Сборник учебных материалов
по реферированию и
аннотированию экономических
текстов для IV курса МЭО
(основной язык)
II семестр
CONTENTS
1. Big and clever
2. Asia’s new model company
3. Detroitosaurus wrecks
4. Marriages made in hell
5. Shall we?
6. Not floating, but flailing
7. The 70-year itch
8. That sinking feeling (again)
9. The euro’s next crisis
10. Be bold, Mario
11. Too big to hail
12. Cyprus one year later
13. In need of new oomph
14. America’s big bet
15. Workers on tap
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1. Big and clever
Why large firms are often more inventive than small ones
SOME people say it is neither big nor clever to drink. Viz, a British comic, settled that debate with a
letter from a reader who said: “I drink 15 pints a day, I’m 6 foot 3 inches tall and a professor of theoretical
physics.” However, another question about size and cleverness has yet to be resolved. Are big companies the
best catalysts of innovation, or are small ones better?
Joseph Schumpeter argued both sides of the case. In 1909 he said that small companies were more
inventive. In 1942 he reversed himself. Big firms have more incentive to invest in new products, he decided,
because they can sell them to more people and reap greater rewards more quickly. In a competitive market,
inventions are quickly imitated, so a small inventor’s investment often fails to pay off.
These days the second Schumpeter is out of fashion: people assume that little start-ups are creative and
big firms are slow and bureaucratic. But that is a gross oversimplification, says Michael Mandel of the
Progressive Policy Institute, a think-tank. In a new report on “scale and innovation”, he concludes that today’s
economy favours big companies over small ones. Big is back, as this newspaper has argued. And big is clever,
for three reasons.
First, says Mr Mandel, economic growth is increasingly driven by big ecosystems such as the ones that
cluster around Apple’s iPhone or Google’s Android operating system. These ecosystems need to be managed by
a core company that has the scale and skills to provide technological leadership.
Second, globalisation puts more of a premium on size than ever before. To capture the fruits of
innovation it is no longer enough to be a big company by American standards. You need to be able to stand up to
emerging-world giants, many of which are backed by something even bigger: the state.
Third, many of the most important challenges for innovators involve vast systems, such as education and
health care, or giant problems, such as global warming. To make a serious change to a complex system, you
usually have to be big.
If true, this argument has profound implications for policymakers (though Mr Mandel does not spell
them out). Western governments are obsessed with promoting small businesses and fostering creative
ecosystems. But if large companies are the key to innovation, why not concentrate instead on creating national
champions? Anti-trust regulators have strained every muscle to thwart the creation of monopolies (for example,
by preventing AT&T, a telecoms firm, from taking over the American arm of T-Mobile). But if one behemoth is
likely to be more innovative than two smaller companies, why not allow the merger to take place?
What should we make of Mr Mandel’s argument? He is right that the old “small is innovative” argument
is looking dated. Several of the champions of the new economy are firms that were once hailed as plucky little
start-ups but have long since grown huge, such as Apple, Google and Facebook. (In August Apple was the
world’s largest listed company by market capitalisation.) American firms with 5,000 or more people spend more
than twice as much per worker on research and development as those with 100-500. The likes of Google and
Facebook reap colossal rewards from being market-makers rather than market-takers.
Big companies have a big advantage in recruiting today’s most valuable resource: talent. (Graduates
have debts, and many prefer the certainty of a salary to the lottery of stock in a start-up.) Large firms are getting
better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to
ideas from elsewhere. Procter & Gamble, a consumer-goods giant, gets most of its ideas from outside its walls.
Sir George Buckley, the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like
his can combine the virtues of creativity and scale. 3M likes to conduct lots of small experiments, just like a
start-up. But it can also mix technologies from a wide range of areas and, if an idea catches fire, summon up vast
resources to feed the flames.
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However, there are two objections to Mr Mandel’s argument. The first is that, although big companies
often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less
comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the
original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did
with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems
in health care and education. But sometimes the best ideas start small, spread widely and then transform entire
systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users.
The second is that what matters is not so much whether companies are big or small, but whether they
grow. Progress tends to come from high-growth companies. The best ones can take a good idea and use it to
transform themselves from embryos into giants in a few years, as Amazon and Google have. Such high-growth
firms create a lot of jobs: in America just 1% of companies generate roughly 40% of new jobs.
Let small firms grow big
Politicians should certainly stop demonising big firms and sentimentalising small ones: an economy
needs both. But they should not allow their new-found appreciation of big companies to degenerate into a taste
for picking national champions. Such firms typically gobble subsidies and crowd out smaller, more creative
firms. Nor should they start tolerating monopolies. The key to promoting innovation (and productivity in
general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die. On that,
Schumpeter never changed his mind.
From The Economist
2. Asia’s new model company
Samsung’s recent success has been extraordinary. But its strategy will be hard to copy
THE founders of South Korea’s chaebol (conglomerates) were an ambitious bunch. Look at the names
they picked for their enterprises: Daewoo (“Great Universe”), Hyundai (“The Modern Era”) and Samsung
(“Three Stars”, implying a business that would be huge and eternal). Samsung began as a small noodle business
in 1938. Since then it has swelled into a network of 83 companies that account for a staggering 13% of South
Korea’s exports. The hottest chilli in the Samsung kimchi bowl is Samsung Electronics, which started out
making clunky transistor radios but is now the world’s biggest technology firm, measured by sales. It makes
more televisions than any other company, and may soon displace Nokia as the biggest maker of mobiletelephone handsets.
Small wonder others are keen to know the secret of Samsung’s success. China sends emissaries to study
what makes the firm tick in the same way that it sends its bureaucrats to learn efficient government from
Singapore. To some, Samsung is the harbinger of a new Asian model of capitalism. It ignores the Western
conventional wisdom. It sprawls into dozens of unrelated industries, from microchips to insurance. It is familycontrolled and hierarchical, prizes market share over profits and has an opaque and confusing ownership
structure. Yet it is still prodigiously creative, at least in terms of making incremental improvements to other
people’s ideas: only IBM earns more patents in America. Having outstripped the Japanese firms it once
mimicked, such as Sony, it is rapidly becoming emerging Asia’s version of General Electric, the American
conglomerate so beloved of management gurus.
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Tomorrow’s GE or tomorrow’s Daewoo?
There is much to admire about Samsung. It is patient: its managers care more about long-term growth
than short-term profits. It is good at motivating its employees. The group thinks strategically: it spots markets
that are about to take off and places huge bets on them.
The bets that Samsung Electronics placed on DRAM chips, liquid-crystal display screens and mobile
telephones paid off handsomely. In the next decade the group plans to gamble again, investing a whopping $20
billion in five fields in which it is a relative newcomer: solar panels, energy-saving LED lighting, medical
devices, biotech drugs and batteries for electric cars. Although these industries seem quite different from each
other, Samsung is betting that they have two crucial things in common. They are about to grow rapidly, thanks to
new environmental rules (solar power, LED lights and electric cars) or exploding demand in emerging markets
(medical devices and drugs). And they would benefit from a splurge of capital that would allow large-scale
manufacturing and thus lower costs. By 2020 the Samsung group boldly predicts that it will have sales of $50
billion in these hot new areas, and that Samsung Electronics will have total global sales of $400 billion.
It is easy to see why China might like the chaebol model. South Korea’s industrial titans first prospered
in part thanks to their close ties with an authoritarian government (though Samsung was not loved by all the
generals). Banks were pressured to pump cheap credit into the chaebol, which were encouraged to enter dozens
of new businesses—typically macho ones such as shipbuilding and heavy industry. Ordinary Koreans were
chivvied to save, not consume. South Korea grew into an exporting powerhouse. Does this sound familiar?
In China, too, the state draws up long-term plans, funnels cash to industries it deems strategic and works
hand-in-glove with national champions, like Huawei and Haier. Some of Beijing’s planners would love to think
that state intervention is the route to world-beating innovation. No doubt inadvertently, Samsung feeds this
delusion.
Of hindsight and survivor bias
For delusion it is, on three levels. Most broadly, South Korea’s prosperity owes less to dirigisme than
China’s dirigistes believe, and nothing to dictatorship—South Korea is now a democracy, and much happier for
it. Second, the chaebol system has been less beneficial for South Korea than Samsung’s success might imply.
Some of the state-directed cheap credit that powered the chaebol produced superb companies, such as Samsung
Electronics and Hyundai Motors. But it yielded some costly failures, too. During the Asian financial crisis of
1997-98, half of the top 30 chaebol went bust because they had expanded recklessly. Daewoo, the Great
Universe, is no more.
Defenders of the chaebol say that the crisis spurred reforms, curbing the tendency of the chaebol to
overborrow and overexpand. They don’t hog credit as much as before—Samsung Electronics now generates
oceans of cash to finance its expansion plans. But in general the giants still crowd out small entrepreneurial
firms: a former boss of Samsung Electronics has warned that South Korea has too many eggs in too few baskets.
And despite a decade of political reform, the ties between the chaebol and the state are still too cosy. President
Lee Myung-bak (the ex-boss of a Hyundai firm) has pardoned dozens of chaebol bosses convicted of corporate
crimes.
As for Samsung, it is an admirable company, packed full of individual successes that managers (and not
just ones in Asia) should study. But inevitably it has not always got everything right—who now drives a
Samsung car? And its overall success is not easily replicable. Samsung is patient and bold because the family of
its late founder, Lee Byung-chull, wants it to be. Family control is guaranteed by a complex web of crossshareholdings. This is fine so long as the boss is as brilliant as the late Lee or his son, Lee Kun-hee, the current
chairman. But if the founder’s grandson, who is being groomed for the top job, fails to measure up, he will be
harder for the company’s shareholders to oust than his peers at GE, Sony and Nokia.
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To that extent, for all its modern technology, Samsung’s story is an old one writ new—the well-run
family firm, with a strong culture and a focus on the long term, which has made good use of an indulgent state.
Celebrate it on those grounds and Asia’s new model has something going for it. Just don’t expect it to keep
going at its current rate for ever.
From The Economist
3. Detroitosaurus wrecks
The lessons for America and the car industry from the biggest industrial collapse ever
THE demise of GM had been expected for so long that when it finally died there was barely a whimper.
Wall Street was unmoved. Congress did not draw breath. America shrugged. Yet the indifference with which the
news was received should not obscure its importance. A company which once sold half the cars in America,
employed in its various guises as many people as the combined populations of Nevada and Delaware and was
regarded as a model for managers all over the world has just gone under; and its collapse holds important lessons
about management, about government and about the future of the car industry.
Government and GM: a fatal mixture
GM’s architect, Alfred Sloan, never had Henry Ford’s entrepreneurial or technical genius, but he had
organisation. He designed his company around the needs of his customers (“a car for every purse and purpose”).
The divisional structure he created in the 1920s, with professional managers reporting to a head office through
strict financial monitoring, was adopted by other titans of American business, such as GE, Dupont and IBM
before the model spread across the rich world.
Although this model was brilliantly designed for domination, when the environment changed it proved
disastrously inflexible. The problem in the 1970s was not really the arrival of better, smaller, lighter Japanese
cars; it was GM’s failure to respond in kind. Rather than hitting back with superior products, the company hid
behind politicians who appeared to help it in the short term. Rules on fuel economy distorted the market because
they had a loophole for pickups and other light trucks—a sop to farmers and tool-toting artisans. The American
carmakers exploited that by producing squadrons of SUVs, while the government restricted the import of small,
efficient Japanese cars. If Detroit had spent less time lobbying for government protection and more on improving
its products it might have fared better. Sensible fuel taxes would have hurt for a while, but unlike marketdistorting fuel-efficiency rules, they would have forced GM to evolve.
As for the health and pension costs which have helped sink GM, the company and the government bear
joint responsibility for those too. After the war GM rejected a mutual scheme that the unions wanted because it
smacked of socialism; and around the same time, the company agreed to give retired workers full pensions and
health care for life. But if successive administrations had dealt with America’s expensive and inadequate health
care, the cost of those union demands would have been far lower. None of GM’s competitors has had to shoulder
costs per worker anything like as heavy: until an agreement in 2007 with the union, each car in Detroit carried
about $1,400 in extra pension and health-care costs compared with the foreign-owned competitors in America.
GM, Ford and Chrysler tried to improve: by 2006 they had almost caught up with Japanese standards of
efficiency and even quality. But by then GM’s share of the American market had fallen to below a quarter.
Rounds of closures and job cuts were difficult to negotiate with unions, and were always too little too late.
Gradually the cars got better, but Americans had moved on. The younger generation of carbuyers stayed faithful
to their Toyotas, Hondas or Mercedes assembled in the new cheaper car factories below the Mason-Dixon line.
GM and the other American firms were left with the older buyers who were, literally, dying out.
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GM’s demise should not be read as a harbinger of doom for the car industry. All around the world
people want wheels: a car tends to be the first big purchase a family makes once its income rises much above
$5,000 a year, in purchasing-power terms. At the same time as people in developing countries are getting richer,
more efficient factories and better designs are making cars more affordable. That is why the IMF forecasts that
the world will have nearly 3 billion cars in 2050, compared with around 700m cars today. In 40 years’ time the
Chinese will have almost as many cars as exist in the whole of the world now. Indeed, GM’s own experience
abroad shows the promise of emerging markets. Brazil has long been a source of profits, and GM has a leading
position in China.
Yet although the long-term prospects for sales growth look excellent overall, the car industry has a
problem: it needs to shrink dramatically. At present, there’s enough capacity globally to make 90m vehicles a
year, but demand is little more than 60m in good economic times. Even as the big global manufacturers have
been building new factories in emerging markets, governments in slow-growing rich-world markets have been
bribing them to keep capacity open there.
Because the industry employs so many people and is a repository of high technology, governments are
easily lured into the belief that car firms must be supported when times are tough. Hence Mr Obama’s $50
billion rescue of GM; and hence, too, the German government’s financial backing for the sale of Opel, GM’s
European arm, to Magna, a Canadian parts-maker backed by a Russian state-owned bank. German politicians
have made it clear that they plan to keep German factories open even if others elsewhere in Europe have to
close. At least the American rescue recognises the need to remove capacity from the market—to cut the number
of factories, workers and dealers.
It could still be a great business
For all its peculiarities, the car industry is no dinosaur—Toyota, for instance, is a byword for
manufacturing excellence. But the unevolved GM deserved extinction. Detroit employed so many people and
figured so large in American culture that governments felt they had to protect it; but in doing so, they made it
vulnerable to less-coddled competitors from abroad. By trying to keep their car industry big, America’s leaders
ended up preventing it from becoming good. There is a lesson in that which all governments would do well to
learn.
From The Economist
4. Marriages made in hell
The troubled history of carmakers' mergers
Mr Marchionne, the corporate troubleshooter, who, since 2004, has been responsible for a highly
successful turnaround at Fiat, has reached the conclusion that volume carmakers will in future need to sell at
least 5.5m vehicles a year to be viable. He reckons that only those firms, such as Volkswagen and Toyota, which
can extract sales of around a million a year from each of a handful of expensively-developed platforms (these are
a car’s architectural underpinnings, on which a variety of models can be based) can hope to be consistently
profitable.
Adam Jonas of Morgan Stanley questions Mr Marchionne’s faith in scale, suggesting it is a function of
success rather than prerequisite for it and gives warning that even successful mergers bring with them “many
hidden cost burdens (financial and non-financial)” and that these can spiral if things do not go well.
Sceptics say cross-border mergers in the car industry have a poor record. Their doubts are rooted in
experience. With the partial exception of the alliance formed between Renault and Nissan a decade ago, autoindustry mergers usually go wrong and destroy rather than create value. Two of the most notorious were the
unhappy marriages between BMW and the ailing British car firm, Rover, and Chrysler’s own supposed “merger
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of equals” with Daimler-Benz. In both cases, the German premium-car maker believed that it needed increased
scale and that taking over a volume maker would make this possible without a potentially risky brand extension.
In particular, BMW wanted a presence in the markets for small cars and for SUVs, while Daimler
thought that Chrysler’s brands were below Mercedes’s, “but not too far below” and that it could learn from
Chrysler’s skills as a low-cost producer—especially the way it handled supplier relationships and the speed with
which it brought new products to market.
Not only was the premise behind both mergers mistaken—BMW and Mercedes have subsequently
discovered that their brands can be safely extended much further than they had once believed—but the
implementation was flawed from the outset for not dissimilar reasons. Although Chrysler had given every
appearance of being in much better health than Rover (at the time of the merger with Daimler in 1998 it was one
of the most profitable car companies in the world), both firms suffered from fundamental weaknesses that their
German owners, partly out of mistaken tact and concern about provoking political hostility, acted only very
belatedly to correct. Instead of doing the difficult things immediately, they let things drift.
In BMW’s case, it should have concentrated all its resources on reviving Land Rover and reinventing the
Mini instead of lavishing resources on the dying Rover brand. BMW’s boss at the time, Bernd Pischetsrieder,
believed that with BMW’s help Rovers could be exported as the “slightly premium” option in every segment,
while BMWs would be the sportier, more expensive choice of keen drivers. It was a fantasy that masked the
degree of Rover’s weakness and diverted BMW from doing more sensible things, such as consolidating
purchasing and closing down the hopelessly outdated Longbridge factory in Birmingham.
A further problem was a growing rift within BMW as to whether the “English Patient” was worth the
time and money it was absorbing. Far from ensuring BMW’s independence, Rover was imperilling it. In 2000
BMW finally extricated itself, paying some former Rover managers to take the thing away, selling Land Rover
to Ford and keeping Mini. All told, the cost to BMW was about $7 billion and six years of heartache and
distraction.
Something similar happened to the ill-fated DaimlerChrysler. Because it was meant to be “a merger of
equals” and Chrysler was superficially in good shape when they bought it, the Germans waited far too long
before dealing with some fairly obvious problems. Having allowed a leadership vacuum to develop at Auburn
Hills (Chrysler’s HQ) as senior American managers who had been enriched by the deal drifted away, Daimler
only acted to cut costs and capacity in late 2000 when the market had turned down and Chrysler was burning
cash at a rate of $5 billion a year. But despite the best efforts of Dieter Zetsche, the Daimler manager sent out to
get a grip on things, the cultural chasm between the two partners became wider.
In a bid to centralise purchasing, Daimler undermined one of the best things about Chrysler, its
collaborative relationship with suppliers. Nor was there any synergy between the departments developing new
models. Daimler's engineers thought Chrysler’s slapdash, while their American opposite numbers found them
arrogant and ignorant about the needs of volume manufacture. The hope that platforms and powertrains would
be shared was only implemented half-heartedly — the Germans in Stuttgart were reluctant to allow Chrysler
technology they thought should be reserved for premium Mercedes cars.
Worse still, during the nine years of the marriage with Chrysler, Mercedes’s reputation for gold-standard
quality took a battering. When in 2007 Daimler, now being run by the same Mr Zetsche who had tried to save
Chrysler six years earlier, finally decided to bail out, its share price shot up. As a measure of the pitiful state in
which the Germans had left Chrysler, its new model pipeline was almost empty and with only one or two
exceptions the cars it was selling were old and uncompetitive.
The alliance between Renault and Nissan has, on the whole, been a much happier affair, although it is no
longer regarded within the industry as quite such a shining exception as it was a few years ago when Carlos
Ghosn, its architect, was the most feted car boss in the world. The secret, according to Mr Ghosn, has been in
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allowing the two companies to work as two distinct, but co-operating entities. He says: “You must be ambitious
for the relationship, but not try to dominate or you will pay for it afterwards.” The alliance had taught Renault to
become a global company and taught Nissan to be much bolder. Its guiding principle is that each can benefit
from the other’s strengths.
For example, the alliance can boast class-leading powertrain technology thanks to Renault’s knowledge
of diesel and Nissan’s highly-rated petrol engines and gearboxes. The key from the outset has been the crossfunctional and cross-company teams, mainly of middle managers, set up by Mr Ghosn to engage in a permanent
quest for new synergies. There must be, he says, complete transparency and a shared sense of purpose.
What Mr Ghosn could have added is that his own background (a Brazilian of Lebanese descent who was
educated in France and speaks five languages) may have brought with it a cultural sensitivity that at times
proved crucial. It is also almost certainly the case that both Renault and Nissan really could see strengths in each
other they could learn from, whereas too many senior people at BMW and Daimler quickly grew contemptuous
of the companies they had bought and were bad at hiding it.
From The Economist
5. Shall we?
The urge to merge could be about to return
THE birds and the bees do it when the weather gets warmer. Likewise company bosses, when times are
good and they are feeling frisky, often get the urge to merge.
This year, they are unsure. In 2012 the dollar value of mergers and acquisitions worldwide was flat, reflecting
unease in the C-Suite. With share prices now surging and huge cash reserves shouting to be spent, one might
expect bosses to feel romantic. But only 28% of chief executives surveyed by PwC, an accountancy firm, said
they planned to make one or more acquisitions during 2013, lower than a year earlier. American bosses seemed
somewhat perkier, with 42% saying they planned some M&A, but that was the same proportion as in the 2012
survey.
Yet there is anecdotal evidence that these predictions are too low, says Bob Moritz, who runs PwC in
America. “From what I’m hearing, if the recent momentum in confidence continues, there may be a lot more
merger activity in the second half of the year,” he says.
Some think the M&A cycle has already started to turn up. In the first three quarters of 2012, as the euro
tottered and fear gripped the global economy, M&A activity worldwide was 17.4% lower than in the same
period of 2011. Yet it surged in the fourth quarter, to the highest level of any quarter in the past four years. This
is one reason to expect more mergers this year, says a report by Wachtell, Lipton, Rosen & Katz, a law firm that
specialises in M&A. However, Mr Moritz suspects that some deals in late 2012 were rushed through by
companies that were worried about possible changes to the tax code.
From a financial point of view, conditions now favour deal-making. Credit is cheap. Balance-sheets are
unusually strong. Many firms have voluminous cash reserves. Yet bosses remain timid. A bungled acquisition
can wreck a career. Boards are far less indulgent than they used to be of imperial chief executives. Having spent
the past few years obsessing about risk management, directors may not easily be persuaded to support even
straightforward deals.
The regulatory risk also seems to be growing. On January 31st America’s Department of Justice
surprised investors by saying it would challenge a planned merger between Anheuser-Busch InBev, the world’s
largest brewer, and Grupo Modelo, a Mexican one. European governments seem keener than ever to protect their
national champions. Italy’s government, for example, recently set up a fund to invest in companies of “major
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national interest”. Meanwhile, China’s antitrust arm in the Ministry of Commerce is starting to make a nuisance
of itself, not least by taking ages to make its mind up. It claims the power to review any deal in which the
combined company would have $63m in Chinese sales and $1.5 billion of global sales—a ridiculously low
threshold.
The market for mates
If M&A activity does pick up, it is likely to involve the kind of cost-saving, margin-boosting deals that
have been the norm since the financial crash. Oil-and-gas deals reached an all-time high last year, as companies
furiously consolidated. Industries such as banking and professional services seem ripe for something similar.
Many firms could become more focused by selling or spinning off non-core businesses. Retailers and makers of
consumer packaged goods have already done plenty of this, but could do more.
Most deals in 2013 will probably be fairly small, designed to strengthen or fill a gap in the buyer’s
existing operations. These are known as “plug and play”. Transformational megamergers grew rarer in 2012,
with only four deals topping $20 billion. That was the same as in 2011, and fewer than in each of the three
previous years.
Will there be more megadeals this year? The $16 billion acquisition of Virgin Media by Liberty Global
announced on February 5th came close. Some investors are hungry for more. Those vast cash reserves provided
valuable insurance in the aftermath of the financial crisis, but they have started to look wasteful. According to a
recent report on corporate finance by Citigroup, activist hedge funds have begun to target companies with big
cash piles, and the shares of cash-rich companies that spend some of that money on M&A have outperformed the
stockmarket in the past couple of years.
If cash-rich firms cannot find suitable targets to acquire, they should return money to shareholders by
raising their dividends or repurchasing shares, Citigroup adds. The report notes that the urge to merge has been
soaring, surprisingly, in Japan. In 2012 Japanese firms spent more than $110 billion on 736 overseas
acquisitions, four times as many as five years earlier, and second only to firms in America, a much larger
economy. With growth at home snail-like, Japanese firms are hunting for opportunities abroad. “The Japanese
expansion model offers a potential template for other developed economies,” reckons Citigroup. It has been a
while since the rest of the corporate world has taken its lead from Japan, but perhaps the wheel is turning, and
with it the M&A cycle.
From The Economist
6. Not floating, but flailing
After 150 years of monetary experimentation, the world remains unsure how to organise global finance
SEVENTY years ago this month, 730 delegates gathered in Bretton Woods, New Hampshire to reopen
an old debate. Global commerce has long faced a fundamental tension: the more certainty countries create
around exchange rates, the less room they have to manage domestic economic affairs. Thirty years before
Bretton Woods a war wrecked the world’s first stab at the problem—the gold standard—and the attempt to
rebuild it in the 1920s led to depression and another war. The exchange-rate system agreed at Bretton Woods
lasted only a generation. After 150 years of experimentation the world has yet to solve its monetary problem.
Most monetary systems have been the product of accident rather than design. The classical gold standard
developed in industrialising Britain. Its economic success encouraged others to transact on its terms. Germany’s
adoption of gold in 1871 put Europe’s two leading economies on one standard; others quickly followed suit.
The gold standard’s priority was the lubrication of global trade. Exchange rates were fixed across
economies and capital flowed without any regulatory hindrance. Though the free flow of capital left currencies
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vulnerable, the system survived for decades thanks to governments’ iron commitment to gold. That, in turn, was
built on the relatively feeble political influence of working people and the relative strength of creditors. Central
banks refrained from destabilising actions and lent to each other in times of crisis.
The first world war changed all this. Belligerent countries instituted capital controls and printed money
to pay for the war. Europe tried to patch up the system after the war but it no longer worked well. Gold reserves
grew increasingly unbalanced; France and America built growing hoards, while Britain and Germany ran short.
Central bank solidarity was also in short supply. America, which at times controlled 46% of the world’s gold,
could have rebalanced the system by expanding its money supply and allowing prices to rise. Yet it refused to do
so thanks to domestic worries, chiefly a desire to limit a Wall Street boom.
The revived system broke under the strain of depression. Struggling economies were forced to choose
between saving domestic banks and defending their currencies’ pegs to gold. Central bankers met repeatedly to
discuss ways to contain the crisis, but failed to recapture the cooperative spirit that prevailed before 1914.
Austria and Germany dropped out of the system in 1931. By 1936 the gold standard was dead.
At Bretton Woods, the world took another crack at a universal system. Yet the compromises of the 1944
conference yielded a patchwork of policies. Countries fixed their currencies’ values relative to the dollar, which
was in turn pegged to gold. But pegs could be adjusted in extraordinary circumstances. The IMF was created to
help manage crises; the World Bank was designed to lend money to poor countries. The conference also paved
the way for the General Agreement on Tariffs and Trade: a forum for trade talks and forerunner of the World
Trade Organisation.
In their first years the Bretton Woods institutions flirted with irrelevancy. The World Bank’s lending to
Europe between 1947 and 1953 amounted to just 5% of American aid under the Marshall Plan. As controls on
capital and trade were lifted, tensions became apparent. When governments splashed out on welfare states and
military adventures, trade imbalances and inflation ballooned, reducing confidence in currency pegs. By the late
1960s these strains became unmanageable. In 1967 Britain was forced to devalue, shaking confidence in the
system. And in 1971 President Richard Nixon opted to drop the gold peg and devalue rather than make
swingeing cuts to balance budgets and control inflation. Most big countries dropped out of the system and
floated their currencies.
The repeated collapse of fixed exchange-rate regimes did little to shake faith in the idea. In Europe,
leaders introduced the European Monetary System in 1979—the ancestor of today’s euro zone. Yet markets
repeatedly found reason to question peripheral economies’ willingness to subordinate domestic policy to the
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demands of the system. A bout of scepticism fuelled attacks on British and Italian pegs, driving them out of the
system in 1992. Italy nonetheless signed up for deeper monetary integration in the euro zone. The euro’s recent
crisis is a variation on an old theme.
Developing countries also found pegs hard to resist. Fixed exchange rates can encourage monetary
discipline and tame inflation—a common emerging-world problem—while reducing borrowing costs. Yet too
often pegs ended painfully, as overindebted economies found it impossible to maintain the discipline needed to
protect them. Markets pounced, initiating crises and forcing devaluations—most dramatically in the Asian
financial crisis of 1997-8.
Despite this history, floating exchange rates remain unpopular. Emerging economies have instead shifted
toward managed rates maintained through market intervention. China, the world’s second-largest economy, is a
particularly energetic manipulator of its currency, and has at times used an outright dollar peg. As a result over
half of global economic activity is concentrated within two massive single-currency blocs. Less than a tenth of
emerging markets allow the market to set their exchange rate.
The aversion to floating is a puzzle. Fixed rates can reduce borrowing costs, but the result is often a
debt-binge and crisis. Modern technology reduces currency transaction costs. IMF research finds that flexible
exchange rates reduce vulnerability to both macroeconomic and financial crises. And Joseph Gagnon of the
Peterson Institute for International Economics, a think tank, finds that economies with floating currencies did
better in the global financial crisis and its aftermath.
History suggests that monetary arrangements last only as long as the political economy that supports
them. Given the dramatic changes in the global economy marked by the rise of the emerging world, it is hard to
imagine that prevailing currency alignments can survive. Indeed, China claims to be gradually freeing its capital
account and encouraging trade denominated in yuan. That may finally bring down the curtain on the dollar era
initiated by Bretton Woods. Yet in practice China is reluctant to give up the perceived safety of a managed
exchange rate. Gold habits are hard to break.
From The Economist
7. The 70-year itch
Both the West and China are neglecting the institutions that help keep the world economy upright
AMERICA learned the benefits of economic co-operation the hard way. Its failure to create institutions
to help steer the world economy after the first world war exacerbated the Great Depression and paved the way
for the next conflagration. That is why, at a small resort in New Hampshire as the second world war was drawing
to a close, America and its allies sketched out a rough management plan for the world economy and created
some institutions to safeguard it. Despite some flaws, the Bretton Woods agreements, signed 70 years ago this
month, helped usher in a long and relatively peaceful period of economic growth.
Yet today’s pre-eminent powers seem to have forgotten this lesson. America and Europe have failed to
strengthen and reform the offspring of Bretton Woods, the IMF and the World Bank; they have been sluggish in
providing a bigger role for China in these institutions (it still has less voting power than the Benelux countries).
Meanwhile, China, like America a century ago, flexes its muscles close to home but outsources global leadership
to others. The combination could lead to another dangerous, rudderless spell for the world economy.
Parts of the Bretton Woods system have proved more durable than others: its capital controls and fixed
exchange rates had largely gone by the end of the 1970s. But the whole edifice now looks rickety. Countries
moan over destabilising capital flows while global trade talks remain in near-stasis. Barack Obama sensibly
promoted a plan to give the IMF more resources and increase the clout of fast-growing developing countries
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within it. Yet Congress now refuses to support the agreed reforms. Meanwhile both America and Europe have
pursued ambitious trade deals with each other and non-Chinese Asia. And again Congress has in effect blocked
those efforts too, before the deals have even been struck.
China has taken the hint. Its interest in the World Bank and IMF, always half-hearted, is waning. Instead,
China’s leaders are working to build a separate system. At a summit later this month the leaders of Brazil,
Russia, India, China and South Africa are expected to agree to create a $50 billion “BRICS” development bank
and consider a BRICS contingency fund modelled on the IMF. China also plans to create an Asian infrastructure
bank that will rival the Asian Development Bank, a regional lender dominated by Japan.
Like the West’s regional trade deals, China’s institution-building looks benign in isolation. Why not
invest in underdeveloped countries? Yet its flurry of initiatives, which conspicuously excludes rich countries,
may signal a strategic shift. Rather than take more responsibility within the existing system, China seems to be
creating a rival one.
Not seeing the Woods for the trees
If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism
but also the huge missed opportunity. Freer trade through multilateral deals would help the world economy and
reduce the allure of mercantilist policies that invite retaliation. Or imagine what would happen if the West and
China worked together to liberalise the latter’s capital account: China’s financial markets would become less
distorted, while the emergence of the yuan as a global reserve currency would ease Western fears about their
currencies’ overvaluation. Perhaps it is time to send another group of dignitaries to New Hampshire.
From The Economist
8. That sinking feeling (again)
If Germany, France and Italy cannot find a way to refloat Europe’s economy, the euro may yet be
doomed
JUST a few months ago the euro zone’s leaders believed that, having weathered the storm, they were set
fair at last. Buoyed by the promise of Mario Draghi, the president of the European Central Bank, to do “whatever
it takes” to support the currency, confidence had seeped back into the continent. Growth seemed to be returning,
albeit at a slow pace. Troubled peripheral countries were recovering, after bail-outs and painful measures to cut
budget deficits and improve competitiveness. Unemployment, especially among the young, was still desperately
high, but at least in most countries it was falling. And bond spreads had narrowed sharply, as financial markets
stopped betting that the euro would fall apart.
It was an illusion. In recent weeks the countries of the euro zone have begun to take in water once again.
Their collective GDP stagnated in the second quarter: Italy fell back into outright recession, French GDP was
flat and even mighty Germany saw an unexpectedly large fall in output (see article). The third quarter looks
pretty unhealthy, partly because the euro zone will suffer an extra drag from Western sanctions on Russia.
Meanwhile, inflation has fallen perilously low, to around 0.4%, far below the near-2% target of the European
Central Bank, raising fears that the zone as a whole could fall prey to entrenched deflation. German bond yields
are hovering below 1%, another harbinger of falling prices. The euro zone stands (or wobbles) in stark contrast
with America and Britain, whose economies are enjoying sustained growth.
What started more than four years ago as a banking and sovereign-debt crisis has decayed into a growth
crisis that is now enveloping the three biggest economies. Germany is teetering on the edge of recession. France
is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago. Since
these three countries account for two-thirds of euro-zone GDP, growth in places like Spain and the Netherlands
cannot make up for their torpor.
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The underlying causes of Europe’s new ills are three very familiar and interrelated problems. First, there
is a shortage of political leaders with the courage and conviction to push through structural reforms to improve
competitiveness and, eventually, reignite growth: the big countries have wasted the two years bought by Mr
Draghi’s “whatever it takes” commitment. Second, public opinion is not convinced of the urgent need for deep
and radical changes. And third, despite Mr Draghi’s efforts, the monetary and fiscal framework is too tight,
throttling growth—which makes structural reforms harder.
Clouseaunomics
Different manifestations of these problems can be seen across the euro zone. But the country that most
dramatically epitomises all three is France. This week its embattled Socialist president, François Hollande, was
forced to reshuffle his government to eject Arnaud Montebourg who, despite being economy minister, was his
own side’s most persistent critic from the left. Mr Hollande, who came to office in 2012 promising a painless
future, is hardly a Thatcherite reformer. But since he appointed Manuel Valls as prime minister in March, he has
at least embraced the principle of public-spending cuts, lower taxes and structural reforms.
In theory a new and more cohesive reforming government could make progress, but public opinion is not
remotely prepared for that. Mr Hollande is not just deeply unpopular; unlike Italy’s Matteo Renzi, who has
bravely made the case for (as yet undelivered) tough reforms, the French president has failed to convince voters
that painful change, including a reduction in the size of the state, is inevitable. Instead, Mr Montebourg and his
chums offer the beguiling notion that, if only the euro zone scraps its rules and allows bigger budget deficits and
generous enough public spending, no more painful reforms will be needed, because the economy will
miraculously lift itself out of danger by its own bootstraps.
Mr Montebourg’s argument is all the more seductive because he is right about Europe’s third problem:
excessive austerity, largely forced on the continent by Germany. Mr Draghi has just implicitly conceded that
fiscal and monetary policy in the euro zone is too tight at the annual economics jamboree in Jackson Hole. He
hinted that he was in favour of quantitative easing, which both America and Britain have used, and he called for
fiscal policy to do more to encourage growth—a message plainly aimed at Germany’s chancellor, Angela
Merkel. She is the leader who insists most firmly on sticking to the euro zone’s rules on fiscal discipline, just as
it is the German Bundesbank that is most strongly against quantitative easing.
Angie, we can say you never tried
Despite the gloom, there should be scope here for a bargain. If Mr Hollande and Mr Renzi can show they
are sincere about structural reforms, Mrs Merkel should be willing to tolerate an easier fiscal stance (including
higher public investment in Germany) and a looser monetary policy. Close your eyes, and you can imagine the
three leaders working with the European Commission to complete the single market and pushing through a trade
deal with the United States. Sadly, in the real world, Mrs Merkel has little reason to trust either France or Italy:
whenever external pressure on them has eased, they have promptly backtracked on promises of reform. And she
has just installed Jean-Claude Juncker, the do-nothing candidate, as president of the European Commission.
So it will be hard. But without a new push from the continent’s leaders, growth will not revive and deflation
could take hold. Japan suffered a decade of lost growth in the 1990s, and is still struggling. But, unlike Japan,
Europe is not a single cohesive country. If the currency union brings nothing but stagnation, joblessness and
deflation, then some people will eventually vote to leave the euro. Thanks to Mr Draghi’s promise to put a floor
under government debt, the market risk that financial pressures could trigger a break-up has receded. But the
political risk that one or more countries decide to storm out of the single currency is rising all the time. The euro
crisis has not gone away; it is just waiting over the horizon.
From The Economist
14
9. The euro’s next crisis
Why an early election spells big dangers for Greece—and for the euro
EVER since the euro crisis erupted in late 2009 Greece has been at or near its heart. It was the first
country to receive a bail-out, in May 2010. It was the subject of repeated debate over a possible departure from
the single currency (the so-called Grexit) in 2011 and again in 2012. It is the only euro country whose official
debt has been restructured. On December 29th the Greek parliament failed to elect a president, forcing an early
snap election to be called for January 25th. The euro crisis is entering a new, highly dangerous phase, and once
again Greece finds itself at the centre.
Investors promptly swooned, with the Athens stockmarket falling by almost 5% in a single day, bank
shares down by even more and Greek 10-year bond yields rising to a new 2014 high of 9.5% (over seven points
above those for Italy). The reason for this collective outbreak of nerves is that the polls point to an election win
for Syriza, the far-left populist party led by Alexis Tsipras. Although Mr Tsipras says he wants to keep Greece in
the euro, he also wants to dump most of the conditions attached to its bail-outs, ending austerity, reversing cuts
in the minimum wage and in public spending, scrapping asset sales and seeking to repudiate much debt. Such a
programme seems, to put it mildly, to sit uncomfortably with Greece’s continuing membership of the single
currency.
The early election is likely therefore to create a political crisis in Greece. What happens beyond that is
less clear. Investors seem to be betting that the people of Italy, Spain and France will peek at the chaos in
Athens, shudder—and stick to the austerity that Germany’s Angela Merkel has prescribed for them. But that
seems too sanguine to this newspaper. It is hard to believe that a Greek crisis will not unleash fresh ructions
elsewhere in the euro zone—not least because some of Mrs Merkel’s medicine is patently doing more harm than
good.
The Greek kalends
Begin with Greece. For 14 months Syriza has been ahead of the ruling New Democracy party of the
outgoing prime minister, Antonis Samaras, in the polls. Although the economy is now growing again, Greek
voters remain understandably enraged that GDP should have shrunk by almost 20% since 2010 and that
unemployment is still as high as 26%. As it happens, Syriza’s poll lead has narrowed in recent weeks, but even if
Syriza does not win an outright parliamentary majority, it is likely to be by some margin the biggest party, so Mr
Tsipras can expect to lead any coalition government that is formed after the election. And this time round Mrs
Merkel will struggle to repeat the 2012 trick of asking Greeks to vote again in the hope that they might produce a
more sensible government.
In its policies Syriza represents, at best, uncertainty and contradiction and at worst reckless populism. On
the one hand Mr Tsipras has recanted from his one-time hostility to Greece’s euro membership and toned down
his more extravagant promises. Yet, on the other, he still thinks he can tear up the conditions imposed by
Greece’s creditors in exchange for two successive bail-outs. His reasoning is partly that the economy is at last
recovering and Greece is now running a primary budget surplus (ie, before interest payments); and partly that the
rest of the euro zone will simply give in as they have before. On both counts he is being reckless.
In theory a growing economy and a primary surplus may help a country repudiate its debts because it is
no longer dependent on capital inflows. But the Greek economy still has far to go to restore its lost
competitiveness, and Mr Tsipras’s programme would undo most of the gains of recent years. The notion that EU
leaders are so rattled by fears of Grexit that they would pay any price to avoid it was truer in 2011 and 2012 than
it is now. The anti-contagion defences that the euro zone has since built make Grexit easier to contemplate.
Much has been done to improve the euro’s architecture, with a new bail-out fund, the European Central Bank’s
role as lender of last resort and a partial banking union. Moreover, most of the bailed-out and peripheral
countries are at last growing again, and unemployment is starting to fall.
15
Europe’s Lehman moment?
The result is a game of chicken that neither Greece nor Europe can afford. Even if the Grexit is safer, it
is still perilous and unpredictable. There was a worrying echo this week of the Lehman crisis of September 2008.
Then the widespread assumption was that the global financial system was robust enough to cope with the failure
of a single investment bank. Now investors are putting their trust in the resilience of unemployment-plagued
countries like France, whose president has record levels of unpopularity, and Italy, whose economy has shrunk
in constant prices in the first 14 years of this century (even Greece’s GDP is higher now than it was in 1999).
That stagnation points to the deeper reason for caution. The continuing dismal economic performance of
the euro zone now poses a big political risk to the single currency. In the short run, so long as creditor countries
(and that means principally Germany) insist only on budgetary rectitude and reject all proposals for further
monetary and fiscal stimulus, that performance seems unlikely to improve. Worse, inflation is now so
dangerously low that the euro zone threatens to tip into years of deflation and stagnation worryingly reminiscent
of Japan in the 1990s. The continent’s leaders have largely failed to push through the structural reforms that
could make their economies more competitive. When voters see no hope, they are likely to vote for populists—
and not just in Greece.
As 2015 approached, most of Europe’s leaders assumed that the worst of the euro crisis was behind
them. The early Greek election shows that hope was premature. Populist parties of left and right that are against
the euro, explicitly or not, continue to gain ground in many countries—the leader of Podemos, Spain’s highestpolling party, welcomed Mr Tsipras’s success in forcing an election this week. Ironically, when a country starts
to recover is also when popular discontent often boils over. That message needs to be heeded this week in Berlin
as much as in Athens.
From The Economist
10. Be bold, Mario
The European Central Bank should learn from the success of unconventional policies in America and
Britain
CENTRAL bankers from around the world gather this week in the foothills of the Teton mountains to
hike trails and share gossip and ideas. It is an apposite time to swap notes: the rich world’s economies have taken
divergent paths and the bankers at Jackson Hole have much to learn from one another about which policies work
best.
In America and Britain, output and employment have surpassed their pre-crisis peaks and are growing
solidly. But the picture in the rich world’s other two big economies is darker. In the second quarter Japanese
output shrank sharply, largely because consumers had accelerated purchases in the first quarter in order to avoid
a consumption-tax rise. The euro zone’s woes are harder to dismiss: second-quarter output was flat, and it
remains no higher than it was in 2011.
European policymakers should study their peers. America’s Federal Reserve and the Bank of England
were quick to deploy unconventional stimuli such as quantitative easing (QE), the purchase of government bonds
with newly created money. They have also worried less about resurgent inflation, using “forward guidance” to
reassure markets that they will take their time about raising interest rates. They have been proved right to be
relaxed: inflation in both countries remains below targets of 2%. Their stimulus has compensated for overly tight
fiscal policies and kept deflation at bay.
16
The European Central Bank (ECB) reacted with admirable force to the global financial crisis. But it has
dragged its feet since then. It has underestimated the threat of deflation, going so far as to raise interest rates in
2011 to choke off a non-existent threat of inflation. It continues to resist QE.
The demon of deflation
This has been costly. The ECB cannot be blamed for harsh fiscal austerity, nor for the fragility of banks,
both of which have crippled growth. But it bears responsibility for inflation, which has sunk to 0.4%,
dangerously close to deflation, and far below its target of nearly 2%. Confidence in its inflation target is eroding:
in financial markets, expectations of inflation over the next five years have tumbled. This should frighten the
bank—once entrenched, such expectations are hard to dislodge. Low inflation, and still more, deflation push up
real interest rates and force businesses, households and governments to slash spending in order to keep their debt
burdens from growing.
It is true that the ECB faces obstacles that its peers do not. Mario Draghi, the bank’s president, lacks the
political backing for QE that his counterparts have in America, Britain and Japan; Germany’s influential
Bundesbank opposes the idea. Many of the region’s biggest problems—burdensome taxes, excessive regulation,
rigid labour markets—have nothing to do with monetary policy. Moreover, if the ECB bought government bonds
now, some argue, it would take the pressure off the likes of Italy and France to enact structural reforms.
This is flawed thinking. Structural reforms are needed and would doubtless make the ECB’s job easier.
But the failure of politicians to do their duty is no reason for the bank to shirk its own. Anyway, such reforms
will take years to bear fruit, and the euro zone needs stimulus now.
Would QE work? With German bond yields below 1%, pushing them lower would not release a surge of
borrowing; nor would it help small firms which banks refuse to lend to. But massive buying of government
bonds and forward guidance are powerful signals of a central bank’s determination to bolster growth and keep
inflation on target.
The Bank of Japan’s experience is instructive. Its previous rounds of QE, in 2001 and 2010, were timid.
When it relaunched the policy last year, it did so with the scale, political support and rhetorical commitment
needed to jolt the country out of its deflationary expectations. Early results are modestly encouraging:
expectations seem to be shifting, a prerequisite for faster growth.
The lesson for the ECB is that QE and a credible commitment not to panic at the first whiff of inflation
can work. These would be bold moves for an institution whose mandate is to keep inflation down. But, as its
counterparts in America, Britain and Japan have shown, boldness pays.
From The Economist
Banks in China
11. Too big to hail
China’s banking behemoths are too beholden to the state. It is time to set finance free
AT FIRST sight, China seems to have a superb banking system. Its state-controlled banks, among the
biggest and most profitable in the world, have negligible levels of non-performing loans and are well capitalised.
That appears to suggest that the country’s approach should be applauded.
Not so. For one thing, though China’s banking system is stable, its banks are not as healthy as they
seem. The credit binge of recent years has left them with far higher levels of risky loans than they acknowledge.
And a profit squeeze is coming. The banks are having to work harder to keep both their biggest depositors, who
are tempted by alternative investment products, and their biggest borrowers, who are turning to the bond market
17
instead. As a consequence, the country’s Big Four banks—Industrial and Commercial Bank of China, Bank of
China, Agricultural Bank of China and China Construction Bank—will no longer make easy money by merely
issuing soft loans to state-owned enterprises, or SOEs.
What is more, that vaunted stability has come at a high price. China’s policy of financial repression,
which forces households to endure artificially low interest rates on bank deposits so that subsidised capital can
be lent to SOEs, is a cruel tax on ordinary people. The size of China’s banks may seem impressive, but in fact it
is a sign that the economy is excessively reliant on bank lending. And the incentives encouraging the risk-averse
Big Four, whose bosses are leading figures in the Communist Party, to funnel lending to cronies at inefficient
SOEs have starved dynamic “bamboo capitalists” of credit.
Excess of caution
China’s new leaders have acknowledged that the old approach has led to excesses, notably overcapacity
in state industries. They are talking of allowing more private (but not foreign) investment in the financial sector
and are urging banks to lend more to private firms. That is not enough.
For a start, China should end financial repression. If deposit rates were gradually freed, banks would be
forced to compete with each other for depositors and free to win back customers now lost to the shadow banking
system. Most Chinese banks have no clue today about customer service, risk management or credit assessment.
That would have to change. Miserable returns on bank deposits encourage punters to plough money into real
estate and other riskier investments, so paying decent deposit rates might help prick the property bubble, too.
Second, China needs to go beyond banking. In many developed economies, non-bank firms and
financial markets vie with banks to issue credit, but in the Middle Kingdom banks still dominate. In recent years
Chinese firms raised nine times as much money from banks as they did on the country’s stock exchanges. The
corporate bond market has grown quickly of late (and big banks no longer gobble up most of the offerings). This
growth should be encouraged.
Third, China must separate banking from crony state capitalism. The best way to do this is privatisation.
Smaller banks like China Merchants and China Minsheng, in which private investors have significant stakes,
lend much more energetically to small businesses and households than do the state-controlled goliaths.
Privatising the Big Four would help, though it would make it harder for the state to manage any future banking
crisis. And as long as sheltered, oligopolistic SOEs exist, banks will lend disproportionately to them because
they enjoy implicit state backing. So the big SOEs must themselves face greater market discipline.
Finally, China should welcome competition, from abroad and at home. Two Chinese internet giants,
Tencent and Alibaba, are starting to provide wealth management, investment funds and other financial services.
Banks are lobbying against them. Regulators worry about the destabilising effect of start-ups with new business
models, but for newcomers that do not pose a systemic risk they can afford lighter-touch regulation.
None of these changes should happen overnight. They can be implemented gradually. But a bit of
disruptive innovation would be good for China’s stodgy banks, and its people.
From The Economist
12. Cyprus one year later
Getting creditors not taxpayers to rescue banks seemed like a good idea, but it has not worked well in
Cyprus
NOTHING has infuriated taxpayers more in recent years than the bailing-out of banks. The cost has
been colossal: €592 billion ($800 billion) of European taxpayers’ money went into teetering banks between 2008
18
and 2012. Moves to make such bail-outs a last rather than a first resort have therefore been welcomed. From
2016 losses from bank collapses in Europe will be met as far as possible by the banks’ creditors.
Cyprus has already provided a year-long test of this “bail-in” approach. The results are discouraging.
The economy is on course to shrink by 5% this year after a similar decline in 2013, and unemployment has
climbed to 17%. Cyprus’s experience should serve as a warning against too violent a swing away from bail-outs,
in Europe and beyond, and as a reminder of why banks have previously been rescued.
Distributing the pain
Amid tough competition, Cyprus’s banking crisis was a contender for Europe’s worst. The botched
rescue a year ago was surely the nadir of an unimpressive record of decision-making by European finance
ministers and the IMF. At first, a raid on insured deposits was envisaged, though ultimately they were spared and
the main victims were uninsured depositors—a decision made easier by the fact that many of them were
Russians. But getting creditors both to absorb losses and to recapitalise the country’s biggest bank (which also
had to absorb the second-biggest and even more comprehensively bust bank) is not proving to be a great success.
The resulting bank, which is dominant in Cyprus, is a blighted behemoth. Though its capital ratio looks
respectable, payments are late on half of its lending book. With the Cypriot economy shrinking and the property
market still overvalued, more loans will turn sour. And the bank’s loans are half as big again as its deposits. That
leaves it dependent on emergency central-bank funding and unfit to provide the flow of credit that the economy
needs if it is to recover.
Three lessons can be learnt from the Cypriot saga. The first is the importance of having a state-backed
“bad bank” into which the bad loans of a restructured bank can be placed. These asset-management companies
lift the weight of bad loans off the books of banks, at a big discount to their value when they were extended,
freeing banks to provide credit for new ventures. Because these asset managers can operate on a longer horizon
than banks, they can avoid distress sales. NAMA, the Irish version, concentrated at first on selling off assets in
Britain, where property recovered faster than in Ireland.
Second, getting uninsured deposits to take much of the pain may help protect taxpayers, but in Cyprus it
has destroyed public faith in banks. Big depositors everywhere will be more nervous as a result, with money
taking flight at the first whiff of danger. It was precisely worries about bank runs that have made states reluctant
for so long to hang banks out to dry. If bailing-in is to work, it should target longer-term debt that cannot be
withdrawn and investors who can factor in the risk of a bust. This makes it vital that regulators promote
innovations like contingent convertible bonds (or “cocos”), forms of debt that explicitly envisage bail-in.
The third lesson is that attempts to set rigid templates are likely to rub up against the crooked timber of
banking. Politicians in America as well as Europe are imposing binding rules to limit public liability and to
discourage risky behaviour on the part of banks. But banking crises vary: some threaten a systemic collapse
whereas others are containable. There must be flexibility to deal with the worst-case contingencies. Cyprus’s
difficulty in overcoming recession while its main bank is in such a mess should serve as a warning against strict
solutions that smack of puritanism rather than pragmatism.
From The Economist
The world economy
13. In need of new oomph
How to make the rich world’s recovery stronger and safer
ECONOMISTS expected 2014 to be the year in which the global expansion stepped up a gear. Instead,
nearly five years into its recovery from a deep recession, the rich world’s economy still looks disappointingly
weak. America’s GDP grew at an annualised rate of only 0.1% in the first quarter. Euro-area growth, at 0.8%,
19
was only half the expected pace. Some of the weakness is temporary (bad weather did not help in America), and
it is not ubiquitous: in Britain and Germany, for example, growth has accelerated, and Japan has put on a brief
spurt. Most forecasters still expect the recovery to gain momentum during the year.
But there are reasons to worry. The stagnation in several big European countries, notably Italy and
France, is becoming more entrenched. Thanks to a rise in its consumption tax in April, Japan’s growth rate is set
to tumble, at least temporarily. America’s housing rebound has stalled. And across the rich world yields on longterm government bonds, a barometer of investors’ expectations for growth and interest rates, have fallen sharply.
The yield on ten-year Treasuries, at 2.5%, is half a percentage point lower than it was at the end of 2013. Given
that American expansions tend to be about five years long, the United States could find itself going into the next
downturn without having had a decent upturn at all.
What should be done to forestall that outcome? The standard answer is that central banks need to loosen
monetary conditions further and keep them loose for longer. In some places that is plainly true. The euro area’s
weakness has a lot to do with the conservatism of the European Central Bank, which has long resisted the
adoption of unconventional measures to loosen monetary policy, even as the region has slipped ever closer to
deflation. Thankfully, it has signalled that it will take action at its next meeting in June.
But if loose monetary conditions are a prerequisite for a more vigorous recovery, it is increasingly clear
that on their own they are not enough. Indeed, over-reliance on central banks may be a big reason behind the
present sluggishness. In recent years monetary policy has been the rich world’s main, and often only, tool to
support growth. Fiscal policy has worked in the opposite direction: virtually all rich-world governments have
been cutting their deficits, often at a rapid clip. Few have shown much appetite for the ambitious supply-side
reforms that might raise productivity and induce firms to invest. Free-trade deals languish. The much-promised
deepening of Europe’s single market, whether in digital commerce or services, remains a hollow pledge.
Against this unhelpful background, central banks have been remarkably successful. Growth has been so
stable that economists are beginning to talk, somewhat eerily, of the return of the “Great Moderation”, the era of
macroeconomic stability that preceded the global financial crisis. Sadly, with such stability at a subpar pace of
growth, low interest rates and low volatility have a bigger impact on asset prices than on real investment, and
risk creating financial bubbles long before economies reach full employment.
One way to address this risk is for central bankers to use regulatory tools to counter the build-up of
asset-price excesses. This is particularly urgent in Britain, where the housing market is showing clear signs of
froth. What is really needed, though, is a more balanced growth strategy that relies less exclusively on central
banks.
Such a strategy would have two elements. One is to boost public investment in infrastructure. From
American airports to German broadband coverage, much of the rich world’s infrastructure is inadequate.
Borrowing at rock-bottom interest rates to improve it will support today’s growth, boost tomorrow’s and leave
the recovery less dependent on private debt. A second element ought to be a blitz of supply-side reforms. In
addition to the obvious benefits of freer trade, every rich country has plenty of opportunities for reforms at home,
from overhauling the regulations that inhibit house-building in Britain to revamping America’s ineffective
system of worker training.
Progress on these fronts would lead to stronger, stabler growth and would reduce the odds that the next
recession begins with interest rates close to zero (making it particularly hard to fight). But it demands politicians
who can distinguish between budget profligacy and prudent borrowing, and who have the courage to push
through unpopular reforms. The rich world needs such politicians to step up.
From The Economist
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14. America’s big bet
Nov 15th 2014
America needs to push a free-trade pact in the Pacific more vigorously
JAPAN TRIED TO negotiate the first trans-Pacific trade agreement exactly 400 years ago. It sent a robed
samurai, Hasekura Tsunenaga, to Europe via Acapulco to request the right to trade directly with New Spain
(today’s Mexico). Among other things, he needed permission from the pope. But because the shogun was
slaughtering Catholics at the time, he did not get it.
Only in the past decade have such agreements finally started to flourish. But they are still dominated by
interests that go beyond the nuts and bolts of trade and into the realm of geopolitics. America and China are
pursuing three separate tracks towards trade pacts that would help define the future of trans-Pacific commerce.
One of the three does not include China, another excludes the United States . The third is still pie in the sky.
All three involve unwieldy acronyms, though whichever wins could one day become as familiar as
NAFTA (the North American Free-Trade Agreement). The furthest advanced is the American-led Trans-Pacific
Partnership (TPP), in which China plays no part. On a parallel track, though further behind, is the Regional
Comprehensive Economic Partnership (RCEP), which covers only Asian countries and includes China, plus
several countries that are also negotiating the TPP.
The distant dream is the Free-Trade Area of the Asia-Pacific (FTAAP), which would include both
America and China, and possibly cobble together elements of both TPP and RCEP. China pushed the FTAAP
ahead of the 21-country APEC summit in Beijing in November, giving a new lease of life to an old idea. Peter
Petri and Ali Abdul-Raheem write in a new paper for the Pacific Economic Co-operation Council: “Nearly 50
years after it was first proposed, it is gaining traction due to the emergence of RCEP and TPP initiatives and the
continuing stalemate in global trade negotiations.”
As trade experts see it, the TPP is the most ambitious in the short term. It is dominated by America and
Japan and also includes Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and
Vietnam. Together these countries account for about 40% of global GDP, making it one of America’s biggest
potential free-trade agreements (FTAs). The Obama administration hopes that it would be complemented by an
even more ambitious agreement with the EU.
America, which already has FTAs with six other TPP countries, sees opening up Japan as the big prize.
But the TPP is not just aimed at dismantling tariff barriers. It is also meant to tackle tough issues such as
intellectual property, services, government procurement, labour and environmental standards. Since its members
include economies such as Vietnam and Malaysia whose supply chains depend on cheap labour, negotiations
were always likely to be tricky. When Japan, which likes to spoil its farmers, joined in 2013, they became even
trickier. But after 19 rounds of negotiations, considerable progress has been made. There is a strong push to
finish it by the end of this year, though a similar deadline last year was missed.
RCEP, which is led by ASEAN, has the unenviable task of bringing China and Japan to the same table.
It is more focused than TPP on market access and on smoothing the way for supply chains. But it includes footdragging India, and may suffer from ASEAN’s softly-softly way of negotiating by consensus.
Many pundits in Washington agree that American leadership in Asia is on the table. Michael Green of
the Centre for Strategic and International Studies says TPP failure would “undermine the impression of the
United States as a Pacific power and look like an abdication of leadership”. It would also take pressure off Japan
and China to reform their economies. Mireya Solís, a Japan expert at the Brookings Institution, says it would be
a “devastating blow to the United States’ credibility”.
Those views are echoed in East Asia. Mr Tay in Singapore says TPP failure would be a disaster: “If the
domestic issues of these two countries cannot be resolved, there is no sense that the US-Japan alliance can
provide any kind of steerage for the region.” Deborah Elms, head of the Singapore-based Asian Trade Centre,
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suggests that so far the American pivot has manifested itself mainly as an extra 1,000 marines stationed in
Australia. “Without TPP, all the pivot amounts to is a few extra boots on the ground in Darwin,” she says.
Even members of America’s armed forces are worried. As one senior serving officer in the Pacific puts
it, “the TPP unites countries that are committed to a trade-based future, transparency and the rule of law. It is the
model that the United States and Europe have advanced versus that advanced by China. It is an opportunity to
move the arc of Chinese development, or identify it as a non-participant.”
Yet when Mr Obama mentions TPP, he talks mostly about protecting American jobs rather than
safeguarding America’s place in the world. The president has never fully put his back into forcing a
congressional vote on TPA. There is still time for him and Mr Abe to rescue the trade talks. But unless Mr
Obama leads from the front, America’s own leadership in the Pacific will seem less convincing than he has
repeatedly promised.
From “The Economist”
The on-demand economy
15. Workers on tap
The rise of the on-demand economy poses difficult questions for workers, companies and politicians
Jan 3rd 2015
IN THE early 20th century Henry Ford combined moving assembly lines with mass labour to make
building cars much cheaper and quicker—thus turning the automobile from a rich man’s toy into transport for
the masses. Today a growing group of entrepreneurs is striving to do the same to services, bringing together
computer power with freelance workers to supply luxuries that were once reserved for the wealthy. Uber
provides chauffeurs. Handy supplies cleaners. SpoonRocket delivers restaurant meals to your door. Instacart
keeps your fridge stocked. In San Francisco a young computer programmer can already live like a princess.
Yet this on-demand economy goes much wider than the occasional luxury. Click on Medicast’s app, and
a doctor will be knocking on your door within two hours. Want a lawyer or a consultant? Axiom will supply the
former, Eden McCallum the latter. Other companies offer prizes to freelances to solve R&D problems or to
come up with advertising ideas. And a growing number of agencies are delivering freelances of all sorts, such as
Freelancer.com and Elance-oDesk, which links up 9.3m workers for hire with 3.7m companies.
The on-demand economy is small, but it is growing quickly. Uber, founded in San Francisco in 2009,
now operates in 53 countries, had sales exceeding $1 billion in 2014 and a valuation of $40 billion. Like the
moving assembly line, the idea of connecting people with freelances to solve their problems sounds simple. But,
like mass production, it has profound implications for everything from the organisation of work to the nature of
the social contract in a capitalist society.
Baby, you can drive my car—and stock my fridge
Some of the forces behind the on-demand economy have been around for decades. Ever since the 1970s
the economy that Henry Ford helped create, with big firms and big trade unions, has withered. Manufacturing
jobs have been automated out of existence or outsourced abroad, while big companies have abandoned lifetime
employment. Some 53m American workers already work as freelances.
But two powerful forces are speeding this up and pushing it into ever more parts of the economy. The
first is technology. Cheap computing power means a lone thespian with an Apple Mac can create videos that
rival those of Hollywood studios. Complex tasks, such as programming a computer or writing a legal brief, can
now be divided into their component parts—and subcontracted to specialists around the world. The on-demand
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economy allows society to tap into its under-used resources: thus Uber gets people to rent their own cars, and
InnoCentive lets them rent their spare brain capacity.
The other great force is changing social habits. Karl Marx said that the world would be divided into
people who owned the means of production—the idle rich—and people who worked for them. In fact it is
increasingly being divided between people who have money but no time and people who have time but no
money. The on-demand economy provides a way for these two groups to trade with each other.
This will push service companies to follow manufacturers and focus on their core competencies. The
“transaction cost” of using an outsider to fix something (as opposed to keeping that function within your
company) is falling. Rather than controlling fixed resources, on-demand companies are middle-men, arranging
connections and overseeing quality. They don’t employ full-time lawyers and accountants with guaranteed pay
and benefits. Uber drivers get paid only when they work and are responsible for their own pensions and health
care. Risks borne by companies are being pushed back on to individuals—and that has consequences for
everybody.
Obamacare and Brand You
The on-demand economy is already provoking political debate, with Uber at the centre of much of it.
Many cities, states and countries have banned the ride-sharing company on safety or regulatory grounds. Taxi
drivers have staged protests against it. Uber drivers have gone on strike, demanding better benefits. Technooptimists dismiss all this as teething trouble: the on-demand economy gives consumers greater choice, they
argue, while letting people work whenever they want. Society gains because idle resources are put to use. Most
of Uber’s cars would otherwise be parked in the garage.
The truth is more nuanced. Consumers are clear winners; so are Western workers who value flexibility
over security, such as women who want to combine work with child-rearing. Taxpayers stand to gain if ondemand labour is used to improve efficiency in the provision of public services. But workers who value security
over flexibility, including a lot of middle-aged lawyers, doctors and taxi drivers, feel justifiably threatened. And
the on-demand economy certainly produces unfairnesses: taxpayers will also end up supporting many contract
workers who have never built up pensions.
This sense of nuance should inform policymaking. Governments that outlaw on-demand firms are
simply handicapping the rest of their economies. But that does not mean they should sit on their hands. The ways
governments measure employment and wages will have to change. Many European tax systems treat freelances
as second-class citizens, while American states have different rules for “contract workers” that could be tidied
up. Too much of the welfare state is delivered through employers, especially pensions and health care: both
should be tied to the individual and made portable, one area where Obamacare was a big step forward.
But even if governments adjust their policies to a more individualistic age, the on-demand economy
clearly imposes more risk on individuals. People will have to master multiple skills if they are to survive in such
a world—and keep those skills up to date. Professional sorts in big service firms will have to take more
responsibility for educating themselves. People will also have to learn how to sell themselves, through personal
networking and social media or, if they are really ambitious, turning themselves into brands. In a more fluid
world, everybody will need to learn how to manage You Inc.
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