May 30, 2012 7:51 pm
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A diabolical mix of US wages and European austerity
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By Robert Reich

What if Europe and the US converged on a set of economic policies that brought out the worst in bothEuropean fiscal austerity combined with a declining share of total income going to workers? Given political realities on both sides of the Atlantic, it is entirely possible.



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So far, the US has avoided the kind of budget cuts that have pushed much of Europe into recession. Growth on this side of the pond is expected to be around 2.4 per cent this year. And jobs are recovering, albeit painfully slowly.



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But a tough bout of fiscal austerity could be coming in six months. The non-partisan Congressional Budget Office warned last week that if the Bush tax cuts expire on schedule at the start of 2013, just as $100bn of budget cuts automatically take effect under the deal to raise the debt ceiling that Democrats and Republicans agreed to last August, the US will fall into recession in the first half of next year.



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Even if these measures were to reduce the cumulative public debt, a recession would increase the debt as a proportion of gross domestic productmaking a bad situation worse. That is the austerity trap much of Europe now finds itself in.



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Meanwhile, real wages in the US continue to fall. A newWorld Outlookreleased by the International Monetary Fund last Friday showed that in the three years since the depths of the downturn in 2009, total national income has rebounded in most of Europe and in the US. But the share of national income going to labour has fallen sharply in the US, while rising in Europe as a whole.



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The trend is even more striking measured from the start of the recession. It used to be that when a downturn began, profits fell faster than labour income because companies were reluctant to lay off employees and couldn’t easily cut wages given labour union contracts or the threat of unionisation.


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That is still the case in Europe, courtesy of stronger unions and labour market regulations. But it is no longer the rule in the US. Since the start of the recession, the share of total US national income going to profits has risen even as the share going to labour has plunged. Profits in the US corporate sector are now at a 45-year high.




American workers have been willing to settle for lower wages in order to retain their old jobs or secure new ones. At the same time, US companies, intent on increasing profits, have more aggressively outsourced abroad, substituted contract workers and temps for full-time employees and replaced workers with computers and software.



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Labour’s share of total income includes the salaries of managers and professionals as well as the non-salary income of high-flying chief executives and financiers who receive capital gains, interest and stock compensation.




The widening gulf between the stratospheric compensation packages of the latter and most other Americans suggests why the median wage is dropping, adjusted for inflation, notwithstanding a growing economy and a jobs recovery.



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The trend is all the more remarkable considering that the share of national income going to labour used to be substantially higher in the US than in Europe because Americans have to buy what most Europeans receive free – including university education and healthcare. A dozen years ago, 64 per cent of US national income went to labour, according to the IMF, compared with 56 per cent in Europe. Today, however, the shares going to labour are converging58 per cent of national income goes to labour in the US and 57 per cent in Europe. Political realities in Europe may be pushing policy makers in the same direction. Germany’s Chancellor Angela Merkel has finally started talking about spurring growth.

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Under increasing political pressure at home, she seems to have accepted the need to add measures promoting growth to the EU’s treaty on fiscal discipline.




But Ms Merkel and her conservative allies haven’t given up on austerity economics. She is still opposed to fostering growth through more spending, insisting that would only worsen Europe’s debt problems. Instead, she wants to spur growth with “structural reforms” – by which she presumably means giving companies more freedom to hire and fire, outsource jobs to contract workers and, in general, be less constrained by regulation.




That is of course the American model – which has been fuelling corporate profits at the same time as it depresses wages.




If Europe were to move towards structural reforms that create a labour market similar to America’s while pursuing fiscal austerity, while America embraces fiscal austerity as US corporations continue to shrink payrolls, we are likely to experience the same results on both sides of the Atlantic. Real wages will decline, we will have less economic security and our public services will be diminished. That is not sustainable, economically or politically.


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The writer is a professor of public policy at the University of California at Berkeley, and was US secretary of labour under President Bill Clinton


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Copyright The Financial Times Limited 2012.



The issue : Could the euro destroy the EU? Our verdict: Only “more Europe” can avoid a deeper crisis
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Summer 2012
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by Kemal Dervis / Javier Solana

 

It’s not just the Eurozone that’s in danger, but the European Union itself, say Kemal Derviş and Javier Solana. They argue that only the emergence of a European “political space” and further sharing of sovereignty can overcome the crisis.




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The European project has had to overcome many difficulties in the past, but the challenges it will face in the next two or three years are going to be momentous. Not only the eurozone but the European Union itself is in danger.


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Even in a worst case scenario, some areas of intra-European co-operation will surely survive. But it is hard to see how the EU as we know it today could survive even a partial disintegration of the eurozone. The sense of failure, the loss of trust and the damage that would be done to so many if two or three countries had to leave the eurozone would be of a magnitude to shake the entire Union.




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Nobody can foresee exactly what the dynamics would be, or how finance and trade could cope, and more important still what the political fall-out would be. Those who argue that one or more countries in the periphery should take a “holiday” from the euro underestimate both the economic and political repercussions this could have.




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Resentment has already built up between the “North” and the “South”, and it could get much worse. The European Union has been built by incremental steps towards greater integration and co-operation. Overall, these steps were perhaps slow, and certainly they were often complex, but they were successful. There was a sense of momentum, of the strength of soft power, and of progress that was almost inevitable.




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All this has been shaken by the crisis that started with Greece, spread to other peripheral countries and continues to challenge the sustainability of the monetary union, and through that, the EU itself.





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The difficulties that now face the eurozone have a number of interconnected dimensions. The one that was most apparent right from the start was the loss of confidence in Greece’s sovereign debt and then of other peripheral countries. A good example of just how quickly market sentiment can shift was the way the spread Greece had to pay over German bonds exploded from very little back in 2009 to hundreds of basis points in less than two years. The Greek crisis suddenly made it very clear to the markets that there was a fundamental difference between eurozone sovereign debt, and U.S., Japanese or UK sovereign debt; the individual countries making up the eurozone no longer had national central banks capable of printing money to stop a run on their sovereign debt.





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The European Central Bank could technically play that role, but not only did it not have to play that role but also it seemed legally barred from doing so. That turned Greece, Portugal, Ireland, Spain and even Italy into typical developing countries undergoing a debt crisis, as had happened elsewhere so often in the 1980s and 1990s. Ireland, too, became a problem country, although its difficulties being entirely due to the banking sector set it somewhat apart.





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Developing countries have of course had national central banks capable of printing domestic money, but their currencies were not reserve currencies, so while a developing country could try to pay for its domestic debt by printing money, it could not do so for its foreign debt, in contrast to the U.S., Japan and the UK, whose monies are reserve currencies that foreign governments, institutional investors and even private citizens are willing to hold at reasonable interest rates.




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The peripheral eurozone countries were thus left without such cover, and that was at the heart of the crisis until the European Central Bank (ECB) finally intervened with sufficient heft at the beginning of November 2011. It didn’t do so by directly buying massive amounts of peripheral debt, but by offering a trillion euros of liquidity to the European banking system with three year maturity at a 1% interest rate and with liberal rules as collateral.





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The ECB’s massive liquidity provision was a clever and necessary move because it was able to reduce indirectly not only the pressure on sovereign debt, but also the second dimension of the eurozone crisis: the perceived weakness of many European banks.




.Some of that weakness was linked to the aftermath of the financial sector’s sub-prime mortgages crisis imported in 2008 from the United States. But much of it was quite simply a reflection of the euro-periphery’s sovereign debt crisis. Essentially, the sovereign debt and the banking crisis were two sides of the same coin as most European banks held large amounts of peripheral eurozone debt on their balance sheets. A decrease in the value of that debt threatened the capitalisation of these banks.





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Commercial banks in the peripheral countries of course held large amounts of their own government’s debt, so many of them were therefore particularly vulnerable. This vulnerability of peripheral countries` banks added a further dimension of risk to the European banking crisis.




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European banks also need more capital now because of the greater stringency of the Basel III capital adequacy requirements that are to be phased in from 2013. But the main reason for their re-capitalisation will be the lower value of peripheral countries' sovereign debt if and when they have to show these losses on their books.




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How great the banks’ re-capitalisation needs are going to be will depend crucially on how the value of sovereign debts evolves. As the sovereign debt and banking crises are so closely inter-linked, the weaker a bank is the less will be its willingness to hold or buy peripheral sovereign debt. By the same token, the lower the value of peripheral sovereign debt, the weaker will these banks be and the greater their need for capital.





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The ECB has moved to relieve the pressure coming from both problems. The banks are being provided with almost unlimited liquidity, which gives them time to try to restructure and find enough capital. At the same time, some of that liquidity is being channelled into buying peripheral sovereign debt, given the very high spreads compared to the cost of the ECB’s money at 1%. Spanish and Italian banks in particular have bought a lot more of their own country’s sovereign debt.





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It should be noted, though, that compared to the purchasing of debt by the ECB itself, the commercial banks continue to carry the sovereign risk on their balance sheets. Neither the underlying creditworthiness of the sovereign borrowers nor the capitalisation of the banks is “solved” by these ECB credits, but both the sovereign debtors and the banks are given time to take more fundamental measures.




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The third and most difficult dimension of the challenge faced by the eurozone is the difference in production costs and competitiveness that has accumulated over time and is reflected in the substantial current account deficits of the “problem countries”. Unit labour costs in Greece, Portugal, Spain and Italy grew between 20-30% faster than in Germany, and faster than unit labour costs in Northern Europe as a whole. This was due to both differences in productivity growth, and even more to differences in wage growth. The inflows of capital into the South, broadly speaking, led essentially to a real revaluation and a lowering of the domestic savings rate relative to investment, resulting in structural current account deficits in the balance of payments.




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In Greece, large fiscal deficits accompanied and exacerbated this process, but the situation was very different in Spain where the counterpart of the foreign inflows was private sector borrowing. The eurozone crisis will not be resolved until this internal imbalance is reduced to a point where it becomes sustainable.




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There`s no need in the long run for every eurozone country to run a balanced current account. Some countries can in principle finance some of their investment with foreign savings. Over the remainder of this decade, however, the peripheral countries will not have much room for substantial current account deficits as they must reduce not only public but also private debt in relation to their GDP.




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There is therefore a need not only for fiscal adjustment, but also for an adjustment in the balance of payments. To facilitate this adjustment there is need for a real exchange rate adjustment inside the eurozone, with production costs in the peripheral problem countries falling relative to the costs of production in the countries of the “broad North”, Germany being by far the largest.




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Real exchange rate adjustments inside a monetary union, or among countries with fixed exchange rates, can take place through differentials in the rate of inflation. The real value of the Chinese Yuan, for example, has appreciated considerably compared to the U.S. dollar, despite very limited nominal exchange rate changes because Chinese domestic prices have risen faster than prices in the United States. For a similar adjustment to take place within the eurozone, assuming similar productivity performances, wages in the peripheral problem countries of the South must rise more slowly than in the North for a number of years, thus restoring their competitiveness.





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With the overall eurozone inflation rate targeted at 2%, and with Germany and the other northern surplus countries behaving as inflation hawks, pursuing policies that keep their own inflation close to the eurozone target, the real exchange rate adjustment inside the eurozone requires actual wage and price deflation in the southern problem economies.




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This pressure on the peripheral countries to deflate their already stagnant economies is turning into the eurozone’s greatest challenge of all. The ECB’s provision of liquidity has bought time, but cannot solve the overall problem. But unless real adjustment takes place, the eurozone cannot be cured of its ills.





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The required real adjustment could be achieved with less real income losses and wage declines if productivity in the peripheral economies were to start growing significantly faster than in the North, thereby allowing prices to fall without wages having to fall. Structural reforms could undoubtedly lead over time to an acceleration of productivity growth, but this is unlikely to happen in an environment where investment faces deep cuts, where credit is severely constrained, and where many young people with skills emigrate.



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Price deflation is in any case not very conducive to bringing about the sort of relative price changes that could accelerate a reallocation of resources. It is much easier to change relative prices when there is modest inflation than when these changes have to be achieved by actual nominal price reductions.



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The need for better productivity performance in the problem countries is undeniable; yet achieving such an improvement in the present climate of extreme austerity and deflation is very unlikely given the atmosphere in them of either latent or open social conflict.



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These economic adjustments would become much easier if the eurozone as a whole were to pursue a more expansionary policy “on average”. If the target inflation rate for the eurozone were to be set temporarily at, say 3.5%, and if the countries with surpluses in the current accounts of their balance of payments encouraged domestic inflation rates somewhat above the euro-zone target, then there could be real internal price adjustment inside the eurozone without actual price deflation in the peripheral problem countries.



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This would and should be accompanied by an overall depreciation of the euro. Such a “softening” of the dilemma, to be achieved by targeting a somewhat higher inflation rate in the eurozone, is not a panacea.


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Courageous structural reforms would still have to be pursued in the peripheral countries, and indeed throughout Europe. High public debt levels would still have to be reduced to create fiscal space and keep interest rates low so as to restore long term confidence. The eurozone would still need to strengthen its firewalls as well as its mechanisms for co-operation. But a temporarily and modestly higher inflation rate would facilitate the process of adjustment and give reforms a chance to work.



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Deflation is not conducive to optimism and a sense of a better future. Putting the whole burden of adjustment onto the countries of the South with current account deficits, while the North continues to run current account surpluses, would actually obstruct adjustment. Letting the “magicnumber of 2% inflation determine the overall macroeconomic framework is irrational. If lower is always better, why not set the target at 1% or even zero? There are times when 3-4% is better than 2%, and Europe is at such a moment.





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Beyond any economic analysis of the eurozone’s problems there lies the deeper question of what kind of Europe is now politically feasible. Truly cooperative economic policies require truly cooperative European politics.



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First, it is clear that if the eurozone survives it will not include the whole EU but will continue to be just part of an EU that for the foreseeable future will exclude the United Kingdom and perhaps a few other countries. There is therefore the great challenge of defining the future of the relations between the eurozone and the UK. It`s going to be a crucial aspect of the EU`s future, but is also beyond the scope of this essay.



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Second, the closer co-operation inside the eurozone that is essential for its survival will as of right now require more integration and harmonisation, particularly in fiscal policies and financial sector supervision and regulation. Temporarily breaking up the eurozone by allowing some countries to takevacations", would be economically and politically much more disruptive than the proponents of this view seem to realise. Even finding the legal means to do so without completely wrecking the EU treaties would be a major challenge. These would be vacations from which the holidaymakers would probably never return.




.But integration means more sharing of sovereignty in matters close to the core of the nation state. That will not be a trivial exercise and is why Europe is at the cross-roads. Either it moves ahead with greater sharing of sovereignty, or it may well disintegrate. Key to success is that this sharing has to take place through transfers of sovereignty to accountable institutions. The legitimacy of the operation has to be achieved through a democratic process. For legitimacy, citizens must have the feeling that the institutions that govern them account for their interests and make them part of the decision-making process, which implies a union based on rules rather than power. The present situation is increasingly perceived by public opinion as one where a reduced number of countriessometimes only oneseem to chart the EU’s future without any referral to a pan-European political process. Such sentiments are likely to make the whole process of co-operation unsustainable.




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The fact that the EU does not instantly have all the answers to its problems does not mean that it has no future. The EU is and will continue to be an experiment which, as with all experiments, entails a degree of uncertainty. The search for solutions cannot just be technocratic but must be embedded in a truly pan-European democratic discussion.



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Interdependence in Europe, with its many dimensions, is now well established. And future economic and social dynamics will pull further in that direction. To try to adhere to a narrow Westphalian concept of sovereignty would in today’s world be at best an anachronism and at worst a dangerous gamble for any EU country that must exist in the global economy and be part of the international community.



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For those countries that are part of the already highly integrated eurozone it is even more impossible. Legitimacy and democratic consent will require that states and their citizens give up some of their sovereignty to institutions based on the equitable sharing of that sovereignty, rather than to a group of countries representing current creditor status or economic might.



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The sharing of sovereignty has of course to recognise the relative weight of countries, and reaching agreement on these weights is a very difficult process. Inter-governmental decision-making processes have of late had the upper hand in Europe and will no doubt continue to play an important role. But unless they are complemented by the emergence of a European political space which backs European institutions built on further sharing of sovereignty, neither the eurozone nor the European Union is likely to overcome the current crisis.





- Kemal Derviş is Vice-President of the Global Economy and Development program at the Brookings Institution and was formerly Minister of Economic Affairs in Turkey and Executive Head of the United Nations Development Program (UNDP). kdervis@brookings.edu

- Javier Solana is the former European Union High Representative for Common Foreign and Security Policy and is currently the President of the ESADE Center for Global economy and Geopolitics in Madrid and a Distinguished Senior Fellow at the Brookings Institution. solmados@gmail.com.


May 29, 2012 7:33 pm
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Investing: Tangled up anew
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By Sam Jones
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Swiss proposals to strengthen light-touch hedge fund rules could pose a serious threat to the industry.
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Switzerland red tape






It may be the most expensive woodshed in the world. From the Pfäffikon Financial Centre, 20km south of Zürich, traders at a dozen or so hedge funds peep over their banks of trading screens to look out on to Herr Ochsner’s workshop: a ramshackle barn under a low-slung alpine roof. In among the shavings and planed planks is an old washing machine and, fluttering above it, a cantonal flag.



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“We invited him to a drinks thing we had,” says Marcel Jouault a former Deutsche Bank hedge fund manager who set up the PFC barely a year ago to house a growing number of start-up hedge funds. “A really nice guy. He’ll never sell up. He loves working with his hands.”
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Click to enlarge




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Pfäffikon may appear a world away from Mayfair, the well-heeled central London district that is home to most of Europe’s $400bn hedge fund industry, but in recent years the clean, trim well-run township has become the exemplar of the country’s hedge fund boom. Cow bells have been all but drowned out by the sound of construction work; steel and glass offices are being slung up alongside the main road, the Churerstrasse. The Ochsner workshop, sitting on land worth millions of francs, is an exception.


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New asset managers are moving into all the new buildings here,” says Mr Jouault. “There’s a shortage of space.”




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In recent months, however, a wave of disquiet has rippled through the nascent Swiss industry.
Rules proposed in March by Swiss politicians threaten to make a country once a byword for hands-off oversight of asset management into one of the world’s most exacting jurisdictions. Regulatory quietudeone of a trinity of benefits offered to hedge funds alongside low taxes and deep pools of investor capital – is gone for good.
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The rationale for the new rules is clear: Switzerland, like every other country, must fall into line with the requirements of the EU’s Alternative Investment Fund Manager Directive, due to come into force in July 2013, if it wants its hedge funds and investors to continue to have relationships with those in European member states.
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But the rules go much further than Europe requires. Bern says they will “strengthen international competitiveness for our financial industry” and ensure financial stability.
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Their sternest critics, however, say the extra-tough provisions have the potential to make Switzerland’s developing hedge fund industry wither and to shut the rest of the world’s hedge funds. Alongside hedge fund managers themselves, Switzerland hosts the world’s largest collection of hedge fund investors after the US and UK, a $200bn capital pool that the proposed rules could severely restrict.
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The new rules are far from being unwelcome by all, however. “The proposals have three good aims,” says Matthäus Den Otter, chief executive of the Swiss Funds Association. “The changes will secure access to the euro market, they will bring Switzerland into line with global standards by which asset managers are subject to financial regulation and they will as a result strengthen asset management in Switzerland and for Switzerland.
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What we do not want is this form of Swiss gold-plating.” Gold-plating, though, is exactly what Swiss authorities have gone for.
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Truth be told, most Swiss have little time for the high-rolling foreign hedge fund managers and financiers that increasingly populate their expensive bars and boutiques. In Zürich, an irritated populace recently voted to end tax breaks permanently for the international super-wealthy.
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Politically, though, the idea of regulating on behalf of the EU – a decision taken by Switzerland’s pragmatic centrist governmentjars with deeply held beliefs about the almost sacrosanct independence of Swiss financial institutions from outside interference.
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The desire to have a set of “Swiss rules for the Swiss”, as one banker puts it, may in part explain why the regulations tabled by Bern far exceed, in stringency, those of the EU.
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“The light touch is over,” says Philippe Jabre, a former trader at London’s GLG Partners, and founder of Jabre Capital, Switzerland’s biggest hedge fund. Things are changing fast,” he says, speaking from his rooftop offices on L’Ile, an islet on the Rhone in Geneva that his firm shares with a clutch of private banks and a 13th century bell tower. “The Swiss are doing what they need to which is to respond to the AIFMD.”
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The regulations, some financiers fret, are perhaps the most concrete example yet that Switzerland’s historic course has shifted. It is no longer a force unto itself, and can no more escape regulation in a globalised world than can any other developed economy. There are an estimated 500 hedge fund managers based in Switzerland. The local industry burst into life after the country dropped capital gains taxes on non-Swiss funds in 2005. It has since experienced a surge in homegrown start-upsmany of which remain small – and, more recently, big firms from London and New York such as Brevan Howard, Moore and BlueCrest Capital opening satellite offices to escape rising and tougher new regulations.
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Few fund managers will escape the new regulations. Essentially amendments to a national law introduced in 2006, they aim “to raise quality in asset management in general and strengthen investor protection”, a spokesperson for Finma, the Swiss market regulator explains. They break down into several main elements: management, custody and distribution, which covers who is permitted in a fund. They are “to be seen in context with the AIFMD rules in Europe”.
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To bring the country into line with Europe’s regulations by 2013, Swiss managers will be required to obtain a licence from Finma that will entail ensuring they have dedicated compliance staff; providing investors with high levels of transparency; limiting leverage; appointing third-party custodians and administrators; and meeting a raft of other operational checks.
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The danger is that the cost of implementation will force such managers under or drive them to merge, say specialists. “You are moving from zero regulation to a lot of regulation in one fell swoop. The potential shock could be big,” says Jirí Król of the Alternative Investment Management Association, the industry’s global lobby group.
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Perhaps more controversially, though, the rules exceed the AIFMD in two respects. First, according to the draft, any fund taking investment from a Swiss-based institution must employ a permanent representative in the country, and meet strict regulatory equivalency requirements in its own home base.


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Funds may be sold to Swiss investors only if Bern has struck information sharingagreements with the country in which such funds are domiciled. Second, the draft rulesunlike those in Europe they are supposed to emulatecontain no exemptions for smaller managers, who will be hit hardest.
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The PFC in Pfäffikon houses several smaller, start-up managers. “It’s a good incubator for the canton,” says Mr Jouault, who estimates there are as many as 50 managers now based in Schwyz, the surrounding canton.
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One of those start-ups is Premier Alpha Capital, run by Brian Cordischi, the American former head of investment management at Barclays Wealth. “The rules look like they will be an increased burden for us,” he says. “We are looking at having to hire a compliance manager.” For two-man outfits such as PAC, such obligations could make business more ex­pensive and time-consuming. Regulation is a good thing,” says Mr Cordischi, “But not necessarily if you’re a very small hedge fund with only a handful of investors – it makes sense to have a two-tier regulatory system.
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For bigger funds, the distribution rules are of the greatest concern. Under the proposed requirements, a hedge fund based in New York with investments from a Swiss bank or institution would have to return such investments or else open an office in the Alpine country.
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With Swiss private banks and asset managers comfortably accounting for more than a fifth of the global hedge fund industry’s assets, the scale of the potential problem becomes clear.



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Jabre Capital is a rarity in that it has already registered with Finma – and as such the rules are likely to have a minimal impact. But for its peers, says Leila Khazaneh, the firm’s general counsel, distribution rules mean that “too much of a burden is being put on the representative”.


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She points out that they must shoulder legal liability for certifying the compliance of the funds by which they are contracted. Without a doubt it would “unduly restrict” who could take money from the Swiss, she says.
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Lobbying to have the rules watered down or even struck out is under way, but there is still little sense of what may stay and what may go. “We think that on most of the controversial proposals, we will be able to get workable changes,” says one person connected with negotiations with Swiss senators who debate the legislation in two weeks. “Nobody here wants to damage this industry.”
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Pessimistic managers point out that, while some of the edges may be rounded off, the overall picture is unlikely to shift much, however.
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Exemptions for smaller managers may be granted, for example, but probably on a case-by-case basis. Similarly, the liability of mandatorydistribution representatives” may be reduced but the requirements for their existence is unlikely to go away.
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No matter what form the law takes, the illusion that Switzerland operates apart from the rest of the world has been dispelled, however. Hedge fund managers can no longer count on Europe having a bolt hole at its heart.

“The changes are important because we need market access and so if the rules change in the EU then it is very important for Switzerland to have rules that are in line – we cannot operate on our own,” said Mario Tuor, a spokesperson for the ministry of finance, charged with drawing up the new legislation.
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On a Wednesday night, the bar of the Widder hotel in Zurich’s high-end Augustiner quarter resounds with the voices of international finance: there are bankers passing through town and hedge fund managers, sipping from the snug, wood-and-leather bar’slibrary” of single malt whiskies.
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“If the new rules come in, then yes, we’ll leave,” says one. Where they would go, of course, is the question. Norway and the Netherlands could be options but both will soon fall within the scope of the AIFMD. Further afield, the Caymans is where most managers’ funds are domiciled. Hong Kong and Singapore both offer competitive tax rates.
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The pianist playsAs Time Goes By” in the background.None of us at our firm are from Switzerland so we’ve no huge loyalty here, other than the fact that we like it as a place. With these rules, and the way they are handling tax disputes with other countries, they’re killing their reputation.”
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A ‘rule-making spring’ for finance


Michel Barnier


Michel Barnier, Europe’s top financial regulator, describes himself as overseeing a “rule-making spring” that will ensure no part of the EU’s financial sector is left ungoverned writes Alex Barker.
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For some hedge fund managers, this has been a golden invitation to decamp to potentially friendlier parts of the world, free from the uncertainty and extra costs generated by this burst of post-crisis regulation.
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Those fund managers who paid little attention to Brussels received a rude awakening in 2009 from the clunkily named Alternative Investment Fund Managers Directive.
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Drawn up amid public anger over financial excess, the European Commission’s proposed rules imposed governance standards, reporting requirements, stricter liability, minimum capital requirements and pay constraints on an industry that had enjoyed relatively free rein.
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After more than a year of wrangling and wails of disapproval from the industry, a political deal was reached among EU member states that softened some important elements of the proposed law.





The predicted exodus of fund managers from the EU never matched the alarmist warnings. But fund managers and big banks are finding the battle over rules does not end with the passing of a law.





Some of the industry’s worst fears were revived by proposed technical standards, which allegedly roll back hard-fought compromises that underpinned the AIFMD deal.




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While the commission’s 110-page draft of “supplementing rulesrelates to specialist issues, the industry fears it would raise costs and shut out US and Asian fund managers.





Mr Barnier’s initial response was to vow not to be intimidated” by “rearguard lobbying”. But both sides say talks currently under way could resolve some of the concerns.





This fight highlights another big concern: the openness of the EU market. Most of those leaving often want to make sure they are still able to do business with Europe from afar.


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But Mr Barnier is taking a tougher approach regarding financial services groups outside the EU, effectively demanding that they work under similar rules and supervision. Moving may not be as easy as it seems.


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Copyright The Financial Times Limited 2012.