The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

David Cameron’s wish to reform the EU has been met with barely-disguised derision in Berlin, Paris and Brussels. It is not that Europe thinks it is perfect: Merkel, Hollande, Draghi et al know they have mountains to climb. In principle and in practice, the euro project has big problems. But why on earth should the leaders of Europe make a complex job more difficult for themselves by pandering to the prejudices of its peripheral northern cousin?

The UK is, at best, unconvinced about Europe. True, all but the hardest of hard-line secessionists understand the value of having an open trading relationship with near neighbours. But there’s deep-seated suspicion in the UK about the loss of sovereignty, legal subjugation and social directives that come with or from the EU. In finance and economics, a combination of nationalism and recollections of the UK’s early 1990s’ experience with the European exchange rate mechanism (ERM) bolster the belief that Britain is best off at arm’s length. The single currency’s current strains only strengthen anti-euro chauvinism.

But hang on a minute. Sterling’s exchange rate sovereignty has made for a more volatile currency than the euro (see chart). Since 1990, the UK’s trade deficit has almost matched Germany’s surplus, while the euro zone has broadly run a balanced account. Britain’s isolationist tendencies have not delivered any discernible long-term growth advantage. European interest rates, weighted to include peripheral as well as German bonds, are lower than the UK’s. Economic sovereignty? Where’s the beef?

The lukewarm British attitude to Europe long predates the 1980s premiership of Margaret Thatcher, but the prime minister who changed so much about the UK reinforced that national characteristic. Although she signed the Single Europe Act, she was almost viscerally hostile, increasingly so as she grew older, to almost everything about the European project. As a result, mouth-watering opportunities to build economic and financial strength, in Britain and in Europe, were wasted.

As Britain says farewell to one of its most influential post-war leaders, it should bury her foolish europhobic legacy.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By Robert Cole

LONDON, April 4 (Reuters Breakingviews) – Fund managers make
too much money. Or so Sven Giegold, a German member of the
European parliament, seems to think. He is pushing proposals in
Brussels that would impose bonus caps on asset managers’ pay.
Borrowing from strictures about to be inflicted on EU bankers,
the Giegold initiative would stop fund managers receiving annual
bonuses worth more than 100 percent of base salary.

If good sense prevails, Giegold’s initiative will be
rejected. Legislators should avoid interfering in the affairs of
private enterprises – unless there are over-riding extenuating
circumstances. There are for bankers: systemic risks and
implicit government guarantees. Asset managers pose no palpable
systemic financial risks; nor do they enjoy taxpayer guarantees.
They, and their customers, should be left to mind their own
business.

That said, there is some economic merit in the Gielgold
ideas. For one thing, it has a rough justice. If fund managers
press for moderation in pay at the companies they invest in,
they should practice what they preach.

Bonus caps might also serve to align more closely the
interests of fund managers and the actual investors. These
clients do not, or should not, care only about investment
performance. Managers’ pay should reflect fund managers’ ability
to manage regulation, match liabilities, and control risk. Since
many of the skills are fixed irrespective of investment market
conditions, it follows that more of the pay should be fixed.

There is a place for bonuses in fund management. Impressive
performance should bring rewards. But that consideration could
be captured within a bonus of up to 100 percent of salary –
especially if base salaries move high to reflect job-market
competition for skills. Would a bonus cap make fund management
firms’ payroll costs less flexible? Probably. But that could
bring individual fund managers a salary security that promotes
intelligent and patient decision making. Bad fund managers,
meanwhile, should be replaced, not allowed to trundle along on
low base salaries.

Remuneration incentives should foster asset allocation
behaviour consistent with clients’ long term interests.
Legislation is unnecessary and unwise, but self-imposed bonus
caps might help.

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CONTEXT NEWS

– Bonuses for fund managers could be capped at 100 percent
of salary, under draft rules being considered by the European
Parliament. The stricture would most likely apply to those
responsible for so-called UCITS funds.

– “This crucial provision will help strengthen investor
protection and reduce risky speculation,” said Sven Giegold, the
German MEP most closely associated with the proposal. “It will
also complement the recently adopted EU rules capping bankers’
bonuses, ensuring these rules cannot be circumvented and
providing for a level playing field,” he said.

– Sven Giegold web site: link.reuters.com/qud27t
- For previous columns by the author, Reuters customers can
click on [COLE/]

(Editing by Edward Hadas and David Evans)

((robert.cole@thomsonreuters.com))

((Reuters messaging:
robert.cole.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS BONUS/FUND

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

George Osborne, the UK’s Chancellor of the Exchequer, will present his annual budget on March 20. To maintain credibility he needs to stick to his austerity agenda. To tackle debt he needs to protect tax revenue. To maximise revenue, and appease recession-restless voters, he needs to promote economic growth. He could do all three by stamping on the UK’s property transaction tax and closing a loophole: capital gains tax (CGT) is not currently levied on owner-occupied homes.

Such a switch could double the government’s take from residential property taxes. As important, it could propel GDP, since new homeowners are enthusiastic repairers and refurbishers, but stamp duty – which is levied on buyers – restrains them. Replacing it with CGT could kick start transactions. With careful setting of thresholds and rates, moreover, CGT could be a more progressive levy, one that gathers more tax on the more wealthy. And since CGT takes a share of sellers’ accrued profit, rather than being a tax on ownership, it should be easier to swallow.

The UK government raises about 4.5 billion pounds a year from about three-quarters of a million property purchases valued at 125,000 pounds and above. The Breakingviews calculator shows that the tax take would double to more than 9 billion pounds a year if CGT is levied on homes at thresholds similar to the current stamp duty regime. If the Chancellor decided to collect only the same amount from CGT as from stamp duty, the least-ritzy two-thirds of homes could be exempted from the new tax altogether.

There are two difficulties. First, the politics of residential CGT would be tough, since the exception is much cherished by voters, and many will feel mugged by a new tax on old gains. But at least both the opposition Labour Party, and the Liberal Democrats, the junior party in the coalition government, have endorsed “mansion tax” levies. A flat 1 percent fee on home values in excess of two million pounds would raise about one billion pounds a year.

Second, flat house prices would lead to lower future tax revenue. But that is a problem for another government.

Good financial decisions often require political courage. The replacement of the economically stultifying stamp duty with a sensible capital gains tax on owner-occupied UK homes is a good enough idea to be worth enduring some political pain.

Calculator: UK home taxes

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Once bitten, twice shy. In fact, investors in Japan have been bitten many times by the seductive notion that the land of the rising sun is emerging from its bear-market night. They would be forgiven for shying away this time.

The temptation is there, though. The MSCI Japan index is up by a third since mid-November, helped by the yen’s steep decline against the dollar. Investors are drawing confidence from the promise of reflation by the new government of prime minister Shinzo Abe. Starmine data suggests that Japanese corporate earnings are on course to strengthen by 22 percent over the coming year – nearly twice the global average.

An analysis of valuation metrics also offers convincing reasons to be cheerful about Japanese stocks. The forward-looking price earnings ratio for the MSCI Japan index sits just below 14. That is a little higher than the equivalent for Europe and about the same as for the United States. But it is less than global average p/e ratio for the last two and a half decades. And today’s multiple is way below the Japanese average for the last 25 years — which sits at a princely 30. It is also lower than nearly 90 percent of all weekly readings for Japanese stocks since 1988.

Dividend yields tell a similar story. Thomson Reuters Datastream data show that Japanese shares pay an average 2.2 percent at present. For nearly two-thirds of the period since 1988, they have yielded less than 1 percent.

How do current circumstances compare with previous points of hope? One of the biggest false dawns broke in May 2003: the MSCI Japan index more than doubled over the subsequent four years before sliding all the way back. At the start point, however, Japanese equities were more expensive than they are now – trading on an earnings multiple of 16 and yielding 1.2 percent.

Investment decisions can rarely be distilled into an exact, numerical science. Abe’s reflationary promises may fade. Companies may fail to take advantage of the cheaper yen. There is, however, good evidence in the valuation data to suggest that now is a good time to buy Japanese equities. This time really might be different.

Haiti’s crisis plucked at the world’s heart strings. Bill Clinton, Sean Penn and Angelina Jolie were among the famous names who stepped up as advocates for the dispossessed. Katz reports that $16.3 billion, much from the United States, was donated. But the effort fell woefully short. “The world came to save Haiti and left behind a disaster”, he writes.

The $16.3 billion promise might sound large, but it pales beside the $806 billion that Katz says went Iraq’s way in military and reconstruction spending up to 2011. It pales, also, against the $20 billion spent over 10 years maintaining roads and railways in Maryland – a small U.S. state of similar size to Haiti. It is equivalent of $1,600 per Haitian. That’s not nothing. But in the context of the scale of the work required, it is hardly a fortune.

Besides, Katz reckons that the sum was exaggerated. Some pledges remained just that. Some dollops of aid were reallocations of already promised funds. Debt forgiveness – which Katz asserts is aid recognisable only to accountants – was lumped in.

Money was spent outside Haiti giving work to non-Haitian aid professionals. Katz acknowledges the need for such indirect support in the messiness of a disaster relief programme. But fears about corruption impeded the flow of funds to Haiti, while Katz asserts that donors’ and aiders’ own practices fell short. Non-governmental, governmental, and supra-governmental organisations, says Katz, showed themselves to be inefficient, ineffective, self serving, and short sighted. Katz describes how 7,500 Haitians died in an epidemic of cholera that he says was introduced by Nepalese soldiers acting under the auspices of the United Nations.

Bad luck exacerbated Haiti’s historic problems with poor institutions and corrupt leaders. Outsiders also exaggerated the threat that disaster and disease would breed cataclysmic civic disorder. By the same token Katz avoids making the mistake of casting ordinary Haitians as caricature innocents. It is refreshing to see them crowding round fuzzy TV screens enjoying the 2010 Soccer World Cup, for instance. And dancing to “Kompa, that thumping love child of merengue, funk, and R&B…”

His sketch of Marassa, one of the accommodation camps that sprang up in Haiti, is even more revealing. “Under a busy overpass, children were flying kites,” he writes, before describing the informal governance structure of the shanty. “New ’camp committees,’ heavily male, were rarely elected,” says Katz. “The young men had come forward on their own, and no one knew how they would use their power.” Yes, there’s a shadow of gangster-dom here. But the existence of the committees points to the powerful role that spontaneous initiatives can play in reconstruction or renewal. The financial cost of such enterprise, meanwhile, can be minimal.

Katz survived the quake personally and lived its aftermath as a news reporter. His book has flaws that may stem from a lack of detachment. But by telling the story from the bottom up, Katz shows that money, though useful, is a poor substitute for know-how, empathy, and trust.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors have started 2013 feeling bold. Equities are firm, bonds are weak and gold is soft. Is this the long-awaited rotation back to risk? Many market participants say so. But betting on a herd movement is a dangerous investment strategy.

January’s apparent flight from safety may herald the start of a new phase. It could equally be a false dawn. Stock-market recoveries have fizzled out many times before. Moreover, making a wholesale switch from one asset class to another flies against the sound investment principle of investment diversification.

Bulls will argue that the world economy has stabilised and the United States is poised to lead a durable recovery. By the same token, the risk of deflation and depression is receding. Perhaps. But even if the economy is improving, that wouldn’t justify betting the farm on stocks. This century, equities haven’t always followed the same trajectory as GDP. Overvalued stocks can tumble even as economies expand.

It’s true that shares, generally speaking, are cheap. The dividend yield on the FTSE-100, for instance, is 4 percent while the UK 10-year gilt gives just over 2 percent. The picture is similar across developed markets in Europe, the United States and Asia. That is illogical if you assume that dividend income is sustainable. Meanwhile, prospective price-earnings ratios – at around 11-13 times, depending in where you are in the world – are below historic averages. That makes allowance for the known threats to corporate earnings, such as the limited scope for further cost-cutting, increased taxation, or economic shocks.

Conversely, real yields on many top-grade government bonds are negative. Exceptional monetary policy is the usual explanation. Whatever the cause, bonds look expensive relative to stocks.

These valuation anomalies have been around for longer than since the New Year. No data has suddenly emerged to explain a mega rally in stocks or the bursting of the bond bubble. The weight of money behind any rotation will have its own pricing force. But investors shouldn’t assume that a bond sell-off will automatically push money into the stock market: shares may simply tread water.

Rotate if you will. But the investment decision should turn on value.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Shareholders in News Corp would be forgiven for being outraged at a report that Rebekah Brooks, the former CEO of News Corp’s UK newspapers, has received a 7 million pound “payoff”. She left her post in July last year as allegations of phone hacking engulfed the News of the World and led to the abrupt closure of the Sunday tabloid owned by the company.

The exact form of payments made to Brooks, reported in the Financial Times, is unclear, and a spokeswoman for News International, which operates the UK newspapers, declined a Breakingviews offer to give details. The precise nature of Brooks’ involvement in the affair is also unclear. She has been charged with conspiracy to pervert the course of justice and conspiracy to intercept voicemails. But ultimately she may be found blameless and deserving of compensation for loss of office. The 7 million pound figure cited by the FT, meanwhile, includes unspecified sums for legal fees. It is also important to note reported references to clawbacks that might give News Corp the right to recover payments that may prove inappropriate.

On the day of her 2011 departure, James Murdoch, son of News Corp’s ultimate boss Rupert, thanked Brooks for her 22 years of service, lauding her as one of the outstanding editors of her generation. “She can be proud of many accomplishments as an executive,” he said, adding: “We support her as she takes this step to clear her name.”

But adjacent to these July 2011 comments, in the same message to shareholders, Murdoch junior referred to News Corp’s decision to establish an independent Management & Standards Committee. “I want to emphasise its importance,” he said. “The Committee has direct governance and oversight from News Corporation Board members and is codifying standards that will be clear and enforced.”

Time may prove that shareholders look on Brooks’ departure, and associated cost, with equanimity. They might even thank Brooks for stepping aside if, as appears the case at present, it was one of the catalysts that sparked company-wide improvements in governance. The 50 percent rise in the value of News Corp shares since Brooks left the company certainly suggests that shareholders are pleased with the way the company is moving ahead without her.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

After years of make-do-and-mend, the UK is once again arguing about the London’s airport capacity, and the possibility of a third runway at Heathrow. Most people seem keen only to rubbish plans they dislike. The right approach is to give airtime to all ideas – and then make a firm decision.

Much depends on the demand which needs to be met. It is certain that London currently caters for 140 million passengers per year. The trend is certainly upwards, if capacity is available. But could it almost triple to 400 million by 2050 as London’s mayor, Boris Johnson, thinks?

At best, any forecast is a guesstimate. The actual number will be determined by many things: the economy, technology, flight patterns, environmental concerns and competition from trains and airports outside of London, and outside the UK. But a prediction is crucial, so the analysis needs to be rigorous and intelligent, independent of any purely political preferences.

The expected demand then needs to be set against the three possible policy options. First, the government could decide to maximise the existing airport capacity at Heathrow, Gatwick, Stansted and Birmingham. This option might encompass a third runway at Heathrow. It certainly could lead to an integrated transport policy based on high-speed rail links. That could make London a stronger hub while also meeting environmental imperatives.

The second policy option is European. Hub airports in Paris, Amsterdam and Frankfurt already have 14 runways among them – perhaps enough to take care of all the increase in air traffic demand in northwest Europe. Co-operation – coupled with investment in stronger terrestrial transport links to and from London – might spur more economic growth across the region than would come with selfish attention on the UK’s hub position.

Finally, if the most robust passenger forecasts are accepted, an all-new Thames estuary airport might be the answer. Favoured by the London mayor, it would provide a pleasingly direct, if hugely expensive, solution. The indirect stimuli could prove very powerful too. And the commitment to a brand new London airport would show that Britain can pull hard on the lever marked “thrust”.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By Robert Cole

LONDON, July 24 (Reuters Breakingviews) – Barclays (BARC.L: Quote, Profile, Research)
in an ugly fix. The rate-rigging scandal has laid waste to the
bank’s senior leadership and trashed its reputation with
regulators, politicians and customers. Barclays shares have
slumped to barely half the average traded price over the last 12
months. There are plenty of reasons to be wary. But a
“normalised” Barclays could offer investors some striking gains.

Breakingviews’ latest calculator compares Barclays’ current
rating to that of its largest global rivals. Based on a blended
average of three closely watched metrics – the earnings
multiple, dividend yield and price to book ratio – the British
bank was trading at a 38 percent discount to its peer group on
July 20.

   <---------------------------------------------------------

    Calculator: Barclays’ scandalous discount

    Run the numbers: r.reuters.com/wem59s

    -------------------------------------------------------->

    There are many good reasons why the discount is justified.

Following the departures of Bob Diamond and Jerry del Missier,

Barclays has neither a chief executive nor a chief operating

officer. Marcus Agius, the chairman, is also on the way out. No

recovery is possible until the bank recruits new leadership.

    But just installing a new CEO is no guarantee of a revival.

The row over manipulation of interbank lending rates has exposed

regulators’ broader concerns about the bank. Adair Turner,

chairman of the UK’s Financial Services Authority, wrote to the

Barclays chairman in April this year expressing his worries

about the “aggressive...interpretation of rules and

regulations.” Barclays’ depressed valuation suggests investors

share those doubts.

    The scandal has also revived political demands for a

complete separation of retail and investment banking. That would

destroy value for Barclays, as its investment bank would face

higher funding costs on its own than as part of a larger group.

But the bank’s ability to resist such a move may be limited.

    More generally, the economic outlook in Barclays’ European

backyard is another drag on valuation. While U.S. peers are

hardly in clover, they currently enjoy a more benign economic

and regulatory environment.

    Given its current woes, it is hard to argue that Barclays

shares are undervalued. But it is unlikely to be a laggard

forever. Just returning the bank’s valuation to the average of

its peers would offer substantial upside. All the more reason

for the board to get on with the task of normalising Barclays.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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    CONTEXT NEWS

    - Barclays’ Chief Executive Bob Diamond resigned on July 3

in the wake of revelations that staff at the bank had attempted

to manipulate the London Interbank Offered Rate (Libor). Jerry

Del Missier, the chief operating officer, resigned the same day.

Marcus Agius, the chairman who had said he would step down the

previous day, was temporarily re-instated pending the

appointment of replacements for all three jobs.

    - Shares in Barclays, the UK bank, trade at a discount to

its nine closest global peers when judged on commonly used

valuation metrics based on Thomson Reuters Starmine data on July

20.

    - E-book: Diamond's not forever: r.reuters.com/nyf59s

- For previous columns by the author, Reuters customers can

click on [COLE/]

    (Editing by Peter Thal Larsen and David Evans)

    ((robert.cole@thomsonreuters.com))

Keywords: BREAKINGVIEWS BARCLAYS/

(C) Reuters 2012. All rights reserved. Republication or redistribution of

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expressly prohibited without the prior written consent of Reuters. Reuters

and the Reuters sphere logo are registered trademarks and trademarks of

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		http://blogs.reuters.com/breakingviews/2012/07/20/review-the-trappings-of-global-money/
		http://blogs.reuters.com/robert-cole/2012/07/20/review-the-trappings-of-global-money/#comments
		Fri, 20 Jul 2012 20:03:21 +0000
		Robert Cole
				

		http://blogs.reuters.com/robert-cole/?p=40
		
			By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When it comes to describing what went wrong, Robert Pringle’s new book, “The Money Trap”, is hard to fault. The editor of the trade journal Central Banking is also right that finance needs reform so it can better serve people, rather than financiers. Pringle deserves praise for offering an alternative financial architecture. But his bold prescription, though intriguing, is imperfect and unrealistic.
“The Money Trap” clearly and comprehensively charts the development and operation of the two historic examples of international financial systems: the first based on gold and the second that grew out of the Bretton Woods conference of 1944. The book’s analysis of the imbalances, the bubbles and the busts that pockmark financial history is well crafted. Pringle is also sharp. For example, in his dissection of the most recent crisis, he cites Walter Bagehot, saying that governments should have saved solvent banks but punished individual bankers. Instead, writes Pringle, “They saved the bankers but let confidence collapse.”
At the heart of his recipe for improvement is a new monetary unit, the ikon. The ikon would be an objective “measuring rod” against which national, and pan-national currencies such as the euro, can be referenced. Individual nations, he says, could retain authority over monetary and fiscal policies. Indeed, he is at pains to emphasise that an ikon would not be a common currency but a global monetary unit of account. He also suggests, albeit tentatively, that its value might be determined by the combined value of global equity markets.
It is a nice idea. An unit of account which is not a currency but which is geared to the size and sum of human economic activity – a concept also promoted by financial reformer Robert Shiller – would have some of the strengths of the gold standard, but without the dependence on the accidents of metallurgy. The equity-linked ikon, though, is imperfect, because global equity markets reflect only a part of human economic activity. Wouldn’t Shiller’s suggestion of real GDP be a better proxy?
Pringle’s desire to see a wholly new global financial system is simultaneously unrealistic. Without a much-worse crisis than the last one, highly politicised governments are not going to agree to surrender so much financial power, and responsibility, to the vagaries of international consensus.
Pringle’s idealism for the future sits also uneasily with his critical analysis of the past. He is not the first to single out Hank Paulson, the former Goldman Sachs chief who was U.S. Treasury secretary from 2006 to 2009, for withering criticism. But he does say that Paulson made “the biggest mistakes” in the most recent crisis and that his career experience meant “he should have known better”. And if Paulson did not know better, and if so many other people in authority performed so lamentably, why is it realistic to expect good leaders will be found to serve future generations?
The world’s financial system may well be trapped inside its own inadequacies, as Pringle says. Freedom may come with the complete reconstruction of the global financial system, and the creation of a common monetary unit of account. But since it is so very hard to see Pringle’s theories put into practice, we may never know.
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