Money is Not the Only Thing at Risk in the Euromess

Most of the media coverage of and commentary about the Euromess has focused, quite appropriately, on the potential enormous financial losses to European nations, banks and individuals. One proposed route toward a less painful European economic future is to give the Eurozone a centralized governing body with significant power over the member states’ fiscal policies. Indeed, this was the vision of Europe’s needed evolution among some of the architects of the Euro currency.

Such centralization might help stanch the financial losses caused by the Euromess, but money isn’t all that is at stake. If more and more political and economic decisions are made by transnational bodies based in Brussels (or Berlin), ordinary European citizens may come to see EU government as distant, hard to influence, and lacking in legitimacy.

This risk of “democracy deficit” is the subject of this intriguing article in the Economist, which is well-worth the time of Europe watchers.

Mein Solardach

A proposal for large solar panel leasing scheme in Spain funded by puritanical Germans.

Was it Matthew asking for ideas to get Europe’s economy moving?

It was a great insight of Keynes that spending doesn’t have to be useful to be effective in a slump (though he also said that useful was preferable). Helicopter drops of cash, banknotes buried in coal mines, and cheques mailed out randomly would work just fine, but clash with the Protestant ethic. Few Germans believe Keynes’ argument, and no German central bankers, so you really have to come up with Useful and Virtuous ideas.

At the risk of sounding like a one-subject crank, here’s mine. A part of my roof as it could be by Christmas:

What I suggest is a very large solar panel leasing scheme, funded or underwritten by the creditworthy members of the EU, meaning Germany. Taking a number out of a hat, 5 GW at €2.5 per installed watt would cost €12.5bn up front. That’s 2 million houses at 2.5 kw each, or €6,250; or 50,000 industrial roofs at 100kw, or any linear combination. Continue reading “Mein Solardach”

Président Hollande

Hollande’s probable election as President of France.

For a year French opinion polls have consistently given François Hollande the forecast of a comfortable victory over Nicolas Sarkozy in the second round of the French presidential election. It seems extraordinarily unlikely that Sarkozy will pull some rabbit out of the hat in the next 10 days: the massacre by nutter-terorist Mohamed Merah in Toulouse in March played to his strengths, and didn’t change things. How can Sarkozy, with his manic and omnidirectional energy, campaign against a candidate who makes a virtue of being boring? Sarkozy’s claim to be the experienced safe pair of hands is about as convincing as one coming from Newt Gingrich. So Merkel, Cameron, Barroso and Obama had better get used to the idea of Président Hollande.

My reading is that nothing much will change for the French, unless they are rich and will face higher top rates of tax. Hollande’s essential appeal is conservative: he will maintain the French social model against Sarkozy’s hypothetical néoliberalisme. The promise to roll back Sarkozy’s raising of the pension age is limited to workers with 40 years of contributions, i.e. the small and shrinking set of those who managed to get a steady job when they were 20. The reintroduction of rent controls is likewise limited to “les zones où les prix sont excessifs”.

The main beneficiaries of his election will be citizens and governments of beleaguered Mediterranean Europe, Portugal, Pain Spain [see comments re parapraxis], Italy, and Greece. Continue reading “Président Hollande”

The Rise of Kanzleramtology

Why did Merkel shake Sarkozy’s hand more warmly than at the last summit? Does that mean she’s softerning her stance on a Greek bailout? And did you overhear what a friend of a friend of mine thinks he overheard in a cloakroom in the Bundestag? These are the sort of parlour game questions to which the ongoing Euromess is driving many Germany-watchers.

Hans Kundnani notes the parallels to a prior era, and coins a word to describe it:

It strikes me that it’s all a little like Kremlinology — that is, the study of the Soviet leadership during the Cold War. Back then, the lack of reliable information forced Western analysts to attempt to understand possible shifts in Moscow by decoding what they thought were secret signs such as the position of leaders at parades. We now seem to speculate about what is really going on in Berlin in almost the same way — what you might call Kanzleramtology.

Bandit cable

Thre cable TV service run by crimunals in Rio´s favelas was much cheaper than its legal successors.

Last month the Rio police, supported by marines in armoured cars and a cloud of TV cameras, stormed the Rocinha favela, unopposed by the drug traffickers. Behind the media theatre, the policy of reoccupation seems to be working. Police stations are followed by social services. Tourists and banks are venturing in. Shopkeepers don´t have to pay protection any more. The favela dwellers are delighted to be freed from the rule of mobsters, right?

Up to a point, Lord Copper. They now have to pay for their electricity instead of stealing it from the street lighting cables. Tough. They also – and here I have much more sympathy – have to pay a lot more for TV. As air reception is very poor on the steep hillsides, TV was supplied over an illegal cable network, the gatonet, controlled of course by the drug gangs. The going rate was 15-30 reais a month for up to 120 channels, including the free-to-air ones that carry telenovelas and football, and hacked paying film channels. I´m quite impressed by the bandits´ technical achievement here.

A gatonet office in Bangu favela

are now being offered the service by legal providers for twice the price: 40 to 80 reais. The minimum wage in Brazil is 543 reais a month, and many favelistas will be living off less. 10% of their income just for TV!

The gatonet was provided by murderous outlaw kleptocrats, but their legal Brazilian counterparts are in this area even worse for the poor. My (non-poor) daughter in Lille pays 30 euros a month (72 reais) for 20-megabit ADSL (the slow offer!), 100 free TV channels and many others at a reasonable a la carte charge, and unlimited phone calls in France.

It´s not I think an accident that there are no low-power repeaters on Rio´s many hills to provide decent air TV reception, or that the municipality has not simply taken over the seizedgatonet and run it as a very profitable public service. There are TV satellites over Brazil, but owned by Globo and Sky (from which we buy a poor-value package). The selection of free-to-air channels is very thin. In Europe the TV satellites are owned by Astra, a Luxembourg corporation independent of the TV networks it carries, including Sky´s encrypted ones and FTA ones from the BBC, ITV, and Germany. There must be a profit opportunity in Rocinha for pirate satellite TV using hacked second-hand Sky receivers.

Brazil has the typical second-world problem of governance. It seems to lack a professional higher civil service; ministers are free to staff their fiefs with party cronies, which helps explain the high level of corruption and the serial scandals in Brasilia. In state capitals, it doesn´t even become a scandal. A technocracy can be a force for competition if it´s given a mandate. The European Commission is unideologically power-hungry, so it´s super-statist in agriculture (inheriting French policy) and strongly pro-competition in electricity and telecoms (inheriting German policy).

Lacking technocrats, it would still be possible for Brazil´s vigorous democracy to provide checks on monopolists. But the Brazilian left is typically soggy on competition. Partly it´s ideology; if you demonise all capitalists, you lose the ability to discriminate between useful and exploitative ones, and this continues when you make your peace with them. Partly it´s the organisational base: for the PT, the unions, representing a labour elite, many working for public and parastatal organisations. Monopolists can offer safe jobs with good wages. (A necessary but not a sufficient condition; see Amazon´s sweatshop warehouses.)

It´s possible for a right-wing party to be pro-competition, if it has a liberal ideology (in the European free-market sense) and a base representing small business, like Thatcher´s Conservatives or the German Free Democrats. If the losing conservative candidate in the last Brazilian general election, Jose Serra, had such a vision, he certainly didn´t articulate it.

Which brings me to the Republicans, another party of businessmen. GOP policies clearly only reflect the interests of big monopolistic corporations, not small ones. On credit card fees, the GOP backs the extortionate fees of the Visa and Mastercard duopoly (>2% per sale against 0.5% in Europe) against the interests of retailers, garage owners and Joe the Plumber. It opposed public works in a recession, a lifeline to small construction companies; and Obama´s moves towards universal health care, an obvious interest of every American employer. How many minutes a week does a Danish employer spend worrying about the health insurance of her employees, and how many staff does she pay to handle it? Zero.

Thomas Frank, in his famous What´s the matter with Kansas?, noted the ¨false consciousness¨ of Republican American workers who vote their cultural biases against their material interests. Does not the same apply to Republican small businessmen?

The Press Should Attend More to Voters as the EuroMess Unfolds

Media coverage today of PM Cameron’s veto of the latest EU attempt to deal with the “EuroMess” (h/t Ezra Klein) has a focus which has become familiar. The Guardian reports that the UK will now be unpopular in Paris and in other European capitals. The Telegraph relays that the other heads of the EU are furious with Cameron, Tory backbenchers are pleased and Labour leader Ed Miliband is on the attack.

All certainly reportable developments as far as they go. But where is the comparable coverage of the opinions of, um, voters in the UK? (You know, the people to whom a British government is supposed to be accountable). Likewise, when Prime Minister Papandreou dared to suggest that the people of Greece should be allowed to vote on a new budget package, most of the media (The Economist was a noble exception) focused mainly on how angry he had made Merkel and Sarkozy rather than how the people of Greece felt about not having the opportunity to participate in democratic governance.

It is easier for the media to cover elites than masses, but that doesn’t make it more important. I wish the big press operations of Europe would re-assign some of their journalists from lingering in the power corridors of Brussels to canvassing the opinions of ordinary people in places like Manchester and Athens. The current coverage reinforces the false idea that the EuroMess can (or should) be sorted in elite-filled rooms without consulting the citizens who might lose their democratic prerogatives in the process.

Perhaps Some American Exceptionalism is in Order

In the ongoing polarized debates about the size and scope of government, many American politicians and talking heads are turning to European examples to make their case.

When discussions of increased government spending arise, some conservatives screech “We are turning into profligate overspenders like those irresponsible Greeks!”

When discussions of cutting government spending arise, some liberals lecture “We are turning into heartless penny pinchers like those cruel Brits!”

OECD data on fiscal benefits and public indebtedness (link here) tell a different story.

At the time the 2010 financial crisis began in Greece, its “profligate” government’s spending as a share of GDP was 49.5%.

Today, under its “heartless” austerity drive, UK government spending as a share of GDP is….48.8%.

The current figure for the U.S. government is 40.4%. The putatively profligate Greeks are a lot more like the supposedly austere Brits than either of them is like us.

Stealth attack of the Tobin tax

Sarkozy lines up somemiddle-rank supporters for a financial transactions tax; and how an FTT can improve financial markets.

The idea for a generalized Tobin tax (financial transactions tax – FTT) on financial transactions continues, slowly but steadily, to gather supporters.

For a long time it was mainly backed by starry-eyed development NGOs who wanted to tax currency speculators (as in Tobin’s original proposal), but to fund a UN war on poverty. Tobin dissociated himself from this linkage. Either way, Tobin tax v.1 didn’t get anywhere.

It took the current financial crisis to revive it in the generalised v.2 form. Continue reading “Stealth attack of the Tobin tax”

Safety nets: hammocks or trampolines?

A ropewalk in Rio illustrates the liberatinrg power of a safey net.

A fable about a safety net.

Catacumba park in Rio is a replanted hillside overlooking the upmarket Rio lagoon. It was once occupied by a favela forcibly demolished in 1970 for the greater good, they said. It includes a (paying) adventure trail, with a longish rope walk at two levels: a high one for adults, paralleled by a low one for children, only a metre off the ground. Users of both have to wear a Serious hard hat and a harness clipped to a safety line. The attraction is a success with middle-class parents and children, though it costs too much for the poor. For some reason when we were there the customers were all small girls (footnote).

This got me thinking about safety nets more generally. Continue reading “Safety nets: hammocks or trampolines?”

Banking behind the event horizon

They just lend to each other.

The large Franco-Belgian bank Dexia went effectively bust last week and had to be bailed out for the second time. Two numbers: the Belgian retail business was nationalised by the Belgian government, with deposits of €60bn. The total balance-sheet of the bank is over €500bn: over eight times the size of the retail bank.

The recent Vickers report on UK banking draws a similar picture of British banks. The Vickers proposal is to ring-fence “£1.1tn-£2.3trn” of retail operations, within total bank balance sheets of £6trn (report, paragraph 3.40, page 52.)

What are the banks doing with the other £4-5 trn? Lending it abroad perhaps? The latest BIS number for the total international claims of British banks is £1.45trn. That leaves £2.5-3.5 trn of domestic non-retail assets to be accounted for.

The FT’s fine pundit Professor John Kay has the explanation :

Most of the £6,000bn total of UK banks’ assets and liabilities represents financial institutions trading with each other.

The UK banking system is an extreme case of hypertrophy, but it’s not alone. The BIS gives the total of international interbank claims (2011 Qtr1) as $8.4 trn.

Most economists are subject to what you might call reality illusion. They think the driving forces of the economy lie in real economic transactions and decisions by households and firms over borrowing, investment, asset allocation and spending. Interbank and other purely financial transactions are unimportant housekeeping.
Really? As Paul Krugman wrote recently on banks in another context:

This is, after all, the 21st century. Things have moved on a bit.

Here’s my wee contribution to postmodern financial theory. Thesis: much of the the financial industry has no connection with the real economy at all, except through its own superprofits, perverse risk creation and huge demands on capital.

A thought experiment. Consider four “investment” banks with no retail operations and no loans to nonfinancial companies. Let then be:

They have access to their central banks. Its CB lets the South Sea Bank have £100m of monetary base. It can now make a loan to Münchhausen Bankgsesellschaft, which in turn lends it on to Banco Ponzisssima, which lends it on the Banque Royale du Mississippi, and finally back to the South Sea Bank. By the magic of fractional reserve banking, the £100m swells to £1bn of loans. But nothing has happened in the real economy. The circuit of such pure banks is a black hole: it sucks in capital, talent, and base money, and produces nothing except its own profits.

Ah, you object, how can the banks make any money on the turn? The answer is that at each stage they lengthen the maturity and add risk in other more advanced ways, with options and swaps and so on. They charge high fees for this negative expertise.

Now of course the thought experiment is unrealistic. It should be widened to nonbank financial corporations, such as hedge funds and financial insurers. This increases the scope for profit and risk generation without necessarily or even probably engaging the real economy in any other way. Eventually, a small proportion does leak out into boring loans to households, businesses and governments – all of which adds the risk, as it’s not just that Greece may default, you have to worry about your loan to Dexia which holds a lot of Greek debt. Still, can you show me that my financial bubble network is impossible?

If the model is even partially true, it has explanatory power over the liquidity trap: it’s not households and non-financial businesses preferring cash to bonds, the cash never reaches them. Monetary expansion in current circumstances is pushing on a cosmic string.