The Great Debate UK

from The Great Debate:

Is France closing for business?

Arnaud Montebourg, a member of the French parliament, has a problem with the iPhone. He thinks consumers in France should pay more for it than they already do. Why? Because, he says, the iPhone is made by “exploited” laborers in China who are taking away the jobs of French workers and the best way to redress that is by putting in place trade barriers and taxes that will stop “excessive imports.”

Then there’s Renault in Morocco. When the French automaker opened a new factory in Tangiers in February, Montebourg decried the move as “a humiliation for French industry,” because Renault hadn’t built the plant in France even though the French state is an important shareholder.

Montebourg’s protectionist stance – he calls it “deglobalization" – is well known in his native France, but now he’s unleashing it on the world. In the new Socialist government, Montebourg is the “minister for productive recovery,” a job whose precise perimeter remains hazy but that appears to cover large swaths of industry and commerce. His first official statement was an announcement that he intends to lean on companies including Shell, ArcelorMittal, Unilever and Peugeot, that are planning to close facilities or lay off workers in France.

It’s still too early to tell how adept President François Hollande will be in steering the French economy through these difficult times, but already there are some early indications – including the appointment of Montebourg – that the business climate in France may be about to change for international companies.

France remains one of the world’s largest recipients of direct foreign investment, and international companies play a prominent role in the French economy, employing more than 2 million French workers and accounting for about one-third of the nation’s exports. Over the past decade, successive governments in Paris have worked hard to burnish the nation’s reputation as a business-friendly place – even as opinion polls continue to show a high degree of skepticism among the French public about the benefits of globalization. The efforts have paid off: Foreign direct investment into France in 2011 totaled $40 billion, according to UNCTAD. While that’s less than half the amount it received in the peak years of 2006 and 2007, it was an increase of 10 percent from 2010 despite the financial crisis, and kept France in the world’s list of top 10 FDI recipients.

France’s rich cultural life is an obvious draw, but over the past few years a range of fiscal and other measures have been put in place that are aimed at attracting foreign business. They include a tax credit for research and development expenses covering up to 40 percent of the amount invested; it ranks as the most generous in Europe.

The wind is now changing. Hollande was voted into office on a platform that is substantially less business-friendly than that of other left-leaning European leaders before him, including Britain’s Tony Blair or Germany’s Gerhard Schroeder, let alone his two conservative French predecessors, Nicolas Sarkozy and Jacques Chirac.

Hollande’s programme marks return of the Ancien Régime

By Laurence Copeland. The opinions expressed are his own.

Seeing the dewy-eyed kids at the post-election celebrations in Paris, I couldn’t help thinking how crazy it all was. The youngsters were plainly convinced they had a president to take their country forward into the new dawn -  after all, he campaigned under the slogan  “Le changement, c’est maintenant”. In reality, Francois Hollande’s programme is unambiguously regressive, with its stop-the-world-we-want-to-get-off determination to go in the opposite direction to every other country, its refusal to countenance any erosion of the country’s ruinously expensive welfare state and its complacent confidence that there is nothing to stop France carrying on as before. What better place to greet the return of the Ancien Régime than the Place de la Bastille?

Of course, the new President promises that he is going to balance the budget in 2017 with the familiar prayer of tax-and-spend governments the world over: “Oh Lord, make me solvent! – but not yet…” Now, even allowing for the fact that France’s deficit is only 5 percent of GDP, it still means he is going to keep on borrowing until the national debt is more or less as large as GDP. (Remember: a balanced budget means no need for more loans, so the national debt is constant. To start paying off its debts, a country needs a surplus, something France has not managed for more than forty years).

Then, of course, the biggest question of all: how on earth is this fiscal miracle of a balanced budget going to be achieved, given the raft of spending commitments which so delighted Socialist voters? It’s rather like listening to someone promising to lose weight while he tucks into a large plate of chips.

However things work out, you can be sure that the burden of paying for France’s public sector will not be borne entirely by today’s taxpayers, given that France is already one of the most heavily taxed countries in the Western world and that a 75 percent tax on the super-rich will probably raise very little revenue (at least for France – it may end up raising tax revenue for Britain, of course, if the rich move to London).

More likely, France will push its borrowing to the limit, so that, unless it actually defaults a la grecque, the debt will have to be repaid by the next generation or two, in other words by the very same youngsters who cheered themselves hoarse in the Place de la Bastille on Sunday evening.

How will they pay if they don’t have jobs? That’s what they really want – or so we are told.

What would markets and Merkel make of Hollande?

It’s time I came out of the closet and ‘fessed up. My friends, colleagues and family all know anyway, so ……OK, here goes.

All my adult life I have been and remain a Francophile. It is a perversion I can neither defend nor explain.

Having got that off my chest, I’ve a feeling my position is going to get more uncomfortable than ever over the next few weeks, as the French Presidential Election campaign gets going. Elections invariably expose the most unattractive aspects of any country, but with the National Front breathing down the neck of the incumbent, the immediate outlook for France is distinctly unappetising.

One common factor the French share with the Americans is a belief in their own exceptionalism, which in the current situation translates into a sort of deficit-denial syndrome, where either the fiscal balance is ignored altogether or the need to do anything about it is questioned. This delusion makes it possible for the French Socialist candidate to enjoy a 10%-plus lead in the polls in spite of running on an unreconstructed tax-and-spend platform for all the world as if it were still 1972 and the intervening decades were some kind of dreadful aberration. Not only does M. Hollande want to spend 20 billion euros or more on job creation schemes, he intends to pay for it by squeezing more tax out of the rich, which has to be good news for estate agents in Monaco and South Kensington. That should raise the French government’s share of national income, already one of the highest in Europe, to nearly 60%, and just to prove his insanity, he is also dead set on reversing the rise in the pension age from 60 to 62, a change which marked the highpoint of President Sarkozy’s timid reform programme.

Now it is often said that markets can only ever concentrate on one problem at a time. Certainly that was the way it looked, as for years they remained totally relaxed about the build-up of debt in the ClubMed countries, before suddenly waking up to the fact that Greece was barely months away from default. In recent weeks, they appear to have become calmer, either because they expect an eleventh hour agreement to save Greece or possibly because they have got so used to the endless sequence of last-chance deadlines that they are now reconciled to a disorderly default.

In the meantime, having moved on to worrying about Spain and the biggest borrower of all, Italy, they remain quite relaxed about France, presumably because they are still counting on President Sarkozy to save France from itself.

That confidence may yet turn out to be justified, because if he is able to win reelection against all the odds, he will be well placed to push through the reforms the country so desperately needs, and which he so predictably failed to deliver in his first term. But right now, the odds are stacked against him getting the chance.

Put the euro zone out of its misery

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

Let me make a wild guess – just a hunch, a vague feeling, the kind you get when you hear a football club chairman say “the manager has my full support”. My forecast is that the IMF monitors currently poring over the Italian government’s books will uncover a black hole somewhere, probably one big enough to swallow the euro zone, and the discovery will leave them as shocked as Captain Renault when he found there was gambling going on at Rick’s Bar in Casablanca.

My gut feeling is based on a deeply rooted suspicion of Italian statistics dating back to the early 1970’s, when I got my first job in academic life, as a research assistant in the University of Manchester. In that more tranquil era, it seemed possible to uncover a number of stable relationships between macroeconomic variables for all the other countries in the industrial world, but somehow never for Italy, which was always the outlier. Suspicion of the data is reinforced by the well-established claim that as much as 25 percent of Italy’s production is in the economia sommersa, the underground economy, exempt from taxation, unmonitored and unregulated (in fact, the Italian authorities have sometimes seemed to take a pride in its size, notably in 1987, when by a sleight of the statistician’s hand, Italy’s GDP was deemed to have overtaken that of Britain, thanks to an overnight reassessment of the scale of the country’s black market).

Even if Italy’s predicament is no worse than it appears from official statistics, the outlook is grim. It is hard to imagine a Berlusconi-led government successfully enforcing a serious austerity regime, but neither is it likely that an opposition dominated by ex-Communists could succeed where he failed. Moreover, as with Greece, those who are enthusiastic for a non-partisan administration made up of technocrats forget that mustering support in parliament is not enough. Restoring Italy to fiscal health will need a government able and willing to enforce spending cuts, raise taxes (or at least collect them more vigorously) and deregulate labour markets in the face of bitter and potentially violent opposition from trade unions, the professions and probably much of the public. It is not obvious to me that a government of supposedly neutral technocrats is better placed to achieve all this.

With a total debt of nearly two trillion euros, even a relatively modest haircut for Italy would be ruinously expensive to the European Financial Stability Facility (EFSF), and a Greek-style coiffure of 50 percent or more would use up all the additional funding promised (but not yet delivered). Moreover, there would be devastating consequences for the creditworthiness of the core countries — France in particular, but even Germany, and of course for all the major European banks.

For months now, commentators have been urging the EU authorities finally to get ahead of the curve, something they have repeatedly failed to do in the case of Greece. They began by refusing to admit the need for a bailout, then denied the inevitability of a partial default, then were forced to recognise the need for a 20 percent haircut, and have now been reduced to begging Greece to accept a 50 percent writedown, an offer which will still leave the country facing a crippling debt-to-GDP ratio for a decade or more and which may be rejected anyway — in which case we will end up with a disorderly default after all.

The same sort of slow-motion trainwreck with Italian debt will sink Europe’s (and possibly the world’s) banking system – yet the authorities in Brussels and Frankfurt seem set on that course. To those who ask whether we face another Lehman Brothers, the answer is yes – and probably worse than in 2008.

Capitalism and democracy under threat from euro zone crisis

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

It takes quite a lot to make me feel sorry for politicians, especially the European variety, but I must say that Nicholas Sarkozy and particularly Angela Merkel have a right to be livid at the news that the Greek government now proposes to hold a referendum on whether they will agree to be given another gigantic dollop of aid. Having only reached agreement (of a very vague kind) at last week’s summit in the early hours of the morning, you can imagine how the French and German leaders must have felt when they discovered that their marathon negotiating sessions may all have been in vain. It seems the Greeks are now too wary of foreigners bearing gifts to accept their largesse without weeks or months of prior deliberation and debate.

The acceptance of the referendum proposal is apparently not a foregone conclusion, which is just as well, since it is plainly insane.

First, consider the wording of the referendum question. Opinion polls appear to show that Greeks remain keen on staying in the EU (and maybe even in the euro zone), so as things stand at the moment the outcome could be a majority in favour of rejecting the deal, but staying in the EU.  But is this option still open to Greece? If not, the Greek government could end up with a mandate to follow a road that is already clearly blocked.

To pre-empt this scenario would require some sort of clear statement from Brussels about whether they would be willing to allow Greece to stay in the euro zone and/or EU if it rejected the latest round of austerity measures.

Even supposing the details of the referendum are sorted out, what then? How long is all this supposed to take? The vote could hardly go ahead before mid-January at the earliest. What on earth does Mr Papandreou think will be happening in the markets in the meantime?  Does he think they will simply sit on their hands and wait patiently for Greek democracy to grind through the gears?

In reality, the momentum of this crisis is so inexorable that you can be quite sure that the deal currently on offer will have become totally irrelevant by the time any referendum is held, if the offer hasn’t anyway been withdrawn by the time you read this.

The euro zone marriage is over

By Laurence Copeland. The opinions expressed are his own.

Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.

The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.

The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.

It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.

This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.

How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.

from Global News Journal:

UNsensational? Five more years of Ban Ki-moon

U.S. Senators Joe Lieberman and John Kerry look on as U.N. chief Ban Ki-moon addresses reporters in Washington. REUTERS/Molley Riley

It's hard to find a delegate to the United Nations who despises U.N. Secretary-General Ban Ki-moon. But it's even harder to find someone who thinks he has the gravitas and charisma of his Nobel Peace Prize-winning predecessor Kofi Annan, who invoked the wrath of the previous U.S. administration when he called the 2003 invasion of Iraq "illegal." As one senior Western official, who declined to be identified, said about Ban: "It's not as if he's lightning in a bottle, but we can live with him."

The former South Korean foreign minister is in the final year of his first five-year term and is widely expected to run for another stint as the supreme U.N. official. The formal re-election process is likely to commence in the coming months. In the meantime, Ban is visiting the capitals of key U.N. member states to gauge his chances of keeping his job. Those chances, U.N. diplomats say, are excellent. So far, no country has nominated any candidate to oppose him. "I'd put my money on Ban Ki-moon getting a second term," said a Security Council diplomat.

The 15-nation Security Council nominates the secretary-general, though the choice has to be confirmed by the 192-nation General Assembly. Despite the veneer of democracy, it is the five veto-wielding permanent council members -- Britain, China, France, Russia and the United States -- who choose the top U.N. bureaucrat in New York. And none of the five has any serious objections to a second and final term for Ban, diplomats say.

Some people say that running the United Nations is the toughest job on earth. With little real power, he spends his time mediating and negotiating behind closed doors, getting blamed for member states' failures and receiving no credit for his off-camera successes. National lobbyists push and pull him in all directions. The five permanent Security Council members, known as the "P5", regularly insist that he acquiesce to their demands, often pressuring him to reserve a healthy portion of top U.N. jobs for their nationals or preferential treatment for themselves or their allies. Journalists harangue the secretary-general to disclose the details of sensitive negotiations, which he usually tries to keep secret under the label of "quiet diplomacy." Human rights groups routinely skewer him for not being tough enough on the rulers of despotic countries, which are, after all, member states like all the others and don't take kindly to criticism.

Ban has been no exception. He has been publicly clobbered for not congratulating jailed Chinese dissident Liu Xiaobo for winning the 2010 Nobel Peace Prize or raising his detention with President Hu Jintao during a recent visit to China. He was hung out to dry for not being tough enough on Sri Lanka's government and Sudanese President Omar Hassan al-Bashir, who was indicted by the International Criminal Court for genocide in Sudan's western Darfur region. Arab and other delegations from the developing world accuse Ban of being a U.S. lackey, noting how often his statements on the Israeli-Palestinian conflict and other issues echo those of the U.S. State Department or White House.

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

Let's start with Ireland, which is kicking in 10 billion euros from its National Pensions Reserve Fund into an 85 billion euro package of support for its banks.

Trust me, this does not reduce the risk profile of the NPRF, which was set up as a sovereign wealth fund to help pay for state retirement benefits.

Putting aside jokes about sovereignty and wealth, of which there is appreciably less in Ireland than formerly, this is effectively a transfer of wealth from the Irish people to its banks. Or rather, to the institutions, mostly European banks, which hold Irish bank debt, none of whom as senior creditors will share in the pain.

In many jurisdictions if Ireland were a corporation and the NPRF part of the corporation's pension fund, then making such a move would be illegal, and quite rightly so.

from MacroScope:

Did France cause The Great Depression?

Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.

Irwin's theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932.  Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.

To prove his point, Irwin ran a model looking at what would have happened without the French move. The results:

Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously.

All this runs counter to the traditional finger-pointing for The Great Depression, which has it that the U.S Federal Reserve tipped the world into the economic abyss by tightening monetary policy.

Irwin does not let the Fed totally off the hook, however. He concludes that France was "somewhat more" to blame than the United States for the worldwide deflation of 1929-33 and that the deflation could have been avoided if central banks had simply maintained things as they were in 1928.

from FaithWorld:

Strong support to outlaw face veils as France prepares to vote ban

France's plan to ban full face veils, which comes up for a vote in the National Assembly on Tuesday, enjoys 82% popular support in the country, according to a new poll by the Pew Research Center’s Global Attitudes Project. Its neighbours also approve -- 71% of those polled in Germany, 62% in Britain and 59% in Spain agreed that there should be laws prohibiting the Muslim veils known as niqabs and burqas in public.

The poll, conducted from April 7 to May 8, did not range further afield, but reports from other countries show support there as well. The lower house of the Belgian parliament has voted for a ban, which should be approved by the Senate after the summer. In the Netherlands, several bills to ban full veils in certain sectors such as schools and public service are in preparation. Switzerland's justice minister has suggested the cantons there should pass partial bans but make exceptions for visiting Muslim tourists (the wives of rich sheikhs visiting their bankers in Zurich or Geneva?)

The big exception in the Pew poll is the United States, where 65% of those polled disapprove of a ban and only 28% support the idea. The poll did not investigate the reasons for this difference, so we can only assume it has to do with the more widespread acceptance of religion in public life in the U.S. and a more open approach to immigration.

The brief analysis that Pew published showed that support for a "burqa ban" seems pretty strong across the pollsters' demographic categories. It said:

"Opinions about banning Muslim women from wearing a full veil do not vary along gender lines in any of the five countries where the question was asked. In France, Britain and the U.S., views on this matter are also similar across education and income groups. However, in Spain and Germany, those in higher income groups are more likely than the less affluent to approve of such a ban; for example, a slim majority (51%) of low-income respondents in Spain favor a ban on full veils, compared with 62% of those in the middle-income range and 68% of those with high incomes.

"Ideologically, those on the right in France, Britain and Germany are more likely than those on the left to approve of a ban on women wearing the full Islamic veil in public places, but majorities across the political spectrum in these countries endorse such a ban. In France, 87% of those on the right support prohibiting women from wearing full veils in public, and 75% of those on the political left agree. Spain is the only Western European country surveyed where those on both ends of the ideology scale express nearly identical views; 59% of those on the right and 57% of those on the left approve of a ban on Muslim women wearing veils that cover the whole face. Ideological differences are also insignificant in the U.S."

In the latest twist to this story in France, businessman Rachid Nekkaz is offering to sell properties to set up a one million euro fund to help Muslim women pay the 150 euro fine they may receive for wearing the full veil in public if the ban becomes law.