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gas price cap

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gas price cap


EU energy ministers have clashed over a plan to put a price cap on Russian gas, casting doubt on whether the measure will go ahead.

Speaking after emergency talks in Brussels in response to surging gas and electricity prices, the EU’s energy commissioner, Kadri Simson, said “nothing is decided” on proposals to curb Russia’s income.

Vladimir Putin has dismissed the idea as “stupid” and threatened to make Europe “freeze” this winter, if a cap is agreed. Russia has already slashed supplies to Europe and said it will not resume flows at previous volumes until the EU lifts sanctions. Russian supply makes up only 9% of EU gas imports, down from 40% before the invasion of Ukraine.

Simson defended the cap plan as reasonable. “The context of this measure is that Russia is gaining huge profits by manipulating and limiting, artificially, supply to drive up prices. And the cap would reduce these profits,” she told reporters on Friday.

There was more consensus over a proposal to cap the high price of EU-produced electricity from renewable sources, such as wind, solar and nuclear, and to reduce energy consumption across the region. The European Commission favours a mandatory 5% cut in electricity use during peak hours.

Countries that import large volumes from Russia, including Hungary, Slovakia and Austria, have spoken out against the cap proposal because they fear the Kremlin would halt all gas flows, plunging their countries into recession.

“If price restrictions were to be imposed exclusively on Russian gas, that would evidently lead to an immediate cut-off in Russian gas supplies,” said Hungarian foreign minister Péter Szijjártó, who was attending the meeting. “It does not take a Nobel Prize to recognise that.”

Around a dozen countries, including France and Poland, say the price cap should apply to all imported gas, including liquified natural gas. The EU energy commissioner voiced doubts about that approach, saying that a general price cap “could present a security of supply challenge”.

Since the invasion of Ukraine, the EU has been scrambling to secure supplies shipped in from other countries, such as Qatar, Norway and the United States, but it faces stiff competition from Asia. “Right now it is important that we can replace decreasing Russian volumes with alternative suppliers,” Simson said.

Only the Baltic states, who have long argued for sanctions on Russian gas, gave full-throated support to the plan. Riina Sikkut, Estonia’s minister for economic affairs and infrastructure, urged other members to ignore Putin’s threats, saying: “It is blackmail, it is war that is waged outside Ukraine … We have to have the political will to make Ukraine win.”

Ministers were more aligned on dealing with a distortion in the energy market, which has seen renewable and nuclear energy companies reaping huge profits because the price of all electricity is pegged to the price of wholesale gas. The proposals are for a cap on power from wind, solar and nuclear, and the redistribution of revenues to vulnerable consumers and businesses.

Ministers also backed a plan to reduce demand for electricity, although Czech industry minister Jozef Síkela, who chaired the meeting, indicated that member states wanted voluntary targets, rather than a legally-binding obligation.

“EU energy ministers have agreed the EU needs a comprehensive plan to face the ongoing energy crisis,” said Simone Tagliapietra, a senior energy expert at the Bruegel think tank. “As all these measures are extraordinarily complex to be engineered, it will take a great political commitment by member states to quickly adopt them in the coming weeks. Europe is off for a grand bargain on energy.”


How Military Spending Affects the Economy

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How Military Spending Affects the Economy

The Why of Military Spending

Military spending is one area where there is no private solution. No single corporation or group of citizens is motivated and trustworthy enough to take financial responsibility for maintaining a nation’s military.

Adam Smith, a father of free-market economics, identified the defense of society as one of the primary functions of government and a justification for reasonable taxation.3 4 The government is acting on behalf of the public to ensure that the military is capable of defending the nation.

In practice, defending the nation expands to defending a nation’s strategic interests. And, the whole concept of “sufficient” is up for debate in any democracy.

Guns-and-Butter Curve

The guns-and-butter curve is the classic economic example of the production possibility curve, which demonstrates the idea of opportunity cost. In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.

The Hole That Debt Built

Capital is finite, and capital going into one spending category means less money for something else.

This fact becomes more urgent when we consider that any government spending that exceeds revenues results in a deficit, adding to the national debt. A ballooning national debt has an economic impact on everyone. As the debt grows, the interest expense of the debt grows and the cost of borrowing increases due to the risk that increased debt represents. In theory, the increased debt will eventually drag on economic growth and drive taxes higher.

Spending in war time







The Cost of Borrowing

The U.S. has historically enjoyed generous debt terms from domestic and international lenders. That tends to reduce political pressure to cut military spending in order to reduce the deficit. 5 6

Some advocates for decreased military spending might tie it to a real or potential increase in the mortgage rates people pay, given the relationship between Treasury yields and commercial lending.7 This reasoning holds and military spending does sit as a large percentage of discretionary spending.

In other nations, particularly ones that are still developing economically, a focus on military spending often means foregoing other important priorities. Many nations have a standing military but an unreliable public infrastructure, from hospitals to roads to schools. North Korea is an extreme example of what an unrelenting focus on military spending can do to the standard of living for the general population.

The generous debt terms that the U.S. enjoys are far from universal, so the trade-off between military spending and public infrastructure is more painful for many nations.

How Military Spending Affects the Economy Read More »

President of Bundesbank is leaving

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President of Bundesbank is leaving

Jens Weidmann, who this week announced his departure from the presidency of the Bundesbank after a decade-long term, played his role as the most prominent dissenting voice on the European Central Bank’s governing council admirably. Labelled by former ECB president Mario Draghi as nein zu allem, no to everything, Weidmann articulated the view of monetary hawks — that the ECB’s extraordinary policies were inflationary and damaging to market discipline — at the highest levels. He provided scepticism over the institution’s forays into areas such as preventing climate change. Yet during a decade of ad hoc responses to financial crises, the extension of extraordinary monetary policies and the creation of the joint EU recovery fund, at every stage the German establishment ultimately threw its support behind the single European currency and the policies embarked on by the ECB to keep it together. While chancellor Angela Merkel, who made those fateful decisions, will soon depart the scene as well, few now doubt the commitment of Europe’s largest economy to the single currency. That means Weidmann’s successor will matter a great deal less than the role once did to the future of the eurozone. Weidmann’s hawkish views, in keeping with many in his country and the reputation of the Bundesbank, meant he was often in the minority and would be passed over to become the next ECB president in favour of Christine Lagarde, with no prior experience of central banking. Still, to his considerable credit, he was a team player, often defending the ECB against unreasoned criticism in his home country. Critically, he rejected the potentially explosive assertion of the constitutional court that the ECB’s quantitative easing programme represented monetary financing. His successor is likely to be less hawkish. A decade of stubbornly low inflation in the eurozone, despite loose monetary policy, has damaged the case for monetary orthodoxy — in fact, in its latest strategy review the ECB integrated its “monetary analysis”, one of the last vestiges of the monetary targeting that built the German central bank’s reputation, with its “economic analysis”. The next Bundesbank president will be selected by a three-party coalition that includes the centre-left Social Democrats and the Greens alongside the pro-business liberals the Free Democrats. Negotiations over the future finance minister and the central bank chief are likely to be conducted in tandem. Whoever the coalition partners nominate as the next president of the Bundesbank, the most influential German monetary policymaker will instead be a member of the executive board of the ECB. That many are asking whether Isabel Schnabel, who currently has responsibility for the ECB’s market operations, would want to leave that role and become Bundesbank president reflects how power has fundamentally shifted between the Frankfurt-based institutions. Either way, Weidmann’s career showed that there was ultimately nothing for the eurozone’s institutions to fear from forceful dissent. Even while it annoyed Draghi, disagreement between members of the ECB’s governing board, which includes the head of the national central banks, did not prevent the ECB from acting decisively in moments of crisis. If anything, a loud voice reflecting the views of more hawkish member states, often in the north, helps build consensus and ensure that the institution — protected from political influence by international treaty — truly reflects the views of all it serves.

Germany’s central bank chief Jens Weidmann on Wednesday submitted his resignation to President Frank-Walter Steinmeier, the Bundesbank in Frankfurt said in a statement. 

“I have come to the conclusion that more than 10 years is a good measure of time to turn over a new leaf — for the Bundesbank, but also for me personally,” Weidmann wrote in a letter to the Bank’s staff on Wednesday.

Weidmann, who has been the president of the Bundesbank since May 2011, is set to leave office on December 31.

Weidmann warns against looking at one-sided risks 

In his letter on Wednesday, Weidmann highlighted the “important, stabilizing role played by monetary policy during the during the pandemic as well as the successful conclusion of the strategy discussion as an important milestone in the European monetary policy.” 

He said that moving forward, it will be crucial for the European Central Bank (ECB) “not only to look one-sidedly at deflationary risks, but not to lose sight of the inflationary dangers either.”

National central bank governors in the 19-country eurozone have a seat on the ECB’s governing council. Weidmann had repeatedly criticized stimulus efforts by the European Central Bank (ECB) as too loose. 

His resignation comes as the ECB faces difficult questions over tackling rising inflation and winding down its massive COVID pandemic stimulus program.

ECB chief praises Weidmann’s ‘search for common ground’

German Chancellor Angela Merkel said she regretted Weidmann’s decision and that nominating his successor will be a job for the new German government when it is formed, a spokesperson told reporters.

Commenting on Weidmann’s departure, ECB President Christine Lagarde hailed his loyalty and willingness to find a compromise.

“Jens is a good personal friend on whose loyalty I could always count,” Lagarde said in a statement.

“While Jens had clear views on monetary policy I was always impressed by his search for common ground in the Governing Council, by his empathy for his Eurosystem colleagues, and his willingness to find a compromise.”

Youngest ever Bundesbank chief

Weidmann, now 53, was the youngest Bundesbank president when he took over the role from Axel Weber in 2011. Weber had quit in a dispute over the ECB’s policy to control the crisis at the time.

Before his role as the Bundesbank chief, Weidmann served as Chancellor Anegla Merkel’s economic adviser for five years.

Weidmann studied in Paris and Bonn. In 1997, he started a two-year stint at the International Monetary Fund.

The promotion caps a remarkable rise for Mr Weidmann, who had previously worked at the IMF in Washington and as head of the monetary policy division at the Bundesbank, before Ms Merkel brought him back to Berlin as her chief economic adviser in 2006. However, given the Bundesbank’s fiercely guarded political independence, Mr Weidmann’s closeness to Ms Merkel means that his promotion is not uncontentious. Carsten Schneider, a finance expert from the opposition Social Democrat party, said “there is a danger of the Bundesbank becoming an extension of the chancellor’s office. That would be unfortunate. It’s up to Jens Weidmann to dispel this worry.” But Hans-Werner Sinn, head of the Munich-based Institute for Economic Research (Ifo), played down such concerns, pointing out that candidates for positions at the Bundesbank usually had political connections. “But once they are in office, they are completely reliable and independent”, he said. “I don’t see a problem.” Mr Weidmann replaces his mentor Axel Weber, who resigned unexpectedly last week. Mr Weber had been expected to be Germany’s candidate to succeed Jean-Claude Trichet as president of the European Central Bank when his term expires in October. But his abrupt departure has left Ms Merkel without an obvious candidate. Mr Weidmann’s move to the Bundesbank has been interpreted by some analysts as indicating that Ms Merkel may decide not to press for a German to run the ECB. However, government sources in Berlin cautioned that no such decision had yet been taken. The ECB’s six-man executive board already includes a German – Jürgen Stark, whom Ms Merkel could have moved to the Bundesbank instead of Mr Weidmann if she had wanted to make space for a German in the top job. “I think it is some kind of indication. They are certainly not clearing the way for a German,” said Erik Nielsen, European economist at Goldman Sachs. However, last week Wolfgang Schäuble, the finance minister, said that Germany had never said it would insist on a German for the top ECB job.

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Turkish canal

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Turkish canal

Turkish President Recep Tayyip Erdogan has taken the first step in the construction of a canal on the western edge of Istanbul, amid concerns over the environmental and economic effects of the project.

“Today we are opening a new page in the history of Turkey’s development,” Erdogan said on Saturday at a ground-breaking ceremony of Sazlidere Bridge over the planned route. Turkey’s Canal Istanbul dispute explainedFor Erdogan’s Istanbul Canal project, critics see few winnersTurkey’s banks reluctant to finance Erdogan’s canal: Report

“We see Canal Istanbul as a project to save the future of Istanbul … to ensure the safety of life and property of Istanbul’s Bosphorus and the citizens around it,” he said.

The government has said that the project will ease ship traffic and reduce the risk of accidents in the Bosphorus Strait – one of the world’s busiest shipping lanes – which links the Sea of Marmara and the Black Sea.

Dubbed by Erdogan as his “crazy project” when he first suggested building the canal in 2011, the 45km (28-mile)-long project linking the Sea of Marmara and the Black Sea to the west of the Bosphorus includes the construction of new seaports, bridges, businesses, housing districts and artificial lakes.

The canal, estimated to cost $15bn, is expected to be completed within six years, Erdogan said.

“Look, this is not a fountain opening ceremony,” he said at the event. “Today we are laying the foundations of one of the exemplary canals in the world.”

Mustafa Ilicali, a professor on transportation and former member of parliament, told Al Jazeera that marine traffic has risen 72 percent in the Bosphorus since 2005.

“Tankers pose accidents in the narrow strait. Pending vessels pollute the sea and cause emission,” he said.

Muzaffer Bayram, a citizen living in Istanbul, sees the canal as being beneficial for Turkey.

“See these ships waiting? When we have the canal, they will not wait here. Besides they will pay more [to pass through Turkey]. It is for my country’s interest,” he told Al Jazeera.

However, opponents say the canal will cause profound ecological damage in Istanbul, exacerbate the dangers posed by earthquakes, and put the already ailing Turkish economy under the burden of even greater debt.

“Through this new canal, the Black Sea and the Marmara waters will get mixed. This will have ecological consequences and imperil an already tenuous water supply and marine life,” Pinar Giritlioglu, vice president of the Chamber of Urban Planners said.

Ercument Gulemek, a farmer and stockbreeder in Baklali, said that the project will claim some of his village.

“We want to expand the business, build an indoor barn, but we can’t. It’s forbidden. What I do is the only job I know. I can only become a night watchman after these places become settlements,” he told Al Jazeera.Play Video

The project’s first structure, the eight-lane, 840-metre (about a half-mile) road bridge, will link to the North Marmara highway that also connects other recent infrastructure projects – a new airport and a third Bosphorus bridge.

This has led Istanbul Mayor Ekrem Imamoglu, who represents Turkey’s main opposition Republican Peoples’ Party, to call Saturday’s ceremony an “illusion” that is related to plans for the highway rather than the canal.

“The construction of a bridge here has nothing to do with the canal project. It’s something to do with the road hub,” he told a news conference in Sazlidere on Thursday.

Samuel Ramani, a Middle East analyst, said that while a 15-fold increase in traffic in the Bosphorus during the past half century is a serious issue, it has to be weighed against environmental and geopolitical concerns – including reports that much of the project’s funding will come from China.

“Deviating the congestion in the Bosphorus is a valid argument,” he told Al Jazeera.

“But then other questions are – does that weigh the environmental cost and does it also potentially pose a threat to Turkish sovereignty if the project is [financed] by China?”

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The European Union’s economy is set to grow faster than expected in 2021 and 2022 thanks to the accelerating pace of vaccination across the bloc and the gradual ease of coronavirus restrictions.

As of today, EU countries have administered 175.3 million vaccine doses and almost 30% of the population have received at least one dose.

These conditions have encouraged the European Commission to upgrade its economic forecast: the executive now estimates that this year the EU’s economy will grow by 4.2% while the eurozone will expand by 4.3 percent.

The numbers represent an improvement from the respective 3.7% and 3.8% growth rates predicted back in February, when the inoculation campaign was mostly stalled.

The brighter outlook is also based on the anticipated impact of Next Generation EU, the bloc’s €750-billion recovery fund. The fund is not yet operational but money is expected to be disbursed as early as July. For the time being, the Commission is only taking into account the effects of grants, which make up €312.5 billion of the total fund.

For 2022, the Commission predict similar volumes: 4.4% growth for both the EU and the eurozone, which comprises 19 of the bloc’s 27 member states.

“The shadow of COVID-19 is beginning to lift from Europe’s economy,” said European Commissioner Paolo Gentiloni, who explained the growth will be driven by private consumption, investment and a rising demand for EU exports from a stronger global economy.

“Maintaining the now strong pace of vaccinations in the EU will be crucial – for the health of our citizens as well as our economies. So let’s all roll up our sleeves.”

All EU countries will return to pre-crisis level by the end of 2022, although some will recover with greater speed than others. Poland, Sweden, Denmark, Hungary, Romania, Slovakia, Lithuania and Luxembourg will offset all the pandemic losses already this year, with Estonia and Finland coming close to achieving the coveted goal.

The remaining EU countries, including Germany, France, Italy and Spain, will have to wait until 2022 to see a full recovery. Despite the long road ahead, the estimation is also good news: in its previous forecast, the Commission expected Spain, Greece and Italy to completely recover sometime in 2023.

The updated economic forecast confirms that Spain was the only country that registered a two-digit plunge in 2020, with a 10.8% drop. On the opposite side, Ireland was the only member state that saw growth in 2020 (3.4%) and is poised to continue expanding steadily in 2021 (4.6%) and 2022 (5%).

Rising debt and unemployment

Since the coronavirus arrived in the continent, European economies have been injecting enormous amounts of fiscal support to prevent companies from going bankrupt and workers from becoming unemployed.

As a result, the debt-to-GDP ratio inside the eurozone will rise to 102% in 2021, the highest level ever recorded, to then slightly fall back to 101% in 2022. The EU as a whole will see a ratio of 94% and 93%, respectively.

The Commission believes the EU’s unemployment rate will be higher in 2021 (7.6%) than it was in 2020 (7.1%) and will then recede in 2022 (7%).

“Today, for the first time since the pandemic hit, we see some optimism prevailing over uncertainty. But uncertainty is, of course, still there,” Gentiloni said.

The risks will remain high as long as COVID-19 looms over Europe, the Commissioner noted. There are still many unanswered questions about the long-term effectiveness of vaccines and consumers’ desire to spend their accumulated savings might be overestimated (or even underestimated).

National governments must be careful to withdraw their fiscal support measures at the right time, the executive warned. If they do so too early, the recovery could be jeopardised. But if they do so too late, the market could be distorted.

European Commission, 2021
Spring economic forecast.European Commission, 2021

The new forecast from the Commission is in line with the 4.4% growth rate that the International Monetary Fund predicts for the eurozone this year, an estimation which also represents an upward revision.

“The big question is the uncertainty and the range of variation in some of the countries that are better off and the ones that are not. Some countries, even in winter, were not expected to recover until 2023 and that level of waiting and uncertainty is still problematic,” Rebecca Christie, an economist at the Bruegel think tank, told Euronews.

“People are expected more manufacturing and they are expecting more consumer spending in countries with a lot of savings, like Germany. The struggles are going to be in the services sector and regions that have been very hard hit that won’t have the same level of bustle that you get with a true economic recovery.”

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London hit worse than excepted by Brexit

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London hit worse than excepted by Brexit

Over 400 financial firms in Britain have shifted activities, staff and a combined trillion pounds ($1.4 trillion) in assets to hubs in the European Union due to Brexit, with more pain to come, a study from New Financial think tank said on Friday. “We think it is an underestimate and we expect the numbers to increase over time: we are only at the end of the beginning of Brexit,” the study said.

The EU has offered Britain little in the way of direct market access for financial services, which were not included in the bloc’s trade deal with the United Kingdom from January. “That access is unlikely to be forthcoming, so it is perhaps better for the industry to take the damage from Brexit on the chin and focus instead on recalibrating the framework in the UK so that it is more tailored to the unique nature of the UK financial services industry,” the study said. Some 7,400 jobs have moved from Britain or been created at new hubs in the EU, the study said. Bankers have told Reuters that some staff moves have been delayed due to COVID-19 travel restrictions. The total of 440 relocations is higher than anticipated and well above the 269 in New Financial’s 2019 survey. New Financial believes the real number is well over 500.




Dublin has emerged as the biggest beneficiary with 135 relocations, followed by Paris with 102, Luxembourg 95, Frankfurt 63, and Amsterdam 48. “This redistribution of activity across the EU has wound the clock back by about 20 years,” the study said. Banks have moved or are moving over 900 billion pounds in assets from Britain to the EU, while insurers and asset managers have transferred over 100 billion pounds in assets and funds, reducing the UK tax base.


“We expect Frankfurt will be the ‘winner’ in terms of assets in the longer-term, and that Paris will ultimately be the biggest beneficiary in terms of jobs,” the study said. Amsterdam toppling London as Europe’s biggest share trading centre since January has been the most visible sign of Brexit in finance.

The study expects that 300 to 500 smaller EU financial firms may open a permanent office in Britain, far fewer than the prevailing forecasts of around 1,000. The City of London will remain the dominant financial centre in Europe for the foreseeable future, but its influence will be chipped away, risking a reduction in Britain’s 26 billion pounds annual trade surplus in financial services with the EU, the study added.

Last year, 52 percent of the UK population voted in favor of leaving the EU, a historic event branded as “Brexit.” Since then, speculation has been rife surrounding the impact of Brexit on the UK economy – particularly the financial sector.

In this article, we take a look at what the anticipated impacts of Brexit on the UK financial sector are, assess their merits and likelihood, and see what the long-lasting impact on the financial sector around the world may be.

The immediate aftermath of the Brexit vote was by all accounts bleak: stock markets plunged, sterling suffered, and consumer confidence took a big hit.

Since then, markets have recovered, waving off concerns of immediate doom for the British economy. Nevertheless, strong doubts remain on the long-term impact of Brexit on the UK economy.

One of the most discussed sectors has been the financial industry, for several reasons.

Reason No. 1 is that the financial industry is by all accounts a hugely influential sector in the British economy, contributing 12 percent to the UK’s total GDP.

Output numbers aside, it generates more than two million jobs and is the country’s biggest export industry, accounting for nearly 50% of the UK’s $31bn trade surplus in services.

The UK financial sector’s relevance to the rest of the EU is also pronounced. British banks lend nearly $1.4 trillion to EU companies and governments. Much of the financial activities carried out in Europe are either directly or indirectly performed out of London (87% of US investment banks’ EU staff are employed in London (Chart 1).

Reason No. 2 is that the financial sector has been one of the principal benefactors of the single market. The EU is strongly rooted in economic motivations.

With all this in mind, it is no wonder that the bulk of the post-Brexit doom and gloom has focused on financial services.

But six months on, my finance friends in London all seem to be carrying out their daily lives much like they were prior to the vote. So is Brexit really even significant? And if it is, what is likely to be the impact going forward?

Question 1: Is Brexit a big deal?

Unfortunately, the answer seems quite likely to be yes.

An analysis of the issues and concerns related to the financial sector bring up a raft of worrying conclusions.

In particular, these center around three important issues: passporting, regulatory uncertainty, and talent-drain.
Passporting: What is it, and why does it matter?

By far and away the most important issue at stake relates to passporting.

Passporting is the process whereby any British-based financial institution, be it banks, insurance providers, or asset management firms, can sell their products and services into the rest of the EU without the need to obtain a license, get regulatory approval, or set up local subsidiaries to do so.

Passporting, in conjunction with a few other key factors described below, has been a major reason why a large amount of financial institutions have decided to set up headquarters in London.

A recent report estimated that nearly 5,500 firms in the UK rely on passporting to conduct business with the rest of the EU. And the flows go both ways. More than 8,000 firms in the rest of the EU trade into the UK using passporting rules.

As Brexit looms, will passporting continue? The answer almost certainly seems to be no.

The only way for Britain to continue benefiting from passporting would be if it pursued a “Norwegian deal” with the EU (membership of the European Economic Area and adherence to all its associated rules).

But a Norwegian-style solution is extremely unlikely for the simple fact it would force Britain to compromise on the very same issues (specifically, immigration) that led to the Brexit vote in the first place. So without passporting, are there other ways that UK firms could sell into the EU? One possible solution would be to go for a “Swiss deal” with the EU (essentially one focused on bilateral trade agreements). But a Swiss-style solution also seems unlikely. As Capital Economics points out, “It is unlikely that the UK would get a deal with the EU as good as Switzerland’s. The Swiss negotiated their deal when they were planning to join the EU; there would be less goodwill for a country leaving it”. And even if it were achieved, there are strong doubts about the efficacy of such a model. More specifically, the “Swiss model” takes advantage of the so-called “third country equivalence” rules, which allow for non-member state firms to perform some of the same functions that passporting allows for.

But as Anthony Browne, chief executive of the British Bankers’ Association points out,

the EU’s ‘equivalence’ regime is a poor shadow of passporting; it only covers a narrow range of services, can be withdrawn at virtually no notice and will probably mean the UK will have to accept rules it has no influence over.

That might help explain why Switzerland has largely underperformed in the UK for the past 15 years in terms of exports of financial services (see chart 2).

If both a Norwegian model and a Swiss model seem tough, is there a third option?

The answer is yes, and would imply a single Free Trade Agreement, similar to what Canada and South Korea have negotiated with the EU.

But these negotiations are long and complicated (for instance, the Canada-EU one has taken seven years) and would in any case result in far more limited conditions than the current passporting rights allow for.

At the end of the day, the trade-off is very clear.

As Jonah Hill, formerly the UK’s most senior diplomat in Brussels, laid out, “Most approaches that offer access [to the EU market] come with free movement of people, and I can’t see that flying given the weight of immigration as an issue in the referendum debate.”

The unfortunate reality for Britain is that you can’t cherry pick. It’s either passporting (or quasi-passporting) with free movement of labor, or not.
Regulatory Uncertainty is on the Horizon

The second crucial issue related to Brexit is regulatory uncertainty.

To be clear, regulation has historically been one of Britain’s strengths, at least when assessing why London came to become Europe’s (and arguably the world’s) financial capital. For two reasons:

English law has certain practical advantages for things like debt issuance and insolvency laws.
British labor laws are much more relaxed and employer-friendly than its Continental European counterparts. (e.g. A recent article in the Financial Times quotes an employment lawyer as saying “a senior banker earning $1.5 million in total remuneration could typically be made redundant with a payout of $150,000 in London, but the cost could currently be 10 or 15 times that in Frankfurt”.)

But whilst this may have been a strength historically, Brexit complicates things considerably.

First, Britain will need to replicate or renegotiate more than 40 years of EU regulations and trade deals. This will obviously take a significant amount of time (see chart 3). And unfortunately, many financial services firms cannot afford to wait that long.

Second, timing issues aside, it’s not even clear whether new UK financial regulations would be good for the sector.

To be fair, this was actually one of the arguments that Brexit-proponents clamored for in favor of leaving the Union. Freed from the grips of excessive Brussels bureaucracy, Brexiters argued that Britain could enter into a new era of deregulation that would in fact boost the financial sector.

But the argument is not obvious.

As Capital Economics states,

It would be wrong to assume that leaving the European Union would result in less regulation on the City. The British government has shown more zeal for regulation than its continental peers recently. Unlike those in other European Union countries, Britain’s banks will be required to ring fence their retail banks from their commercial banks from 2019. The Bank of England’s stress tests were tougher than the European Banking Authority’s last year.

All in all, while an independent regulatory environment could indeed be a long-term benefit, the short-term impact of regulatory uncertainty might prove too much to handle for many of London’s firms.

The Dangers of Brain Drain

The third key reason why Brexit might cause long-lasting damage to the British financial sector is that it might set off a dangerous process of brain drain that would undermine one of the principal reasons London rose to prominence.

London, much like Silicon Valley, benefits from a critical mass of world-class, industry-specific talent living and working in close proximity. In a recent interview with the Wall Street Journal, the CEO of UBS made that clear: “[There are] three main reason why we’re in London. First and foremost, the talent pool.”

But would that continue to be the case in a post-Brexit world? Disruptions such as visa uncertainty for foreign employees and near-term job-loss prospects could cause top talent to go elsewhere.

On the visa-issue specifically, a recent report found that “If the current visa system were extended to EU migrants, research suggests that three quarters of the EU workforce in the UK would not meet these requirements”. This would be a huge issue for the City of London where 12% of the workforce is European (and much of it in the financial sector).

Once the the wheels are put in motion on a talent-exodus, the trend may be difficult to reverse.

Network effects are powerful and work both ways – in attracting talent, as well as in pushing it away.

The crux of it all is that talent is mobile, and whilst London currently provides the perfect set of factors to attract top talent, there are several other decent-looking alternatives ready to bite at its heals should Brexit start taking its toll.

Short-term prospects look dim.

With all this in mind, it’s hard not to be pessimistic for the UK economy going forward.

What has for many years been one of the principal drivers of growth and prosperity will no doubt be affected. To be clear, London is unlikely to collapse as a financial center, but it seems inevitable that some, if not a lot, of the capital’s financial firms will move elsewhere.

And unfortunately, it looks like it’s already happening.

Investment banks have already begun shifting, or preparing to shift, many of their back-office functions to other jurisdictions. And that affects a lot of people (chart 4).

And there is no doubt more to come.

A report by PricewaterhouseCoopers estimates that up to 100,000 financial-sector jobs may leave the country as a result of Brexit.

Question 2: What is the medium-term outlook?
London won’t slip into irrelevance but it will decline in significance

While London is likely to be negatively impacted in the short-term, there are strong reasons to believe that it won’t slip into irrelevance. There are few other cities in the world that have the same depth of infrastructure and network to sustain a buzzing financial services center.

But Brexit seems certain to take big dent out of London’s current position at the top of the global financial system.

Martin Wolf, of the Financial Times, put it nicely:

London will remain an important financial centre under any plausible circumstances. It survived the 1930s and two world wars. It will survive Brexit. Yet, within the EU, it was emerging as the undisputed financial capital of Europe, as well as one of the world’s two most important financial centres. After Brexit, it is likely to become an offshore centre, relatively more vulnerable to policy decisions, especially regulatory decisions, made elsewhere, particularly by the eurozone.

London could reinvent itself

In fairness to the Brexiters, London and the UK could actually take advantage of the situation, and turn things around. Two ways in which this could happen come to mind.

Regulatory Overhaul

First, as pointed out above, the UK might in fact be able to overhaul the regulatory environment and create an even better ecosystem for financial firms.

Removing pay caps, relaxing capital requirements, and generally ridding itself of the regulatory burdens of the EU, could help retain and even attract top talent to alternative asset industries, like hedge funds, which in any case raise much of its capital from outside of the EU and are not as affected by a loss of passporting.

New Industry and Technology

While certain firms will move abroad, new industries will emerge to replace those that leave.

As Brooke Masters, of the Financial Times, puts it:

Innovative Londoners will almost certainly [create new products and push into new markets] — renminbi-related products are an obvious place to start. Brexit could well provide the spur that banks, insurers, and asset managers need to rethink the way they do things, and create a true twenty-first century financial system that taps big data, artificial intelligence, and other new technology. It will probably be painful in the short-term, with job losses and empty office buildings. But don’t count London out.

Longer-term therefore, Britain may find ways to reinvent itself and carve out an even better situation than it currently benefits from.

Who is poised to take advantage of the short-term disruption?

Who will benefit from London’s lost business? The obvious answer is: other European cities.

Already, delegations from Paris, Frankfurt, and other Continental European cities are vying to attract business to their localities.

Recent reports state that Germany is considering changes to its labor laws to attract some of London’s firms to move to Frankfurt.

But where the next European financial capital will end up remains unclear.

In an interesting piece by the New York Times, Amsterdam and Frankfurt stood out as the most attractive replacements based on a range of criteria, including English-language proficiency, transportation and communication infrastructure, the regulatory environment, and other factors, such as schooling options, dining, and cultural offerings, etc.

But if one were to go by some of the comments of recent global banking executives, London’s decline might actually end up benefitting its principal rival, New York, the most.

The reasoning is interesting and scary: Brexit, while only affecting the UK, stokes the flames of populism around Europe and raises the spectre of a break-up of the Union. With these risks on the table, it might be more prudent to veer toward the safety of New York.

Other potential beneficiaries could be in Asia, particularly with relation to the insurance industry which could move to Hong Kong or Singapore.

Whatever the case, it seems unlikely that most of London’s losses will flow evenly to the same destination. More likely, London’s decline will lead to a more decentralized global financial market with multiple beneficiary-cities snapping up parts of the pie that London left behind. Ultimately, the unintended consequence of Brexit could be a new wave of innovation in the financial services industry as a broader range of players take control of the industry’s direction. The true winners will be those best setup to capitalize on this opportunity.

($1 = 0.7262 pounds)

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Shipping groups prepare for more ‘black swan’ events after Suez blockage

PRO Business MS

Accounting and Finance

Shipping groups prepare for more ‘black swan’ events after Suez blockage

In the first quarter, the effects of seasonal factors were felt, but also the negative effects of the Russian-Ukrainian conflict, which caused even greater uncertainty and worsened expectations. Placements in loans to non-financial entities grew solidly in the first quarter as well, with an annual growth of 10.1%. Most of the quarterly credit growth was aimed at enterprises, but growth was also observed in household loans.

      In the first quarter, the solvency of the banking system remained at a stable and solid level, with a capital adequacy ratio of 17%. Liquidity indicators are still at a satisfactory level and point to adequate management of the banks’ liquidity risk. The share of non-performing loans in the total loans of the non-financial sector was reduced to the historically lowest level of 3.1%, i.e. lower than the pre-pandemic level, so the quality of the banks’ loan portfolio is still solid.

      Uncertainty about the further course of events related to the covid-19 pandemic, which is still present, rising energy prices and fragmented and disrupted supply chains due to the conflict in Ukraine, as well as the strict restrictive measures introduced in China, are the most significant risk factors that will affect the future dynamics of the growth of economic activity and the activities of the banking system, the Report states. 

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Flying in covid time

PRO Business MS

Accounting and Finance

Flying in covid time

The U.S. will soon require airline passengers to prove they recently tested negative for Covid-19 before flying to the country, the Centers for Disease Control and Prevention said Tuesday. The measure, which aims to curb the spread of the disease, comes as new infections have hit records. Starting Jan. 26, arriving travelers will have to test negative for Covid-19 within three days of their flight to the U.S., the CDC said.

“Testing does not eliminate all risk, but when combined with a period of staying at home and everyday precautions like wearing masks and social distancing, it can make travel safer, healthier, and more responsible by reducing spread on planes, in airports, and at destinations,” CDC Director Robert Redfield said in a news release.

The agency last month started requiring negative Covid tests for travelers flying from the U.K., as a more contagious strain of the virus was detected there, though it has since been found around the U.S. International air travel remains extremely depressed because of the virus and travel restrictions that prohibit many foreigners from entering the U.S. December international arrivals by air were down 76% from a year earlier, with noncitizen arrivals down 83%, according to Airlines for America, a trade group that represents most large U.S. airlines.

Delta Air Lines on Tuesday said it will waive any difference in fare for travelers booked on international flights to the U.S. through Feb. 9 if they want to fly before Jan. 26, when the new requirement takes effect. The tickets would have to have been purchased on Tuesday or earlier.

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