Germany’s financial squeeze offers Brexit hope

Its big current account surplus means Merkel will not want a cliff-edge British exit

by Wolfgang Münchau


Angela Merkel (left) with Theresa May: A country in the middle of Europe with a large current account surplus can ill-afford the chaos of a cliff-edge Brexit © Getty


One of my expectations directly after the Brexit referendum was that Germany would ultimately come to the aid of the UK because of its trading interests. I admit that this prediction looked a bit shaky in the light of the robust negotiating position taken up by Angela Merkel, the German chancellor. But it was the right call. As we approach the December crunch date in the first round of Brexit talks, Germany’s language has softened notably.

I always thought it was unrealistic to expect that German companies would have nothing to say if faced with the possibility of a sudden and brutal cut in supply chains. In 2016, Germany ran a trade surplus with the UK of €50.4bn — 1.6 per cent of German gross domestic product — the single-largest bilateral trade surplus with any country.

But there is another reason for Germany’s more constructive attitude, one that did not exist a year ago. Ms Merkel is about to negotiate one of the most expensive coalition agreements in German history. The outgoing government has amassed a moderately large fiscal surplus, which Ms Merkel will need to use to satisfy the special interests of her future coalition partners, the Free Democrats and the Greens. I have heard estimates of a fiscal expansion of more than 1 per cent of GDP, though this is clearly the outer limit of what is possible under the debt ceiling in the German constitution. The closer the coalition goes to that limit, the less fiscal space there will be for any German largesse in the EU.

This looming financial squeeze informs Germany’s position on Brexit in rather specific ways.

Germany clearly wants to avoid a breakdown in the Brexit talks. A no-deal Brexit would cause an existential crisis in the EU since neither Germany nor France would be willing to plug the gap. But while Germany wants a deal, it does not want to be short-changed by the UK, either.

Germany does not seek to profit from the UK’s withdrawal but is right to insist on a cost-neutral Brexit. If and when Theresa May, the UK prime minister, provides the necessary clarity on finances, I see no reason why the EU should refuse to take the Brexit negotiations into the second phase, consisting of talks about the transition period and the future trading regime.

The second phase of the Brexit negotiations will be a lot tougher than the first. I am relatively confident that the various transitional legal issues can be sorted, but the permanent trade agreement will be very complex. I read with interest a story last week, according to which the German foreign ministry has prepared a four-page memo on the outlines of a future trade and co-operation deal. The paper seeks far more than a tariff-free zone for manufactured goods. It proposes co-operation on foreign and security policy, on terrorism, and on a number of selected service industries, including airlines. Finance was notably absent.

This is not an official document. Ms Merkel’s own position may be different. But a country in the middle of Europe with an exceedingly large current account surplus can ill-afford the chaos of a cliff-edge Brexit. Economic and security interests interact — hence the involvement of the foreign ministry.

What the UK government does not see with sufficient clarity yet is that any such comprehensive association agreement would come at a price. I do not see the EU agreeing to free movement of airlines or nuclear materials without free movement of people. This brings us back to immigration, the issue at the heart of the Brexit talks. If the UK restricts the movement of EU citizens into Britain, it is hard to see how a trade agreement can extend much beyond free tariffs on manufactured goods.

Even if the UK were to agree to free movement, I cannot see the EU accepting financial services in a trade agreement. Mrs May has chosen a Brexit without membership of the single market and the customs union. That choice determines the outer scope of the future relationship. I see no chance that the City of London will retain its current level of access to the European market — though there may be deals for certain sub-categories of financial services. It was never an optimal arrangement that the eurozone’s main financial centre was outside its borders. This is the one area where euro nations see an obvious advantage as a result of Brexit. They will not easily give this up.

What makes me moderately optimistic that the EU and the UK will end up with a broad co-operation agreement is the current trend in net UK immigration, which has been falling fast.

By the time the trade talks reach the critical point, both sides may conclude that the price of a compromise is worth paying. The UK needs to avoid a cliff edge in 2021 or 2022. Germany does not want to lose the €50bn. Accidents are always possible at any stage. But what matters the most is that interests are aligned.

Powell empowered?

Jerome Powell is poised to be named chairman of the Fed

By recent standards, Mr Powell would be an unusual pick to lead America’s central bank
.


YOU could forgive Janet Yellen, the chair of the Federal Reserve, for feeling peeved. With unemployment at just 4.2%, and inflation at 1.6%, she is close to achieving the Fed’s two goals of curbing joblessness and pinning price rises at 2%. Ms Yellen is a Democrat appointed by Barack Obama in 2014. The tenures of past three Fed chairs were all extended by presidents from the other party. Yet as we went to press, President Donald Trump was expected to nominate Jerome Powell, a Republican on the Fed’s board, to replace Ms Yellen.

If picked, Mr Powell—also an Obama appointee—would stand out from recent incumbents. He would be the first Fed chairman since William Miller, who left office in 1979, with no formal economics training; and, according to the Washington Post, the richest since the 1940s.

Mr Powell, who is 64, is a lawyer-turned-banker. His first role in Washington was at the Treasury during the presidency of George Bush senior. He had responsibility for financial institutions and helped deal with the collapse of the Bank of New England, then the third-largest bank failure in American history.

On leaving government, Mr Powell joined the Carlyle Group, a private-equity firm, before starting his own business. From 2010 to 2012 he worked for the Bipartisan Policy Centre, a centrist think-tank. There, he made a name by warning Republicans about their threats not to raise the limit on government borrowing.

At the Fed, Mr Powell has occasionally sided with hawks. But recently, his views on monetary policy have hewed close to Ms Yellen’s. In June he stressed the need to tighten monetary policy only slowly. He also mounted a robust defence of the Fed’s loose monetary policy after the financial crisis. Mr Powell has, however, recently suggested that there is some room to improve the financial regulations imposed after the crisis.

Critics of the Fed’s recent monetary policy include rivals for the chairmanship, such as John Taylor, an economist at Stanford University. The question is whether Mr Trump might appoint hawks like Mr Taylor to other open seats on the Fed’s board, of which there are three, including that of vice-chair. One more slot would open should Ms Yellen resign from the board, as is normal but not required for departing chairs. The balance of the committee will give a clearer idea of how much a Powell Fed would differ from the Yellen one.

Europe’s Border Problem

By George Friedman


For centuries Europe has fought wars over borders. During the 19th century and the first half of the 20th century, Europe’s borders shifted wildly, as empires fragmented, new nations arose and wars were waged. After 1945 and the beginning of the Cold War, a new principle emerged on the Continent. The borders that existed at the end of World War II were deemed sacrosanct, not to be changed. The confrontation of the United States and the Soviet Union in Europe was enormously dangerous. It was understood that border disputes had been one of the origins of the two world wars and that even raising the legitimacy of post-war borders risked igniting passions that led to violence.

Europeans generally accepted that living with unreasonable or unjust borders was far better than trying to get them right. So, during the Cold War, border issues were rarely raised, and when they were, they were usually quickly swept under the rug. The U.S. and Soviet Union were calling the shots, and neither wanted a world war over Europe’s borders, nor did they trust the common sense of European politicians, particularly after the wars of the first half of the 20th century.

Similarly untouchable were the existing spheres of influence on the Continent. There was the East and the West, and neither would mess with the other. Thus, when the Soviets crushed independence movements in Hungary and Czechoslovakia, the United States refrained from any military action (not that there were many options). When Yugoslavia chose a pro-Western neutrality over membership in the Warsaw Pact, and the Soviets might have responded by supporting independence movements in Yugoslavia’s member states, they ultimately declined.

Borders, and the reckless behavior of Europe’s leaders over those borders, had led to tens of millions of deaths. The Americans and Soviets were more prudent, in part because it wasn’t their borders at stake.

In 1991-92, two things happened. First came the fall of the Soviet Union; then came the signing of the Maastricht Treaty and the creation of the European Union. Border issues began to drive events again. The border of the Soviet Union collapsed, and a multitude of countries popped up to reclaim their past. There were many questions about borders that were mumbled about. The border of Ukraine and Belarus had moved far to the west in 1945. The borders in the Caucasus were poorly defined. The borders in Central Asia were theoretical. And the borders between Eastern European countries had been the subject of suspended dispute.

For Eastern European countries, other problems took precedence: establishing national sovereignty, finding their place in a Europe that they longed to join, and building a new life for their people. They let the border issue drop – for the most part.

Yugoslavia and the Caucasus were exceptions that drove home the lesson of European borders.

There, outside the framework of the EU and of little consequence to others, more than 100,000 people died. Compare this to the Velvet Divorce of the Czechs and Slovaks, which took place within the context of future European states and left no one dead. After this, and with Yugoslavia and the Caucasus in mind, the European Union tried to reinstate the principle that borders were sacrosanct. It provided what it had promised – peace and prosperity – and treated borders as anachronistic. No one was supposed to care where the lines were drawn.

But there was a problem. The European Union had affirmed the principle of national self-determination while avoiding the question of what a nation actually was. A nation was, under the bloc’s definition, any political entity that was in place when the EU was formed. There was little consideration after that.


Protesters gather in the center of Barcelona to demonstrate against the Spanish federal government’s move to suspend Catalan autonomy on Oct. 21, 2017. JACK TAYLOR/Getty Images


This is why Catalonia is so important, along with Scotland. The Scots rejected a divorce by a startlingly narrow vote. One would have expected 90 percent of Scots to want to remain in the United Kingdom. Slightly more than 55 percent wanted to, which means secessionists are within striking distance of secession – which would not only divide Scotland from England, but would also maintain the divide among the Scots.

Add to this another critical element. Catalonia has been part of Spain for a long time, but it has considered itself a unique nation apart for an even longer time. Spain will not legalize an independence vote. The underlying questions are the ones the Europeans tried to bury, particularly after Yugoslavia: What is a nation, and what rights does it have? Both Scotland and Catalonia are nations. Do they therefore have a right to national determination or have they lost that right? And what are the consequences if the Catalans disagree?

This is not the only such issue festering in Europe. Hungary was partitioned between Romania and Slovakia. Does it have a right to reclaim these lands? Belgium was a British invention binding the Dutch and French in an unhappy marriage. Can they divorce? Lviv used to be a very Polish city, and now it is part of Ukraine. Can western Ukraine secede and its people rejoin the countries they were citizens of before 1945?

The European Union promised universal prosperity for everyone if they suspended the question of borders and ignored their identities. It was a good bargain. But times have changed, and economic problems make borders much more important. Europe, of course, has no solution to the problem. That we would be talking about an independent Scotland and Catalonia in 2017 would seem preposterous. No economist would see it as a rational discussion.

The economic man, as envisioned by the EU, is unfortunately an insufficient explanation for who we are. Nations matter because Europe is merely a continent, and the EU is merely a treaty. It is a useful entity, and being useful is the only thing that justifies it. If it loses its utility, it loses its legitimacy.

And that would also mean that the boundaries it has set on what is admissible would wither and die.

Catalonia and Scotland both have serious independence movements. They want to determine their own futures, because they see themselves as distinct. Even if they were to join the EU on their own, the very idea of old European nations reasserting themselves, and questioning the legitimacy of borders as they were drawn in 1945, terrifies the EU. Indeed, it should frighten it more than Brexit.

Almost all current nations in Europe have border issues and constituent parts that want to be independent. Most are quiescent at the moment. But they are watching Scotland and Catalonia.

And they know where border issues in Europe lead.

A Matter of Life and Debt

Patrick Cox
Editor, Transformational Technology Alert

Trump’s Republican Collaborators

Nina L. Khrushcheva

NEW YORK – After nine months of Donald Trump’s presidency, the leaders of the Republican Party appear finally to be waking up to the harsh reality that their country stands at the edge of an abyss. They now have a choice: they can either continue to collaborate with Trump, thereby sustaining his destructive leadership and courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party/tribe.

Recent statements by a Republican senator from Tennessee, Bob Corker, suggest that the tide is turning against Trump. Corker sniped that, “the White House has become an adult day care center,” before warning that Trump’s Twitter threats may put the US “on the path to World War III.” Similarly, Senator John McCain warned of the threat posed by a “half-baked, spurious nationalism.”

 

But true political honor demands more than veiled condemnations (McCain did not mention Trump by name in his speech), or simply quitting, as Corker and Senior Republican Congressman Pat Tiberi of Ohio are doing. Rather, it calls for crossing the political aisle, as Winston Churchill (no doubt a hero to all of them) did, when he switched from the Liberal to the Conservative Party.

 

As Churchill demonstrated, there is no shame in shifting political allegiances. There is, however, shame in loyalty to a disgraced or deplorable party or cause. And any Republicans today who think they can delay breaking definitively with Trump, without irreversibly damaging their own reputations, should recall the fate of others – in the Soviet Union in 1917, in Germany in 1932, and in Russia and Turkey today – who thought they could tame a monster.

 

Consider Nikolai Bukharin, a favorite of Vladimir Lenin and the editor of Pravda. For more than a decade after the Bolshevik Revolution, Bukharin tried to reconcile his academic understanding of “the dictatorship of proletariat” with its real-world implementation. This wasn’t so difficult while Lenin was in charge: despite the bloodshed the new regime engendered, mass murder wasn’t its main purpose or source of energy.

 

That changed with the arrival in power of Joseph Stalin, for whom terror was both a means and an end. Nonetheless, Bukharin aligned with Stalin to purge Leon Trotsky and other Bolsheviks who sought to adhere more closely to Lenin’s dictates (and his testament against Stalin). Bukharin reasoned that Stalin’s methods were enabling the Soviet Union’s rapid development into an industrial power, and the future of communism was far more important than the loss of a few thousand lives – or even a few million.

               

Bukharin would soon regret that reasoning. Once Trotsky was out of the way, Stalin turned on all the other senior Bolsheviks, calling them “enemies of the people” – a phrase that Trump’s populist supporters, like United Kingdom’s hardline Brexiteers, have revived to denounce anyone who dares challenge their “blood and soil” code. Bukharin was executed in 1938.

 

Franz von Papen also bet that he could tame a dictatorial demagogue. To advance his own political ends, Papen persuaded German President Paul von Hindenburg to appoint Adolf Hitler as Chancellor in 1933. A seasoned and autocratically inclined politician, Papen thought that, once Hitler was in power, he could control the Nazi leader, whom Papen regarded as a provincial blowhard.

 

Instead, on the Night of the Long Knives, the Nazis hunted and executed Papen’s trusted associates, Herbert von Bose and Erich Klausener, and seized control of the government.

Papen’s fate was kinder than Bukharin’s, though: Hitler shipped him off to serve as ambassador to Austria and then to Turkey. After World War II, Papen was acquitted at the Nuremberg trials.

 

Boris Berezovsky, Boris Yeltsin’s trusted oligarch-henchman with his own murky reputation, similarly underestimated a would-be autocrat. It was Berezovsky who brought Vladimir Putin to Yeltsin’s attention, anticipating that the diminutive ex-KGB officer was the ideal candidate to protect the Yeltsin family’s riches – and Berezovsky’s own wealth – once Yeltsin retired. Yet soon after Putin was in power, Berezovsky lost his business empire and was forced to emigrate to England, where he ultimately died under suspicious circumstances.

 

Finally, in Turkey, President Recep Tayyip Erdoğan and his predecessor Abdullah Gül worked together to create the Justice and Development Party (AKP), which has dominated Turkish politics since 2002. But, as Erdoğan has concentrated power in his own hands, he has silenced Gül. Likewise, former Prime Minister and AKP leader Ahmet Davutoğlu long supported Erdoğan, until deepening disagreements – at times rooted in Erdoğan’s contempt for the very position of the prime minister – forced Davutoğlu to step down last year.

 

Of course, America’s democracy is stronger than that of Turkey or Russia. But with his shameless lies and relentless attacks on those who disagree with him – and his recent suggestion that it might be appropriate to “challenge” a major US news network’s broadcast license – Trump has shown that he is not interested in adhering to democratic norms.

 

A weakened democracy is an exceedingly high price for the US to pay – and for what? At first, Republicans wanted to use Trump to help them pass legislation such as a repeal of the 2010 Affordable Care Act (“Obamacare”) and tax reform. But, after ten months of controlling the presidency and both houses of Congress, Republicans have accomplished almost nothing legislatively. At this point, it seems that they simply want power for power’s sake – and that means beating, not cooperating with, the Democrats.

 

But that may be changing. Congressional Republicans have already joined with Democrats to enact “Trump-proof” sanctions against Russia, and lately there have been moves toward cooperation on maintaining the subsidies on which Obamacare depends (after Trump cut them by executive order).

 

These are steps in the right direction. But, with Trump’s behavior becoming increasingly capricious and dangerous, it is not nearly enough. Republicans who care about ending up on the right side of history cannot stay on Trump’s side any longer.

 

 

Nina L. Khrushcheva, the author of Imagining Nabokov: Russia Between Art and Politics and The Lost Khrushchev: A Journey into the Gulag of the Russian Mind, is Professor of International Affairs and Associate Dean for Academic Affairs at The New School and a senior fellow at the World Policy Institute.

Why the Bitcoin Market Could Soon Triple in Size

By Justin Spittler, editor, Casey Daily Dispatch



Bitcoin just went mainstream.

I’m not saying this because teachers, plumbers, and librarians are getting filthy rich off bitcoin…or because cryptos are the biggest story in the investing world.

I’m saying this because the CME Group just made a historic decision.

The CME Group runs the world’s largest options and futures exchange. On Tuesday, it said that it will introduce its first-ever bitcoin futures contract.

This contract will track the price of bitcoin. And the CME Group plans to introduce it by the end of the year.

• The price of bitcoin surged 19% since this story…

It’s now trading seven times higher than where it was at the start of the year.

But it should head much, much higher.

The market for bitcoin could even soon triple in size because of this historic decision.

I’ll show you why in today’s essay. I’ll also show you how to get in front of this coming stampede.

But you first need to understand something important.

• The “smart money” barely owns any bitcoin…

This refers to institutional investors, which includes hedge funds, money managers, and sovereign wealth funds.

You might find this hard to believe. After all, institutional investors are usually the first to invest in groundbreaking technologies.

So, why don’t they own any bitcoin?

Simple. They can’t.

• You see, many institutional investors manage billions of dollars…

Some manage trillions.

When you oversee that much money, the stakes are high. So, these firms must hedge their bets when they make big trades.

There are many ways to do this. But the most common way is with futures contracts.

Now, the actual mechanics of hedging with futures are complicated. But they basically allow big institutional investors to protect themselves against adverse price movements.

In other words, they act like insurance if a big trade goes against you.

Up until now, big institutional investors haven’t been able to do this with bitcoin.

But that’s about to change…

• LedgerX just introduced the world’s first bitcoin options contract…

LedgerX is the only federally regulated exchange and clearing house for digital currencies.

Two weeks ago, it held a “soft launch” of its bitcoin options product.

The exchange did $1 million in trades in the first week. The next week, it cleared $2 million.

That’s much better than people expected, but let’s be real. A couple million dollars is nothing for big institutional investors.

That’s why the CME Group’s announcement is such a game changer…

• The CME Group handles 3 billion contracts every year…

That adds up to about $1 quadrillion in volume.

In other words, it’s a much bigger deal than LedgerX.

So, why did the CME Group do this? Simple. Its clients are begging for a bitcoin product.

And the CME Group plans to give that to them by the end of the year.

When that happens, it will become the first major exchange to embrace bitcoin. But it won’t be the last…

• The Chicago Board Options Exchange (CBOE) has also embraced bitcoin…

The CBOE is the largest U.S. options exchange.

Like the CME Group, it also plans to launch its own bitcoin futures contract. And it could do so before the end of the year.

According to CBOE chief strategy officer John Deters, this product will make it much easier for many of its clients to speculate on bitcoin:

“People will be able to settle in cash,” Deters said. “So you can take a speculative position without touching bitcoin itself, which helps make it more attractive to all sorts of folks.”

I cannot overstate how important this is…

• Institutional investors manage about $30 trillion…

That’s about 250 times bigger than the entire bitcoin market.

Now, these big firms obviously aren’t going to move all their money into cryptos. But they won’t need to for bitcoin to skyrocket.

If they put just 1% of their money into bitcoin, that’s $300 billion. That would cause the bitcoin market to nearly triple in size.

But that’s not the only reason to be bullish on bitcoin today…

• The CME Group’s decision also paves the way for bitcoin ETFs…

But don’t just take my word for it.

ProShares and VanEck, two of the world’s biggest providers of exchange-traded funds (ETFs), are already working with the U.S. Securities and Exchange Commission (SEC) to introduce their own bitcoin ETFs.

If they succeed, it will become easier than ever to invest in bitcoin. And that will bring even more everyday investors into bitcoin.

• In short, the floodgates of the bitcoin market are about to rip open…

When they do, billions of dollars of pent-up demand will pour into what is still a relatively tiny market.

That’s obviously something you want to get in front of. So, consider speculating on bitcoin if you haven’t already.

Of course, I realize that buying bitcoin might sound intimidating. After all, it’s not like you can buy bitcoin through your broker.

But trust me. It’s not as hard as you think.

I know because I just bought bitcoin for the first time ever. The process took about 10 minutes.

It was so easy that I walked my dad through it a couple days later. And let’s just say he’s not the most tech-savvy guy on planet.

• Unfortunately, I can’t personally walk you through the process…

But Teeka Tiwari can.

If you don’t know Teeka, you should get to know him.

He’s the editor of Palm Beach Confidential. And he’s one of the world’s top cryptocurrency analysts.

Now, I know a lot of people in our industry make this claim. But Teeka’s the real deal.

Just look at his track record. Since April 2016, Teeka’s told his readers about 26 crypto opportunities.

The average gain of those recommendations is 1,021%.

His biggest winner was a cryptocurrency that soared 14,354% in six months. That’s enough to turn $1,000 into more than $143,000.

Those are life-changing gains. But don't worry if you haven’t bought bitcoin.

Teeka says we’re on the brink of a crypto boom that will “make even more everyday folks megamillionaires.”