Monday, 18 December 2017

28 years from the bloodiest regime change in Eastern Europe. Has Romania made it?

Twenty-eight years ago the combination of genuine popular anger, regional historical evolution and unacknowledged support from western and eastern intelligence agencies have delivered the most chaotic and violent regime change in Eastern Europe. Over 1,000 people died in the events but Ceausescu, Romania's Stalinist dictator was deposed of power and summary executed (on Christmas Day) and the country entered a long, tortuous and sometimes painful period of transition to a political democracy and a capitalist liberal economy.
All this years later, what many people know about Romania went from "small place behind the Berlin Wall", Ceausescu, Nadia Comaneci and Dracula to "small place in Europe", Ceausescu, Nadia Comaneci, Dracula, Hagi, maybe Simaon Halep (WTA #1 currently), poverty, corruption and not much else. This, a recent read and references to a World Bank report prompted this little posting, a first for me on Facebook.
In spite of disastrous birth rates and devastating emigration (second only to the civil-war torn Siria), Romania is by a margin the seventh largest country in the EU by population, behind the big four (Germany, France, UK and Italy), Spain and Poland. Think Ohio in the US on a relative basis and New York in absolute terms 19 to 20m).
In 1992, GDP per head was $1,100. This year will be in excess of $10,000, a more than respectable increase, up there in top 10 with China, Vietnam, etc., but Romania is significantly more prosperous that any of these (e.g. China is at $8,000 per capita). This 800% increase came in spite of often incompetent and sometimes corrupt leadership, in spite of sometimes challenging regional and international circumstances, in spite of often shattering social evolution. By comparison, there was just few tens of percents expansion in wealthy EU economies (Germany 59% and Italy 32%) and a global weighted average of around 120%. For optimists believing that economic and political transition and reform is an irreversible, ultimately successful process, just look at neighbouring Ukraine (just 54% for this whole quarter of a century, to just $2,200).
Sure, there are meaningful regional differences within Romania. Bucharest and the wealthier regions have grown faster than China and are now around six times wealthier that the poorest region, a regional discrepancy akin to Spain's. The poorest regions have grown even below the global average and have registered incredible losses of population - they all went to pick strawberries in Italy and Spain, paint houses in the UK and write software all over the place. Bucharest is now on a GDP per capita basis similar with Western Europe in the '90ies, while the wealthier parts of the country are at the '80ies level.
Hyper inflation in the '90ies, the recent economic crisis, numerous examples of questionable economic management have all eaten away at the even higher growth potential, but have not altered the fundamentally solid economic foundation. Public debt, in spite of tripling in the last decade or so, is still a fraction of what most other EU countries have.
EU and NATO membership certainly helped, although not always as much as once hoped and certainly sometimes in the wrong direction. Healthcare and education are still below par, infrastructure is often lacking or problematic, yet Romania decided (or was asked to decide) to spend $3.9 billion buying Patriot missiles. Although there are examples showing that rule of law and human rights sometimes seem an afterthought (Romania has a disastrous record at the European Court of Human Rights), the country is unmistakeably European in foundation, but still displaying emerging markets growth and development prospects and potential. Fairly well educated, cosmopolitan urban population, high industrial and consumer potential sustained by productivity and an interesting social and cultural mix make this potential still more attractive.

So, tick the "successful transition" box next to Romania's name and think about spicing up your  diversified investment portfolio. Or even better, go and visit.

Thursday, 18 October 2012

Mediterranean stories

Italy’s efforts to survive as a functioning economy and democracy as well as remain in the eurozone have captured a fair share of the economic and business news recently, particularly since the Monti government has focussed its efforts on the “piano per la crescita”, the growth and development-oriented follow-up to the much needed austerity and war against tax evasion. After about one year of rope walking, with the vested interest of the unions, liberal professions (surely including the lawyers, which are the largest profession in the Parliament), taxi drivers, etc. on one side and economic and social reality on the other, Prime Minister Monti has achieved some reasonable results which seem to upset everybody. Too much change for the nay sayers and not enough for the “aye”. Reforming Italy is a mammoth task and, by the standards of the last 15 years, probably Mr Monti did well enough. He seems to continue to be the most popular politician in spite of the real pain he inflicted on the average taxpayer.
Il bell paese as always, is wonderful and unpredictable. One of the fairly popular new parties created as a reaction to the country's apparent inability to heal itself is a new movement that borrowed its name from a hotel category (“Movimento Cinque Stelle”) and is led by a stand-up comedian, Beppe Grillo, a weird combination between Robin Williams and Serge Gainsborough but without the humour of one and the poetry of the other. In terms of political programme, he seems to advocate for a better way of doing politics and an increased competence for the country’s leaders by, and I am quoting, “fighting against global warming”. One of his guys won, by everybody’s surprise including his, the elections for mayor in Bologna.
We sometimes encounter little gems of stories that somehow, and not by careful analysis and thorough investigation, offer some kind of distilled wisdom able to explain complex issues. Taxi drivers throughout the world are often depositories of such treasures. This one comes from a friend of mine and illustrates the incredibly complex and large waste that and overdeveloped, incompetent and corrupt state can generate.
Campania Felix, as the ancient Romans used to call it, is today one of the largest and most populous regions in Italy’s mezzogiorno. Poor and corrupt as one suspects, it suffers from most maladies that poison the country’s southern half. Camorra, the Neapolitan version of the Mafia is unfortunately very present.
A university in the region of Campania, following instructions from the Ministry of Education, University and Research concerning the new teacher qualification program, has organised a competition to select 25 sports teachers for the region’s schools, something that one may think it is fairly straightforward. Well, not so much. In a region with Spanish-levels of unemployment, working for the state is still seen as one of the best professional alternatives not for the pay but for the fringe benefits: little work (i.e. 18 hours a week), no requirements to perform, steel-plated job security, plenty of time to do something else on the side. No surprise that Italy has about 1 million teachers, probably the largest single profession in the country with the lowest birth rate in Europe for many years now.
The selection started with a couple of exams, where only graduates from Scienze Motorie (five years university degree) were allowed to participate. The exams where thorough and difficult. My friend, an intelligent person with high work ethic and international doctoral experience had to study hard a couple of months. The testing included multiple written tests as well as interviews for the whole 500 plus candidates, a long and complex affair aimed at selecting the 25 best candidates. The successful ones will then be required to go on a one-year post graduate course where they will study more or less the same stuff they did in their long five years of university training, most likely with the same teachers. Once they graduate, they will be able to go in secondary schools and teach physical education.
One would expect that with this level of requirements Campania is a record provider of Olympic champions. Unfortunately not so because in spite of wasting a lot of money and resources in preparing PE teachers, a large proportion of the region’s schools does not have appropriate sports facilities and, on direct indication from the school director, teachers avoid PE classes because the “ragazzi” can get hurt while doing some kind of physical exercise. No surprise then that almost 52% of the children and 21% of the teenagers in the region are overweight or obese and nobody seems to see the irony of this whole situation. In the meantime, the complicated set of exams for the 500 candidates goes ahead, spiced up with complaints and legal actions that question the clarity of the questions. However, in a just under two years, the 25 happy and lucky graduates will be able, after at least six years of graduate and post-graduate studies (one can re-take one or more years in case of failure during university more or less at will) will be able to claim their PE teacher salaries from schools with no facilities and PE hours only on paper. On the other side, chubby pupils will be sitting at their desks throughout the long school-week (which includes Saturdays) and will be able to nibble on their panini during the nominal PE class. Then they'll go home to listen to their parents complaining some more about the unbearable taxes regime.

Saturday, 4 February 2012

Robin Hood, the Prime Minister

Income redistribution in the Middle Ages was a clearer affair than nowadays. The rulers at that time did not have VAT, duties, income and capital taxes as well as social assistance programmes to play with. It was plain and simple: let’s build another cathedral, paid-for by the king and the local wealthy lords. As the sponsors owned most meaningful and  income-producing assets, after a few generations most of the wealth redistributed to the people who worked for years at the spiritual infrastructure of the day was back in the iron boxes down in the chateau’s dungeons. Such an ineffective system created the demand for informal distribution via entrepreneurial outlaws who became the stuff of legends. As most fictional characters, the Robin Hoods in most cultures that have them were brave, competent and just. Always. Taking from the rich and giving to the poor was their business and, had that the masses at that time had the right to vote, merry men across Europe would have gotten a one-way ticket to the top.
We live now in times that, sometimes, resemble the Middle Ages. The crisis we are now navigating started, as most crises do, with an asset bubble, real estate this time. It then became a credit crisis and now, finally (?) reached the major issue of the developed world, unsustainable sovereign indebtedness. 
Owning your home, paying for it with a long term mortgage that the government partially guaranteed became a norm that sustained prosperity but also was an effective tool for social “control”, fundamented primarily by Roosevelt’s New Deal. Conditioning regulatory approval of bank mergers with set targets for mortgage lending for lower income families in one of the world’s most fragmented banking markets set for consolidation, as Carter did, played a major role in setting the demand for what was much later called sub-prime lending. Financial deregulation, lax monetary policy and dumb bankers fuelled the seemingly endless supply of cheap money. Greed, the overwhelming greed  of the consumer, politician and banker did the rest.
Financial panic caused by banking collapses, particularly Lehman Brothers, switched-off the credit markets.  Both households and corporates started the largest mass de-leveraging process ever witnessed. Large companies have now unusually cash-rich balance sheets; Apple’s cash reserves now stand at just under $100bn, although two thirds of it is trapped in foreign subsidiaries.
The credit crunch and overall deleveraging moved the spotlight to some of the world’s worst borrowers, some European governments. Widely leveraged balance sheets, large and hardly to adjust social entitlements, decreasing competitively and bad demographics showed the hollow body behind the now gone AAA ratings. Sovereign debt of wealthy countries that cannot grow their economies is by far the largest threat to the Western economies and the global financial system.
Human nature made us the voters and homeowners that borrowed like there is no tomorrow, decide that we could not possibly have played any role in this mess. Politicians, whose fundamental profession requires short term posturing and medium to long-term dishonesty and inconsistence, also decided that there was no responsibility on their side and that the blame lays, fair and square, with the bankers. That’s a), dishonesty. The solution to the crisis, according to most bureaucrats, is more regulation and more capital, which are the key blocks in banks expanding their balance sheets, i.e. lending more, which is the chief requirement from politicians across the spectrum. That’s b), inconsistency. Banker bashing became popular a couple of years ago and it continues to be, on both sides of the Atlantic. It is has re-focussed on the financial profession, particularly now that banks announce results and bonuses, but it has expanded a bit to the rich, the wealthy, the 1%, whatever you want to call them. That’s c), posturing.
Financiers are a popular target as they are fairly visible as a profession in the top 1% earners. In the US, while the share of lawyers and doctors in that group stayed constant at 8% and 16% respectively since 1979, financiers have increased to just under 14%, up from 8% in 1979, although somehow in line with the increase of the overall financial services sector. Roughly a quarter of the income earned by the top 1% come from dividends and capital gains that are taxed differently. Such incomes are heavily affected by economic crises, hence the share of 1% in the overall US income fell from 23.5% in 2007 to 17.6% in 2009.
This is another topic of debate and most rational people would probably agree that wealth concentration to very, very few while the very, very many struggle, is a recipe for social trouble in democracies as well as in dictatorships. What is concerning is that the current rhetoric is exceptionally populist, goes in many ways contrary to the interest of the society and appeals to most basic instincts of people.
In the “Land of the Free”, the quintessential business-friendly country that is the US – remember “the business of the US government is business” –  success seems to be now frowned upon. Mitt Romney, the front-runner Republican nomination candidate, has been constantly attacked for his successful career as a senior private equity executive with Bain Capital. The issue of his tax returns became a central debating point, something that he himself seemed to be ashamed of. The fact that he paid a 13.9% effective tax rate on his $42m income over the last two fiscal years  is a reflection of the legal tax rate on capital gains, not of him parking money in an anonymous Swiss bank account. Vicious attacks came from within the Republican party, particularly from his political opponent New Gingrich, who has attacked the whole institution of private equity as being job destroying, very much alongside the “leeches” comment made a few years ago by a German social democrat politician. Three comments on this. i) When taking into account a two years post-investment period, private equity owned business in the US lose on average 1% of their workforce; considering they tend to invest in underperforming businesses that does not seem that bad. ii) Job creation is the result of positive economic activity; it may reflect sometimes specific government policies, but it is not what private equity firms are supposed to do; as the Head of Bain Capital said at Davos, private equity is supposed to create good companies, not jobs. iii) Mr Gingrich is a career politician, a former Speaker of the House that at some point was a consultant of Freddie Mac and Fanny Mae, the US mortgage giants that needed enormous taxpayer bailouts; he is remembered as the driving force behind Bill Clinton’s impeachment for lying about the Monica Lewinski affair, while having himself an affair with an intern in her early 20ies.  In the US, the politics of wealth seems to be moving away from an analysis of effective and rational measures, such as revisions of the exceptionally complex tax code, and hard to sustain unsustainable and moving towards class warfare rhetoric.
In the UK, one of the Labour Government’s latest acts in power was to increase the top tax rate paid by the wealthier parts of the population to 50%, part of a wider populist discourse in the run-up to the elections. They estimated that about 300,000 people would have to pay that on income exceeding 150,000 pounds per year. This was less that 1% of the overall UK voting population and most of them were anyway non-Labour voters. On the other way, it was a very popular measure, presented to people and consumed by a lot of them as the panacea to UK’s heavy public debt load and the way for a fair society. The voices of economists saying that it would raise relatively insignificant amounts of tax while acting as a deterrent for highly mobile wealthy people and that overall, the UK may even lose tax money, were swamped in populist cheers by politicians as well as simple people. The additional tax intake is indeed limited, particularly given the greatly diminished number of bankers in the City. Some exceptionally wealthy individuals and businesses have moved, mostly to Switzerland, and took their income tax, council tax, VAT, etc with them. London is now the heaviest taxed financial centre in the world, well above Paris, Tokyo, Zurich, New York or Hong Kong. The anti-bonus backlash has pushed banks into finding alternative pay structures, which offer benefits over a longer time period, and much, much less cash now; while that may be a positive incentive structure, it does mean much less tax now.
If you think that banker bashing has now toned down, you would be mistaken. Stephen Hester, a well respected banker, was brought by the Labour government in 2009 to run RBS, the bank owned 82% by the government. His restructuring plan was considered very good and was approved. Among other things, the plan detailed a renewed focus for RBS’s investment banking business, however subsequent government regulation and capital requirements among other things made that impossible and this business is now closing.  In spite of a difficult business environment, hostile public as well as continuously shifting and uncertain regulatory background, Mr Hester did a good job. Everybody seemed to agree including RBS’s Board that awarded him a  one million pounds bonus in shares that vest in three years from now. This bonus is still half of what he could have been entitled under the terms of his 2009 contract. The choir of outraged politicians was deafening, all of them were outraged, particularly the Labour party that appointed him. All the merry men of UK politics were up in arms against the fat cats getting richer. Mr Hester became Public Enemy #1 in the eyes of politicians and public and was essentially forced to give up his bonus. This was a sad moment, a clear indication when politicians have interfered in running a bank. The long-term impact of this situation on RBS’s value (i.e. the government’s stake) is hard to quantify.
Francois Hollande, the front running candidate for the French presidency, has identified the bankers and the financial sector as the real enemies he will have to fight. He will make sure that as much money is taken from these wealthy people as possible, as he will have to pay for tens of thousands of state-sponsored jobs for young people and hundreds of thousands of additional public service workers that he committed to create. And, he will also have to pay for the revised retirement age, which should go down to 60. Yes, this is XXIst century!
So, Robin Hood seems to be the ticket the Western politicians decided to run on. How awful it will be for them to behave, once in power, like the Sherriff of Nottingham. 

Saturday, 21 January 2012

Merkozy v Cameronti

 Prime Minister Monti’s visit to the UK was a breath of fresh air. Gone were the winkles to pretty girls and glances to female backsides, in were clear speeches in excellent “international” English, delivered to a selected audience at the London School of Economics as well as investment bankers gathered in the London Stock Exchange. Mr Monti was on a roadshow to explain its economic reforms to the investors that would pay Italy’s bills in the coming years  and affirm his country’s commitment to stick to these plans. He spent time with Prime Minister Cameron discussing not only a backstop to the financial blows that Italy will face after the forthcoming Greek default, but also EU-wide growth measures dear to both UK and Italy, particularly full liberalisation of services. Then, Professore Monti rushed back to Rome where he will play host to both Ms Merkel and Mr Sarkozy. The contrast between the sober ex – EU Commissioner for competition, now a respected although unelected technocratic prime-minister and the vivacious Mr Berlusconi, the longest – serving Head of government in post war Italy, could not be starker.
Clearly, it’s not just appearance. In addition to heavy austerity measures that add up to well over 3% of his country’s GDP, Mr Monti launched a direct attack on tax evasion, labour market inefficiencies and mini-monopolies of various professional categories. His recent measures are aimed at liberalising parts of Italy’s ossified economy, particularly in the services market. Italy also implemented a rare pension reform which, hard to find elsewhere, creates a legal link between the retirement age and life expectancy.
Professore Monti looked very much like that species of Italian aboard that I came to observe in my life as an investment banker and were so different from what one could see in the ruling classes in the country’s recent history. Smart, sophisticated, very, very well educated (with a wonderful blend of classic education, Dante & all, plus excellent economic or technical literacy), professional and very good at their job. Many left Italy because their dream job, with commensurate pay, was in the City, or because they were not “raccomandati”, i.e. did not have an uncle in a senior position in one of Italy’s banks or companies. The “brain drain” from Italy is unique in the Western world and resembles that of an emerging economy. To my knowledge, most investment banks of any significance had at least some senior executives of Italian origin running their London headquarters. The contrast between these “emigranti” and Italy’s ruling class became even more perplexing during the absurd Berlusconi years, a heated topic of conversation at many dinners or cocktail parties in London.
British people generally like Italy and Italians. Although direct military conflict is not absent from the common history, there was never a real or perceived contest for some kind of regional supremacy. Italy was never a threat, as Germany and France were, just this wonderful place where classic education, great artists and wonderful food comes from. You can’t get mad on these guys!
Italy’s long absence from the European game-making machine was baffling. A founding member of the enlarged Europe (think Treaty of Rome), one of the four largest countries and economies of the continent, together with the UK, Germany and France, Italy was always supposed to be at the forefront of decision making. Always conscious of their role and very attentive to what they call a “bella figura” (make a good impression), Italians tried to reaffirm their importance by comparing themselves with the other three. A big deal was made over 25 years ago with the “sorpasso”¸ when a growing industrialised economy and favourable exchange rates powered the Italian GDP above UK’s. This was long forgotten post the 90s when, tributary to a poisoned political system and deep social and economic maladies, Italy practically became Europe’s problem child.  Over the last 15 years Italy had the fourth lowest average annual GDP growth in the world; in five of the last ten years, the economy was in recession. Had this been happening in a poor country with a weaker social fabric there would have been no other outcome than massive social unrest, violence, crisis.
However, Italy is a wealthy country with estimated per capita wealth of over €450,000, although not uniformly spread. Moreover, the combination of exceptional family ties and cohesion (“ la famiglia” is still the bedrock of Italian society) and a high informal economy helped cushion the economic hardship. The effect was, unpredictably maybe, some kind of general anaesthetic at the level of common people, who were not as dissatisfied with the country’s leadership and economy as one might have expected, did not think anything was wrong and were convinced, well into the largest economic crisis in recent history that “la crisi” won’t make it to the country’s shores.
The country’s economic decline was mirrored in its diminished political stance within EU. The Franco – German engine, rather informal at the beginning, took over and became indeed the driving force in the EU. UK was always a bit of an outsider, the eccentric crazy aunt that steps on everybody’s feet and tells things as they are, but Italy became increasingly irrelevant. Mr Berlusconi’s antics only accelerated this process, nobody really wanted him around. So we, Europeans or not, all grew accustomed to this Franco – German engine, so much so that we’ve invented a new word for it, Merkozy.
Could things be changing now? France and Germany are likely to remain the driving force within EU in the near term. However, Ms Merkel does not seem to be able to understand what Germany can do to help Europe beyond austerity and more austerity, in spite of appeals to understand that it is in her “enlightened interest” to put German and ECB balance sheet to work. Mr Sarkozy’s increasingly erratic drive and economic problems (see the diminishing credit rating) make him look more and more vulnerable in an election year. It is not at all impossible that he will be kicked out of the race in the first round and France’s next president would be the non – Le Pen candidate that makes it in the second round, probably Mr Hollande.
The EU fiscal summit at the end of last year where the UK showed some English bulldog spirit, according to an exuberating Tory backbencher, and played a different tune to the rest of EU has less real impact than many commentators make it to be. A fiscal union cum Schuldenbremse (debt break – see my posting earlier this month) is by no means agreed, the plan is exceptionally complex and needs ratification from 26 multicoloured Parliaments. It is under heavy criticism from many individual countries for going too far and from the ECB (the plan’s real supervisor) for not being aggressive enough. While the current draft plan, drawn after heavy criticism from ECB on the negotiators’ first attempt, seem to include “a centralised correction mechanism that can be triggered automatically in case of significant deviation from the agreed 0.5% of GDP agreed structural budget deficit” (according to Bloomberg) it won’t be easy to enact all those heavy, detailed provisions in national law of so many countries. Ms Merkel and Mr Sarkozy seem also to be at odds on what can really be achieved with such a plan, which is anyway a long term structure that does nothing to fight the financial crisis in the short term.
In this context, one can only rejoice at the common elements of Italy and UK’s stances. UK’s major interest in the EU is full liberalisation of services, and they are pushing this relentlessly. Mr Monti’s interests and instincts are aligned, at least on these issues. If there is ever to be a major counterbalance to the Franco – German alliance, the UK – Italy duo is the real heavyweight.
Clearly, EU’s short term priorities (including UK’s and Italy’s) are survival and a coherent response to the financial crisis. After the very likely Greek default, Italy will be the next in the line of fire, so defensive mechanisms via the IMF (to which UK would need to contribute to), ECB or German – backed Eurobonds, are now essential. Mr Monti’s political career may be very short, particularly if he is exceedingly successful at delivering the economic performance all Italians hope for, hence incentivising his political class to get rid of him and reap the benefits. Italy has never been at the forefront of economic liberalism and the current stance owes much more to Il Professore’s instincts than to the mood of the left-leaning Italian public. Long – term redistribution of power in the EU is not a priority now, but it should be on the drawing boards. There is a long, long way to a meaningful UK – Italy alternative European engine, but this would indeed be something that would change history and may bring a new political term, Cameronti.

Thursday, 19 January 2012

Natural gas, markets, politics and other bores

After the WWII,  US made a major commitment to natural gas as a source of energy. From a very small and local business (i.e. no long-distance pipe network), natural gas became a major energy source covering 25% of the US energy demand by the beginning of the 1970’ies. By that time, gas companies built an intricate network of pipes connecting high demand urban sprawls to remote gas fields. This economic and engineering development had not been matched by a similarly progressive policy, and the gas prices stayed highly regulated. As always, this means low prices to keep voters happy, but set arbitrarily and in a complex way. Politicians have generally shied away from the difficult task of convincing their voters to trade today’s low prices for a much larger but less clear multi-generational benefit. Economics suggests this is a disastrous choice that it discourages long-term investment, ultimately leading to supply constraints. As bad things come, such a bottleneck came in the exceptionally cold winter of ’76-77 and brought large scale industrial shut downs, closing of schools and major disruptions to other public services . Even the politicians found such a disaster hard to ignore and started the exceptionally difficult process of liberalising the prices, a process finalised with the Natural Gas Policy Act of 1978. Deregularisation brought predictability to a large and growing market, which in turn attracted the large, long-term investments required; gas supply never became a problem in the US, while overall reserves were fairly continuously augmented by new discoveries. Prices dropped and kept voters and businessmen alike content – there was even talk of a gas bubble at some point. The so-called bubble (oversupply) was, as it is in most cases, linked at least partially to the half-measures produced by the US legislators. Price deregulation did not mean full market liberalisation; politicians decided to ban the use of natural gas in the production of electricity as this was too valuable to just be burned away, so a growing economy resorted mainly to coal to satisfy its power needs, leaving natural gas mainly for domestic and industrial consumption. One can speculate on the long-term impact on the environment.
When this ban was removed in the 90ies to help sustain the booming economy of the Clinton era, gas prices increased rapidly but were soon tamed by alternative supplies, principally LNG, which Japan had been using for years to power its manufacturing-focus boom.  By 2000, the US energy market had two large alternative and complementary supply sources for the natural gas – multiple North American fields (plus the required pipelines) and multisource LNG supplies (Middle East, Trinidad). Shale gas becomes now the third, owing to very large, economically viable fields in North America. This is what energy security and a stable and predictable market really rely on – diversified supply sources.
As many other governments do, the Romanian one decided to ignore the lessons learned from past experiences of other countries and went on to make the same mistakes, mostly from incompetence and a natural desire to avoid political heat. Lucky to have domestic reserves of natural gas, the government decided to keep a tight grip on the prices for the domestically produced gas as well as on the other aspect of the markets – regulation, control, ownership of the national gas company (Romgaz), etc. Predictably, this determined a certain level of underinvestment resulting in decreasing natural gas reserves . As the domestic production is insufficient, there is a certain dependence of a single source of gas imports, Russia, for which Romania pays a high market price. In this case, what “market” really means is the result of some form of negotiation with the Gazprom mammoth, with no realistic alternative in short and medium term. Gas storage alternatives(large empty holes in the ground where gas can be pumped in during the summer and used to smooth the supply/ demand balance during the winter) have been feasible from an economic and technical standpoint, but these initiatives have suffered enormous delays.
However, some things have changed. The privatisation of Petrom, Romania’s national integrated oil company in 2004 brought both investments and a more business-like approach. Petrom is now Romania’s premier natural gas producer having taken over Romgaz years ago. Some liberalisation of the natural gas prices is being pursued, half-heartedly and only due to the pressure of the EU. Regulation has been maintained complex, with all sorts of rules on what kind of gas (imported or local production) various domestic and industrial consumers can use and when. Such a complicated and regulated market is, as almost everywhere, the perfect recipe for inefficiency, market disturbance, fraud.  In the meantime, the blanket subsidy of low prices continues to benefit everybody, the poor as well as the wealthy and inefficient – particularly some gas-intensive industries. When the next step of liberalisation comes through, a hard political act that most politicians will try to exploit one way or another particularly in an election year, the correct economic measure (liberalise the prices and direct financial help to some categories of poor private consumers) will be swamped by a torrent of populism and incriminations. Some say that this has already started and refer to recent events, particularly a large scale prosecution of some 40+ people connected to the market (executive management and Board members of Romgaz, officials from the relevant Ministry, the owner of Romania’s largest industrial consumer of natural gas, etc.).
In a nice symmetry to the American story above, the Romanian government took a keen interest in Petrom’s plans to bypass the over-regulation of the gas market by building its own gas-fired power plant, as the electricity market is indeed liberalised. Romania’s most modern power plant, the only facility of this sort built in the country in 40 or so years, was finalised last year. However, the government decided that Petrom’s own natural gas is far too valuable to be just burned and decided that the power plant can only burn a combination of domestic and imported gas. Petrom needs to buy the imported gas (expensive) while gas from its own domestic production (cheap) will still go to the over-regulated market. This issue may not be finally settled, but it is another example of market manipulation that goes against economic efficiency.
One can only hope that years from now all this would look as childish as the American experience of 30 years ago, and Romania will have a stable, secure and  well supplied market from domestic natural gas (Romgaz, Petrom and international companies), imported (Russia and Caucaz), LNG (Qatar)and off-shore shale gas.

Wednesday, 11 January 2012

European fiscal stability pact. How credible or good is the Schuldenbremse?

The favourite catch-phrases of political and financial commentators nowadays seem to be gravitating around the tabloid-friendly idea that Germany may have lost the war but finally, after 70-odd years, just won the peace. Disappointingly, there is no talk of eurozone’s citizens goose-stepping dressed-up in lederhosen. The Europeans will first have to demonstrate their credentials and cast in law, constitution or stone, the cornerstone of the Teutonic austerity that is the Schuldenbremse. This “debt-break” for us, the non-German speakers, is meant to inject a bit of responsibility into the dealings of profligate European governments that like to spend the next generation’s money on this year’s Christmas party.
All in all, not such a bad thing. Many West-European governments  worked hard to implement the left half of the communist ideal, i.e. to everyone according to their needs, not worrying too much about the bill that comes, as we know, exactly when economies start sliding down on the choppy economic cycle of the day. The deal is in fact a limitation of the deficit the government can run (which in the case of Germany is to be eliminated by 2016 at the federal level) and  seeks to limit eurozone’s members to a structural deficit of 0.5% of GDP. This will be achieved, i.a. by fining governments whose budget deficit exceeds 3%.
Poorer countries such as Poland, have already implemented hard debt limits, as have other non-Europeans such as Georgia. The poles have a 60% cap on public debt in their constitution, but this is a limit that they have not reached in the recent history, so not something where they had to get after years of hard-fought surpluses, but rather something not to get too close too. Italy’s debt to GDP is at over 120%, France’s sails towards the 90% mark that will surely mean a debt downgrade and  Germany is just under 83%. The crisis has pushed down some of the current account balances of the PIIGS countries, but in relative terms this is just cosmetic. The Dutch and the Germans will still be more productive and will still run surpluses that seem to match the deficits of their southern partners in the eurozone, irrespective of what Merkozy, Barroso and van Rompuy say.
The practicalities of implementing a debt limit are huge and will clearly test the political will of most European countries. It is not at all clear that economies poisoned for decades by sclerotic labour markets and unsustainable fiscal indiscipline can implement such a task without a major impact on the standard of living of their citizens, particularly when strangled in a monetary union where traditional quick-fixes such as devaluation are not possible. Italy is probably the first example on everybody’s lips, but Spain, Portugal, Greece, all countries with poor labour markets and productivity well below the European average, are in the same situation. These are countries with chronic budget deficits, old-fashioned labour relations and a propensity to protect vested interest of various interest groups, be they lawyers, notaries, pharmacist or taxi drivers.
Germany’s unit labour costs have barely notched-up around 5% since 2000. Over the same period, France’s jumped well over 20%, while Portugal, Spain and Greece are all happily hovering around the 30% mark; all are expected to notch down a bit over the next two years, according to OECD. Italy alone, happily to indulge in the bunga-bunga Berlusconian style of running the economy, has increased its unit labour costs by over 35% and may fare even worse over  the next two years in spite of the honest efforts of Professore Monti. In the Italian case, such an abysmal performance has been achieved over a period when the average GDP growth was the world’s smallest, bar basket cases such as Haiti, Zimbabwe and Somalia. This is the key factor behind the eurozones imbalances and, given it’s huge, visible and immediate impact of any correcting measure, it is something difficult to correct.
Germany will be able to set an example of sombre management of their deficit by flagging the self-imposed limit and push their economic model as they are indeed the European paymasters. In the meantime, the other eurozone member will be too busy to notice that last year’s generous deficit calculation gives Germany a wonderful base-effect breather, which will be reflected in the state employees 2012 bonuses. In the meantime, all those “lazy” Europeans will get back to work (whoever has it) and more and more austerity. The danger is that, while sipping on their espressos halfway through the day, they will start thinking whether to repay or not that loan they took from Deutsche Bank to pay for the shiny new BMW.