18/11/17: ECB Induces Double Error in the EU Policy Markets

In economics, two key market asymmetries/biases lead to the severe reduction in markets efficiency often marking the departure from theoretical levels of efficiency (speed, with which markets incorporate new relevant information into pricing decisions of markets agents) and the practical outcomes. These asymmetries or biases are: information asymmetry and agency problem.

For those, uninitiated into econospeak, information asymmetry (sometimes referred to as information failure), is a situation, in which one party to an economic transaction possesses greater knowledge of facts, material or relevant to the decision, than the other party. For example, a seller may know hidden information about a car on offer that is not revealed to the buyer. In more extreme example, a seller might actively conceal such information from a buyer. This can happen when a seller 'prepares' the car for sale by cleaning the engine, thus removing leaks and accumulations of oil and / or coolant that can indicate the areas where the problems might be.

The agency problem, also referred to as principal-agent problem, arises when an agent, acting on behalf of the principal, has distinct set of incentives from the principal. The resulting risk is that the agent will act in self-interest to undermine the goals and objectives of the principal. An example here would be a real estate agent contracted by the seller, while taking a commission kickback from the buyer. Or vice versa.

Occasionally, both problems combine to produce an even more powerful distortionary result, pushing the markets further away from finding a 'true' (or fundamentals-justified) price point.

Today, we have an example of such interaction. As reported in Euractiv, the ECB has denied the EU Court of Auditors access to data on Greek bailout. (Full story here: http://www.euractiv.com/section/all/news/ecb-denies-eu-auditors-access-to-information-on-greek-bailouts/) The claimed justification: banking secrecy. The result:

1. There is now clearly an asymmetry in information between the EU, the Court of Auditors, and the ECB when it comes to assessing the ECB actions in the Greek bailout(s). The 'car salesman' (the ECB) has scrubbed out information about the 'vehicle' (the bailout(s)) when presenting it to the 'buyer' and is refusing to show any evidence on pre-scrubbed 'car'.
2. And there is an agency problem. The ECB is an agent for the EU (and thus an agent relative to the principal - the EU Court of Auditors, which represents the interest of the EU). As an agent, the ECB has a contractual obligation to act in the interest of the EU. But as a part of the Troika in the case of the Greek bailout(s), the ECB is also contracted into a set of incentives to act in concert with other players: the sub-set of the EU, namely the EU Commission and the EFSF/ESM funds, and the IMF. At least one of these agents, the IMF, has a strong incentives to avoid transparent discovery of information about the Greek bailout(s) because these bailout(s) have, potentially, violated the IMF by-laws in lending to distressed countries. Another agent, the EU Commission, has an incentive to conceal the truth about the same bailout(s) in order to sustain a claim that the Greek bailout(s) are(were) a success. The third set of the agents (various EU funds that backed the bailout(s)) has incentives to sustain the pretence that the Greek bailout(s) were within the funds' bylaws and did not constitute state aid to the insolvent government.

In simple terms, the ECB refusal to release information on Greek bailout(s) to the EU Court of Auditors is a fundamental violation of the entire concept of the common market principle that overrides any other consideration, including the consideration of monetary policy independence. This so because the action of the ECB induces two most basic, most fundamental failures into the market: the agency problem and the asymmetric information problem, which are (even when taken independently from each other) the core drivers for market failures.

5/2/15: Gazprom's Nord and South Streams: Lessons Learned, Strategy Changed

I just published a long note on the trials and tribulations of the ill-fated South Stream gas pipeline project that was designed to deliver Russian gas to Bulgaria and Southern Europe. Here is the link: http://trueeconomicslr.blogspot.ie/2015/02/5215-gazproms-nord-and-south-streams.html

Economics 14/10/10: Innovation Union from European Union

Just in case you thought our own Government's naive and overly optimistic 'knowledge economy' papers were original in their lack of understanding of business, take a look at the latest EU-wide policy idea.

According to the European Commission boffins, by 2020 we will be living not in a Fiscal Union (won't happen, cause Germans wouldn't want a de jure responsibility for PIIGS) or the Monetary Union (can't last much longer in its current shape due to contradictory forces of sovereign economic policies) or even a Bailout Union (the current reincarnation of the big idea)... instead we will be the happy citizens of an Innovation Union.

The details (if one call them such) of this well-meaning stuff are provided here.

Not to waste anybody's time with navigating the lofty dream space of European 'thinkers' on development policy, let's cut straight to the chase. Two things come to mind reading the document.

1. It is aspirational (good thing) of benefits of the Innovation-driven economy and is strong on traditional bits of bureaucratic competency, promising good targets on legal environment and strategic partnerships, but
2. The big iceberg awaiting the Euro dreamliner (err... Titanic) is also right here - on the Welcome page: "Innovation as described in the Innovation Union plan broadly means change that speeds up and improves the way we conceive, develop, produce and access new products and services. Changes that create more jobs, improve people's lives and build greener and better societies."
   

Spot what's missing in the grand vision? Here:

• Sales
• Marketing
• Logistics
• Commercialization
• Consumer
• Finance (especially the issue of relationship between current fiscal imbalances and promised subsidies)
  

You see, folks in Brussels think that once a nerdy type draws a squiggly thingy on an i-pad and another nerdy types says 'Cool, man!', you instantaneously get more jobs, improve lives and green-up the bettered society. Not much else is required:

• Lower taxes to promote greater consumption, especially given we are facing rapidly aging and more risk averse European demographic, which is not exactly representative of early adopter consumer types needed for Innovation Union? Nope, not needed.
  
• Lower state charges to promote more investment, again especially in economies where savings will be increasingly consumed by pensioners instead of invested by the younger income earners? Why bother!
  
• Fewer Nanny State regulations to improve 'access', especially in the regulatory environment that has by now even managed to ban insurance companies from pricing the basic risks? Will have Innovation without that, thank you.
  
• More entrepreneurship to support deployment of products into the marketplace, again a major bottleneck in the aging and largely socially immobile society of EU? Uh, oh, what's 'entrepreneurship'?
• Improved early stage finance environments with fewer state subsidies inducing distortions in the market, especially crucial given the state of public finances in the non-Innovation EU? We can't have anything that involves 'fewer subsidies'!
  

So this is why, in my view, the latest idea, despite being aspirational and well-intentioned risks becoming yet another Titanic of economic policy, to join such hits of the past as:

• The Lisbon Agenda (which aimed for EU to overtake US in terms of economic growth, jobs creation etc by 2010);
• The Social Economy (which aimed for the EU to become a singular welfare state where the young labour away assets-less and savings-less to preserve the status quo of landed gentry and pensioned state employees);
• The Knowledge Economy (which aimed for the EU to become a heaven for all sorts of knowledge), and
• The Green Economy (which aimed to turn EU into one big nature preserve at a wave of a magic wand of subsidies).

What can possibly go wrong this time around with Innovation Union, then?

The unravelling of the core?

The latest report (here) from Switzerland is claiming that the Swiss are considering imposition of limits on the admission of the migrants from the EU15 + Malta & Cyprus. First, background, then conclusion:

Per EUObserver report, "under bilateral accords signed with the EU, the Swiss government is entitled to limit the number of workers entering the country" from the original EU15 states, plus Cyprus and Malta, whenever Swiss unemployment rises above a certain threshold.The threshold is not an absolute level of unemployment, but a rate of increase in jobless of more than 10% in a year "compared to the average rate in the previous three years". The latest data shows that Swiss unemployment reached a new three-year high of 3.5% in April - a 35.5% increase y-o-y. EU27 is now forecast to reach 9.7% unemployment in 2009 and 10.9% in 2010.

Currently there are no restrictions on the number of EU15+2 workers that can take jobs in Switzerland. "If the clause is activated", says EUObserver, "immigration from the EU15, plus Cyprus and Malta, will be limited to the average migration rate of the previous year plus five per cent for a maximum of two years.

So what is my analysis of this development? Access to the Swiss market - within a broader EEA community - is a legitimising point for EU in so far as it shows that European Union has attraction as a trading, capital and migration partner for countries which, unlike Eastern Europe, cannot be either bought or bullied into submission. Norway, Iceland, Lichtenstein (EEA members) and Switzerland are, at this point in time, the only countries that can claim such a status, although in the past the EU tried to 'compel' all of these states in relation to various aspects of their internal regulations.

Should Switzerland put in place even symbolic restrictions on the EU citizens' ability to gain work there, one of the three legs of this pillar will be gone. The questions to be asked in this context are:

1. Should Swiss authorities limit inward migration from the EU15+2, will this trigger a push within the EU15 to further restrict access to their own labour markets for the EU12 Accession states?
2. Should the Swiss elect to enact the restrictions clause, what signal on the integrity of EEA+ does this send out in the context of the future EU enlargement? Are we risking losing Switzerland as an investment and jobs market partner in order to gain Turkey? Albania? and so on?
3. Will Swiss-imposed restrictions signal an alternative 'Third' way for countries currently finding themselves in a difficulty within the harmonized EU monetary and FX policies - e.g. Austria - for distancing themselves from the full EU membership into an Association-style treaty Swiss-style?

In an opposite, but widely anticipated move, Iceland is now swinging in favour of full EU membership - a dubious win for Brussels, considering the state of general economic collapse in that country.

A disclaimer: applicable to anything I write on the EU - I do not advocate any of the above measures. This post is simply about presenting an argument as to what might be possible.

Hush-Hush & Sweep it under the Rug: EU's latest 'transparency' move

Last week EUObserver reported an interesting story (here) about the EU Commission efforts to keep transparency at bay.

Per EUObserver report: "New rules on public access to EU documents have prompted one of the European Commission's key departments to circulate a memo warning officials to be careful about what they write in emails and advising them on how to narrowly interpret requests for information. The 15-page handbook was circulated in January to officials working in the commission directorate for trade, one of the EU's most important policy areas affecting millions of people both within and beyond the bloc.

"Each official must be aware that all his/her documents, including meeting reports and e-mails can potentially be disclosed. You should keep this in mind when writing such documents. This is particularly the case for meeting reports and emails with third parties (e.g. industry)," reads the memo.

It asks officials... to avoid making references to informal contacts, such as meals or drinks, with lobbyists. "Don't refer to the great lunch you have had with an industry representative privately or add a PS asking if he/she would like to meet for a drink." [Hold it, folks - wouldn't such a PS qualify as a solicitation of a payoff in the first place?] The document also tips off officials on how to narrow down the interpretation of a request for information. It points to a past example where a request referred to DG trade meetings with individual companies, meaning the department could avoid making public its contacts with business lobbyists."

Well, there is more the EUObserver report worth reading, but what is absolutely clear is that the EU Commission has absolutely no interest in following the spirit of the disclosure rules, preferring instead to bend the rule-book in order to conceal the extent, nature and effectiveness of lobbyists, as well as to cover up its own governance practices.

Of course, one solution to this problem is to make all information concerning EU public - including the so-called commercially-sensitive one. Taxpayers must be allowed to know who was bidding on which projects, how these bids were evaluated and judged and how the bidding companies spent their lobbying money. This will include a transparent and complete list of lobbying organizations, bureaucrats diaries and other information that can assist us, the taxpayers, in determining who dined with whom, when, why and at whose expense.

In fact, they should also be required to post the actual bills paid - in my humble opinion, if MEPs claim expenses on things like meals and entertainment, I would like to know how many lobsters were eaten in Brussels on the back of my taxes... wouldn't you?

And let's apply the same principles to our local politicians and officials...