Poland, the Natural Ally for Post-Brexit Britain

By Nora Kalinskij


By March 2019, Britain will leave the European Union. It can’t, however, leave Europe. If it wants to remain a key player on the Continent, it needs to carve out a new role for itself. Since World War II, the U.K. has been trying to strike a balance between participating in the European project and developing its own, independent relationship with the U.S. to maximize its room for maneuver. But it can’t lean too heavily on its relationship with Washington and risk becoming overly dependent. It’s best hope to remain an influential power in Europe is to build stronger ties with another state on Europe’s periphery: Poland.
The Unrecognized Leader of Eastern Europe
Poland has found itself on the outs with the EU since 2015, accused of violating the bloc’s democratic values. Both Poland and Hungary have resisted EU directives, for example, on refugee quotas. Poland wants to be strong enough to hold its own in Europe and fears being dominated by Germany and Russia, given its history of being divided by various European empires and being caught in the crossfire between the Soviet Union and the Third Reich during World War II. One way for Poland to increase its maneuverability on the Continent is by becoming the leader of Eastern Europe.

The Poles have resurrected the Intermarium concept, first proposed by Polish statesman Jozef Pilsudski in the 1920s. Pilsudski envisioned the Intermarium as a confederation that would include most Central European states and that would act as a counterweight to Germany and Russia. This time around, the Poles are not hoping for a confederation – which they could not achieve anytime soon because of historical grievances and competition that divide the region – but rather a looser alliance in which Poland would play the lead role. The Three Seas initiative, which would include countries along the Baltic, Adriatic and Black seas, is an extension of the Intermarium.

EU heavyweights France and Germany may not be ready to treat Poland as an equal partner, but that might change if Poland presents its position as representing a majority of member states in Eastern Europe – about half the bloc’s total membership. Although most of these states depend on Brussels for funding, coordinated action from Eastern European members can significantly impede badly needed EU reform and other policies pushed by Brussels. But Warsaw needs to progress from being a self-declared leader of Eastern Europe to a leader recognized by other states both in and outside of the region.

Enter Britain. Poland is a natural ally for Britain, considering that both countries are, in different ways, challenging the status quo on the Continent and Brussels’ authority. Britain can offer Poland a number of benefits in a partnership, including defense cooperation. Although Warsaw is a member of NATO, it has chosen not to rely solely on the alliance for its security, cultivating bilateral defense relationships with key countries. Poland’s closest defense partner is the United States, which has, for example, supplied Warsaw with Patriot missiles. But supplying weapons is one thing; providing military support during a crisis is another. Poland therefore is looking for bilateral ties with other countries closer to home, and Britain is chief among them. In December, the U.K. and Poland signed the Treaty on Defense and Security Cooperation, in which they pledged to coordinate on a number of fronts such as cybersecurity and strategic communications.

Britain can also give Poland recognition as the leader of Eastern Europe. After Brexit, Britain will have autonomy over its foreign policy, and it can throw its diplomatic weight behind Poland’s resistance against Germany and the other country that Warsaw feels threatened by: Russia. Britain can also offer Poland investments and preferential trade agreements that, in the long run, could decrease Polish economic dependence on Germany and, as a result, strengthen Poland’s political position in Europe.
Pushing Back Against Germany
The British want the EU to remain what it was meant to be – a union that will preoccupy Germany and prevent it from one day politically and militarily reasserting itself on the Continent. The EU is a major source of Germany’s economic strength because it provides markets for the export-based German economy and a common currency that facilitates trade. Yet the EU is also a major source of German vulnerability. Germany is so dependent on EU markets that any trade or financial disruptions could send its economy plummeting. What’s more, the EU limits any political and military ambitions that Germany may have. Berlin’s primary concern is keeping Brussels afloat. Britain can exploit this German weakness by boosting the legitimacy of the Polish resistance against Berlin. Encouraging any process that puts pressure on the union without breaking it would benefit the British.

The Poles similarly view German ambitions in the EU with caution. Germany and Poland have conflicting views of what the EU’s future should look like, particularly how much agency Brussels should have to intervene in the domestic affairs of member states. When the 2008 economic crisis began, Germany, as the state with the largest economy in the EU, helped navigate the situation by leading the response to the Greek debt crisis and ensuring that austerity was implemented across the eurozone. Berlin has maintained the power it gained during the crisis and has used its influence over Brussels in other matters, including immigration policy. Germany is willing to contribute substantial funds to the EU – more than any other member – to make sure that the bloc and its less affluent members remain intact. In exchange, it expects member states to comply with Brussels’ demands.

Poland rejects EU leadership in many areas, but its resistance is limited by its dependence on EU funding and trade. Indeed, standards of living in Poland have risen since it joined the union in 2004, but so too has Poland’s integration into the German supply chain. In 2016, 27 percent of Polish exports went to Germany, mainly to be used as components in German industry (such as auto parts, which accounted for 8.3 percent of those exports). Poland has developed a chronic economic dependence on Germany, making Poland a subordinate rather than an equal.

What Warsaw can do, and has done successfully so far, is establish a better bargaining position against Germany. Threatening to leave the EU may place pressure on Berlin, but it’s a threat on which Warsaw could not follow through. A survey released by pollster CBOS in January showed that 92 percent of Poles want to remain in the EU. Poland is therefore positioning itself as the leader of Eastern Europe instead and looking to recruit Britain as an ally. For the British, partnering with an emerging Eastern European leader is one way they can remain relevant in Europe. For the Poles, having the support of an economic powerhouse is pivotal.

"My best regards to dollar bears": Bulls cheer buck’s resurgence
Bets against the dollar feel the heat, with more gains now expected

 Katie Martin

The dollar is back, and those who had always kept the faith in the currency are running a victory lap. With bells on.

The dollar index, which tracks its value against a basket of other major currencies, is now up by 2.4 per cent from the middle of this month to reach its highest point since early January. The euro, meanwhile, continues to sink in the wake of the latest European Central Bank press conference, which delivered a note of caution, albeit measured caution, over the region’s economic soft patch.

“My best regards to all dollar bears,” writes Ulrich Leuchtmann, currencies analyst at Commerzbank. (A saucer of milk for Table 12 please, thanks.)

He continues:

The amount of ridicule, malice and criticism my colleagues and I had to face over the past months, was overwhelming! Our view that the dollar depreciation in December and January was fundamentally unfounded, that the market would not be able to ignore the dollar-positive arguments forever and that therefore we would see a recovery of the US currency was rejected by many: by readers, by clients, by colleagues.

I have to admit that in view of a wall of dollar bears I too had my doubts sometimes — as I am happy to admit. Perhaps everything really was going to be different this time round? Perhaps I had overlooked important arguments or mistakenly dismissed them as circumstantial? Perhaps the whole approach of our FX analysis was incorrect after all?

So it makes me particularly happy to see that the development of the markets is now proving us right.

Yep, we got that last bit. But he’s not done…

All these fabricated, sometimes absurd arguments that were used at the start of the year to extrapolate and justify dollar weakness have collapsed (a) because they are devoid of content and (b) because the development of the exchange rates can no longer disguise the fact this fact. As a result the dollar recovery is a self-perpetuating process. In a way it could be claimed that the dollar weakness was a speculative bubble that is currently bursting.

A Fed that is on track for several more interest-rate rises this year (compare and contrast with the ECB) and robust US inflation both mean that the buck can keep climbing from here, he said, quite aside from the rise in US bond yields, which he considers to be a distraction.

Michael Sneyd at BNP Paribas, meanwhile, argues that fickle traders have abruptly latched back on to signals from the US bond markets as a driver for the buck. “US rates didn’t matter for the dollar, now they do,” he said, adding that bets against the currencies are now folding under unbearable pressure.

We do not see events over the weeks ahead triggering a return to the weaker dollar theme, unless the FOMC delivers a dovish surprise on 2 May, which we consider unlikely, or April’s non-farm payrolls disappoint sharply (again, we do not expect this). Rather, we view that a catalyst for a euro or yen recovery would need to come from Europe or Japan in the coming weeks, which also appears unlikely.

ING sympathises with those who are caught on the wrong side of this, saying it “had thought the end point to the Fed policy cycle was nearly priced, but instead short rates are still moving and making dollar hedging costs very expensive.”

“It has been a tough week for those short dollars,” the bank adds.

HSBC’s David Bloom says he expects the euro to sink to $1.15.

Cyclical drivers are becoming dominant again, pointing to dollar strength as the Fed tightens and others hesitate.

Deutsche Bank and Barclays: Trans-Atlantic Drift

Investment banks appear to diverge dramatically, but for now, the differences are easy to overstate

By Paul J. Davies

Change in revenue for first-quarter 2018 over the same period in 2017 in U.S. dollars

Source: the companies
Note: Currencies converted at end of period rates

Investment banking yielded surprises at Deutsche Bank and Barclays in the first quarter of 2018: the former’s revenue looked as horrible as the latter’s did outstanding.

However, neither of Thursday’s results gave much clarity to investors. It isn’t clear that Deutsche can stop losing market share, or that Barclays is really regaining much. Big questions remain about where they go next—and at Deutsche whether the new chief executive, Christian Sewing, really can make any big changes.

Barclays saw some of the best first-quarter revenue gains in equity and bond trading of any bank, but its true performance was somewhat obscured. The U.K. bank might look good partly because it did much worse than rivals in the comparable period of 2017. However, there is another tricky element: It moved some funding and hedging costs to its head office from the investment bank and that may have flattered this quarter’s revenue. 
Deutsche, on the other hand, was obscure in its intentions more than its numbers. Mr. Sewing, just two weeks into his new role, brought a sterner, sharper tone to match his pledges of speed and clarity in making changes. However, the detail was absent.

Deutsche Bank’s new CEO Christian Sewing brings a sharper tone. Photo: armando babani/epa-efe/rex/shutt/EPA/Shutterstock 

The investment bank will see “material” cuts to staffing—the numbers aren’t clear—and the U.S. and Asia will bear the burden because that is where Deutsche does less profitable business that is less connected to the rest of the bank.

Deutsche’s first-quarter numbers underlined the need to act. The bank suffered its wearily familiar problem: revenue fell across the group and costs rose. This isn’t the way to boost returns. 
The investment bank led the declines with an even worse performance than had been feared. Bond trading did worse than rivals and Deutsche suffered the ignominy of being the only bank to have lost revenue in equities trading at a time when heightened volatility gave almost everyone else a major boost.

The fear for investors is that as managers take their scythes through the investment bank again, more front-line bankers and traders will walk away and take revenue with them. And Deutsche won’t be able to cut other people and costs fast enough in response.

The bank has little financial room for maneuver: its profitability is thin, limiting the extra costs it can bear for restructuring. Radical change might just be unaffordable, whether it is wanted or not.

The biggest problem for Deutsche, Barclays and other European banks is that they are still trying to sort out their investment divisions, while their U.S. rivals enjoy higher profits and perhaps regulatory easing. It is tough to make repairs when the race is under way.

How Long Until China Cranks Up the Debt Engine?

Its economy’s steady first-quarter growth masks some worrying signs

By Nathaniel Taplin

Cherry blossoms during their peak season earlier this month in east China's Jiangsu province. While the country’s economy grew this quarter, cracks are beginning to show. Photo: Liu Shuyi/Zuma Press 

Cherry blossoms are blooming in Asia—and so is the Chinese economy.

Growth was 6.8% in the first quarter, the government announced Tuesday, just a hair lower than in 2017 as a whole. Key indicators like electricity output and construction investment ticked up as companies took advantage of easing seasonal pollution restrictions. 
But beneath the seasonal thaw, there are hints the long winter did real damage.

Retail sales ticked up in March, but in services and construction, the purchasing managers’ employment index hit a five-month low. More worrying, real borrowing costs for industrial firms are rising quickly again. 
Higher U.S. inflation and rates, slowing trade, and renewed debt defaults at home could pose a tricky problem for Beijing by late 2018: Ease up on the “deleveraging” drive to help struggling firms stay afloat and keep growth around current levels, or allow borrowing costs to remain high to contain long term risks and capital outflows.


Producer price inflation adjusted rates 
Source: CEIC, Thomson Reuters*Weighted average lending rate.

China’s central bank has already begun to quietly moderate its hawkish stance. After the last two U.S. rate hikes, it has “pretend[ed] to follow the Fed,” raising interbank rates by only small amounts while actual market interest rates in China remain much higher, said Julian Evans-Pritchards of Capital Economics.

A quick look at China’s lending market shows why. Real yields on AA-rated corporate bonds—issued mostly by industrial and real estate companies—rose to nearly 3% in the first quarter, according to Thomson Reuters, while real bank loan rates likely hit 2%. Those rates are still far below the 7-10% levels seen when debt defaults peaked in early 2016. But if producer price inflation keeps slowing—it hit a 17-month low in March—real rates could be in that neighborhood by early 2019.

The key question appears to be how deep and effective China’s much-celebrated “supply side reforms” have really been. If enough excess capacity has been eliminated and housing inventory sold down, then producer price inflation will remain healthy and Beijing won’t need another massive stimulus to push prices back higher and stave off defaults.

Otherwise—and particularly if a true trade war seriously disrupts exports—the chances of another big debt splurge next year will rise significantly. That would probably mean a commodities buying opportunity, but be negative for China’s long-run prospects.

Either way, it’s likely to be a trickier next twelve months than indicated by Tuesday’s smooth growth figure.

The Empire Strikes Back, Part 3: “Big Meat” Tries To Define Away The Competition

Silicon Valley is pouring venture capital into startups that use cultured animal cells to grow meat. The hope (now backed with hundreds of millions of dollars) is that they’ll someday replace corn fields, feedlots and slaughterhouses with football-field sized vats from which an entire city’s hamburgers and chicken nuggets emerge sans animal suffering or land degradation.

Most people would probably say that as long as the taste, nutrition and price are comparable to traditional meat, the more the merrier. Let the competition begin.

But not Big Meat. Like most entrenched Establishments, the various factory farming organizations and state farm bureaus have no intention of becoming the next coal industry, virtually wiped off the map by new and better technologies. So they’re trying to head this stampede off at the pass by, among other things, laying claim to the word “meat”:

Nebraska Farm Bureau petitions USDA to limit definition of beef
LINCOLN — Nebraska Farm Bureau is urging the United States Department of Agriculture (USDA) to not use the term “meat” when referring to all lab-grown and plant-based meat alternatives. 
The request to limit the definition of “beef” and “meat” to only products from live animals born, raised and harvested in the traditional manner comes from a strong movement to develop and commercialize alternative protein products, particularly “clean meat,” also called lab-grown or cultured meat, as well as plant-based proteins. 
“The production and processing of livestock is of vital importance to our members and our state’s economy,” Steve Nelson, Nebraska Farm Bureau president, said in a letter to the USDA’s Food Safety and Inspection Service (FSIS). “This translates into tens of billions of dollars of economic activity as well as thousands of jobs.” 
Nelson said consumers depend upon the USDA FSIS to ensure that the products they purchase at the grocery store match their label descriptions. In the letter, he specifically requested FSIS to: 
– Prohibit products derived from alternative sources — e.g., synthetic products from plants, insects, non-animal components and lab-grown animal cells — from being labeled as “beef” or “meat.” 

– Limit the definition of “meat” to the tissue or flesh of animals that have been harvested in the traditional manner. 
– Limit the definition of “beef” to products from cattle born, raised and harvested in the traditional manner. 
– Add the definitions above to FSIS’s Food Standards and Labeling Policy Book.

This is of course way off the “global financial crisis” beat, but it does illustrate a point that will become important as things spin out of control: Common-sense solutions to the implosion of the world’s fiat currencies/fractional-reserve banks/military empires, including big cuts in pensions and entitlements, the end of overseas military commitments, and the immediate adoption of sound (ideally gold-backed) money – will be met by entrenched interests standing in the way, demanding the equivalent of Big Beef’s silly definitional protection.

Hardly anyone gives up power voluntarily, and today’s system has handed immense amounts of power to a small group of bankers, central bankers, politicians and bureaucrats who can now create money out of thin air and use it to enrich themselves and their friends.

They love being part of an aristocracy and sincerely believe that, to quote Goldman Sachs’ CEO, they’re “doing God’s work.”

This explains the willingness to pervert formerly free markets by depressing interest rates and gold while elevating stock prices beyond levels that investors would normally accept. So expect more market manipulation, increasing regulation of cryptocurrencies, and never-ending war to prop up the petrodollar, all in the name of preserving a status quo that – based on the amount of debt necessary to sustain it – can’t last much longer.

The coming decade will be defined in part by how tenaciously these guys hold onto their losing hands when they should be folding.