hace dos años la regularización de dinero no declarado en España o el extranjero a cambio de pagar apenas un 10% de impuestos, calificada de "enorme error" por los inspectores de Hacienda. http://www.eldiario.es/economia/Luxemburgo-fortunas-espanolas-empresas- Ibex_0_321618897.html

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The Struggle for Free Trade in Asia Pacific Author: Dan Steinbock · November 6th, 2014 If the APEC meeting can agree on the proposed regional free trade plan and a reasonable implementation schedule, it would take a leap into faster regional growth and prosperity. The Asia-Pacific Economic Cooperation (APEC) forum on November 10-11 will take place amidst the rebalancing of China, the United States and the integration of Southeast Asia, which is causing substantial system friction. If representatives at the upcoming APEC meeting can agree upon the proposed regional free trade plan and a reasonable implementation schedule, the Asian Pacific will see increased growth and prosperity. However, the promise of an ‘Asian Century’ requires an inclusive free-trade zone spanning the Asia Pacific – not exclusive regional trade fortresses. The rise of APEC and the dream for free trade Asia-Pacific Economic Cooperation seeks to promote free trade and economic cooperation across the region. It was created at a unique moment in history – at the end of the Cold War. In January 1989, Australian Prime Minister Bob Hawke called for more effective economic cooperation across the Pacific Rim region. That led to the first meeting of APEC in Canberra in November, which was attended by ministers from 12 countries. At first, the Association of Southeast Asian Nations (ASEAN) opposed the initial proposal, which favored the East Asian Economic Caucus that would have excluded non-Asian countries, including the U.S., Canada, Australia and New Zealand. Tokyo and Washington, which were rivals in trade but shared strategic interests in the region, deeply opposed this proposal. As the Berlin Wall fell in Europe, Japan was seen as the key power in East Asia, while the role of China was still marginal. In Washington, Tokyo was perceived as a trade rival that did not play fair. In emerging Asia, imperial Japan’s wartime conduct had not been forgotten. Accordingly, APEC was seen as a countervailing force against potential Japanese domination in the region. Through APEC, the regional economies also hoped to create new markets for their agricultural products and raw materials beyond Europe, where demand had begun to decline. Today, APEC’s membership has almost doubled to 21 countries, which account for some 40 percent of the world’s population, almost 60 percent of the world economy, and nearly 50 percent of world trade. In turn, the idea of regional free trade has been around since at least 1966 when Japanese economist Kiyoshi Kojima advocated a Pacific Free Trade agreement. More

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practical measures ensued during the 1994 meeting in Bogor, Indonesia, when APEC leaders opted for free and open trade and investment in the Asia Pacific. In 2006, C. Fred Bergsten, the then chief of the Peterson Institute for International Economics, an influential U.S. think-tank, made a forceful statement in favor of the Free Trade Area of the Asia Pacific (FTAAP). If the agreement could be achieved, he argued, it would represent the largest single liberalization in history. Ironically, the FTAAP has been on the sidelines as Washington and emerging Asia have been working on their own regional trade initiatives. Initially, APEC was launched by smaller industrializing countries, but it will be completed by large emerging economies. The geopolitical triangle drama: TTP versus RCEP versus FTAAP In the Obama era, Washington has been actively promoting the completion of its Trans- Pacific Partnership (TPP). The TPP originates from a 2005 free trade agreement among Brunei, Chile, New Zealand and Singapore. Since 2010, Washington has led to talks for a significantly expanded FTA, which reflects U.S. interests in the region. As the US Trade Representative Ron Kirk has put it, the TPP is to be a “high-standard, broad-based regional pact” aiming at the emerging trade issues in the 21st century – hence the inclusion of several Asian tiger economies, ASEAN countries, Latin American nations, and the three NAFTA partners (US, Canada, and Mexico). However, the TPP excludes China. In the past year or two, the TPP talks have been conducted in relative secrecy. As a result, the initiative has been coping with rising opposition and delays. In turn, controversy about the TPP has intensified emerging Asian-Pacific cooperation in which China does have a role, through free trade talks among the ASEAN member states, and their FTA partners (Australia, China, India, Japan, Korea and New Zealand). These talks aim at a Regional Comprehensive Economic Partnership (RCEP), which excludes the U.S. The RCEP reflects the interests of emerging ASEAN, but it has a slower implementation schedule and humbler goals. In Washington, the proposed FTAAP is seen as a distraction from its TTP. U.S. officials argue that the currently negotiated regional trade deals – read: TTP – take priority over new rounds of talks. In contrast, China’s view is that FTAAP could serve as a foundation for other regional talks, including TPP and RCEP. After all, the FTAAP includes both the U.S. and China. A bold initiative Today, Asia Pacific is vital to China. In 2013, some 60 percent of the mainland’s total foreign trade and 83 percent of its utilized foreign investment was with APEC members, while almost 70 percent of the mainland’s outbound investment flowed to APEC members. Ever since its leadership transition in 2012-13, Beijing has presented a series of vital initiatives in the region, including the Silk Road Economic Belt and the 21st Century Maritime Silk Road and, most recently, the Asia Infrastructure Investment Bank (AIIB). In each case, U.S. opposition has intensified; in the case of AIIB, Washington opted for more open, forceful campaign to persuade important allies to reject the initiative.

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Behind the façade of the FTAAP negotiations, Washington has reportedly pushed to have two provisions from the draft of the APEC final communiqué to be dropped. The goal has been an APEC statement that will not call for starting FTAAP negotiations or the year 2025 as an end date to finish the deal. Those two objectives go against Chinese aspirations. Unfortunately, Washington is sending mixed signals to Beijing. On the one hand, it wants Beijing to be a “responsible stakeholder” in global governance. On the other hand, when Beijing is willing to take the lead, the effort is too easily rejected. Emerging Asia is trying to hedge between the U.S. pivot to and the Chinese rebalancing in the region. But surely the Pacific has room for two major powers. Besides, in much of Asia, the FTAAP has been perceived as a broader platform that could represent a compromise between the U.S.-driven TTP, which favors advanced economies and the RCEP, which reflects the interests of the emerging Asia. The FTAAP has also been seen as a constructive alternative to the lack of progress in the WTO Doha round talks and as a way to overcome the “noodle bowl” effect created by overlapping and conflicting elements in current free trade agreements. Only three years ago, the Asian Development Bank reported that Asia could account for more than of global output by 2050. That ‘Asian Century’ is not viable without economic integration that is supported by both China and the U.S. What Asia Pacific really needs is an inclusive bloc, which reflects the interests of both advanced and emerging economies and rests on economic benefits rather than strategic distrust. That’s what FTAAP could offer: a free trade zone that would significantly expand commerce and inspire other major regions worldwide – and one that has room for both China and the United States. The original version was published by China-US Focus on November 5, 2014 http://www.economonitor.com/blog/2014/11/the-struggle-for-free-trade-in-asia-pacific/

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ft.com/global economy November 6, 2014 10:06 am OECD urges members to encourage growth Chris Giles in London The Organisation for Economic Co-operation and Development has urged member states to redouble their efforts to encourage growth, warning that the global economy faces a diverging outlook and months of exchange rate instability. In its assessment of trends before next week’s Group of 20 summit in Brisbane, the Paris-based organisation called for a different mix of fiscal policy, monetary policy and structural reforms to raise demand in the short term and improve the longer- term outlook for prosperity. More ON THIS TOPIC// Big business blow in anti-graft clampdown/ Immigration helps wages and employment/ Triple shock for world economies/ OECD warns farm subsidies still too high IN GLOBAL ECONOMY// IMF slammed over support for austerity/ Pace of eurozone companies reshoring rises/ Report says cost of saving climate is low/ Dollar soars after BoJ stuns markets In a change of stance at the OECD coinciding with the appointment of a new chief economist, the organisation said governments should delay efforts to cut public borrowing as one leg of a “three-legged stool” to improve growth. Outlining growth forecasts similar to those from the International Monetary Fund last month, with global growth rates predicted to rise from 3.3 per cent this year to 3.9 per cent in 2016, the OECD said there was an increasing risk of stagnation in the eurozone. The expected rise in interest rates in the US at some point next year, at the same time as the Bank of Japan and European Central Bank sought to loosen policy, was certain to cause disruptions, according to Catherine Mann, the new OECD chief economist. “There is no doubt that there is going to be more serious instability and volatility in exchange rates and in emerging economies as investors reposition portfolios,” she said. She added that in these potentially difficult circumstances, with the US showing robust recovery while Japan, the eurozone and some emerging markets lag behind, there was a need for policy makers to use the time available for changing fiscal policy, monetary policy and passing structural reforms. Speaking to the Financial Times ahead of the OECD report’s publication, she said: “Monetary policy, fiscal policy and structural reform are three legs of a stool and we need all three legs of the stool to stand.” The OECD usually urges governments to reduce public borrowing. But Ms Mann added it now thought that a more flexible approach was warranted, sometimes urging austerity to boost confidence and sometimes calling for fiscal stimulus.

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Current circumstances called for stimulus, she argued. “We’re in a position where the downside risk of slow growth means we need to take all available options, particularly in Europe,” she said, urging Germany to increase public investment and other countries, including France and Italy, not to cut their deficits too fast. In depth Euro in crisis

News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness Further reading

“The situation in Europe is delicate. The global economy is in a more robust place, but the global economy cannot be considered healthy if Europe is not part of that equation.” Responding to longstanding criticisms from Berlin that a small fiscal loosening would do little for Germany and almost nothing to boost the rest of the eurozone, she said the main benefit of more stimulus lay in “confidence-building that fiscal policy is not being left on the sidelines”. For the longer-term, the OECD also joined the IMF in warning that its estimates of the growth potential in most countries had declined in recent years, partly as a result of low levels of private investment and partly from disappointing labour productivity trends, particularly in emerging economies. “Raising potential growth depends on all three legs of the stool,” Ms Mann said. “Structural reforms to product and labour markets are the foundation for increased investment, but how you get that going depends on [macroeconomic] policy, which has a role in setting the rules of the game.” http://www.ft.com/intl/cms/s/0/e6e76690-6508-11e4-ab2d- 00144feabdc0.html#axzz3IHL81cjm

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