Articles – Robert Bischof

UK and EU Could Be Better Partners Apart

Why a deal will (have to) be done

by Bob Bischof in London
Published on OMFIF Wed 28 Feb 2018

As a German businessman who has lived and worked in Britain for 40 years and seen all facets of the Anglo-German divide over Europe, I am convinced that UK and continental negotiators will reach a mutually satisfactory accord over European Union withdrawal.

Britain and the EU-27 are better off apart than together. The EU will reach an agreement because the other 27 countries believe it is in their interest that Britain not only leaves now, but also that no future government thinks of knocking on the door again. Many well-meaning British Europhiles from all parties are sadly wasting their time by campaigning for Britain to stay in.

There has been much noise and hot air. Prime Minister Theresa May’s cabinet met last week and declared that only a bespoke deal is acceptable – earning an immediate rebuff from Brussels that this is impossible. Jeremy Corbyn, the leader of the Labour party, has pledged that Britain will stay in a customs union with Europe to help industry and employment and prevent a ‘hard’ Irish border. This spurred claims that Labour is ‘betraying’ those party supporters who want a full-scale EU exit. It also threatens May by encouraging Europhile Conservative rebels to join Labour against the prime minister’s strategy.

Squabbling over Europe is as old as Britain’s 50 years of half-hearted attempts at being a full and engaged European partner. European wrangles have haunted successive Conservative prime ministers. David Cameron had to step down after miscalculating the outcome of the 2016 referendum. May would have met the same fate, had her adversaries not hesitated to oust her out of fear of Corbyn in Downing Street.

The litany of divergence is long and substantial. Not having accepted the euro or Schengen area borderless travel, Britain will never sit at Europe’s top table. Public opinion, heavily influenced by a powerful right-wing press, is hostile to Europe. The British don’t like and are not good at the big government, structure and regulation conducive to European integration.

Other sources of division are Britain’s affinity with case law and a non-written constitution, contrasting with the continent’s Napoleonic code, and the British hankering for flexible labour markets and shareholder value rather than worker protection and the social market economy.

The referendum outcome gave credence to James Surowiecki’s book The Wisdom of Crowds. Large numbers of ordinary people sometimes make better decisions than smart elites. Because of deep cultural, political and economic disparities, I believe now – as I did before the vote – that Britain will continue to have misgivings about the EU and its political framework in spite of the fact that it will be worse off economically. Moreover, the EU will be better off without its quarrelsome neighbour.

For all these reasons, May and the EU have to and will agree a deal that Remainers and Leavers can (just about) live with in parliament and even in a second referendum.

Ultimately the EU will deliver such an accord. The reasons are rooted in reality, not fairyland. The right-wing press regularly claims that the EU needs Britain more than vice versa, that the EU’s exporters are somehow more vulnerable than the UK’s, or that the EU will be a more dangerous place without a deal. These mantras are overdone and misleading. Both sides need a deal, for equal and opposite reasons.

Separation can take place amicably. The French and German elections led to one common political result: more Europe and more integration.

A softer EU stance on Brexit is unlikely to encourage other countries to leave, as the EU is economically out of the doldrums. Employment is rising. Growth is higher and at a more sustainable rate than in Britain, where, in spite of sterling’s fall, the high current account deficit is expected to show only marginal improvement. Household debt is at record highs. Unemployment started to creep up in the last quarter of 2017.

No wonder net migration to the UK has fallen substantially. Because of Britain’s worse economics, I predict that immigration will shrink so much that May will claim victory and can drop insistence on free movement of people for a future accord. This is one more reason why, in the coming months, headlines will portray more harmony than hostility between London and Brussels.

Bob Bischof is Chairman of the German-British Forum, a Vice-President of the German-British Chamber of Industry and Commerce and a member of the OMFIF Advisory Board.

Merkel’s Germany: Shaper or Taker of a United Europe?

As Europe’s largest economy struggles to find its future path, what about calls that Germany is Europe’s hegemon?

As Published on The Globalist, December 15, 2017

Credit: MagMac83 Shutterstock.com

As Germany’s main political parties struggle to find a formula for a new coalition agreement under Angela Merkel’s leadership, the rest of Europe is testing the waters.Some argue nothing in Europe can move forward with a Germany occupied with itself. Others relish German paralysis. Yet again others fear German dominance no matter what. That is quite a spectrum of opinion.

Where should the future European journey go?

The majority of Europe’s political elites are trying to determine the proper pathway. Should there be further integration towards a United States of Europe?

Is such a move not mandated as a proper global counterweight in a world marked by the incessant rise of China, the hard-to- calculate Russians and the demise of the United States under Trump as the leader of the free world?

France’s President Emmanuel Macron has definitely defined such a response as his main aim. He needs Germany to come on board, not least to guard against the centrifugal powers of populism that are rising throughout most of Europe and keen to destroy his dream.

Spreading ominous thinking

But where does Germany stand? Is it really tearing apart at the fringes? That’s the suggestion of many who see the German elections in the dark light, on account of the success of the extreme left and right parties. Sections of the British press compared the right-wing AfD‘s march into the Bundestag to events in 1930.

Fortunately, this is far from the reality. Germany’s centrist parties scored an overwhelming 78% of the vote.

Still, one cannot deny or underestimate the disruptive danger of populism. In Poland and Hungary, for example, populists are making hay out of old fears and tribal aspirations.

German hegemony?

One underlying thread that united much political analysis throughout Europe is the fomenting of fears that is associated with the talk of a new German hegemony. In my view, that is just alarmist talk, designed to whip up the forces of populism in whatever country whose leaders think in those terms.

Others present a milder suggestion. For example, David Marsh in a recent article on The Globalist talks about a rerun of the Holy Roman Empire of German Nations in the Middle Ages.

That, too, sounds ominous. However, any student of history knows that Germany‘s neighbors would have nothing to fear.

That Empire was never dominated from the center. In fact, the center was kept deliberately weak. Power resided in the leaders of the constituent parts of that empire, who elected whoever the new emperor would become. It was thus anything but an effective political entity.

If anything, that Holy Roman Empire – transferred to our era – actually resembles quite closely the European model which the UK always has in mind.

If one wants to compare the European present with the past, the first German reunification in 1871 is a more fitting example. Driven by the onset of the industrial revolution (today’s equivalent of globalization in terms of its transformative powers), first a customs union was created. Then, under strong leadership by Prussia, came monetary and political union.

But even that parallel doesn’t really fit for various reasons. Anybody looking for a clearer understanding of Germany’s multi-layered historic, social and cultural role in Europe should read Stephen Green‘s excellent book “Germany the Reluctant Meister.“ He hits the nail on the head.

What about Angela Merkel?

Frau Merkel‘s Germany needs France much more than the French need the Germans. Herself long on desire, but short on actual vision, she would like nothing better than Monsieur Macron driving the European project forward. To her delight, he has taken the initiative. He is her “vision king.”

True, unlike the SPD – her potential governing partner – Merkel will only be a reluctant follower when it comes to German taxpayers shouldering too much of the cost of futher European integration.

But I am sure Merkel believes it is a reasonable price to pay, all the more so as she can rely on the Social Democrats to provide her sufficient political cover. They will allow her to convince most of her voters, who want the CDU to govern, that this is worth the cost.

Which leads to one big question in the European context: Will the SPD jump aboard the Merkel bandwagon once again?

The reason why I feel confident about a rerun of the last coalition is that the Social Democrats need not to fear playing second fiddle to her and falling further back in the next election. This is definitely Merkel’s last term in power. In fact, it would be a surprise if she stayed the full term.

Berlin Rules: Book Review for OMFIF

If you plan to read Paul Lever’s book, Berlin Rules: Europe and the German Way, to enjoy a bit of good old fashioned German bashing, and to confirm your anxieties about a Europe run by Germany, you might be disappointed at times and reassured at others.

As published on omfif.org – September 2017

In just over a decade, Germany has been transformed from the ‘sick man of Europe’ into a domineering and threatening force, according to some. Given the UK’s decision to leave the EU and the negotiations about the terms of Brexit, there is renewed interest in all things German, and British authors have responded.

Read the review in full – download PDF.

Apprenticeships for the UK

Vocational Education Training (VET) can offer a first step on a debt-free pathway from “shop floor to top floor” as an alternative to a university based education or a prelude to one. To make this a reality certain changes have to be made to the present system regarding the content of the learning offering.

In addition it needs simplifying and a higher degree of standardisation to achieve the necessary scale, which in turn will make it more cost effective. These changes are of course primarily designed to make apprenticeships more desirable to youngsters as well as employers.

A lot of what is on offer at present can stay in place and form the basis of an upgraded Universal Apprenticeship model as an attractive and substantive first step on the ladder of a career for young people. Over time it should replace/absorb all NVQ 1-4, Intermediate, Advanced, Modern and Higher Apprenticeships. It would need high level political and business support together with a PR makeover.

Vocational should therefore mean that young persons’ differing talents – academic, artistic or practical – are recognised as equally useful. Accordingly, young people need to be offered corresponding pathways. Firstly, from school into the world of work and after a successful completion of the first step – a successfully completed apprenticeship – further career progression opportunities to fulfil their aspirations may they be in trades, crafts, technical, commercial or other occupations.

Education should mean that school leavers aged 16 to 19, by choosing an Apprenticeship are not just taught the ins and outs of a specific job in a narrow manner, but that they continue their education in general terms, too. Continuing with the ‘3 Rs’ and enhancing their social and communication skills sould be part of their further education. This will lay the necessary foundation to enable the person to move off “the shop floor” and reach “the top floor” of his chosen profession, whatever it may be.

This part must be the responsibility of vocational colleges, as it needs real teaching abilities. Of the total college based part of the apprenticeship, it should be around one third of the learning program, whilst the other two thirds are the theoretical part backing up the in-house company job specific training. College training should be largely standardised and span all sectors including trade, commercial and technical apprenticeships. This is how economies of scale and cost savings are achieved. Outsourcing this to the private sector is not ideal!

The largest part of the Apprenticeship, namely Training should be based on standardised frameworks of in-company/organisation learning. This should typically be over a period of around 2-3 years, for which the apprentice and employer enter into a training contract. Ideally the frameworks should give the apprentice as holistic an insight into their work environment as possible. This gives the employees more self-esteem, empowers them to work more autonomous with less supervision and ultimately more flexible, cost efficient and productive.

The apprenticeship training contract should be largely standardised and safeguarded by law.To complete an apprenticeship successfully there should be a recognised certification process, which has meaning and help to give the young professional a standing in society. A successfully completed apprenticeship should not be the end but the beginning of a career for those with aspirations.

The government in England has tried to standardise apprenticeships somewhat following our submission and differentiates now into intermediate (level 1 and 2), advanced (level 3) and higher apprenticeships (level 4-5). The latter, which is the basis for the SEMTA higher apprenticeship for engineering technology in our opinion goes too far in terms of an apprenticeship, but still lacks educational and commercial content. The intermediate apprenticeship hardly deserves the name. The advanced apprenticeship is the nearest to European standards. The attainment rates are shockingly low.

If London First want to promote a strong brand “apprenticeship” and sell this to employers and employees alike then it is essential that it has the same standards and meaning. In spite of the fact that the UK has decided to leave the UK, it is also important to ensure a coherent approach in line with other European countries. For instance German companies in the UK want to have similar training for their British and German apprentices for obvious reasons.

British youngsters deserve to be enabled to compete on a level playing field with their other European colleagues.

BB/April 2017 for London First Skills Commission.

Trump and Germany

Germany should point out to Trump that it is his own irresponsible macroeconomic policies that make the dollar strong and the euro weak.

This article first published on The Globalist, 10 March 2017.

https://www.theglobalist.com/trump-germany-on-trade-imbalances-exchange-rates/

President Trump is a man on a mission, to the tune of several earth-shaking ones a week. After Mexico, this time it is Germany’s turn.

Going mano a mano with Germany

Another staggering current account surplus of near 9% of German GDP has caught his administration’s eye. Clearly, the euro too weak, the Trumpists argue. They want to have a mano-a-mano talk with the Germans, outside of WTO and EU structures.

Rampant bilateralism is the only way in which the Trump administration can imagine the world. Otherwise, the world clearly gets too complicated for him and them.

It ain’t so easy

But whatever Mr. Trump’s desires, the world of exchange rates doesn’t move to the tune of the unilateral issuance of executive orders. Here is an inconvenient fact: There is a market out there that actually establishes those (market) rates.

Still, there are some serious questions to be answered – none bigger than this: If the euro is too weak (and the dollar too strong), who dunnit?

And: Is Germany taking advantage of the United States? And what can the U.S. government possibly do to rectify the imbalances.

The President, for all his assumed omnipotence, will be in for a surprise the who’s dunnit. He will also find to his great dismay that the world of currencies and revaluations and devaluations has changed.

The old world

Under the Bretton Woods Agreement, signed in July 1944, the exchange rates of the major countries were fixed, with the U.S. dollar acting as the reserve currency, at an agreed price to gold of US$35 per ounce.

This system made business transactions between nations again possible after WWII and led to a rapid increase in world trade.

Over time, however, this regime started to create increasing imbalances between countries. Britain, economically ever more lacklustre, had to devalue its currency in 1967 against the dollar, from 2.80 to 2.40.

Similarly, an economically resurgent German deutschmark was revalued, from 11.20 to 9.60. Even so, the UK trade deficit did not go away though and further devaluations of Sterling became necessary.

As an importer of engineering products from Germany at the time, I had to buy DM forward in order to protect myself against these gyrations in the markets. At first, is wasn’t easy to get reasonable cover as there was not enough liquidity around in the market.

Brave new world

Soon enough, the banks and other Fintech companies became aware of the fact that there was a lot money to be made in the foreign exchange business and that, in order to tap into these profit opportunities, there was no need for an underlying trade in the real economy to occur. The currency casino started to gear up big time.

With North Sea oil coming on stream in the late 1970s and 1980s, and with the UK service sector expanding after Big Bang with the massive deregulation of the financial sector, Britain’s current account stayed more or less in balance.

UK runs out of steam

Selling a huge number of assets — from luxury homes in London to the energy sector, ports and airports as well as numerous companies — helped to keep the UK’s current account in balance.

During the last decade, however, this situation has reversed dramatically. Both trade and services are now showing growing deficits.

The UK current account deficit, as of 2016, stands at around 5% of GDP, probably because much of what could be sold off to foreigners has been sold off.

Even so, this period of growing current account deficits coincided with the opposite of what one would expect — a period of relative strength for Sterling, which was only interrupted by the Brexit vote.

During the same period, the eurozone has developed a growing current account surplus (in 2016 amounting to around Euro 400 billion).

However, contrary to what one would expect – a strengthening of the euro, to reflect the strong fundamentals — the euro remains weak.

As goes the UK, so does the US

Why am I telling this UK story? Because it foreshadows developments with regard to the United States. Despite a huge current account deficit there, the U.S. has to contend with a strong dollar.

How does Germany fit into all this? It has, of course, contributed around three quarters of the eurozone’s current account surplus.

Can Trump make the mental leap?

Somebody has to explain to Mr. Trump that the rules of the current account/forex game have changed significantly. Of course, the U.S. dollar is overvalued in PPP terms. However, the dollar will remain strong and even may appreciate further.

Particularly so if – and this is where it gets interesting — Trump goes on a spending spree and inflation picks up. He won’t have much choice under those circumstances but to introduce defensive tariffs to compensate for the strong dollar to fend off imports.

His advisers may have foreseen this – hence all the noise about “putting the U.S. first” and hitting out at the world.

The real world doesn’t matter that much anymore

What is fairly new, of course, is that currency adjustment don’t follow any more what is happening in the real economy. Rather, they are determined by interest rate expectations and movements.

Ask any currency broker and he/she will confirm this. The problem with this new scenario is that the imbalances will be getting worse as the deficit countries like the U.S. and UK are expected to be the first to raise interest rates.

What then is the reason behind the performance of the real economy no longer being the main driver for currency adjustments in the short and medium term?

The answer is simple: The volume of the currency trade needed for “real economy transactions” – which still shape our collective mind about exchange rate developments — is totally dwarfed by the volume of speculative currency transactions traded each day in the financial markets.

Just how dwarfed? By 5 trillion a day total market.

We clearly live in financial times.

Lord Mandelson – New President of GBF

Lord Mandelson, President of German British Forum

The German British Forum is delighted to announce that Lord Mandelson will join its supervisory board as President with immediate effect.

The German British Forum is the United Kingdom’s primary bilateral forum for discussing German-British affairs and activities, particularly promoting dialogue on business, social and political issues.

Peter Mandelson is a senior British Labour politician and chairman of strategic advisory firm Global Counsel. He is a former European Trade Commissioner and British First Secretary of State. As Trade Commissioner between 2004 and 2008, Peter negotiated trade agreements with many countries and led European negotiations in the WTO Doha World Trade Round.

Lord Mandelson became President of the Great Britain China Centre in 2015, and he is also President of the Policy Network think tank and Senior Adviser to Lazard. With several strong links connecting Britain and Germany, the German British Forum welcomes Lord Mandelson’s experience of international affairs to the board.

“Peter’s experience as a parliamentarian, UK Cabinet member and European trade commissioner makes him a perfect, highly experienced president for the GBF at a crucial time in our 22-year history,” said GBF chairman Robert Bischof. “With the possibility of a hard Brexit underway, a changing relationship between the United States, Britain and Europe, and many people in both Germany and Britain keen to maintain strong ties, Peter’s gravitas can help the GBF to increase high value dialogue between the two countries.”

Lord Mandelson said: “Brexit will mean that Britain has to work all the harder to maintain country to country relations with Europe’s leading economies. These relations will also be important during the coming negotiations. By deepening our links with leading players like Germany, along with other EU member states, Britain will be able to maintain some of its influence in our own neighbourhood.”

The GBF’s current president and co-founder David Marsh is stepping down to dedicate all his time to OMFIF, the Official Monetary and Financial Institutions Forum.

Download the Press Release here

For more information about the German British Forum please visit our website www.gbf.com or contact me.

For more information about Global Counsel visit: global-counsel.co.uk/

Shooting the Messenger

Exports row masks corporate governance issues

Liam Fox, the British secretary of state for international trade appointed by Prime Minister Theresa May to lead post-Brexit trade negotiations along with Boris Johnson and David Davis, put his finger squarely – but not fairly – on the biggest headache Britain has had for years last week.

In comments to the right-wing Conservative Way Forward group, he referred to the anaemic export performance of Britain’s major companies, calling their bosses ‘fat’ and ‘lazy’, and claiming they would rather play golf than open up new markets with new products. The Times, which first published the comments, accompanied an opinion piece with the headline, ‘Don’t shoot the clumsy messenger‘.

The comments prompted an expected backlash from business leaders, but the facts themselves are evident. Former Chancellor of the Exchequer George Osborne’s ‘march of the manufacturers’ and the goal he set of doubling exports to £1tn by 2020 look further away than ever – exports of £510.3bn in 2015 were below 2014’s figure of £511.7bn.

Will Brexit make a difference? Sterling’s approximate 10% devaluation since 23 June has prompted hopes of a boost to UK exports. But while there may be anecdotal evidence to suggest this has already happened, the decline will have only a limited effect if sterling’s 25% fall in 2008-09 has any lessons for today.

British managers are not lazier than their German counterparts. But in many ways they have a much harder – if not impossible – job. They do not spend their time on golf courses these days, but rather use it to present quarterly return figures in such a way that they satisfy shareholders and/or optimise their profit- and often share price-related bonuses.

Many of the best British companies sit on large cash piles. They do not spend them on product development or opening up export markets in the Far East, for fear of an adverse reaction affecting their share price. They prefer to ‘return cash to shareholders’ through share buy-backs or look for mergers and acquisitions, rather than growing their companies organically. If all else fails, they can ‘bring the company into play’ and sell it at a premium.

The Anglo-Saxon corporate governance model puts British businesses at a disadvantage compared with their European and Asian competitors. More than 85% of German businesses – the famous Mittelstand – are not quoted on the stock market. Managers can afford to think and act long-term without fear of a takeover, being dismissed or losing out on remuneration.

Chief executives of listed companies are shielded by their supervisory boards, which include worker and frequently customer representation. This acts as a practical defence against takeovers and over-adventurous board directors, and is a useful tool for communicating with workers.

May – like Angela Merkel, the German chancellor, a scientist by training – appears to have a better handle on the root causes of the UK’s export malaise than Fox, a medical doctor with no business experience. She fired a first salvo in the right direction shortly before taking office by suggesting worker participation on company boards, as well as an overhaul of the UK company takeover code and remuneration practices in British boardrooms. It is ironic that, just as the UK turns its back on Europe, its prime minister wants it to adopt a more continental-looking business model.

Changing the UK’s shareholder value model will not be easy. Tony Blair talked in 1995 about the stakeholder economy model, similar to Germany’s social market economy or ‘Rhineland capitalism’, and was very quickly stopped in his tracks. Let’s hope May’s attempts to address the root causes of the problem, rather than its symptoms, are more successful.

The Globalist: Economic Lessons from the UK’s Olympic Success

There can be no doubt that there is enough talent in the United Kingdom to compete with the best – but the system has to be right. Brexit or no Brexit, the UK has a choice to make. It can follow an Olympic strategy or stay with the calamitous football set-up, which has all the glitz and none of the glory.

This article was first published on The Globalist website 25 August 2016

2016 were the most successful Olympic Games ever for the United Kingdom. With 27 gold medals (and 67 medals overall), Team UK came in second place, ranking only behind the United States.

In spectacular fashion, the UK beat both China (3rd) and Russia (4th), as well as Germany (5th ) in the overall standings.

What makes this very special Olympic glory so noteworthy is the contrast to the Olympic Games two decades earlier. In Atlanta in 1996, the British team received just one gold medal – its lowest score ever.

What a difference smart planning makes

What has made the difference over these 20 years? The short answer seems money from The National Lottery, with each ticket sale generating proceeds that were dedicated to funding Team UK at the Olympic games.

But that is not the whole story. Once Britain was awarded the 2012 Olympic games, the country’s then-government under Messrs. Blair and Brown decided to change things around a bit.

A long-term strategy was developed and priorities were set to focus on certain sports where the chance of medals were greatest.

To that end, specialized facilities like the Manchester Velodrome created (yielding a record haul from indoor cycling events for Team UK this time around).

In addition, the best coaches were hired and they and the athletes were highly motivated through incentive schemes based on performance.

Just apply the Olympics strategy to the UK economy

As far as I can tell, the new British Prime Minister, Theresa May, is determined to take a leaf out of her nation’s Olympics book and apply it to the entire British economy.

Mrs. May certainly doesn’t want to copy the English football team’s example, which reached its own “Atlanta moment” this year, with a defeat against Iceland in the European Championship.

Britain has got plenty of sports talent but, as the Olympics strategy has proven, that talent must be properly nurtured.

England’s national football team failed because of systemic problems. That football is considered the national game in England makes these failures especially stinging.

The BPL cover-up

However, for most of the year, they are carefully covered up. With the relentless focus on the global commercialisation of the Barclays Premier League, club football seems a glorious enterprise.

But even here, as is seen in the late stages of international club competitions every season, English clubs fall short of expectations.

A key part of the explanation is short-term pressure on results, paired with too many foreign owners and managers with no interest in the national game.

They look for spectacular foreign signings rather than developing home-grown talent over the long term. The contrast to Spanish and German clubs is palpable. They do hire foreign talent, but develop plenty of home-grown talent.

Sir Alex Ferguson was the last manager who raised English youngsters to become world-class football payers – and that is now too many years ago.

As goes football, so does the economy?

Unfortunately, England’s football saga bears an uncanny resemblance to the overall British business approach, with a similar result.

The Anglo-Saxon “shareholder value” governance system, with its inherent pressure on quarterly results, drives short-term decision-making by boards.

M&A activity yields quicker results to make a corporation larger than organic growth would. For the latter approach, you need patient product improvement and development, investment in the latest technologies, focus on opening up new markets and, above all, on skills development in house (at all levels, from shop floor to top floor).

Balance sheet maneuvers, instead of focusing on productivity

All that costs money and reduces profits in the short term. The approach chosen instead is to massage the balance sheet – often through share buy-back schemes – to make the company’s results “look” better, even if this is just a financial engineering exercise achieving no real enhancement in value.

It is part of the shareholder value model where the incentives for directors are in line with those of the shareholders – unfortunately both thrive on short-term results.

Bizarre “business” practices

Even more importantly, they mostly just pay mere lip service to the stakeholders – employees and their families, the towns and cities where operations are based, as well as society as a whole.

To give a concrete example how far this disregard for employees and society can be taken, consider Sir Philip Green’s purchase of British Home Stores some years ago.

His special dividend payment of £400 million to his tax-exiled wife, followed by his sale of the company (which carried a £572million pension deficit) to a three times bankrupt associate for one Pound and the subsequent collapse of the company led to the loss of 11,000 jobs.

This bizarre, but carefully crafted chain of events has rightfully been described as “the unacceptable face of capitalism”. It clearly highlights major shortcomings in the UK’s corporate governance.

To make a long story short, under the British business-as-usual rules, the deck is amply stacked against long-term thinking and value creation.

Selling the family silver until there is no more?

Britain has lived for decades on the proceeds of selling assets to shore up the country’s current account deficit and the exchange rate.

Ports, airports, the energy sector, huge numbers of industrial businesses have been sold to foreign investors. The London Stock Exchange and high-tech ARM Holdings PLC are the latest in a long line.

For a long time, all this selling off the family silver was falsely heralded as underlining the attractiveness of Britain as an investment location and considered a virtue.

Why was all this misleading thinking pushed on the British public? Because plenty of people in “the City” got filthy rich in the process of acting as advisors to, if not instigators of, these transactions.

Just ask all the lawyers, investment bankers, accountants and management consultants.

England and the “kindness of others”

Now, at long last, doubts are being voiced over the long term effect of all this so-called inward investment. Mark Carney, the governor of the Bank of England warned before the Brexit vote that the reliance on “the kindness of strangers” might backfire.

There undoubtedly is a short-term gain for the national accounts when the proceeds of a sale support the British balance of payment. However, the dividend flow leaves the country forever.

Unsurprisingly, the UK’s once considerable earnings flow from overseas investment has reversed. While the country’s trade balance has for decades been negative, it is a new and worrying development of the last few years that the service sector is in deficit, too.

In some areas, the open door policy has of course worked with remarkable results. The car industry, once the perpetual laggard, is now thriving as it is almost completely under foreign ownership and management.

That is a great success story — and so are hundreds of foreign owned businesses in the UK. The profits from these operations, however, are only partly re-invested in the UK.

The largest part flows abroad. It is thus like English league club football – a great success story, but sadly not so much for the national team.

May’s mind in the right place: Can she do it?

The UK Prime Minister Theresa May appears to understand that there is a problem. Rather atypically for a former Home Secretary, she has been referring to:

rethinking the role of workers on boards of publicly listed companies
refocussing on industrial strategy and board room remuneration in connection with the ease with which British companies and assets can fall into foreign hands.

It will be interesting to see what she can actually do about it. The prime minister’s mind certainly is in the right place, but she will encounter plenty of resistance from her country’s financial establishment that has gotten very rich on selling off assets.

A true challenge given global competition

Britain’s businesses are up against world-wide competition, quite a few of them like the Germans, Japanese, Chinese and others who are determined to play the long game.

These nations engage in the long game for very different reasons. For example, most German companies, even in the export sector, are not listed on the stock market.

They are family-owned enterprises, whose main aim is to grow to survive and look after its stakeholders – their employees, customers, suppliers and the community.

But even those companies that are listed on the stock market have supervisory boards with worker and management representation.

This structure, reflecting in actual voting rights for workers at the supervisory board level, prevent a company’s top managers from purely self-interested behaviour that underlies most prettifying balance sheet manoeuvres.

I know because I was there: As a top manager of German companies, I was always paid bonuses on market share and profit – never on profit only.

What can be done?

It is impossible, and even counter-productive, to try to copy the German governance system and corporate culture for many reasons. Theresa May is obviously avoiding any reference to the German model – the Social Market Economy also called Rhineland Capitalism.

It would be ironic, to say the least, if Britain would turn in the direction of the continental economic model after leaving the EU. Probably for that reason, Mrs. May has been called May Guevara already!

The search is on for a workable construction that combines the best of both worlds and allows British managers to act in a long-term oriented fashion to the benefit of their shareholders, employees and the national performance.

There can be no doubt that there is enough talent in the United Kingdom to compete with the best – but the system has to be right.

Brexit or no Brexit, the UK has a choice to make. It can follow an Olympic strategy or stay with the calamitous football set-up, which has all the glitz and none of the glory.

Is English Glory Foreign-Made?

Exploring parallels between English football and the economic and political landscape of the country.

This article was published in The Globalist on 5 July 2016

England has without doubt the most expensive and internationally most followed football league in the world. Many Premiership clubs are owned by Americans, Russians, Saudis, Iranians, Thais and Chinese.

The global element shaping the sport in England doesn’t end there: Out of the top 12 clubs in the 2015/16 season, 11 were trained by Italians, Spanish, French, Dutch, a Chilean, a Croat and a German.

In the pool of players signed by all Premiership teams, 59 foreign nationalities are represented, accounting for 67% of all players in the league. Of the remaining 33% — the English players — not even half get to play every weekend.

The English press regularly proudly reports the Barclays Premier League as the richest, best and most successful league in the world.

It also elevates the English team before every international tournament like the World Cup in Brazil in 2014 and the current European championship to semi-favourite status.

Soccer, just like the economy

The English are without doubt the champions in self-promotion. The meeting with reality is quite harsh, though. Consider that Spanish club teams made a clean sweep of trophies in European club competitions this season, with the English clubs all knocked out early.

The early exit of the national team in Brazil in 2014 and now in 2016 against Iceland shows up the fundamental weaknesses of the overall approach.

The sport is played for profit only, with little regard for the development of home grown talent on or off the field. That money-based approach has an obvious impact on the national team, which has underperformed badly yet again.

This soccer saga has all the hallmarks of the overall British economic and political malaise. In politics, the bragging about the greatest league translates into “We are the fifth-largest economy in the world” and “We are the fastest growing country in the G8.”

This self-boosting rhetoric has been peddled by Cameron and Osborne over the last few years and featured hugely in the British press. However, once the pair decided to campaign for remaining in the EU, it came to haunt them.

Harsh economic reality

The two slogans were effectively used by the Leave campaign by simply claiming, “we can stand alone, we don’t need Europe.” Neither Cameron nor Osborne could admit that both claims were untrue for fear of being accused of “talking the country down.”

As David Smith, the Economics Editor of the Sunday Times, pointed out, economic reality is not as kind. The UK, by Purchasing Power Parity (PPP), is the tenth largest economy.

And in the first quarter of 2016, Britain’s economy grew at less than half the pace of the Eurozone – 0.3% versus 0.7%. Moreover, it was forecast to lag behind for the full year without the Brexit disaster.

But not only that – the country’s fiscal deficit is also going up. The current account deficit is at record high with 7% of GDP, this under a presumably strict Conservative government.

Private household debt hit a new record way above the pre-crisis level of 2008, with credit card debt rising at double-digit rates. The much talked about National Health Service is under water, to the tune of £2.5b billion.

The underfunded company pension schemes – like those of Tata Steel and BHS – amount to £92 billion, much of that shortfall will have to be covered through the government guarantee scheme.

Public pension deficits look even worse.

Sterling under pressure

All of it is totally unsustainable, even without the shock of Brexit. Theresa May, the leading contender for the prime ministership, announced simultaneously with Chancellor Osborne the abandonment of the fiscal target for this parliament. It makes sense, but doesn’t solve the problem.

Britain’s current account deficit is of particular concern. The trade balance has always been negative, but services made up for the gap in the past.

No longer so. Britain has lived for decades on the proceeds of selling assets to shore up the current account deficit and the exchange rate. Ports, airports, the energy sector, huge numbers of industrial businesses have been sold to foreign investors.

Unsurprisingly, the UK’s once considerable earnings flow from overseas investment has reversed. It means that Sterling would have come under pressure before any Brexit-related effects.

Overseas investment

The car industry, once the perpetual laggard, is now thriving. It is almost completely under foreign ownership and management. These firms have trained their workforce well, for example, by re-introducing German-style apprenticeship systems and taking a long view.

The Brits treat this as a great success story. But working for so many foreign employers has another side to it. There is a deep psychological problem here, too.

Having foreign bosses and even being paid well by them is one thing. Liking that situation is quite another matter altogether.

Accordingly, there is a growing feeling of alienation in the country because of these developments. The migration crisis, which made the timing of the referendum so awful, has of course magnified this feeling.

“We want our country back” seems also a cry of despair about what has happened – and blaming others like Brussels was just so easy to exploit by the populists on the right and left.

Need for home-grown talent

What gets lost amidst all this is that what still makes Britain great these days is that it attracts so many skilled professionals in all sorts of fields, not just soccer; however, more home reliance is clearly necessary.

German and many other clubs on the European continent are owned by their members. Of course, German clubs also import players, but they are serious about developing their own young players – always with an eye on the national game, too.

Unless Britain develops more home-grown talent in all walks of life, changes the overall approach from short to long-term thinking and stops kidding, if not deluding itself, it will not succeed — on or off the field.

Sterling at €1.34 is a threat: Britain, the EU and the price of independence

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular.

This article originally appeared on OMFIF’s website here

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular. For many in Britain, the euro project is not a basket of former independent currencies, rather a basket case. Doubts about the wisdom of so-called ‘German-backed austerity policies’ or about the ability of Greece and others to stay in the single currency have strengthened this belief in many British minds.

The ‘in-out’ referendum on Britain’s membership of the European Union which could take place in 2017, depending on the outcome of the May general election, will further focus attention on this point. Latest opinion polls indicate a majority in favour of departing.

The big question for a relatively small country like Britain is what ‘independence’ means in a globalised world. Being on your own, in monetary affairs as well as politically, can be damaging. Against its €1.04 low point in 2009, sterling has appreciated by 30% to around €1.34. This may be good news for Britons holidaying abroad, but the pound’s rise will hammer British manufacturing exports.

Switzerland, which has just abandoned its currency peg against the euro, has a current account surplus and high-value manufacturing goods, helping the Swiss absorb the shock of the latest 20% Swiss franc revaluation. Britain, on the other hand, has a large and growing current account deficit. It desperately needs to rebalance its economy away from services to manufacturing.

Although the UK’s coalition government has declared it wishes to further the ‘march of the manufacturers’, it has made little progress. Britain’s external performance will get worse. All this spells future trouble for sterling, especially if an inconclusive May election result brings political uncertainty.

Against this sobering background, Britain’s power over monetary and fiscal policy – setting interest rates, deciding quantitative easing and calibrating fiscal expansion or contraction – is well short of being an unmitigated benefit.

Germany has been doing well within the euro area because it benefits from the weak euro for its non-European exports, and even more from the stability, or lack of volatility, that emanates from membership of a large club. Germany still runs a substantial trade surplus with the rest of the euro area, but it has fallen sharply in recent years, making up less than 25% of Germany’s overall external surplus, against 40% in 2011.

If Britain wants to be serious about rebalancing the economy, it has to give its manufacturers a solid base, particularly in foreign trade. Currency hedging is expensive, the more so when volatility is high. The euro bloc encompasses most of the UK’s largest trade partners. Every transaction to another currency – whether one is buying or selling – costs money.

With so much of British industry in foreign ownership, there is an additional danger. When the foreign owners see developments they don’t like, they will first stop investing and then look elsewhere. At the German-British Chamber of Commerce and Industry we hear many worried comments from the over 1200 German-owned companies in the UK. The grumbling is getting louder.

And it’s not confined to the Germans. British business is overwhelmingly in favour of the UK staying in the EU, as a recent poll by the EEF manufacturers association showed. Britain can hardly be expected to join the euro in the foreseeable future. But as the election approaches, the issue of UK EU membership will start increasingly to occupy business people’s minds. Some might even support Labour as a potential party of government that will not brook a referendum on the matter – and could bring a weaker currency as well.

OMFIF

The Official Monetary and Financial Institutions Forum is an independent research and advisory group and a platform for confidential exchanges of views between official institutions and private sector counterparties.

The overriding aim is to enable the private and public sector to learn from each other in different ways, promoting better understanding of the world economy and higher across-the-board standards.

All developments regarding OMFIF can be followed at www.omfif.org and www.twitter.com/OMFIF.

Bob Bischof is a member of the OMFIF Advisory Board.