About financialguy

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Author Bio: Hi everyone, I have a background in finance and an interest in economics and politics, if you can see the distinction. I don't pretend to be an analyst of the calibre found elsewhere on this site, but hopefully I can add a little something here and there to the debates online.

Articles by financialguy

Can The Eurozone Escape Italy?

Posted by financialguy on 01/11/14

About two weeks ago I found myself in a conversation with a lady at a dinner party. She spoke at length about Italy and kept repeating more and more loudly that “Italy has collapsed”. That may be true. In trying to make her understand my slightly more nuanced position I made the point that the word “collapsed” suggested that it was over, past tense, finished, but since there seems to be no real plan to fix the huge systemic issues, Italy would continue downwards for some more time to come. The bottom has not yet been reached and may not be for a long time.

Not being or speaking Italian I follow the news via English language press outlets, such as this article, but nothing I read is positive.

What worries me is that with such a large public debt, an economy that has been struggling for more than a decade, high unemployment and an overly complex political gridlock that nobody, except perhaps for Berlusca, can rally together, can the eurozone escape Italy?

With national balance sheets straining and wheezing from the pressure added by all the previous bailouts, is Europe able to handle a much larger nation, such as Italy, needing a rescue?

My guess is that it cannot. But, since Italy seems to be nowhere near the end of its downward economic slide, can it be escaped?

Perhaps the next round of bank stress tests should be for European central banks to see what happens if or when Italy needs to be rescued…?

David Cameron’s Asymmetric Referendum

Posted by financialguy on 19/09/14

In the world of financial speculation there is something known as an asymmetrical trade. This means that the downside is very limited – or none at all – and the upside is considerable.

I have long thought that the in/out referendum in Scotland was a superb move by David Cameron, but reading his speech this morning, I realise just how seriously I underestimated that. He made a huge asymmetrical bet and it has paid of handsomely for him. It is going to be the gift that keeps on giving for him and the Conservative Party.

He made two bold moves that many thought were foolish errors. Firstly, the vote allowed 16 and 17 year olds to vote. What would this do to the electorate? How much risk did this add? Who could say? Secondly, the actual question being asked was simple and straightforward. Compared to most questions asked, this was a triumph of democracy.

He was rewarded with an active and passionate debate and a very strong turnout. Though the winning margin for the No campaign at 55.30% to 44.70% was not huge, it was large enough.

My initial thoughts have been for some time that Alex Salmond is a canny fellow and a smart political operator. By beating him, David Cameron could see that the landscape in Scotland could be changed decisively. Since the SNP has beaten Labour to power in Holyrood, a defeat for Salmond would probably remove a thorn in his side in Scotland and render an entire political movement impotent.

If the Yes campaign had won, then the Labour Party in Westminster would have lost it’s 40 seats and the likelyhood of winning a general election outright would plummet for years to come. Cameron would have lost Scotland from the UK, but secured Westminster for the Tories.

It might have cost Cameron his job had the Yes campaign won, but I doubt he would have resigned as Alistair Darling was leading the campaign, not David Cameron.

However, the questions raised by the debate in Scotland about who votes for what have given a new impetus to democracy in the UK. All three main party leaders in Westminster came together to block the currency issue. They also broadly agreed on their joint campaign approach, which was that more power would be devolved to Scotland if the No campaign won.

Now that they have all agreed to that and the vote was won, there is very little that they can really say or do to disagree with Cameron’s speech this morning. In it he promised to address the West Lothian question, which will reduce the power of Labour in Westminster. He also plans on a similar move for Welsh votes for Welsh laws etc. This can be seen as devolving more power, but it will also likely strengthen the Conservative Party in Westminster.

By doing all this while the stakes were so high Cameron has played and won at the highest political poker table. Without a referendum these issues would have laid simmering for years more without resolution. By pushing the electorate to decide on such a large issue that he could bring politicians of all parties to his cause, he united a team to win for the country that has now won for him.

We have witnessed a bold strategic triumph and it will cement Cameron in power for some time to come.

Business Models And Innovation

Posted by financialguy on 12/09/14

In the EU world we hear about “innovation” all the time, but what does that actually mean?

I am currently re-reading “More Money Than God” by Sebastian Mallaby. It tells the stories of the pioneers in the hedge fund sector, explaining their methods and the workings of this secretive arena.

It has made me realise just how important business model iterations are. I knew this anyway, but seeing it relating to a totally separate business sector is instructive.

Each chapter of the book tells the story about one company and their role in the growth of hedge funds, from George Soros to Jim Simons to Ken Griffin, they are all here. And actually, each story follows a similar pattern.

That pattern can be summarised as: a few very smart people work in fund management and are very, very good. They leave their employer to set up their own shop. Things go very well. Everyone makes lots of money. Then their method stops working as well, there is a big market shock and they lose money. A number of team members decide to leave. A few stick around, rethink their approach, improve their business model, innovate in some way and go on to be even more successful than before.

This sounds a little like the forced curve used in large consulting firms – get promoted or leave. Up or out. Improve or exit.

To quote Mallaby, “the truth is that innovation frequently depends less on grand scale academic breakthroughs than on humble trial and error – on a willingness to go with what works, and never mind the theory that may underlie it. Even in finance, a field in which research findings can be translated directly into business plans, trial and error turns out to be key.”

This suggests that innovation within a business is simply a mindset and does not require academics in white coats.

For most businesses, the path is simple. They learn how to do something reasonably well, make some money and then keep on doing it forever. If and when the marketplace changes there will be little or no experience in making the changes and improvements needed.

The question therefore seems to be, how can policy help teach and encourage small business owners and managers to innovate in the way they do business? In a rapidly changing business climate, this would seem to be a core skill for long-term survival and success.

Israel: When is enough enough?

Posted by financialguy on 31/07/14

Over the past twelve months there has been a stunning turnaround in the international fortunes of Russia and Vladimir Putin. If we think back to the beginning of the Edward Norton scandal, it became clear that there was very little that the world could do to stand in his way.

Now, under twelve months later and with Crimea, East Ukraine and potentially a commercial aircraft shooting coming in quick succession, it has been relatively easy for the international community to start imposing economic sanctions against Russia. It was unthinkable, but then enough became enough.

What about Israel?

I’m not going to try and tackle the rights or wrongs of the situation, who started what and when or any of the other long-running issues that could be discussed when mentioning Palestine and Israel.

Rather than being pro one side or the other I am pro peace and against bombing or shooting innocent civilians. (I’ll just add a couple of links to back up my position – mainly for potential readers in the future that might not know the current context – here, here and here).

At what point does the switch flick and enough becomes enough? When will the world have seen enough death and destruction of the civilian population to start doing something about it? As the last link suggests, civilians are unable to shelter in schools, hospitals or UN buildings with any sort of safety.

When will Israel become a rogue state? As is mentioned in the last link above, “Asked repeatedly whether Israel would be held accountable for possible war crimes, Mr. Eliasson [deputy Secretary General of the UN] would say only: “The scale of the response is of such a violent nature, questions of accountability come up.””

Just ten minutes spent on almost any thinking person’s twitter of facebook feed will yield at least one link about the situation. Unlike previous situations in the Middle East, the general public really has a feel for what is happening and the majority of everyone is not impressed. One presumes that if there are not yet calls being made to elected representatives to “do something”, there will be soon.

What impact public pressure really can have, who knows. We might just find out soon.

Of course, most of the EU is on holiday right about now, but one hopes that national governments and international organisations can come together soon to try and end this bloodshed.

More Citizenship Confusion In Malta

Posted by financialguy on 19/06/14

This week has been a curious one here in Malta, if you happen to have been following the developments of the Individual Investor Programme. In case you aren’t aware, IIP is the scheme under which citizenship is possible in 12 months subject to applications and a contribution of 650,000 euros (the best description of it that I can find is here).

First there was an announcement by the original concessionaire, Henley and Partners, that 100 applicants with total commitments of 100 million euros to Malta were underway.

To say that the programme is contentious is something of an understatement. Since the concept was announced within the first nine months of new Prime Minister Joseph Muscat’s term, but did not appear in his party’s manifesto, it has divided opinions with many more Maltese being opposed than in favour of it. As such, whenever there is any mention of the plan from almost any source, questions are asked in Parliament and front page news is made.

Those questions prompted an answer confirming that 144 applications for residency have been made (applicants need to become a Maltese resident for 12 months before they can be approved) but that only 12 were complete applications. Of these 12, only 6 will be approved it seems, the rest have been returned by Identity Malta. Of the other 132, one presumes that the applications were incomplete and that more (or or more appropriate, or translated) documentation is being sought.

The contributions of 650,000 euros are being made to the National Development and Social Fund. The fund itself is new, but I had not realised until this week that it’s governing board has not yet been appointed.

It also seems that the monitoring committee, established to oversee the process, has not yet met for the first time.

Whether these delays are designed to protect the scheme is difficult to say. Back in November, the leader of the opposition, Simon Busuttil, announced that when in power he would cancel the scheme and revoke the passports sold.

So honestly, who knows what might happen…

The Perfect Crime?

Posted by financialguy on 14/06/14

Over the last year or so I have read quite extensively about Bitcoin. The amateur economist in me is fascinated by it’s disruptive capabilities and supply and demand characteristics.

However, something that has been evident over the months is the extent to which very smart people around the world have been able to hack less secure environments and steal other people’s BTC.

There are many reasons why this might be and I don’t understand cryptography enough to try and explain any of them.

What I do know is that Bitcoin is semi-anonymous (each transaction is logged in the blockchain, but who the parties are and what they exchanged are not known) and that the amounts that have been hacked (from Bitcoin and other alt coins) is truly astounding.

If this had happened in a traditional bank, it would have been global news, but because of the inherent complexities, these “heists” have barely registered.

There are three reasons why I think that this might be the perfect crime – presuming a person has the skill to pull it off.

Firstly, barely anyone understands the subject which makes investigation quite tricky.

Secondly, it is anonymous and there is no need for a balaclava and shotgun to pull it off. No shootouts with the police are required here.

Thirdly, for now at least, there is zero consensus as to where Bitcoin should be regulated, or even if it should be.

To me this is fascinating. As global financial rules and regulations become more interlinked (at last!) a technology has sprung up that simply weaves a path through all of the laws.

I’m not saying that it is the job of the EU to try and regulate it, I do not believe that is the case. However, all the news about Bitcoin seems to come from the United States and virtually none from Europe.

Given the currency problems that the EU has had in recent years, I wonder whether there are any policy folk in the EP or EC focused on what might be the most disruptive technology ever.

If you have no idea what I am blathering on about, you could start by reading this.

Decision Making Alphas And The War For Talent

Posted by financialguy on 23/05/14

Over the last few weeks I have been involved in a pitch for comms and tech work for an EU lobbying organisation. No names, sorry.

The process has been the same with every other EU project I have been involved in pitching for:

1. The process to pitch has an extremely short timeline. This is urgent people!
2. The budget isn’t big enough for the work the organisation wants done. Dreams vs Reality.
3. The project is due to start just days after the application deadline. Management are going to hustle through a decision.
4. On decision deadline day everything is postponed by several weeks.
5. On the postponed decision deadline day, everything is postponed for a few more weeks.
6. The project was already due to start more than one month ago.
7. When it finally does begin, management will probably expect miracles, the cancelling of summer holidays and more to get results before a board meeting (which will probably be postponed).

Whats up with this?

This is the typical modus operandi of management in the EU space and it is ludicrous.

We have all read about the “war for talent” and how businesses are finding it hard to recruit and keep skilled workers in their organisations and how this is getting harder and harder as the years pass.

My hypothesis is that in the not too distant future, most EU and lobbying projects will simply grind to a halt. Few will start. Even fewer will complete.

The reality
One of my best friends is a very skilled database developer. I asked him to take a look at something for me a couple of weeks ago. I explained the problem and he guessed that he would need one or two days to really investigate the problem and fix it.

He put it in his diary for mid November!!! I knew he was busy but this is ridiculous.

To work on short notice EU projects, consultants tend to be brought in. With good reason, they often have a wide range of skills that these projects need to tap into. However, in the tech world (and what project does not need tech development or support?) there is just such high demand for the really skilled consultants that soon enough it just won’t be possible to hire people.

I have a long held theory that the decision making problems in the EU space comes down to the exercising of power. The executives need to be made to feel important. The faster people rush to put quotations and applications together and the longer they are forced to wait for a decision, the more powerful these executives feel.

One of the issues that most managers have yet to understand is that most developers already earn good money and only really want to work on projects they find “interesting”. If the work is not interesting, they can just quit and find another employer in the next couple of weeks. The next employer will probably pay them more too! In the meantime, they get a couple of weeks off – it’s all good!

My guess is that within the next couple of years executives will start to learn who really holds the power in the modern economy. Hint: it isn’t the executives.

These projects will have some sort of protracted decision making process and once everything is agreed upon, the consultants that will actually do the work will be too busy to even start. Management will be forced to double their budgets because to make the consultants quit one project to start another they will need some serious financial incentive.

Delivering projects late and over budget is the kind of error that executives are fired for…

Are European Wages In A Race To The Bottom?

Posted by financialguy on 08/04/14

Anecdotal stories from friends in recent months have alerted me to a stunning drop in wages for new hires here in my adopted home of Malta.

Essentially, the economy has been so bad in [enter name of country here] that young people have upped and moved, looking for better opportunities elsewhere. Since the Maltese economy has been quite steady in the last few years, lots of Italian, Spanish and French twenty-somethings have arrived. The influx of labour has pushed down the prices for all new hires. While I am sure this is great news if you are an employer, it isn’t so great if you are one of the many people that needs to earn to eat.

For this reason, I was interested to invite myself to an event run by EESC in Brussels last week. It was a public hearing of the EESC’s Single Market Observatory (SMO) to release a draft final report on “The working of the services directive in the construction sector”.

The main problem being discussed is known as “Social Dumping” a rather unpleasant phrase used to describe a situation where workers from a nation with lower labour costs move in large numbers to a nation with higher labour costs. For example, construction workers moving from Bulgaria to Germany.

In EU speak, this issue relates to the Services Directive (2006/123/EC) which enables people to freely move from one EU member state to another. This is known as freedom of establishment and the free movement of services. It also relates to the Posting of Workers Directive (96/71/EC) which enables free provision of cross-border services while guaranteeing rights of posted workers.

What was interesting for me was the agreement in the room. The report was based on interviews with employers, employees and government officials in six different member states. Speaker after speaker said something along the lines of, “Everyone I spoke to agrees that the current system does not work well”. There were many variations as to why the current system is not working, but the fact that it is a problem seemed to be virtually universal.

Since I cannot imagine trying to encapsulate the complexity of the entire event into a blog post, I shall try to convey what seemed to me to be the most important point: this is a structural problem at the heart of the EU that has the power to further cripple European economies. Or to put that another way, we are in a race to the bottom.

We all know that the job of business owners and managers is to deliver profits growth and dividends to shareholders. To do this, the manager needs to balance a fine line of improving sales while lowering costs to boost profit, preferably in a sustainable way. We also all know that for most businesses, wages are their largest single expense.

Therefore, when presented with an opportunity to cut costs by hiring low or semi-skilled labour from another country where expectations and prices are lower, many businesses will gladly choose the lower priced employee. It seems that some firms do this legally and others do this illegally – I guess that for some people, “cheaper” or “cheapest” are never enough.

This creates a downward spiral where hourly rates are cut and cut, forcing the locals out of the market and into the unemployment lines, while the new hires use a two year window to pay their taxes and social security in their home country. Meanwhile, should anything unfortunate happen at work, the host country will be footing the bill for medical services etc.

On the one hand, the natural inclination of the EU is to open borders, but somehow they need to find a way to limit the impact, enforce rules more consistently and prevent member states from taking a protectionist stance. Meanwhile, the current situation provides populist politicians and media outlets lots of room to complain about “foreigners taking our jobs”. One speaker even described the situation as “mission impossible”.

Your author does not propose to have the answer – nobody does at this stage – but it is clear that this is a thorny issue that needs to be addressed if the rights of workers everywhere are to be protected.

Five Years Later…

Posted by financialguy on 29/09/13

If you can believe it, the first post on this blog was five years ago today! I’m amazed.

At the time, I had been in my new position as Director of Blogactiv for a few weeks and felt that it was about time that I learned what a new blogger to the platform went through to sign up. It was not easy. On top of that, the platform was just a few months old and on some days (usually a Friday) we didn’t have a single blog post to publish in the homepage feed. I signed up so that I could write on the days when needs must.

As it turned out I only ever wrote a handful of posts because we needed them. The rest were written because I felt compelled to. By meeting and talking to lots of people I was able to sign up more and more bloggers to the extent that a few months later finding content was not an issue. To the best of my knowledge, the only active blogger on the platform that started before me is Eberhard Rhein – now that is heroic.

I took it upon myself to push a few boundaries with this blog. I was the first person to have a guest interview with a Vice President of an EU institution (here) and then the first person to interview an institution President (here). Believe me I tried repeatedly to be the first blogger to interview a Commissioner, but I still have not managed that (though I sort of did by accident here). While working with EurActiv I was also (as best as I can tell) the only blogger to officially attend COP15 in Copenhagen (here).

Though these are obviously very small steps, I believe that they (and others still unmade) are vital to the progression and growth of an online EU public space. As the man in charge of a platform like Blogactiv I occupied a central role in the growth of eurosphere for some time. I still feel a little responsible for it to this day.

It was the end of 2010 that I left Brussels and that slowed my writing down substantially. By then the platform often had over eighty bloggers writing each month. I began to write less because I was attending far fewer events and also partly because I was working more and more on other things. These days I aim to simply write one or two posts each month.

Despite that, they add up. Looking at the stats for my blog, there are now over 170 posts online. Some have taken a few minutes to write, others have taken hours. Some were insightful pieces of genius, others were complete dross (especially the first one). That is the nature of blogging, politics and policy!

At this point it is unclear to me how long I will continue for. As I perform less and less EU policy related work I am in less of a position to comment sensibly. Additionally, as I work on other things (mostly internet marketing related), there is less and less time for me to write. For now though, I plan to continue and see what happens.

Until next time…

Europe Needs More Startups

Posted by financialguy on 09/09/13

On Friday last week (6th September) your author moderated two panel discussions at an EU event in Floriana, Malta. It was an EESC Going Local event in partnership with DG Connect.

Robert Madelin presenting at EESC Going Local Malta

The first panel discussion began with a few words and some Q&A with the Director General of DG Connect (responsible for the Digital Agenda), Robert Madelin. Here are my (very) brief notes.

- Europe needs more start-ups and once they are growing and established we need them to stay in Europe.
- Southern Europe still needs improved connectivity which means “more big, fat pipes”.
- Events of recent weeks show just how vital trust and security are to the full functioning of the web.
- If the internet is going to genuinely benefit everyone then improved inclusion, skills and education are vital for Europe.
- Europe needs better SME benchmark information. Considering the number of small companies there are and the impact they have on employment and the economy, we need to understand them better. According to a BCG report, the more web based firms there are in an economy, the faster growth will be.
- Not enough SMEs are online. While this is a European problem, it needs local attention. Sitting down with a small business owner and helping him or her build a website, fix problems and get started with online customer service can only really happen at a local level.
- Please visit and sign up to startupmanifesto.eu.

Do EU Politicians Want The Cloud To Move To Europe?

Posted by financialguy on 09/08/13

Until 5th June 2013 there was only one place in the world to launch your tech start-up if you wanted the best possible chance of success: Silicon Valley. There are genius coders, tech venture capital funds and mentors everywhere and it is the role model for geographic “clusters” the world over.

Then on June 6th Edward Snowden arrived on the global news scene and everything changed. At first Americans shrugged their shoulders because only people outside of the US were being spied upon. The other 97% of the world’s population was slightly less impressed. As the days passed we learned that people inside the US were being spied on as well. Further revelations revealed parts of the scale of operations in the UK and France too.

In the last couple of days it has become clear that there are other battles going on behind the scenes. The announcement that Lavabit is to close and that the owner cannot explain why speaks volumes.

Suddenly, Silicon Valley isn’t such a great place to have your start-up (or any tech firm for that matter).

The potential impact is truly huge and it presents an amazing opportunity to the European tech scene to transfer much of that wealth and those jobs across the Atlantic.

As the Information Technology and Innovation Foundation (ITIF) suggests there will be large amounts of business lost from the American cloud companies. (For a brief overview, please read this).

The techtonic plates of the tech industry are starting to shift beneath our feet.

Can Europe benefit?
For longer than anyone can remember, people that count in the EU and Brussels have been moaning about the lack of a culture of innovation in Europe and that all the best start-ups are in the US or soon move to the US.

The question is what will the EU make of this opportunity? The types of cloud services that businesses and individuals want and need are now pretty clear. Many of them are suddenly “for the taking” with the potential for one cloud market for Americans and one for the rest of the world. Which will be bigger and more valuable…? Firms like salesforce.com are NASDAQ listed and valued at US$25bn or so, meaning that there is suddenly a lot up for grabs.

As Commissioner Kroes said recently, “If European cloud customers cannot trust the United States government, then maybe they won’t trust U.S. cloud providers either. If I am right, there are multibillion-euro consequences for American companies. If I were an American cloud provider, I would be quite frustrated with my government right now“.

The real question then, is whether the EU wants that business to travel across the Atlantic or not. The stakes for individual entrepreneurs are going to be pretty high if they plan to create services that deliberately thwart access to the CIA and NSA. Becoming a start-up entrepreneur is already considered to be somewhat similar to a suicide mission – without fearing government black bag actions as well.

To quote Commission Kroes again, “Concerns about cloud security can easily push European policy-makers into putting security guarantees ahead of open markets, with consequences for American companies. Cloud has a lot of potential. But potential doesn’t count for much in an atmosphere of distrust“.

If the next Silicon Valley is going to be located somewhere in the EU, it seems that further safeguards to the data privacy of users and the safety of the entrepreneurs enabling it will be needed. What will the EU do and how quickly can the do it?

Decision Makers Need To Speed Up Or Face Irrelevance

Posted by financialguy on 17/07/13

In recent months I have been noticing more and more that the pace of life has changed.

On the one hand, we all know that technology is developing so quickly now – and that the pace of development is accelerating – but it feels more and more as though it is seeping into everyday life as well.

I used to joke that the web works in dog years, but the reality is that the web is much faster than that. Soon enough, life will run in dog years. The web is more like dog years times five.

If the eurozone crisis has taught us anything (and I hope it has) it must be that decisions need to be made quickly and effectively. In financial markets you get the weekend to sort things out – if you are lucky.

But what of other areas?

PRISM and the scandal surrounding online data collection is a good example. You don’t need to be a technical genius to see that the ability of websites and cloud service providers to gather information has far outpaced the speed of legislation. While the Commission and Parliament may have sent letters to the US asking for clarifications and explanations, the information of 400 million or so EU citizens is being harvested today.

While diplomacy often moves at a glacial pace, even glaciers have sped up! Admittedly not in a good way, but it is an example of another policy area where more action is needed immediately but is not forthcoming.

Of course climate change is an area where there are myriad policy issues amongst hundreds of countries. But sooner or later – preferably sooner – people need to recognise that the world cannot wait any longer.

The result in the real world – away from diplomacy – is that businesses need to be able to come up with a new plan and begin executing on it tomorrow. Next week might be too late. With asset prices now so volatile, for example, the impact of accidentally being on the wrong side of something (the price of oil, for example) can be crippling.

Anyone in business that has a five year plan is either an idiot, a liar or in possession of an intelligence way beyond the rest of us. And what of the EU? Umm, Horizon 2020…

There are undoubtedly opportunities arising amongst all this. But they fall to those that are best prepared mentally and willing and able to act at short notice without waiting for a committee meeting or board approval. That, of course, is unfair. All major decisions need board approval, but some companies can get it tomorrow while most need to wait for the next quarterly meeting to table a first proposal.

To quote American marketing guru Eben Pagan, “Speed of implementation will soon be the separating factor between success and failure in business”.

This, I find interesting. I know of a couple of businesses that have been established for decades that have closed in the last few months. Not being involved in the companies I do not know the full stories. However, from the information I have been told, it seems as though a failure to adapt was a core problem for management – they simply were not ready to invest in their technology and clung to the “old ways”. Now they are closed.

Even more interesting is that many business owners cling on to power in their companies to the very last day – just as we have seen Middle Eastern dictators do. These owners may not realise it, but their time is over and if the company is to survive, it needs younger more tech savvy people at the helm.

At what point will the same credo apply to governments, civil servants and diplomacy?

With the world rapidly crowdsourcing everything, from demonstrations against bankers (the Occupy movement), to overthrowing governments (as in Egypt twice and many other countries), to crowd funding projects for finance and social media tools for connections, the people are taking over some of the decision making roles of governments.

The world is decentralising, while the EU (at least because of the eurozone crisis) is collecting more powers in the centre.

The game is changing forever and the genie is out of the bottle. You can’t put it back in. Politicians and those in power need to start streamlining their decision making abilities. Somehow they need to find a way to make national and international decisions much faster and in a way that does not compromise democracy, but if they do not, it is they and their power bases that will be compromised.

An Opportunity For The EU And Soft Power

Posted by financialguy on 03/07/13

The last few weeks and the Edward Snowden affair have been fascinating. When was the last time one person seemed able to cause such division and debate around the world? Oh hang on, it was Julian Assange wasn’t it … a man who is clearly deeply involved in the current situation.

I am told that on the first day as either a member of staff or the “stage” in the Commission, that everyone is told that Brussels is the second highest city in the world for spying and espionage. Doubtless most people forget this a few minutes later. I bet they weren’t expecting their internal computer system to be the target though…

What is interesting is the ironic own goal. We have all heard members of the US government, including multiple Presidents, use words like, “national security” and “strategic interests”. Those strategic interests are almost always related to trade and business. Yet as the scandal continues to unfold day by day, the EU-US trade negotiations seem to be having a wobble before they start, Ecuador is clearly unfazed by the prospect of it’s own trade deal being heavily revised and John Kerry is apparently wielding the big stick of trade to force other countries to do his bidding.

On top of that, there seems to be a growing swell of countries and politicians that are unhappy about the size and scale of PRISM and willing to speak out about it.

Land of the free…?
Freedom of speech…?
World’s policeman…?
Defender of human rights…?

I could go on.

While it seems that explaining that Americans are protected by law took the heat off the issue in America, it did very little to assuage the rest of us. Now that those statements seem to have been publicly contradicted, one wonders why the American people are not up in arms. A quick glance at the latest news from Egypt shows what democracy really means to people.

Not so long ago, a phrase often used around the corridors of Brussels was “soft power”. First coined by Joseph Nye in his 2008 book, “The Powers to Lead”, Nye suggested that it was important to understand, “the soft power of attraction as well as the hard power of coercion“.

President Barroso and many others were proud that the EU could be an inspiration and provide ideas worth following. Then the eurozone crisis really started to bite and Europe didn’t look quite so inspirational any more. In many ways it still doesn’t.

However, the level of outrage being displayed by many of Europe’s highest level of politicians suggests that the NSA and / or CIA has crossed a line of unacceptability. It seems reasonable to presume that if these politicians really are outraged that their own institutions are not crossing those same lines. (It would be a humiliating thing to have to own up to later, wouldn’t it? Akin to Director James Clapper having to admit to saying something clearly erroneus).

Suddenly, the United States looks quite a bit less like the defender of democracy and a bit more like a global bully. In contrast, the EU looks quite a bit more like a defender of normal people and the type of values that most of us hold dear.

Perhaps this could be the start of a renaissance in the soft power of the EU?

Some minimal background reading suggests that the EU has the toughest legislation in the world relating to digital privacy, though enforcement differs widely from member to member. Now that so much abuse has been, and continues to be, exposed, it is up to the EU to defend those laws and it’s people and make clear what is and is not acceptable.

Since most of the highest traffic websites and cloud services in the world are located in the US, this is a matter of importance for all of us. Whether this will be the spark that ushers in a new era of internet privacy and services located in countries like Sweden, Denmark and Iceland where data privacy is much stronger, only time can tell. If it is, then this is an opportunity for European tech entrepreneurs as well as European politicians.

Does Problem Solving Need An Increasingly Continental Context?

Posted by financialguy on 29/05/13

Left to themselves, the Europeans run the risk of becoming absorbed by their internal social concerns. Europe’s economic recovery has obscured the longer-run costs of its seeming success. These costs are damaging economically as well as politically. The crisis of political legitimacy and economic vitality that Western Europe increasingly confronts – but it unable to overcome – is deeply rooted in the pervasive expansion of the state-sponsored social structure that favors paternalism, protectionism, and parochialism. The result is a cultural condition that combines escapist hedonism with spiritual emptiness – a condition that can be exploited by nationalist extremists or dogmatic ideologues.

This condition, if it becomes rampant, could prove deadly to democracy and the idea of Europe. The two, in fact, are linked, for the new problems of Europe – be they immigration or economic-technological competitiveness with America or Asia, not to speak of the need for a politically stable reform of existing socioeconomic structures – can only be dealt with effectively in an increasingly continental context.

Taken from The Grand Chessboard by Zbigniew Brzezinski and first published in 1997. It just seems so appropriate to me currently.

When Confidence Is Lost

Posted by financialguy on 22/03/13

So the eurozone crisis is back with full force. Did it ever really go away?

I don’t propose to try and recap the events of the last few days in Cyprus with the bail-in of bank depositors, things are moving quickly enough that I would be out of date almost immediately. Instead, let’s focus briefly on the precedents that seem to have been made.

It seems that recent weeks have brought the eurozone crisis two new sets of headaches. The first is from the Italian elections and the 25% share of vote won by Beppe Grillo and his 5 Star Movement. Whatever else it may be, it is a clear message from the Italian electorate that they demand change. Grillo’s message is very clear and it is not at all supportive of either the EU or the euro.

Having already had a technical government under Mario Monti, Italian’s have had the chance to decide whether they like the idea of austerity and reform. The answer appears to be a clear “no”. It is difficult to blame them, but it means that from here on the Troika, or any part thereof, is going to find it very difficult to impose financial rules in Italy.

From Lorenzo Bini-Smaghi in his FT blog about the election result in Italy: “Austerity is the result of countries’ democratic decisions to wait until the last minute before acting, under the pressure of the markets, mainly by raising taxes rather than implementing long-waited reforms. Denying this, by claiming that austerity has been imposed on countries – rather than self-inflicted – and looking for scapegoats, is the biggest threat to democracies going forward.”

It seems that the Italian people would like to wait some more.

What for the rest? It seems hard to imagine that this makes it easier for the Troika to impose it’s will elsewhere now, a point that has been underlined by the Cypriot parliament voting against the bail-in of small bank depositors. If little Cyprus can stand up to the big boys, what about Italy or Spain?

Whether a Banking Union could have prevented this is open to discussion (I presume not), but since it has been gently sidelined as an idea (here) it won’t be helping. Once again it is clear that the banking sector and it’s inability to operate safely is the cause of much of the problem. As I have mentioned before (here) Europe can’t bring in much stronger banking regulations soon enough if it is to survive.

This leads on to the second problem. The banking sector is very weak in many EU countries currently. The current issues in Spain and Italy come leaping to mind, but there must be problems in many other countries too. With a precedent set that a national bailout might require your personal savings to be used, I wonder how many people in eurozone countries other than Cyprus are currently withdrawing their life savings?

Over the last two years or so capital flight has been a problem, one that caused many economists to worry about the “Target 2″ system (I don’t understand it well enough to try and explain it) and whether that might bring down the banks. If people with savings were worried about them then, I presume that they must be more worried about them now. It would seem logical.

If this starts a wave of cash withdrawals from eurozone banks it could well expose weaknesses in other unexpected places.

Having closed the Cypriot banking system for several days, it is hard to imagine that confidence will immediately be restored if and when they open their doors. Rather, the general public in Cyprus will likely queue for hours to try and empty their accounts to salvage what they can. In banking, confidence is everything and when it is gone, it is gone.

Will Cyprus still be in the eurozone by Monday?

We Are Sleeping On A Volcano

Posted by financialguy on 18/03/13

“I believe that right now we are sleeping on a volcano … can you not sense, by a sort of instinctive intuition, that the earth is trembling again in Europe? Can you not feel … the wind of revolution in the air?”
Alexis de Tocqueville (1805 – 1859)

Is There A Bull Market Underway?

Posted by financialguy on 11/03/13

It is a long time since I last made a financial prediction in print, but I feel a need to make one now. The previous ones can be found here and here.

Regular readers might recall that I have been confused about the state of the economic world for a while and how and why some of the major stock markets continue to rise while the news is a perpetual procession of doom and gloom (here).

Over the last week I have had something of a realisation and recognition of (what I believe to be) reality. My prediction: some of the world’s major stock markets (such as the Dow Jones and FTSE) are going to keep rising strongly for some time to come.

There are three reasons that I underpin my thoughts:

1. The weaker players are gone. The recession has been long enough that lots of poorly managed, under-capitalised, overly-indebted or marginal companies have closed their doors already. The stronger firms therefore have less competition. Perhaps not much less, but less.

2. Wage inflation will remain low. It is no secret that stock markets rise when corporate profits increase. However, it is less well known (though I have no idea why) that corporate profits tend to rise when wage inflation is low. Wages make up such a large portion of the running costs of most businesses that should they not rise for a while this translates itself onto the bottom line. Considering the unemployment situation in most of the developed world, it seems hard to imagine that people are negotiating hard for pay rises currently. This looks set to stay for the forseeable future.

3. Lots of cheap money. For some time I have believed that QE is only temporary and as and when it ends there will be “trouble”. As time passes, it has dawned on me that rather than this being a short period of cheap money, it is becoming the new normal. While interest rates are low, borrowing remains cheap (or at least cheaper than perhaps it should be). It is not easy to guess how long cheap money and low interest rates will last, but I am starting to think that it is both economically and politically impossible for many countries to end QE any time soon. This might still be here in 5 years time.

The traditional view is that when an economy struggles and is in recession, stock markets will fall. Despite worsening news from the US, UK, France, Italy, Spain, and on and on, the FTSE and Dow Jones have powered on. This, I believe, is a sign of what we all know but rarely think about. Most major companies are now so international – or global – that the trading conditions in the nation in which they are listed is not necessarily a guide to how the underlying business might perform. Companies list for business advantage these days and not for historical or sentimental reasons. Big innkeeper, not big brother.

For reference, according to the app on my iPhone, the Dow Jones stood at 14,412.77 and the FTSE100 at 6,492.63 15 minutes ago (on Monday 11th March 2013). We’ll see whether I am right or wrong.

It is a little ironic that while the EU is gearing up for what seems to be multiple layers of banker bashing (starting here) stock markets look set to deliver the kinds of returns that will provide big wins for many fund managers.

(Please understand that I disclaim any and all responsibilities to actions you might take. This post is for entertainment only and should you choose to invest or speculate, you do so at your own risk).

An End To The Political Protection Of The Banking System?

Posted by financialguy on 06/03/13

The election result in Italy, when combined with the obvious horrors of mass unemployment in a number of countries, real financial hardship for many and a growing number of corruption scandals (listed here) might just be the beginning of the end.

With Beppe Grillo’s party taking the largest slice of the vote it is hard to believe that further austerity will be possible to apply in Italy. The ECB, Angela Merkel, the Commission – or even the Troika – can say what they like but they will not be able to enforce it. This will likely lead to other countries trying to renegotiate the terms of their own austerity.

What started as a banking crisis and became a sovereign debt crisis is now a social crisis caused by high unemployment. In Italy that has lead to a political crisis (the latest in a long line of governments to fall).

I’m starting to think that time is almost up for the banks. It was clear in 2008 and 2009 that reform was needed. Like an ostrich, many put their head in the sand to try and ignore the signs. There have been many situations where banks have been forced into changes, but too many seem to be in denial and hoping for a return to the good old days. Those days are over.

While it is clear why they would want to see thoughtful and careful legislation in place rather than some knee-jerk reaction, time has passed and many have not moved anywhere near quickly enough, either to reform their corporate governance or to improve their balance sheets. The problems in Spain and the fear of a banking union in Germany would seem to back up this assertion.

My guess is that the banks have around 12 to 18 months left under the old system. The new system will be built around very strict rules governing bank behaviour, entire populations that wish to see them reformed, very large numbers of unemployed voters that hold them responsible and want revenge which will be delivered by more and more politicians like Beppe Grillo that will turn the establishment on it’s head.

Their political protection will soon be gone in many countries and it will be replaced by politicians representing voters that actively wish to see debt default, banks fail and bankers in prison. The clock is ticking.

Is Disaster The New Normal?

Posted by financialguy on 17/02/13

Where has the volatility gone in financial markets? Why is the current political situation not causing mayhem?

Over the last few weeks I have been developing a theory about the current state of financial markets. The theory isn’t fully fleshed out, despite my efforts, but I hope that by explaining my thinking here I can stimulate thoughts in others and hopefully some comments.

The background to my thinking is rooted in the common wisdom of markets and economics. For example, when there is a lot of bad news around markets fall. When there is lots of uncertainty volatility increases. When money creation rises so does inflation.

Just a quick mention of a few things ought to be enough to have spooked financial markets but it seems to have failed. In the eurozone there is huge problem after huge problem in Spain, wide ranging economic problems in Italy, Greece, Portugal, Ireland and on and on. There has been the postponement of the fiscal cliff in the United States. Are we entering a new era of currency wars? Is this a race to the bottom? Who might “win”?

Any of these things ought to have been enough to spook markets and force significant turbulence, but no, not this time. For several months I have been wondering the same question day after day, “How bad does the news have to be?”

I ought to out myself. In financial terms I am a perma-bear, always expecting the worst. This latest round of equity gains has had me staggered – are markets, economics and politics really that unrelated???

I have begun to wonder whether markets have simply come to the conclusion that the near collapse of the European currency and economies is the “new normal” and nothing to worry about. Have they decided that the ability of politicians to postpone the inevitable indefinitely is unlimited and therefore there is nothing to worry about?

Perhaps they are right? We will lurch from problem to problem with none being quite insurmountable enough to bring the house of cards to ground.

If we cast our minds back to 2007/8 it was unthinkable that the financial system could emerge unscathed from the sub-prime crisis. It did not, but the world continued to turn. Then it became unthinkable that Greece could stay in the euro. It has. As sovereign balance sheets expanded to mind bending levels it was unthinkable that we could escape higher inflation. We have. Each potential catastrophe that has been faced and somehow passed at the eleventh hour (or later) has not compounded onto one another.

It has crossed my mind several times that the exceptionally high rates of unemployment are the reason. Typically when wage inflation is low, corporate profits rise and so do equity markets. With young people out of work on such an enormous scale it is difficult to imagine that there is much negotiation over rates of pay.

Surely this cannot be enough though. Can it?

At some point sovereign balance sheets are just going to fall over. Well, one would have presumed that might have happened already, but it has not.

Perhaps we have simply entered a new era of economics and politics of crisis management.

If this is the case, then most troubling of all, equity markets look cheap and we should all be rushing to buy assets at almost any price. Normal thinking would suggest that the “dumb money” rushes in at the top, which would seem to be now while the “smart money” continues to sell. I discussed this here a few months ago, and I am just as confused now about the levels of risk to potential return as I was then.

Normal theory falls down again because there is traditionally a link between equity markets and property markets (residential property, for example, is pro-cyclical). In the countries that are really struggling (Spain for example), it is clear that both the stock market and property market are in deep doo-doo. The banks have been less than willing to fully write down their property holdings, mortgages and non-performing loans. In other words, there is much more to come.

In the UK for example, the London property market seems to be about level in the last year but much of the rest of the country has seen gentle falls for several years – but the FTSE keeps powering onwards and upwards – all while the national economy seems to be struggling on.

Have some stock markets therefore become decoupled from property markets? Or their national economies? From reality?

As I said, I am struggling to link all of this together, so if you have any thoughts or insights to add – whether I am right or wrong – please do so.

Too Many Envelopes Of Happiness

Posted by financialguy on 11/02/13

Corruption amongst public officials is never nice, but it seems that suddenly it is everywhere. Amongst the recent news I have seen references alleging:

- Slovenian politicians not declaring their incomes
- Greek politicians overlooking tax evading family members on the “Lagarde list”
- Spanish politicians apparently receiving extra cash each year
- the suspension of the Vatican Bank’s credit card processing system
- Who knows what will emerge from the Banca Monte Paschi di Siena and what are apparently 40 million euros of ‘payments’ on top of the derivatives trades that are bringing the bank into such trouble
- Allegations against former Commissioner Dalli relating to up to 60 million euros of requested bribe money

At this stage, who knows who did what and when and what the outcomes of the above might be. What I do know is that there seems to be more emerging each week. This might just be the tip of quite a large iceberg.

A Politician Is Not A Country

Posted by financialguy on 18/12/12

Today I plan to ask a simple and somewhat rhetorical question. It relates to the recent movements in the eurozone crisis and their relationship to German politics.

If you have been following the eurozone crisis, you might have noticed that the pressure on Greece seems to have eased. A few months ago it seemed to be a near certainty that they would not receive their next tranche of money and, well, who knows where that might have lead to … a Grexit perhaps?

Yet in recent weeks the talk of a Grexit has dropped. This might be because the politicians that kept mentioning it have managed to frighten the Greeks enough to get their way and now don’t need to brandish that stick for a while. However, it might be for other reasons.

One of the very plausible reasons is that there will be elections in Germany next year. Postponing major decisions until after the elections is seen as preferable. Of course it is. In his recent Project Syndicate column, Nouriel Roubini describes the situation very well (here). The question is, since there will be anywhere between tens and hundreds of billions of euros at stake, how much is postponing any major decisions really worth? If we think back to the first Greek bailout, it is now a near universally accepted truth that the delay in German decision making cost billions of euros.

A political agreement is not an agreement
One of these decisions is the banking union. There is near complete agreement that breaking the bond between banking debts and the balance sheet of sovereigns will be a very big help. It may not end the crisis, but it ought to be a big step in that direction. Since a ‘political agreement’ was made at the European summit, the definition has slowly changed and as people think about it more, the idea has been watered down until there might be little or nothing left. (I wrote about this recently (here) and it appears to me that there has been little or no forward motion since then).

The dirty secret appears to be that there are some big problems in many German banks. It has been easy for some politicians to criticise bankers in other countries, such as Spain, but if they have to look too closely at home, there might be some nasty surprises. If this is news to you, read this.

Movement beats meditation
I offer you three reasons as to why Europe cannot wait for Angela.

The first reason is that postponing economic decisions until after political elections makes little sense in an EU context. Several significant decisions were either postponed or not taken in 2012 because of the potential ramifications at the ballot box. A great example was the potential fall out of the elections in Catalonia a few months ago. The problem is that in a 27 member state union, there will always be elections just around the corner somewhere. Rather than try and hide from that fact, it is a fact of life and should be considered.

Secondly, the major failing of the euro is that it is a political construct. I am a firm believer that it was a political masterstroke at the time, but as we have seen, it has proved to be an economic albatross. Depending upon your perspective, this may be proof that making economic decisions for political reasons is not guaranteed to be successful. The euro was at least a shared political decision. If progress in resolving the euro crisis is to be on hold for some months, should it be on hold just to help Angela Merkel’s political career?

I cannot speak for the German electorate, but it seems like a lot of money to spend to preserve just one career, or at best one party, especially when there are so many unemployed people across the EU.

Thirdly, I think we ought to consider value for money. After her experience in recent years, Angela Merkel may well be the most experienced person in the world at dealing with the eurozone crisis, however, if the impact of keeping her in position is in the tens of billions range (or more), I think it might be possible to use a little of that money and buy in some extra talent – just like a football team would. If there is going to be so much at stake (and given the situation in Spain and Italy, it is many multiples of this) then we need to be thinking about a dream team and not just the Merkel and Schauble show.

How much would it cost to bring in Martin Wolf, Nouriel Roubini, Paul Krugman, Wolfgang Munchau, Kenneth Rogoff and a few others to be the brains behind the operation? (Yes, I am talking about having economists try to solve an economic problem rather than politicians). It doesn’t really matter how much they charge, it won’t be billions, so the impact they can have ought to still be value for money, even if they charge multiple millions of euros.

Therefore, I come to my simple rhetorical question…

Can the citizens of Europe afford (financially or otherwise) the potential impact of postponing progress in the eurozone crisis until after the German elections?

Matching Ideas To Money

Posted by financialguy on 26/11/12

Readers of this blog will know that I post my thoughts about innovation policy from time to time. One of the key areas – at least in my mind – of the innovation policy area is that of funding. Typically an entrepreneur with an idea does not also have the required money to back the project.

Over the past few weeks your author has been reading about this a lot. I have an idea and do not have the savings to fund it. Looking into this arena from a practical perspective is much harder than from a theoretical policy perspective. Questions such as what should happen and why rapidly become when, how and who.

The phrase ‘venture capital’ seems to be used as a catch-all for many. They seem to be discussing financing in general when of course, venture capital is typically a late stage funding option for existing ventures that have some sort of IPO or exit in mind in a few years time. For the much smaller project (such as my own), venture capital would not be of use. My idea of a worthwhile investment would be a long way short of their idea – it wouldn’t be worth their time to even meet me…

For the smaller scale projects, business angels (from family and friends to wealthy investors) are more likely to be the answer. But that isn’t always an answer either. I for one, have very high-hopes for my idea, but it might not work. If it doesn’t work, I have no intention to pull my family and friends down with me!

This is a complex and confusing area of finance and policy for sure. That policymakers are yet to figure it all out and make improvements is no surprise. Having moderated a VC policy event a couple of years ago, it was clear that the VC titans and business angels in the room did not have the answers either. And so, this is one of the issues that the EU really needs to find workable solutions and answers to if it is to find the high-growth companies1 that can help reverse the economic malaise and unemployment we face.

It isn’t all about the Benjamins
One problem that I think is very difficult to overcome is that of the role of capital. Money is important, I get it, but not that important. It is, I believe, the ultimate commodity. It all looks the same, it is printed by central banks in ludicrous quantities and often is just a number on a screen with no physical form. You can get it from any ATM machine and essentially it is everywhere. And yet, we recognise it’s power to the extent that we suplicate to it at every turn. Venture capital (even I am using the term as a catch-all now!) is important but I think that we are too deferential.

In contrast, the good business ideas aren’t all that common. I know that I have lots of good ideas, but only a very small number that are big enough to really pursue. Without being unkind, most people don’t have either the idea or the cojones to pull a start-up off. I might not. There ought to be a lot of money out there for a good idea…!

As a policy and legislative community, there needs to come a time when alternatives are established to the VC industry because we need them. Ultimately, crowd funding is such an idea and it is happening without any help from government. People see good ideas and want to fund them. On a smaller scale, there are micro-finance websites that enable the public to participate in projects in the same way as Grameen Bank does. Some innovative people with an idea and an online solution are changing the world. These platforms will not be the ‘VC killer’ that has happened to many other sectors (such as stockbroking and publishing) but it will come. It is only a matter of time.

Is VC in Europe working?
At the moment, the relationship between policy and industry does not seem to be very clear to me. I know there are many working on this, but I think that the dynamic needs to change. While on the one hand the VC industry tells government that “we know what we are doing” and to “get out of the way”, we all know where that approach to financial services has lead us. More importantly, the system does not seem to be working in the way the European economy needs.

That said, I am not convinced that government is the right format for business financing either – the rules and regulations imposed on start-ups to access the finance are often ridiculous. Personally, I know enough to know how I’d get financing from government and also enough to know that I don’t want it.

This is an almighty mess and it needs our best minds to try and improve it. Clearly I do not have the answers, but we need to find them.

A Lurch Backwards In The Eurozone Crisis

Posted by financialguy on 10/11/12

Over the last few days, it seems to me as though the eurozone crisis has become much worse. Please don’t misunderstand me, there hasn’t been another bailout an it was hushed up … the Netherlands didn’t request help, no. Instead, there has been something of an unstitching behind the scenes.

If I think back to about this time last year, there were very few ideas as to how to the crisis could be solved. Over time, the Fiscal Compact and the Financial Transaction Tax were thrown about. There seemed to be full agreement that they could help prevent the next crisis, but will probably not do much for this one.

Then earlier this year there was a proposal for a banking union. It was just being sketched out around April and May of this year. It has since been agreed at a summit. After the summit, there are typically lots of politicians and policy folk that offer their thoughts about what the agreement actually means and how it might work in practice. As this debate grew, it became clear to everyone that breaking the link between failing banking systems and sovereign debt was vital. Without this nothing can happen.

Alas, over the last two weeks it seems as though any hope of this link existing has been scotched by Chancellor Merkel and others. In other words, the banking union is now unlikely to be agreed to if it does what it needs to do. Another EU fudge.

This is really problematic. I personally have always felt that much of the banking union was theoretical at best (the idea of a single supervisor being able to clean up the banking system by the start of 2013, as was first proposed, was the most ridiculous element for me, though the idea of anyone being willing to backstop the current system ran a very close second). But, it did offer a theory as to how one of the major problems in the crisis can be fixed. Now it doesn’t.

Where does this leave the euro? It’s best minds have been working on this for months. This was the solution. Now, if it cannot be implemented as required, it seems to me as though the eurozone is back to where it was perhaps one year ago.

First, there needs to be an idea, a concept. Then it can be expanded upon. Then it can be agreed upon in principle, with a timetable. In EU terms, this all takes time and we aren’t anywhere near implementation yet.

Now, minus a banking union that can do the job, we are once again without an idea about how to end the crisis. Just let that sink in for a moment. Take a second. Despite the fact that the Greek crisis first started to really show itself in late 2009 – three full years ago – we are back in a situation where, it seems, there is still no idea as to how to fix the crisis.

Things are a lot worse than they might seem.

The Greek Tragedy Is Extended

Posted by financialguy on 24/10/12

I can remember being asked by a friend back in June what was going to happen with the euro for the rest of this year. That is the kind of question that I normally try and fend off, but I was feeling a little vulnerable that day and so I just blurted out an answer.

Towards the end of the year, around November time, Greece will need more money. To get it, they will have had to have made even more budget cuts that will be virtually impossible to make. If they haven’t made them, they will run out of money. And Germany has just announced that they won’t get any more time. Bankruptcy and a euro exit seem virtually assured.”

Well, it seems that yesterday, an extension to Greek reforms was granted and they now have until 2016 – not 2014 – to make the cutbacks required of them. The can has been kicked further down the road.

Once again, this is very last minute. Once again, catastrophe has been either averted or postponed. Once again, a firm position has been fudged. Once again, the previous official statements now amount to nothing. Once again, I am proved wrong.

Trying to figure out what might or might not happen is virtually impossible. How can markets, banks, businesses and the general public make any sort of long-term financial decision when there is such uncertainty?

It seems that the expected budget gap for 2013 that could not be filled amounts to something north of 15bn euros. And that the expected receipts from privatisations by 2015 will be around 8bn and not the 19bn originally hoped for (really, who’d pay top dollar for state assets in Greece now, knowing what we know?). Will two years be enough?

Some Soap Operas Are More Important Than Others

Posted by financialguy on 08/09/12

My local chip shop is owned by a Londoner called Andy. A couple of days ago I found myself being talked to by him about the Premiership. I don’t follow football all that closely, but he and I support the same team so there is a very real but limited amount of kinship between us.

Our team had won but the star player had fallen and hurt his leg. I was frankly amazed that he could try and search for such insight and meaning in the future by discussing the hamstring of another man. But pontificate he did.

After hearing the same news for the third time but fearing he could go on, I stopped him and said, “In other news, the President of the ECB seems to have a plan to centralise large parts of European countries powers and roll them up into the centre. This could profoundly impact democracy for hundreds of millions of people”.

He looked at me stunned for about three seconds and then asked simply, “There will still be football, right?”

To me, the English Premiership is like a television soap opera. It seems to roll onwards forever with new facts and games every few days. There is so much to think about and analyse and for what?

Another soap opera, but much harder to understand is the eurozone crisis. Following it, as I try my best to do, takes real effort and thought. We lay people (not central bankers) mull over the implications of the Target 2 payment system in a similar way as a football fan thinks about a metatarsal injury.

I know a number of people that are very interested in the future of the world and whether Europe is going to implode. They often ask me for insight just like the partially sighted leading the blind. At least they care and are interested.

In a way, the eurozone crisis is a soap opera as well. The ‘narrative’ changes often, from ailing country to ailing country, plunging each one into trouble and offering a few days of breathing space to others. So much of politics and financial markets are based on rumour and opinion that the future of hundreds of millions of people is being decided – in part – on unknowable speculation. We are in real trouble.

When I think about the likes of Andy I despair. I realise that most people are not interested in politics and economics, which is fair enough, but this is the system that enables everything else we do in life. Without it there will be trouble. Right now there is trouble and people seem to be ignoring it all the more.

Should more power be concentrated in the centre in Brussels it will be a very painful experience to the Andy’s of the world. It won’t be easy for them to understand how, why and when the power over national budgets was handed to Brussels and why their local services are being closed down because an unelected and unidentified nabob enforced ‘conditionality’ as part of their debt repayments.

Words like conditionality ought to send a shiver down the collective spine of the population because of the power they enable. At the last EU summit Messers Monti and Rajoy worked hard to obtain some leeway from Germany in the hope that financial oversight could be avoided. With the nature of power in the EU in such flux currently, almost everything is up for grabs. The politicians can see it, but the public seems to be unaware.

While waiting for my chips a few weeks ago Andy asked what I do for a living. I mentioned that I often write about politics and economics. His next words were priceless, “I think politicians are just a bunch of idiots and crooks”. While the standard distribution curve would suggest that there will be a percentage of larcenous fools in any group, including the political class, it is hard to believe that they all are. This kind of opinion is very common as we all know, but at a time like this when so much about our way of life is under threat, when our national futures are being argued over by the leaders of other countries, I am left wondering, “Where does that leave YOU?”.

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Formerly in finance, now in the EU world, this is a take on financial and economic matters, EU Innovation policy intermingled with occassional interviews of EU policy professionals. Click here to find out more.



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