Tuesday 27 September 2016

Capitalism, Imperialism and Finance

Here is a link to the video of the launch of my book, The City: London and the Global Power of Finance, at SOAS in London on 19 May this year.

The presentation, together with a Q&A session, takes a little over one hour, and it is possible to scroll through the presentation file used. (The only amendment I would make is that early on in my talk I wrongly said that Carlsberg was a Netherlands company, when it is Danish, and I should also have noted that Anheuser-Busch InBev/SAB Miller also had a US connection. I had other things on my mind at the time and got a little confused.)

Tony Norfield, 27 September 2016

Monday 19 September 2016

Le Monde Diplomatique

Next week, on Monday 26 September, I will be presenting a discussion on 'The International Financial Markets and the City of London' at one of the regular Cafe Diplo meetings held by Friends of Le Monde Diplomatique.

Event details are:

Monday 26 September
Time: start 6.45pm to finish around 8.30pm, with plenty of time for discussion
The Gallery, Alan Baxter & Associates LLP
75 Cowcross Street
London EC1M 6EL

Entrance fee: £3 (£2 concessions)

Wine and fruit juice are available.

The nearest tube/overground station is Farringdon. Walk into Cowcross Street, away from the station, and past The Castle Pub on the corner. Further along, on the right hand side you pass the Three Compasses Pub and about 50 metres later you will see some iron gates with a small Cafe Diplo sign. Inside the gate you will find the reception area on the lower ground floor.

Tony Norfield, 19 September 2016

Wednesday 14 September 2016

'Humanitarian Intervention' in Libya

The UK parliamentary report on the 2011 intervention in Libya and its aftermath gives an interesting summary of events. The whole thing, in President Obama's words, became a 'shit show'. However, the real lesson that comes from reading the report is how calls for 'humanitarian intervention' are a cover for big power interests. In this case, it turns out that even these interests were not fully thought through by the key advocates for intervention, first France, then the UK and the US.

The Libya report is published today, now that a certain David Cameron is not in the embarrassing limelight. One note in the report, however, sums up the general stance taken by British politicians: the House of Commons voted by 557 to 13 in favour of British intervention. Of the 13 opposed, just 8 were from the Labour Party, two were from the Conservative Party, two were from the SDLP and one was a Green MP.

Such parliamentary reports aim to identify problems ... so that they may be avoided next time. This report has been relatively prompt in the making, but during the five and a half years since the Libyan intervention, the major powers have not been slow to get involved in plenty of other mischief and destruction.

A concluding note on France's rationale for intervening in Libya (the report spends little time on the UK's), taken from a US State Department report of a meeting in April 2011 with French intelligence agents. President Sarkozy's plans in Libya were reported to have been driven by:

a. A desire to gain a greater share of Libya oil production,
b. Increase French influence in North Africa,
c. Improve his internal political situation in France,
d. Provide the French military with an opportunity to reassert its position in
the world,
e. Address the concern of his advisors over Qaddafi’s long term plans to
supplant France as the dominant power in Francophone Africa.

So much for Bernard-Henri Levy and the humanitarian 'public intellectuals'.

Tony Norfield, 14 September 2014

PS: For those interested, the Parliamentary debate on intervention in Libya was on 21 March 2011. Details of who said what are available in the Hansard report here.

Friday 9 September 2016

Shifting World Corporate Power

Those who like international comparisons that highlight the shift in global power will be interested in the following table. It is from research by Paul Kellogg, University of Toronto, published in 2015, and shows the geographical breakdown of the 2,000 largest public corporations, ie those whose shares are quoted on stockmarkets.

There is a striking decline of the US, Europe and Japan over this period, countered by a rise of the BRICS countries, but mainly China. To some extent, China's data will also have been boosted by the stockmarket bubble in 2014, which burst in 2015. But the underlying trend is nevertheless clear, and China's stockmarket in 2016 has since recovered to and beyond 2014 levels. As Kellogg puts it: 'In 2004 there were just 50 corporations from China on the full list of 2,000 (25 of which in Hong Kong). By 2010, the Hong Kong total had jumped to 49, the total in all of China to 162. In 2014 the Hong Kong total stood at 58, the total for all China at 207.'

My only quibble with the table is that he would have better shown only one decimal place in the numbers!

Tony Norfield, 9 September 2016

Thursday 8 September 2016

Trends in World Debt

The reality of a global economy is shown by close connections in trade and investment, and is reflected in similar trends that affect many key countries. One of these trends is the rise in debt held by governments, households and corporations, as borrowing grew to provide the funds to maintain economic activity. After the acute phase of the economic setbacks in 2007-08, the world is now in the chronic phase of stagnant growth. Occasional blips higher look good, and the patient goes for a walk, but the economy is never far from stumbling back into a ditch.

There are individual deviations from the average picture, but each country's details express the evolution of a world economy. Even though one country may be impacted less, or more, that deviation usually reflects its position in the hierarchy of world economic power. Higher debt levels, or ratios of debt to GDP, are common among the richer countries, especially those that have a privileged position in world finance. After all, they can raise funds from the world market fairly easily since they are the guys in charge and, in the market's 'wisdom', are likely to remain so. Poorer countries have what is called a 'less developed' financial system and tend to hold less debt, at least in relation to the size of their economies. This general point is borne out by the data on debt/GDP for those the Bank for International Settlements considers the 'advanced' versus the 'emerging' countries, as shown in the next chart for the period 2000-2015:

Two features of the previous chart stand out: first, the much higher debt ratios for rich countries, but, second, the faster rate of growth of debt in the poorer countries in recent years. This reflects how much more the poorer countries attempted, from a lower base, to keep their economies ticking over in the wake of the acute phase of the crisis by accumulating more debt.

Country details bring out some other points. First, here is the chart of the total financial sector debt for some key emerging market countries, to add to that already given in a blog post a few days ago for the major advanced countries:

Clearly, China and South Korea have had the biggest growth of debt in the past 15 years, and have the highest ratios of the main 'emerging market' countries. China's rise in debt has been most dramatic after 2008, but, as a later chart will show, this has principally been on the back of the extra debt burden taken on by non-financial corporations (both private and state-owned).

This China development is similar to the results for many EM countries. It contrasts with the picture for advanced countries, where the extra debt has been mainly held by the government sector. This reflects the ability of the major states to borrow and alleviate the burden of the crisis in the corporate and household sectors via government liabilities (debt), while the emerging market countries and their governments, with less access to world markets, are far less able to do so. The breakdown of EM debt in BIS data only goes back a few years, compared to the longer time series for advanced countries, but the next two (different) charts below indicate what has happened:

While advanced countries have seen the debt burden (debt/GDP ratios) of the household and corporate sectors decline in recent years, emerging market country debt ratios have increased sharply, especially for the corporate sector. Government debt ratios have not changed much for emerging market countries.

Now to some country pictures for the breakdown of debt, starting with the major powers. Every picture tells a story, so my comments will be brief. Take care to note the y-axis scale in each chart. A taller bar in one chart compared to another chart does not necessarily mean that the debt ratio is higher.

The US: total debt has stabilised around 250% of GDP. Government debt has doubled to 100% of GDP, but household and corporate debt ratios have declined. As mentioned in an earlier blog post, these data ignore the US Federal Reserve's 'assets' in the form of mortgage securities that they have bought. Also, the data only cover 'non-financial' sector debt, so exclude many other liabilities of the financial sector, not least pension funds.

The UK: similarly, the UK has seen household and corporate debt shrink somewhat, while government debt ratios have also doubled to around 100%. Total non-financial sector debt in 2015 was a touch lower than in 2012, at 266% compared to 277% of GDP, but again, this ignores the many extra liabilities of the Bank of England apart from other obligations.

France: this country is in a worse debt position than the UK. The increase in government debt has been similar, but household debt, and especially corporate debt has risen further in recent years, rather than declining. The total debt ratio in 2014-15 was 290%. In the past five years, annual economic growth in France has been below 1% and often close to zero. This picture gives the backdrop for worries about French banks.

Italy: traditionally having a relatively high government debt ratio compared to other major countries, that debt grew still further after 2007. Total debt stabilised at close to 275% of GDP in 2014-15. Economic growth has been lower even than in France.

Spain: there has been a sharp rise in total debt since 2000, but some recent reduction. Corporate and household debt ratios have fallen in recent years, largely offset by a rise in government debt. In 2015, total debt was 283% of GDP.

Germany: this is the outlier country, with a steady reduction of the total debt ratio in recent years, hitting 184% of GDP in 2015, and with the ratio staying below 200% even in the acute phase of the crisis. German annual economic growth has been weak, at less than 1% in recent years, but Germany's government debt ratios increased by much less than in most other major countries. This may be related to the liability that Germany takes on for the eurosystem via the Bundesbank, and this is not counted in the data here.

Emerging Market Countries

Interesting emerging market countries from a debt perspective are China, South Korea and Brazil. The total debt picture for these was given in the second chart above.

China: historical details for China's debt data are patchy, so for 2000-2006 the following chart only gives the total and the government number (with the black bar indicating the difference). After being fairly stable from 2000 to 2008, China's total debt rose sharply, principally through the rapid debt accumulation of non-financial corporations, both state and private. Household debt has also risen, but not by much. In 2015, the total debt ratio was 255% of GDP, with corporate debt at 171%, up from 99% in 2008. This rapid debt accumulation has led to worries about bad loans, but against this one has to take into account some important mitigating factors. While corporate debt has risen rapidly, the average leverage of corporations is low. Furthermore, the government has an ability to allocate funds between different sectors in the case of emergency, apart from still holding more than $3 trillion in foreign exchange reserves.

South Korea: there has been a steady rise in debt ratios for all three non-financial sectors from 2000 to 2015. In 2015, total debt was 235% of GDP, which nevertheless remains well below the figure for most of the major countries shown above.

Brazil: the debt picture for Brazil would seem to belie the crisis the country faces. Total debt rose from close to 100% of GDP in the early 2000s to 149% in 2015, but not by much in the scheme of things, and to a level that remained below all the other countries shown, even below Germany's debt ratio. As in China, Brazil's debt ratio only started rising after 2008. This indicates that the debt ratio is far from giving a full summary of economic conditions. Brazil's economy has been in decline for several years, hit by weaker commodity prices and a slowing of world trade. Government debt started at a relatively high level, but has hardly changed. The increases in household and non-financial corporate debt has accounted for the rise in the total.

Debt and Interest Rates

If you were wondering why interest rates remain at very low levels, with central bank rates negative in Japan and in many European countries, the debt burden is the clearest answer. Huge debts have been accumulated in most key countries in response to the crisis. Now they stand as a mountain of liabilities, payments on which can only be serviced - and defaults avoided - if interest rates remain low. Higher levels of interest rates would threaten to collapse the edifice that has been erected to shore up the world economy.

Tony Norfield, 8 September 2016

Sunday 4 September 2016

The Debt Mountain

Financial debts are obligations to pay back the creditor. This may not happen, either because the debt is 'forgiven' (rarely) or because it otherwise gets written off in a deal to restructure future payment obligations in a way that looks more plausible to the creditors, who may be banks, insurance companies, pension funds or other private sector asset managers, or another government or public sector organisation. For the major powers, being in such a situation is a little tricky. They are meant to be on the disciplining, creditor end of the balance, even if they also happen to be in a lot of debt themselves. However, a recent set of data from the Bank for International Settlements indicates that, despite the much-vaunted recovery of the world economy from its acute crisis phase, debt ratios to GDP have generally gone up in recent years in the key countries. Even where the debt ratio appears to have fallen a bit, this hides a wide range of other, not-counted obligations (implicit debts) that may be hidden off budget, or are deep in the details of the relevant central bank accounts.

The following chart for five key countries shows the picture for the 2000-2015 period. Japan remains an outlier, with far and away the highest debt ratio of 388% of GDP in 2015. Having had such a long deflationary depression, even an earthquake and tsunami leading to dreadful nuclear radiation fallout from the Fukushima plant could not induce the comatose economy (and political class) to wake up.  The UK looks in a slightly better position, although its recent lower debt ratio ignores the run up of Bank of England liabilities, plus many other off-budget items. The US debt ratio has stabilised in the past five years or so, but this has been despite the supposed recovery of the economy, and also ignores the post-2008 accumulation of Federal Reserve 'assets', including nearly two trillion dollars of mortgage securities bought from banks. France's debt ratio has continued to rise. Germany's has fallen, helped by the stronger economy. But the latter calculation ignores the liability of Germany, at the heart of the eurosystem's finances, where endless volumes of dodgy 'assets' have been accumulated by the European Central Bank, whose main shareholder is the German state.

So, following my usual caveats about what data really cover and what is ignored, here is a chart of how the total debt ratio of the non-financial sector (including governments, households and non-financial companies) in five countries has developed in the past fifteen years:

Tony Norfield, 4 September 2016

Friday 2 September 2016

Britain’s Brexit Limbo

Britain’s divorce from the European Union will be a tortuous affair.* The British establishment losers in the June 23 Brexit referendum were shocked by the vote to leave, as were the financial markets: sterling’s value slumped some 10 per cent on the foreign exchange markets and the UK’s credit rating was cut. But even many victors looked shocked too. Some, including several leading Conservative Party Members of Parliament, only wanted to gain some appeal with their populist stance against the EU, not really to go ahead with such an uncertain venture. Perhaps more importantly, world leaders were bemused that the British government could have let things come to such a pass. Long having been able to pose as the knowledgeable consigliere to the major powers and others, advising on disputes and helping to negotiate deals, the UK now looks like a reckless troublemaker. For them, the aftermath of the Brexit referendum is another unwelcome upset in an already crisis-ridden imperial landscape.
Article 50
The formal exit process begins when the UK invokes the never yet used Article 50 of the EU’s 2009 Lisbon Treaty to inform other members of its decision. In normal clubs, there is a procedure for a member leaving. But, as far as I know, this Treaty for first time gave one for the EU. (Let no one be so impolite as to mention that there is still no procedure at all for leaving the euro group of countries, since, of course, membership of the euro currency area is ‘irrevocable’) Article 50 is the explosive device, but it turns out that the UK does not have to trigger it any time soon. Even if it did so next week, to begin formal negotiations on the terms of exit, then there would still be a period of some two years before the final farewell. The latest reports suggest that it will not even be triggered until 2017.
There is now a developing conflict of interests between the UK and the European Union. In the referendum campaign, the UK ‘Leavers’ claimed that they could achieve more or less full access to the European single market, while making good trade deals elsewhere. Above all, they promised to get these advantages while stopping the unwanted immigration of workers from the EU, whom they claimed were putting ordinary Brits out of jobs, while adding to the queues for housing and welfare services. What never got a look in during these debates was the idea that capitalism, dysfunctional and averse to economic security, might be responsible for the problems, not the EU.
On the EU side, the last thing the main European powers want to do is to make an exit seem like an easy option, especially since they are also faced with political opposition to the EU and/or the euro in France, Spain, Italy and Greece. They have been cautious in their approach; perhaps thinking that the British Parliament might somehow disregard the result of the referendum, although this is politically a non-starter. But there have also been signs of irritation that the Brits do not just get on with the process of leaving.
Most observers reckon that a UK exit from the EU will not occur before the end of 2018 at the earliest, with German, French and Dutch national elections in 2017 likely putting a constraint on how flexible the UK’s partners will be for their sadly departing friend. Even if the main EU powers were conciliatory, they would be faced with the problem of a lack of clarity on the UK side. A recent Financial Times story cited an EU diplomat who was exasperated at this: ‘They have to sort themselves out. They come from London and they don’t know what they want. They don’t know what their government wants, what their parliament wants. They have not prepared.’ All this could be part of a cunning plan by the wily Brits to increase their room for manoeuvre in negotiations. But it looks more like reflecting that, beyond vague generalities, they do not yet really know what they are going to do.
Regime Changes
So much for a Brexit vote, one might think. However, changes are afoot, nonetheless. Already, Lord Hill, UK European Commissioner for Financial Stability, Financial Services and Capital Markets Union, resigned his post in the wake of the referendum. This means that there is more leeway for the EU’s other powers to try to undermine the position of the City of London in European financial affairs, something already attempted by the European Central Bank and France in 2011-2015. It will be plus c’est la même chose, plus ça change for the Brits in the next few years, because being not quite an EU member will mean British interests will be less protected by EU single market rules.
While things on the UK Brexit front have been very far from sorted out, some of the recent vagaries of British politics have been more neatly varnished over. The governing Conservative Party swiftly resolved its leadership contest in favour of Theresa May, after former Prime Minister Cameron resigned when his ‘Remain’ position failed. This was deftly executed and made the opposition Labour Party, under embattled leader Jeremy Corbyn, look like a bunch of nobodies going nowhere.
New Prime Minister May stamped her authority with an inaugural speech on the steps of 10 Downing Street that claimed to care for all in a striking one-nation approach. She gave her policy goals as improving social justice, being anti-the privileged few and helping workers. This was a clear appeal to the Brexit working class, especially in England, that had voted both against the establishment line and against EU immigration, and was effectively calling on the British state for support.[1] It also further undermined the opposition Labour Party’s claims to speak for the mass of people, a claim already weakened by its poor performances in the 2010 and 2015 general elections.
The Three Brexiteers
Theresa May has appointed three campaigners for Brexit to handle negotiations with the EU, although she will retain the commanding position on the British side, chairing the government’s Cabinet committee on Brexit. A major position, Foreign Secretary – Secretary of State, in US terms – was given to a Brexiteer, Boris Johnson, who had been the de facto head of the Leave campaign, and one-time challenger for the position of new Prime Minister after the Brexit vote. This former major of London is widely known internationally for his image-prepared tousled blond hair, his populist rhetoric and his PR prowess. But his new position puts him in a tricky spot, one so elevated that it will leave him gasping for air.
Like other celebrities who have captured popular attention, Johnson is known often only by his ‘first’ name Boris, although his real moniker is Alexander Boris de Pfeffel Johnson. He has joint UK-US citizenship, and is an alumnus, like others in the British elite, of Eton College, Oxford University and its infamous Bullingdon Club of riotous upper class yahoos. In contrast to many of his social peers, who are also in opinion-forming or government circles, his political career has been characterised by well-timed clowning and bombast to distract attention from his lack of attention to detail – or, commonly, his invention of details – plus his jibes at a multitude of world leaders when writing columns as a journalist. His qualifications for the position of UK Foreign Secretary, one that demands diplomatic nous, are so precisely wrong that the phrase ‘square peg, round hole’ comes to mind.
In one of his first international media encounters in his new job, alongside US Secretary of State John Kerry, Boris had to deal with journalists who wondered whether he still thought that Hillary Clinton was someone with ‘dyed-blonde hair and pouty lips, and steely blue stare, like a sadistic nurse in a mental hospital.’ The comment might have been a reference to Louise Fletcher’s role as Nurse Ratched in the movie, One Flew Over the Cuckoo’s Nest. If so, Boris must now fear he might suffer the same fate as Jack Nicholson’s character.
Just in case Prime Minister May’s chess strategy of putting a potential challenger in a zugzwang position became too problematic, she has downgraded this otherwise top political job. She has invented two more ‘foreign’ posts to distribute the burden, and the blame if things go wrong. Each of these has gone to other Brexiteers, as if to prove that she was not reneging on her democratic responsibilities.
Brexiteer Number Two, really Number One in practical terms, is David Davis, the new Principal Secretary of State for Exiting the European Union. Don’t worry if you have not heard of him; most people in the UK outside of the political circuit feel the same way. In his favour, he has a better record of keeping a consistent political position than the more famous Boris and, surprising though it is to note, he has even sometimes been progressive in his opinions. For example, he criticised a British policy of outsourcing torture to Pakistan.
Davis is unreasonably optimistic about the ability to secure favourable new trade deals quickly with non-EU countries, but in a recent article he showed a commitment in line with Theresa May’s new Brexit working class orientation. It was EU regulation of trade, not regulation of the labour market that, he said, that was stifling growth:
‘All the empirical studies show that it is not employment regulation that stultifies economic growth, but all the other market-related regulations, many of them wholly unnecessary. Britain has a relatively flexible workforce, and so long as the employment law environment stays reasonably stable it should not be a problem for business.
‘There is also a political, or perhaps sentimental point. The great British industrial working classes voted overwhelmingly for Brexit. I am not at all attracted by the idea of rewarding them by cutting their rights.’[2]
This stance fits neatly into the slightly more conciliatory approach of the British ruling class in the economic crisis. They sense the need to be cautious about political implications when there is a potentially disruptive populace. It has already led to a stepping back from the previous more direct approach to reducing government spending deficits. For example, instead of agreeing to balance the budget in the next few years, the new Chancellor of the Exchequer (Finance Minister), Philip Hammond, has said he would weigh up the evidence before committing to new spending plans in the Autumn. This was widely seen as a retreat from austerity policy, which, for similar reasons, is being followed in other rich countries. On 4 August, the Bank of England complemented the new post-Brexit policy with a cut in interest rates, promising more to come, and to expand so-called quantitative easing, including a plan to buy bonds from companies that ‘make a material contribution to the UK economy’. The latter pledge completely contradicted the ‘level playing field’, ‘free and fair market for all’ rhetoric of economic policy in recent decades. It is another sign, albeit a small one in this case, of a move towards a more nationalistic policy framework.
Liam Fox is Brexiteer Number Three, taking the newly invented position of Principal Secretary of State for International Trade. A return to frontline politics was always on the cards for this political operator, despite his previous misdemeanours. The black marks on his copybook have included him having to repay money that he had ‘over-claimed’ on expenses as a Member of Parliament – an easy mistake that all busy people are prone to commit when they view their profile in the state hierarchy as a source of unlimited funds for themselves. More damning for his reputation, and an issue forcing his resignation in 2011 as Defence Minister, was that he invited a business friend to numerous official meetings with diplomats and defence contractors. That friend posed as a government consultant to gain contacts, which was a step too far from official protocol.
Five years in the political wilderness was enough for Fox, and he saw his opportunity with the post-Brexit Conservative Party turmoil. His tactics were neatly executed: he put himself forward in the Conservative Party leadership election, although there was no chance he would win, then pulled out early and declared himself in favour of Theresa May, who was clearly set to top the poll. As a result, Prime Minister May rewarded him with the international trade position.
Fox has had no previous experience of the politics of dealing with international trade, unless one includes his promotion of arms deals, both when in office as Defence Secretary and when in a corresponding opposition role. It will be instructive to see if he can do his new job of reworking the web of UK-EU trade relationships – alongside promoting the much-vaunted non-EU trade deals too, of course. However, it has not been surprising to hear very little from him in his first month in office.
Plan 9 From Outer Space
One might wonder whether the new UK Prime Minister’s appointments for managing the Brexit process are part of some devious plan. Is the aim to string out the EU negotiations, helped by inept UK negotiators? But, if so, what would be the point? While settling a comprehensive deal quickly with the EU is not feasible, especially one that would be favourable to the UK, why muddy the exit route when British-based business would prefer a clearer path? However, the problem is not simply that the relevant expert negotiators are not available. It is worse than that: there is no easy, and perhaps no real solution to this impasse. In some form, the UK’s EU relationships will certainly continue, but the question is in what form? Political and economic factors offer plenty of room for conflict on both sides of the coming debates and, to say the least, there are no precedents from which to make a confident judgement on the likely outcome.
If it looks like the ruling elites in Britain, Europe and elsewhere are making it up as they go along, then that is because they are. At best, capitalist policymakers can exhibit something that could, very generously, be called ‘tactical flair’, as happened in the wake of the 2007-08 financial collapse and detailed in numerous memoirs by those involved. For example, in the famous ‘Lehman weekend’ in September 2008, the US Treasury and the Federal Reserve were faced with trying to rescue the financial system. They summoned banks and investment funds to emergency meetings and made desperate calls (including to the UK) to bolster their support for several US financial companies that were collapsing at the same time. Other examples abound, including many in Europe, from the European Central Bank’s policy initiatives to those of the Bank of England.
The Brexit aftermath is not as acute for the UK as was the 2007-08 debacle, but managing to avoid another collapse is hardly a sign of health. British economic policy is changing, as it is in other countries. This reflects how policy has adapted to what medical practitioners might call the chronic phase of an illness, after its acute phase, in this case the malady of modern capitalism. The patient – the British or other major economies – may now have good days along with the bad, leading to some short-lived optimism about recovery. But the illness is not going to go away and debt levels continue to rise. From the perspective of most of the population, economic ‘growth’ will look like stagnation at best.
This helps explain why politicians seem so incompetent or powerless these days. It is not a sign of a mysterious viral infection that especially impacts the closely-knit elites, however plausible that might sound, especially when looking at the choice US voters face in November. Instead, note that the current generation of politicians has been brought up not to question the operation of capitalist markets that seemed to bring them some prosperity. It is now faced with far more difficult choices. The ones that might now look more attractive – tactically, strategically, who can tell? – often threaten to dismantle the framework on which they have relied, with unpredictable consequences. This results in political disarray, with prolonged, bumbling hesitation and wild recklessness, even from the same politician. If the post-Brexit developments in the UK are beginning to look like scenes from a poor B-movie, with wooden actors spouting unconvincing dialogue and walking around crashing into the wobbly scenery, then that is just one reflection of a crisis-ridden world.

Tony Norfield

Note: * This article first appeared in the New York journal BrooklynRail, in the Fieldnotes section

[1] See my analysis of the domestic politics of the Brexit vote here.
[2] See http://www.conservativehome.com/platform/2016/07/david-davis-trade-deals-tax-cuts-and-taking-time-before-triggering-article-50-a-brexit-economic-strategy-for-britain.html

Thursday 1 September 2016

Farewell European Finance?

The latest Bank for International Settlements survey of the global FX market offers some interesting insights into the development of the global economy. Currency trading is critical as a measure of market activity, since it encompasses all the deals between countries (assuming they have a different currency), whether for trade, investment, hedging or speculation. Deals are largely done between financial companies, but they also reflect the activity of non-financial ones and the economy in general. Between April 2013, the date of the previous survey, and April 2016, the latest one, the striking feature of the BIS report is the decline in the volume of currency trading for the first time in many years. On a net-gross basis (the measure used, there are others!), the volume of global FX trading fell by 2%.

The main casualty is the UK (basically, London) as a trading centre, although it remains by far the biggest in the world. The gainers in terms of market share are the US and Canada, but more significantly the Asian FX trading centres. To have a smaller share of a market in decline, as the UK has had, is a big problem for a previously lucrative financial business.

The UK's share of global currency trading fell from 40.8% in 2013 to 37.1% in 2016, a very sharp drop, although still above the level in 2010. Meanwhile, the US, in second position, rose by 0.5% to 19.4% from 2013 to 2016. The US rise in share nevertheless meant that its volume of dealing rose by less than 1% over the three years; the UK's volume fell by 11%. The UK decline reflects the weaker European economy and the related weakness in euro currency trading in London (some three-quarters of the total euro trading), while US banks were in a relatively strong position, but that was not saying much.

Overall, Europe's share of currency dealing fell between 2013 and 2016, not only due to the UK. France, the Netherlands, Luxembourg, Italy, Ireland and Switzerland also declined. Although Germany had a slight gain in market share over this period, its share in this financial business is minimal at less than 2%.

Asian trading centres are recorded as the winners from the latest BIS report. Despite the impact of the global crisis on 'emerging market' countries that are vulnerable to changes in developments in the world economy, several Asian trading centres have had success on this financial dealing measure. Singapore's share of the volume of trading rose from 5.7% to 7.9%; taken together, China and Hong Kong's rose from 4.8% to 7.8%. This is an astonishing result for China, especially, backed by the near-doubling of the use of the renminbi in global FX dealing to 4%, making it the eighth largest trading currency, just behind the more established Canadian dollar and the Swiss franc. Meanwhile, the euro slipped to its lowest share since its inception, to just 31%, while the US dollar rose slightly to 88% (note that with two currencies in each deal, the total shares add up to 200%).

Financial dealing is far from being a full picture of reality. But the shift in economic weight from Europe to Asia is a clear message from the latest BIS FX report, with the US holding its own. This is consistent with a wide variety of other economic assessments.

Tony Norfield, 1 September 2016