Author Archives: Alex Harrowell

About Alex Harrowell

Alex Harrowell is a research analyst for a really large consulting firm on AI and semiconductors. His age is immaterial, especially as he can't be bothered to update this bio regularly. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

We’re only making plans for Nigel

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Via Crooked Timber, French Politics has interesting things to say about the Sarkofund:

In France it’s hardly unprecedented for major capital spending to be directed by the state, whether under the Commissariat au Plan, through state-controlled or -influenced enterprises, or directly by the Ministry of Finance. Sarkozy always danced nimbly between the neoliberal and state-capitalist camps. If the last two decades were the neoliberal decades, the coming two are likely to consecrate the hegemony of state capitalism. Sarkozy has been quicker than most to draw that conclusion and try to get ahead of the tsunami.

In a sense, there have been two really interesting consequences of the crisis, one short- and one long-term. The short-term one is that the vast quantity of risk transferred into the shadow banking sector…well, was it?

What we do know is that a hell of a lot of risk was transferred off the banking system’s books, into the hedge funds, into SIVs, and through securitisation. However, we also now know that the banking system itself was a counterparty to much of this; the proprietary trading desks and fund management arms consumed quite a lot of the paper the investment banking groups produced from the loans the retail mortgage lending ones originated. I wouldn’t be very surprised if a bank turns up holding some hundreds of millions of its own mortgage securities that its mortgage arm thought were safely off the books. Let’s just say that the risks were moved into the twilight zone, where they didn’t officially appear on anyone’s books – rather like some of Enron’s special purpose vehicles, come to think of it.

Now, as the risks turn out to be real and greater than anyone wished to believe, this stuff is being brought back on the banking sector’s balance sheets. As human nature would suggest, of course, the stuff transferred into the Zone was preferentially the riskiest stuff, so this process is extremely painful and capital-sapping. So the financial sector’s fundamental role – intermediating the allocation of capital – is going to be paralysed for a while to come, as the Mortgage Pig makes its way through the pecuniary python.

The other, longer-term issue, is that the financial system’s validity in assessing risk and allocating capital is itself in question. Capital was more abundant than ever before, as were liquidity and demand; and the system misallocated it spectacularly, diverting a great river of money, the savings of all the world’s industrial exporters, into the single purpose of inflating housing markets in certain districts of California and Ohio. This function has to be carried out by somebody, and just as for some time the Eurozone’s wholesale lending market has been replaced by operations at the European Central Bank, perhaps a large fraction of the industrial capital market will be replaced by….what? It seems unlikely that it can all be state portfolio investment, but given the combination of plunging activity and the incredible appetite for treasury bonds, a hell of a lot will be.

Keynesian Sarko

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It has come to this. Does anyone remember Nicolas Sarkozy of a year ago? Back then he was being feted by the anglospheric media as a French Thatcher, a neoliberal wind of change shaking a battery of outdated perceptions to its heart and mixing a few other metaphors whilst they were at it. We blogged a certain amount about how vacuous so much of this was; France, after all, did indeed go through a fearfully tough industrial restructuring in the 1980s, apparently entirely unnoticed by the media establishment. Its economic problems simply are not those of Britain in the early 1980s; anyway, a lot of people are now busy amending the level of confidence they have that those solutions were appropriate at all. (This London Review of Books article is required reading.)

Without the original radical-right dream, which had little enough substance to begin with, the Sarko presidency basically returned to its default settings and ran on under automatic control. Now, however, the banking crisis has given him a new dose of authority, much as it has to Gordon Brown; but nobody is talking about making everyone work more hours, or facing down the trade unions, now. Instead, Sarko has found his inner Gaullist; perhaps it was never so far away. Here’s the German newspaper whose website is slightly better organised these days; the factoid is that the prez wants to set up a state investment fund to buy into “strategic” industries, as part of a broader reflation strategy for which he intends to bring forward a lot of capital expenditure projects and cut taxes on business.

(Remember when “les caisses sont vides!” and scares based on funny figures were the order of the day? As Max Sawicky so wisely put it, there are no atheists in foxholes; we are all Keynesians again now.)

There’s more detail in Le Monde; especially, there’s one specific detail we’ll have to come back to. A lot of people have greeted the news of the fund with a certain degree of nonsurprise. Since when hasn’t the French government taken stakes (and influence) in “strategic” industries? The new fund will be managed by the CDC, the state-owned bank which exists to, well, invest in strategic industries. It’s no great surprise that the Germans, and specifically the CDU, are suspicious to critical at what they probably think is an invitation to put their money into the French military-industrial complex.

There is certainly a very traditional look to some of this proposal; the prime minister has ordered all the 93 prefects to hold monthly meetings with banks and enterprises on their turf to ensure the availability of credit, which as well as being suitably Bonapartist also reminds me of the passage in J.K. Galbraith’s The Great Crash about the importance of meetings that are held to do no business. Handelsblatt‘s blog duly hands out the pious opposition; they even descend low enough to say such things should be left to Russia.

But there’s an interesting detail in the Le Monde version which no-one else seems to have picked up; rather than Alstom, Alcatel, Thales, EADS etc, this new fund is meant to buy into small and medium-sized companies, which makes it considerably less of a classic military-industrial stitchup. That, at least, suggests that this project or perhaps this one might not be beyond its scope.

Over and beyond this, Sarkozy has revived the regular French suggestion of an “economic government” for the EU, or the Eurozone. Now, my problem with this has always been that the EU already has an economic government; it’s called the European Commission. However you cut it, it’s a governmental institution, and the great majority of its functions are economic; which goes double, as the economic functions are the ones in which it has exclusive jurisdiction. The usual suspects are delighted by this, and by the fact that there has been a summit meeting of Eurozone members. Oddly, they don’t seem to say much about the fact it was bookended by full European Council meetings, or that the plan it adopted originated in the UK, although much if not all of its content originated with VOXEU academics.

You could often get the impression that if the conversion of Europe into a single state occurred tomorrow, there are quite a lot of important people in France who would welcome it as a chance to call a Eurogroup summit meeting, such is the obsession. And there is no reason why they shouldn’t have it; after all, as the usual suspects point out, all it amounts to is a “point of contact”. However, one thing the crisis has shown up is that there isn’t a sensible economic distinction between the EU and the Eurozone; problems blow up in one and pass straight into the other, as do solutions.

Of course, the real difference between the Commission and an “economic government” is economic; it’s the member states who have serious money available, the Commission’s budget power being further restricted by its mandates under the CAP. And the upshot has been that no-one has really looked to the Commission for anything much in the crisis; it’s been either the ECB, or else the intergovernmental wiring that gets used. If they want to be relevant, now’s the time to put the Commission’s money where its mouth is and back something like the Sarkofund. If you want a soundbite, perhaps it’s time for it to move from funding the transition to membership to funding the transition…to the future! Corny!

This Weekend in Thrilling European Administration

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There are essentially two basic critiques of the EU’s institutions; one is the classic, Monnet/Schuman house ideology view that its problems are simply because there isn’t enough of it. If it was more like the US federal government, it would work better; and, as we designed it to get more like that, it must be somebody’s fault. The British are usually the somebody, but Italy, Spain, Germany, and the new members are all candidates.

The other one is the classic Eurosceptic or libertarian (genus: north american) view, that all its problems are down to the fact that it exists, because it’s a bureaucratic monster operating a planned economy. (I didn’t say these had to be based on facts.) Usually, the evil monsters are either the French government or the EU itself, presumably meaning the Commission.

These myths meet the standard framework for understanding the EU’s politics at an odd angle. Power in the EU institutions is usually described by the tension between a supranational force, the Commission as the EU high priesthood and executive branch, and an intergovernmental force, embodied more by the European Council – the regular summit meeting – than the Councils of Ministers, the much more regular final legislative bodies. It nearly matches the two myths, in that the Commission and friends always skew to the first myth, following their interests, and the supporters of the second like to blame Brussels (i.e. the Commission) because it’s there.

But the standard model is getting old. For a start, where does the democratic power of the European Parliament fit in? You can’t just blow it off; ask Denis Olivennes and Nicolas Sarkozy what happened to their clever idea. It’s not supranational, it has national caucuses and its constituencies don’t often cross borders. But it answers to no national government, and very good that is too – remember the Kaczynskis’ attempt to unelect Bronislaw Geremek? And so much of its work puts it in the role of a loyal opposition to the supranational power, and for that matter to the national governments as well.

Them. At least the academics did spot the rise of the intergovernmental power; ever since the first European Council was called by Giscard in 1975, the intergovernmental power has got stronger. It used to be that the Commission proposed and the ministers signed off; now, much of the time, the Council takes a strategic lead, the Commission drafts suitable legislation, Parliament amends it, the ministers make a final decision, and then the Commission administers the finished job. Traditionally, it was seen as bad and anti-European that the intergovernmental wing of the union got involved; surely, if all those egos got going, nothing would happen…and something must happen, for Monnet prophesied it!

It was further thought that intergovernmentalism meant inaction. This was shared by both the myths – the true believers insist that we need an “economic government” (whatever one of those is), “reinforced cooperation”, anything so long as the Commission gets to be more like the US Federal Government, while the eurosceptics insist that only national governments acting alone can get anything done, or alternatively that government in general can achieve nothing and therefore it shouldn’t be encouraged.

Now, the Tartars have finally arrived out of the steppes; the crisis is upon us. Of course, the myth fans all find it equally supportive to their own myth. That economic government is trotted out again. This glibertarian nonsense gets another outing. But let us consider the system’s performance. To begin with it looked poor; as the third wave of the bank crisis arrived, everyone still thought bank failures could be handled as individual cases. The UK seized, and immediately resold, Bradford & Bingley; Belgium did likewise with Dexia, and then Fortis, with the Benelux states. The crisis kept up; it looked like no-one had any grip; but then, the mighty federal bureaucracy of the US Treasury Department was if anything even more lost.

In the event, the British announcement of last week pulled in one idea from Ireland (guaranteeing wholesale lending) and another from Sweden (equity recapitalisation), and probably owed quite a bit to the VoxEu paper; but it was the first serious suggestion to apply across the board and offer a comprehensive solution. Once it was out there, it took only one European Council and one Eurogroup meeting over the weekend to get consensus on the plan and press the trigger.

There’s a real sense in which the value of the EU is simply in getting into the habit of cooperation, and getting over the coordination/trust problems. Beyond that, it strikes me that the “laboratory” argument for federalism applies very well here.

The Todd That Failed

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The Nation has a cracking, snarky and sharply reported, story out about Rick Davies (John McCain’s campaign manager) and his role in the run-up to Montenegrin independence. Read the whole thing, as they say. What struck me about it was first that AFOE had a damn good little controversy of its own about the same issue, and secondly that the slightly larger controversy – whether Montenegrin independence was at all legitimate, or part of a devious anti-Russian plot orchestrated by the liberal hegemony – now looks very silly. After all, our own dear trolls were very keen to denounce it as a CIA plot against all that was holy, cos of Kosovo and stuff; but it turns out that Davies, in his role as spin doctor for Milo Djukanovic’s campaign, was being lavishly funded by….Russia.

You know, that Russia – big place, with bears, space rockets, birch trees, vodka, pan-Slavic brotherhood, yes? Hilariously, it looks like Davies had the support of Henry Kissinger and at least one Rothschild in this exercise, to say nothing of the aluminium king Oleg Deripaska, new owner of Montenegro’s huge lossmaking bauxite smelter, which you’ll have met in these pages before. It’s as if all the far-left stereotypes about the Balkans were true; but just on the other side. Of course, there’s something of a history of dodgy Russian money and rightwing Republicans when it comes to the Balkans, but that was far more closely associated with Tom DeLay.

As a bonus, the Nation piece is the answer to the question “What is Mark Ames doing with himself these days after The Exile?”

Enlarging the tubes

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In my work inbox this morning, a message from TeleGeography. Their latest report on IP transit pricing is out. This bit struck me: 1,000Mbits of transit over Gigabit Ethernet in Bucharest now costs no more than it does in London – and only a couple of dollars more than in San Francisco. That’s incredible, and impressive. Talk about returning to Europe. Interestingly, the price is almost identical whether you’re in North America or Europe; but it’s higher by a factor of seven in Sao Paulo.

Join!

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Canada is interested in a huge bilateral agreement with the European Union, which going by the details given would almost amount to membership in the EEA. Cool.

Ironically, in the years when the British Empire was either trying to recast itself as an EU-like economic union or trying to get into the ECSC/EEC with all its members, Canada was notably the least enthusiastic state – and given that this included South Africa, that was saying something. Had the cards fallen differently, you can almost imagine Canada leading the effort to get the UK to join.l

It wasn’t that long ago that there were people in the Conservative Party who thought the UK should leave the EU and join NAFTA; it’s amazing what a few years’ rampant misgovernment will do. It’s almost a cliche of American discourse that Canada is almost France; you wonder what the Eurosceptics and their creepy ideological friends in the US will think when it happens.