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September 30, 2010
 by Steven Hill

THE PRIME MINISTERS WEIGH IN; WHAT IS THE PROPER ROLE AND SOCIAL FUNCTION OF A BANK?…The panel on which I am speaking today is titled “Rebuilding confidence in financial markets: financial regulations, budgetary discipline, monetary stability.” Fellow panelists include Danuta Hübner, Member of the European Parliament and former European Commissioner (equivalent to a former presidential Cabinet member in the US); Ingrida Simonyte, Lithuania’s Minister of Finance; Jacques Delpha, a member of the French prime minster’s economic advisory committee; Olivier Lacoste, Director of Studies, Confrontation Europe; and Ross Walker, UK Economist at Royal Bank of Scotland. This panel got really down in the weeds about the nitty gritty of financial reform, but for my 10 minute contribution I had decided to take a different tack. I pulled back to the 30,000 foot level to survey the broader landscape, titling my talk "Principles to live by during an economic crisis."I delivered a somewhat tongue-in-cheek perspective, hoping the humor would translate across the Atlantic. “We live in a time of great uncertainty,” I began, “and so we need some principles to guide us. But I must warn you, these principles may turn out to be completely unreliable. So use them at your own discretion.” From the mostly blank stares I received from the 100 or so people attending that panel, I’m not sure they “got” the irony. My comments were being translated into six languages simultaneously, and the translation can take a couple of seconds, so it’s hard to say. No matter, I plunged on.

My first principle: Only trust those economic experts who tell you “I don’t know what’s going on”. I proceeded to make the case that the economic profession has been discredited. “Keep in mind, the ‘experts’ missed an $8 TRILLON housing bubble in the U.S.” They clearly have a shaky handle on how the economy actually works. “Economists are like a chef who not only burned the meal but burned down the entire restaurant, yet the cook wasn’t fired. How many economists have lost their jobs?” I then laid out a two decade long track record during which economists have been wrong more than they are right on the big issues (here’s a link to an article I wrote about this theme called “Shorting Economists: The Economists Keep Getting it Wrong”. “We are flying blind, lost in the fog, when it comes to redesigning the financial architecture, and it is important that we admit this.” The room of course is filled with economists, as I knew it would be. Do I detect an uneasy shifting of chairs?

The heart of my speech was this principle: Values-based banking and finance - what are the right values for a banking and financial system? I explored how we could turn banks and the financial industry away from the casinos they have become and make them into responsible institutions. “What is the proper role and social function of a bank? It seems that as a society we have lost sight of the crucial difference between productive investment and gambling, between the banker and the bookie, and between the insurer and the speculator.”

Watching the audience’s faces from the podium, it didn’t seem like my comments were going over real well. I felt suddenly like a comedian who was dying up there, not connecting with his audience. But during the Q and A I received a lot of head nods from the audience, and afterward quite a few people thanked and even praised my comments for “telling it like it is.” In particular they liked my suggestion that Europe should employ traditional means of public relations, including advertisement in US newspapers, TV and radio, to help Americans appreciate “Brand Europe.” European companies employ about 2.5 million Americans throughout the United States, and have invested more than $50 million in the state of Texas alone, more than U.S. businesses’ investments in all of Asia. Yet no Americans know about it (You can read more of my thoughts about this at this article). So all in all, it was a “good show,” as they say.

Spotlight on the Prime Ministers and the European Parliament President. The highlight of this day’s events undoubtedly was the final plenary session featuring most of the heavyweights at the conference. These include Jerzy Buzek, President of the European Parliament from Poland (the equivalent of U.S. Speaker of the House Nancy Pelosi); Yves Leterme, Belgian Prime Minister, now holding the rotating presidency of the European Union; Viktor Orban, Prime Minister of the Republic of Hungary; Joseph Daul member of the European Parliament and chair of the European People’s Party Group; and Jaime Mayor Oreja, member of the European Parliament, Vice-Chairman of the European People’s Party in the European Parliament.

Hungary’s Orban is a particularly interesting figure. Ruggedly handsome like the former football/soccer player that he is, he swept into office earlier this year with a populist campaign that brought him an unprecedented two-thirds parliamentary majority. This is one European leader that stimulus hawk Paul Krugman would love, since Orban has resisted the International Monetary Fund and is the first major European leader to challenge the German-led orthodoxy of budget cuts and structural reforms that has swept Europe since the Greek debt crisis. Orban has won public support by announcing plans to reverse an IMF-imposed increase in the retirement age, proposed a one-off tax on the country’s banks and trumpeted a mini-stimulus plan. His criticisms of foreign banks, speculators and most recently the European Union and the IMF certainly are more in tune with the sentiment in the European streets, as protests have swept across the continent in opposition to budget cuts and bank bailouts. While such an approach is crowd-pleasing in Hungary and elsewhere, it also runs the risk of alienating European allies and foreign investors. His policy choices are an explicit rejection of those trumpeted by most of those in the room, so I am curious to hear what he will say to this audience.

“Europe has changed before our eyes,” begins Orban. He calls for greater regulation of financial speculation and says economic growth and job creation should be the main goal of Europe and the EU. He cautiously treads familiar center-right turf, saying nothing controversial and playing the role of local host to leaders from the corners of Europe. But in one small jab at the European Union he says “People are fed up with grandiose plans that mostly lead nowhere,” and combines that with an appeal for an acceptance of each country steering its own independent path. But then he lapses back into “diplomat speak,” keeping things polite. Hungary is not using the euro, having retained its own currency the forint, but his prescription is exactly contrary to the tenor of the times in Europe, since the eurozone nations have been promoting greater fiscal union, i.e. convergence and harmonization of budgetary rules as a reaction to the Greek/sovereign debt crisis. Indeed the speaker right before him, Joseph Daul, who is a member of the European Parliament and chair of the European People’s Party Group, calls for greater convergence over retirement age, number of hours worked, and more. “We need a balance between security and liberty,” says Daul. But this difference of opinion will have to be argued through another day, since this evening everyone is on his or her best behavior. That is often the case in these forums, a diplomatic exchange of differing viewpoints. And with the economic “experts” themselves divided over stimulus vs. deficit reduction as the best strategy at this point in the economic crisis, there is little point in being too fundamentalist or passionate in one’s opinion.

European splendor along the Danube. That night, the conference has a private dinner inside the fabulous Hungarian Parliament building. Like its impressive exterior, the interior of the Parliament is a masterful work of architectural design. Once inside, visitors walk up a grand staircase and are suddenly uplifted inside the womb-like ambience of a stunning grand hall, glittering with gold artifacts, archways, trim and ceiling. Very impressive. Between the gold craftsmanship are stained glass and glass mosaic paintings. As one ascends the stairs, one is greeted by all the magnificence that the Austro-Hungarian empire once had to offer. The effect is dazzling.

At the top of the stairs is a famous hexadecagonal (sixteen-sided) central hall, with huge chambers adjoining it, including the Lower House (where the National Assembly meets) and the Upper House. Other rooms shoot off to the left and right, the whole effect like a regal honeycomb. The Holy Crown of Hungary is displayed in the middle of the rotunda of the central hall, inside a glass case. The food is as exquisite as the building -- these European leaders know how to treat themselves well at these conferences.

This marks the conclusion of this conference, and tomorrow, I am off to give a lecture in Luxembourg, followed by Paris…

Steven Hill 1:14 PM Permalink | Trackbacks
 by Steven Hill

EUROPEAN DOUBTS ABOUT THE UNITED STATES; CAUTIOUS OPTIMISM OVER RECOVERY FROM GREEK CRISIS…I am still attending the conference, "The Crisis in Europe: Re-inventing EU Policies Delivering Growth and Fighting Poverty." The signature conference event for today is a round table called "Europe 2020 from a Center-Right Perspective: Priorities for Stronger Growth in Europe." This is a "big conversation" about the impact of the economic crisis, steps being taken to cope with it and prevent its reoccurrence, and also a discussion about how to move forward from the “new normal” to make Europe stronger economically. In typically European fashion, the event is being translated simultaneously into six different languages. Participants include Margaritis Schinas from the European Commission and an adviser to European Commission President Jose Manuel Barroso (which is the closest thing that Europe has to President Obama); Andreas Schwab, a member of the European Parliament from Germany; Theodor Dumitru Stolojan, member of the European Parliament from Romania; Tomi Huhtanen, director of the Center for European Studies; and several other directors and researchers from various economic think tanks. The big theme here is economic growth, with the representative from the European Commission announcing that the Commission has a new plan for increasing the competitiveness of European businesses and economies and renewing the “single market” across the continent. The plan is greeted with equal measures of seriousness and skepticism. In the early 2000s the Commission launched a similar plan designed to make Europe the most competitive economy in the world, and that plan produced only modest results.

What I find most interesting are the introductory comments from the Commission representative, Margaritis Schinas. He talks about how the current economic crisis actually has created opportunities for the European Union to "plug holes in its financial and economic architecture" that had failed during the Greek debt crisis (a theme that I have written about previously). Specifically, a degree of fiscal union is being added to the monetary union that is unprecedented in its scope and ambitions. Various reforms have been passed or are in process, including allowing Ecofin to look over national budgets even before national parliaments have a chance to, creating the ability to "name and shame" laggard governments. And of course Europe already had fashioned a trillion dollar bailout, essentially a European Monetary Fund, that was used to shield Greece from the bond markets and bankruptcy. As I listen to the Commission representative, it strikes me as darn near miraculous that countries like France, Germany, Italy and others -- which had fought horrible wars against each other for centuries -- had banded together to bail out a fellow member state, with no previous history or even institutions for doing so. Yet in the United States, when my home state of California was going through its own “Greek debt crisis” in 2009 and Governor Schwarzenegger asked the White House for a bailout, the Golden State was sent packing and had to issue IOUs to pay its debts. It suddenly occurred to me that this European intervention and display of, yes, unity and solidarity, was historic and unprecedented. Yet instead of recognizing it as such, the US media continues to malign Europe and report it as being close to collapse. It seems to have only a single narrative for Europe, a “glass half empty” storyline, sounding like a one-note tuba.

Mr. Schinas was somewhat congratulatory in saying that, despite the predictions of the doomsayers and Euroskeptics, the EU had effectively dealt with the sovereign default crisis that had threatened Europe throughout the spring. "From March 25 through May 9 (when the bailout fund was created), the member states showed tremendous discipline and unity. Greece is like a heart patient, if you don't stop smoking and lead a healthy life, you will have problems. Well the heart surgery for Greece worked."

He cautioned, however, that the crisis was by no means over and vigilance is necessary. "Sustained political will must continue, and will continue," he says. Going further, he says that in effect "a kind of new economic government has formed because there is substantial agreement across all euro countries. We don't need to create new institutions because consensus has been achieved." There appears to be substantial agreement about these points both from the panelists and the audience. Though in private conversations after the panel, I note a degree of skepticism among a few panelists as well as audience members. “The Commission representative’s job is to be a cheerleader,” says one person. “I take it with a grain of salt.”

The most eye-opening comments during this Round Table came next, and they had to do with how Europe regards the United States. During a discussion about the overall global situation, one panelist, Christian Stoffaes, who is chairman of the Center for International Prospective Studies based in Paris, says that the "United States is in disarray, extremely polarized. It is practically a civil war there, and you can't count on it." This theme is echoed by several panelists, one who says that "we need to shift our emphasis eastward (towards Asia) and not wait for the Obama administration." I find these statements to be surprising, and even vaguely alarming, given the importance of the transatlantic relationship in the post-World War II period. Europe is feeling ignored by the Obama administration and so it’s hard to tell if these are “jilted lover” comments or are ones based on a more profound shift. Others on the panel and in the audience seem to find these statements to be noncontroversial. There seems to be a widespread perception that the US is being consumed by the severity of the Great Recession, brought on by a broken Wall Street capitalism, as well as by the quagmires of the Iraq and Afghanistan conflicts, and an inability to change or reform. Previously, Obama’s failure at the Copenhagen summit on climate change to deliver a serious sign of US commitment to that agenda, and instead to shake hands on a deal with the Chinese to do next to nothing, was a real wakeup call to the Europeans. It was as if they suddenly “got” it, that it wasn’t George W. Bush who was the problem but something more profound about a broken political system (with a sclerotic “filibuster-gone-wild” U.S. Senate) that prevents any leader, even a Democrat as talented as Obama, from delivering.

Keep in mind that these are the conservatives of Europe talking in this session, the political party/perspective currently in control of the European Parliament as well as the European Commission, with conservative governments also in Germany, France, Britain, Italy and more. Afterward, in a conversation with Roland Freudenstein, who is head of research for the Centre for European Studies (and is one of these impressive Europeans who speaks better English than many of my relatives), we remark with amazement about how both Europe and the US seem to be writing each other off and looking eastward towards Asia. Truly remarkable.

Steven Hill 12:26 PM Permalink | Trackbacks | Comments (1)
September 28, 2010
 by Steven Hill

EUROPE'S CONSERVATIVES GRAPPLE WITH THE ECONOMIC CRISIS...In Budapest I am participating in and speaking at a two-day, invitation-only conference, "The Crisis in Europe: Re-inventing EU Policies Delivering Growth and Fighting Poverty." This conference is hosted by the European Ideas Network, a think tank associated with the center-right European People's Party (which holds the largest number of seats in the European Parliament). In other words, these are the leading conservatives in Europe. Yet interestingly these conservatives do not sound much like the Republican Party in the United States. Whether the issue is healthcare, social spending in general, the economy and the current crisis, military interventions, immigration, security or virtually any other major issue with which governments deal today, these "conservatives" sound remarkably like their opposition, the various Social Democratic parties in Europe. Indeed, with conservative leaders like Germany's Chancellor Angela Merkel and French President Nicolas Sarkozy speaking eloquently about the need to preserve "social Europe," the center-right in Europe in most ways is to the LEFT of the Democratic Party. That's why these "left-right" terminologies don't translate well across the Atlantic.

Speakers at the conference include two prime ministers (from Hungary and Belgium), the president of the European Parliament, various Members of Parliament and Members of the European Parliament, various former European Commissioners (like Obama's cabinet members at the EU level), national ministers, and leaders of a host of NGOs and think tanks. It's quite an impressive group, a broad cross-section of Europe's elected and political elites, and it will give me a clear window into what the leaders of the European People's Party are thinking at this stage in the post-crisis. I will be speaking on a panel about the financial crisis and how it has affected Europe and the US. Given the recent proposals from the European Union, featured in the Wall Street Journal (European version) yesterday to crack down on derivatives, hedge funds, short sales and the like, as well as the recently concluded Basel III negotiations which call for banks to quadruple the amount of its capital reserves as a step towards preventing bank insolvencies, it's bound to be a lively event. Just this morning, pre-conference meetings were occurring in the breakfast room at the Four Seasons Budapest, with hushed whisperings back and forth as the political elites renew the face-to-face contact that no doubt already had been occurring on the Internet and by phone.

Steven Hill 9:00 AM Permalink | Trackbacks | Comments (1)
September 27, 2010
 by Steven Hill

DAY ONE: BUDAPEST, HUNGARY... I just arrived in Budapest, Hungary as the first stop in a five-week speaking tour in Europe that will take me through 12 different countries and 20 cities, including most of Western Europe and ending in Athens and Istanbul. During this tour, I will give presentations at the European Commission (which, for those who don't know, is like President Obama's cabinet for the European Union), as well as to a host of think tanks, policy institutes and NGOs in Europe. I also have been invited to speak to some local chapters of Democrats Abroad, which is the international wing of the Democratic Party. In Vienna I will observe the Vienna (Austria) municipal election which is occurring on October 10. I will arrive in Stockholm just after the Swedish national election, in which an anti-immigration party is predicted to win a few legislative seats for the first time in Sweden's history. And I will spend considerable time in Greece, where the recent sovereign debt crisis threatened not only Greece but the other so-called PIIGS countries (Portugal, Ireland, Italy and Spain), as well as the euro zone itself.

During my peregrinations across the European continent, I will be assessing the impact of the economic crisis, including what the political elites are saying, as well as what the average person is experiencing. Is the highly vaunted European social capitalism, which provides so well for families and workers, in danger of erosion? The varied venues in which I will travel and speak will put me in contact with people in many different countries, and should be a good vantage point for hearing a range of viewpoints.

Here in Budapest, the largest city in Hungary with nearly two million people, the post-crisis situation appears fairly “EU normal.” I don’t see any obvious signs of deep recession, i.e. numerous shops out of business, more homeless people, empty cafes, restaurants and bars. Quite the contrary, these seem quite full and teeming; I was in Budapest a year ago and I don’t detect any obvious differences between last year and this year. But looks can be deceiving, so I chat with a few shopkeepers, people in cafes, my taxi driver, a bartender (most of whom speak decent English), and some Hungarian politicians at the conference I am attending (more on that below). The consensus seems to be that the crisis was worse last year, that this year things are better. But certainly not all better, unemployment has increased since the start of the crisis from 8 percent to about 11 percent (unemployment in the US is about 9.6 percent, more than double since early 2008). Like nearly all countries around the world, Hungary experienced a massive economic decline during the global recession, and in 2008 it became the first EU country since the U.K. in 1976 to take a bailout from the International Monetary Fund. But as one of the politicians tells me, “In Hungary, people are philosophical about it. As crises go, compared to what Hungary (a formerly Communist country) has seen in the past, this has not been a big one.”

The view from my hotel balcony is stunning. I'm looking across the impressive Szechenyi Chain Bridge , with its imperial arches and massive lion guardians, which spans the wide Danube. Boats are chugging to and fro, and visible on the other side of the river is the massive Buda Castle, set high on a hill and looming over the passage of commerce and time as it has done since its first construction nearly 800 years ago. Hungary's impressive Parliament building also sits astride the river, and not only is it one of Europe's oldest legislative buildings it also is the most stunning I've ever seen, similar in its Gothic Revival style to Westminster in London. Budapest long has been this region’s political, cultural and commercial hub, and today it is a beautiful, quintessentially European metropolis. Decked out in castles, Roman ruins and architectural styles that range from Gothic to Bauhaus to Art Deco and Classicist residential blocks along the wide boulevards, it is a place where Western Europe long has met Eastern Europe, and not always peacefully. It is easy to forget that Hungary itself once was an empire, ruling over vast stretches of Europe; it also was subjugated and occupied for 140 years by the Ottoman Empire that arrived from Turkey; and it was the scene of a brief but heroic uprising in 1956 against the Soviet empire. As I stand on my balcony looking at the Danube and the scene before me, I realize this is history itself flowing downriver.

Back to the economic crisis. Hungary's local elections are on October 3, and campaign posters are visible in the streets. The big question/fear on everyone's minds is whether the nationalist anti-immigrant party, known as Jobbik, will make gains. I expect that they will, since that's what typically happens at this point in an economic downturn. That's true not only in Hungary but also in Belgium, France, the Netherlands, Austria, possibly Sweden, and even the United States (e.g. Tea Party, Ground Zero mosque, Arizona profiling). Due to the insecurities of the age, and the anger of the populace that arises from the insecurities, the right wing populists are able to find a more willing audience, i.e. voters looking to give a thumb in the eye to the system. While this is alarming, it also is to be expected. These right wing populists raise issues that the mainstream parties have been either unwilling or incapable of addressing. While the ideologues are noisy, provocative and offensive, I believe they also play a role in a democracy. Better to have their perspective in the legislature, I say, and to show that they don't really have any policy solutions; they just make a lot of noise.

It's also important to keep in mind that typically the populists and/or their parties decline on the political landscape within an election or two. Witness Jorg Haider in Austria, Pim Fortuyn in the Netherlands, Pat Buchanan and Marilyn Quayle at the podium during the Republican National Convention in 1992 -- at the height of a recession -- spewing their right-wing populism (I confess to remembering Buchanan's "peasants with pitchforks" speeches with a degree of nostalgia -- they were so over-the-top as to be amusing, the way the Village People was over-the-top. You have to admit, the man was not bland). Within a couple of election cycles, all of these populists and/or their parties diminish on the political scene (Le Pen in France has hung on longer than most, but his impact has waned as each crisis fades). They burst on the scene like a Roman candle, and then fizz away just as quickly, having shed more heat than light.

So you can count on right wing populists appearing during economic downturns with the precision of a Swiss clock. While of course it is alarming, I believe it is nothing to panic over, since in their own way they can play a necessary role in a healthy, robust democracy. It provides an opportunity to counter their bigotry and further refine society's views. That's how the societal consensus process works, as much as it feels raucous and disconcerting when in the middle of it. It's necessary not to overreact to the headlines, but instead to maintain a longer-term perspective on these matters.

Steven Hill 2:13 PM Permalink | Trackbacks | Comments (1)

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