Monday, April 24, 2017

Win or lose, Marine Le Pen is a nightmare for the EU

Published on CNN
France has spoken, for now. The country voted yesterday in the first round of its presidential elections, after weeks of campaigning that have been dogged by scandals, gaffes and surprises.
Though the first round treated voters to 11 candidates to pick from, in the year following Britain's decision to leave the European Union and American voters sending Donald Trump to the White House, one candidate has dominated media coverage: the populist, nationalist, far-right Marine Le Pen.
As had been expected for some time, Le Pen has made the final round, where she will face the centrist Emmanuel Macron. Macron's centrism and pro-European leanings will now inevitably frame the run-off as an effective referendum on France's future relationship with the EU. As a founding EU member, this will likely be giving political leaders in Brussels reason to worry.
Le Pen's National Front Party has a long history of euroskepticism and promotes a number of policies that are anathema to the high-minded principles behind the European project.
In recent years, Le Pen has attempted to soften both her image and the position of her party on the matter of France's future in the EU.
At one time, the National Front was in favor of abandoning the euro, plain and simple. More recently, she has said she would organize a referendum on France's common currency membership.
Now, she has specified that she would try to renegotiate France's EU membership over six months. If that attempt fails, she'll hold a referendum.

Could she hold a referendum, and what could happen if she does?

Even if she does win the presidency, Le Pen would be wise to keep the champagne on ice for a while. She is unlikely to get a majority in the French parliamentary elections, due to be held June 11, and would therefore face a hostile -- probably center-right -- government standing in the way of executing her plans -- and holding a referendum.
Still, she would able to call a nonbinding referendum without the approval of the government.
If the French people were to vote to keep the euro -- which is likely if you believe French opinion polls -- she would stand down, given then that "70% of my project cannot be put in place."
If a majority in France voted to leave the EU and the eurozone, it's constitutionally illegal for France to leave, as its constitution states "the Republic is part of the European Union." So a French EU exit would require a burdensome constitutional change.

Frexit and the economy

Of course, all of these legal considerations regarding EU membership will be of minor importance should France actually decide to leave the eurozone. The economic chaos it would likely cause would be the top priority for everyone in France and across the continent.
The French Central Bank has estimated that refinancing French public debt outside of the eurozone would cost more than 30 billion euros ($32 billion) in additional annual interest.

According to Le Pen, exit from the euro would not result in economic "catastrophe." She has stressed she wants France to leave the eurozone in the best possible circumstances, saying she does not want to "break the dishes," and suggesting it should happen through consultation with other European countries she considers to be "suffering" from euro membership, predicting that Italy, Spain and Greece would join France.

Even a moderate President Le Pen is trouble for EU

If France votes to stay in the eurozone but Le Pen doesn't stand down, some of her other proposals are hard to square with anything for which the EU stands. Look at her protectionist proposals, such as imposing an import tax of 3%.
Everything really would be on the table if Le Pen is elected, given the political damage it would do to the EU and the eurozone: projects that are completely reliant on political goodwill.
With regard to Schengen, things may get serious right from the start. She has just made clear that, if elected, she would immediately suspend France's membership of the border-free zone.

The European Commission has already stretched the possibility of suspending Schengen, but proper border checks -- with all the traffic jams they would cause, as witnessed when they were implemented between Croatia and Slovenia some weeks ago -- are bound to create a lot of economic damage right away.
Brussels may have avoided what German Finance Minister Wolfgang Schauble called the nightmare scenario of the final round being between Marine Le Pen and left-wing Euroskeptic Jean Luc Mélenchon.
But even if Le Pen is ultimately thwarted, the success of her campaign and the flames it has fanned will ensure that any celebrations are short-lived.

Tuesday, April 04, 2017

Is Brexit the euro's first major blow to the EU?

Published by New Direction (p25)

In his book "The Euro: The Politics of the New Global Currency", David Marsh shows that the drive to forge a common currency in Europe was animated by the traumatic experience of the break-up of the Bretton Woods agreement in 1971, when the US declared it would default on its obligation to exchange the dollar reserves of European nations for gold.

At the beginning of the 1990s, a system of fixed exchange rates was in place in Europe, in preparation for this planned common currency. In 1992, investor George Soros made a lot of money as his speculation forced the British government to pull the pound from the European Exchange Rate Mechanism (ERM). Soros understood Germany would not be willing take extreme measures to keep Britain in the ERM, an insight lost on many in the City of London.

Similarly to the euro crisis that would come later, this humiliating chain of events did not stop the big project from proceeding. The 10 year borrowing costs of struggling European countries such as Italy, Spain or Belgium (see figure) continued to stay high over the next few years. No half-hearted budget cuts, gold sales or tax hikes succeeded in bringing them down. The only measure that lowered borrowing costs was the decision to create a common currency. In 1995, investors became convinced that the common currency would be a reality and that Italy and other weaker European economies would become members. This is evidenced by the fact that this was the last peak before which borrowing rates dropped off precipitously. For each of the eurozone’s member states, the prospect of entering the common currency zone resulted in a drastic reduction in borrowing rates.

Why does this matter? It matters because it explains how the euro was not born as a result of positive experiences with fixed exchange rates or of some ideological consensus. There were many opponents, not least in Germany, but also in France, where almost half of the population voted against the Maastricht Treaty, which provided the euro’s framework. Rather, the euro emerged because it allowed politicians to postpone painful decisions and in some cases even outright state defaults. When politicians were desperately scrambling for ways not to have to cut spending in the 1990s, they eventually discovered that deciding to create a common currency allowed them to kick the can down the road. As the US Dollar has proven for decades, a large currency zone affords more mismanagement, in terms of loose budgetary or monetary policy, than a small currency zone.

Just as the euro was pushed through despite the opposition of a large part of the political class, it has now given rise to a transfer union, despite the reluctance of both Northern European politicians, who had to defend to the system of transfers to their taxpayers, and Southern European politicians, who had to accept the conditions and foreign interference linked to the transfers.

Just as the common currency emerged unintentionally, also Eurozone protectionism, which endangers the whole EU project, may emerge as a result of events. When Spanish banks got in trouble in 2012 and frightened Northern European politicians provided Spain with a 100 billion euro bailout, they could only get away with this move, politically, by ensuring that the bailout had strings attached. In this case, the strings amounted to a concession that a Eurozone framework for financial supervision would be created, parallel to the EU framework, to supervise Spanish and other eurozone banks. The ECB was entrusted with this task, and thereby directly ended up in direct competition with an existing EU banking watchdog, the “European Banking Authority” (EBA) in London.

One can imagine that after yet another round of bailouts and further, stricter prescriptions for banks, eurozone banks may start to lobby to exclude competitors who enjoy market access in the Eurozone without having to comply with ECB rules. In short: common eurozone rules might easily serve as an excuse for keeping out external non-eurozone competition in the future. The aftermath of the Brexit vote and the many warnings from the continent about Britain losing its single market access hint at the underlying desire to kill off competition from outside the eurozone.

The ECB has proved not to be immune for the protectionist virus. Already a few years ago, it tried to force clearing houses to relocate to the Eurozone if they wanted to continue clearing in euros. This attempt at grabbing business from London failed and the ECB had to back down, thanks to Britain’s EU membership, which allowed the UK government to exert some pressure.

As Britain leaves the European Union, further, more aggressive, attempts will likely be made to export Eurozone rules outside of the common currency zone. This in turn will likely boost anti-EU sentiment in Denmark, Sweden and Poland, which may have their financial institutions barred from the eurozone market. Once the EU’s free movement of capital is damaged, it is only matter of time before the freedom of movement of services, persons and goods comes under fire.

Still the differences within “old Europe” are quite material and this itself may be the reason for a hypothetical future EU break up. It is unlikely that the far right in France or the populist left in Italy will manage to convince the citizens of those countries to leave the euro by referenda, because of fears that savings would be ruined in ensuing banking crises. If the euro does blow up, it will likely be the result of some financial event, not a political one. Such a scenario would force the German government to make a choice: will it only bail out its own banking system or will it bail out the banking systems of the Benelux, Austria, France and Italy as well? The German government would not have more than a few hours to make this choice. Perhaps on the next two occasions when it has to make this choice, it will again decide to bail out the whole of Europe. Perhaps the German government will go much further than anyone can now imagine—but at some point, enough will be enough.

Why would there be financial crises forcing the German government to make such a choice? The answer to this question is not just about the euro. It is related to the nature of our fractional reserve banking system, whereby banks are allowed to only keep a fraction of the funds they owe to their clients in reserve. This is a means by which the total amount of money in circulation can be expanded, which drives down the price of money, also known as the interest rate. This in turn allows governments to refinance their old loans more cheaply, so they can avoid raising taxes. The unsustainable investment following excessive creation of money produces investment bubbles and financial crises. When these appear in Japan or the United States, the odds are high that the respective governments will bail out the whole currency zone, even when this means they have to impose significant financial repression. In Europe, this is more difficult, given that the burden wouldn’t be suffered evenly across the monetary union. Nationalism would pop up as violently as it did in Greece, where anti-German sentiment was rife during the eurocrisis, which even led to a Greek Parliamentary investigation aimed at pushing for German World War II reparation payments.

Why should the EU break up when the euro collapses? There is no reason that it should, but politicians like Angela Merkel have linked the two together, in order to get away with Eurozone bailouts. In 2011, she said: 'If the euro falls, Europe falls'. One can only hope people understand that to have a common currency is different than to have a treaty whereby countries promise not to impose trade barriers upon each other. When banks close and people lose considerable parts of their savings that message may be a hard sell and human folly may rule the day.

Still, one shouldn’t be overly pessimistic. Already now, many have understood that to have savings in the bank is a risky undertaking, and that it’s probably a good idea to shift a part of one’s wealth into hard assets like real estate, stocks and physical gold and silver, despite the fact that also these investments come with great volatility and risks. Today in 2016, only a tiny part of services are compensated in private “cryptocurrencies”, of which Bitcoin is the most popular, but this will only grow. This kind of currencies have proven to be very volatile and risky, but at the same time they have proven to be a very effective way to avoid capital controls, while the technology behind bitcoin, blockchain, has now been adopted by major banks. If in 20 years time, one third of transactions would be in private currency, a breakdown of the public money system in Europe may be much less traumatic than it would be today.

Another alternative is of course that we could just see the German government effectively allowing the full erosion of savings in the Eurozone in order to save the euro-project, but this isn’t likely, given the current German hostility against such payments. Some may think that common Eurozone joint debt issuance may save the Eurozone, but this overlooks the fact that the ECB has been the crucial actor in propping up the currency zone, precisely because there was no political support for doing bailouts in a more transparent manner, through the eurozone’s lending schemes, such as ESM and EFSF. According to prominent German economist Hans-Werner Sinn, the ECB has provided for about 75% of the bailouts in the Eurozone.

Alternatively, we could see moves towards a world currency, in the framework of the IMF’s “Special Drawing Rights” (SDR). In the same way that the decision to create the euro effectively bailed out struggling European welfare states, the debt-crippled industrial nations of today may get a few decades respite as a result of beefing up the SDR system. US economist Jim Rickards suggests that the world’s bad debt could be rolled up the into the Special Drawing Rights (SDR), which he thinks is also why China has been buying SDRs on the market.

Of course, there are two sides to this coin, and savers would pay the price for such a move. Perhaps there may simultaneously be moves to reboot the system. There may be “bail-ins” or operations to recapitalize banks through the shrinking of the money supply, similar to what happened right after World War II.

Britons had a lot of reasons to vote to leave the EU. What they most certainly did not like, was that the club which was supposed to be about scrapping trade barriers turned out to be a club mostly centred around a common currency helping to boost an ever-centralising bureaucracy and helping to prop up virtually bankrupt European welfare states. Without the eurocrisis, which gave the EU such a bad reputation, the British may well have voted to stay, despite concerns about freedom of movement. Brexit is just the first big blow the euro has inflicted on the European Union.

At the moment, elites in Berlin, Paris and Rome still believe they will manage to save the euro project through a “transfer union”, despite the fact that the large eurozone transfers since 2010 (and before, through the ECB) have done little to mitigate the crisis. Given the series of euro crises that will continue into the future, and which eventually may lead to its demise, it is now crucial to make the case for an arrangement in Europe that secures the right to do business and move cross-border, and make sure this great part of EU cooperation isn’t tainted by the failure of the euro. Otherwise, the enemies of free and open trade will happily seize the occasion to kill the EU, alongside with the euro.

Monday, April 03, 2017

Will clean coal be allowed to develop in Europe?

Published on

Trianel Kraftwerk Lünen calls its tself the most modern and efficient coal power station in Europe
EU and national energy policies are strongly focused on promoting the use of renewable energy. However, EU policymakers should not overlook progress being made in traditional energy sources, especially in coal power plants, writes Pieter Cleppe, head of the Brussels office of think tank Open Europe. According to Cleppe, a significant expansion of ‘clean coal’ – which involves both carbon capture and storage (CCS) and supercritical power plants – may be needed to achieve the EU’s climate targets. 
A lot is changing in the energy debate, and not just because President Donald Trump may rewrite the playbook, even for Europe. In fact, for both renewables and traditional fuels, there are major developments on the technological front.
While cost reductions of renewables have been making headlines, technological breakthroughs in the realm of fossil fuels have also been coming thick and fast, although they are much less reported on.
India deserves particular attention: there, despite the country’s significant renewables drive, two-thirds of power still comes from coal plants. Its government plans to double 2016-level coal production, to 1 billion tonnes by 2020, even pledging that state-owned companies would ramp up production if private production wouldn’t be sufficient.
The EU’s own reference scenario predicted last year that two-thirds of solid fuel energy generation will come from plants that use CCS technology
To resolve the discrepancy between India’s reliance on coal power and its global carbons emissions commitments, India is implementing an ambitious CCS program. For example, at a prototype 10 MW facility in Chennai, 90% of carbon dioxide released is being captured and stored. The company behind the technology claims it can be scaled “up to 1,000 MW”, indicating how important this technology could become.
While the Chennai facility promises to capture nearly all of the CO2 emitted from the burning of coal in a commercially viable way, India’s government has also announced it will invest in modern, more efficient “supercritical” coal-fired power plants that leverage new technologies to produce more power with fewer emissions. In fact, Indian Energy Minister Piyush Goyal is so optimistic about this new development that he recently argued that upgrading 40GW of such out-dated plants will generate CO2 “saving[s] [that] will be far greater than possibly the 100,000 MW of solar power that we will be generating.”
Green campaigners
According to U.S. coal industry representatives, a favourable legal framework could spark a surge among “clean coal” plants in the United States as well. With Donald Trump in the White House and the GOP firmly behind a fossil fuel-friendly energy agenda, coal might very well get a boost.
To avoid a national blackout that month, Germany had to rely on coal power plants, 30 of which are scheduled to be shut down by 2019
Green campaigners may object to Trump’s pro-coal policy, but in view of the fact that coal will remain a dominant part of the energy mix for decades to come – at least according to the International Energy Agency – any option for making it cleaner should be given a chance.
Actually, under the Obama administration similar efforts were made. Obama increased tax credits for capture and sequestration last year. Just before he left office in January, the first large-scale government-backed “clean coal” facility was declared operational in Texas. Another is near completion in Mississippi.
If Trump double downs on carbon capture technologies, as he will according to his allies, this may have an effect on Europe as well.
Governments in the UK and France have pledged to phase out unabated coal generation completely, and more than half of Europe’s power generation is currently coming from non-fossil fuels, including renewables and nuclear energy.
Still, member states like Germany and certainly Poland generate a large percentage of their electricity from coal, more than 80% in Poland’s case. As a result, Europe will need to implement carbon capture technologies similar to the ones being developed elsewhere, if only to reach its own emission target reductions for 2050. Actually, the EU’s own reference scenario predicted last year that two-thirds of solid fuel energy generation will come from plants that use CCS technology.
The development of supercritical plants will be important too for Europe. In Germany, this technology is already being used, for example in the Trianel coal power station in Lünen. On average, Europe’s coal power plants lag behind Japan’s and even China’s in terms of efficiency, so there is a lot of room for improvement.
Construction of Trianel Kraftwerk Lünen
In almost every EU member state, electricity markets are characterisedby subsidies, overregulation and preferential treatment for various energy sources. On top of that, the EU is distorting competition itself through its imposition of targets to achieve a certain share of renewables. With Open Europe, we’ve estimated that the cost of adopting the EU’s 2020 climate change targets will come to an extra £220,000 for a small-to-medium British business. At the same time, this delays technological progress which could benefit both consumers and the environment, given that technologies to improve coal aren’t as rewarding any more when the market for non-renewables is kept artificially smaller than it would have been otherwise.
It’s also a matter of energy security. Germany, which has a highly developed renewable energy sector, has to rely on traditional energy when push comes to shove. On a single day in January of this year, nuclear- and gas-fired power plants, as well as those using black- and brown coal, had to supply 90 percent of Germany’s electricity. With hardly any sun or wind, renewable energy sources failed to provide much energy.
Renewable technology holds great promise, but how responsible is it to exclusively rely on it while ignoring very real downsides
Indeed, to avoid a national blackout that month, Germany had to relyon coal power plants, 30 of which are scheduled to be shut down by 2019. Partly due to the decommissioning of nuclear power plants, coal’s share in the electricity mix has remained stable, accounting for about 40% of Germany’s electricity production. With willing customers for its relatively cheap coal-generated energy in neighbouring countries, German coal production levels are expected to only decline slowly.
Real downsides
Outside the EU, major energy markets are far less shy about using coal power. In Japan, South Korea, Southeast Asia, Turkey and the Balkans, it is far from extinct. The International Energy Agency (IEA) foresees that coal will remain the single biggest global source of electricity generation until 2040, while worldwide demand would increase by 5%. It’s no wonder that the IEA and the United Nations Intergovernmental Panel on Climate Change consider carbon capture and storage to be a necessary technology to curb greenhouse gas emissions.
While renewables continue to develop, Europe shouldn’t miss out on other technological developments which may help achieve the same goals
Renewable technology holds great promise, but how responsible is it to exclusively rely on it while ignoring very real downsides? Wind and solar energy infrastructure operates part-time and needs back-up capacity, driving up electricity prices. Furthermore, how wise is it to declare only one particular kind of energy production environmentally friendly and economically viable? Hazardous materials are needed to produce solar panels, while the environmental downsides of wind turbines have also been documented. While renewables continue to develop, Europe shouldn’t miss out on other technological developments which may help achieve the same goals.