Will the Mother of the ‘Mother of All EU Summits’ finally decide something about the social-economic future of the EU and the Euro-zone?! Chief Commissioner Jose Manuel Barroso doesn’t seem too optimistic about the expected result. So am I!

Today, on October 18, 2012, is the day that yet another decisive summit starts on the future of the Euro-zone. Although this summit is very important of course, it seems that all elephants in the room (i.e. Spain and Greece) are cautiously left out of the official agenda.

Instead of ‘Don’t mention the war’, the creed of this summit could have been ‘Don’t mention Spain and Greece’. This statement led to the savvy Dutch economic journalist Hella Hueck heaving a sigh: ‘what the hell these guys will be talking about then?!”. She wrote a must-read column in Dutch on the summit (please use the Google translate service).

Here is a translated snip:

My experience with these kind of summits? After a meeting running for hours, well past midnight, you receive a two page document with vague agreements that every government leader can explain in his advantage before his national press. It’s much more interesting to look at the topics the government leaders didn’t agree upon and which subsequently will be decaying further.

I’m afraid that Hella is totally right with this statement. In her column she mentions five other elephants in the room that won't be discussed during this summit.

In the meantime in Brussels:

• Dutch PM Mark Rutte has been planning to make minced meat of Herman van Rompuy’s proposal for a more politically integrated union with an integral Euro-zone Budget and to say ‘nyet’ as often of possible without running the risk of being kicked out of the Justus Lipsius building.
  
• PM David Cameron of the UK is softly humming the tune ‘Should I stay or should I go”, concerning the British membership of the EU. A lot of countrymen would not mind if he chooses the latter.
  
• Chancellor Merkel finds it officially a good idea that representatives of the EU assess the state budgets of the individual member-states, but thinks silently: ”Everybody should understand that this is only about the State Budgets of the PIIGS, Eastern Europe, France and Belgium. The first SOB that has remarks upon the German State Budget will be thrown off the Bundestag (German parliament)”.
  
• PM Antonis Samaras of Greece and PM Mariano Rajoy of Spain simultaneously think: ‘Don’t mention the troika, don’t mention the troika, don’t mention…’.
  
• President François Hollande of France thinks: ‘Why did I have the big mouth to tell that the Euro-zone crisis would soon be over. What was I thinking when I stated it. Now the people are expecting something from me. And I can’t deliver anything, can I?!’
  
• Herman van Rompuy sobs: ‘Why do I not have the charisma of Tony Blair, the eloquence of Barack Obama and the looks of Ashton Kutcher. Nobody likes me really and nobody wants to endorse my ideas when push comes to shove. Still, I am right about it and the ideas I presented are really great ideas. Sh*t, I hate my job’.

Of course these are (bad) jokes, but they do reflect the positions that the various protagonists in this summit are in currently. With this in mind, the hopes for an agreement with muscles are very, very slim.

Jose Manuel Barroso, the uncharismatic chairman of the European Commission was very well aware of this problem. In a speech held hours before the official start, he spoke upon his hopes for this summit. Here is the larger part of his speech:

Let me start by saying that I believe we had today a very good, open and dense exchange between the social partners and also the representatives of the European institutions. I think it is critically important at this moment to have this kind of serious, open exchanges.

But let me also address a message to those in Europe that are hit hardest by the current crisis. We are perfectly aware of the very difficult situation in which many of our fellow citizens face themselves. And I want to say to all those who are experiencing hardship from the current crisis that the European Commission is making every effort, together with our Member States and social partners, to move Europe back on the path to growth and jobs. We are working to provide them with hope and perspective

.

[…]  we can say that we all agree on the need to come back to sustainable growth and jobs, to more competitiveness but also more social cohesion in Europe.

[…] we have to be clear that there is no easy way out of this crisis. We need the right mix of differentiated fiscal consolidation, structural reforms for more growth and

competitiveness, and targeted investment. And of course we need a comprehensive solution for the financial instability in the Euro zone, because without this solution we will not have the confidence that is so critically important for investment and for growth.

Clearly, this will require increased efforts from Member States to take decisive and immediate action.

I want to thank president Van Rompuy for putting at the centre of this European Council precisely not only new measures, but to see in which way we are or we are not implementing the measures agreed before. Implementation is key and I believe an additional sense of urgency is necessary when it comes to growth.

Very frankly I am not happy with the progress made so far. That's why I call on the European Council to accelerate the adoption and implementation of many important growth-enhancing measures included in the Growth and Jobs Compact. It is true that we have been making more efforts in terms of fiscal consolidation than on the measures for growth that were already agreed at the European Council level. We need to balance the important efforts made in terms of sound public finances with the right measures to have growth enhancing policies.

We also need to move ahead with our structural reform agenda – the country-specific recommendations have to be implemented at national level. In a few weeks' time already, the Commission will launch the next European Semester for economic policy coordination, outlining the reform priorities for 2013 in our Annual Growth Survey and we are associating the social partners for that exercise.

Finally, targeted investment at European level needs to be made in areas with a high potential for growth and jobs. This is precisely also the main purpose of the future European budget between 2014-2020. Unfortunately we see little willingness on some of our governments to ensure appropriate funding for key instruments to help to bolster the negative social impact of the crisis. And I want to make this clear – I believe that proper funding for the European Social Fund, the European Globalisation Adjustment Fund or aid for deprived persons (for which we will present a new programme next week) is very important. There are some of our citizens in Europe that are in a very difficult and emergency situation.

To conclude: today and tomorrow, EU leaders will once again have the important task to show that they are serious about their commitments and about the implementation of those commitments.

I sincerely hope that the European Council will give a strong political impetus in this regard and I believe today's meeting with the social partners was for us, for me it was certainly, a way of bringing this sense of urgency to all the Heads of State or Government. The message that we are receiving from trade unions, but also from businesses, namely SMEs, is the need to work more with a better focus on the way to promote sustainable growth and jobs at European level.

This is truly a good speech and Barroso addresses the problems correctly: during the last two years the Euro-zone and EU have mainly spoken on the fiscal aspects of the crisis, but merely failed to address the economic side-effects of the current crisis and the devastating consequences it had for the social cohesion in the South-European countries. 

These side-effects are huge and will be huge for the coming years, still they aren't addressed properly.

Unfortunately, this is only a speech and unfortunately it comes from someone with the same image-problem as Herman van Rompuy: too little charismatic and decisive to be taken seriously by the European leaders. This is exactly the reason that people like Van Rompuy and Barroso get these kind of jobs.  They are not posing a threat to anybody and let the government leaders do their thing without serious protest. Could you imagine someone like Churchill in the role of chief of the European Council? Exactly!

Therefore I am very pessimistic on the outcome of this summit. It will be the same ole’ same ole’ that it has been before during the many previous summits. All government leaders will bragg on the important results that have been reached during the summit, but the true outcome will be dead on arrival.

State bank ABN Amro should be sold ‘at all costs’, according to Z24, as ‘state banks usually suffer from low performance’. The newspaper is right indeed, but for different reasons!

Today, the online Dutch economic newspaper Z24 wrote in an article that ABN Amro, the Dutch state bank should be sold 'at all costs'; even if this meant a loss for the state.  Their argumentation was that a state bank in general performed worse than a privately owned bank. I happen to agree with Z24, but not for their reasons.

Here are the pertinent snips from the Z24-article:

Sell ABN Amro, even at a loss

State banks often perform bad. That is the reason that ABN Amro should be sold as soon as possible, in spite of a possible loss. This is stated by Harry Huizinga, professor International Economy at the Tilburg University.

Extensive research has been done into state banks, according to Huizinga. This research disclosed that statebanks:

• have lower efficiency than private banks;
• have to book more depreciations on bad loans;
• have to make a higher interest margin at the expense of their customers.

On a macro-level statebanks give rise to lower economic growth and badly developed financial markets.

There is a bright spot, however: state banks bring more stability in times of crises. They keep the brake on loans in good times, but are less afraid to lend in bad times. However, there are better means of stabilizing the economy, like a monetary policy for interest rate reduction in bad times and rising capital buffers for banks in good times.

Former Finance Minister Wouter Bos paid €16.8 bln for the Dutch parts of ABN Amro and Fortis in October 2008 and spent another €6 bln on reorganizations within the bankparts (i.e. ABN Amro and Fortis Bank) and insurance company (i.e. Fortis Insurance, currently called ASR).

CEO Gerrit Zalm of ABN Amro stated recently that a future IPO remains the best option for the nationalized bank. Huizinga agrees: as soon as the stock markets are stable, you have to sell ABN Amro.

I agree with both persons, but for different reasons. I want to make one thing clear: ABN Amro is a good, professional and customer-friendly bank for private customers and its internet telebanking application is probably the best in The Netherlands. However, that is not the point.

Unfortunately, ABN Amro’s current reputation is far from undisputed.

The bank has been heavily involved with the still developing Vestia affair, while the name Fortis Bank (now part of ABN Amro) has been mentioned in the bribery affair of VVD-delegate Ton Hooijmaijers.

ABN Amro was the first bank to issue a structured finance product again after the crisis started in 2008/2009 in The Netherlands. It has also a reputation of using ‘near-extortion’ tactics to force its suppliers into handing out vast discounts.

Then there is the issue that ABN Amro – just like all SIFI (systemically important financial institution) banks in The Netherlands – has a large base of houses with mortgages that are underwater, while the number of arrears on mortgages is soaring currently.

On top of that it calls itself ‘the most important credit supplier for Commercial Real Estate in The Netherlands’,  which means that the bank is therefore heavily involved in CRE financing. What that means won’t be a secret for the regular readers of my blog.

At this moment the bank seems to be explicitely looking abroad (especially to the Far East) for new business opportunities. This is a 180 degree change with last year’s policy to become a national champion, instead of an internationally aimed SIFI-bank.

All in all there are quite a number of reasons why the Dutch citizens should be not too proud of owning a share in ABN Amro through their tax-money.

Most of these reasons have to do with moral hazard: why should the bank shy away from taking risks with the full firepower of the Dutch government (i.e. the Dutch tax-payer) behind it. It can privatize the profits and socialize the losses.

For me this is the main reason that the bank has been consistently showing more risk-seeking behaviour than (f.i.) ING Bank over the last 3-4 years, together with the fact that the bank wants to become as valuable as possible in case of a future IPO. A national champion gains less shareholder’s money than an internationally operating bank with a bright future ahead.

This brings us to the difficult point of an IPO for ABN Amro. The reasons that the Dutch government should be interested in bringing the bank to the stock exchange as soon as possible, presumably even at a loss, are the same reasons that shareholders should be not too interested in buying shares of this bank.

There are simply too many hazards at this bank, that could mean future loss of shareholder value: the risk-seeking behavior of the bank, the moral hazards, the still unfolding Vestia case or the CRE/RRE issue that could take a big bite out of the bank’s balance in the future.

All these hazards mean that an IPO for ABN Amro in 2013-2014 might not yield much more than €7-8 bln for the government, that invested a staggering €22 bln in this bank (although even amounts of €30 bln have been mentioned in the press).

That will be a very bitter pill to swallow for the next Dutch government. On the other hand: keeping this bank in the hands of the state could mean much larger losses in the not too distant future.

Sell, Mortimer, sell!!!

Welcome in the strange world of Building and Construction

Today, there were two news items concerning the strange world of Building and Construction. Both news items were shocking in their own right.

Default Fraud or ‘a means to an end’?!

2012 has turned into a very bad year for the whole Building and Construction (B&C) industry: 

Many building projects for Residential and Commercial Real Estate have been withdrawn, due to a total lack in demand from potential buyers and the mounting difficulties among project developers to finance new building projects.

A second cause is that even the most backward communities and cities are nowadays wondering whether it is wise to continue building new residential areas, commercial buildings and industrial zones like there is no tomorrow. 

Many cities and communities are still filled to the brim with building ground, but there are no buyers to take their bait (see the second part of this article). 

Both  circumstances turn 2012 into an annus horribilis (i.e. horrible year) for communities, project developers and building companies. Although there is still some work to be done for infrastructure (waterways, railroads, highways and other infrastructural projects) and special projects, like football stadiums and concert halls, it is nowhere near enough to keep all building companies alive with their current amount of personnel.

What makes life difficult for the B&C companies in The Netherlands is that it is quite hard to lay off people, unless a company can make clear that it is on the brink of defaulting if nothing happens with the worker base.

Worker and dismissal protection are still at a high level in The Netherlands. Although there have been very good and justified reasons for maintaining our level of dismissal protection in The Netherlands, it might force companies to take desperate measures to keep their head above water.

Building and Construction companies may have discovered a new ‘trick’ to lay off their excess personnel: they file for bankruptcy for (parts of) the company, enabling them to lay off all their workers in that part of the company. Afterwards they make a second beginning with the company (part) and re-engage (some of) their former workers using a so-called ZZP-contract (Freelancer / Independent worker without personnel).

This is much cheaper for the company that can finish its projects and meet its contractual obligations, but doesn’t have the hassle with excess personnel. The workers, however, lose their job and their fixed income and enter an uncertain future as freelancers for the company, knowing that their assignment might end when their projects are finished.

The question is: is this default fraud or a means to an end to survive with one's company?!

The Dutch newspaper Algemeen Dagblad (www.ad.nl) writes on this story:

Builders ditch personnel through ‘unfair defaults’

More and more building companies file for bankruptcy in order to ditch their fixed personnel. After such a bankruptcy, these companies quite often have a second beginning with freelancers (zzp), which enables them to work much cheaper.

On top of that: as a consequence of this construct, defaulted building companies don’t have to pay dismissal fees to their workers, where they should pay such fees normally. According to the labor union for the B&C industry ‘FNV Bouw’, these unfair defaults ‘ are how its goes here in this industry’.

“Building companies are in dire straits nowadays. Competition is killing. Employers only want one thing and that is to rent personnel at the lowest possible price”, according to FNV Bouw managing director Wilco Veldhorst..

By hiring a freelancer employers save on their personnel expenses. Besides that, it is quite easy to get rid of excess workers when their project is finished.

Employers in this industry, gathered in Bouwend Nederland (i.e. ‘Building Holland’ ), state ‘they don’t recognize themselves in these kinds of abuse. According to the organization, ‘this is not a widespread phenomena’ and ‘it is a way of working that we certainly don’t endorse as employers’.

Before I give my opinion on this news item, first I want to state this: the labor unions in The Netherlands are in dire straits themselves. With dropping numbers of members, the new pension and retirement plan disaster that backfired enormously at the largest federation of unions 'FNV' and the internal cat fights within the FNV ‘mothership’ on the question who is ultimately in charge within the union, the union could use some positive attention to show it's still alive and kicking.

Therefore this news ‘might’ be a virtually non-existent problem that has been blown up to substantial proportions. On the other hand, I tend to rather believe the union in this situation than Bouwend Nederland that states that everything is hunky dory within the industry.

Although I can understand that some building companies would deploy these kinds of desperate measures and sometimes are even forced to do so, I do not approve of it. It would not be correct to call it ‘default fraud’, but it comes darn close!

Workers that already go through a difficult situation with lots of uncertainty as a consequence of the continuing crisis, must either ‘earn’ their own job again, while entering into a very unsecure ZZP-contract or they are fired: straight into Unemployment Benefit without any dismissal fees. Especially workers that have worked long years for such a company feel betrayed by this treatment. 

Especially in this economic situation, it should be more easy for companies to lay off excess personnel, when they can show that the company needs it to survive eventually. However, this personnel should be entitled to either outplacement services delivered by the company or a fair dismissal fee. 

Unfortunately it happens much more often that excess personnel is ditched through defaults of company parts. Especially the Dutch BV (private limited) is a very suitable legal form for this kind of personnel reduction. Personnel can be moved internally from one limited to another limited within the holding. When this so-called personnel limited defaults, the rest of the holding company (operations limited + management limited) can continue their operations without any problems whatsoever.

That this kind of operation skims over the edge of legality is obvious, but it happens. That is very unfortunate for the workers that work at such a company.

Cities that took ‘a bigger bite of building ground than they could chew’, now start to pay the price for it.

In the past I wrote several times on the ‘kamikaze tactics’ of cities and communities concerning the purchase of building ground for new residential areas and commercial/industrial zones.

Yesterday, the Dutch news magazine Nieuwsuur (www.nieuwsuur.nl) presented data on the financial losses that communities and cities suffered as a consequence of excess ground purchases in the past. Read, shiver and hold your pants:

Communities lose millions on building ground

Many Dutch communities lost millions of euro’s on building ground they purchased in the past. This became clear from a Nieuwsuur investigation among 40 communities. These losses force substantial austerity measures in these communities.

From the fourty communities, with among those the thirty largest in The Netherlands, 33 suffered a loss in excess of €1 mln. Eleven communities suffered a loss in excess of €20 mln. The five communities with the largest losses were:

Kaag and Braassem	-/- €46 mln
Groningen	-/- €63 mln
Den Haag	-/- €64.8 mln
Heerenveen	-/- €79.5 mln
Apeldoorn	-/- €124 mln

At the beginning of this year, it became clear that the community of Apeldoorn took a large risk by purchasing vast amounts of building ground. That ground turned out to be unsaleable. The investigation proves that more communities suffer from the same problem.

According to Erwin van der Krabben, professor  with a chair in Real Estate, it are enormous losses that the communities had to take. “Most communities have no flesh left at their bones. They ran out of any reserves. This means: closing swimming pools and libraries and making an end to subsidies for sporting clubs and local welfare associations.

The end to the financial misery is not in sight yet, according to Van der Krabben: ”Most communities reckon that the Dutch housing market might improve again in a few years. However, things might remain bad for the next five to ten years. This means taking additional losses”. Van der Krabben also found that many communities kick the can down the road, instead of taking losses immediately.

Alderman Lucas Vokurka(D66) from Delft thinks that the Dutch national government has to intervene:”We have large amounts of building ground. Our neighbour cities have that too. There is a large overcapacity that causes further drops in prices”. According to Vokurka, the central government should make an inventory of all building locations and ”should decide top-down what building locations should be scratched. The communities involved should be compensated by the central government”.

Alderman Vokurka is a blatant fool.  So are all the other aldermen that have been involved in the kamikaze actions concerning the purchase of building ground.

The central government should not compensate the communities that purchased excess building ground, but should put these communities under legal restraint and force austerity measures on them: especially among the parts of the civil service that are involved in building and construction. Parts of the community budget that involve necessary utilities like swimming pools and libraries should be left unharmed.

On top of that, it should be explicitely forbidden for these communities to raise municipal taxes and parking fees and to lower the degree of service to their citizens. The inhabitants of these cities should not suffer from the stupidity of their city council and civil service.

To give you an impression, I will calculate the losses per inhabitant that the communities in the aforementioned table suffered:

Kaag and Braassem	-/- €1782 per inhabitant
Groningen	-/- €327 per inhabitant
Den Haag	-/- €129 per inhabitant
Heerenveen	-/-  €1826 per inhabitant
Apeldoorn	-/- €789 per inhabitant

Heerenveen, the lovely Frisian city, is the clear loser in our ‘Pathetic Top Five’, but the other communities should also be very ashamed of themselves.

I hope that central government will be hard on these communities, but the strong and growing trend among central and local governments to tax themselves out of misery makes this a very implausible option, unfortunately.