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Joseph Stiglitz, ‘Rewriting the Rules of the European Economy’

The EU is not lost to market fundamentalism just yet

In an apparent swipe at Anglo-Saxon-style capitalism, former French president Nicolas Sarkozy managed in 2007 to get the goal of free and undistorted competition demoted in the EU’s Lisbon treaty. The French victory was largely symbolic, but it was emblematic of the decades-long battles within Europe between a markets-centred vision and one prioritising greater state protections and control.

In his new book, the American economist Joseph Stiglitz argues that fight is now being won by the wrong side. Free-market ideologues, he suggests, hold excessive sway over the continent. Too many European elites, he says in Rewriting the Rules of the European Economy, have propagated a myth that unfettered markets promote societal wellbeing.

A “markets-will-save-us” mentality has seeped into a wide range of policy areas. The EU has “abandoned” the idea that government spending cushions downturns, and the European Central Bank has been focused myopically on inflation control. The continent, he writes, needs to do far more to champion its traditional social model.

Mr Stiglitz, a Nobel Prize winner, is a longstanding critic of the euro, as well as a leading progressive voice in the US. This book follows a similar volume attacking America’s wafer-thin social protections and endemic inequality. Yet his new book ends up exaggerating the hold that market fundamentalism has taken on Europe.

In the early chapters, Mr Stiglitz lashes the EU’s fiscal regime and its “ugly offspring” — austerity. What it needs, he argues, is an employment, stability and growth pact that tackles joblessness and prevents a repetition of the harsh economic crackdowns imposed on states including Greece and Ireland during the crisis.

His demand for reform of the fiscal rules is undoubtedly justified: the stability and growth pact is singularly bad at encouraging states to deploy budget policy to battle recessions.

But this does not mean it deserves the prominence Mr Stiglitz gives it. The European Commission has, after all, repeatedly bent its budget rules, rather than imposed fines.

A swath of EU states have run up public debt levels far exceeding official limits — among them France, Spain, Belgium, Italy and Greece, all of which have burdens close to or exceeding 100 per cent of gross domestic product.

And while Mr Stiglitz bemoans crisis-era austerity, he spends no time asking what part countries such as Greece played in their own downfall.

Many of the reforms he advocates are sensible. The continent needs to do far more to prioritise public investment — especially in nations such as Germany with strong public finances. Repair of the banking sector, coupled with the completion of its banking union project, would help to address the failings of its weak financial sector. Ending the race to the bottom on corporate tax pursued by some states would be a boost to the single market. The ECB needs at least to adopt a fully symmetrical inflation target.

Important though EU-level policies are, much of the action will have to be at the state level, however — and here the devil is in the detail. Mr Stiglitz argues, for instance, that all EU countries should introduce a minimum wage. The commission is indeed preparing such a policy — but it is discovering that the impact on individual states can be highly varied. Nordic nations, which boast the kind of collective bargaining mechanisms that Mr Stiglitz espouses, warn that their systems could be inadvertently undermined by a one-size-fits-all proposal.

Ultimately, Mr Stiglitz seems to fear that Europe is going down a similar path to the US. Yet while he argues that income inequality is now a “fundamental characteristic” of most European societies, research by Zsolt Darvas at Bruegel shows inequality in the EU in 2016 was at its lowest since 1989.

Europe’s low-growth challenge is a real one, as is the threat posed by populist rightwing parties seeking to capitalise on economic discontent. But Mr Stiglitz’s conclusions show a lack of sensitivity to the multi-faceted realities in individual states. That is a pity, given the urgency of the problems the continent faces.

DAG Global to resubmit application despite regulatory caution

A UK start-up is applying to become the country’s first bank for cryptocurrency businesses, in what will be a test of regulators’ openness to the digital assets as they grapple with concerns over links to financial crime.

Companies that handle cryptocurrencies such as bitcoin and those that provide services to them have long struggled to maintain relationships with mainstream banks because of their perceived links to money laundering and other forms of criminal activity.

However, DAG Global, a London-based start-up established in 2018, said it would resubmit its application for a banking licence next month with a view to providing bank accounts for crypto businesses from 2021.

“It’s a lack of understanding and reputation risk that has kept others away — we think it can be a cleaner sector [than mainstream finance],” said Sean Kiernan, chief executive.

He said that since the bank submitted a first application last May it had had several rounds of “constructive dialogue” with UK regulators, the Prudential Regulation Authority and Financial Conduct Authority. “Thus far, the regulators have not raised any red flags,” he added.

DAG’s efforts to secure a licence have already taken longer than it initially hoped. The company previously aimed to launch in 2019, but it is one of several would-be banks that have run into delays over the past year as regulators have increased scrutiny of challenger banks’ business models.

The FCA and PRA said they did not comment on individual companies. Both regulators have previously warned about the risks associated with cryptocurrency businesses, but neither has actively discouraged banks from providing services to them.

The PRA in 2018 reminded banks to maintain “effective risk strategies” and “act in a prudent manner” with regards to cryptoassets, raising concerns about their volatility and the risk that they could be used for money laundering and financing terrorism.

The FCA, which last month took over responsibility for supervising anti-money laundering and counter-terrorist financing risks in crypto asset businesses, has also highlighted the need for strong measures to avoid cryptocurrency-related criminality.

However, its guidance says that “there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements”.

Even established businesses such as Coinbase, which operates one of the largest cryptocurrency exchanges and is backed by well-known investors such as Andreessen Horowitz, have struggled to establish banking relationships in the UK.

Coinbase opened a bank account with Barclays in 2018 after a long process to reassure the bank about its anti-money laundering systems, but Barclays stopped serving the company last year.

British cryptocurrency businesses have instead turned to foreign banks such as California-based Silvergate Bank, which was founded in 1988. Silvergate, which used to focus on small businesses in San Diego, has grown rapidly since switching to serve cryptocurrency businesses and listed on the New York Stock Exchange with a $300m valuation late last year.

Stephanie Ramezan, chief commercial officer at DAG, said: “We’re being approached on a daily basis by corporates in the space because people are fed up with what they’re faced with to meet basic business banking needs at the moment.”

‘Moonshot’ division forms outside partnership with Brooklyn incubator New Lab

X, the experimental lab of Google’s parent company Alphabet, is looking beyond Silicon Valley for its next big idea, forming a collaboration with New Lab, a start-up incubator in Brooklyn.

The heavily-lossmaking X, which describes itself as a “moonshots factory”, is most famous for creating Waymo, the self-driving car project that is now a standalone Alphabet business. Its other bets include beaming the internet from hot air balloons, creating fuel from seawater and storing electricity in molten salt.

Alphabet’s “other bets”, which include X, racked up a $4.8bn operating loss in 2019, prompting executives to promise a “sharper focus” in the future.

Now it has approached New Lab, founded in 2016 and home to 152 companies working on projects including vertical farming, space robotics and other “frontier technologies”.

On Monday, New Lab companies will be able to take part in the first “X Demo Day”, an opportunity to pitch X on their ideas in the hope of receiving investment. The event is likely to be repeated every quarter.

A spokesperson from X confirmed the relationship, but emphasised that it has not yet invested in New Lab or any of the companies located at the hub.

New Lab declined to comment on the collaboration, but last month told its members to put forward pitches for the “possibility of investment or being acquired as a ‘Moonshot’ for Google X.”

X’s grandiose description of a “moonshot” is a project aiming to “improve the lives of millions, even billions, of people.” At New Lab, investors have already pledged more than $700m in venture capital for some wildly ambitious projects.

Launcher, founded in 2017, plans to send 3D-printed, breadloaf-sized satellites into orbit. HoneyBee Robotics designs mechanical tools for space exploration and was last year awarded a contract from Nasa to send two payloads to the moon for drilling. AirLev is focused on rapid, air levitation based transport systems.

“We need more funding for moonshot companies,” said Deborah Navarro, co-founder of AirLev. “Google X’s involvement is key. This isn’t something a VC would typically fund. The majority of VCs have a certain amount of time to make a return on their investment but a lot of these technologies won’t have a return — or they will, but it might take 10 years or more.”

John Levy, co-chief executive of Seeqc, a semiconductor design group focused on quantum computing, said it would be “extraordinary” to be able to pitch to X.

In contrast to Silicon Valley, New Lab has focused on diversity, said Lynn Fischer, its chief marketing officer. “There are members from 30 different countries. And 30 per cent of the founding teams of all member companies are female,” she said. “That just lends itself to more openness, collaboration and networking.”

High winds disrupt travel as 500,000 homes lose power and Met Office warns of risk to life

Hundreds of flights were cancelled, rail services pared back and the Met Office issued countrywide warnings of danger to life from flying debris as storm Ciara battered the UK on Sunday.

Half a million homes lost power and more than 190 flood warnings and 170 flood alerts were issued.

Hundreds of flights were cancelled at Heathrow, with the UK’s busiest airport warning that some services on Monday would also be cancelled as a result. A spokesperson declined to give figures.

At Gatwick, 190 flights were cancelled, almost half of the day’s outbound total, with possible knock-on cancellations expected on Monday.

“We are experiencing very high winds today and this is causing some delays and cancellations to flights,” a spokesman added. “Passengers are advised to allow plenty of time to get to the airport and to check the status of their flight with their airline.”

Some of the cancellations at both airports were pre-emptive, an attempt by the airlines to reduce the knock-on impact of short-term cancellations, which leave aircraft in the wrong locations.

Rail operators reduced services and trains ran more slowly, with Network Rail, which manages the infrastructure, warning that disruption may last into Monday.

“High wind levels can make it unsafe for engineers to work at height, or with certain machinery, meaning any repairs might not be completed in time for Monday morning’s services,” a spokesman said.

Nick King, network services director at Network Rail, said: “We are working closely with our train operator partners to ensure passengers and freight are moved as safely and reliably as possible over the weekend and into Monday morning. But with such strong winds expected across large parts of the country, there will inevitably be some reduced services and speed restrictions in place.”

London North Eastern Railway, which runs the line between Edinburgh and London, has cancelled half of its services and advised passengers not to travel on Sunday. It is offering full refunds.

Dozens of properties were flooded across Lancashire and Yorkshire while hundreds of residents in the towns of Blackpool, Bury and Ramsbottom were evacuated.

Winds of up to 80mph hit higher and coastal areas, with gusts of up to 60mph inland. Heavy rainfall caused localised flooding, the Met Office said.

It earlier issued “amber warnings” for wind across most of England, including awarning that “flying debris could lead to injuries or danger to life”.

Manchester City’s Premier League football match against West Ham on Sunday afternoon was among the sporting fixtures cancelled “in the interests of supporter and staff safety”, the host club said.

Investors looking at the heated arguments that started to fly between London and Brussels just two days after the United Kingdom legally exited the European Union on Jan. 31 can see that the official Brexit date didn’t bring more clarity as to what will happen to the two respective economies.

There is no reason to feel reassured when looking back: The British stock exchange has massively underperformed its European peers since the Brexit referendum that took place in June 2016. The FTSE 100 index is up 20% since then. That’s half the performance of the French, German, and Italian stock markets, each up about 40% over the same period.

But at least two uncertainties have disappeared since last year: The U.K. has a government supported by a solid parliamentary majority, and Brexit is indeed happening. All the more reason, then, for investors to start looking at the fate of U.K. companies, now that the country has left the largest free-trading area in the world.

The veil of uncertainty is far from being lifted over the consequences of Brexit, though. The U.K. and the EU have 11 more months to negotiate a trade deal, which leaves room for ample brinkmanship and political bluffs in the meantime.

Depending on the scope and ambition of the future agreement, some industries may be hit harder than others. After the U.K. practically leaves the EU’s single market and its customs union at the end of the year, all exporters can expect to suffer from increased formalities at the EU border, and the associated costs.

But highly regulated industries subjected to complex technical and security norms, such as the pharmaceutical, chemical, and aeronautics sectors, may be particularly penalized if the U.K. keeps insisting on a wide freedom to “diverge” from the EU.

The U.K.’s powerful financial-services industry will also be affected because it’s expected to remain outside the scope of even a comprehensive trade deal. That’s why some of the biggest players tried preemptive damage control and moved some of their operations to the Continent, in order to benefit from continued access to EU markets.

Companies focused mostly on the domestic market, on the other hand, should be spared the hit from reduced or costlier trade. If the U.K. economy picks up, the long-suffering shareholders of grocer J Sainsbury (ticker: SBRY.UK), for example, could soon see the end of their pain—just as a new CEO is due to take over in June. The same is true for banks that cater mostly to domestic customers, such as Lloyds Banking Group (LLOY.UK).

For domestic-centered companies, the main question will center on the state of the U.K. economy in the months to come.

The Bank of England cut its growth forecast in its latest report, even though it based its predictions on the rather rosy government scenario of a smooth Brexit transition. But the central bank may still be inclined to cut interest rates before summer, if only to act preemptively.

And on the fiscal front, the government is expected to unleash big public spending as soon as next month on infrastructure, the National Health Service, and other types of much-needed public investment. This should provide a stimulus, benefiting companies in the public-works and building industries.

The wisest thing for investors to do in the coming months—and perhaps the more difficult option—will be to ignore the screaming headlines reflecting the posturing of politicians in London and Brussels.

At the same time, they’ll need to keep an eye on the substance of the talks: What are the two parties really agreeing about?