ft weekend 1
Next ECB head must broaden policy toolkit
Christine Lagarde needs to finish the job Mario Draghi started
Mario Draghi, the outgoing president of the European Central Bank, has a good claim to be the premier European statesman of the past decade. His intervention in 2012 that the central bank would do “whatever it takes” to keep the eurozone together got the currency bloc through what might have been a terminal crisis. This confidence trick worked, removing what many investors saw as the risk of having their euro-denominated bonds converted back into lira or drachma, helping to stabilise borrowing rates and bring the most acute phase of the crisis to an end.
His adoption of unconventional monetary policy instruments, especially quantitative easing, pioneered by the US Federal Reserve, created the space for economic recovery. Asset purchases and negative interest rates will always be controversial but they helped reassure investors and businesses that at least one institution was pushing for a recovery in the bloc. It was in 2013, after the ECB cut rates to the same level as in the US, that the eurozone began growing again after a five-year recession.
In spite of these achievements, Mr Draghi leaves the eurozone with many of the internal imbalances exposed during the crisis still there. More than a decade after the financial crisis began, the bloc still combines a prosperous and resilient northern “core” with a more fragile southern periphery. Mr Draghi was not able to persuade governments to broaden the policy toolkit to include structural and fiscal policies. Much of the north-south divergence remains as a consequence.
Some crisis-hit countries — Spain, Ireland and Portugal — used the space afforded to them by monetary policy to reform, and they seem to be out of the woods. Others, notably Italy, have faced more intractable problems.
Now as Mr Draghi departs, his critics, who have been consistently wrong in the past, are getting louder. Colleagues on the ECB’s governing council, often from the northern countries, have made public their doubts over a recently announced resumption of asset purchases, while six former German, Austrian, Dutch and French central bankers wrote a letter arguing that the relaunch of quantitative easing was a mistake that risked eroding the ECB’s independence.
These disagreements ultimately reflect the divergence of interests within the eurozone and the determination by some of those opposed to the measures taken by Mr Draghi to intimidate his successor, Christine Lagarde. Her primary job will be to manage the difficult politics while sticking to Mr Draghi’s broad approach. As Ms Lagarde takes over the helm of the ECB the global economy is slowing, partly because of the US-China trade war and Brexit; the IMF cut its forecast for global growth next year to the lowest level since the financial crisis. There is little monetary policy alone can do to support growth from here.
Ms Lagarde, as the new leader of the eurozone’s most important federal institution, must try to bring forward consensus on the need for fiscal policy to support the recovery. That the German economy is slowing at the same time as others will help her case. For example, Christian Kastrop, architect of the Federal Republic’s controversial debt brake, has called for a rethink. He suggests that the eurozone’s largest economy may need to borrow to fund modernisation efforts. Mr Draghi used his final meeting to call for greater fiscal stimulus himself, after launching a package of monetary support in the prior meeting. In these final few meetings he has laid the groundwork for his successor. Now Ms Lagarde needs to finish the job.
The undercover economist
Why uncertainty affects business investment
Tim Harford
The one certainty in politics at the moment is that it is uncertain. From a British point of view, there is the apparently endless game-playing over Brexit — coupled with the looming prospect of an unpredictable and highly consequential general election. I’m sure I don’t need to elaborate on the situation in the US.
The received wisdom is that political uncertainty is bad news, at least for the economy. Is that really true? And, if so, why? If we understand the problem a little better we may also have a sense of whether there is any chance of improvement.
The evidence from the research of various economists suggests that uncertainty is indeed a brake on economic activity. Nuno Limão and colleagues have shown that uncertainty over trade policy is itself a kind of barrier to trade. Meredith Crowley and colleagues have found that UK companies were less likely to enter EU markets, and more likely to exit, if those markets were more exposed to the risk of a breakdown in Brexit negotiations. And Nicholas Bloom has found that uncertainty — measured in various ways — tends to be a cause of recessions as well as a consequence.
So the problem is real, but what exactly is causing it? One theory is that there is something deeply unsettling about ambiguity. Back in 1961, a promising young economist named Daniel Ellsberg explored this issue in the Quarterly Journal of Economics. (Mr Ellsberg later became far better known as the whistleblower who leaked the Pentagon Papers.)
Mr Ellsberg imagined a gamble involving two urns, each known to contain a hundred red or black balls in total. The first urn contains 50 red and 50 black balls. The second has an unknown
mix. Let’s say I offer to pay you $100 if the ball you draw out of an urn is red. From which urn would you prefer to pick — the first or the second?
Most people prefer the first. But people also prefer the first urn if they are paid $100 for a black ball instead. It’s not that they feel their chances are better — logically, the first urn cannot possibly be a better choice for both red and black. It’s just that . . . well, the known risk feels less uncomfortable than the ambiguous risk.
That aversion to the unknown may explain part of why uncertainty seems to corrode the foundations of the economy. But I suspect that the main problem is something far less ethereal.
Imagine you are an entrepreneur with plans and permits to build, say, a cardboard recycling facility in Peterborough. If there is a fairly soft Brexit, or no Brexit at all, you think that a large plant would be profitable. If there is a hard Brexit, or even no deal, you still think you can make money with a smaller installation. What do you do?
Simple: you wait. You wait even though you would want to build some kind of factory under any circumstances. You wait because you will make a better decision if the Brexit uncertainty resolves itself. The uncertainty makes it more profitable to delay.
That’s the theory. What do the data suggest? In the UK, private sector investment is remarkably weak, given that the UK has not been in a recession. In fact, it is hard to find a parallel where a growing UK economy has been accompanied by such feeble investment. This weakness has persisted since about the time of the 2016 referendum. It is weak both historically and compared with the situation in the US and Germany. Perhaps that is all a coincidence, but I rather doubt it.
In the face of uncertainty, companies will value flexibility. The economists Benjamin Nabarro and Christian Schulz, contributing to the Green Budget of the Institute for Fiscal Studies, make an intriguing argument. They speculate that given persistent Brexit uncertainty, this desire for flexibility is being satisfied by hiring workers instead of making large investments in capital. That is a way to expand output without doing anything irreversible. It’s good news for jobs, and bad news for investment and productivity.
My example of the cardboard recycling plant implied that uncertainty will tend to depress investment, but uncertainty is not always an obstacle in that way. If the building permit for that recycling facility was about to expire, making this a now-or-never decision, you would find yourself making your best guess and building something. If the uncertainty would not be resolved until 2025, you might also decide the costs of delay were too great, and build immediately.
There are even cases where uncertainty encourages exploratory investments: not knowing what will happen, you try to ensure that you have a toehold in every possible future. For example, the mere possibility that a large country’s government might get serious about climate change encourages research into low-carbon technologies.
Not all uncertainty depresses investment, then. But if there is a scenario guaranteed to put everyone’s plans on ice, it is this: a major decision with weighty consequences that is forever being postponed. If that reminds you of anything, you are not alone. tim.harford@ft.com
One theory is that there is something deeply unsettling about ambiguity
Now the UK has a deal in sight, we need to think about what comes afterwards
If Brexit happens, there will be no choice but to boost the economy and tackle inequalities
Camilla Cavendish
Dear Prime Minister,
As the world awaits the next step on your Brexit deal, it’s time to think about how to maintain prosperity and bring the country together. How will you build the “high-wage, low-tax, high-skill, high-productivity economy” you described in your speech to the Conservative party conference last month?
You can strike out “low tax”, of course, with your promises to splash the cash on schools and other vote-winners. But please do demand some quid pro quos for your largesse. Reform is always easiest when you’re spending. Get the National Health Service to prioritise prevention, so your upgraded hospitals don’t just fill up. Abolish the overbearing Independent Office for Police Conduct or your 20,000 new officers may be reluctant to use their stop-and-search powers.
I hate to say it, but we Brits are as good at excessive bureaucracy as Brussels. Despite the “bonfire of the quangos” lit by your predecessor David Cameron and his minister Oliver Letwin, Britain is littered with watchdogs that have been captured by industry or passed their sell-by dates. Tax loopholes don’t help: do make time to meet with the Office of Tax Simplification.
We won’t copy Singapore on fiscal policy, but we should emulate it on regulation. Intelligent regulation is not laissez-faire; it is proportionate, cost-effective, and, where possible, it supports competitiveness. The UK’s financial services will face more global competition after Brexit. Yet neither the Financial Conduct Authority nor the Prudential Regulation Authority consider the competitive position of our financial markets in their decision-making.
There are legitimate concerns about systemic risk, in the wake of the 2008 financial crisis. But prioritising safety over growth dampens innovation, and leads to an overly cautious approach to capital. Why not ask your chancellor to emulate the US Treasury secretary, Steven Mnuchin, and review the competitiveness of the UK’s financial regime?
Leaving the EU will put Britain on a war footing. We need to be as nimble as our Asian competitors, not ponderously digging a few more multimillion-pound inches of our ill-starred high speed rail project. I’ve opposed HS2, given its unconvincing cost-benefit analysis. But you need to make a cast-iron commitment that people can plan against. If I were you, I’d prioritise the northern stretches of the line and Northern Powerhouse Rail can boost the clean growth strategy.
I would also stop Whitehall’s futile attempts to lure jobs to lower-productivity areas. Focus instead on helping people commute by improving road junctions. That would help tackle the nurse and teacher “deserts” that diminish our public services in some deprived areas. So would building homes for nurses on spare NHS land. The Treasury won’t like that idea, but it’s the right thing to do.
In your speeches, you often extol British scientists. But too many of their brilliant ideas still disappear into a valley of death, invented here but commercialised in other countries. Technology transfer has improved markedly at some universities. But we still don’t match the US for technology licensing, the rapid scale-up of businesses, the treatment of postdoctoral researchers or even thinking its normal for professors to have start-ups.
The UK should be a world leader in personalised medicine, capitalising on our prowess in pharmaceuticals and helping patients benefit from genome sequencing and clinical trials. But we need a national effort to boost the collaboration between the NHS and the life sciences industry. Singapore built a biotech hub from scratch in only 10 years: it now has a vast network of public and private laboratories, and the world’s shortest approval time for clinical trials. We need to match that if we are to keep scientists who fear the loss of research grants.
You rightly seek to drive up productivity by transforming investment. Central to that will be restoring business confidence, which has taken a big hit over the past three years. Beware of delegating this task to the business department and expecting results. You need a high-powered bureau to attract foreign direct investment and dissuade companies from moving their headquarters. You also need to signal clear long-term ambitions and stick to them.
If the referendum achieved anything, it exposed the deep grievances of citizens whose standards of living have been bypassed by globalisation. People who have worked hard and played by the rules have seen their wages stagnate and their children’s prospects overtaken by rentier capitalists.
So how about a citizens’ wealth fund, ringfenced to prevent a Treasury raid, which could make long-term investments and give people a clearer stake in society? The 2017 Conservative manifesto proposed a version of this, funded by revenues from shale gas and public asset sales. You could go further and consider a wealth tax, as the economist Stewart Lansley has proposed. After all, a stable economy is one that works for everyone, not just the rich. How you square wealth taxes with courting business, I leave to you.
Incidentally, nothing I’ve suggested requires Brexit to happen. It’s a red herring, rather like that kipper you brandished when you wrongly claimed that British packaging rules on fish came from the EU.
After Brexit, don’t imagine you can delegate meetings with business leaders. And don’t, whatever you do, underestimate the sluggishness of the British state.
The writer, a former head of the Downing Street policy unit, is a Harvard senior fellow
Leaving the EU will put the country on a war footing. We need to be as nimble as our Asian competitors
BRITAIN
There is a lot in the next Speaker’s in-tray
Bronwen Maddox
It takes a talent for showmanship to become an internet sensation — and star of the German tabloid press — with catchphrases of ornate antiquity that include “I enjoin you”, “take a soothing medicament” and of course, “Order, order”.
When John Bercow steps down as Speaker of Britain’s House of Commons on October 31 he will have achieved that and more. He has given far more voice to backbenchers — as he intended when he took on the role. And he has modernised some practices, letting MPs take their babies through voting lobbies, for example.
But he leaves behind controversy about all three main elements of the Speaker’s role — above all, about the Speaker’s wide discretion over how the Commons conducts its debates. As nine MPs compete to succeed him, there are pressing questions about whether the Speaker has too much to manage, too little accountability, and whether there need to be more rules about how the job is done.
The Speaker’s three roles are: acting as ringmaster and referee of the business of the House; chair of the House of Commons Commission on the management of parliament; and representing the House externally.
The first has provoked the most controversy. True, some of his innovations have broken no formal convention and have attracted broad support. He has allowed much more use of urgent questions, for example, allowing MPs to comment on events as they happen. This has done a lot to counter a public perception that MPs are out of touch.
However, the charge — mainly from the government — is that Mr Bercow has not been impartial, as the Speaker is required to be, and has upturned parliamentary procedure along the way, changing the course of Brexit. In September, he allowed for the first time an emergency debate on a “substantive” motion. This allowed MPs to take charge of Commons business and pass the so-called Benn Act forcing the government to ask the EU for a Brexit extension. That echoed his decision in January to let MPs amend a business motion — something normally amendable only by the government — and gain control of the agenda.
However, it is wrong to blame Mr Ber-cow for the uproar, even if he seemed to relish it. The conventions governing the Speaker and procedure tend to assume that there are two big parties, one of which has a majority. They begin to rupture when there is a minority government and backbenchers are trying to use procedure to obstruct its plans.
There has also been controversy under Mr Bercow over the Speaker’s role in managing parliament. The charge is that a person who is good at chairing Commons debates may not have the management skills — and time — to supervise a complex organisation.
Last year, an independent report by Laura Cox concluded that the current leadership was incapable of changing a culture of bullying and harassment (though the report did not deal with individual complaints of bullying against Mr Bercow personally, and he has denied grounds for these). Parliament is also about to embark on the repair of the Palace of Westminster, and MPs are nervous of public anger at the cost. There is some momentum behind the notion that the Speaker should no longer chair the Commons Commission — for good reason.
The third role has been shaped by Speakers’ different tastes for explaining publicly what the House does. But it matters now that they do this. In evidence to the Public Administration and Constitutional Affairs Committee hearing on the Speaker’s role on Tuesday, the academic Philip Norton noted the “collapse in public trust in the House of Commons”, adding that “the Speaker has a very strategic role” in countering this.
Brexit, building work, bullying — there is a lot for the next Speaker to take on. Candidates to replace Mr Bercow are now tripping over themselves to say they are not like him. But focusing on the personality risks ducking big questions. When the Brexit wave has finally washed over Westminster, unresolved questions it will leave behind include the relative powers of parliament and the government, how convention interacts with law, and what parliament’s role in any future codification of conventions would be. The Speaker will have influence on all of these.
Some have called for more accountability. Others call for term limits. While there is little support for publishing the private advice clerks give the Speaker — for fear they would not then give it — there is some for requiring the Speaker to publish the reasoning for decisions.
But room for discretion will remain at the heart of the job — and therefore, room for controversy. If there is another minority government, these questions will be unavoidable.
The writer is director of the Institute for Government, a think-tank
Bercow will leave behind questions about the relative powers of parliament and the government
SEC prepares regime to rein in powers of proxy adviser firms
Curbs on shareholders agitating for change Win for pro-business lobby groups
PATRICK TEMPLE-WEST — NEW YORK AND KADHIM SHUBBERN — WASHINGTON
The US Securities and Exchange Commission is set to propose new limits on shareholders’ ability to agitate for change at companies, handing a win to pro-business lobby groups.
The SEC, led by chairman Jay Clayton, is expected to vote to propose rules that would require proxy adviser firms to give companies two chances to review proxy voting materials before they are sent to shareholders, according to people familiar with the plans.
The SEC will also vote to increase the resubmission thresholds for motions that shareholders file at companies on issues ranging from executive compensation to climate change disclosures, the people added. The thresholds set what level of shareholder support is needed to keep a proposal alive.
The commission is expected to vote to put the changes out for comment on November 5, according to the people, who cautioned that the plans and the timing were still in flux and could change before the vote next month.
If ultimately passed, the rules would be a blow to proxy adviser firms Institutional Shareholder Services (ISS) and Glass Lewis, and a significant win for business lobby groups such as the US Business Roundtable, which has argued that proxy adviser firms wield too much influence in corporate governance battles. The firms give investors advice on how to vote on various corporate issues, including climate change disclosures and executive compensation.
The resubmission changes would increase the thresholds that shareholders need to reach in order to force change at big corporations. Currently, proposals need to win support from 3 per cent of a company’s shareholder base in the first year they are submitted, rising to 6 per cent and 10 per cent in the second and third years respectively.
Under the new proposal, the thresholds would rise to 6 per cent, 15 per cent and 30 per cent, the people said. If a shareholder proposal failed to hit those levels, it would be barred for three years before it could be resubmitted.
In 2018, the Business Roundtable said proxy advisory firms should give companies their draft reports so companies can correct inaccurate information and make any significant comments. The group also called for shareholder proposal resubmission thresholds to be increased to 6 per cent, 15 per cent and 30 per cent over three years. The proposals mark the SEC’s latest regulatory effort to rein in the proxy adviser firms. In August, the SEC voted to publish guidance clarifying that proxy advisers are subject to anti-fraud rules concerning materially false or misleading statements. Previous SEC guidance was vague on whether proxy advisers must adhere to anti-fraud provisions, the agency said.
The changes would be subject to public comment for several months before the SEC would consider finalising them, giving ISS and Glass Lewis time to mount a challenge against the commission. Representatives from ISS and Glass Lewis declined to comment.
The SEC’s two Republican commissioners and Mr Clayton, an independent, are expected to approve the proposals. The agency’s two Democratic commissioners are expected to oppose them. The SEC declined to comment.
The rules would be a blow for ISS and Glass Lewis which advise investors on how to vote on issues
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