Articles by Stephen Adams on the GC Blog and GC analysis
UK: Global Counsel Senior Director Stephen Adams and Chief Economist Gregor Irwin discuss US investors' attitudes to Brexit, looking at challenges and opportunities for US investors in a post-Brexit UK, following Gregor's recent trip to North America.
What are the politics of artificial intelligence? What does it mean when we talk about regulating the actions of a machine that expresses intelligence?
Most assessments of the impact of AI on European labour markets conclude that it will have two key impacts: displacing human labour and driving productivity. In the long run, both of these effects can be positives. In the short run, they are likely to be disruptive and disorienting. The reach of automation into parts of the cognitive labour market that have heretofore been protected from it may be a social shock, and raises the prospect of a hollowed out labour market where elite cognitive labour and non-routine low-cost manual work sit above and below a disappearing landscape of traditional skilled middle class jobs in both manufacturing and services. While new roles are likely to be created as well as old ones displaced by machine judgement, the detail of this evolution is inherently uncertain in advance.
WORLD: Global Counsel Senior Director Stephen Adams is joined by Oliver von Landsberg-Sadie, Founder & CEO of BCB Group, Oliver Tonkin, Co-Founder and Adviser of BCB Group, to discuss the regulation of crypto-assets.
The Trump administration’s revamped NAFTA (or USMCA, as we are being invited to call it) landed this week after a year or so of fraught negotiations with Mexico and Canada. If we discount the amendments to KORUS (The United States–Korea Free Trade Agreement) prompted by the US’s steel and aluminium tariffs earlier this year, it is the Trump administration’s first major trade agreement. It is certainly more than just a rebrand. The many small and large changes throughout the revised text group into and embed some now-familiar Trump policy themes, alongside some long-standing Washington aims.
The UK House of Lords EU External Affairs Sub-Committee has published the report of its inquiry into post-Brexit customs arrangements: Brexit: the customs challenge. The report reviews a wide range of important customs and trade facilitation issues linked to the UK’s exit from the EU.
UK: Senior Director, Stephen Adams, and Senior Associate, Joe Armitage, discuss the UK government's Brexit strategy and the likelihood of a second referendum.
Over the next few months, the UK is likely to start setting out its detailed plans for the establishment of a UK trade remedies system after it has left the EU. Freed (at least in theory – watch the customs partnership debate) from the obligations of the EU system of which it has long been a critic, the UK will have an opportunity to adopt its own rulebook for the investigation of claims of dumping and subsidy in UK trading partners, and for designing measures to penalise unfairly traded goods.
The Trump administration’s threat of 25% tariffs on $50bn of Chinese imports to the United States has inevitably dominated coverage of the President’s decision to escalate a long-standing irritation with Chinese approaches to US inward investment into a full-blown trade dispute. But there are three legs to the US review of Chinese practice under Section 301 of the 1974 Trade Act, and tariffs are only one.
The imposition of rules of origin on trade between the EU and the UK is often poorly understood as an important factor in managing the impact of a UK exit from the EU. While it is generally expected that the UK and the EU will ultimately trade with each other on a largely or completely tariff-free basis via a preferential trade agreement, accessing the preferential terms of such an agreement will require that exporters in both directions comply with origin rules. These are the detailed local content requirements that goods must meet to benefit from a preferential trading framework.
Recent years have seen important global shifts in both the policy frameworks for screening inward foreign investment and the way in which they are applied. These shifts come against a backdrop of protectionist political rhetoric and anxieties about the impact of foreign direct investment (FDI) in traditionally open economies. The new landscape is exemplified by the position in the US, from the increase in the volume and intensity of CFIUS reviews (leading to the collapse of deals such as Ant/MoneyGram and Canyon Bridge/Lattice Semiconductor), to the current proposals for expansion of the CFIUS mandate. It also extends to Europe, with increased intervention in France and Germany, the European Commission planning EU legislation on inward investment screening for the first time, and the UK government proposing extensive changes to its powers of national security review. Against the backdrop of these larger changes are many smaller shifts in the political mood around FDI across the OECD.
In September 2017, Global Counsel and Clifford Chance published with UK Finance a detailed set of proposals for the financial services content of a possible future EU-UK FTA.
The last few months have seen a growing awareness of the challenge facing both the EU and the UK in adapting their customs processing systems for the reimposition of a hard border between the two sides once they are no longer linked and merged in the EU’s free movement zone for goods. With around 10% of the EU27’s goods exports going to the UK market and around 40-50% of the UK’s currently routed into or through the EU27, this is clearly a big potential shift in the conditions attached to movement of goods and a potential source of new frictional costs for traders.
Over Summer 2017, EY and Global Counsel collaborated on a project reviewing the challenges posed for UK boards and managers by political populism. EY have just published some of these reflections as part of their regular Corporate Governance Latest Insights Series.
For all their obvious differences, the landslide election of Emmanuel Macron in France, the election of Donald Trump as US President, and Brexit all have something important in common. They all appealed to an overturning of establishment consensus and they all offered a diagnosis of a society or economy moving in the wrong direction. They all appealed to voters’desire for change and to punish elites. To a greater or lesser extent, this element of dissatisfaction and unease is present in most Western politics.
A few months ago, we looked at the evolution of the debate on foreign investment screening in Europe and the joint French-German-Italian call for a new regime in the EU. In mid-September this year, the European Commission published a draft regulation for such a system which is now being considered by EU member states and the European Parliament. This is an important development, in the sense that it ends a long period in which the critics of foreign investment screening in Europe have successfully resisted EU action. However, the Commission’s proposed approach makes it clear that for now this is a partial change of approach at most, albeit one with new questions for investors attached. But the Commission’s chosen approach also raises the question of how far it is likely to go to satisfy political demands for a tougher EU approach to Chinese capital in particular.
Yesterday, the UK floated a set of ideas for managing the future of the customs frontier between the EU and the UK. They were broadly divided between two proposals: a first, based around some very practical ideas for using technology to streamline the movement of goods across a future EU-UK customs border. The second was a much more radical idea that the UK would offer to implement the EU’s own external border protocols on its behalf as part of a wider approach that would remove any need to process goods moving between the two markets. The first is sensible enough. How serious is the second?
Earlier this month, the German cabinet adopted a directive expanding the scope of the German state’s ability to investigate foreign acquisitions in a wide range of critical infrastructure and the IT services that support it. In parallel, Berlin has led an advocacy campaign at the EU level over the last six months for the creation of a new EU level screening regime for FDI in sensitive sectors where state-backed acquisitions might raise political concerns. This is a material shift from Berlin, and one which has the scope to produce material change in the way the EU approaches inward investment from China and Russia in particular. So is this a pre-election gesture from Berlin, or a sign of a more serious shift in the EU approach to inward investment?
The setting before Parliament of the UK government’s legislative agenda for the two years leading up to the expected exit from the EU, has provided a further opportunity for ‘soft’ Brexiters in the UK to rekindle a debate about how detached from the EU the UK should aim to be. After the UK election, my colleague Jade Rickman and I examined the renewed debate over the possibility of customs union between the UK and the EU. Last week, a group of UK opposition MPs tabled an amendment calling for the UK to remain in “the EU single market” and “the customs union”. This would certainly be a very soft Brexit indeed.
When Theresa May’s UK’s government was stripped of its majority in last week’s general election, the result was widely interpreted as a demand that the UK government focus on minimising the impact of its exit from the EU. One concrete consequence has been to put the question of customs union with the EU back in play as one possible variant of a soft Brexit, although it had been explicitly ruled out by the government in January. So, what would customs union mean? Have the politics in the UK shifted in a way that makes it feasible? And would the EU accept it?
Last week’s ECJ judgement on the ‘mixity’ question in EU trade agreements was a big one for EU trade policy. The ECJ overturned the Advocate General and years of practice by declaring that almost all of the things the European Commission negotiates on in FTAs should be treated in this respect as the exclusive competence of the EU. This includes big areas like transport policy, labour and environmental rights and IP protection.
We were lucky to have former MEP and Dutch Labour Party President Michiel van Hulten in to GC this week for a briefing on the Dutch election. Michiel provided plenty of food for thought, especially on the coalition-building dynamic over the weeks (months?) ahead. A couple of things stood out from the group’s discussion for me.
One of the many things the UK will need to do on its way out of the EU is to establish its new ‘most favoured nation’ trading profile at the WTO in Geneva. This means establishing the tariffs for goods, minimum market access conditions for services trade and a number of other notified conditions that will apply in the UK market. Other WTO member states will have the right to challenge this process if they feel they have been disadvantaged by it. To help avoid this, the UK has said that it proposes to adopt for itself the goods and services schedules that it currently applies as an EU member state, except in a small number of areas where quantitative EU import quotas will need to be divided in some way between the two markets.
This week marked something of a milestone for the 21-year old World Trade Organisation (WTO). After being agreed at the December 2015 Nairobi Ministerial meeting, the Trade Facilitation Agreement (TFA) has now been ratified by more than two thirds of the WTO membership and has thus entered into force. This makes it the first successful multilateral agreement reached under the auspices of the WTO. It is important in its own right, and has a couple of important lessons for the future of EU-UK trade.
The British Prime Minister has just returned from an important visit to a large UK trading partner with a controversial and often provocative leader. There was talk of a possible future bilateral trade deal between the two, and agreement to start preliminary discussions to this effect. This was a cause of mild irritation in Brussels, where the UK’s right to trigger such bilateral engagement is contested, and its tendency to break European ranks seen as a political problem. Yes, Theresa May has just been in Ankara.
There was some comment this week about the fact that the UK’s largest financial services advocacy body TheCityUK has self-consciously ceased to advocate the retention of passporting rights for UK-based financial services businesses after the UK has left the EU. This was presented as a concession of ambition, but it is also a form of tactical retreat.
In collaboration with Herbert Smith Freehills and The Boston Consulting Group, Global Counsel has co-authored a paper looking at the meaning and implications of a hard Brexit for businesses, aiming to help them understand the role they may play in shaping this or an alternative outcome.
Following the result of the US presidential election, we ask thirteen of our policy specialists for a first take on a Trump administration and its implications for policy and politics.
A British think tank rather definitively announced last week that it had added up the potential tariff bill for EU-UK trade in a ‘hard Brexit’ scenario – and declared the EU the bigger loser by some margin. Applying the EU’s existing tariffs by tariff line to existing trade flows gave them a ‘bill’ for EU exports of around £13bn. The implied tax on UK exports to the EU was less than half this. Inevitably this has got quite some media coverage, although it largely reflects the volume of flows in both directions – i.e. the UK’s deficit in goods trade with the EU. However, to see this differential purely as UK leverage in a future negotiation with the EU requires you to ignore two basic things about trade.
Like many divorces, Brexit is going to be a custody battle of sorts. UK Secretary of State for International Trade Liam Fox has warned (via his preferred UK newspapers) his EU counterparts that attempts to prevent the UK inheriting a large number of FTAs signed on the UK’s behalf by the EU could be met with retaliation by those EU trading partners. This is, in essence, the question of who gets custody of the EU’s FTAs after Brexit.
One of the consistent themes of the UK referendum campaign on EU membership was just how hard it would be to re-establish trading terms between the two sides if the UK was outside the EU. Opponents of exit warned that it could take many years for the EU and the UK to negotiate a ‘Free Trade Agreement’ (FTA). To be sure, the EU’s own experience with such negotiations has rarely produced a final deal in less than five years, and Parliamentary ratification can extend this further.
It is widely accepted that services, and financial services in particular, are a key comparative advantage of the UK. A full quarter of UK services exports are financial or insurance services. This is an asset and a liability. Much of this financial services trade is potentially exposed to the impacts of Brexit, where the loss or roll-back of the EU passporting regime for the UK would impact materially. Outside of the EU, these are the sectors for which market access is often patchy or constrained and where conditions of local regulation are often key to UK firm performance. These factors make a trade policy customised to opening up and deepening export markets for UK services a priority for the UK. So what might that mean in practice?
It was interesting to watch the new UK Secretary of State for Exiting the EU David Davis face-off for the first time with the British Parliament this week. As expected, he was pushed on the detail of his vision for the future relationship between the EU and the UK and he ultimately got in trouble with his boss in Number 10 for sounding a bit too sure on the question of whether the UK would leave the EU single market.
The UK referendum vote on leaving the EU is reverberating across EU politics in a range of ways. Economic and market volatility has brought to the boil a simmering banking crisis in Italy. The huge implications of British exit for the Republic of Ireland have triggered a febrile debate on Ireland’s ability to insulate itself from the implied economic disruption. In the UK itself, the political settlement of the British union has been called into question by the apparent divergence of Scots and English on the question of continued EU membership. These are all clearly material and important examples of ‘contagion’ from the vote. In the Italian case, they have potential wider implications for the stability and political and policy consensus of the EU.
Among the many implications of a UK exit from the EU is a fundamental change to the way that the UK makes and implements trade policy. As part of the EU, the UK’s trade policy is effectively set by the EU’s common commercial policy. The UK shares a single external tariff regime with the EU – a corollary of the single market – and many of the key elements of its wider trade policy position (farm subsidies, investment and intellectual property rules) are defined in Brussels. Much of this is now set to change. For supporters of exit, this is indeed one of the potential attractions of greater UK autonomy. What policy choices need to underpin an independent UK trade policy? How quickly can the UK expect to be able to start signing deals – and who with? And what leverage will the UK bring to the table to attract a new level of ambition from others?
What connects a bank in Sienna to a voter in Sunderland? Simple answer: they both have a problem with the EU, or think they do. Matteo Renzi wants a state aid waiver for support for the Italian banking sector, but new EU bail-in rules suggest he will have to force debt holders – many of whom are poorly-informed retail customers – to bear some of the costs of recapitalisation or resolution.
There are reports today that the European Commission is on the verge of the declaring the EU-Canada CETA a mixed agreement, paving the way for it to be ratified via national parliaments. This would be a big reversal for the Commission, which has fought a long battle over the Lisbon Treaty and what it does or does not do to restrict member state ratification rights in trade deals.
My colleague Gregor Irwin has just published a great blog on the ‘room in the middle’ between the views of the supporters of Brexit in the UK and the emerging views in the rest of Europe on what might constitute an acceptable trade-off between rights in the single market and the UK’s expressed intent to take back policy control from Brussels. Gregor’s view is that one possible compromise is ‘partial participation in the single market’ and UK involvement in some horizontal EU programmes all priced against a set of UK policy concessions that allow the EU27 to feel that the UK is not cherry-picking just the bits of being ‘in’ Europe it likes.
Another ‘what if’ Brexit case study yesterday. ESMA has finally announced that the Chicago Mercantile Exchange (CME) has been recognised as a qualified central counterparty for EU banks and investment firms. This means that EU counterparties can use the CME to clear derivatives trades and in doing so meet their EU obligations under the European Market Infrastructure Regulation without incurring much the higher capital charges for using non-qualified CCPs. Large EU-based banks are subject to the EMIR clearing obligation from June 21.
At the end of last week the European Commission released its latest proposed bindings of market access terms in the long-running Trade in Services Agreement (TiSA) negotiations in Geneva. For anyone with the inclination to scan a draft services schedule, the EU TiSA text is interesting because it is a timely illustration for businesses of what trading services in the UK from London might look like if the UK voted to leave the EU on June 23. If the UK was to opt leave both the EU and the EEA its guaranteed access to the EU market might revert to looking something like the TiSA schedule.
Another week, another banking union/disunion issue. A draft set of European Commission proposals in the public domain this week seem to confirm the intent not to seek explicit EU harmonisation of minimum eligible liability requirements (so-called MREL) for bail in. This is an EU counterpart for TLAC, although applicable to all banks, not just SIFIs, and accounted in different ways and on different scope.
There has been some comment this week at the German decision to use Monday’s Eurogroup to push for a change to the way sovereign debt is risk weighted by EU banks, as part of a wider set of steps to move the banking union dossier forward. The German argument is that there is a necessary political trade-off between accepting a measure of collective liability through a new deposit guarantee scheme and a change to what Berlin sees as the subsidy of zero risk weights across all Eurozone sovereigns.
On 24 July, the WTO announced the conclusion of negotiations to update and expand the product coverage of the 1997 Information Technology Agreement (ITA). ITA II will eliminate tariffs for over 200 high-tech products – including new generation semiconductors, videogame consoles and global positioning system devices – traded between the 80 signatories of the original agreement. The final approval of ITA II at the WTO Ministerial Conference on 15 December in Nairobi will make it the first WTO tariff-cutting agreement in almost two decades. Beyond its obvious direct impact on global ICT trade, ITA II is interesting for what it might suggest about the future of WTO-led trade liberalisation initiatives and the balance that it is possible to find between a world of bilateral FTAs and the apparent impossibility of striking a world trade deal of the kind that has not been seen since 1994.
The European Commission last week published its new trade policy strategy, the most comprehensive restatement of EU trade policy since 2010. It is exceptionally ambitious – adding more FTAs to the already crowded stable of EU open and recently-concluded deals. It is also highly defensive in its attempt to win back political ground lost in the Transatlantic Trade and Investment Partnership (TTIP) and anti-globalisation debates over the last two years. From this balance come some interesting new ideas, a lot of practical questions about implementation, but also an opportunity to widen the way the Commission thinks about its own key role in improving trading conditions for EU businesses.
The awarding of Trade Promotion Authority (TPA) to the Obama White House last week ends a seven year lapse in the special ‘fast track’ authority granted by Congress to the US president on trade policy. It is the latest staging post in a two year fight by the Obama administration to secure the Trans-Pacific Partnership negotiation and a number of other US trade deals including the Tran-Atlantic Trade and Investment Partnership (TTIP). TPA in 2014-15 became a vehicle for two big linked debates about how trade policy is made in the US, one about Congressional prerogatives, the other about trade policy substance. While TPA gives fresh impetus to the White House’s agenda, the debate that produced it showed how politically divisive trade liberalisation remains in the US.
The UK Fair and Effective Markets Review (FEMR) was conducted jointly by the Bank of England, the UK FCA Conduct Regulator and the UK Treasury and released its recommendations on June 11. It was launched in the wake of the LIBOR scandal by Bank of England Governor Mark Carney as a major contribution to the UK political and policy debate around the conduct of traders in UK FICC markets. Where much of the first wave regulatory responses to the 2008 crisis in the UK focused on good and bad structures, FEMR has explicitly and largely exclusively addressed conduct and personal accountability. It tweaks the conventional UK approach to wholesale market self-regulation, beefs up sanctions and makes a serious bid for a global code of conduct for FX markets.
The debate has now started in earnest over whether the EU will – or must – award China ‘Market Economy Status’ (MES) in 2016. The status is politically sensitive for Beijing, but has no technical standing outside of EU nomenclature. However, it is linked to one very specific and narrow element of EU trade defence practice where the material impact for some businesses competing with Chinese imports is potentially very significant. The debate around MES in the EU is going to combine heated disagreement on the meaning of a fifteen year old treaty, EU-Chinese political relations and a liberal dose of globalisation anxiety. So how much does the decision actually matter and how will it get made?
While the eyes of the world were fixed on Paris in December 2015 for the COP21 climate summit, the 10th WTO Ministerial was also taking place in Nairobi in Kenya. WTO Director General Roberto Azevêdo described the package of measures agreed at Nairobi as the most significant package of reforms in trade in agricultural goods ever agreed. This is a fair assessment, although Nairobi exceeded expectations in large part because expectations of serious WTO multilateral agreements could not be much lower.
The defeat of centre-right governments in Portugal, Ireland, Poland, and Spain despite favourable economic statistics highlights the difficulty for European governments to earn a political dividend if growth is not increasing living standards. Voters are more willing to support political parties outside the mainstream - which is taking a particular toll on the centre-left - though in the case of these four countries this is not being driven by migration or Euroscepticism. Nevertheless, these new policy revisionists are far from winning office, limiting the prospect for a rollback of structural reforms.
The decision by the UK to participate in the founding of the Asian Infrastructure Investment Bank (AIIB) provoked an intemperate response from Washington, which it as a challenge to the primacy of the Bretton Woods institutions and an instrument of Chinese regional influence. But the AIIB is also a concrete policy response to a very concrete policy problem. Whatever the uncomfortable realities for Washington suggested by Beijing’s desire to assert its own influence over regional institutions there is a wider need to recognise the shared aims in improving and derisking public and private capital formation for Asian infrastructure, especially for cross border trade. Viewed this way, an effective AIIB could reinforce US policy in the region, even if it remains out of US control.
At its heart, the February Indian budget was a calculation that a renewed pace of growth buys the Modi government time to get its political house in order to deliver further structural reforms. It was a political budget sustaining government welfare support while aiming to channel it more effectively. Insofar as it was a budget for investors, it focused on infrastructure investment and measures to improve ease of doing business, without ultimately dealing with some of the knottier structural challenges, like land reform. It was a budget that reflected the political realities of the Modi government: high and binding voter expectations and a government whose power to govern is weaker than an historic election win would suggest.
Last week brought to a close the two-month public courtship of GE and Alstom, with a government-brokered deal that will see the French state acquire a minority voting right and ultimately a minority stake in the French company. The Alstom episode cast a long shadow in the UK, where the government faced pressure to take a similarly activist approach to the proposed acquisition of AstraZeneca by Pfizer. The result is new legal tools in France and signs of a shifting mood on takeovers in the UK. This has less to do with nationality than is usually assumed. So what is driving it?
After last weekend’s European Parliamentary elections, the new European legislature has begun to compose itself for the next five year term. As usual, the multiple political markets of the EU have sent a wide mix of parties to a chamber that is very imperfect snapshot of the mood across Europe. The composition of the Parliament matters for its likely approach to legislation and it has reflected a turbulent political picture, but the extent of that turbulence can only really be understood on a national level, where the impacts will be felt most.
A Global Counsel/TNS poll of British public opinion three weeks ahead of the European Parliamentary elections suggests a fine balance between supporters and opponents of UK membership of the EU. There is a marked generational split. Britain’s quintessential Eurosceptic is a man over 55, working class, living in the South East of England and no longer in employment. By contrast, many younger voters still support EU membership, most often for economic reasons. The full poll results are available HERE.
The issue of Investor State Dispute Settlement (ISDS) has surfaced in the EU as a focus of political opposition to a possible TTIP trade and investment deal with the United States. The ISDS issue has reinforced the fact that TTIP's key rationale – that the EU and US markets are now so integrated that common approaches to market rulemaking make sense - is also its key political vulnerability. Despite attempts by the European Commission to substantively rewrite ISDS rules, the concept may yet be removed altogether from TTIP, which may or not save the deal politically in the EU. But the wider reasons why a concept that has existed for decades has proved so controversial in the TTIP context are important.
The new European Commission takes office on November 1 after its requisite run of confirmation hearings with the European Parliament. First Vice President-designate Frans Timmermans observed in his own hearing that the Juncker Commission was “the first Commission born in the European Parliament”. The question for the coming five years of policy and politics is what – if anything - this might mean. Juncker may owe his job to the Parliament, but this fact alone is likely to mean little for the policy substance of his tenure. His legacy will depend far more on his management of the Commission itself, EU states and day to day pressures. This Commission may be born in the Parliament, but for businesses watching it develop over the months ahead it is important to recognise that it will be raised by the European Council, and by events.
A Global Counsel/TNS Poll conducted between 15 and 17 July asked British adults a series of questions about the desirability and timing of a vote on Britain’s membership of the EU. With Westminster convulsed by the perceived Eurosceptic challenge, British voters present a complicated picture of their own appetite for a plebiscite. They appear in favour of a referendum only by a narrow margin, with even a significant cohort of the Tory party ambivalent about the idea. Among backers of a referendum there is scepticism of a wait for 2017 and a possible renegotiation of Britain’s terms of EU membership. Among critics, a very large majority are in favour of ruling out a referendum even in the event of a future transfer of powers.
Leadership changes at African retail bank Ecobank two weeks ago ended a long and debilitating governance crisis for the bank. These events offer a case-study in the complicated politics of African cross-border banking and some of the big challenges banks like Ecobank will face working with African regulators struggling to build institutional frameworks to keep up with African market developments. The question for Africa’s cross-border banks, the businesses that depend on them and the investors increasingly interested by their potential is how politicians and policymakers in Africa balance the benefits of cross-border banking and supervisory concerns about risk contagion. The regulatory gap that needs closing in African banking also matters for African systemic stability. The experience of EU and ASEAN may provide lessons and ideas.
The interim government formed in Kiev this week will need political skill, external support and good fortune if it is to restore stability, hold the country together and satisfy the high hopes for economic and political change. Kiev’s choices will be fundamentally shaped by the choices of its neighbours, above all Russia and Vladimir Putin. The current situation is a blow to Putin’s standing and a threat to his vision of Russian strategic policy. Kiev, Brussels and Moscow are now likely to be locked in a struggle for Ukraine’s future in which bigger tensions between the sweeping ambitions of its neighbours will be as decisive as the decisions of Ukrainians themselves.
In 2014 the European Central Bank (ECB) will take on one of the biggest and most complex banking supervision roles in the world. For the ECB this is an institutional, cultural and political transformation. It faces the double challenge of doing it when the Eurozone banking system is in poor shape, and when that banking sector weakness is undermining the ECB’s other core role in setting monetary policy. Three big practical tasks lie ahead in 2014, culminating in a stress test of Eurozone banks. The problem for the ECB is that it is undertaking this massive practical task with its credibility as yet untested and a political mandate that is ambiguous at best. For investors, creditors and customers of Eurozone banks how the ECB navigates this problem will be one of the big stories of 2014.
Late last month, Indonesian Trade minister Gita Wirjawan stood down to concentrate on his long-anticipated campaign for the Indonesian Presidency. Wirjawan has set the tone for Indonesian inward investment and trade policy for half a decade, and that tone has been a pragmatic mix of openness and intervention. Under Wirjawan, Jakarta has taken a series of measures designed in large part to force change in Indonesia’s trade profile – substituting a higher level of value-added production for a heavy dependence on raw commodity exports. Handicapped by a party ticket in free fall and in a potential contest with Indonesia’s rising political superstar Joko Widodo, Wirjawan is very unlikely to win the Indonesian Presidency. But his political and policy style is likely to outlast him.
On November 13, an important provisional agreement was reached in Brussels on the EU’s flagship regulation of insurance companies – Solvency II. As part of the package the EU appears to have reassessed the way it approached the question of regulating EU insurers operating in third countries – especially the US. A tough line on demanding regulatory ‘equivalence’ from foreign jurisdictions has been softened, and a vaguer target of ‘regulatory convergence’ set. The last minute pragmatism – mainly at the hands of the European Parliament – is a reflection of the limits of Europe’s ability to export its own financial regulatory standards to other developed markets. With the EU-US TTIP on the horizon, it also says something about the trade-offs European regulators may have to strike between Europe’s desire to export its standards, and its desire to export its services.
For investors in Europe the question of the Eurozone’s internal macroeconomic imbalances is central to the long term sustainability of the currency block. Last week, for the first time, the European Commission, formally triggered a review of Germany’s large current account surplus under one of the more obscure parts of the EU’s post-2011 economic governance arrangements. Berlin’s sensitivity to having its contribution to aggregate Eurozone demand raised as a policy problem being what it is, this is a small but interesting step. It has – in theory - a range of policy tools behind it, although they are more than likely to remain unused. So does the Commission’s move simply highlight the limits of Eurozone economic governance? Or could it shift the terms of the policy debate about Eurozone demand?
Without attracting much wider attention, Slovenia has spent the last six months struggling to avoid following Cyprus into a Eurozone bailout. In particular, Ljubljana has been fighting a rear-guard action with its chronically damaged banking system. The numbers – including downgraded growth forecasts this week - increasingly suggest this is a fight it will struggle to win. A bailout would be a political and policy setback for Ljubljana, but would it have any wider consequences for the Eurozone? Slovenia may be an extreme example, but it is a reminder that the legacy problem of weak banks is still lingering under the first signs of good economic news for the Eurozone.
The plans for the new Shanghai Free Trade Zone have been closely read since they were published by the Chinese authorities at the end of last week. Details about the Zone’s operation remain unclear in many respects, although it will potentially create an enclave on Chinese soil where the rules for foreign businesses will look dramatically different. The Zone will genuinely roadtest new modes of liberalisation and regulation in the services sector in particular and with respect to foreign participation in the financial sector, although scaling these things up to a national level would be complex and sensitive and should not be assumed. But is it also a political strategy for a new leadership consolidating its power and choosing its battles?
This week the German centre left Social Democratic Party will open preliminary talks with Angela Merkel’s conservative CDU on the formation of a Grand Coalition government in which it would be the decidedly junior partner. Squeezed between a dominant centre right and a relatively resilient far left, the SDP has only two plausible ways to access government: moving leftwards to try to rebuild a left-wing governing majority or political accommodation with the centre right. There are interesting parallels with the Dutch Labour party, which struck a similar pact with the centre right in September last year. Both the PvdA and the SPD have resisted moving sharply left, but if the numbers continue to count against them, could this change? And given their key role in anchoring the European mainstream left in fiscal austerity, open markets and the reform of European welfare systems, what might this mean?
Last Wednesday Ukraine reached a major political milestone in its relations with the EU when the Ukrainian government gave the green light to the signing of an Association Agreement between the two in Vilnius in November this year. After ten years of hesitation, Ukraine is choosing between two distinct and probably incompatible economic and geo- political alignments. Moreover, by rejecting Vladimir Putin’s Eurasian Economic Union in favour of closer economic integration with the EU, Kiev is making a choice that is likely to provoke Russian resentment and retaliation. This is far from a definitive statement of Ukraine’s European orientation: public attitudes are still ambivalent and Moscow remains a constant source of pressure. But it is a significant geopolitical setback for Vladimir Putin’s regional agenda. What he does next will matter for business.
Nothing raises anti-trust eyebrows like a mega merger, and the proposed Publicis/Omnicom combination last week is certainly that. The deal will have to be approved by competition regulators in Europe, the US and Asia. The companies themselves are confident of regulatory approval for the merger, and they are probably ultimately right. But in getting there they will be dealing with regulators whose views of consolidation in digital industries are being shaped by a deep suspicion of scale and a shifting view of how ‘market power’ works on the internet. Here we look at the three basic questions for regulators and one potential wildcard for the parties – China.
July 2013 marks one year since European governments committed to the creation of a ‘banking union’ in the EU. In their own way each of the three steps taken by European leaders since June 2012 has suggested that there is little real distinction between banking union and political union in Europe. Confronted with the political reality of pooling exposure to each other’s banks, and the concomitant pooling of the power to govern banks in the collective rather than the ‘national’ interest, Berlin in particular has pulled back from full ‘Europeanisation’ at each stage. In this respect, Europe’s idea of progress on banking union over the last year tells us a lot about the current limits of a unified political economy in Europe.
This week EU officials have been in Beijing working out a negotiated settlement to the EU-China dispute over low-price solar panel exports to Europe. The case has seen the European Commission’s attempts to take a tougher line on Chinese subsidy practice, and enforce European ‘trade defence’ rules, collide with some very stark realities about the political limits on this area of European trade policy. Beijing no doubt sees Europe’s lack of unity as a sign of weakness. In reality, it is a reflection of the very genuine divided interests created by the globalisation of European supply chains.
This week Elvira Nabiullina will formally become next governor of the Bank of Russia. Nabiullina is an interesting, and largely unexpected, candidate for the job. She is a low-key Putin loyalist who has also developed a reputation as a moderniser, a liberal and a private advocate of a Russian ‘normalisation strategy’ – piloting Russia into the WTO in 2012. She is likely to bring the same instincts to the Bank of Russia, on both monetary policy and in the new responsibilities of the Bank of Russia for financial regulation. But managing Russian politics, and a dramatically beefed up institutional remit will test her undoubted skills.
The European Commission is set to commence the negotiation of a Transatlantic Trade and Investment Partnership with the US. The five year hiatus since the stalling of the WTO Doha Round of global trade negotiations, and the political need in a number of EU capitals - and Washington to a lesser extent - for a big strategic gesture has opened up the political space for a big new bilateral trade initiative. However, the grand strategic flavour of the initiative is also at risk of inflating political expectations of what the deal will deliver and how quickly.
April was a month for both theory and practice in Chinese international merger clearance. After a long delay, Chinese authorities approved the mergers of Glencore and Xstrata and Gavilon and Marubeni. In both cases Beijing imposed strict conditions on the mergers. In the same week the Chinese Ministry of Commerce (MOFCOM) also closed a public consultation on its new regulations on Restrictive Conditions for mergers. The gap between theory and practice was notable and instructive. With Glencore and Marubeni Beijing has used the merger clearance process less to address competition concerns and more to leverage favourable terms for the supply of what it sees as strategic commodities.
Two big new EU legislative decisions this month have aligned the EU with the US in creating a strong new precedent for country by country tax and payments reporting requirements for multinational companies. Both epitomize the growing trend since 2008 of using various forms of transparency and disclosure as a regulatory tool. The co-opting of the market and the media into the business of scrutinising companies means new challenges for both corporates and their regulators.
Last weekend’s Sino-Russian Summit was Xi Jinping’s first foreign trip as Chinese President. The choice of Moscow was more than symbolism. It was a marker in a rapidly evolving relationship in which the politics and economics of energy are increasingly complex and central.
The attempt to make Cyprus’ international bailout contingent on an enforced bail-in of Cypriot bank depositors is a serious political gamble for the EU and a gamble on market sentiment on Eurozone banks.The attempt to make Cyprus a test case is motivated by a desire to keep Russian money in Cyprus firmly on the hook for any bailout – a fact that explains the contortions in the plan. But the Eurozone states behind the plan are also behind a wider push to put creditors back in the line of fire for bank failures, which is a reaction to the acceleration in plans for a European banking union.
The European Commission’s rejection of the combination of Deutsche Börse and NYSE Euronext in 2012 was one of the biggest merger stories of the year. The speculation this week that the Chicago Mercantile Exchange (CME) might have its own plans for the Frankfurt exchange raised the question of whether such a tie-up might also fall foul of European competition regulators. A CME-Deutsche Börse deal would almost certainly attract regulatory attention, but not for the same reasons that sank the NYSE deal last year.
Spanish politics have taken a dramatic turn in the last fortnight, and one that has not fully registered outside of Spain. Spain’s biggest political scandal of the post-Franco era may yet bring down Spanish Prime Minister Mariano Rajoy. But the real cost of the ‘Bárcenas Scandal’ is as likely to be the compounding of a broader crisis of authority for the pre-crisis Spanish political mainstream. This is likely to have longer-term implications for the speed and depth of Spanish reforms.
This week the UK government has published draft legislation that will restructure British banks on significantly different terms than the rest of Europe and the US, and on terms that the government itself would not have chosen. For all the talk in continental Europe of its Anglo-Saxon intransigence and resistance to reform, the UK will probably be the only major jurisdiction to produce a serious structural reform response to the banking crisis. Why?
January was a month of war and peace in Paris. The same day France committed military forces in Mali, a three month negotiation between France’s employers' federation and its major unions produced an agreement on changes to France’s labour laws. The agreement is a victory for Hollande’s consensus-building approach, but how much does it actually change?
Tom Albanese’s departure from Rio Tinto last week was precipitated by substantial write downs in Rio Tinto’s aluminium businesses. Rather than just a case of a badly-timed bet on the global market for aluminium, this is the result of a bigger shift in aluminium markets. It is a structural shift in which speculative investors and Chinese state capitalism play a key role.