Beyond The Brink: The Brinkmanship Is Over For #BrexitBoris And His Merry Band Of Brexidiots

Source: Byline Times

Boris Johnson has always known that leaving the EU is not in the UK's interests. Now he must live with it - and each of us must take our own path out of this mess.

Like spoilt kids, Johnson and his Brexidiot cronies want Little England to have the benefits of EU membership without the obligations. 

Their only weapon has been brinkmanship - threats of a referendum, threats of invoking Article 50, threats of leaving without a withdrawal agreement, and now threats of trading with no free trade deal. 

But the EU27 have called Britain's bluff every single time, and now Britain is beyond the brink. 

All that is left is endless whingeing about how tedious it is to be a 'third country' and the negotiation of 600 international trade agreements. 

There is no half-way house. 

This is crippling for services, in particular. The City can push for 'equivalence' instead of passporting for financial services, but knows that equivalence can end quickly (ask the Swiss). Everyone else is stuck with a mish mash of different rules, including inconsistent recognition of qualifications and some weird visa restrictions for business travellers. Why else would the EU have simplified it all with just 'four freedoms of movement' for goods, services, capital and labour? What else would tempt others to join the trade club?

So people and businesses must simply adapt to the UK's new status.  If you want to export anything to the EEA, then relocate the relevant operations to an EU27 member state, get qualified there (as I did in 2018) - whatever it takes.

The time for trusting the UK government to look after your interests is over.

You're on your own.

For Your Personal Brexit Preparations: Which EU Countries Allow Dual Citizenship?

While I hope Brexit will be stopped, I'm expecting and preparing for the worst. So, with only two months before the EU approval process would need to start and Brexidiots in charge on the UK side, I'm expecting the UK to 'crash out' on 29 March 2019, without agreeing the terms of withdrawal (let alone any deal on future trade).

As a self-employed lawyer, there's both the professional and personal angles to consider.

Professionally, my UK legal qualifications will no longer be recognised in the EEA. So, I need to get qualified in an EEA state in order to continue credibly advising my UK clients on their EEA business activities, and advise my EEA clients on their UK activities. The only realistic option is adding an Irish legal practising certificate and consulting through an Irish law firm. Ireland will be the only truly common law jurisdiction left in the EEA, as both Malta and Cyprus have a mix of civil and common law, and it's laws are still very similar to the law in England and Wales.

That rather costly process is well underway, as previously explained.  

But that doesn't mean I personally have the right to live in Ireland, of course. So the question remains whether I could replace my UK right to live and work anywhere in the EEA by means of citizenship in the remaining 27 EU member states or one of the 3 EEA member state (Norway, Iceland or Liechtenstein) - without losing my UK and Australian passports? 

As the EU Parliament research reveals, there are differing national approaches to being or becoming a citizen of the various EU member states. But the key issue is whether your favoured country allows you to retain your UK (or other) citizenship. For instance, the following countries would require you to give up your UK citizenship in order to become a citizen there:

• Austria 
• Bulgaria 
• Croatia 
• Czech Republic
• Denmark 
• Estonia 
• Germany
• Latvia 
• Lithuania 
• Netherlands 
• Slovenia 
• Spain

So there goes any chance of moving to, say, Barcelona or Mallorca without first becoming a citizen elsewhere in the EEA.

Unfortunately, given the dual nationality of my spouse and children, of the 3 additional EEA countries, only Norway requires you to renounce your other citizenship(s) if you wish to become a citizen there (i.e. rather than automatically having it by birth etc) -  although a change in the law has just been submitted to the Norwegian parliament. 

Otherwise, the options are as follows (excluding those where the EU research says you can still later lose your citizenship by living somewhere else):

• Belgium
• Cyprus 
• Finland 
• France 
• Greece 
• Hungary 
• Ireland 
• Italy 
• Luxembourg 
• Malta 
• Poland 
• Portugal 
• Romania 
• Slovakia 
• Sweden

and 

• Iceland
• Liechtenstein 

Remember, any port in a storm...

The Cat Is Out Of The Bag: The EU Bars UK Financial Outsourcing

A key EU financial authority has asked EU regulators to be strict on UK firms seeking to escape the impact of Brexit. The concern is that having lost their EU passporting rights, desperate Brits will try to get authorised in Europe but continue to rely on UK managers and operations. 

"UK-based market participants may seek to relocate entities, activities or functions to the EU27 in order to maintain access to EU financial markets. In this context, these market participants may seek to minimise the transfer of the effective performance of those activities or functions in the EU27, i.e. by relying on the outsourcing or delegation of certain activities or functions to UK-based entities, including affiliates. It is therefore necessary to ensure that the conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks."

ESMA even proposes a Cat o' nine tails set of 9 "principles" to prevent UK firms making the best of Brexit: 

1. No automatic recognition of existing financial firm authorisations;
2. Authorisation processes by the EU27 should be "rigorous and efficient";
3. Regulators must verify the objective reasons for relocation;
4. Regulators should avoid "letterbox" entities in the EU27 - the EU firm must perform substantial activities;
5. Outsourcing and delegation to third countries (like the UK) is only possible under strict conditions;
6. Substantive decision-making must occur in the EU, especially over outsourced activities;
7. There must be sound local governance of EU entities, by resident directors/senior managers;
8. Regulators must have the resources and data to effectively supervise and enforce EU law. 
9. ESMA is watching and will co-ordinate to ensure adequate and consistent supervision. 

Of course, the UK could retaliate with red tape of its own. Brexit is also a challenge for 8,008 EEA firms that hold 23,532 passports (about 3 each) to cover their UK offerings.

There's No Single Market For Consumer Finance: What Next?

Perhaps it's not what the European Commission intended, but its green paper on retail financial services is a great explanation of why there is so little cross-border activity in consumer finance: 3% for payment cards, current accounts and mortgages; 5% for loans (less than 1% between Eurozone countries!) and only 3% of gross insurance premiums. For a very long list of reasons, it's just not practicable for most retail financial services providers to operate across EU borders, as the EC has known since at least 2007. Could it be time, therefore, to scale back EU requirements for firms that only focus on their national market, so consumers have a clear choice between national and genuinely cross-border suppliers and products?

The Commission concedes that its vast, confetti-like attempt to harmonise EU financial regulation  has proved futile in catalysing a single retail finance market, yet it continues to ask what more can be done.

One issue in particular that the Commission is huffing and puffing about is 'geo-blocking', the use of technology to identify and block or re-direct consumers based in certain countries.

But the Commission's own findings are that few players have the resources to focus on cross-border markets. Suppliers who do target multiple countries typically use separate local operating entities to deal with all the problems listed in the green paper, so they don't even properly qualify as 'cross'-border. At any rate, how can you force a Spanish motor insurer to sell policies to Germans if it simply can't afford to administer claims in Germany? How would that be in the policyholders' interests? Even assuming the focus solely on Spanish customers is the supplier's own choice, rather than due to some legal restriction, wouldn't requiring the firm to deal with Germans or Swedish consumers put it at risk of going bust, leaving the whole market to a few big players who can afford to serve customers everywhere?

In its response to the green paper, the UK's Financial Conduct Authority quite rightly urges caution on the economic impact of more (futile) regulation, as well as careful analysis of consumer needs and behaviour before churning it out. The FCA points out that existing regulation must be allowed to 'bed-in' before assessing its real impact; and the Commission needs to consider that EU consumers are not some amorphous clump of flesh waiting eagerly for Greek insurance policies homogeneous, but diverse in their needs and behaviours - so a 'one-size-fits-all' approach won't be universally acceptable and risks crushing local financial services that are working well.

The FCA hints at the idea of a range of EU-approved products that might be provided by any EEA firm to any EEA consumer in a standard way, though this still begs the question whether the providers are able to manage this operationally. 

I guess it's possible that those able to target cross-border markets would benefit from some kind of voluntary EU-cross-border safe harbour scheme that enables them to adopt the same approach to marketing, contracts, customer service, complaints handling and enforcement and so on throughout their target market(s). It could even be very a attractive product in some national markets that are currently under-served or where consumers are being fleeced.

But that's more or less what the current regime allows, yet few firms are bothering to do it: the whole point is that we know it is futile to impose a cross-border scheme on firms and consumers who just want to focus on their own national, regional or local market.

Which begs the question: rather than add more regulation, why not allow member states to scale back EU requirements for firms that wish to remain nationally focused? This would allow further differentiation between national and cross-border suppliers and products, presenting consumers with a clearer choice to make.

Of Brexit, Red Tape and Light At The End Of The Eurotunnel

A pragmatic approach to the Brexit debate is to ask whether withdrawal from the European Union would solve enough root causes of Britain's problems to make up for the inevitable disruption.

But we are yet to see that level of analysis, and I doubt we ever will.  

That, and the fact that opportunists like Boris Johnson are able to swing their booms from one side of the debate to the other in the hope of catching any old puff of political wind, tells me the UK's membership of the EU is just a political issue, unconnected to anything 'real'.

One thing that is clear, however, is that cutting the ties with Brussels will not automatically cut the UK's source of red tape: Britain is expert at producing its own. You only need to look at the NHS, the social welfare 'system', the Home Office or education to see how much of a mess the UK is capable of making on its own turf; and its approach to implementing EU law is similarly self-defeating...

Generally speaking, you might say that 'an Englishman's red tape is a Frenchman's business plan'. The English common law principle is that 'the law follows commerce' and we should be able to get on with something until the law forbids or restricts it; while civil law dictates that an activity is not lawful until the state says so. Another difference, somewhat surprising in light of the first, is that the common law system is based on literal interpretation; while civil law is interpreted on the basis of its purpose - the spirit rather than just the letter - and this is how EU law is interpreted by the European Court of Justice.

While the EU's civil law countries rely on EU regulation to tell them more or less how to act, the UK has not coped with this distinction very well. Firstly, the UK's attitude to EU membership means that it misses opportunities to influence the favourable development of EU law in the first place - the UK always seems to be on the back foot. Then, once EU laws are passed, the UK suffers from a policy of 'gold-plating' directives by simply copying them word-for-word into its own national laws which are interpreted literally under common law principles rather than reflecting the purposive interpretation that civil law member states adopt. So the UK creates several rods for its own back.

While it is said that the English courts do (or should) adopt a purposive approach when interpreting national legislation in areas covered by EU law, in practice this opportunity is not widely embraced either by officials or the legal and regulatory community. Once any awkward or confusing EU requirements are transposed into national law, everyone in the UK seems doomed to take them literally.

The result is a system that pushes the burden of resolving any EU regulatory awkwardness or confusion off the public sector's plate and onto the private sector (and, ultimately, the consumer or citizen). A recent case in point include the UK's approach to implementing the Payment Accounts Directive. There are others too numerous to mention.

I do have a little sympathy with the UK's approach to the EU legislative process. It is outnumbered by civil law countries who may not appreciate or respect the more reactive common law approach.  It is also tempting to avoid the expense in time and resources required to continually debate with EC officials whether UK regulation reflects the purpose of EU directives, rather than the letter. But this doesn't bother Italy, Germany, France or the other countries higher on the league table of those failing to implement European laws.

Maybe you could say this failure to navigate the EU legislative process is a reason to leave the EU, but it seems pretty feeble for the UK to lose the benefits of membership due to a political problem of its own making. At any rate, if UK ministers and officials would only take full advantage of the opportunity to resolve any problems in the formation of EU laws in Brussels and take a purposive approach to enacting them nationally, they would surely reduce any adverse impact on the wider UK community from laws that might be unduly restrictive.

Meanwhile, ironically, the EU authorities are beginning to take a more common law wait-and-see approach to regulation, having realised that regulation won't catalyse cross-border markets that don't already exist. Contrast the futile approach to consumer credit with the more cautious approach to regulating crowdfunding and virtual currencies/distributed ledger technology.  

In other words, the UK seems keen to leave when there may be light at the end of the Eurotunnel.

Is There Really A Single EU Market?

Some sobering figures from the European Commission for single market fantasists enthusiasts (as if Greece wasn't sobering enough).

EU cross-border services account for 4% of all online services, as opposed to national services within the US (57%) and in each of the EU member states (39%). 

15% of EU consumers bought online from other member states, compared to 44% who bought online nationally, with online content seeing double-digit growth.

Only 7% of SMEs sell online across EU borders - and it costs an average of €9,000 to adapt their processes to local law in order to do so. 

The cost/price of delivery is (obviously) cited as a major problem, as well as differing VAT arrangements. But suggested solutions seem to ignore these and other key barriers to cross-border retail that have been cited in previous market studies, such as lack of marketing strategy, preference for national brands, language barriers and local employment law challenges. Presumably, that's because the Commission can do little to address such fundamental practicalities. Instead, they want to focus on:

• stronger data protection rules;
• broadband/4G roll-out;
• use of 'Big Data' analytics; and
• better digital skills amongst citizens and e-government by default.

The sense of futility that permeates such reports by Eurocrats only emphasises the fact that the law follows commerce; it doesn't catalyse markets.  

Yet, ironically, in areas where commercial and consumer pressure to enable cross-border activity is emerging, such as crowdfunding and crypto-technology, we find European institutions taking an unduly restrictive approach.

When will they simply get out of the way?

Eurocrats Need A Reality Check

The Society for Computers and Law was recently entertained on the topic of trust in Big Data and the Cloud, by Paul Nemitz, European Commission Director of Fundamental Rights and Union Citizenship (in the Directorate-General for Justice). Both immigration and data protection feature among the main responsibilities of his Directorate, so you can imagine Paul is a very busy man right now, and it was very kind of him to take the time to speak.

Right, so that's the polite bit out of the way ;-)

Paul was keen to challenge the Brits in the audience to be more pragmatic in their attitude to the European Union. He believes the UK is among those who engage with the EU irresponsibly on the basis that "everything that comes out of Brussels is shite". Instead, he says British officials, lawyers and academics should be focused pragmatically on how to engage positively to achieve better European policy and regulation.

Of course, it's an old rhetorical trick to characterise your opponent's views as overly simplistic, boorish and stupid. Paul knows that the UK's opposition to red tape is based on more serious and fundamental differences than simply declaring everthing from Brussels as 'shite', as discussed below. But as a Commission official, he's not able to enter into debates over the fundamental principles of the EU. It's his job to be a 'Believer' and get on with building the vision. He must take it on faith that the European Union is a single market, rather than a loose collection of disparate nations held together by red tape and political ambition. 

It suits some EU member states to accept that same article of faith, but not all, and the people in the streets certainly don't think that way - consumers have been worryingly slow to purchase across borders, for example. And the recent election results revealed that a huge proportion of the electorate remain to be convinced that EU governance is wholly worthwhile. 

In these circumstances, the UK's rather sceptical view of what comes out of Brussels is quite broadly representative, and the attempt to draw a line in the sand over the imposition of a fervent unionist as head of the Commission was completely understandable. It's also pragmatic. If the EUrophiles were humble enough to accept that the single market is still an ambition, they too would realise it's unwise to be seen to force the issue. People have to be brought along on the journey, and maybe the UK is a good indicator of how far they are being left behind.

To back his claim that the UK's attitude is simply boorish, Paul points to a 'typical' lack of empirical evidence for resisting provisions in the General Data Protection Regulation requring large firms to appoint a data protection officer and to facilitate fee-free 'data subject access requests'. He says these things work well in other EU member states already, and haven't driven anyone out of business. And against the UK's charge that the European Commission is needlessly committed to ever-increasing levels of privacy regulation, Paul points to surveys that show ever-increasing levels of concern amongst EU citizens about commercial and governmental intrusion into their private lives; as well as recent judgments from the European Court of Justice and the US Supreme Court curbing commercial and governmental intrusion into these areas (ironic, given that one of the ECJ's decisions was to declare Europe's own Data Retention Directive invalid).

Again, he's missing a sensible, pragmatic point. The UK's reaction is telling him is that when huge swathes of the population questionn the very existence of the EU, it's wiser to stick to the essential foundations and building blocks, rather than snowing people with confetti about day-to-day compliance issues.

However, I'm glad to say that Paul was able to explain how the European Commission is working on some important foundations, such as getting standing for foreigners to take action to protect themselves in the US courts; and preventing indiscriminate mass collection of the personal data of EU citizens by any government or corporation, inside or outside the EU. Those two things are very important to building trust in governments, as well as Big Data, and are the sort of fundamental constitutional changes that citizens would find extremely difficult to achieve solely through the democratic process - though the European Commission has climbed on the bandwagon of public opinion (or Merkel's personal outrage), rather than initiated pressure to achieve these outcomes in its own right.

I also think Paul is right to point out that businesses are wrong in the view that personal data is 'the currency of the future' or 'oil in the wheels of commerce'.  Money is fungible - we view one note as the same as another - and, similarly, oil is just a commodity. So the data related to money and oil are hardly very sensitive and can be dealt with through economic regulation. But people, and the data about them and their personal affairs, come with more fundamental rights that can't simply be dealt with in economic terms. It's important that citizens have a right of action against governments and corporations to protect their interests (though I think the Google Spain decision was wrong).

But Paul overstates the 'synergies' between EU regulation, trust and innovation. He is stretching too far when he says that vigorous regulatory protection is essential to the creation of trust between people and their governments and the corporations they deal with. As evidence for this, he claims that the UK's Financial Conduct Authority as doling out the largest fines in the EU for the abuse of people's personal data, and asserts that this has built trust in the UK financial services market. From there, Paul leaps to the conclusion that similarly vigorous regulatory attention is somehow one of the necessary pre-conditions to the creation of commercial trust generally. He then leaps again to the notion that commercial trust driven by regulation is a pre-condition for innovation because, "There is no trust in start-ups," he says.

This is all nonsense.

Here Paul seems to be looking at the world through the lens of his own area of responsibility rather than from a consumer standpoint. Very few of the FCA's fines have anything to do with abuse of customer data, and its fines are puny compared to US regulators in any event. And in survey after survey, we've also seen that the providers of retail financial services are generally among the least trusted retail organisations in the UK and Europe. Enforcement processes also tend to be slow, resulting in fines for activity that ceased years before, and depriving consumers of the opportunity to cease dealing with firms at the time of wrongdoing. So, relative to consumers' perception of other industries, complex financial regulation and allegedly vigorous enforcement action has been no help at all.

It's also strange for Paul to suggest that "there is no trust in start-ups" without the backing of regulation, given the vast number of start-ups that have achieved mass consumer adoption absent effective regulation - certainly across borders. Unless, of course, Paul still considers Google, Facebook, Twitter etc to be 'start-ups', which would be weird. This ignores the fact that, love 'em or hate 'em, such businesses have been far more responsive to consumer/citizen pressure in changing their terms and policies than the European Commission or national legislators have been in altering their own laws etc. Indeed such businesses have even been relied upon by governments to enforce their consumer agreements to shutdown activities that national governments have been powerless to stop.

Paul's view of start-ups appears to reflect the continental civil law notion that citizens cannot undertake an activity unless the law permits it; while in the common law world 'the law follows commerce' - in the UK and Ireland (and the US, Canada, Australia etc) we can act unless the law prevents it. The havoc that arises from these opposing viewpoints - and the differing approaches to interpreting legislation - cannot be underestimated. In fairness, the UK needlessly creates a rod for its own citizens by 'gold-plating' EU laws (transposing them more or less verbatim). The national version is then interpreted literally. We would be far better off adopting the purposive interpretation of EU laws and implementing them according to their intended effect. This may mean a bit more friction with the Commission on the detail of implementation, but the French don't seem to mind frequent trips to the European Court where the Commission objects, and meanwhile their citizens don't labour under unduly restrictive interpretation of EU laws.

None of this is to say that I disagree with Paul's claim that strong individual rights and regulation to protect them are not inconsistent with making money and healthy innovation. But I reach this conclusion by a different route, starting from the premise that retail goods and services must ultimately solve consumers' problems, rather than be designed to solve suppliers' problems at consumers' expense. Strong individual rights are only one feature of a consumer's legitimate day-to-day requirements, not all of which can be legislated for. Co-regulation, self-regulation and responsible, adaptable terms of service are all part of the mix.

Of course, regulation can be helpful in preserving or boosting trust where it is already present - as can be seen in the development of privacy law amidst the rise of social media services (and in the context of peer-to-peer lending and crowd-investment, for example). But regulation can't create trust from scratch, any more than Parliament can start businesses.

If only the Eurocrats would recognise these realities and limit their attention to areas where government action is essential, I'm sure they would find more favour with pragmatists everywhere.

Wither Europe?

The Conservative's position on Europe does appear a little screwy. A 'commitment' to reform an over-reaching, bloated bureacracy backed by a phoney 'threat' to leave - the sop to backbenchers that Britons might just decide on a return to economic uncertainty in five years time.

But we've already seen from reports that this plays quite well with the Germans and Swedes. They, and no doubt others, badly need an excuse to talk about European reform without sounding Eurosceptic. The whole experiment is going badly wrong, and something must be done. The British position provides a catalyst as well as someone to blame if it all goes Bristols-up.

This appears to leave Labour in an impossible position. Their options are to oppose a referendum, thereby threatening to deprive other EU members with an excuse to talk about reform, or to outdo the Tories with proposals for EU efficiency. Naturally, their instinct has been to oppose a referendum. After all, they spent 13 years carefully constructing a bloated British public sector and allowing Brussels to bloom. Old habits die hard. And they must be hoping there are enough Europhiles with their snouts in the trough to keep gobbling up our taxes regardless. 

I guess it's a fair bet. But that future looks bleak...

Bailout Fund Ratings And Snake Oil Don't Mix

The response to the downgrade of the Eurozone bailout funds from Aaa has yielded a fascinating political response from the head of the fund. 

Moody's, the ratings agency, says the €700bn European Stability Mechanism (and the the EFSF it replaces) is now a riskier proposition since France lost its Aaa rating earlier this month. It considers that, if the full fund were needed, France would have to stump up 20%. The whole purpose of the fund is to invest in the debt of weaker Eurozone member states whose creditworthiness is highly correlated. So, if one runs into economic trouble, they all do. That also makes for a "highly concentrated credit portfolio." And if push came to shove, Moody's doesn't think France would prioritise it's ESM contributions above its own debt payments. Similarly, in that event it would be unlikely that other member states would make up France's shortfall.

Both the chairman and managing director of the ESM were keen to claim political support for the fund. The ESM's chairman said:

"The 17 euro area Member States are fully committed to ESM [and EFSF] in political and financial terms and stand firmly behind both institutions."

And the ESM's managing director said:

“Moody's rating decision is difficult to understand. We disagree with the rating agency's approach which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure."

Of course, the political reality is actually the flaw in the single market and Euro fantasy: there's no credible plan to discipline profligate states, as the continuing Greek tragedy demonstrates. Those who negotiated the Maastricht Treaty foolishly believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would refrain from driving their firms into a wall out of concern for the interests of shareholders and taxpayers... snake oil. 

The only real disciplinary option is for creditor states to 'send the boys around' to the debtor states. In that event all political solutions will have been exhausted, and the 'European Union' long gone. 

So Moody's is right to discount the politics - and the ESM's credit rating.

If the politics is not to further undermine the ESM, politicians have to demonstrate that the disintegration of the Euro zone is survivable. 

The ECB Won't Really Do "Whatever It Takes"

I can't understand why 'stock markets soared' 2% on yesterday's announcement by the European Central Bank (if there really was a causal link). 

Mario Draghi's threat/promise in late July that the European Central Bank would to do 'whatever it takes' to save the Euro always rang hollow. And yesterday's long-promised follow-up announcement on (some) of the detail only confirmed the lack of substance.

Doing 'whatever it takes' would involve the ECB buying the bonds of troubled Eurozone Zerozone countries unconditionally - regardless of whether those countries operate their economies responsibly. Of course that's a crazy notion, and a long way from what the ECB is really offering to do. Draghi added yesterday that troubled countries would actually have to formally request such purchases and accept "strict and effective conditionality", which roughly translates into all European languages as "austerity". 

Of course that's something Greece and Spain have shown a marked reluctance to accept - understandably. And there seems no real way to force them to do so without sending the boys around, which would shatter the single European fantasy ideal. As Graham Bishop has explained, this has always been the flaw in Zerozone monetary 'union'. There's no credible plan to discipline profligate states. Those who negotiated the Maastricht Treaty believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would ultimately refrain from driving their firm into a wall in the interests of shareholders and taxpayers...

So it seems the giant EU foot is intent on kicking this particular urn down the road until it breaks. In the meantime, hopefully Greece and anyone else who is genuinely unable to cope will grasp the opportunity for an amicable parting to recover on their own terms.

Image from JMK Advisors.

EU Pecking Ordure

Image from email circulating this week - happy to provide attribution if anyone knows who created it.

Eurocratic Mathematics

Click here for the full-screen version

So, they've bailed out Greece again. This time investors took shorter 'haircuts' and the European Central Bank will pass its profits on Greek bonds (yeah, right) to national central banks so that it "may be allocated by Member States to further improving the sustainability of Greece’s public debt." If all goes really well (uhuh), this €130 bn 'lifeline' should mean that Greece will still owe the world 120% of its GDP in 8 years time.

To ensure Greece takes the requisite fiscal pain, it is to be permanently monitored  - the sovereign equivalent of house arrest. But the Greeks won't mind the ankle bracelet, as they've had one before. Five years after the 1893 default:

"foreign pressure led Greece to accept the creation of the International Committee for Greek Debt Management. This committee monitored the country's economic policy as well as the tax collection and management systems of Greece."

In fact, Greece has been in default for about half the time since achieving independence from the Ottomans. It's the country's part-time job. And I'm sure the latest reprieve won't rid Greece of its feeble system of political patronage, either. History is doomed to repeat.

So of course the numbers are all rubbish. This is Eurocratic mathematics, the bunting on the facade of a single Europe.

I'm sure we'll all get used to it - unless, of course, they cut Greece loose...

Image from Demonocracy, hat-tip, ZeroHedge.

Sweat The Small Stuff

I enjoyed a great conversation with the Renegade Economist on Thursday. On the humorous side, it reminded me that:

"Among the maxims on Lord Naoshige's wall, there was this one: "Matters of great concern should be treated lightly." Master Ittei commented, "Matters of small concern should be treated seriously." Ghost Dog (previously cited here).

But, seriously, it's stunning how little of the detail is really understood by our institutions. Instead, they are obsessed with erecting grand schemes that are shaped most by surprise events beyond our control - 'black swans'. These grand schemes, like the 'single market' and the Euro, are brittle political constructs that neither minimise our exposure to the downside of surprise events nor maximise our exposure to the upside. Worse, they distract us from coping with structures that emerge organically outside the artificial regulated sphere as well as day-to-day outcomes that we might otherwise have avoided within it. It was typically five years too late before any financial regulator demonstrated any understanding of the shadow banking system lurking outside the walls, for example. And our regulated financial system has suffered from within due to poor due diligence on sub-prime debt, lack of scepticism amongst auditors, analysts who rarely say 'sell', banks who are fined millions for lax controls, and tax incentives that concentrate investors' risk and fail to deliver finance to creditworthy people and businesses.

Retail is detail, they say, but so is everything else. We need to align our tax and regulatory system with our actual or desired end-to-end activities, bottom-up, rather than with artificial, paternalistic institutional visions for the future.


Image from Core77.

When in Doubt, Stay Out

I’m with the Tories on the EU treaty veto. There are just too many unanswered questions for anyone not already implicated to sign up. Even other EU leaders are now saying they'll struggle to sell the treaty nationally. 

Key among those questions is how the EU can democratically enforce its fiscal rules. I say ‘democratically’, because the whole point of the European Union is to avoid the diplomatic equivalent of ‘sending the boys around’.

Graham Bishop tries to address this in his short book, "The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?".

Perhaps the best place to start is Graham's point that “Wrong behaviour in misleading investors is still wrong even if the motive is patriotism, rather than personal greed.” During the Maastricht Treaty negotiations in the early ‘90s, Graham wrote some papers that “doubted the willingness of finance ministers to discipline profligate states”. The issue was ignored at that time on the basis that member states assumed it would always be in a profligate state's interest to want to do the right thing - a version of the efficient markets hypothesis, royally debunked first by Lehman Bros et al and now Greece. Even Alan Greenspan has had to admit that, left to itself, when any organisation is in trouble it is likely to behave in a way that suits those in 'control', which is why a taxpayers' guarantee constitutes a moral hazhard.

After gamefully attempting to explain the alphabet soup that comprises the EU financial bandaid stability aparatus, Graham recommends four principles of more effective fiscal supervision:

1.       Recognise there is nominal credit risk in the debt issued by a state that can’t print its own money – traditionally, there is assumed to be no nominal credit risk on loans to central governments held to maturity, since it's assumed that if the government needs more money it will simply print it (even though this may create other problems) - this is clearly wrong for Greece, for example;

2.       Make it progressively harder for EU banks to finance the excesses of an EU member state;

3.  Insurers, pension funds and other caretakers of peoples’ savings should be similarly disincentivised from concentrating on risky public debt;

4.      “Develop necessary flanking measures".

Funnily enough, non-Eurozone investors seem to be playing by these rules, even if the Eurozone isn't.

Little wonder private investors are working hard on contingency plans for Eurozone break-up.

In Brussels It's Always 3 Years Ago

Yesterday's speech from the European Commission President perfectly underscores Brussels' feeble grip on reality. 

Now is not the time, amidst multiple sovereign insolvencies - "a burning building with no exit" - to be debating (yet again) the need for a 'Tobin Tax' that might take effect in 2014. 

Now is not the time to be recommending legislation that might one day deliver greater centralised control. Nor is it timely - or wise, given the confessed lack of central control - to assert that solutions cannot be achieved by negotiations between governments. 

Surely, the EC President's role in such troubled times, if he ever really had one, was to do all he could with the structure he'd been given. Which would have included locking governments in a room until they did what was necessary.

Alas, that opportunity slipped by in 2008, if not before. "Europe" is an ex-parrot.

Even the news that German MPs have backed moves to bolster the Zerozone rescue fund is beside the point, as Satyajit Das explains in an excellent article today. The Zerozone central banking system simply does not have the capital to leverage itself, CDO-style, to the point at which the rescue mechanisms need to stretch:

"A 20 per cent first loss position may be too low. Unlike typical diversified CDO portfolios, the highly concentrated nature of the underlying investments (distressed sovereign debt and equity in distressed banks exposed to the very same sovereigns) and the high default correlation (reflecting the interrelated nature of the exposures) means potential losses could be much higher. Actual losses in sovereign debt restructuring are also variable and could be as high as 75 per cent of the face value of bonds."

We must get our heads around the fact that Europe's building will inevitably burn down.

So where will you be in 2014, Mr Barroso?

Images from Crisisboom and The Nation.

Okay, So How About A Mutual Europe?

Putting harsh economic reality aside for a minute, those who've always suspected that the Euro was a political Trojan horse for full fiscal European union must be highly amused by the current rhetoric.

The self-congratulatory political engineers of the European Union, like Jacques Delors, are lambasting their successors for ruining the grand plan. In their minds, monetary union and the Euro should have naturally led to complete union by now. That having failed, suddenly an enormous shared debt is suggested as the new political vehicle for the single market vision:

"To avoid falling, the choice looks straightforward to me: either member states accept the robust economic partnership I always demanded, or they transfer more powers to the Union."

Delors said Merkel and Sarkozy were playing games by arguing for "a minimum amount of cooperation designed to limit any transfer of sovereignty" to Brussels.

Taken on that basis, the ideas for eurozone reform they put forward on Wednesday after a head-to-head in Paris "won't amount to a hill of beans...

[Delors] instead called for a part-mutualisation of eurozone member states' debts, "up to 60 percent of GDP," saying the pooling of guarantees on that basis would "put out the fire" on money markets." 

Or, as Hunter S. Thompson once put it: 

"when the going gets tough, the weird turn pro."

"Fear and Loathing at the Super Bowl" 
(Rolling Stone #155, Feb. 28, 1974)

All very reminiscent of the following scene:

Wither The Zerozone?

I'm no Eurosceptic, but after all the dithering over the options open to the Eurozone it seems only the default option, as it were, will transpire: break-up. 

It remains to be seen whether we need to go through the farce of country-by-country downgrades and bank-by-bank recapitalisation. I guess we do, since avoiding or pre-empting that would take some kind of decision which the Zerozone politicians are incapable of making and for which they probably have no electoral mandate anyway.

But why stop there? I wouldn't weep for all those European Commission officials having to lodge their final excessive expenses claim and head home to defend their huge pensions from rioting neighbours. 

Flowers will grow through the cracks in Brussels' streets, and we can forget Strasbourg again.

We could certainly use the money more wisely.

Image from Crisisboom.

Lifting The Lid On The EU's Finances

Congratulations to the Financial Times and the Bureau of Investigative Journalism on their exposé on the gross fraud, waste and ineptitude inherent in the EU's €347 billion 'structural and cohesion' funds.

Even putting fraud and waste aside, it's hard to understand how this approach is sustainable if Greece, Ireland, Portugal and Spain are anything to go by. Public sector largesse eventually seems to generate the need for public bail-outs, especially when local governments borrow to match the free money that's available. No wonder the new UK government has put an end to direct local authority funding through this mechanism.

Certainly all this porkbarrelling has done little for 'cohesion'. A recent poll found that only 42% of Europeans trust the European Union - reflecting a general disenchantment with EU institutions over the past few decades.

The seven year budget cycle and lack of provision for returning unspent funds to donor states also makes the scheme incapable of flexing to meet changing economic circumstances. The fact that a large proportion of this money is lying around simply unclaimed in the current environment is scandalous, and another blow to economic confidence.

It's a travesty that this money was raised in national taxes in the first place, let alone handed over to Brussels on the terms of this scheme.

The EU's budget for this nonsense should be slashed next time around.

Image from Forest's Fine Foods.

Could An EU Contract Law Catalyse A Single Market?

Not content with the dog's breakfast of European consumer and retail finance directives, the European Commission now wants to harmonise all contract law in the European Union.

The latest fry-up is yet another futile attempt by the EC to catalyse cross-border retail markets of the same scale as national markets within the EU. This is spawned partly by a dogmatic interpretation of single market policy. But it also reflects the difference between the common law view of the world (do anything until the government says 'stop') with the civil law view (wait for the government to tell you how it can be done).

I'm an avid fan of cross-border markets, but long experience and the EC's own research has shown that they can't simply be mandated. Regulation is the least significant of the numerous barriers to cross-border retailing. Cooking up a bunch of extra regulation that doesn't solve a real problem merely adds legal costs for everybody to no end. Or worse: it's ironic that the EC's changes to VAT on electronic services from 2015 actually removed a significant driver for firms to structure their activities in a way that boosted cross-border e-commerce in the first place.

When will this expensive, Quixotic tinkering end?

Well, economic reality may be pointing away from a single European market of the scale envisaged by the EC. Some describe the north-south divergence in the EU and others herald a return to national currencies, or at least regional versions of the Euro.

But if, as I suspect, this latest Green Paper is intended as a frantic signal that the single market is not dead, there'll be plenty more such concoctions before the whole thing finally comes apart at the seams.

Does Investment Beat Donations In Sub-Sahara Africa?

While we're on the lookout for new markets, reports on why Asia has taken a knock due to recent problems in the Eurozone reveal that China will also be competing strongly elsewhere in order to reduce its reliance on Europe. MF Global research director Nicholas Smith suggests:

"China is significantly more exposed to Europe than the US, and is also Japan’s biggest trade partner... when the euro plunged, one of the hardest-hit stock markets was China (“because China now sells around a quarter more to Europe than to the US, and is highly sensitive to a slowdown in exports”). [So, for Asia, a week Euro means]:

• Europe will buy less from Japanese companies.
• European companies, particularly German ones, will be made incomparably stronger and more competitive by the weak currency.
• Europe will buy less from China, which will damage Chinese growth and hence depress the prices of commodities, which “anyway tend to follow a similar dynamic to the euro exchange rate”.

One area of Chinese activity in the spotlight recently is sub-Saharan Africa. It's a sign of China's special focus on the region that 2006 was China's "Year of Africa". The web site devoted to Sino-African relations lists extensive contacts between the regions, and China recently announced its biggest deal in South Africa (to build a cement plant) since investing $5.5bn in Standard Bank in 2007.

Western government hand-wringing about the ugly track record of some African nations seems to hide a reluctance to engage effectively in the region generally, and perhaps a desire to undermine the success of more adroit competitors. The blurb for Patrick Bond's book "Looting Africa: The Economics of Exploitation" suggests why:

"Despite the rhetoric, the people of Sub-Saharan Africa are become poorer. From Tony Blair's Africa Commission, the G7 finance ministers' debt relief, the Live 8 concerts, the Make Poverty History campaign and the G8 Gleneagles promises, to the United Nations 2005 summit and the Hong Kong WTO meeting, Africa's gains have been mainly limited to public relations. The central problems remain exploitative debt and financial relationships with the North, phantom aid, unfair trade, distorted investment and the continent's brain/skills drain. Moreover, capitalism in most African countries has witnessed the emergence of excessively powerful ruling elites with incomes derived from financial-parasitical accumulation. Without overstressing the "mistakes" of such elites, this book contextualises Africa's wealth outflow within a stagnant but volatile world economy."

Other commentary on the significant development aid donors Germany, the UK and France is also less than flattering (though it's worth pointing out that France Telecom is a major investor in one of Africa's undersea cable projects, while Alcatel-Lucent is the lead contractor on another). The US approach to the sub-Sahara region has also needed realignment:

"With the collapse of the Soviet Union leaving both an economic and power vacuum, Bill Clinton began a program of engagement with Sub-Saharan Africa’s economic powers like Nigeria and in encouraging passage the Congress of the Africa Growth and Opportunity Act which reduced trade barriers between the U.S. several African countries... George W. Bush followed on Clinton’s achievements... and is widely regarded as the U.S. President who did most for the advancement of the African people by bringing American money to bear on myriad social and health problems... [including] the goal of eliminating malaria and offering AIDS treatment to many who need it with the backing of $20 billion in U.S. aid grants."

Against this background, it's worth carefully considering the criticism that:

"Chinese companies are the second-most likely (after India) to use payola abroad, according to Transparency International's Bribe Payers Index. Similarly, a World Bank survey of 68 countries last year found that the sub-Sahara leads in the "percentage of firms expected to give gifts" to secure government contracts (43%). That meeting of the minds has made for hyperefficient deal making in Africa."

What does this really mean? Are 'bribe payers' to blame for ineffective donor programmes? Is the Bribe Payers Index really "improving the lives of millions" as is claimed? The criticisms of these league tables suggest they are not helpful in teaching us anything about the presence or effect of real corruption.

In fact, Deborah Brautigam, author of "Dragon's Gift: The Real Story of China in Africa" suggests the reality of Chinese investment in sub-Sahara Africa is rather more effective for the local people than Western aid programmes:

"As a donor, China’s way has several advantages... The focus on turnkey infrastructure projects is far simpler and doesn’t overstretch the weak capacity of many African governments faced with multiple meetings, quarterly reports, workshops, and so on. Their experts don’t cost much. In addition, their emphasis on local ownership is genuine, even if it leads to projects like a new government office building, a sports stadium, or a conference center. They understand something very fundamental about state-building — something that Pierre L’Enfant understood in 1791 when he teamed up with George Washington in newly independent America: new states need to build buildings and dignity, not simply strive to end poverty.

The Chinese avoid local embezzlement and corruption by very rarely transferring any cash to African governments. There is almost no budget support, no adjustment or policy loans. Aid is disbursed directly to Chinese companies who do the projects. The resource-backed infrastructure loans work the same way. Of course those companies themselves might give kickbacks, as we’ve seen in Namibia..."

But that is not to say such alleged activity goes unchallenged, as reports of the Namibian case reveal. Nor does Brautigam gloss over China's role in the Sudan, which has attracted intense criticism. However, she points out:

"First, China’s role in Sudan has changed over the past several years. They were crucial in getting Khartoum to accept a joint UN/African Union peacekeeping force (one, by the way, authorized by the UN, but not funded as generously as originally pledged). They allowed al-Bashir’s case to be sent to the International Criminal Court for prosecution for war crimes (as Security Council members, they could have vetoed this). And as noted both by President Bush’s special envoy, Andrew Natsios, and President Obama’s special envoy, Scott Gration, Beijing is now working together with the US government and other major powers in developing joint strategies to bring the Sudanese government and the rebels to the negotiating table. As China-watcher Erica Downs put it, the West and China are now coordinating their “good cop” and “bad cop” roles in trying to end the crisis.

Second, there is no doubt that Beijing could have moved much sooner, and much more effectively, to become part of the solution. But they never held all the keys to solving the Darfur tragedy. In making a tactical decision to focus on China as the lynch pin to solving Darfur’s crisis, and using the 2008 Olympics as the pressure point, activists let the other major powers off the hook. To end the violence, Darfur needs a peace agreement, and that requires all the parties to participate in negotiations. The West has not yet been able to get all the major rebel groups to show up to start talking."

So, it's clear that Africa rewards investment in education and infrastructure, even if it comes in the form of work done by foreign companies directly rather than planeloads of cash. And it's also clear there is no substitute for effective international co-ordination to call recalcitrant regimes to account over human rights. That can't be achieved by a single nation - even a 'superpower', as we've seen elsewhere.

Yet I wonder whether a bottom-up approach to investment in sub-Sahara Africa might also be far more effective than top-down donations? Apart from the provision of basic infrastructure and health services, supporting the rise of the Cheetah Generation and facilitators like M-Pesa and the technology hubs may do more to enable individuals to seize control of their own economic destiny than merely benevolent giving. Kiva, the microfinance provider, is a great example of this bottom-up approach:

"Kiva promotes:

•Dignity: Kiva encourages partnership relationships as opposed to benefactor relationships. Partnership relationships are characterized by mutual dignity and respect.

•Accountability: Loans encourage more accountability than donations where repayment is not expected.

•Transparency: The Kiva website is an open platform where communication can flow freely around the world.

As of November 2009, Kiva has facilitated over $100 million in loans."

Image from Run For Africa