On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

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■ December 13, 2018, 12:01 AM EST

On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

● Exit Britain. Enter Wall Street.

By Edward Robinson, Lananh Nguyen and Yalman Onaran

With Donald Trump rattling the international order Washington built after World War II, engagement is out and isolationism is in. Yet Wall Street, an expression of American influence every bit as defining as Hollywood or Silicon Valley, apparently didn’t get the memo.

European finance—whipsawed by debt crises and political upheaval since the financial crash of 2008 and now on the verge of the Brexit trauma—is seeing just how internationalist American banks are. U.S. financial powerhouses such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have been running up the score on their European rivals, dominating investment banking overseas as never before.

The U.K.’s separation from the European Union will cleave Europe’s financial industry in half. London’s diminished role as the financial gateway to the Continent may prevent Europe from matching the U.S. with its own deep, seamless flow of capital. Brian Moynihan, the chairman and chief executive officer of Bank of America Corp., calls this effect “disaggregating liquidity.”

“That’s not going to be good for the economy,” Moynihan said at an industry conference in Boston in November. “It puts them back about 10 to 15 years in the possible development of capital markets, which is critical to a country’s success. At the end of the day, what makes the U.S. powerful is our capital markets and all the capital we can bring to the situation. That just allows us to develop wealth faster for people, and companies can access the capital a lot faster.”

The result: Wall Street’s deepening penetration into the EU. Bank of America is turning a post office in the center of Paris into a trading floor for hundreds. Goldman Sachs, Morgan Stanley, and JPMorgan are shifting capital and staff to Frankfurt, Paris, and possibly other locales. JPMorgan Chase Chairman Jamie Dimon and his peers are increasingly signing up clients for work at the expense of homegrown rivals such as Deutsche Bank AG and BNP Paribas SA. In January, for instance, JPMorgan, Morgan Stanley, and Lazard advised Belgian drugmaker Ablynx and Paris-based Sanofi on a $4 billion takeover that featured no involvement by a European investment bank. This year, five of the six top institutions handling European transactions worth $500 million to $6 billion were American, according to data compiled by Bloomberg.

It’s possible the contest between U.S. and European investment banking will shift again. In the precrisis decade, European institutions were making inroads into the new world. UBS Group AG built an airplane hangar-size trading floor in Stamford, Conn., and Barclays, Deutsche Bank, and Credit Suisse elbowed into the upper ranks for securities underwriting and mergers advice in the U.S. In 2010, top European banks raked in 51 percent of global revenue from trading equities, compared with 44 percent for American lenders.

The UBS trading floor is no more, and Deutsche Bank is the latest European bank retreating from the U.S. In equities trading this year, Wall Street commands 60 percent of global revenue, compared with Europe’s 34 percent, according to data compiled by Bloomberg. The top five U.S. investment banks earned $75 billion in the first nine months of 2018, a quarter more than the same period last year. In contrast, Deutsche Bank, which has been hobbled by CEO turnover and a round of money laundering cases, saw its shares fall to record lows in December. BNP Paribas, France’s No. 1 bank, jolted investors in the third quarter when it reported a 15 percent drop in revenue in fixed income, long considered one of its strongest businesses.

Even before Brexit, Europe struggled to overcome obstacles that would make its lenders more competitive. Brussels’ bid to unify its member states’ banking industries, for example, has foundered. “The fact that European politicians failed to produce banking union is a travesty,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, which holds big stakes in European lenders. “If you’re a U.S. capital markets bank, you are looking at a free runway to step in and take market share.”

As if that weren’t enough, Dimon and Moynihan and their fellow Americans are riding a tailwind courtesy of the U.S. Federal Reserve—a surge in lending revenue. Over the last eight quarters, the Fed has lifted its benchmark interest rate to a range from 2 percent to 2.25 percent, which means banks can charge more for loans. The European Central Bank, nursing a fragile regional economy, has stood fast with a subzero rate. “There’s strong lending growth coming from companies in the U.S.,” says Jan Schildbach, head of research on banking, financial markets, and regulation at Deutsche Bank. “In Europe there’s only modest lending volume growth after years of contraction.”

Wall Street is doing well in Asia, too. U.S. banks take the five top spots in Asian equities underwriting, according to Bloomberg data. In the global business of trading securities, only one Asian lender, Japan’s Nomura Bank Holdings Inc., makes the top 16, with just a 1.7 percent share. In mergers and acquisitions, Asian institutions tend to show up in deals on their own turf. The Bank of China Ltd., for example, leads yuan bond underwriting.

It’s tempting for European banks to conflate the financial industry with the other sources of U.S. economic influence. The dollar continues to be the world’s reserve currency, and the U.S. Department of the Treasury has stepped up its role as a global financial cop—whether on trade with pariah states, policing money laundering, or enforcing tax laws. Foreign bankers and lawmakers bristle at what they call the “weaponization” of the dollar—how its dominance makes it harder for other countries to borrow and trade—and fear that Washington is indirectly giving Wall Street a boost by fining overseas banks billions of dollars.

The EU is starting to push back. Brussels was dismayed by the Trump administration’s withdrawal from the 2015 international agreement to curb Iran’s nuclear program and pursuit of penalties for companies that have renewed doing business with the oil-rich country. So Brussels is trying to cook up a way to get around the dollar-denominated economy to preserve commercial links with Iran.

Indeed, Trump’s willingness to undo long-standing accords on trade, security, and climate change has emboldened rival powers to challenge Washington’s reach. On Dec. 5 the EU unveiled an initiative to strengthen the euro as an alternative to the dollar by calling for companies in the financial and energy industries to denominate more trading contracts in the single currency. China is in its fifth year of rolling out its Belt and Road Initiative, a program worth hundreds of billions of dollars designed to project Beijing’s influence through myriad infrastructure and commercial ventures in dozens of nations in Africa, Asia, and Europe. Russian President Vladimir Putin, for his part, has called on nations to use their own currencies for international trade to blunt U.S. economic power.

Yet when it comes to Wall Street, the great game of geopolitics may ultimately amount to little more than noise. The industry, of course, has only one lodestar: money. And if a tectonic shift such as Brexit creates new opportunities, you can bet America’s big banks will grab a bigger share of business. Still, some fret about what will happen when the cycle turns. “The banks are never going to be terribly good at identifying what would cause them to fail,” says Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England. “There will be a recession at some point, and people will lose money. The economy relies on these banks, and so they need to be able to withstand a lot of stress.”

Theoretical fears of some future downturn aren’t likely to put off Wall Street from making money today. And in the pursuit of profit, America’s global financial profile will grow only more prominent. “That old adage that the business of America is business is still true,” says Curtis Chin, the former U.S. ambassador to the Asian Development Bank and now an Asian Fellow at the Milken Institute. “Soft power comes in many forms.” —With Chitra Somayaji

To contact the authors of this story:
Edward Robinson in London at edrobinson@bloomberg.net
Lananh Nguyen in New York at lnguyen35@bloomberg.net
Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editor responsible for this story:
Howard Chua-Eoan at hchuaeoan@bloomberg.net
James Hertling

BOTTOM LINE – American banks are establishing global hegemony as European institutions retrench even before London loses its place as the world’s financial capital.

Get Ready for $10 Oil Rising oil production and falling demand will combine to drive oil prices lower. By A. Gary Shilling – Feb 16, 2015, 6:00:02 PM

Get Ready for $10 Oil
Rising oil production and falling demand will combine to drive oil prices lower.

By A. Gary Shilling – Feb 16, 2015, 6:00:02 PM

Black, yes. Gold, not so much.
At about $50 a barrel, crude oil prices are down by more than half from their June 2014 peak of $107. They may fall more, perhaps even as low as $10 to $20. Here’s why.

U.S. economic growth has averaged 2.3 percent a year since the recovery started in mid-2009. That’s about half the rate you might expect in a rebound from the deepest recession since the 1930s. Meanwhile, growth in China is slowing, is minimal in the euro zone and is negative in Japan. Throw in the large increase in U.S. vehicle gas mileage and other conservation measures and it’s clear why global oil demand is weak and might even decline.

Oil Prices

At the same time, output is climbing, thanks in large part to increased U.S. production from hydraulic fracking and horizontal drilling. U.S. output rose by 15 percent in the 12 months through November from a year earlier, based on the latest data, while imports declined 4 percent.

Something else figures in the mix: The eroding power of the OPEC cartel. Like all cartels, the Organization of Petroleum Exporting Countries is designed to ensure stable and above-market crude prices. But those high prices encourage cheating, as cartel members exceed their quotas. For the cartel to function, its leader — in this case, Saudi Arabia — must accommodate the cheaters by cutting its own output to keep prices from falling. But the Saudis have seen their past cutbacks result in market-share losses.

So the Saudis, backed by other Persian Gulf oil producers with sizable financial resources — Kuwait, Qatar and the United Arab Emirates — embarked on a game of chicken with the cheaters. On Nov. 27, OPEC said that it wouldn’t cut output, sending oil prices off a cliff. The Saudis figure they can withstand low prices for longer than their financially weaker competitors, who will have to cut production first as pumping becomes uneconomical.

What is the price at which major producers chicken out and slash output? Whatever that price is, it is much lower than the $125 a barrel Venezuela needs to support its mismanaged economy. The same goes for Ecuador, Algeria, Nigeria, Iraq, Iran and Angola.

Saudi Arabia requires a price of more than $90 to fund its budget. But it has $726 billion in foreign currency reserves and is betting it can survive for two years with prices of less than $40 a barrel.

Furthermore, the price when producers chicken out isn’t necessarily the average cost of production, which for 80 percent of new U.S. shale oil production this year will be $50 to $69 a barrel, according to Daniel Yergin of energy consultant IHS Cambridge Energy Research Associates. Instead, the chicken-out point is the marginal cost of production, or the additional costs after the wells are drilled and the pipes are laid. Another way to think of it: It’s the price at which cash flow for an additional barrel falls to zero.

Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won’t be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.

Also consider the conundrum financially troubled countries such as Russia and Venezuela find themselves in: They desperately need the revenue from oil exports to service foreign debts and fund imports. Yet, the lower the price, the more oil they need to produce and export to earn the same number of dollars, the currency used to price and trade oil.

With new discoveries, stability in parts of the Middle East and increasing drilling efficiency, global oil output will no doubt rise in the next several years, adding to pressure on prices. U.S. crude oil production is forecast to rise by 300,000 barrels a day during the next year from 9.1 million now. Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry. Consider also Iraq’s recent deal with the Kurds, meaning that another 550,000 barrels a day will enter the market.

While supply climbs, demand is weakening. OPEC forecasts demand for its oil at a 14-year low of 28.2 million barrels a day in 2017, 600,000 less than its forecast a year ago and down from current output of 30.7 million. It also cut its 2015 demand forecast to a 12-year low of 29.12 million barrels.

Meanwhile, the International Energy Agency reduced its 2015 global demand forecast for the fourth time in 12 months by 230,000 barrels a day to 93.3 million and sees supply exceeding demand this year by 400,000 barrels a day.

Although the 40 percent decline in U.S. gasoline prices since April 2014 has led consumers to buy more gas-guzzling SUVs and pick-up trucks, consumers during the past few years have bought the most efficient blend of cars and trucks ever. At the same time, slowing growth in China and the shift away from energy-intensive manufactured exports and infrastructure to consumer services is depressing oil demand. China accounted for two-thirds of the growth in demand for oil in the past decade.

So look for more big declines in crude oil and related energy prices. My next column will cover the winners and losers from low oil prices.

To contact the author on this story:
A Gary Shilling at insight@agaryshilling.com

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net

Russia’s aggression in Ukraine is part of a broader, and more dangerous, confrontation with the West THE ECONOMIST FEB. 15, 2015

THE pens were on the table in Minsk, Belarus’s capital, for the leaders of France, Germany, Russia and Ukraine to sign a deal to end a year-long war fuelled by Russia and fought by its proxies.

But on February 12th, after all-night talks, they were put away. “No good news,” said Petro Poroshenko, Ukraine’s president. Instead there will be a ceasefire from February 15th. A tentative agreement has been reached to withdraw heavy weaponry.

But Russia looks sure to be able to keep open its border with Ukraine and sustain the flow of arms and people. The siege of Debaltseve, a strategic transport hub held by Ukrainian forces, continues. Russia is holding military exercises on its side of the border. Crimea was not even mentioned.

Meanwhile the IMF has said it will lend Ukraine $17.5 billion to prop up its economy. But Mr Putin seems to be relying on a familiar Russian tactic of exhausting his negotiating counterparts and taking two steps forward, one step back. He is counting on time and endurance to bring the collapse and division of Ukraine and a revision of the post-cold war world order.

Nearly a quarter-century after the collapse of the Soviet Union, the West faces a greater threat from the East than at any point during the cold war. Even during the Cuban missile crisis of 1962, Soviet leaders were constrained by the Politburo and memories of the second world war.

Now, according to Russia’s chief propagandist, Dmitry Kiselev, even a decision about the use of nuclear arms “will be taken personally by Mr Putin, who has the undoubted support of the Russian people”. Bluff or not, this reflects the Russian elite’s perception of the West as a threat to the very existence of the Russian state.

In this view Russia did not start the war in Ukraine, but responded to Western aggression. The Maidan uprising and ousting of Viktor Yanukovych as Ukraine’s president were engineered by American special services to move NATO closer to Russia’s borders.

Once Mr Yanukovych had gone, American envoys offered Ukraine’s interim government $25 billion to place missile defences on the Russian border, in order to shift the balance of nuclear power towards America. Russia had no choice but to act.

Even without Ukraine, Mr Putin has said, America would have found some other excuse to contain Russia.

Ukraine, therefore, was not the cause of Russia’s conflict with the West, but its consequence. Mr Putin’s purpose is not to rebuild the Soviet empire–he knows this is impossible–but to protect Russia’s sovereignty.

By this he means its values, the most important of which is a monopoly on state power.

Behind Russia’s confrontation with the West lies a clash of ideas. On one side are human rights, an accountable bureaucracy and democratic elections; on the other an unconstrained state that can sacrifice its citizens’ interests to further its destiny or satisfy its rulers’ greed. Both under communism and before it, the Russian state acquired religious attributes. It is this sacred state which is under threat.

Mr Putin sits at its apex. “No Putin–no Russia,” a deputy chief of staff said recently. His former KGB colleagues–the Committee of State Security–are its guardians, servants and priests, and entitled to its riches. Theirs is not a job, but an elite and hereditary calling. Expropriating a private firm’s assets to benefit a state firm is therefore not an act of corruption.

When thousands of Ukrainians took to the streets demanding a Western-European way of life, the Kremlin saw this as a threat to its model of governance. Alexander Prokhanov, a nationalist writer who backs Russia’s war in Ukraine, compares European civilisation to a magnet attracting Ukraine and Russia. Destabilising Ukraine is not enough to counter that force: the magnet itself must be neutralised.

Russia feels threatened not by any individual European state, but by the European Union and NATO, which it regards as expansionist. It sees them as “occupied” by America, which seeks to exploit Western values to gain influence over the rest of the world.

America “wants to freeze the order established after the Soviet collapse and remain an absolute leader, thinking it can do whatever it likes, while others can do only what is in that leader’s interests,” Mr Putin said recently. “Maybe some want to live in a semi-occupied state, but we do not.”

Russia has taken to arguing that it is not fighting Ukraine, but America in Ukraine. The Ukrainian army is just a foreign legion of NATO, and American soldiers are killing Russian proxies in the Donbas. Anti-Americanism is not only the reason for war and the main pillar of state power, but also an ideology that Russia is trying to export to Europe, as it once exported communism.

Anti-Westernism has been dressed not in communist clothes, but in imperial and even clerical ones (see page 77). “We see how many Euro-Atlantic countries are in effect turning away from their roots, including their Christian values,” said Mr Putin in 2013.

Russia, by contrast, “has always been a state civilisation held together by the Russian people, the Russian language, Russian culture and the Russian Orthodox church.” The Donbas rebels are fighting not only the Ukrainian army, but against a corrupt Western way of life in order to defend Russia’s distinct world.

Mistaken hopes

Many in the West equate the end of communism with the end of the cold war. In fact, by the time the Soviet Union fell apart, Marxism-Leninism was long dead. Stalin replaced the ideals of internationalism, equality and social justice that the Bolsheviks had proclaimed in 1917 with imperialism and state dominance over all spheres of life. Mikhail Gorbachev’s revolution consisted not in damping down Marxism but in proclaiming the supremacy of universal human values over the state, opening up Russia to the West.

Nationalists, Stalinists, communists and monarchists united against Mr Gorbachev. Anti-Americanism had brought Stalinists and nationalists within the Communist Party closer together. When communism collapsed they united against Boris Yeltsin and his attempts to make Russia “normal”, by which he meant a Western-style free-market democracy.

By 1993, when members of this coalition were ejected by pro-Yeltsin forces from the parliament building they had occupied in Moscow, they seemed defeated. Yet nationalism has resurfaced. Those who fought Yeltsin and his ideas were active in the annexation of Crimea and are involved in the war in south-east Ukraine.

Alexander Borodai, the first “prime minister” of the self-proclaimed Donetsk People’s Republic, who fought with anti-Yeltsin forces, hails Mr Putin as the leader of the nationalist movement in Russia today.

Yet for a few years after Mr Putin came to power he built close relations with NATO. In his first two presidential terms, rising living standards helped buy acceptance of his monopoly on state power and reliance on ex-KGB men; now that the economy is shrinking, the threat of war is needed to legitimise his rule.

He forged his alliance with Orthodox nationalists only during mass street protests by Westernised liberals in 2012, when he returned to the Kremlin. Instead of tear gas, he has used nationalist, imperialist ideas, culminating in the annexation of Crimea and the slow subjugation of south-east Ukraine.

Hard power and soft

Mr Putin’s preferred method is “hybrid warfare”: a blend of hard and soft power. A combination of instruments, some military and some non-military, choreographed to surprise, confuse and wear down an opponent, hybrid warfare is ambiguous in both source and intent, making it hard for multinational bodies such as NATO and the EU to craft a response.

But without the ability to apply hard power, Russia’s version of soft power would achieve little. Russia “has invested heavily in defence,” says NATO’s new secretary-general, a former Norwegian prime minister, Jens Stoltenberg. “It has shown it can deploy forces at very short notice…above all, it has shown a willingness to use force.”

Putin drew two lessons from his brief war in Georgia in 2008. The first was that Russia could deploy hard power in countries that had been in the Soviet Union and were outside NATO with little risk of the West responding with force.

The second, after a slapdash campaign, was that Russia’s armed forces needed to be reformed. Military modernisation became a personal mission to redress “humiliations” visited by an “overweening” West on Russia since the cold war ended.

According to IHS Jane’s, a defence consultancy, by next year Russia’s defence spending will have tripled in nominal terms since 2007, and it will be halfway through a ten-year, 20 trillion rouble ($300 billion) programme to modernise its weapons.

New types of missiles, bombers and submarines are being readied for deployment over the next few years. Spending on defence and security is expected to climb by 30% this year and swallow a more than a third of the federal budget.

As well as money for combat aircraft, helicopters, armoured vehicles and air-defence systems, about a third of the budget has been earmarked to overhaul Russia’s nuclear forces. A revised military doctrine signed by Mr Putin in December identified “reinforcement of NATO’s offensive capacities directly on Russia’s borders, and measures taken to deploy a global anti-missile defence system” in central Europe as the greatest threats Russia faces.

In itself, that may not be cause for alarm in the West. Russian nuclear doctrine has changed little since 2010, when the bar for first use was slightly raised to situations in which “the very existence of the state is under threat”. That may reflect growing confidence in Russia’s conventional forces.

But Mr Putin is fond of saying that nobody should try to shove Russia around when it has one of the world’s biggest nuclear arsenals. Mr Kiselev puts it even more bluntly: “During the years of romanticism [ie, detente], the Soviet Union undertook not to use nuclear weapons first. Modern Russian doctrine does not. The illusions are gone.”

Mr Putin still appears wedded to a strategy he conceived in 2000: threatening a limited nuclear strike to force an opponent (ie, America and its NATO allies) to withdraw from a conflict in which Russia has an important stake, such as in Georgia or Ukraine. Nearly all its large-scale military exercises in the past decade have featured simulations of limited nuclear strikes, including one on Warsaw.

Mr Putin has also been streamlining his armed forces, with the army recruiting 60,000 contract soldiers each year. Professionals now make up 30% of the force. Conscripts may bulk up the numbers, but for the kind of complex, limited wars Mr Putin wants to be able to win, they are pretty useless.

Ordinary contract soldiers are also still a long way behind special forces such as the GRU Spetsnaz (the “little green men” who went into Crimea without military insignia) and the elite airborne VDV troops, but they are catching up.

Boots on the ground

South-east Ukraine shows the new model army at work. Spetsnaz units first trained the Kremlin-backed separatist rebels in tactics and the handling of sophisticated Russian weapons. But when the Ukrainian government began to make headway in early summer, Russia had regular forces near the border to provide a calibrated (and still relatively covert) response.

It is hard to tell how many Russian troops have seen action in Ukraine, as their vehicles and uniforms carry no identifiers. But around 4,000 were sent to relieve Luhansk and Donetsk while threatening the coastal city of Mariupol–enough to convince Mr Poroshenko to draw his troops back.

Since November a new build-up of Russian forces has been under way. Ukrainian military intelligence reckons there may be 9,000 in their country (NATO has given no estimate). Another 50,000 are on the Russian side of the border.

Despite Mr Putin’s claim last year that he could “take Kiev in two weeks” if he wanted, a full-scale invasion and subsequent occupation is beyond Russia. But a Russian-controlled mini-state, Novorossiya, similar to Abkhazia and Transdniestria, could be more or less economically sustainable.

And it would end Ukraine’s hopes of ever regaining sovereignty over its territory other than on Russian terms, which would undoubtedly include staying out of the EU and NATO. Not a bad outcome for Mr Putin, and within reach with the hard power he controls.

The big fear for NATO is that Mr Putin turns his hybrid warfare against a member country. Particularly at risk are the Baltic states–Latvia, Estonia and Lithuania–two of which have large Russian-speaking minorities.

In January Anders Fogh Rasmussen, NATO’s previous secretary-general, said there was a “high probability” that Mr Putin would test NATO’s Article 5, which regards an attack on any member as an attack on all–though “he will be defeated” if he does so.

A pattern of provocation has been established that includes a big increase in the number of close encounters involving Russian aircraft and naval vessels, and snap exercises by Russian forces close to NATO’s northern and eastern borders. Last year NATO planes carried out more than 400 intercepts of Russian aircraft.

More than 150 were by the alliance’s beefed-up Baltic air-policing mission–four times as many as in 2013. In the first nine months of the year, 68 “hot” identifications and interdictions occurred along the Lithuanian border alone. Latvia recorded more than 150 incidents of Russian planes entering its airspace.

There have also been at least two near-misses between Russian military aircraft and Swedish airliners. This is dangerous stuff: Russian pilots do not file flight plans. They fly with transponders switched off, which makes them invisible to civil radar. On January 28th two Russian, possibly nuclear-armed, strategic bombers flew down the English Channel, causing havoc to commercial aviation. Such behaviour is intended to test Western air defences, and was last seen in the cold war. Mr Stoltenberg calls it “risky and unjustified”.

Since 2013, when Russia restarted large-scale snap military exercises, at least eight have been held. In December the Kremlin ordered one in Kaliningrad, an exclave that borders Lithuania and Poland, both NATO members. It mobilised 9,000 soldiers, more than 55 navy ships and every type of military aircraft. “This pattern of behaviour can be used to hide intent,” says General Philip Breedlove, NATO’s most senior commander. “What is it masking? What is it conditioning us for?”

A huge problem for NATO is that most of what Russia might attempt will be below the radar of traditional collective defence. According to Mr Stoltenberg, deciding whether an Article 5 attack has taken place means both recognising what is going on and knowing who is behind it.

“We need more intelligence and better situational awareness,” he says; but adds that NATO allies accept that if the arrival of little green men can be attributed “to an aggressor nation, it is an Article 5 action and then all the assets of NATO come to bear.”

For all the rhetoric of the cold war, the Soviet Union and America had been allies and winners in the second world war and felt a certain respect for each other. The Politburo suffered from no feelings of inferiority. In contrast, Mr Putin and his KGB men came out of the cold war as losers.

What troubles Mr Stoltenberg greatly about Mr Putin’s new, angry Russia is that it is harder to deal with than the old Soviet Union. As a Norwegian, used to sharing an Arctic border with Russia, he says that “even during the coldest period of the cold war we were able to have a pragmatic conversation with them on many security issues”. Russia had “an interest in stability” then, “but not now”.

Meddling and perverting

Destabilisation is also being achieved in less military ways. Wielding power or gaining influence abroad–through antiestablishment political parties, disgruntled minority groups, media outlets, environmental activists, supporters in business, propagandist “think-tanks”, and others–has become part of the Kremlin’s hybrid-war strategy. This perversion of “soft power” is seen by Moscow as a vital complement to military engagement.

Certainly Russia is not alone in abusing soft power. The American government’s aid agency, USAID, has planted tweets in Cuba and the Middle East to foster dissent. And Mr Putin has hinted that Russia needs to fight this way because America and others are already doing so, through “pseudo-NGOs”, CNN and human-rights groups.

At home Russian media, which are mostly state-controlled, churn out lies and conspiracy theories. Abroad, the main conduit for the Kremlin’s world view is RT, a TV channel set up in 2005 to promote a positive view of Russia that now focuses on making the West look bad.

It uses Western voices: far-left anti-globalists, far-right nationalists and disillusioned individuals. It broadcasts in English, Arabic and Spanish and is planning German- and French-language channels.

It claims to reach 700m people worldwide and 2.7m hotel rooms. Though it is not a complete farce, it has broadcast a string of false stories, such as one speculating that America was behind the Ebola epidemic in west Africa.

The Kremlin is also a sophisticated user of the internet and social media. It employs hundreds of “trolls” to garrison the comment sections and Twitter feeds of the West. The point is not so much to promote the Kremlin’s views, but to denigrate opposition figures, and foreign governments and institutions, and to sow fear and confusion.

Vast sums have been thrown at public-relations and lobbying firms to improve Russia’s image abroad–among them Ketchum, based in New York, which helped place an op-ed by Mr Putin in the New York Times. And it can rely on some of its corporate partners to lobby against policies that would hurt Russian business.

The West’s willingness to shelter Russian money, some of it gained corruptly, demoralises the Russian opposition while making the West more dependent on the Kremlin. Russian money has had a poisonous effect closer to home, too. Russia wields soft power in the Baltics partly through its “compatriots policy”, which entails financial support for Russian-speaking minorities abroad.

econ 2The Economist

Mr Putin’s most devious strategy, however, is to destabilise the EU through fringe political parties (see box).

Russia’s approach to ideology is fluid: it supports both far-left and far-right groups. As Peter Pomerantsev and Michael Weiss put it in “The menace of unreality”, a paper on Russian soft power: “The aim is to exacerbate divides [in the West] and create an echo-chamber of Kremlin support.”

Disruptive politics

Far-right groups are seduced by the idea of Moscow as a counterweight to the EU, and by its law-and-order policies. Its stance on homosexuality and promotion of “traditional” moral values appeal to religious conservatives. The far left likes the talk of fighting American hegemony.

Russia’s most surprising allies, however, are probably Europe’s Greens. They are opposed to shale-gas fracking and nuclear power–as is Moscow, because both promise to lessen Europe’s dependence on Russian fossil fuels. Mr Rasmussen has accused Russia of “sophisticated” manipulation of information to hobble fracking in Europe, though without producing concrete evidence.

There is circumstantial evidence in Bulgaria, which in 2012 cancelled a permit for Chevron to explore for shale gas after anti-fracking protests. Some saw Russia’s hand in these, possibly to punish the pro-European government of the time, which sought to reduce its reliance on Russian energy (Gazprom, Russia’s state-controlled gas giant, supplies 90% of Bulgaria’s gas).

Previously, Bulgaria had been expected to transport Russian oil through its planned South Stream pipeline, and its parliament had approved a bill that would have exempted the project from awkward EU rules. Much of it had been written by Gazprom, and the construction contract was to go to a firm owned by Gennady Timchenko, an oligarch now under Western sanctions.

Gazprom offered to finance the pipeline and to sponsor a Bulgarian football team. The energy minister at the time later claimed he had been offered bribes by a Russian envoy to smooth the project’s passage. Though European opposition means it has now been scrapped, the episode shows the methods Moscow uses to protect its economic interests.

In all this Mr Putin is evidently acting not only for Russia’s sake, but for his own. Mr Borodai, the rebel ideologue in Donetsk, says that if necessary the Russian volunteers who are fighting today in Donbas will tomorrow defend their president on the streets of Moscow.

Yet, although Mr Putin may believe he is using nationalists, the nationalists believe they are using him to consolidate their power. What they aspire to, with or without Mr Putin, is that Russians rally behind the nationalist state and their leader to take on Western liberalism. This is not a conflict that could have been resolved in Minsk.

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Germany’s economic policy is hurting Europe, the world, and itself Business Insider  / The Economist

FROM Washington to Athens, politicians and economists who often have little in common all agree that Germany under Chancellor Angela Merkel is largely wrong about economic policy.

Germany’s apparent economic strengths–the lowest unemployment in two decades; steady, if low, growth; a balanced federal budget–mask weaknesses and policy errors, they say.

A first mistake is to insist that troubled euro-zone countries such as Greece not only make structural reforms to their economies, but simultaneously cut spending and borrowing (depressing demand).

But a second is domestic. Given low interest rates, now would be a golden opportunity to borrow and invest more at home, boosting the economy and providing a Keynesian stimulus to the entire sluggish euro zone. Instead, Germany is investing less than in the past and less than most other countries (see chart).

Raising investment could also deal with another imbalance in the German economy: its current-account surplus, the largest in the world, which has just set another record in 2014 of EUR220 billion ($250 billion), over 7% of GDP. By definition, this surplus measures the excess of savings over investment. Invest more, and the surplus would shrink or even disappear.

Such thinking has fans even in Germany. Marcel Fratzscher at the German Institute for Economic Research in Berlin thinks that German strength is an “illusion” given its large “investment gap”. Public investment in Germany–shared by the federal, state and local governments–has fallen from 6% of GDP in 1970 (in the West) to 2% now. Roads, bridges, broadband internet and much else could do with more money.

The German Marshall Fund has said that 40% of bridges in Germany are in “critical condition”. The Cologne Institute for Economic Research, another think-tank, reckons that the capital stock of German machines has not risen in real terms since 2008. Markus Kerber, director of the German Federation of Industries, a trade association, says that a “long-term investment-offensive is needed” to sustain growth.

But other German economists are sceptical about claims of underinvestment. Christoph Schmidt, chairman of the German Council of Economic Experts, which advises the government, thinks published ratios of investment as a percentage of GDP can be misleading when compared both across time and between countries.

France, for example, has a lot of public housing. Germany does not, and this skews the numbers. Reunification in 1990 caused a one-off investment boom in both parts of the country. And whereas other countries had property crashes, Germany did not. In that case, at least, skimping on housebuilding was sensible.

Yet the trend of declining public and private investment remains clear. A recalculation to fit European Union norms lifts Germany’s investment ratio from 17% to 19%, by including companies’ research and development spending. But that is still low. Why is this?

Most investing is done by private firms. But German ones have for years preferred to invest abroad, not at home. Mr Fratzscher regrets this: he reckons that German investment abroad has yielded an annual return of 10% over 20 years whereas foreign investment in Germany has made more like 15%.

The main reason for low domestic investment, says Michael Hüther, the Cologne institute’s director, is uncertainty and nervousness over the future. Continuing anxiety over Greece and the euro has been especially damaging.

More recently worries about Russia, which is more commercially entangled with Germany than with other big Western economies, have unsettled the business climate. But the biggest problem for many businessmen may be benighted government policies.

These start with Germany’s “energy transition,” a plan to exit simultaneously from fossil fuels and nuclear energy. The main policy is a huge subsidy to solar and wind. The surcharge that many firms have to pay on a unit of energy is larger than the entire cost of electricity paid by firms in America. Half the firms polled by Mr Hüther’s institute claim that this makes any new investment unattractive.

Many also complain, in a country that has an ageing, shrinking population, about a shortage of skilled workers despite Germany’s admired apprenticeship system. Mrs Merkel’s government, under the influence of her Social Democratic coalition partners, has made things worse by letting some workers retire at 63, rather than at 67, as previously envisaged.

In the housing market, owners are put off investment by a cap on rents in many cities. A new federal minimum wage is yet another measure that will add costs for business.

The best way to boost investment is to fix these policy errors, argues Mr Schmidt. On energy, even if the government insists on sticking to its emissions targets, it could leave the choice of technology to the market.

The pension age could be raised again; the minimum wage should be lower. And public investment should be raised. Gustav Horn, head of the Macroeconomic Policy Institute, part of a foundation with links to the trade unions, reckons that a 1% increase in euro-zone public investment would boost GDP by 1.6%.

Yet Germany led resistance to calls for more public money to be put into the European Commission’s planned investment programme. At home it is constrained by the constitutional “debt brake”, adopted in 2009, which requires state governments to balance their budgets by 2020 and the federal one to do so by 2016.

Wolfgang Schäuble, the finance minister, has beaten the timetable, balancing the budget in 2014. He and Mrs Merkel are proud of the “black zero”, which demonstrates that Germans sticks by the rules, as others should. The books may balance, but Germany is a long way from rectifying its investment shortfall at home.

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The Netherlands is now less creditworthy than Microsoft

Aside

Standard & Poor’s stripped the Netherlands of its AAA credit rating today. This ignominy means that the Dutch, now rated merely AA+, are considered less creditworthy than the Germans, on a par instead with the Americans.

Although considered part of the euro zone’s sturdy northern “core,” the Dutch economy has performed more like the wobbly southern “periphery” recently, with GDP set to shrink by 1.2% this year, according to S&P. The size of the Dutch economy won’t surpass its 2008 peak until 2017, reckons the ratings agency. Future growth will be weighed down by aggressive government austerity and falling house prices.

S&P also cut France’s rating earlier this month, to a notch below the Netherlands. Economist Holger Sandte of Nordea bank expects a gradual convergence of ratingsamong euro members, driven by French and Dutch-style downgrades rather than upgrades of lower-rated countries; Germany, Luxembourg and Finland are now the only members of the 17-nation euro zone with the top rating from all three leading credit agencies. S&P upgraded its outlook for Spain today, to “stable” from “negative,” but left its BBB- rating in place.

Not that any of this really matters. For widely held, extensively scrutinized bonds like those issued by the Dutch government, the opinion of one ratings agency doesn’t move markets much; Fitch and Moody’s, the other two big agencies, still give the Netherlands the top grade. Dutch bond spreads barely budged on the downgrade news, and continue to fetch lower yields than fellow AA+ rated America (as does AA rated France, for that matter).

Ten-year-government-bond-yields-Germany-AAA-US-AA-Netherlands-AA-France-AA-_chartbuilder

Although it is somewhat facile to compare countries and companies, agencies like S&P rate them according to same scale, so why not? There are only four AAA rated corporates: ADP, Exxon Mobil, Johnson & Johnson and Microsoft. Thus, today’s downgrade means that S&P considers the Dutch government less creditworthy than Microsoft. Still, it did not exactly drop in with a bunch of deadbeats; among the companies rated AA+ is a certain Apple Inc.

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