10 february 2011, ecb runners and riders

Not since the start of the euro in 1998 has anyone picked an ecb president, the eu's most powerful post. Then, they agreed on wim duisenburg, with a succession by jean claude trichet, who steps down in october. Trichet was in so many ways both the perfect candidate - a personifaction of hawkish bundesbankism with french nationality - and the perfect president: part diplomat, part chairman, part politician, all central banker and outstanding intellect. More than anything he was a leader, playing an immeasurable role in establishing the euro. Tomasso padoa schioppa (25 october) was a towering presence in the central banking world, but seeing him at a board meeting with trichet was like watching a boy. Until today, bundesbank president axel weber seemed favourite for these hard to follow shoes. Now we risk a credibility-sapping race as familiar eu arguments over balance and nationality inevitably rear their head. Whilst a german candidacy in 1998 was almost unthinkable, now it is almost inevitable. However, the issing-like presence of stark is already established on the board and so with credibility, credibility and credibility the top 3 qualifications, it will be a central banker through and through, ruling out other german candidates like klaus regling. The ever more chauvinist german politics around the bailout clash with merkel's natural and indeed traditional germanic bent to be kingmaker - ensuring the best, but not a german appointment. So the second most important qualification will be hawkishness; the warm compromise of yves mersch looms. My tip though, despite however many articles that tell you isn't possible: jurgen stark. Politics has a way of trumping iffy interpretations of eurosystem law when it needs to. As to whether it is a good choice, well it ticks all the boxes and he's as rigorous and orthodox as they come, but with leadership qualities so far unproven...

5 february 2011, no magic bullet

The much maligned nick clegg is right in his protestations that there is no magic bullet to create economic growth in uk plc. Clichés they may be, but there is usually some truth at their heart: selling out the next generation is the ultimate short termism he says, politicians can fall prey to the myth that somewhere there is a lever they can pull to generate growth and that they should simply pull as many as possible in the hope of finding it. His prescription of moving away from dependence on debt-financed growth (excruciatingly painful if actually done), investing in real infrastructure and in knowledge, skills and education and attempting, to the degree possible, to diversify sources of growth, is surely right. At best though, this is going to lead to an export-led feel bad recovery, with the great majority feeling not an updraft but rather a dwindling of their spending power. Worse, there is a risk of a rump at the bottom, especially the young (first victims of all recessions) all but cut adrift. It is not just their spending power being hit, but also the various (expensive) layers of national and local support previously in place and now being stripped away as an unfortunate consequence of the cuts. This generational timebomb is worrisome not just to the left, but also the right - "youth unemployment permanently scars its victims' lives... even when they get a job, someone who has been out of work for more than a year in their youth will earn as much as 28% less over their lifetime, and is more likely to be convicted of a crime". There, that question is coupled with another, "why, with 150,000 young unemployed in london, does your waiter so seldom have a london accent ?". Following through both clegg logic and its downside, the result is that there is indeed the need for the "plan b" that everyone is talking about, but it is not fiscal splurge on business and sexy sectors, but instead mitigation tightly-targeted on unfortunates ready to work and firms ready to employ them - future jobs fund anyone ?

3 february 2011, one small LEP for manckind

As manchester often does, we have embraced a government initiative with gusto where it broadly aligns with what we wanted anyway, so why not get some extra kudos ? So it is with the not-really-replacements for the behemoths that were england's "regional development agencies", our newly-minted local enterprise partnership. We're now officially looking for 13 leaders to pull us all together and drive us all forward; an interesting job, perhaps. You'll need to read the small print to know what the lep will actually do; or rather to be on it, as the intention is very much to have big people with minds of their own who can think innovative thoughts in this highly-restrictive climate, and take the rest of us with them. We can always hope.

Attached File: lep.pdf

1 february 2011, there’s no wall in cairo, but...

They're not quite falling like ninepins, but there's a strong whiff of 1989 in the air as the tunisian government sort of goes, they march in yemen, the momentum to get rid of egypt's president and indeed whole regime becomes unstoppable, the lebanese government collapses (again), and in a pre-emptive strike jordan's gentle despot sacks his whole government. The arab exception to the onward march of democracy over the last decades, and the west's acquiescence in it (as it delivered stability and a degree of support for israel) has long been debated, but no-one saw this potential headlong rush towards toppling dictators and letting freedom ring. A big question for many, including israel's prime minister, is whether the result of all this will be "fundamentalist" islamic regimes in a "one person, one vote, one time" scenario. His likening a possible outcome to iran is short-sightedness and scaremongering of the worst kind, that ha'aretz, a very reliable source of israeli news, correctly called him on. How illustrative that israel has taken its place amongst the status quo of the middle east, and left so far behind its idealism, its aspirations and its pride as a light unto the nations. Even the EU has done better, calling for an "orderly transition... to a genuine process of substantial democratic reform ... paving the way for free and fair elections", which I put down as a small victory for lisbon (time for europe). Though hardly as exciting as the politics, the greatest fears should perhaps be economic. As the ever excellent nouriel roubini points out, 3 of the past 5 global recessions were sparked by geopolitical shock in the middle east that led to a spike in oil prices. Yet another reason to fear that stagflation may be stalking our economic future.

28 january 2011, growth down, inflation up, rates up

Major shock, apparently, this week, that uk growth at the end of last year was only minus 0.5%, meaning it actually shrunk; another of those and we're back in recession. Suddenly of course, everyone seems to have predicted it, but actually it's much more drastic much quicker than anyone forecast. This is not unconnected to inflation, the figures released a few days before being not that much less of a shocker themselves, and yet again way above bank of england predictions. They have now missed the 2% target 55 of the last 66 months. There is a point at which the longevity of this means that inflation expectations rising becomes a given and any concept of it being a "temporary spike" impossible. I would argue that point has come, although its usual consequence, the infamous wage-price spiral, has not - as low (now negative) growth will continue to depress wages. What this all really means to me is that uk plc is well on with its grand plan (22 nov 2009) to get rid of the debt, namely cut a third (yes, plans will slip), devalue away a third (virtually done already) and inflate away a third, that pain being spread widely through the gentle but elongated depression of all our purchasing power. It will bite that much more deeply when interest rates start to go up, and even the bank of england can hold back that rising tide only so long; it will be infinitely harder once the ecb makes the first move, as I think is now more than odds on in the next very few months.

22 january 2011, not in for a pickles, but in for a pound

In london last week to meet everyone's favour minister, eric pickles, the man fronting the local government cuts, as well as greg clarke, minister for "decentralisation". The uk is chronically centralised and so this is a timely job, but not an easy one. Whilst this ministerial brace have backed the setting up of vague local enterprise partnerships (I was there as part of a representative sample), actually transferring any sort of powers away from whitehall (mainly meaning other departments, like business, skills, employment) to local areas, even where, like manchester, the strongest foundations are already in place, is a difficult mission, but one, with all the localism rhetoric, that cities have a right to push hard on. What does success look like ? How will we know if devolution is real or just facade ? Simple really, follow the money. According to mckinsey (p63), no less than 72% of public expenditure in the uk is central, compared to 15% in switzerland, 19% in germany and even supposedly paris-centric france is just 35%. The test is whether, like amsterdam, munich and barcelona, cities like manchester are allowed in the coming years to actually decide on how to spend more of their own money, regardless of central prescription.

Attached File: ministers2.pdf

13 january 2011, the cuts come to town

And so finally, after the months of phoney war, as expectations went up and down, the size and consequence of "the cuts" comes into focus. Several councils up here have already announced numbers: 800 in oldham, 500 (maybe) in bolton, 400 in bury and stockport and today a whopping 2, 000 in 1 year in manchester, which always has to do everything bigger and better than everyone else. Plans were well advanced for taking 50 million out of the budget, but in the end the bottom line was 110, neccessitating this rather drastic news, which has gripped the council. Their leader talks about redistribution from poor areas like manchester to those more affluent, which is certainly a noticeable effect as various extra funding lines that successive governments, especially the last one, created to improve the amounts going to the worst-off areas, especially northern cities, have been wound up. Manchester, for all that it is a beacon of growth and centre of the second largest economy in the country, imports most of its skilled labour daily, and has no less than 66% of its resident population in the UK's 20% most deprived. It is also at the heart of greater manchester's drive to find innovative and hard hitting ways to reduce dependency and create efficiencies, not least through the ten councils acting as one (23 oct), and the big risk of all this is that each organisation pulls down the shutters and has neither the stomach nor inspiration for innovation as the cuts begin to take up every last ounce of everyone's energy and attention.

10 january 2011, masochistic voters

Some proof, perhaps, of what I have long suspected: that although instincts and the governor of the bank of england suggest that the purveyors of the biggest cuts in public expenditure in the uk this side of the battle of hastings are likely to be out of power after all this for a generation; instincts and the governor may be wrong. Alesina, carloni and lecce, nicely summarised in the economist studied the ten harshest periods of cuts in western, i.e. oecd, countries and the elections that followed them within 2 years. 37% saw a change of government - compared to an all-period average of 40%; statistically insignificant. This also works for the harshest 60 cuts periods. As interestingly, there was a great difference between those instances where spending cuts took the strain, with just 20% of governments losing their jobs, as opposed to tax rises, where it was 56%. There are of course many questions like cause and effect (was it strong governments that could implement the cuts ?) but the evidence here is pretty strong: if fiscal consolidation is the right thing to do, voters can be made to understand it, and purposeful governments can reap the reward.

5 january 2011, home is where the heart is

Back, as usual in the new year, from a brief spell in hungary. Word association around europe is not the country's eu presidency, which began 1 january, but the new "draconian" media law. Despite the coverage, by hardly an uninterested party (or abroad at least, a particularly well-informed one), I'm not sure it's really the return of stalin, but seems certainly another chapter in the sad and long, long running saga of new hungarian government, new party posts at every state level. More unusual are a couple of novel fiscal measures. Most controversial is a new tax imposed on foreign investors, which companies such as e.on, deutsche telekom, allianz, ing bank, axa and omv have all bitterly and publicly blanched at, threatening to pull out of the country altogether, but rendering a total of some eur1.3bn (a UK windfall tax a few years ago on the oil companies pulled in many times more), I suspect protestething rather too much going on. More ominously the new government's nationalist streak is encouraging tens of thousands of new hungarian citizens, despite them living in other - "greater hungary" - countries. My old colleague adam lebor's long-residence in budapest perhaps leads him to underplay this. Perhaps most interestingly, though, and another seesaw policy that changes with each election result, is another push to increase the indigenous population, through reducing income tax for bigger families is an interesting mechanism designed to benefit those that pay taxes in the first place...

25 december 2010, as failure to act has consequences

As bombs are man-made and we're terribly used to them, and with dozens not thousands dead, I doubt the pakistan blast will define this year's christmas day as the tsunami did boxing day a few years ago. Nuclear-armed pakistan though is a critical place in the world today. I well recall a friend who served some un-time there likening it to cold war berlin: a fault line of the geopolitical world where any spy worth their salt could do business. Whilst the most unstable nuclear state award undoubtedly goes to north korea, its range and arsenal are limited. Pakistan by contrast is a crossroads for many of the world's conflicts, and a player in its own right. It's also hugely unstable politically, and today's bomb is notable for being a first female suicide bomber. If you see the extreme islamists as hamas, and the american-aided government as plo, one begins to understand that such extremists having a national bomb programme almost as big as britain's is unlikely but possible. More worrying still, as politics is shades of grey over time, the more bombastic end of the current establishment already refers proudly to its "Islamic Bomb". As in many things though, what drives this as much as anything is western double standards, india and israel both having accepted nuclear arsenals despite their refusal to sign the nuclear non-proliferation treaty, and providing justification for pakistan and others like iran to go nuclear. And some fine obama words notwithstanding, we have gone back on the deal we signed up to, literally, a generation ago that if you don't go nuclear, we will disarm. Over time, and that time may be coming, saudi arabia, turkey, egypt, japan, taiwan, south africa and australia may all reassess whether the status quo can hold indefinitely, making mass nuclear breakout within a decade a dramatically realistic scenario. Happy 2011.

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