Tag Archives: European Union

Comments on Geneva Report 23

Panel with Elga Bartsch, Agnès Bénassy-Quéré, Giancarlo Corsetti, Olivier Garnier, and Charles Wyplosz. Moderated by Tobias Broer.

Elga Bartsch, Agnès Bénassy-Quéré, Giancarlo Corsetti, Xavier Debrun: Geneva Report 23 | It’s All in the Mix: How Monetary and Fiscal policies Can Work or Fail Together.

Event at PSE.

My comments on the report.

On the Declining Political Support for Economic Unions

In an NBER working paper, Gino Gancia, Giacomo Ponzetto, and Jaume Ventura propose a theory of declining public support for economic unions: Broad gains from trade in differentiated goods make way for distributive conflict due to specific factors:

… this is partly due to the growth of trade between countries that are increasingly dissimilar. … political support for international unions can grow with their breadth and depth as long as member countries are sufficiently similar. However, differences in economic size and factor endowments can trigger disagreement over the value of unions between and within countries. The model is consistent with some salient features of the process of European integration and statistical evidence from survey data.

On the Gains from Integration in the European Union

In an interview with the NZZ, Gabriel Felbermayr explains where the European Union adds value, and where it doesn’t. The key points:

  • Free trade for goods and services as well as capital and labor mobility are partial substitutes. Partial, because factor mobility fosters trade and technology transfer.
  • Estimates suggest that free trade and capital mobility generate more than 80% of the welfare gains from European integration.
  • Even labor mobility does not require admission into welfare systems. “… der Nutzen uniformer Regeln im Güter-, Dienstleistungs- und Kapitalbereich [ist] sehr hoch … Dies stimmt indes nicht für das Sozial-, Arbeits- und Steuerrecht, auch innerhalb der EU. … Politisch will die EU die Harmonisierung im Arbeits- und Sozialbereich möglichst ausdehnen, um den Wettbewerb zwischen den Staaten zu disziplinieren. Das ist traditionell ein französisches Anliegen.”
  • The EU’s budget is mis-allocated: “Wenn man das EU-Budget ansieht, gehen 40% in die Landwirtschaft. Es gibt keinen einzigen guten Grund, dass das auf der zentralen Ebene angesiedelt werden muss. Es widerspricht dem Subsidiaritätsprinzip.”
  • What is missing: Capital requirements for government bonds held by banks; a European Monetary Fund; Germany’s long-overdue investments in cross-border rail and energy networks; more EUIs.
  • What is not missing: European redistribution mechanisms disguised as “insurance” schemes. “In den EU-Ländern ist die Qualität der Institutionen sehr unterschiedlich. Das erklärt, warum die Wirtschaftsleistung in manchen Ländern hoch, in anderen niedriger ist. Wir können nicht so tun, als hätten Griechenland und Italien immer Pech, die Niederlande und Deutschland immer Glück. Versicherungen sind gut bei zufälligen Schocks. Die sind aber nicht das Problem.”

Europe’s Response to the US-Iran Sanctions: Accounting Rather than Banking

On Spiegel online, Christoph Schult reports about “Instrument in Support of Trade Exchanges” (Instex), the new special purpose vehicle founded by France, Germany, and the UK with the task to facilitate legitimate trade with Iran. Instex is not meant to bust US sanctions, but to circumvent the banking sector which the the three countries perceive as “overcomplying.”

Eigentlich dürfen europäische Unternehmen alle Waren, die nicht den Sanktionen unterliegen, weiter in den Iran exportieren. Problem ist allerdings, dass fast alle Banken in Europa ablehnen, den Zahlungsverkehr für solche Geschäfte abzuwickeln. Die Geldinstitute haben Angst, sie könnten in den USA bestraft werden. “Overcompliance” von Sanktionen nennen das EU-Diplomaten – Übererfüllung.

Instex ist eine Art Tauschbörse, in der die Forderungen von iranischen und europäischen Unternehmen miteinander verrechnet werden. Geld, das Iran zum Beispiel für Öllieferungen nach Europa in Rechnung stellt, könnte direkt an europäische Firmen fließen, die Produkte nach Iran verkaufen.

Update (Feb 4): In the FT, Michael Peel discusses the SPV.

Legal Commentary on U.S. Iran Sanctions and the EU’s Blocking Statute

Laurent Ruessmann and Jochen Beck, FieldFisher, 17 July 2018, International firms caught between US Iran sanctions and EU blocking statute.

Several authors, Gibson, Dunn & Crutcher LLP, 9 August 2018, The “New” Iran E.O. and the “New” EU Blocking Sanctions—Navigating the Divide for International Business.

The “primary sanctions” that limit U.S. companies and persons from engaging with Iran have on the whole never been lifted. The principal sanctions relief provided by the United States [until 2018] have been of “secondary sanctions” that focus on non-U.S. companies’ transactions with Iran. These measures are designed to force non-U.S. firms to choose to either engage with Iran or the United States. …

All of the sanctions and [the EU’s] counter-sanctions are in large part discretionary. …

… the Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unclear how this would work in practice, it appears to allow an EU operator to exercise a private right of action and to be indemnified by companies that do comply with the U.S. laws if in so doing those companies injure the EU operator. …

The United Kingdom has in place a law … which broadly makes compliance with Blocked U.S. Sanctions a criminal offence. … other Member States have also opted for the creation of criminal offences, including Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance. Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU General Blocking Regulation …

… element of flexibility in the Blocking Statute is that EU operators will not be forced to continue business with Iran. Rather, the Guidance notes that EU operators are still free to conduct their business as they see fit …

Several authors, Dechert LLP, August 2018, Iran Sanctions—U.S. Reimposes Sanctions After JCPOA Withdrawal, First Measures Come Into Effect.

The practical effect of these developments is to return the U.S. secondary sanctions regime to the status quo pre-JCPOA. However, the New Iran E.O. does expand upon the U.S. primary sanctions regime in one critical respect: U.S. owned or controlled foreign entities … Until now, OFAC’s sanctions have not prohibited a foreign subsidiary from dealing with a non-Iranian SDN. Although many such transactions would likely have subjected U.S. owned and controlled foreign entities to potential secondary sanctions pre-JCPOA (on the basis that they were providing material support to an SDN), they may now result in civil or criminal liability under U.S. law.

For other foreign businesses … The New Iran E.O. does little to clarify the Administration’s current posture, but does grant it significant discretion to target a wide range of activity, effective immediately. Given the Trump Administration’s rapidly shifting approach on other issues relating to international trade and national security, from tariffs to North Korea, businesses should plan for the worst while continuing to strategize and advocate for a more pragmatic approach.

Jeremy Paner, Holland & Hart, 8 November 2018, The Return of All Financial Secondary Sanctions on Iran:

U.S. law currently authorizes OFAC to impose correspondent and payable-through account sanctions on non-U.S. financial institutions that knowingly conduct or facilitate any significant financial transaction involving the following:

  • the Central Bank of Iran;
  • a designated Iranian individual or entity, other than banks solely designated for being Iranian;
  • the automotive sector of Iran;
  • the National Iranian Oil Company (NIOC) or Naftiran Intertrade Company (NICO);
  • petroleum, petroleum products, or petrochemical products from Iran;
  • the purchase or sale of Iran rials; and
  • a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial.

Additionally, non-U.S. financial institutions that maintain Iranian rial denominated funds or accounts outside of Iran are exposed to potential correspondent and payable-through account sanctions.

Truata

In the FT, Mehreen Khan and Aliya Ram report that MasterCard and IBM plan to create a “data trust” to allow businesses with EU customers to meet the strict General Data Protection Regulation (GDPR) provisions that come into effect by the end of May. “Truata” will be based in Dublin.

The independent company, called Truata, will manage, anonymise and analyse vast amounts of personal information held by companies such as travel agents and insurers in a way that is compliant under the EU’s General Data Protection Regulation (GDPR). …

Truata will strip data sets of key details such as a person’s name, contact details or email address so they cannot be re-identified from the information. It will also offer analytical services to allow a business to extract valuable information from the data.

Monte dei Paschi Bail-X

The Economist reports about plans for Monte dei Paschi’s future:

… retail investors in the bank’s junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been “mis-sold” the bonds: they will receive shares which will in turn be swapped for new, safer bonds.

Italy has to come up with a restructuring plan, likely to involve job losses and branch closures, for the commission’s approval. (The ECB must also certify the bank’s solvency.) Bosses’ pay will be capped at ten times the staff average. And Monte dei Paschi must sell its sofferenze, the worst category of non-performing exposures, which in March amounted to 24% of all its loans. A state guarantee will cover senior tranches of these securitised debts. Atlante 2, a fund backed by Italian financial institutions, and others are negotiating with the bank over more junior slices.

Brexit and Third-Country Treaties

In the FT, Paul McClean reports that according to FT estimates and as a consequence of Brexit, the UK will have to negotiate more than 700 treaties with third countries. More than 160 countries need to be dealt with; Switzerland, the US and Norway stand out.

Some negotiations have to be concluded very soon:

… the EU-US Open Skies accord for airlines, were agreed when the forces of liberalisation were at their peak. The political mood has hardened considerably since then. … The timing is tight. The US needs to know the UK’s arrangements with the EU before it can commit, and that may not be clear until late 2018. … “It is not as if you can wait until March 2019 to see what the regime will be. You probably need clarity by the early summer or spring of 2018.”

`Brussels’ to Disrupt European Banking

The Economist reports that forthcoming European payments regulation has the potential to disrupt the industry.

Provided the customer has given explicit consent, banks will be forced to share customer-account information with licensed financial-services providers.

… payment services … could become more integrated into the internet-browsing experience …

With access to account data … fintech firms could offer customers budgeting advice, or guide them towards higher-interest savings accounts or cheaper mortgages. Those with limited credit histories may find it easier to borrow, too, since richer transaction data should mean more sophisticated credit checks.

The IMF In Greece

The IMF has released a report with an ex-post evaluation of Greece’s 2012 Extended Fund Facility (Exceptional Access under the 2012 Extended Arrangement under the Extended Fund Facility with Greece).

A critical discussion by Charles Wyplosz on VoxEU.

The Greek authorities are more optimistic than IMF staff about the economy’s outlook.

Redistribution at the EU Level

On VoxEU, Paolo Pasimeni and Stéphanie Riso argue that at the EU level, cross-border redistribution is limited:

The EU budget accounts for roughly 1% of the EU’s GDP. Around 80% of it, on average, returns back to each country in the form of various allocated expenditures, and only a limited part is actually redistributed among countries. On average over the past 15 years, the redistribution operated by the budget at the level of the EU was equal to 0.2% of the Union’s GDP. As a matter of comparison, the average yearly cross-border flows operated through the federal budget in the US between 1980-2005 was equal to 1.5% of GDP (d’Apice 2015).

“Dirk Niepelt über die Folgen eines Brexit für die Schweiz (What Brexit Means for Switzerland),” SRF, 2016

SRF, Tagesgespräch, June 16, 2016. HTML with link to MP3.

  • Half-hour-long interview on the Swiss news channel.
  • Topics include monetary policy, exchange rates, financial stability, Brexit.

Financial Transactions Tax—Stalled

In the FT, Jim Brunsden reports that the European Commission’s 2013 proposal to install a financial transactions tax has not made much progress. At least nine countries have to sign up.

The report highlights that key differences remain on how to craft exemptions from the tax, including the problem of how to shield transactions in other non-participating EU countries such as Britain. Other splits concern how to protect market-making activities by banks, and also what carveouts should apply for derivatives that are used by traders to hedge risk when they buy sovereign debt.

New Questions about Greece’s Indebtedness

On the FT’s Alphaville blog, Matthew Klein reports about discrepancies between IMF and Greek (and EU) assessments of Greek net indebtedness. The IMF appears to report lower Greek financial asset holdings than the Greek Central Bank.

Matthew Klein quotes the Greek Central Bank:

We would like to clarify that the Bank of Greece compiles its financial accounts, from which data on the general government’s net debt are derived, according to European standards. The Bank of Greece’s data are compatible with the ECB’s and Eurostat’s rules (ESA 2010) regarding financial accounts and are used as an integral part in the production of the Monetary Union’s Financial Accounts. These data can also be accessed through the ECB’s Statistical Data Warehouse at http://sdw.ecb.europa.eu/reports.do?node=1000002429.

The IMF’s series on the general government’s net debt come from its WEO database and are not necessarily based on official statistics provided by Greek Statistical authorities. We understand that they may be compiled by IMF’s desk economists (and not its Statistics Department) and we cannot vouch for their accuracy, since they are adjusted according to the programming needs of the IMF. At first glance, they appear to be based on outdated information contained in past EDP [excessive deficit procedure] documentation.

FATCA in Reverse?

The Greens/EFA group in the European Parliament wants the European Union to exert more pressure on the United States: the US should no longer serve as a “tax haven” for European tax dodgers. Proposed measures include blacklisting and a FATCA-type 30% withholding tax on EU-sourced payments.

From the executive summary of the report commissioned by the group:

Two global transparency initiatives are underway that could help tackle financial crimes including tax evasion, money laundering and corruption: registration of beneficial ownership for companies (to identify the real persons owning or controlling such companies) and automatic exchange of bank account information between tax administrations. The European Union has made progress in both respects, with the adoption of a 4th anti-money laundering Directive (in May 2015) and by committing to implement the OECD’s common reporting standard for automatic exchange of financial account information. The United States (U.S.), in contrast, has done neither so far.

On May 5th, 2016 the U.S. announced new measures to improve its financial transparency, although not all the texts of the proposed regulations were provided. The U.S. Treasury announced three new measures: … In any case, not only would some of these new rules require Congress approval, but even the U.S. Treasury final proposals on beneficial ownership collection by financial institutions are not enough to solve all the problems nor to bring the U.S. into line with the OECD’s standard for automatic exchange of information. …

Two main issues in the U.S. affect the global progress towards transparency: … Company registration is regulated by each of the 50 states’ law. In 14 states, companies may be created identifying neither shareholders nor managers. At the federal level, tax rules require filing some information to obtain an Employer Identification Number (EIN). However, not all companies require an EIN and, even if they do, the ‘beneficial owners’ (the actual natural persons owning or controlling the company) are not necessarily among the information to be provided. Companies only have to identify one ‘responsible party’, who may be a nominee director. In order to (partially) address this, the White House 2017 budget proposal and the new measures proposed on May 5th, 2016 suggest requiring all companies (or according to the May 5th proposed rules, at least some foreign-owned disregarded entities, such as single-member limited liability companies) to obtain an EIN. Not only does this proposal need to become effective, but information would apparently still be about the ‘responsible party’ and not necessarily about the real physical person owning and controlling the company (the so-called beneficial owner).

… The U.S. has refused to join the trend for multilateral automatic exchange of information. Instead, it will implement its domestic law called the Foreign Account Tax Compliance Act (FATCA) and the related Inter-Governmental Agreements signed with other countries. However, these involve unequal exchanges of information: the U.S. receives more information than what it sends (for example, about beneficial ownership data). Oddly, though, the OECD did not include the U.S. among jurisdictions that did not commit to its new standard.

Even if the U.S. committed to exchange equal levels of information in the future, the current U.S. legal framework does not allow its financial institutions to collect beneficial ownership information for all relevant cases covered by the OECD’s global automatic exchange of information standard. U.S. financial institutions are currently only required to obtain information on beneficial owners for correspondent banking (i.e. accounts held for foreign financial institutions) and for private banking of non-U.S. clients (accounts holding more than USD 1 million).

Final rules to address these limitations have been announced on May 5th, 2016 although financial institutions must comply with them only by May 11th, 2018. However, the final rules still have the same problems that the IMF identified regarding the 2014 version of the rules so they will not fix all the problems. Remaining shortcomings include: some entities will still not be covered (i.e. insurance companies), the definition of ‘beneficial owner’ is incomplete (it does not include the ‘control through other means’ test, meaning that if you cannot identify at least one person owning 25% or more of the shares, financial institutions should try to find someone who controls the company through other means, before identifying only someone with a managerial position-who may be a nominee director), the verification of information would rely mainly on customer’s own certification, information on beneficial owners would be required for new accounts only (not for existing ones) and it will not need to be updated after the first time of collection, unless the financial institution becomes aware of changes as part of monitoring for risks. In addition, trusts will not be required to provide beneficial ownership information unless they own enough equity in an entity, such as a company, required to provide this information.

To fix this situation and promote equal levels of transparency, this paper provides a series of recommendations. For example, the European Union should consider including the U.S. in the upcoming list of tax havens, unless it effectively ensures registration of beneficial ownership information for companies and commits to equal levels of automatic exchange of information with European Union countries. Ideally, all financial centres should effectively implement the OECD standard for automatic exchange of information (by becoming a party to the OECD Amended Multilateral Tax Convention, signing the Multilateral Competent Authority Agreement and agreeing to exchange information with all other cosignatories). The European Union could thus consider imposing a sanction (such as a 30% withholding tax on all EU-sourced payments) against any financial institution that refuses to automatically exchange information about EU residents holding accounts abroad. In a second stage, sanctions could also be used to ensure that financial institutions from financial centres will also provide information to developing countries with which the European Union is already exchanging information.

Reports by René Höltschi in the NZZ as well as Markus Fruehauf und Winand von Petersdorff in the FAZ.

Brexit: Minor Costs, Unclear Benefits (Given the Political Constraints)

A report by Open Europe argues that for the UK the cost of Brexit would be minor. The benefits might be minor as well. For interest groups could make it hard to reap the potential benefits of newly gained flexibility.

… the path to prosperity outside the EU lies through: free trade and opening up to low cost competition, maintaining relatively high immigration (albeit with a different mix of skills), and pushing through deregulation and economic reforms in areas where the UK has historically been sub-par compared to international partners. … whether there is appetite for such changes in the UK is unclear.

… implications for the type of relationship the UK should seek with the EU post-Brexit. Realising the potential economic gains we’ve identified – notably via immigration and deregulation – means a relatively high degree of flexibility from the EU. The confines of a Norwegian or Swiss-style arrangement would not deliver this. As such, the best option would be for the UK to pursue a comprehensive bilateral free trade agreement, aimed at maintaining as much of the current market access as possible while also adopting a broader liberalisation agenda over the longer term.

Update: The Economist reports about other cost/benefit estimates.

Drivers of High Skilled Migration into Switzerland

In the December Issue of Die Volkswirtschaft, Ronald Indergand and Andreas Beerli argue that increased high skilled migration into Switzerland mainly resulted from (i) higher educational attainment in the source countries and (ii) stronger demand by Swiss firms for high skilled labor.

The authors argue that the agreement between Switzerland and the European Union on the free mobility of labor (which is in force since 2002) did not contribute to an improved skill mix. Rather to the contrary, lower barriers to migration for EU citizens might have contributed to a slight reduction in the average skill of immigrants from the EU.

Lack of Trust in the European Commission

In the FT, Henry Foy reports about critical comments by Jeroen Dijsselbloem. The chair of the Eurogroup has argued that the Euro area needs an independent fiscal oversight body to disperse fears of “politicised” European Commission decisions when it comes to evaluating national budgets.

Naturally, lack of trust in the Commission is widespread. But now it seems to have reached the higher echelons of EU institutions themselves.

In the meantime, Tony Barber writes (also in the FT) that “The eurozone’s fiscally lax nations are at it again”.

“Fiskalunion auf tönernen Füssen (Fiscal Union on Shaky Grounds),” FuW, 2015

Finanz und Wirtschaft, October 7, 2015. PDF. Ökonomenstimme, October 9, 2015. HTML.

Fiscal union proposals are not convincing:

  • Enforcement should be key but remains weak.
  • Monitoring and counteracting of “imbalances” is dubious.
  • Subsidiarity is important.

PS: In the FT (October 18), Wolfgang Münchau reaches a similar conclusion albeit from a different starting point: “Better no fiscal union than a flawed one.”