Free Markets, Anybody?

By Paolo von Schirach –

WASHINGTON – Let’s be honest. The free markets that we learn about in school do not exist. They never did and never will. What we have instead are very imperfect approximations. What we have, at least in some parts of the Western world, is a declared intention to have a level playing field in which different corporations try their best to offer products and services, without enjoying any special advantages. For this purpose, governments established, (among others), antitrust authorities tasked with the goal of preserving free markets and fair competition.

Gaming the system

But this is an effort, a goal, an aspiration. In reality, most big corporate players do their very best to game the system in their favor. The dark secret of all true blue free market capitalists is that they all aspire to have and keep an impregnable rent position, whereby they will continue to dominate their market sector, hopefully for ever.

In pursuit of this anti-free market goal, US companies and trade associations spend larger and larger amounts of money on Washington, DC-based lobbyists whose only mission is to obtain, via legislation or specially designed regulations, set-asides, tax breaks, quotas, restrictions on imports, and whatever else may make it easier for their clients to protect their market positions and fend off competitors.

A semi-market

Therefore, what we have in America is a semi-market. In many ways there is competition, access and opportunity for new comers to come in and do their best to offer their products and services. But this system is quite imperfect.

And, again, the thriving, in fact almost monstrous, lobbying industry in Washington, DC illustrates how everybody, from dairy farmers to sugar growers, from the auto industry to the film industry, is trying to get special favors from Congress, the Executive Branch and all sorts of regulators, or prevent their competitors from getting them.

Europe pushing champions

That said, it seems that in Europe they are about to take this game up one level. Afraid of losing not just a few battles but the actual war on innovation and competitiveness, the Brussels-based European Union technocratic elites are now dreaming of creating EU Champions in leading tech sectors, (batteries for electric vehicles, telephony, artificial intelligence, robotics, you name it). This will be done by creating partnerships between the private sectors, national governments and EU institutions.

Well, this is a lot more than just lobbying. This is about openly subsidized new conglomerates created for the specific purpose or carving pieces of markets now occupied by American and increasingly Chinese tech giants.

Airbus worked

There is, of course, an illustrious (and remarkably successful) precedent to all this. And this is the Airbus consortium created back in 1970 by the Europeans to compete against America in the critical sector of passenger jets, and more. At the time, US companies dominated world markets. Europe had nothing.

If the intent was to carve a space for European companies, the notion of different companies in different European countries (France, Germany, Britain and Spain), enjoying varying degrees of state aid, being capable of designing, manufacturing, and selling state of the art jetliners for the global market seemed truly preposterous.

Indeed, many skeptics predicted that this Airbus consortium would turn out to be a gigantic waste of time and money. To begin with, the business model seemed most improbable, since it rested on the willingness and ability of various corporate entities located in different countries, with distinct agendas and corporate cultures, to successfully cooperate in a major effort aimed at designing, producing, and selling state of the art jetliners.

Success

Well, surprise! it worked. In fact it worked extremely well. Nowadays, Airbus is the undisputed number one or number two (depending on the year) manufacturer of jetliners. However, Airbus, especially in its early years, managed to survive because, beyond its now undisputed ability to make good airplanes, it enjoyed various subsidies. Could Airbus have survived without them, especially in the difficult early years? May be not.

Of course, Boeing, the US aerospace conglomerate that suffered the most on account of this new, well heeled competitor, cried foul. How can a US private sector company compete against a European conglomerate that benefits from various states aid, while its customers (the airlines) could obtain extremely generous finance terms for purchasing Airbus products?

The Airbus reply was that Boeing enjoys its own subsidies. It gets a lot of business from the US Defense Department. With those profits it can finance its civilian airliners sector.

However, even though there is some truth in the argument that Boeing is not a pure private sector company fighting against many competitors, it is absolutely clear that Airbus could not have been conceived without the massive state subsidies that gave the company the staying power (especially in its early years) it needed in order to consolidate its fragile market positions.

More subsidized consortia in the EU?

So, is the EU idea now to repeat the Airbus formula, extending it to different critical industrial sectors? Can this be done? Will it work? Well, it seems that this is the only idea that might work in Europe. The European private sector, (assuming we can talk about a EU-wide private sector), is just not capable of doing important, ground-breaking things on its own. And this reality has critical implications. Europe is already falling way behind in tech innovation. If nothing happens, the competitiveness war will be lost very soon. Europe will be an industrial backwater.

China, the emerging world economic power, does not have any problems pushing its own national champions, be they state owned enterprises, or nominally private enterprises, (think Huawei), that clearly enjoy special status as favored companies. Clearly China is not a market economy.

Free markets are an abstraction

Alright. The above tells us that truly free markets, with open and unfettered competition, are an abstraction. In varying degrees, everybody is exhibiting rent-seeking behavior. Everybody is trying to game the system via carve-outs, set-asides, protectionism, ad hoc regulations, and other non-tariff barriers in order to keep the competition out, or at least in a disadvantaged position.

More lobbyists in Washington, DC

Comparatively speaking, the US seems a bit better. However, do not expect the armies of Washington, DC lobbyists to disappear any time soon. If anything, they are becoming bigger, more sophisticated, and more expensive. And this is a worrisome trend. We preach free markets. Some politicians may actually believe in them. But corporations currently enjoying a dominant position are not really committed to this idea.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Brexit Should Force EU To Rethink Its Purpose

WASHINGTON – The most improbable is now reality. Great Britain opted out of Europe. What does this Brexit vote mean? it means as a minimum that the grandiose European Project that was supposed to have already created a “Continental Symphony” with all EU members playing harmoniously together, in order to praise the virtue of a strongly felt “European Unity” was and is in fact a dream.

The Brits do not buy it

Most British people do not buy any of this. This vote also means the end of David Cameron as British Prime Minister. He led the “Remain” campaign, and he lost, becoming now another political casualty in the broader war between old European political establishments and a restless public, deeply uncomfortable with the status quo.

The British do not see themselves as Europeans

Whatever the political, economic and trade consequences of this upset, as a minimum we know this: a majority (albeit slim) of British voters do not think of themselves as Europeans. The “Leave” camp claims that by severing these ties, the UK regains its full sovereignty. What does sovereignty mean to the average UK voter? Probably something akin to freedom from a vaguely defined foreign (Brussels based) interference.

Narrow victory

It is true that the “Leave” camp won by a narrow margin. But this result in favor of Brexit was not supposed to happen. The UK is after all a leading member of the EU. Its voice matters on the Continent. And yet most British citizens feel that being in the EU is damaging their country.

Is this really true? Probably not. Hard to assess the net losses or benefits for the average British voters of a complicated web of treaties, agreements, regulations, and administrative procedures that binds Britain to the EU.

Vote driven by emotions

In the end, it is clear that most British people voted on the basis of emotions rather than a rational assessment of costs and advantages of EU membership. But emotions and gut feelings do matter when one determines his/her allegiance to any entity that has the aspiration of becoming more important than one’s own Fatherland. The gut feeling here is mostly negative.

And now what?

That said, what will happen next? Who knows really. Before this vote, the Cameron Government made extremely dire predictions of economic losses, stagnation, unemployment and more in case of Brexit. But we do not know that for sure.

There will be a two-year window of time to plan for the exit. And while the disengagement from the horribly convoluted layers of European agreements may prove to be very complicated, I do not believe that this will doom the UK. I suspect that the necessary adjustments will be easier than anticipated.

And some basic things will not change. We are after all in a globalization era of mostly zero-tariff free trade. Finally, I do not believe that it is in the interest of the rest of the EU to make things too complicated, just for the pleasure of giving a hard time to the bizarre British.

Little Britain

True enough, since Scotland voted overwhelmingly in favor of “Remain”, we may very well see demands for a new referendum on Scottish independence. And this time it may succeed. Great Britain may very well cease to exist the way we know it today. Besides, Britain will have to sort the post Cameron era. Will Boris Johnson, former Mayor of London and leading “Leave” champion, become the next Prime Minister? Possible.

The future of Europe

But here is the most important consequence of this shocking referendum result. The unexpected vote in favor of Brexit will force –this is my hope– the rest of the EU members to have a serious debate about the current state and future prospects for the EU.

It is no secret that there is a strong anti EU sentiment also in other European countries, from France to Poland. If the UK survives this transition out of the EU without too much damage, others may be tempted to follow suit. Indeed, unless the EU begins to mean something really important for the average European, what is the compelling reason for staying in this arrangement?

Bureaucratic set up

Other European citizens may want to sever their ties to the EU because they also see the European Union mostly as an elitist affair managed by Brussels-based unelected technocrats who have no political mandate and no political mission. They are faceless functionaries who regulate everything, and inspire nothing.

Indeed, the anemic European Union grows little and in most key sectors it does not invest and innovate enough. For EU members, being together does not mean that the Union they belong to is much more significant and more vibrant than the sum of its parts. The parts (with few exceptions) are weak, and the EU is also weak.

More countries to follow the UK?

I suspect that, given a chance to express their opinions, significant pluralities or even majorities of EU citizens would vote to follow the British example. The EU is an interesting experiment in free trade and building supra national institutions. But it is inefficient, it lacks coherence and –most fundamentally– it lacks a truly inspiring purpose that can be understood and embraced by the average citizen.




There Is No European Identity

WASHINGTON – For the outside world, the current political debate within Great Britain about staying in the European Union, EU, or leaving, depending on the outcome of a June referendum, looks like arcane stuff, and probably not that interesting. Another strange internal European thing that foreigners, and Americans in particular, do not understand much, and frankly do not care that much about.

What difference does it make? 

In the end, what difference does it make to America if Britain, a much diminished second rate power, belongs or does not belong to an assorted group of medium, mediocre, and poor European countries tied together by a complicated web of trade agreements?

Well, it probably does not make a huge difference to Americans.

Failure of the “Idea of Europe” 

But this issue matters in Europe. And I am not referring here to the ripple effects of a British Exit, or “Brexit”, when it comes to trade between the UK and the rest of the EU, or the possible consequences on the City of London as a key global financial center, should Britain begin to operate outside EU banking and securities rules.

No, I am referring to something else. I am referring to this. The very fact that Britain is openly debating whether or not it is good for the country to stay in the European Union attest to the failure of the “Idea of Europe”.

The unfulfilled promise of a “European Union” 

The very denomination “European Union” suggests a relevant and powerful new entity that is and will be involved in a lot more than agricultural subsidies and regulating the allowable size and shape of vegetables.

True, from the other side of the Atlantic, the EU looks mostly like an over complicated, and rather cumbersome arrangement among under performing economies, run by bureaucrats who seem intent on regulating everything.

A Big Project 

But, in Europe, the expression “European Union” is supposed to have a strong meaning. In Europe, at least for some, the European Union is an unfolding “Big Project”. It is the plan to progressively unify almost 30 countries, eventually creating a United European Super State, (or something close to that), so that the new entity would be much more relevant than the sum of its individual parts, (the member states).

And this Big Project supposedly is the pull factor attracting so many applicants. The EU is the future; and they want to be part of it.

Well, this is the official, or semi-official narrative.

Lack of shared strategies

In practice, the picture is far less attractive. Cohesion and solidarity, let alone unity of purpose among members, is rather low. Getting to an agreement on practically anything within the EU involves an immensely laborious process aimed at reaching a consensus among almost 30 governments.

And when the focus is on major policy choices, common strategies, the EU members find watered down unity at the lowest possible common denominator. In simple terms, this means that whatever the EU declares, nobody listens to it, because it is usually just empty rhetoric.

Right now the EU is trying, with little success, to forge a common policy to face a major refugee and immigration crisis triggered in part by the civil war in Syria. It is obvious that there is very little common ground among member states.

Furthermore, there is no discernible European foreign policy; let alone security policies based on a genuine consensus on external threats and appropriate countermeasures. Threat perception in Portugal is not the same as threat perception in Greece or Poland.

Europe is not irrelevant

Do not get me wrong. I am not suggesting that the EU is inconsequential across the board. On matters of global trade, anti-trust, financial arrangements, and a lot more the EU is very consequential. And for foreign investors and exporters into the EU, the harmonization of rules within the EU, plus the existence of a pan-European market where the same norms are applied across almost 30 countries, from Finland to Croatia, is a major advantage.

No European Identity 

Still, all this notwithstanding, the EU failed in its ultimate goal: the creation of a genuine “European Identity” that successfully replaced or will soon replace national identities. If this shift had been accomplished, then the issue of Britain leaving Europe would have never come up. Nobody would want to leave a new Super State that all citizens strongly identify with and that brought about so many advantages to all its members.

What will Britain do? 

And yet, the debate about leaving the EU is going on in Great Britain. In June there will be a referendum that will allow voters to settle this issue. My hunch is that eventually the British people will decide to stay in the EU.

Still, the very fact that no one dares to predict the outcome of this referendum is an indication that Britain is deeply divided on an issue that should have been settled decades ago. Other countries that are not planning any “In or Out” vote are also deeply divided on whether EU membership is a good thing or not. (Think of Poland, Denmark, Greece, and to a lesser extent France and Italy).

EU will survive; but it will stay weak

Here is the thing. With or without Britain, the complex inter-governmental arrangements that make up the European Union will survive.

But Europe will continue to be a rather weak hybrid in which some components of national sovereignty have been delegated to EU functionaries in Brussels, while others remain under the control of national political authorities. All these competing authorities and jurisdictions created a recipe for confusion and weakness.

With or without quarrelsome Britain, forget about a strong Federal Europe. And, most of all, forget about a strong Europe playing a decisive role in world affairs. If the Europeans do not believe that much in Europe, why should the rest of the world take the EU seriously?

 




Immigrants No Longer Welcome in Europe

WASHINGTON – Predictably, the European refugee problem has turned into a major Europe-wide political crisis. Anti-immigrant, far right political forces are gaining strength, prompted by widespread illegal behavior displayed by many immigrants.

It used to be about logistics

Here is the thing. Until not too long ago, when it came to massive immigration from Africa and the Middle East the major focus and concern for most European policy-makers was on logistics and budgets. How many new immigrants can Europe accommodate every month? How many shelters are there? What about paying for food, clothing, medical care, education? And what kind of jobs can communities across Europe create for these often illiterate new comers? 

Xenophobia 

But now, while all these “practical issues” still matter, we have to add open xenophobia. Yes, most Europeans do not want these immigrants.

In a way, it is not surprising that among millions of new arrivals there are some criminals and some would be –or real– radicals and terrorists. Of course, the trouble makers are not the majority. But there have been and there are enough nasty daily occurrences of immigrant law breakers to give a bad name to all immigrants/refugees/asylum seekers.

Every time an Arab or African immigrant is arrested because of theft or violent acts, this fosters an atmosphere of fear and alarm. In many localities, and sometimes entire countries, now the prevailing sentiment is that all the new arrivals are bad people, or at least dangerous.

The highly publicized New Year’s Eve attacks by immigrants, some of them recent refugees, against a very large number of German women in Cologne, and in other German cities, are now considered hard evidence that all immigrants are criminals and rapists.

In Italy a small group of young kids was taken hostage for a short while by Muslim immigrants who put the boys in a line and asked them in a menacing way: “Do you believe in God or Allah?” While a weapon was fired in the air, no violence followed. Still, this sounds like material lifted from some ISIL internet propaganda video.

Throughout Europe, every day there are reports of attacks against immigrants. Shelters for immigrants are often set on fire.

Unprepared Europe 

The problem is that Europe is not equipped materially and psychologically to welcome millions of poor people with vastly different cultural backgrounds. They are mostly Muslim. Many of them come from a region in which there is a great deal of political violence and terrorism inspired by radical Islam.

Of course, the recent Paris large-scale terror attacks seems to confirm what most people fear: “All Muslim immigrants are dangerous. We do not want them. They should be sent back”.

Send them back? 

But this is impossible. Europe does not have and will not have both the will power and the practical ability to kick everybody out. We are talking about millions of people. And it will also be extremely difficult to close the door to all new immigrants. Desperate (and opportunistic) people are coming in, they will keep coming in. Some of them have traveled long distances on foot. The “civilized” Europeans simply do not know how to stand firm and prevent them from getting in.

It is probably true that most refugees are genuine. They are poor and desperate people seeking a better life. But the criminals and would be terrorists among them created the now prevailing negative perception.

I’m afraid this cannot be fixed. And European leaders are in a bind. They cannot be at the same time humanitarians, and really strict on law and order. The current refugee problem, now mixed with the unsolved issues created by vast and not assimilated older immigrant communities, has become too big.

Europe will be changed by this wave, in a bad way 

Expect the mess caused by these chaotic waves to continue and to get worse. And here is a simple, if sad, prediction.

Europe will be changed by the enormous numbers of Muslim refugees. Not the other way around. The refugees will not be assimilated. They will transform Europe. And quite frankly this is not going to be an improvement, simply because what they bring is not a refined culture. “Multiculturalism” sounds really nice. Yes, provided that you can have a productive encounter among developed cultures. And this is absolutely not the case right now.

Traditional cultures with outmoded values 

What these mostly illiterate or semi-literate refugees bring along with them is at best a traditional rural culture of old, outmoded values (including medieval ideas about the role of women in society, and full justification for “honor killing”).

Sadly, the days of refined Arab scholarship ended many, many centuries ago.




Europe’s Refugee Crisis Getting Worse

WASHINGTON – According to UNHCR, the UN refugee agency, so far in 2015 Europe received about 300,000 refugees who landed on EU countries after crossing the Mediterranean Sea from North Africa. For the entire 2014 the number was 219,000. So, we are trending up. And there is no end in sight. People escape from poverty, war, persecution and civil strife. Unless major changes occur in their countries, they will continue to flee.

Many are coming 

And these numbers are about those who were processed, and therefore counted. It is a safe bet to assume that the actual numbers are much higher. (And here we are not adding to the total count other refugees streaming into Europe from the Balkans, through Macedonia, Serbia, Hungary and other countries).

Well, beyond the humanitarian crisis, is this injection of millions and millions of new people (over many years) good or bad for Europe?

Mostly bad for Europe

Unfortunately, it is mostly bad. In order to explain why, let’s understand the broader context.

In most European countries the indigenous population is slowly declining, while on average it is getting older. All statistics about fertility rates point to a steep fall, especially in Southern and Eastern Europe.

This means that existing (and often generous) entitlement programs that provide cash transfers and free health care services to seniors citizens can no longer be funded via the financial contribution of the active population.

Costly entitlements

Add to this worrisome trend anemic economies that generate very little wealth, and you get an ugly picture of older populations progressively consuming more resources in countries that produce less and less.

As politicians are afraid of engaging in reforms that would amount to lower benefits, the only “solution” is to borrow part of the funds destined to transfer payments. This means that these shrinking and increasingly older societies, bit by bit, are also getting more indebted, and therefore poorer.

Is immigration a remedy? 

Given all this, allowing, in fact promoting more immigration could be a remedy. New, younger immigrants getting into the labor force would strengthen the productive base, while adding to the pool of active workers paying into the welfare systems.

Yes, this is true. Except that much depends on what kind of immigrants you get. Unfortunately, most of the refugees getting into Europe seek help rather than work. They are mostly unskilled. Many of them are Muslims, something that makes it even harder to be integrated in historically Christian societies.

Immigration into America 

On balance, America, with all its real problems caused by a broken legal immigration process, is still a magnet for people “who want to do something”.

On balance, America is still viewed by would-be immigrants as the “Land of Opportunity”. “Over there, we shall be able to do things that we cannot do here at home”. The perception of a country that offers a good combination of personal freedom and economic freedom creates a real incentive for motivated immigrants.

Needless to say, America also gets a lot of poor, illiterate people who have a really hard time adapting, once they get to the USA. They do not speak any English. They have no education. They have no skills.

High end 

But, on balance, most immigrants come to America seeking opportunity, not welfare. At the very high end, the highly educated Indians, Chinese or Korean immigrants who settle in Northern California quite often end up setting up and running successful high-tech ventures. While they make money, they create businesses. They create jobs. They enrich America.

The poor 

Sure, there are also hundreds of thousands, in fact millions, who end up at the bottom of the labor market. We find them as janitors, entry level construction or landscape workers. We see plenty more behind a counter at a 7/11, or working as parking attendants.

Still, on average, the new immigrants try to fit in, and eventually they rise within the existing economic and social fabric.

And then there are also truly remarkable stories. The Vietnamese “Boat People” who came to America, back in the 1980s, had nothing. Well, in many cases, because of their incredible ability to work hard and use any opportunity for economic advancement, their children ended up going to good universities. And this is also the case for other Asian immigrants who tend to value work and education.

In Europe, a different story 

Well, in Europe it is mostly a different story.

First of all, we are dealing with a different group of immigrants, with vastly different motivations. These immigrants are mostly poor or very poor people who come from Africa, North Africa, and the Middle East. Many of them are real refugees, escaping from conflict or civil strife in Syria, Iraq or Afghanistan. Just like the Central American immigrants crossing the US-Mexico border, most of them are illiterate.

But here is the fundamental distinction. America is viewed as a “Land of Opportunity”. America is a “Can do country” that is natural magnet for“Can do people”.

Go to Europe to get help

Europe instead is viewed by the would-be immigrants as a peaceful, tolerant place where the state has many generous social programs. In other words, you go to America to get work, while you go to Europe to get help.

Granted, this is a broad generalization that will not do justice to many highly motivated people. Still, by and large poor people are attracted to Europe as the place to go to not in order “to do something”, but in order to “get something”.

No benefit for Europe

For all these reasons, demographically challenged Europe will get very little benefit from this relentless migratory wave from Africa and the Middle East. Instead of the immigrants learning European customs, while focusing on improving their education, skills and work opportunities, we see that larger and larger parts of Europe start resembling the countries where the immigrants came from.

A giant welfare agency 

Look, I am not against multiculturalism –as long as the new cultures enrich the existing one. But this is not the case. The immigrants bring into Europe mostly their problems, including out of step customs regarding the value of education, and the place of women in society.

In the meantime, Europe has become an extra-large social welfare agency that has just received and will continue to receive millions of new applicants, while its funding sources are dwindling.

This does not look good.

 

 




Europe Sliding Into Irrelevance

 

WASHINGTON – Here is today’s Europe. Stagnating economies, non-existent innovation, high debt caused by unaffordable pensions and other entitlements, and educated young people going away in search of opportunity.

Old societies

And there is more: high unemployment, especially for young people, and declining birth rates. Combined with the slow but steady drain of the most ambitious within the new generations, declining birth rates (below replacement levels in all of Europe, with the exception of France), mean frail societies dominated by senior citizens whose main preoccupation is not investment in the future but collecting pensions.

Generous pensions  and other entitlements were pledged by politicians  who over promised, thinking that the money to pay for future benefits somehow would materialize.

Immigration from Africa

If you think this is bad enough, sorry to say that there is more. Yes, add to this depressing mix the steady inflow of desperate illegal immigrants from North Africa, Sub-Saharan Africa and the Middle East. They escape from poverty, wars  and political chaos, hoping to find something better in Europe. This is not a massive wave, but a steady, daily drip-drip. Tens of thousands arrive every month, and this has been going on for years, with no end in sight.

Now picture this. Italy has zero growth and high unemployment (above 10%). Youth unemployment is about 40%, and around 60% in the South. And yet now the same tired, over stretched and impoverished Italian state has to provide for thousands of new illegal immigrants who sail daily from North Africa, landing in Sicily. (So far, 20,000 new arrivals in 2015).

And what can these poor migrants, (many of them women and children), add to a semi-comatose Italian economy? Nothing. Absolutely nothing. In fact, they represent a new cost. They are poor, illiterate, and unskilled. On top of that, a majority of them are Muslim, this way adding another layer of complexity to the already impossible task of integrating millions of aliens into a new society.

We have a strategy

In all this, there is an amazing degree of wishful thinking in Europe that has now passed the threshold of collective insanity. Here is the plan, the smart (and painless) strategy to get out of all this.

“No worries. Mario Draghi and the European Central Bank, (ECB), have got this thing under control. You see, they have launched Quantitative Easing, (QE). And this clever remedy works practically like a (free of charge, mind you!) Elixir of Long Life.

All of a sudden –Puff!– interest rates are down to zero, And this magic remedy means that (essentially broke) governments now and going forward can keep borrowing, since the cost of servicing new debt is down to nothing. 

Therefore, this QE Elixir means that we can keep on ignoring the fiscal disasters caused by monstrous and totally unaffordable welfare states. As long as we can issue more bonds, all is well. We shall pay pensions by issuing more bonds. This is a really smart policy, and it will work wonders.

Yes, we may concede that Greece overdid this a little bit. But everybody else will be fine. Italy’s national debt is now 130% of GDP? Totally manageable. France’s economy is semi-comatose? Wait for QE to work its magic.”

No reforms

While delivering his monetary cocaine, Draghi did also say to the EU policy-makers that they should get serious about realistic new fiscal policies, and pro-growth legislation. But the policy-makers have gladly taken the QE cocaine dished out by the ECB and ignored the warnings.

In all this, Europe is not going to go down in flames, in the midst of financial chaos and political unrest. No, just like on old person afflicted by a variety of serious, but not lethal, chronic diseases, Europe will shrivel, and slowly slide into irrelevance.

 




Advice To Europe: Deregulate And Cut The Red Tape

WASHINGTON – Well known Wall Street financier Steven Rattner stated the obvious about Europe’s lack of competitiveness and what to do about it in a NYT op-ed (Europe’s Anti-Business Stance, January 29, 2015). Europe’s problem, he says, is not about making the right choice between “stimulus” and “austerity”.

Not competitive Europe

The problem is that Europe is no longer competitive. The real problem is in stratified laws, ruled and customs that make it very difficult for enterprises to thrive. “Archaic restrictions on hiring and firing workers –writes Rattner– flawed energy policies and kilometers of red tape that can make even starting a business difficult –just to name a few– have combined to damage the Continent’s ability to compete in increasingly global markets”.

Centrist advice

So, there you have it. Red tape, rigid labor markets, and more. This is the problem. And, in case you are wondering, this is coming from a practitioner who worked for Barack Obama at the time of the General Motors bailout. In other words Rattner represents a centrist point of view, not some kind of far right, ultra free market extremism.

Yes, as he says, a stratification of bad policies, to which we should add the exaggerated power of trade unions, have created an anti-business and therefore anti-growth economic environment. This is the problem; and this is what needs to be addressed and resolved, if Europe wants to get out of this trend leading to economic decline.

QE is the wrong remedy

Given all this, continues Rattner, the recent European Central Bank (ECB) decision to start its own Quantitative Easing (QE) policy “amounts to reaching into a medicine cabinet when the patient needs open-heart surgery”.

Got that? The patient –Europe– needs the equivalent of open heart surgery, and instead the ECB is ladling more easy money, as if this were the appropriate cure for profoundly non-competitive economies.

Change policies

Indeed, what is the point of QE in Europe now? With real interest rate at zero across Europe, how much lower can they get? Europe’s problem is not that obtaining financing is too expensive, the problem is that there very few investments in activities that will create wealth and employment.

Europe needs to become more competitive in global markets“, continues Rattner. “That can be achieved only by a variety of policy changes, such as keeping top tax rates at sensible levels and regulatory reforms that would give companies more freedom to manage their businesses as they see fit, including, when necessary, closing plants and reducing head counts”.

Unheard of

Can you believe that? Companies need freedom to operate, including the freedom to hire and fire employees. And taxes should be reasonable.

Unheard of.

And yet this almost banal advice comes from Steven Rattner, a centrist who used to work for the Obama administration, not exactly a nest of right-wing reactionaries.

However, the very fact that what Rattner, a reasonable practitioner, suggest has little chance of being enacted in France and Italy, let alone Greece shows the profound disconnect between what many Europeans believe to be sensible economic policies and what it takes in the real world to generate growth, wealth and jobs.

Socialism is alive and well

The sad conclusion is that, while the communist parties have lost their appeal in Europe, destructive socialist ideas are alive and well. To the extent that silly egalitarianism dominates, while profit-making activities are demonized, there is no way for Europe to come back.

For sure the ECB “medicine” is not going to solve deep-seated problems that are not even acknowledged by most policy-makers.

 




Fiscal Stimulus Does Not Work –Yet We Keep Applying It

WASHINGTON “If economic troubles are approaching, put together a big stimulus package”. This is the universally accepted prevention/remedy therapy to save any country from the storms of recession or the chills of stagnation.

A good idea?

In principle it sounds like a good idea. If demand is falling, the government will create it through major public spending programs, (infrastructure is a big favorite), and by injecting more liquidity into the financial sector, this way encouraging banks to lend more money.

Well, guess what, it does not work.

Malinvestment

In most cases the money spent by governments becomes “malinvestment”. Many new loans become bad loans because, in the rush to promote more economic activities, undeserving, sub par projects get funded. So, when the dust settles, precious capital has been wasted, growth has not increased, while deficits and debt have grown.

If you want a more detailed account of this sad tale of dashed expectations, read How Spending Sapped the Global Recovery, an interesting WSJ op-ed piece, (January, 16, 2015), by Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management.

China’s stimulus did not work

For instance, China, in order to forestall any major contamination spreading from the devastating 2009 US financial crisis, launched a mega stimulus program (12% of GDP)to protect its economy. The problem is that these new funds have often been poorly allocated.

State banks gave money to badly managed State Owned Enterprises, (SOEs). This led, (among other things), to the creation of massive overcapacity in the steel industry that was beefed up in order to produce the material needed to fuel an absurd construction spree.

And now, after all that spending, empty apartment buildings, under-utilized airports and half-occupied shopping malls dotting many Chinese cities provide painful evidence of bad allocation of capital. In the meantime, China did not manage to avoid an economic slow down.

The spectacular failure of China’s stimulus plan should serve as a lesson.

But no. We learn nothing.

We learn nothing

Confronted with stalled economies and frozen political systems that are incapable of promoting the creation of new competitive enterprises, unimaginative government go back to the same, tried and discredited Keynesian medicine: more stimulus.

Abenomics in Japan did not work. But wait, politically victorious Prime Minister Shinzo Abe has the magic powder. How about a brand new $ 29 billion stimulus program? Yes, it sounds like a great idea. In a country with a debt to GDP ratio of 240%, creating more debt seems like a good way to grow out of debt.

And what about Europe? Same story. In this scenario the savior is going to the European Central Bank. The ECB will do the heavy lifting, by buying bonds, this way supposedly revving up the financial sector, by making it easier for (often semi-comatose) European corporations to obtain new commercial loans.

It is amazing how we keep doing the same old stuff, even when the evidence shows that it does not work.

Real growth

Real growth in mature economies is about R&D that produces commercially viable innovation. In time, innovation will translate into increased workers’ productivity and growing standards of living. Of course, we all want economic, fiscal and monetary policies that will not create obstacles to the growth of new enterprises.

But here we have instead the childish belief that propitious monetary and fiscal policies –by themselves– will create innovation and vigorous enterprises. It would be nice if it worked this way. But it does not. Capitalism requires real entrepreneurs. And no, financial manipulations and government mandated investments do not produce solid, wealth-generating corporations.

As Agustin Carstens, the President of Mexicos’ Central Bank, told Sharma, (the author of the WSJ piece referenced above), “fiscal and monetary policy cannot create growth”.

Indeed, they cannot.

Overall, stimulative policies most of the time amount to bad allocation of capital and malinvestment, higher deficits and a larger debt.




The Economist Gives Good Advice To Europe – Anybody Listening?

WASHINGTON – The respected The Economist magazine dishes out good economic growth advice to Europe, (The World’s Biggest Economic Problem, October 25th 2014). Here are the highlights. Stop Germany’s “austerity fixation”. Severe spending cuts contribute to economic stagnation in under performing countries like Italy and France. 

Less austerity, more reforms

Wise policy-makers should agree to relax austerity a bit. In exchange, the countries that will gain some more breathing room (Italy, Greece, Spain, France and Portugal) should commit to serious reforms that will enhance economic growth.

This is a nice idea. But it is naive to believe that this can happen. Italy and France are still prisoners of outdated ideologies that in practice work against growth. Sure enough, there are some sincere reformers. But they face an enormous, established and entrenched opposition.

Good advice

Of course, as The Economist suggests, it would be good for France and Italy to shed excessive and often stupid regulations, old labor laws that discourage hiring more workers, confiscatory taxation, and a lot more.

Of course, it would be nice if elected leaders could see the light and understand that economic growth requires a pro-growth “eco-system”. There are literally mountains of evidence indicating that if it is too difficult or too expensive to start or grow an enterprise you will have very few of them. Everybody should know that.

More of the same

Still, despite all the empirical evidence about what should and should not be done to create growth and jobs, the hoped for structural reforms are not coming along. Therefore, the notion that you can have a deal whereby in exchange for less austerity the struggling countries will get serious about reforms is wishful thinking.

This is what they will do. With a green light for less austerity, they will free to borrow more in order to finance more public spending that they will re-label as “investments”.

Translation: “Expect more of the same”.

Mega Plan for Infrastructure

By the same token, The Economist suggests that Europe should engage in a Grand Plan aimed at creating/modernizing “Pan-European” infrastructure. This would create jobs across the EU, while improving overall economic productivity. All this could be funded by the European Investment Bank, (EIB), with the help of the European Central Bank, (ECB) that could agree to buy bonds issued to finance these productivity-enhancing mega-projects. There you go: solid projects, easy funding.

This is another wishful thinking marvel. Think about it. First you need an agreed upon and carefully prioritized Grand Plan with the concurrence of 28 countries. Just imagine getting this done.

Then you need agreement among all the obvious and not so obvious stakeholders regarding an implementation schedule. Among them: the EIB, the EU, the ECB, the central and local governments of the countries concerned, (The Economist likes regional infrastructure), and then all the economic interests affected.

And finally you will need to win over all the environmentalists, greens and assorted “Luddites” who are against building anything new, as a matter of principle.

What The Economist suggests is not technically impossible. But it is politically impossible.

Lack of pro-growth political parties

Let’s say again that in many European countries policy debates are shaped mostly by political forces, (the Socialist Party in France, the Partito Democratico in Italy), that (amazingly) continue to believe in watered down but still damaging socialist ideologies.

These beliefs in general place redistribution and egalitarianism ahead of measures that will increase production and wealth creation. Despite the spectacular failure of this approach, hard to sell anything else.

Useless advice

Unless all of this changes, forget about serious (as opposed to cosmetic) plans to create the needed pro-growth “eco-systems”.

I would think that The Economist‘s editorial writers know all this very well. But their essays full of good, practical advice assume a radically different type of audience.

 




Total’s Chief Accidently Killed By His Russian Friends

WASHINGTON – It is really odd that oil man Christophe de Margerie, Total’s CEO and Putin’s friend, was killed in an airplane accident caused by Russian negligence, as his private jet, a Dassault Falcon 50, was taking off from Moscow’s Vnukovo Airport in bad weather.

Russia’s friend

de Margerie was one of Putin’s strongest supporters in the West. He openly advocated closer energy ties with Russia. He wanted Total, one of the largest oil and gas conglomerates in the world, to continue joint energy projects with Moscow, despite the EU-imposed trade sanctions caused by Putin’s aggression in Eastern Ukraine.

Sad irony

The sad irony here is that de Margerie was killed, according to preliminary findings, by the ultra negligent behavior of his good and trusted friends. The crash was caused by a Russian Airport staff person who left his snowplow too close to the runway. Most unfortunately, as de Margerie’s private jet was taking off, it hit the plow and became uncontrollable. It fell from the sky, and the impact killed everybody on board.

So, de Margerie, on a good will trip aimed at keeping an open dialogue with his Russian friends, was killed by their lack of professionalism.

Negligence

The first news coming out of Russia is that the snow plow operator responsible for the accident was drunk. More broadly, other news accounts indicate that there was chaos at the Vnukovo Airport, because many commercial flights had been diverted there on account of bad weather.

As a result of too many flights and bad weather, the airport ground operations were overwhelmed. Hence confusion, a large piece of equipment parked in the wrong place, and then an accident.

Of course, this is a tragic accident. And it is not unique. There have been other instances of crashes in other countries when airplanes try to land or take off in bad weather.

This is Russia

But in this particular case, this unfortunate accident is also a reminder of what Russia is. It is a mix of bluster and over confidence, thuggish behavior and colossal incompetence. In this case, a snowplow obstructing the runway of a major international Airport.

Sure, Russia also has a lot of oil and gas. And this is why it has “friends”, just like de Margerie. Too bad that the Russians accidentally killed him.

Count on Total’s friendship

But I suspect that his successor at Total may be counted on to continue on the same “realist” course aimed at salvaging the relationship with Russia because of its self-evident economic benefits.

Benefits that, according the France’s sophisticated and super savvy managers, should not be sacrificed on account of energy poor, destitute Ukraine.