Commentaries

Should he stay or should he go? Miliband ponders

Should he stay or should he go?

British Foreign Secretary David Miliband could be Europe’s first foreign minister in all but name, with one of the most influential jobs in shaping the place of the 27-nation bloc on the world stage, if he is willing to risk leaving British politics for the next five years. That’s a big if.

Miliband is half of a “ticket” concocted by French and German diplomats to fill the two new top jobs created by the Lisbon treaty. The other half is Belgian Prime Minister Herman van Rompuy, the preferred candidate for president of the European Council. Officially, Miliband says he is ”not available” and is backing Tony Blair’s forlorn bid for the presidency. If he turns the role down, it could well to go to former Italian Prime Minister Massimo d’Alema.

The High Representative for foreign and security policy, with a big diplomatic staff, a multi-billion-euro budget and the additional position of senior vice-president of the European Commission, will arguably be more powerful than the European Council president, whose role is largely to prepare and chair quarterly summits. Miliband would bring dynamism, an incisive intellect and inspiring oratory to the job.

At 44, he is seen as the natural next leader of the Labour Party if, as expected, Gordon Brown loses the next general election. Given the average length of Britain’s political cycle since the 1980s, the centre-left party probably faces at least two parliamentary terms in opposition – roughly eight years. So Miliband would have time to burnish his international credentials in Brussels and return home before he turns 50, and before Labour has exited the political wilderness.

Another former Labour leader, Harold Wilson, famously said that a week is a long time in politics. Five years is an age. Other Labour politicians will fill the vacuum left by Miliband if he decamps to the continent. They may be less talented, but no one is likely to placidly keep the opposition leader’s seat warm until he is ready to make a triumphant comeback.

And don’t rule out smaller short-term considerations. A Miliband departure would cause an unwelcome by-election for Labour before the next general election.

Lower Opel costs to help government aid

General Motors’ decision to scrap the sale of Opel rests on the carmaker’s calculation that the hole in its European unit’s finances is not as deep as previously feared.

Governments should welcome the lower demands on taxpayers with open arms. But there is still some horse trading to be done to get everyone on board. 

GM’s chief executive Fritz Henderson is due to present his plans for Opel next week. He has good reason to be bullish.

GM’s previous forecast that Opel needs $3.3 billion to keep going until 2011 appears to have been sharply revised. Some in the industry think the amount required could be nearer 60 percent of that figure — some $2 billion.

Like other carmakers, European scrappage schemes and improved economic conditions have allowed Opel to significantly reduce its inventory. Cars that were sitting on the tarmac have been sold, putting much-needed cash back into the carmakers’ coffers.

Moreover, GM itself is doing better than originally expected in the United States since emerging from bankruptcy in July. This has given it the confidence not only to scrap the sale of Opel to a consortium led by Magna, the Canadian auto parts maker, but also to repay the remaining 900 million euros on a  bridge loan from the German government.

Earlier concerns about GM using U.S. taxpayer funds to prop up its units overseas seem to have eased. Henderson is now confident he can dip into GM’s U.S. pocket to shore up Opel.

Turkey’s EU bid fades with little drama

Turkey’s bid to join the European Union is fading away with surprisingly little drama because investors no longer see the prospect of accession as an essential policy anchor.

But EU leaders should keep Ankara’s entry negotiations alive on the back burner rather than trying to engage Ankara on alternatives to membership, as French President Nicolas Sarkozy would like to do.

In a version of the old Soviet workers’ joke, “they pretend to pay us and we pretend to work,” the buzz on Turkey in the European Commission’s enlargement department is, “they pretend they’re reforming and we pretend we want them”. (more…)

German covered bonds under scrutiny

Fitch Ratings seems to be getting nervous about the amount of commercial real estate loans included in German banks’ covered bond pools.

The agency today affirmed 17 covered bond programs as part of a review, but kept nine German banks programs `under analysis.’ The rating firm now wants more information from the banks on the kind of real estate debt they use as collateral for their covered bonds.

Covered bonds are a kind of secured debt issued by banks in which bondholders have recourse against both the issuer and a segregated pool of assets, such as mortgage or public sector loans.  German banks include large amounts of commercial real estate debt in the covered bond pools, alongside more granular and lower risk residential and public sector loans. Investors were happy to keep funding the banks and rating agencies gave the debt AAA ratings because the loans included in cover pools were required by law to be backed by a minimum amount of collateral, giving the loan a cushion in case the borrower defaulted.

The rules state that loans can only be included in covered bond pools if the principal is no more than 60 percent of the value of the property. However, given the sharp fall in commercial property values in recent years, Fitch is no longer comfortable relying on just this rule.

Fitch said today in a report:

“Whereas so far, Fitch considered that the mortgage lending value threshold set at 60% by the German Pfandbrief Act provided adequate protection against expected losses evening higher stress scenarios, the agency recognises commercial real estate risks in German cover pools need to be assessed more precisely’’

The rating firm has given banks three months to gather all the necessary data it needs to analyse the loans. There’s no mention of downgrades in Fitch’s report., though if the firm does decide the bonds aren’t adequately covered by the current cover pool, it could mean banks will have to stump up more collateral to support the deals’ ratings.

SPD debacle shows agony of European centre-left

It was a black night for Germany’s Social Democrats. Their catastrophic general election score of just 23 percent was by far the worst since the creation of the Federal Republic in 1949. It was more than 11 points worse than their result in 2005, and nearly 6 points worse than their poorest post-war showing in 1953.(Picture shows party activists at SPD headquarters watching first exit polls on television)

Their shattering defeat was the latest in a series of debacles for the European centre-left since the onset of the financial crisis. Just when the social democratic outlook of a strong state to regulate and curb the excesses of the markets and protect workers from the rough edges of capitalism has made a comeback around the developed world, its original proponents are in disarray.

Why? Partly because the centre-left is blamed by its own voters for having embraced deregulation and globalisation without taking care of the losers of such policies. Partly because it lacks charismatic leaders of the calibre of Helmut Schmidt, Francois Mitterrand, Tony Blair or Barack Obama. And partly because new social and economic forces — the services sector and the knowledge economy — and new ideas — ecology and communitarianism — have moved the political goalposts.

France’s Socialist party has been consigned to opposition since 2002 and is deeply divided over personalities, policy and ideology. The British Labour Party, after a record 12 years in power, is deeply unpopular and looks doomed to lose a general election next year. The Italian left has not managed to mount a serious challenge to Prime Minister Silvio Berlusconi, despite scandals over the billionaire media tycoon’s sex life.

As in France, the SPD bled votes to the radical Left party, to the Greens, to the conservatives and to abstention. An estimated 2 million Social Democratic sympathisers stayed home. As many switched to the Left — a mixture of former East German communists and disenchanted former Social Democrats demanding red-blooded socialism and an exit from NATO and the European Union.

The SPD took the blame for unpopular curbs on unemployment benefits under former Chancellor Gerhard Schroeder, as well as raising the retirement age to 67 from 65 under the grand coalition with conservative Chancellor Angela Merkel. An election-day opinion poll showed 67 percent of SPD sympathisers believed the party had betrayed its principles on these issues.

The party now has a chance to regenerate itself in opposition. But it will share the hard benches with the more outspoken Left party, which scored a record 12.5 percent on Sunday, and the environmentalist Greens, who draw a lot of young and educated voters. The SPD’s electorate is shrinking or dying out — pensioners, trade unionists, manufacturing and public sector workers. Whichever way the party goes in opposition, it stands to lose as many voters as it wins back.

Germans vote for change; will they get it?

Germans have voted for change. A centre-right government with a clear parliamentary majority will replace the ungainly grand coalition of conservatives and Social Democrats that ran Europe’s biggest economy for the last four years.

This should mean an end to ”steady as she goes” lowest common denominator policies, and at least some reform of the country’s tax and welfare system. The liberal Free Democrats, who recorded their best ever result with around 14.7 percent, will try to pull the new government towards tax cuts, health care reform, a reduction in welfare spending and a loosening of job protection in small business.

Conservative Chancellor Angela Merkel, a cautious centrist, made clear in her first post-election comments that she she would not allow a radical lurch to the right. She promised to be the ”chancellor of all Germans” — old and young, entrepreneurs and workers — and said the conseravtives would be sufficiently dominant in the new coalition to prevail “in questions that affect social balance”.

The new government faces tough economic challenges in what is bound to be a more polarised political atmosphere, with the Social Democrats in opposition. The economy is expected to contract by at least 5 percent this year, and export-led growth is likely to return only slowly. Unemployment is set to explode in the coming months as short-time work schemes run out. The budget deficit is set to top 6 percent of gross domestic product next year, more than twice the EU limit. So 2010 will be an extremely difficult year. But there are some problems that are even more urgent.

The first big choice involves Germany’s ailing banks. Outgoing Finance Minister Peer Steinbrueck admitted last week that the public-owned regional Landesbanks “continue to pose an enormous systemic risk to our market”. The outgoing parliament passed a virtually useless “bad bank” law meant to encourage stricken financial institutions to put their toxic assets into state-guaranteed special purpose vehicles. The banks have so far spurned the system because it leaves the risk of losses with them rather than with the taxpayer.

Merkel and her new partners need to amend the law so that the state takes more of the risk, otherwise Germany faces a future of “zombie” banks that are too burdened with liabilities to lend to the real economy. That won’t be popular, with the left bound to claim that taxpayers are being forced to bail out wealthy bankers.

Fixing the banks is more urgent than cutting taxes or curbing public spending to revive the economy. That also means merging the Landesbanks, shrinking their activities and privatising as much as possible. The Germans must also be ready to allow healthy foreign banks to buy up sickly German ones. That is the logic of the European single market, to which a centre-right government is likely to be more committed.

West raises stakes over Iran nuclear programme

President Obama and the leaders of France and Britain have deliberately raised the stakes in the confrontation over Iran’s nuclear programme by dramatising the disclosure that it is building a second uranium enrichment plant. Their shoulder-to-shoulder statements of resolve, less than a week before Iran opens talks with six major powers in Geneva, raised more questions than they answer.

It turns out that the United States has known for a long time (how long?) that Iran had been building the still incomplete plant near Qom. Did it share that intelligence with the U.N. nuclear watchdog, and if not, why not? Why did it wait until now, in the middle of a G20 summit in Pittsburgh, to make the announcement — after Iran had notified the International Atomic Energy Authority of the plant’s existence on Monday, after Iranian President Mahmoud Ahmadinejad had delivered a defiant speech to the U.N. General Assembly on Wednesday and after the Security Council had adopted a unanimous resolution calling for an end to the spread of nuclear weapons on Thursday?

Is this all part of Obama’s choreography to  build international pressure on Iran by getting Russia, in return for the dropping of plans to put a U.S. missile shield in Poland the Czech Republic, to threaten more sanctions against Tehran? A U.S. official says Obama shared the intelligence with Russian President Dimitry Medvedev at the United Nations this week and China had only just been informed. Did Obama try and fail to get Medvedev and Chinese President Hu Jintao — both in Pittsburgh — to join the three Western leaders on the podium? Or was his hand forced on timing by the fact that the New York Times had got wind of the Iranian nuclear plant and was set to publish the news on Friday?

The division of labour between Obama, Sarkozy and Brown was striking. The U.S. president sounded stern but his tone was measured. He stressed his commitment to dialogue and negotiation with Iran and to Tehran’s right to peaceful nuclear energy. He did not mention sanctions, let alone the possibility of military action. It fell to the Europeans to inject a tone of menace.

Sarkozy accused Iran of defying the international community and taking the world on a dangerous path, and said that unless Tehran changed course by December, there would be tougher sanctions. Brown charged the Islamic Republic with deception and said the international community had no choice but “to draw a line in the sand”, and that he did not rule out anything although sanctions were the preferred route. 

Will the latest disclosure on what Iran insists is a peaceful nuclear programme persuade Russia to renounce the sale of advanced S-300 anti-aircraft missiles to Tehran? Will it persuade China, which reaffirmed its scepticism about more sanctions this week and has begun supplying gasoline to Iran, to change its mind? The West sees Iran’s dependency on imported fuel as a key vulnerability.

Friday’s dramatic announcement was a clear effort to appeal to the world court of public opinion and maximise pressure on Tehran before the Oct. 1 talks, but there is no sign that the Islamic Republic’s leaders are even considering yielding on their nuclear ambitions. On the contrary, they seem convinced that the nuclear standoff will enable them to patch over deep internal divisions over the disputed June presidential election by playing the patriotic card.

Germany will have to change Opel deal after election

It looks increasingly clear that Germany will have to change its deal to aid carmaker Opel once Sunday’s general election is out of the way.

The European Commission has signaled to Berlin that promising 4.5 billion euros in loan guarantees to only one of the two bidders for General Motors’ European arm to preserve all four German production sites and most Opel jobs in Germany may breach EU rules on state aid to industry. EU regulators want to know why Chancellor Angela Merkel and four German states offered the money to back car parts maker Magna’s bid but not for financial investor RHJ International’s, and on what conditions. 

With Britain, Spain and Belgium’s Flanders region — all hosts to Opel production sites – crying foul, the EU executive is under strong political pressure to intervene. British Business Secretary Peter Mandelson has questioned the viability of Magna’s business plan in a letter to the Commission.  Brussels reaffirmed in a statement on Wednesday that Germany could not attach political conditions to the company’s restructuring plan or tie its hands. 

The European Commission will not accept that State aid granted under the Temporary Framework is conditional upon the implementation of a specific business plan, previously discussed and/or negotiated with Member States, which defines the geographic distribution of restructuring measures, without leaving to the beneficiary undertakings the possibility to revise their plans if necessary.

State funding under the Temporary Framework is meant to tackle the financing problems due to the credit crunch, and cannot be used to impose political constraints concerning the location of production activities within the internal market. The beneficiary undertakings must therefore retain full freedom to develop their economic activities in the internal market.

Even the Commission’s German vice-president, Guenter Verheugen, long regarded as the German car industry’s best friend, has told his countrymen that one EU country cannot be allowed to buy a favourable solution for its workers at the expense of another. He has offered the Commission’s help to bring all the Opel host countries together and work out a joint state aid plan for Opel to be monitored by Brussels.

In theory, that means Berlin ought to sign Magna and its Russian partner Sberbank a blank cheque which might lead to a plant in Antwerp or Luton or Zaragoza being kept open instead of an assembly line in Bochum, if the Belgian, British or Spanish site is more efficient. That would be hard for German taxpayers to swallow.

A chance for real change at the G20

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Most commentators are not expecting much. Such cynicism is easy to understand. When the IMF tried to bang heads together in 2006 the result was a series of empty pledges. It now makes for comic reading.

The United States swore to eliminate the federal deficit by 2012 and contain spending growth. China agreed to allow further exchange rate liberalization. The euro area said it would reform labor markets. We all know what happened to these promises.

But self-interest is providing a strong tailwind behind the current talks.

One background motivator at the G20 may be the mounting suspicion that imbalances were a leading culprit of the 2008 financial crisis. The tide of savings flowing from China into the U.S. bond market certainly helped fuel the asset price bubble by lowering borrowing costs.

The influential governor of the Bank of England, Mervyn King, recently warned that unless the situation is resolved the world was “doomed to repetitions” of the meltdown and the “substantial recessions” that accompanied it.

This theory is unlikely to be the driving force, however. Imbalances may after all have only played a walk-on part in the crisis. The deluge of money from China did not oblige U.S. regulators to tolerate a surge of bank leverage and a slide in lending standards.

“Tobin tax” gaining ground in Europe

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept. (more…)