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.

Advertisements

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.

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.

Invensys Sale: UK Manufacturing On the Fast Track to Oblivion?

This article was published in the Daily Mail on 7 August 2013

The sale of Invensys, one of the last remaining substantial engineering companies in the UK, to the French industrial giant Schneider Electric simply beggars belief.

The declared aim of this Government is to rebalance the economy towards manufacturing. In reality short-term shareholder value rules and the Brits will sell anything and everything to please the City.

As a German living in this country, I am aghast at this. Germany’s manufacturing prowess is founded on a much more long-termist approach. But Invensys is, sadly, a typical British industrial story.

The company was created out of the merger of two engineering companies Siebe and BTR in 1999. The new company was debt-laden and poorly managed, going through a £2.7billion debt restructuring exercise in 2004. In 2005 the board appointed Ulf Henriksson as chief executive, who restored the company to financial health. Enter Sir Nigel Rudd as new chairman.

Opinion in Daily Mail: Sale of InvensysIn March 2011 he fired Henriksson, an engineer, because ‘he could not see the big picture’ and replaced him with the chief financial officer Wayne Edmunds. The share price subsequently halved in 2012 because of technical problems. It only bounced back when the break-up of the company was announced and set in motion with the sale of the signalling business to Siemens.

The rest is now on its way to being swallowed by a French company for £3.4billion – well done, Sir Nigel. Does anybody get the message that these deals are a sure way to manufacturing oblivion in the UK?

My own experience bears this out. I arrived in the UK 40 years ago to set up a UK subsidiary of a German lift truck maker. Our main European rival was the British company Lansing Bagnall, based in Basingstoke. Their market share in the UK was around 45 per cent and they exported 60 per cent of their production worldwide. They were the envy of the industry.

Some 20 years later a large German industrial conglomerate bought them. A few years later they were sold on with the rest of the lift truck division to private equity, who closed the Basingstoke factory and moved the production to Germany and France.

In 1994 my company bought the last remaining British lift truck manufacturer Lancer Boss, invested huge sums for a while, but then had to give up, close the plant in Leighton Buzzard and moved the production to Germany.

One of the reasons was that they could no longer get cold-rolled steel sections for the lift masts of their trucks in the UK, as the Corus plant in the North East was ‘restructured’ – the other was that there was a cyclical downturn in the sector.

There are dozens of industries and companies where the same or similar happened. Mergers, acquisitions, de-mergers and break-ups of companies are a favourite game in the UK to enhance so-called shareholder value. It promises faster returns for shareholders and bonuses for the board members rather than following the slower path of growing their companies organically. They would rather ‘return cash to the shareholders’ by share buy-back programmes and high dividends than invest in the future of their businesses and the prosperity of UK Plc.

What is the Government doing to change this pattern? The slogan needs to change from ‘It’s the economy, stupid’ to ‘It’s the real economy, stupid.’

‘Hire and fire’ has destroyed Britain’s jobs economy

Europe’s biggest problem now is youth unemployment – we should be looking at the German labour model

As published in the Guardian: by David Marsh and Robert Bischof. http://www.guardian.co.uk/commentisfree/2012/jan/26/hire-and-fire-destroyed-uk-jobs

These days we tend to talk about the divisions in Europe as one between net creditors and debtors. In reality this is just a sideshow. There is a much more fundamental gulf, hinted at by Angela Merkel in her Davos speech yesterday: between countries with organised industrial training systems such as Germany, the Netherlands, Belgium, Scandinavia, Austria and Switzerland – all currently with jobless rates of between 3% and 7% – and those with much higher rates of unemployment, often in double digits, in peripheral Europe.

The issue pits Anglo-Saxon precepts of free market regulation against the Germanic “Rhineland” system of managed capitalism, with modern apprenticeship systems built on a long-term compact between labour and employers. In the years before and immediately after the euro’s birth in 1999, the peripheral countries of the European monetary union (Emu) often followed Anglo-Saxon principles by liberalising parts of notoriously inflexible labour markets. “Hire and fire” became the motto.

Initially this seemed to work. But as debt market conditions worsened and growth stalled after the 2007-08 financial crisis, Emu’s periphery has been left seriously exposed by the failure to replace unproductive regulations with new mechanisms to generate jobs.

In the battle between rival systems, “Rhineland capitalism” appears to be winning hands down. In the two years since the global economic downturn in 2009, Germany has expanded employment by 1.8m, while the UK, US, France, Italy and Spain have shed 7m jobs. In 2007, when most other countries were nearing the end of a boom driven by excess credit, Germany had the highest unemployment rate (8.7% of the workforce on a harmonised basis) of the group of seven leading industrialised countries. Yet in late 2011, according to OECD figures, German unemployment, at 5.2%, was the lowest in the G7 apart from Japan.

While the UK struggles with record youth unemployment, Germany’s youth unemployment rate is one third of the OECD average and one eighth of the rate in Spain. High youth unemployment is the most pressing problem in Europe right now – Merkel acknowledged as much when she admitted that mere austerity would make the European project meaningless for the next generation of young people. “Structural reforms that lead to more jobs are essential,” she said in her opening statement.

But Merkel is drawing strength from Germany’s own experience with low unemployment in the mid-noughties, and she is right to do so. While the German labour market underwent some Anglo-Saxon-style deregulation under Gerhard Schröder in 2003-2005, it still places more emphasis on employers’ freedom to build long-term loyalty between employers and workers. These relationships are embedded in a strikingly different cultural approach to industrial training, closely tied to the German tradition of family-owned Mittelstand businesses buttressed by long-term savings that take a generational approach to assembling skills and technology.

British politicians are keen to talk about “skills”, but at the same time they are reluctant to let go of the flexible labour laws that have set them apart from the European mainland in the past. They can’t have it both ways. Employers who do not have a sense of social responsibility for training are unlikely to be durably persuaded to hire apprentices through one-off state payments. Instead, governments should consider building comprehensive vocational training schemes that could be funded through a reduction in the social costs ensuing from unemployment. Tinkering with apprenticeship programmes on a piecemeal basis, as has been done in the UK, is unlikely to yield long-term results, as such half-hearted reforms result in expensive and wasteful systems that lack both scale and content.

And it’s not just the German system of apprenticeship schemes that could do with being copied. One of the main reason why Germany’s economy was able to recover so quickly after the downturn was the system of short-time working support (Kurzarbeit), introduced in the 1920s and extended in recent years.

Funded by an employment insurance levy, it pays for firms to keep workers for six to 12 months, provided employers can show their businesses are in a cyclical and not a structural downturn. Imagine a small engineering firm that ran into financial trouble in 2008: rather than letting go of the 17-year-old apprentice who had recently joined the firm, it would have been able to keep employees on board and then benefit from their experience when the economy was back on its feet. Even if the company had gone bust, the apprentice would by law have been sent to another company.

Sir Anthony Bamford, chairman of UK excavator maker JCB, points out that his company was forced to shed more than 20% of staff in Britain when production halved in 2009. By contrast, the Kurzarbeit system enabled him to keep all his labour force in Germany.

Such examples underline how Germany’s previously unfashionable model has enabled it to become the industrialised world’s premier job machine. As the economic climate darkens, 2012 will be a difficult year both for Germany to hold on to its advantages and for other countries striving to follow the German lead. Yet unless they start to lay the groundwork for longer term gain, time for catching up will soon run out.

Hit the Loan Sharks

Published 23 Jan 2012, Daily Mail, Letters to the Editor

Sir

James Coney in the Money Mail 18th January 2012 (“Banks can easily fix this flawed system”) highlights rightly the fact that the system is geared towards “the vulnerable paying for the better off”.

However, this is only the tip of the iceberg. Banks, Credit Card and Store Card operators, Mail Order companies and worst of all loan sharks and those known by a camouflaged name, the so-called Pay-Day loan providers all work on a similar principle. They can afford to lend money out indiscriminately at exorbitant rates, as these include provisions for defaulting customers: The higher the risk, the higher the interest rate. They are exploiting the socially weak and uneducated by luring them often  into spending money they do not have and  in the most expensive way. Frequently they are driven  deeper into debt and in the end it is invariably the state that has to pick up the pieces with social welfare support. It is a disgrace of the first order and one of the reasons for British private household debt to stand at 1.5 trillion.

The Mail has often been critical of European ways – I wished it could break with this tradition and start a campaign to outlawing this practice of exploiting the weakest group in society. Countries like Germany, the Netherlands, Switzerland have tough usury laws to protect this most vulnerable group. There any contract or deal that carries interest rates above 18-20% pa are nil and void and unenforceable in court. Repeated offenders can be imprisoned. It is noticeable that the above mentioned countries are also those doing reasonably well in the present economic climate.

As this proposal would put half of Britain’s financial services operators behind bars, a law like this would have to be introduced over time and with decreasing rates starting maybe with 30%, which put at least an immediate end to the horrible loan sharks.

Bob Bischof

Bob Bischof Letter printed in the Daily Mail January 2012
The letter as printed in the Daily Mail, 23 January 2012