Articles by Gregor Irwin on the GC Blog and GC analysis
Last week the US announced it will oppose a further increase in IMF quotas, because the Trump administration believes the fund has ample resources already and countries have adequate alternatives to draw on if they get into difficulty.
The Democratic Unionist Party has threatened to vote down the budget if it does not like what the UK government proposes for the Irish backstop in the Brexit negotiation. The response from Downing Street has been partly bluster – claiming that under the terms of the Fixed-term Parliaments Act, voting down a budget won’t cause the government to fall – and partly to call the DUP’s bluff, based on the belief that the DUP has more to fear from a Labour government under Jeremy Corbyn than anyone else.
WORLD: Global Counsel Chief Economist, Gregor Irwin, and Senior Associate, Thomas Gratowski, discuss implications of the global trade war.
There is nothing new in British government ministers showing a basic lack of understanding of trade policy. The Brexit referendum and its aftermath have been characterised by ministers asserting ambitious free trade goals which are not deliverable in the real world. Now the opposition Labour party has followed suit with its leader, Jeremy Corbyn, setting out a new “Build it in Britain” agenda, which seeks to re-write international trade rules.
This is the third quarterly issue of the Global Counsel Brexit dashboard. More than two years on from the vote – and with just six months before the UK leaves the EU – we are taking the macro pulse of the UK economy, using a balanced set of 15 indicators. We are not attempting to isolate the impact of Brexit from all the other factors affecting the economy, as that is near impossible. Instead, we are providing a health check, to see where the economy is faring better or worse, compared to the years before the vote.
US trade policy under Donald Trump has become volatile, noisy and aggressive. This makes it hard to follow policy developments, let alone to understand what is driving them. But the key to understanding the dispute with China is to recognise it is quite different from the disputes the US has provoked with other countries. In fact, it is not a conventional trade dispute at all.
The Irish border has become a major obstacle in the Brexit negotiations. With time running short, the probability of a no-deal Brexit – and the chaos this would imply – is increasing. So what are the potential solutions?
European influence in the world is under threat. The privileged role enjoyed by European states in multilateral institutions has been challenged by the big emerging countries for some time now. More recently, both Russia and China have attempted, with some success, to play European states off against each other. And now the long-standing alliance with the US is in jeopardy, following the G7 shambles in Charlevoix, which saw Europe and the US move closer to an outright trade war.
This is the second quarterly issue of the Global Counsel Brexit dashboard. Two years on from the vote – and with just nine months before the UK leaves the EU – we are taking the macro pulse of the UK economy each quarter, using a balanced set of 15 indicators. We are not attempting to isolate the impact of Brexit from all of the other factors affecting the economy, as that is near impossible. Instead, we are providing a health check, to see where the economy is faring better or worse, compared to the years before the vote.
The UK and the EU have been staking out their positions on the future security partnership over the past week. This pillar of the Brexit negotiation matters in its own right; but it also has the potential to set precedents that could be important for the future economic partnership.
The IMF’s latest World Economic Outlook warns that waning support for global integration, geopolitical strains and political uncertainty have the potential to upset global growth prospects. It is not the first time the fund has drawn attention to political risks, which have become a recurring theme in recent years. Is there any reason why businesses and investors should be particularly concerned now?
Was it a rehash of old announcements or concessions that could prevent a trade war? These starkly different verdicts have been offered on President Xi’s plans to liberalise the Chinese economy, set out at the Boao forum this week. In practice, it was neither. What Xi provided is a basis for negotiation, which means the hard work still needs to be done if trade tensions between the US and China are to be deescalated.
This is the first issue of the Global Counsel Brexit dashboard. 21 months on from the vote – and with just 12 months before the UK leaves the EU – we can now take the macro pulse of the economy, using a balanced set of 15 indicators, each quarter. We are not attempting to isolate the impact of Brexit from all the other factors affecting the economy, as that is near impossible. Instead, we are providing a health check, to see where the economy is faring better or worse, compared to the years before the vote.
Recent years have seen important global shifts in both the policy frameworks for screening inward foreign investment and the way in which they are applied. These shifts come against a backdrop of protectionist political rhetoric and anxieties about the impact of foreign direct investment (FDI) in traditionally open economies. The new landscape is exemplified by the position in the US, from the increase in the volume and intensity of CFIUS reviews (leading to the collapse of deals such as Ant/MoneyGram and Canyon Bridge/Lattice Semiconductor), to the current proposals for expansion of the CFIUS mandate. It also extends to Europe, with increased intervention in France and Germany, the European Commission planning EU legislation on inward investment screening for the first time, and the UK government proposing extensive changes to its powers of national security review. Against the backdrop of these larger changes are many smaller shifts in the political mood around FDI across the OECD.
The Institute for Government’s model of managed divergence for the UK and EU economies has been influential in shaping the UK government’s position. It’s an ingenious attempt to address some of the thorniest economic and political challenges presented by Brexit. But while it may provide a basis for the UK cabinet ministers to bridge their differences, it is unlikely to be acceptable to the EU, now or in the future.
Are economic statistics – such as for inflation, growth and productivity – no longer reliable? And if not, what does this mean for economic policy and for businesses?
One of the most contested issues, before and since the referendum on UK membership of the EU, has been the potential impact of Brexit on the UK economy. The exercise is almost as difficult now as it was before the referendum, because we still don’t know what Brexit will mean for the UK’s trading relationships, or the regulatory environment in Britain, two issues that will have a significant bearing on the long-term economic consequences.
In New Delhi last week, I joined business and political leaders considering the prospects for the digital sectors in India and Europe. The differences and the similarities, in the outlook and the issues being confronted by policymakers in each market, are equally striking.
The baseline for the trade relationship after a no-deal Brexit would be WTO rules. In practice – and depending on the political atmosphere – there would at least be some enhancements to this baseline in the form of bilateral agreements between the EU and the UK on specific issues that are designed to avoid the worst consequences of a no-deal Brexit. Any business or investor that wants to understand their exposure to a no-deal Brexit needs to take a systematic approach to assessing both what operating on WTO terms means and the prospects for enhancements in different areas. This must draw on an understanding of the existing templates that the negotiators could potentially draw on and a realistic assessment of how the legal, political and practical constraints will shape the likely outcomes. This is a complex task, but it can be kept manageable by focusing on the issues that are most critical for the business model or investment thesis.
While in Australia at the start of this month, one question that came up repeatedly was how Australia should approach its trade relationship with Europe.
The Irish border is one of the few Brexit issues for which the positions of the parties to the negotiation are precise and clear. They are also irreconcilable, as things stand.
The British government papers on Brexit published this week leave you wondering if cabinet ministers really understand what the UK is proposing and the implications.
Unless you’re fond of ambling, it’s the choice of the destination that usually determines the path you take. The Brexit negotiation is no stroll in the park, but it now looks like one of those cases where it is the path that will determine where we end up.
The political environment facing large international businesses has rarely been more uncertain or more complicated. Over the past twelve months, the UK has voted to leave the European Union, Donald Trump has become President of the United States, and Dilma Rousseff has been impeached and removed from office as President of Brazil.
If you want to understand the predicament facing ECB Governor Mario Draghi you need look no further than estimates of long-run real interest rates for the major eurozone economies.
The European Commission published this week its assessment of how the benefits of globalisation can be harnessed, while addressing the anxieties that are also created and which are impacting on political debates across Europe.
When the finance ministers of the world’s largest economies gathered in Washington over the weekend they had in front of them IMF analysis of the global economy that for once was quite up-beat. The growth forecast is higher, financial markets are buoyant, and a long-awaited cyclical recovery is underway in many economies.
Theresa May’s decision to call a general election on 8 June is timed to minimise disruption to the negotiations with the EU. The early stages were always going to be about modalities - about who will participate, what they will discuss and when - and that can still happen in the run up to the election. The serious discussions, requiring high-level political backing, will need to wait until the new German government is in office after elections there in the autumn.
Central bankers have never operated in a political vacuum, even though many of the most important are at least operationally independent. For some, that independence is now being eroded - or even directly challenged. The result is a creeping politicisation of policy, at a critical decision point for monetary policy, which may have long-lasting economic implications.
The early stages of any negotiation are all about positioning. The Brexit negotiation is no different. British Prime Minister Theresa May’s letter invoking Article 50 - and the draft negotiating guidelines issued by European Council President Donald Tusk - are both exercises in positioning. Each sets out objectives and constraints, as the two sides compete to shape the negotiations in their favour.
If you want to understand the state of the EU-China economic relationship, then reading the analysis of China’s Manufacturing 2025 strategy by the European Chamber of Commerce in China is a great place to start. It does not bother with the usual, dry statistical analysis of export growth rates and bilateral deficits. Instead, it is a stark exposé of why European businesses find competing in China anything but fair. It sends a strong signal that the political pressure on European policymakers to take a tougher line on Chinese investment and competition in Europe is only going to grow. And it suggests that those hoping a far-reaching bilateral investment agreement will soon be agreed between China and the EU are likely to be disappointed.
If there is a second independence referendum in Scotland, one of the central issues will be which single market matters more, the UK’s or the EU’s? The latest export statistics for Scotland, published last month, reveal what’s at stake.
British Prime Minister Theresa May goes to Washington this week to meet President Trump, with the aim of securing a strong public commitment to conclude a trade deal at the earliest opportunity.
Theresa May’s Lancaster House speech has provided much needed clarity about the British approach to Brexit. It has reset the baseline for the negotiation by taking the UK out of the single market. This is a hard concession for Europhiles in Britain to swallow, but one that was inevitable. By conceding the point early, the UK will avoid being put on the defensive immediately and will therefore find itself in a better negotiating position.
Interest in a universal basic income is growing at both ends of the political spectrum, albeit for very different reasons. It is also attracting support, and some financial backing, from tech entrepreneurs. The flexibility of the concept explains why it has created such broad interest. It can be regressive or progressive, depending on the level, who pays and what it means for other welfare benefits. But that may also make it politically impossible to implement for now. A radical version – set either at a high level or which replaces a large part of a welfare system – could appeal to left or right, but not both. As a policy, it is also risky, with clear and tangible costs, but mostly theoretical benefits, explaining why mainstream political parties are reluctant to take the idea seriously. Experiments with a basic income are important, both to inform design choices and to provide hard evidence of the benefits. The political saleability of a basic income may turn on this. It may also depend on whether the future of work is as insecure and socially disruptive as many people now fear it will be.
Campaign group Change Britain has published flawed and incomplete analysis suggesting the UK will gain £24bn a year, or £450mn each week, if the UK government pursues a ‘clean Brexit’ and leaves the single market and customs union.
In Delhi last week I had the opportunity to hear how Indians see Britain and what they make of Prime Minister Theresa May.
It is an interesting week to be in Delhi. While everyone is trying to work out the implications of Donald Trump’s shock victory, Indians are also coming to terms with their own domestic political earthquake.
Soft political risks from changes to regulation, fiscal policies and the way legislation is enforced are now at least as important as hard risks from security threats, political instability and geopolitical tensions. Their prevalence in Europe and the United States means they are now a core issue for just about any investment thesis or corporate strategy. This is partly explained by insular politics, economic nationalism, and challenges to policy orthodoxy. Managing soft risks requires an understanding of how political stresses impact on policy choices in ways that are materially important for businesses or investors. It requires knowledge of policymaking, the political process and the political currents that are influencing the choices being made. There may be up-side or down-side risks for businesses or investors, depending on the nature of the exposure. Businesses with the capability to manage soft political risks may find that this is a significant source of competitive advantage.
Germany’s EU Commissioner, Günther Oettinger, is no diplomat. He has been accused of racism, homophobia and sexism following a speech he gave last week in which described Chinese diplomats as “slitty-eyed rascals”, joked that gay marriage might soon be made compulsory in Germany, and implied women only get jobs through quotas. It is not the first time he has been accused of causing offence, which is why patience with his careless use of “slang” (as Oettinger subsequently described it) appears to be wearing thin in Brussels, particularly among MEPs. There have been calls for him to apologise (no sign of that yet) and quite a few who say it is time for the serial offender to step down.
When British Prime Minister Theresa May addressed her Conservative Party conference earlier this month she railed against the side-effects of super-low interest rates and bemoaned the cost to savers. She promised to fix the problem “because that’s what a Conservative Government can do” raising concerns about whether a government that says it is “prepared to intervene” might be about to squeeze the independence of the Bank of England. That is most likely not the message she intended to send. Somewhat ironically, however, her market moving speech, and the economic fall-out from the Brexit vote, may help to produce the conditions that allows interest rates to rise.
International Trade Secretary Liam Fox slipped out an important change in policy earlier this month when he told Conservative MPs that from now on the government would give the same weight to supporting outward investment as it does to inward investment. His concern is the deterioration in the current account. Inward investment may bring jobs, but foreign companies want a return on their investment which, according to Fox, is a problem, unless there is a matching flow coming in the opposite direction. Leaving aside questions about the economic rationale for the policy change, does the data suggest the government’s concerns are justified in the first place?
As a £400bn investor in the British economy, the Japanese deserve the attention of the UK Government on the question of how Brexit is handled. The economic relationship with Tokyo is important. Japan is a big trading partner, providing the destination for 1.5% of British goods exports and 2.6% of services last year. It’s a top tier inward investor, accounting for 3.5% of the stock of direct investment in Britain. But it is in a different class as a portfolio investor, with no less than a 5.3% share.
UK trade policy will require ruthless prioritisation if scarce diplomatic resources are to be deployed to the best possible effect. We provide advice based on a series of metrics. The US and China should be the top priorities, although for different reasons. The government should not spend too much time on India or Australia and it should largely forget about Canada. It is worth seeking to boost trade elsewhere in Asia, specifically in Japan, Korea and the ASEAN countries. The government would be advised to not overdo the Gulf. Finally, it should not neglect countries in Europe that are not members of the EU, specifically Russia, Turkey and Switzerland. There are likely to be significant opportunities in all three, although progress with Russia will be held back by a difficult political relationship.
Almost four weeks on from the vote to leave the EU and the FTSE 250 has edged back up to just 0.4% below where it started before the polls closed, while the FTSE 100 has surged by 6.5% (all values are at the close of markets on 27 July). This is an impressive turnaround from the day after the vote when the FTSE 100 dropped by 3% and the FTSE 250 by over 7%.
The Transatlantic Trade and Investment Partnership (TTIP) currently being negotiated between the European Union and the United States has been sold by politicians on both sides as a strategic opportunity to shape globalisation to the benefit of both parties. A new research paper by Global Counsel’s Chief Economist for Chatham House finds that the risks of such an ambitious project are significant and the UK vote for Brexit increases those risks.
I have spent this week in Shanghai and Beijing explaining the likely consequences of the vote for Brexit to investors and hearing their views.
The political manoeuvring over Heathrow expansion is a case study in political risk and the final decision, recently postponed once again, will present an important test for David Cameron’s successor.
It was hard to imagine before 23 June that the uncertainty about what exactly ‘Out’ would mean could get any worse. But since the vote all sorts of ideas have been floated. Is it possible to peer through the Brexit fog to get an idea of where the UK’s relationship with the EU might be heading?
That is the headline you did not read last week, but in many ways it should have been. The focus of analysts has naturally been on when the Federal Open Markets Committee – the group that sets US monetary policy – will next raise interest rates, following the first rise in seven years last December. For now, the Fed is on hold, with expectations falling of another increase when it next meets in July, particularly after disappointing jobs figures in May. But in sharp contrast to this picture of inactivity, the Fed has been steadily revising down its forecast for longer term rates. This tells us much about the future prospects for the US – and global – economies.
Whatever the result on 23 June Britain faces political risk. If Britain votes to leave there will be political instability in the UK, the process of withdrawal will be messy, and investors will give their verdict on the structural implications for the UK economy. If the UK votes to stay David Cameron will have to work hard to keep his job, his Europe problem will not go away, and the government’s remaining time in office will be marked by weakness.
Seven years ago as it prepared for G20 summit in London the British government debated internally whether the G8 was worth bothering about. The contention then was that a successful G20 would leave no space for the G8, while the G20 might not succeed if groups of countries caucused before G20 summits. Seven years later, and shorn of Russia, the G7 appears to be in good health, with a successful summit hosted by Japan in Ise-Shima just last week. But among the press statements, the 32-page communique and the photo-ops was there really much for anyone else to bother about?
Fitch Ratings this week concluded that Brexit would increase political risk across Europe by boosting populist political parties, including many who are Eurosceptic, and by changing the political centre of gravity in the EU. There is not much to disagree with in that. As the referendum debate grinds on, however, it is also worth considering some of the ways in which the political risks for the rest of Europe will feed back and impact on the UK following a vote for Brexit.
The full financial force of the Chinese state has been on display over the past few weeks as the authorities have responded to collapsing stock prices with an array of interventions that now appear to have established a floor under the Shenzhen and Shanghai indices. The episode is revealing about the nature of risk in the Chinese financial system and the willingness of the state to socialise risks. It suggests that Chinese reformers have not solved the conundrum of how to introduce market disciplines based on the alignment of risk and reward in a system unable to tolerate the consequences of widespread losses. Until they do, the ‘Chinese put’ – by which substantial downside risk from speculative investment is implicitly absorbed by the state – will continue to distort the allocation of capital. This means stability now may come at the cost of a much bigger crisis in future.
The ‘in-out’ nature of the Brexit debate, and the focus on uncertainty about the referendum outcome, obscures another, equally important layer of Brexit uncertainty for business, which is about what a vote to leave the EU would actually mean in practice. There are uncertainties about both the destination – what the future relationship between the UK and the EU would ultimately look like – and the journey to get there. We are unlikely to get clarity about the destination before the referendum as those who want the UK to leave the EU want to avoid this becoming the question. But the alternatives have very different implications for business. There are equally many uncertainties about the journey, in part because the process of leaving the EU is unclear, but also because politics – in the rest of Europe as well as the UK – will trump economics in the negotiation between the UK and the rest of Europe. Most large businesses will want to evaluate the risks created by Brexit uncertainty from a fiduciary, operational, and strategic perspective.
The UK election campaign may have been boring, but it has revealed quite a bit about the current state of British politics and the prospects for the next government regardless of who wins. This note identifies eight important takeaways. Some of these are about policy. We now know a lot more about what we do not know about fiscal policy, which is one of the main divides between the parties. We have seen a rise in grey power, with policies targeting older voters, but no hint yet of a backlash from the young. We have seen a marked rise in appetite for market interventions, but not only by Labour. And on Europe what is most striking is how this has not really featured as a central issue. There are also some important takeaways that are not so much about policy, but about political debate and political stability in the UK. One is the sharp divide between Scotland and England, most obviously manifested in the rise of the Scottish National Party, but running much more deeply than that. Another is the hollowing out of the centre ground of British politics, with the rise of parties in the margins producing the first campaign in over a generation that has not been fought on the centre ground. A third is the decline in influence of the traditional media, most profoundly at the national level. Finally, and on a somewhat more positive note, we draw the conclusion that, despite all of the angst and the accusations about who may be in whose pocket, a minority government might not turn out to be as unstable as some predict.
The Scottish National Party looks set to return a large, visible and potentially powerful group of MPs after the British general election on 7 May which promises to be the tightest in over a generation. The SNP has said the election is not about independence, but that remains the party’s objective. Regardless of whether it is Labour or the Conservatives that lead the next British government, the SNP will seek to establish the political conditions under which a second referendum can be justified and is successful. The strategy will involve driving a political wedge between Scotland and England. While a justification for a second referendum is more likely to emerge under a Conservative-led government, English dissatisfaction is likely to grow over time with the consequences of Labour government being sustained in power by the SNP. From an SNP perspective they may need to be more patient under Labour, but they gain more immediately in terms of policy influence. Either way, the SNP wins on 7 May.
The political framework agreed by Iran and the P5+1 on 2 April is a major milestone towards a comprehensive nuclear deal that could stop a military conflict in the Middle East and open up Iran’s large consumer market and energy sector to outside investment. The negotiators still have much work to do before a final deal is reached and the reaction in national capitals, as well as the conflicting interpretations over what has already been agreed, shows that success is not guaranteed yet, even if both sides have a great deal invested in a successful outcome. The biggest gap between the US and Iran is over the pace of sanctions relief and how this is linked to the steps Iran must take. The best way to bridge this gap is by agreeing to implement both over a short time frame. This means that if a deal is to be done and Iran is to open up, it may need to be done quickly, with substantial progress by the end of the year. Iran will remain a difficult place to do business, but there are considerable opportunities for businesses that are well prepared.
The UK’s new settlement won’t satisfy Eurosceptics, but does establish principles and precedents that will impact on the EU in future if the UK votes to remain. Some are for the better, while others are risky and potentially damaging. If Britain votes to stay in the EU the prime minister will need to demonstrate that the new settlement really does make a difference. He would not only want to be seen to be using its provisions, but to be pushing and testing their limits. This is partly about setting the right precedents. It also means more confrontation in Brussels.
Last week brought to a close the two-month public courtship of GE and Alstom, with a government-brokered deal that will see the French state acquire a minority voting right and ultimately a minority stake in the French company. The Alstom episode cast a long shadow in the UK, where the government faced pressure to take a similarly activist approach to the proposed acquisition of AstraZeneca by Pfizer. The result is new legal tools in France and signs of a shifting mood on takeovers in the UK. This has less to do with nationality than is usually assumed. So what is driving it?
The Russian economy, fuelled by high energy prices, boomed during the first decade of this century. But in recent years the limits of the current economic model have become clear as growth has slowed. Many among the Russian elite understand the need to modernise and diversify the economy. Even so, Russia is a serial under-reformer. More recently the Ukraine crisis has seen the economy stall, with capital flowing out, interest rates up and the rouble under pressure. Sanctions are partly to blame, but the bigger problem is political risk and uncertainty. The state has become harder to predict and appears indifferent to the economic consequences of its actions, while the agreements in May to establish a Eurasian Economic Union and export gas to China suggest Russia is pursuing a trade policy based more on geopolitics than commercial logic. Staccato progress on reform and the rise in political risk means the outlook for investors has deteriorated. Strong, centralised leadership, with an apparent insensitivity to the consequences of policy choices may turn out to be a source of weakness, if it continues to exacerbate Russia’s economic vulnerabilities.
Russia is now more isolated than at any time since Mikhail Gorbachev became General Secretary of the Communist Party of the Soviet Union in 1985. This is a consequence of President Vladimir Putin’s response to the Maidan revolution in Ukraine. The western sanctions and Russian counter-measures pose more than just a set of legal questions for trade lawyers to understand. Russia is attempting to reduce its exposure to the west. This means protecting and supporting home-grown Russian enterprises. It also means prioritising trade and investment relationships to the east and south. For western businesses with operations or trading partners in Russia this poses a new set of questions about the merits of doing business there. This Global Counsel Insight note explains the current trends, the risks that these pose and the implications for business.
Tax revenue leakage has become a hot button issue in Europe, the US and the G20. The European Commission is seeking to strike down advance tax agreements concluded years ago between member states and some of the world’s largest corporations, because they confer a selective advantage and fall foul of state aid rules. The test cases currently in progress could have far-reaching implications for multinationals operating in Europe. The real target is not unfair competition, but aggressive tax avoidance. The actions of the Commission open a new front against tax avoidance, but the practices they have exposed will also add political impetus to wider international efforts to improve tax transparency and clamp down on profit shifting. The job of tax planners is becoming more difficult and the reputational and political risks of the corporations that employ them are increasing.
At the start of this week the Portuguese authorities announced plans to resolve the failing Banco Espírito Santo. The approach taken – bailing in shareholders and junior bondholders, splitting off problem assets, and creating Novo Banco, a bridge bank, to operate as a going concern – provides a case study for the operation of the new European rulebook on bank resolution, even though it is not yet in force. The approach appears to have been successful, with losses borne where intended, no signs of contagion, and a positive impact on incentives that will help contain moral hazard in future. It will likely embolden the ECB which takes over responsibility for the supervision and resolution of Eurozone banks from November.
Iran and the P5+1 were unable to reach a comprehensive agreement in Vienna this month on Iran’s nuclear programme and have instead extended the Geneva interim agreement by four months to allow further negotiations. The outcome was no shock: while progress has been made in the negotiations, significant gaps remain on key issues such as Iran’s enrichment programme. The incentives to strike a comprehensive deal remain strong on both sides. The key question is whether political space exists in Washington and Tehran to make the required trade-offs. The new deadline of 24 November, coming after the US mid-term elections and during the lame duck session of Congress, is well chosen. A second extension looks unlikely. The next four months will therefore determine whether the dangerous stand-off between Iran and the west is resumed or relations are to move decisively towards normalisation, opening up new commercial opportunities in Iran’s consumer market and energy sector. More work is needed in capitals as well as in Vienna if the next phase of negotiations is to succeed.
In 2014 the European Central Bank (ECB) will take on one of the biggest and most complex banking supervision roles in the world. For the ECB this is an institutional, cultural and political transformation. It faces the double challenge of doing it when the Eurozone banking system is in poor shape, and when that banking sector weakness is undermining the ECB’s other core role in setting monetary policy. Three big practical tasks lie ahead in 2014, culminating in a stress test of Eurozone banks. The problem for the ECB is that it is undertaking this massive practical task with its credibility as yet untested and a political mandate that is ambiguous at best. For investors, creditors and customers of Eurozone banks how the ECB navigates this problem will be one of the big stories of 2014.
Middle earners could be on the verge of a secular stagnation in their real incomes. In many advanced economies the benefits of GDP growth appear to be increasingly concentrated on the providers of capital and the top end of the income spectrum. Last week, in his State of the Union speech, President Obama announced a year of action on inequality. A prolonged squeeze on the economic prospects of middle earners, who are often decisive in elections, will complicate the politics of recovery and have profound implications for both government policies and business.