Monday, 23 December 2013

Pre-Christmas reflections

Reflection No. 1 - A Christmas present to the nation
A compromise solution between the government and the opposition regarding the Individual Investor Scheme would be a nice Christmas present to the nation.

Government has already agreed to lift the secrecy provisions included in the original version.  Negotiations have continued in earnest related to differences about the requirement to make investment and residency as a form of bonding before individuals qualify for citizenship.

A compromise is possible.   Government should concede a quota to ensure this is a very selective exercise not a wholesale arrangement.  The fee of Euro 650k, increased if need be, may be converted into a long term investment in a development or sovereign wealth fund.   The residency requirement should be handled carefully as any hard stipulation about it could put us out of the game when other EU members states have very relaxed residency conditionality to similar visa  schemes.

Reflection No. 2 - Success often means self destruction to its authors

Life often presents leaders with hard choices.   Success could often depend on their self-destruction.

Take former German Chancellor Gerhard Schroeder.  He engineered the social changes that has turned Germany from being the sick man of Europe, as it struggled under the weight of integrating the East, to the economic champion it is today.   But for that he was punished with an electoral defeat in 2003 as at the time he could only show the pain and not the gain that came after.   The gain was enjoyed by Chancellor Merkel who is entering her third consecutive term as Chancellor.

Another example of this hard reality is the Gdansk shipyard in Poland.  It was where the trade union Solidarnosc movement was born which led to the resistance which brought down the USSR and liberation of former Soviet satellite nations in the Warsaw pact.   In 1980 it employed 18000 workers including Lech Walesa, the leader of Solidarnosc and eventually a President of Poland.  The Gdansk shipyard was part of the core industry in communist Poland.

Now it employs 1200 workers and is heading for its third bankruptcy since it was partly privatised.

This explains why change is so difficult to administer and why often it is easier to defend the status quo.  The status quo defends narrow interest and prejudices wider ones.  Change challenges narrow interest of the change motivators but enriches wider sectors.

The true heroes are those ready to self-sacrifice for the common good.

Reflection No. 3 - Banking Union proposal is detached from reality

A viable banking union is important for the survival of the Euro and the EU.   Without it we will have a banking crisis and the prolonged recession in distress countries will never end.  Indeed it could turn into depression as weak banks withhold credit and the single EU market for banking services remains a dream as banks in surplus countries don't trust banks in deficit countries.  It is the cruel truth that banks are international in life and national in (troubles threatening) death.

The problem with banks in peripheral countries is here and now.  Unless banks in Spain, Italy, Greece and Portugal are rendered capable of performing their true function of extending credit especially to small and medium sized companies who have no access to capital markets, the economy of these countries will remain in recession in spite of the restructuring pain they are going through.

The agreement reached at last week's EU summit, as usual after facing tough German resistance to ensure that they do nothing that could endanger their taxpayers' money in any show of European solidarity, especially if that could be challenged in front of German constitutional court, projects the painful process of finding a long term solution to funding the Banking Union rescue mechanism through bank contributions collected over a period of 10 years.   Even then the amounts projected are nowhere near what could be required in a financial crisis of the 2008 type.

The ECB rightly pointed out that the scheme put together was too complicated, was insufficiently funded, and could not be put into practice with the speed required to head off a crisis.   The Germans remained adamant and as usual it will take a market challenge to force a crisis for a proper architecture of the Banking Union to be put in place at one minute to midnight.

One of the founders of the EU once wisely said that in the EU big decisions are only taken when forced by crisis.   The EU is taunting the markets to bring along the next crisis.

Contrast that with the US approach where they rolled out the TARP at second attempt putting together a shock and awe sum of USD 700 billion instantly which could be further leveraged up to re-capitalise instantly its weak banks.   The result is that the US is now out of recession and enjoying an impressive recovery, whereas the Euro area, or parts of it, are risking deflation.

Clearly Germany's current leaders do not want to self sacrifice themselves like Gerhard Schroeder did.

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