Friday, May 31, 2013

Europe's Road Towards Regrowth - Part 3

This post is obviously a continuation of some work in my 'Convergence' report as well as some other blog posts.

It's clear that things have stabilised but we need to get things back into growth mode. Let's examine some of the options:
- let's start to tax companies/individuals properly. This means that we either create incentives to keep money onshore or else change laws so that they they apply on-shore. Long term incentives for us to do this internaionally especially with the advent of globalisation, low/tax free havens, and the increasingly important role of online commerce.
Make life easier for everyone by making tax laws simpler particularly for larger firms. Maintain tax neutral position when compared to now if possible.
- it's clear that banks either don't want to loan, don't have the ability to loan, etc... I've been considering a joint temporary (or even permanent) venture overseen by ECB but with joint funding by both the private sector as well as the ECB? It would allow the ECB to figure out the logistics of setting up and running the SSM and would also allow basically allow people to start afresh if they want to (without the burden of existing bank loans/assets). It would focus in on 'bang for buck' projects and loans specifically to in relation to the SME sector.
- there are a lot of international deadlocks over various issues particularly in the trading area. Try to get them settled (whether through private negotiations, holding off temporarily) or work your way around them.
- continue to try to spread the load so that we are no longer so dependent on banks and the ECB to return to growth. Something else that we should consider is increasing the size of the (access allowed to both retail and wholesale investors) corporate loan/bond market to share greater burden for capital raising. We may need to consider foreign ownership/takeover rules here? as it's likely that at least in the short to medium term those who provide the capital are going to come from overseas
- figure out how much further debt can be forgiven realistically and and will produce the intended impact or otherwise
- continue work on banking union and bank resolution/consolidations (recapitalisation those that are able to continue and are relatively healthy, wind up those that are have little chance of medium/longer term surivial, divide them, etc...). Attempt to increase standardisation of banking practices (risk management/mitigation, etc...)? Does the ECB come up with measures? clear that they already have systems in place? Use them as the basis to work with industry and create new standards?
- continue to/crack down harder on crime and money laundering (aware of the difficulty of this)
- try to look for opportunities or areas where bringing back work to Europe actually makes more sense. Outsourcing makes sense but only up to a particular point. Logistical, transportation, geographical, and other issues all play an important part.
- consider limited Quantitative Easing? Problem always seems to be how and when to exit smoothly, whether to exit at all, whether you are merely creating an asset bubble and so on?
- massive stimulus just the the Japanese recently announced? Problem is that you could just ending up debt on top of more debt without it having any impact. It should be obvious that the thing that I'm trying to achieve with some of the measures here (and in some of my previous posts) is basically ensuring that any stimulus that is injected into the economy actually makes an impact and has an impact quickly.
- I don't support Tobin tax in current form as it basically penalises the financial sector for simply existing. Other options may be coming down harder on insider trading and market manipulation. This would include both individuals as well as organisations where these individuals actually. If not substantial fines then equity in the company which can be sold off, etc... Something else that I've been considering is something called I call a, 'considered risk tax'. Basically, it is generally accepted that rates of return are generally directly correlated to the level of risk with regards to the investment in question. If there are excessive profits or losses this means that in all likelihood they would have taken on some extra risk. This should form the basis/crux for the new tax. It avoids penalising the sector, maintains liquidity, but it also means that people will have to think twice before taking on likely speculative investments.
Need to avoid taking the bottom out of venture capital market though where massive gains/losses are possible.
If they still want to try it though, try in on a small group of voluntary countries to see the impact?
- Eurobonds/debt sharing once the banking union/supervisor is in place?
- something I've been interested in for a while now is watching the spread between retail interest rate and the official interest rate from the central bank. What I'm curious about is whether or not we can somehoe change our laws so that we can basically force banks to pass on the saving more effectively or less so. Essentially a rule which says that if the official rate is x% the minimum that you should pass on the end client (x+y)% If we can change the amount of y% across the union we effectively have different levels of interest rates? Obvious questions relating to legality, interference, whether this would make some bank operations unprofitable, etc... Need more thought on this...
This is obviously a means of manufacturing competitiveness within the union. Other ways could involve regulatory arbitrage, creative use of capital controls, trade barriers/controls, etc...
- in the past I've been thinking about regaining growth in the EU region by thinking about it in terms of competitiveness. Basically, if a country is more competitive than another then it has a better chance of exporting it's way out of trouble. To a certain extent we are seeing this trend come true. One of the things that has been noticeable is how some of the struggling EU countries have basically found that much of their growth has come down to trading with countries in 'emerging markets'. One of the questions that has recently been posed is how do you measure competitiveness though? Attempts have been made but should be obvious that price comes first, quality and reliability play a role, product support, and uniqueness of product/service offering as well all come into play. Ultimately, this means that as a consequence of national reforms (which may take time to filter down), or else stronger exports, over time price will play less and less of role which means that ultimately EU countries are going to become more competitive amongst one another and will increase trade within the region.
Internal devaluation, alteration of workplace relations, and other trade policies will largely achieve the same things.
- would like to see if we can something about the intellectual property rights, counterfeiting, etc... in certain Asian countries. It's one thing for them to copy shirts, it's another to see a what seem to be near copies of military equipment, telecommunications equipment, etc... rolling off the production line. Take the issue to the WTO or else implement measures so that local companies are better protected. Ironically, both sides lose somewhat in this equation. The people who engage in counterfeiting often don't learn many of the lessons that can only be gained through trial and error, research and development, etc...
- said it before and I'll say it again the EU needs to be more pro-active with regards to the problems that they face. Part of the problem is that some countries don't seem to realise the seriousness of the situations that they face until it's too late. Compounded by the nature of the discussions/negotiations that often occur until the very last minute decisions sometimes end up being non-optimal. Break the job up into pieces if need be but just try to get the it done more swiftly, optimally...
- be pro-active with regards to private debt. If you've spent enough time in the private sector you'll realise how lacking some businesses are with regards to managing their finances. I am aware of a program currently being run in Ireland which deals with exactly this particular issue (mainly to do with private property loans) and basically allows banks/individuals to renegotiate the deal so that the bank can recover as much as possible and the individual can afford the loan.
- something I've been asking myself for a while now (in the context of the Greek situation) is whether or not under the right circumstances low taxes are workeable over the long term. If people are basically taking care of themselves in a cash economy than technically it should work provided they never introduce too large of a burden on the state, the state never over-borrows, etc... I guess it's a question of macro-economic management/planning. It may also mean that during times of low employment and stress any problems are magnified though. For instance, welfare would have to support a larger group of unemployed people or else you would have to reduce the number of people who were eligible for welfare. You'd likely have to store some money away for 'rainy day' but obviously, the since the tax base would be so much smaller you may have to raise it on those individuals/organisations that do actually pay proper amounts of tax.
- one of things I've learnt while working on my 'Cloud and Internet Security' report (a few weeks should do it) is how certain countries under sanction have managed to harden their economies and have become self sufficient to a certain extent. Let's assume that the union is able to basically sustain itself without too much external input then technically if they are still relatively competitive globally they can partially shut down external trade and trade themselves out of trouble internally. This will allow them to eventually open up down the line and gain the benefits of globalisation without necessarily having to deal with a 'massive shock' that they would otherwise incur. One area in particular where they could/should think about this is with regards to their energy infrastructure. If there were a massive grid within the EU the countries in a stronger position could basically use their better positions to invest in greener (or even standard) power generation technologies (with subsidies from the weaker countries). Energy could be shared (especially during off peak times) to supplement those countries with less advanced infrastructure. Else, simply trade energy like other commodities. A switchable network that will purchase power from the cheapest/most available power network within the union to another... This will reduce costs of manufacturing through reduced cost of energy production.
- one of the things I've noticed about the EU is that a lot of work is done which is probably non-critical and probably costs more than it should if it were done at a national level. Hold off on non-critical work and shut it down and divolve these powers in these circumstances?
- have been thinking about the parallel currency thing for a while. Have been thinking that if several entering nations are re-considering their desire or holding off on joining the Eurozone, want to be part of the EU, but want to be part of a monetary union they possibly start one with the other members who are in the same situation entering the Eurozone especially if we can't get the Eurozone stablished and growing once more within a reasonable time frame...
- interesting studies/articles on the logistics of leaving the union
- we need multiple plans for growth and to provide us with a better idea of where the EU is headed. Possibly multiple plans one short (1-3), another medium (4-7), another longer (8-?)... The reason why I'm saying is that it's clear that the impact of some measures will take longer to filter down (education/training, direct stimulus to hire younger people, population growth, etc...) Moreover, it's fairly clear that some people are willing to work less or for lower wages, while others want a long term career in more advanced industries. I think we need to figure out just exactly where Europeans want to head with regards to this at both a continental as well as a national level. Thereafter, figure out how to achieve this and split our spending accordingly.
- something which is already being done by banks is packaging lower quality loans and selling it. Need a demand/market for it though... Any way to encourage International investors to take the risk? or is it more likely that they will only take the bet if they believe that the union's issues have been resolved (which is generally the case. The way the union is currently structured doesn't allow for rapid decision making during crisis periods though...)?
- would like to see greater pro-active work with regards to helping European nations out of their problems. I've previously stated that I'd like a closer examination of each state (SWOT style analysis which is actually done to a certain extent already by various bodies/consultancies) so that we could basically figure out where/how they fit into the union. Something else I'd like to see more work done on is a break down of exactly how they fit in with other union countries and the rest of the world. This would be similar to a risk analysis (and subsequent asset allocation) that is often conducted between private investors and financial advisors. In this case, it would occur at the national level. Depending on the state of their economy and the governments need/desire to maintain stability/grow we can then set about determining the best way forward with regards to controlled risk/investments. Curious to know what is the spending breakdown of a truly healthy economy is though?
- I believe in the benefits of globalisation (lower costs, better product, a unique solution, etc...) but only to a certain extent. I believe that there are certain industries that are critical to the functioning of every country and should be maintained locally (up until a certain point). These include food/agriculture, advanced research and development, manufacturing, construction, health, and defense. Some of these have to do with security, others quite simply because once you lose them it's likely going to take heavy subsidies to bring them back up once they are shut down. It also acts as a hedge (by providing stability) against international problems should they arise even if it may come at the cost of slightly lower growth rates over the medium/long term.
- further thought with regards to multi-tiered EU?
- been thinking about the workplace relations a bit. If you've ever been involved in a slow job market then you'll realise that there is sometimes very little choice in what you can do. Moreover, workers more often than not come off second best in any form of arbitration so I think our target should be to create as many jobs as we possibly can (I recall stories of my parents being able to get multiple job offers in a single day when they first arrived in Australia. This is almost un-imaginable now) so that workers have the chance to leave if they want to. Obviously, that's the ideal situation but otherwise it's a case of finding a balance between job security and worker rights.
- a local first policy? Part of the problem is that there just isn't the demand. Chicken and egg problem... Would banks be more willing to lend if there was a guarantee of local work though?
- ultimately, we need to realise that there is only so much that we can do. Even though the EU is a huge trade block it operates within the context of a very big world and is therefore subject to the same problems that the rest of the world has to deal with.
- I think the EU needs to take a better look at some of the industries that we are subsidising. The EU needs to make a genuine review/assessment of whether its geuninely worth defending/protecting, stopping, or else supporting expansion/export if the local market is too small for it to be genuinely profitable.
- I think it should be clear that a lot of what I'm trying to achieve here is attempting to spread the burden/risk of solving the problem of EU growth across as many sectors as possible. Basically, doing everything I possibly can to maximise the impact of any stimulus that we do spend so that it can result in 'real' (as opposed to growth that will only last as long as there is a supply of stimulus available).
- I think that something we should never lose sight of is that Europe should never lose it's character. Despite it's difficulties it should never lose sight of it's history, culture, identity and the way in which it fits in with the rest of the world. It truly is unique and I don't want it to see it end up being beholden to financial markets. Let's hope that we can achieve our goals of a prosperous and flourishing EU soon.