The European energy policy: a story of misused sovereignty and missed opportunities.

Ulko Jonker, the EU correspondent of Het Financieele Dagblad, is one of those journalists who can write, what you could refer to as ‘hidden treasures’.

He seldomly writes ‘scoopy’ news or those power-interviews with the leading politicians in Europe. No, his real strength is writing well-considered and elaborate background stories, often with surprising conclusions.

Last Saturday on January 25, Ulko Jonker wrote a very interesting article upon the deployment of a ‘durable economy’ within the European Union, but unfortunately I only read it today.

This must-read article had the following bombshell in it:

Lakshmi Mittal [the chairman of ArcelorMittal – EL] warned this week that Europe should reduce its ambitions, with respect to the climate. Traditional industries like his should be offered lower energy prices.

[…]

And Mittal has a point: the European energy market has been cut into pieces so much and it is so distorted, that the cost differences between the various EU countries are bigger than those with the United States.

National [and unharmonized - EL] targets for durable energy caused that Germany is currently loaded with (Chinese) solar-panels, while these panels would yield twice as much energy in Greece…, which can’t afford them.

On the continent, the nuclear power plants will be shut down in due course, but in the United Kingdom new nuclear power plants will be started up, using loads of subsidy money.

Tax-payers pay for market distortions, on which electricity producers break down. And the best means for reaching those durable economy targets – the emission trading scheme (ETS), which diminishes CO2 exhaust through a system of paid CO2 emission rights – has gridlocked in the meantime.

Actually, the red and bold text is really funny, when you think about the consequences of this madness:

• Greece has the sun, but Germany has the solar panels;
  
• The United Kingdom is starting up new nuclear power plants, while Germany and France are planning to decommission them at the same time;
  
• Many countries in the European Union are reluctant to exploit the shale gas supplies, but look with pure envy at the USA and Canada, which pump up this gas and use up the oil-laden tar sands, like there is no tomorrow;
  
• Energy plants, driven by coal, are planned at various places in Europe. Coal is extremely polluting, but also extremely cheap;
  
• The recent EU 'clean energy targets for 2030' have been diluted so much under pressure of various corporate lobbies, that they seem as tasteless as thin coffee;
  
• Electric energy, sold to consumers and companies as ‘green’ is in reality often G.I.N.O. energy: Green In Name Only;
  
• Instead of generating this energy with solar panels, windmills, hydro-power or geothermal sources (Iceland(!)), the energy is generated conventionally, using purchased CO2 emission permits;
  
• “officially green, but not really clean!”, would be a nice slogan for it!

These effects are typically the result of the 28 frogs in a wheelbarrow, which we so lovingly call the European Union: ‘everybody is having his own party and nobody is thinking about splitting the bill!’

The efficient, effective and optimal (i.e. close to maximum) usage of green, renewable energy is a European challenge – and not a national challenge –, which should be solved in a pan-European way, whether you like it or not!

Europe has traditionally been the frontrunner for clean, renewable energy and will remain so in years to come. Unfortunately, however, renewable energy currently suffers from the fact that the rest of the world does not hesitate to use more polluting kinds of energy, like shale gas, tar sands, oil, coal and nuclear energy.

And what are the European countries doing?!

Every country wants to be the boss on its own turf and thinks that energy generation and usage must be a sovereign decision, which the European Commission should leave alone.

Consequently, these countries constantly quarrel with each other and try to compete one another to death for the lowest energy price, often based on massive state subsidies or polluting sources of energy.

Or – in a counter-productive move – they impose the highest taxes and levies; even on green and renewable energy, generated by privately-owned windmills(!): 

• They either do so with a bombastic, earth-saving masterplan in mind; 
• Or just in order to clean up the state budget, 'because they are worth it'. 

In the process, the EU countries reach suboptimal (or even worse) results when it comes to energy and energy-dependent industries.  

Read for instance this snippet from an article I wrote a few weeks ago:

What also outraged the people from Groningen, is that their companies lose the competition with German companies, due to the high energy prices in The Netherlands. And that in spite of the fact, that Groningen still has massive gas fields with an annual production of 49 billion cubic meters.

Latest victim of this energy inequality between The Netherlands and Germany was Aldel (i.e. Aluminium Delfzijl), an aluminium producing plant, which perished one week ago.

Het Financieele Dagblad wrote: ‘It is different for metal plant Aldel: the energy costs account for 40% of the production price. When these costs increase, they can’t simply be processed into the sales price of their product. In such case, the higher energy bill leads to a competitive disadvantage.’

And frankly, things should not be so complicated when you look at Europe with your European, 'green energy' glasses on. 

Look at this map, for instance:

 

Map of Europe with all renewable energy forms mapped
at the countries with the best sources for it
Picture courtesy of Google Maps
Click to enlarge

Of course, these renewable sources of energy are nowhere near enough for replenishing the energy needs of the European Union and beyond. 

But heck, would it be a good star,t if these renewable sources of energy would be used optimally in a supranational, pan-European way!

However, such a grand energy scheme for renewable, low-carb energy can only work out, when the European countries can finally forget the stupid quarrels and their bleating about keeping their sovereignty and maintaining their very own tax policies.

At this moment, the other countries, like the USA, Brazil, Russia, China, India, Canada and Japan are scornfully laughing their behinds off, while looking at that old and indecisive Europe. 

Nevertheless, Europe can very well remain the moral leader of the world as it has been so often, when it comes to renewable, green energy. 

If the countries in the European Union could only work together...

Summarizing, it is time to turn this negative trend with respect to renewable energy around and show the European Union at its very best to the rest of the world!

Why do the United States and The Netherlands see totally opposite actions as THE solution for spurring economic growth?

Both the United States and The Netherlands have been severely hit by the economic crisis, which started in 2008.  But where the US seem to have almost left the crisis behind them, The Netherlands are still fully in it.

This has something to do with the crisis lifecycle that the US and The Netherlands have been in, since the crisis started in 2008. And… it had also something to do with the Dutch solution for fighting the economic crisis, which is battering the country these days.

A few years ago – in January 2012 - I created the following graph to describe this crisis lifecycle.  Although it refered to the Euro-zone as a whole, it has been very much applicable to The Netherlands, as one of the formerly leading countries in The Euro-zone.

Today, I added some new text balloons and arrows to the graph, in order to show the progress both countries made:

Crisis lifecycle graph
Ernst's Economy for You
Click to enlarge

Where my graph has been very much correct, is in the fact that the worst had yet to come for the Euro-zone and especially The Netherlands in 2012; something that many employers, politicians and some of the economic pundits didn’t want to see in those days.

Although the crisis lifecycle has been different for  the US and The Netherlands, the effects of the crisis have been largely the seem in both countries:

• High unemployment;
• Struggling and defaulting retailers and Small and Medium Enterprises;
• Increasing poverty and austerity among the population;
• Large companies that became highly profitable again, while small companies continued to struggle until this day;

In other words: although there are definitely differences between both countries, the general economic situation and the effects of the crisis were rather equivalent. 

When it comes to the desired solution, however, the difference between both countries is almost 180 degrees opposite!

Today, Het Financieele Dagblad wrote an article about the United States, where economic growth in 2013HY2 had been spurred by increasing consumption:

Consumption spurs growth in the United States

When the 2013Q4 results would be annualized, the US economy would have grown by 3.2%. Consumer spending was an important stimulant, as it increased by the strongest rate in three years.

This was announced by the American Ministry of Trade, this Thursday. The 3.2% growth rate was in synch with the forecast of economists inquired by Bloomberg.

On top of that, this growth took place at a time, in which the cash-strapped American government went through its shutdown period. And also in those days were the aggressive  arguments and negotiations between Democrats and Republicans,  about the solution for avoiding the debt ceiling. Before, the annualized Q3 growth had yet reached 4.1%.

“For a period in which a government shutdown took place, 2013Q4 has been a quite successful quarter”, according to economist Sam Coffin of UBS against Bloomberg.

The data disclosed that government spending dropped in Q4 and housing construction stood under pressure. However, consumer spending increased by 3.3% and also the corporate investments and the smaller deficit on the current account added to the growth rate.

Well, there you have it. In spite of the decreasing government spending and dropping housing construction, the US economy grew, due to strongly increased consumer spending and increasing exports. Like so often before, it seems that the American consumers are saving the day for the US economy…

Sometimes I wish that we had such consumers in The Netherlands. But seemingly… we don’t. 

And the worst thing is: nobody in The Hague and in 'corporate Holland' seems to give a rat’s behind about it, that we don’t have such consumers. 

Like I stated last Monday at BNR Newsroom in my question to professor Lex Hoogduin:

How can we re-enable economic growth in The Netherlands, when the consumers don't get more purchase power? During the last five years, ‘our’ purchase power only diminished, as a consequence of enduring wage restraint and (largely) government-spurred inflation. The Dutch export can't supply the whole economic growth, can it?!

Professor Lex Hoogduin, during BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge

Lex Hoogduin, who is definitely on my side in this, answered:

I know what you mean... 

What stands out blatantly when you look at the development of wage expenses in The Netherlands, is that this development has been extremely moderate during the last thirty years.

In the eighties, the reason for this moderate wage development was crystal-clear. With our soaring wages in those days, we had outpriced ourselves. This had a very negative influence on the profitability of companies.

However, such is not the case at all nowadays. Nevertheless, the wage increases are still extremely moderate, which has negative effects upon the income development in The Netherlands. Hence, it has definitely negative effects on Dutch consumption too

This very question emphasizes perhaps the most important difference between the United States and The Netherlands: the United States know that an elevated level of consumption by the middle and upper class Americans is paramount for the wellbeing of the American economy.

So while the unemployment figures in the United States reacted much quicker and more violently to the start of the crisis in 2008, there has never been a ubiquitous government or corporate demand for wage restraint or wage reduction in the US. 

And this, in spite of the terrible economic situation in 2009 or 2010. Unlike in The Netherlands…

Consequently, when the US unemployment started to drop in the years after 2010 and more people regained a job and a stable income, consumption started to slowly, but surely increase again, as we could see in the aforementioned article.

However, such a scheme seems NOT to be the ideal solution for The Netherlands.  Here ‘we’ think that economic growth should come from exports, more exports and yet more exports.

Government officials, captains of industry and many economic pundits think that the yields and additional jobs, coming from these increased exports, will trickle down in the whole Dutch economy. In their eyes, everybody is happy again in the end, as a result of our increasing exports, and will consequently start to consume again. And this, in spite of the almost continuous wage restraint that The Netherlands went through since the Eighties. 

At least: so they think.

Everybody who masters Dutch, should for instance listen to the whole broadcast of last Monday’s BNR Newsroom radio show, as this discloses very clearly how much the Dutch economic growth paradigm is intertwined with the need for expanding exports and how little with increasing consumption.

You have to know something: my aforementioned question at BNR Newsroom, about the faltering Dutch consumption, was initially answered by one of the other guests, Thecla Bodewes of Bodewes Shipyards.

Thecla Bodewes of Bodewes Shipyards, during BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge

[I didn’t make a transcript for the other guests of BNR Newsroom, due to the importance of Hoogduin’s statement and a general lack of time – EL].

Instead of saying something about the need for Dutch consumers to restart spending, in order to help the Dutch economy grow again, Thecla Bodewes talked about preserving the Dutch crown jewels (i.e. successful companies) for (you guessed it probably) … successful exports. 

She didn't mention a single word about the Dutch consumers! 

Thecla Bodewes is a very bright woman, but she either didn’t understand (the impact of) my question or she didn’t WANT to understand it. She is also a ‘belieber’ in continuous and unrestrained exports. 

And for successful exports..., the wages have to remain low!

This is exactly the reason that, in spite of the already gargantuous surplus on the Dutch current account, we always maintained our policy of moderate wage development during the last thirty years. And since the crisis started, we added yet more wage restraint and even wage reduction to the mix.

The consequences are that the Dutch middle-class consumers are so much cash-strapped, due to the continuous wage restraint and their still very high mortgages, that they went on strike in 2009 and beyond: a movement that still didn’t stop and probably won’t stop in years to come.

Unfortunately, virtually nobody at the large employers in The Netherlands – the large companies, institutions and the central and local governments – asks himself the question: “Gee, shouldn’t we perhaps pay our personnel and our subcontractors and freelancers a little bit more salary and fees, as we have ample money to do so?!”

To the contrary: the large employers are choking their personnel and especially their subcontractors and freelancers, in order to force them to further lower their salaries and fees. This increases the problems of Dutch consumers.

And now the Million Dollar questions of this article are: 

• Are the United States wrong, with their focus on consumption? 
• Or are The Netherlands wrong with their single focus on exports? 
• Or are perhaps both countries right with their 180 degrees opposite solutions?! Is this perhaps a question of more routes leading to Rome?! 

Well, at this time, I am so arrogant to state that the Dutch government and companies are blatantly wrong! 

And I have hundreds of thousands of cash-strapped consumers, tens of thousands of corporate and private defaults and many thousands of vacant stores and commercial buildings to prove it!

I predict that the crisis in The Netherlands will indeed last until 2017 (at least), if nothing dramatically changes in the remuneration of employees and freelancers. 

In this case, the consumers in The Netherlands will remain on strike in years and years to come!

Ernst’s Economy in discussion at BNR Newsroom: the Lex Hoogduin show!

Last Monday was the first episode of BNR Newsroom in 2014.

This economic, semi-live talk radio show of Dutch radio station BNR News Radio, hosted by the distinguished and savvy Paul van Liempt, had again a series of quite interesting guests: 

• Ronald van Raak of the Socialist Party;
• Mark Harbers of the liberal-conservative VVD;
• Three female CEO’s:
• Thecla Bodewes of Bodewes Shipyards;
• Jacqueline Zuidweg of Zuidweg and Partners, insolvency mediators;
• Marjan Oudeman, chairwoman of the Board of Directors for the Utrecht University;
  
• Han de Jong, the chief economist of ABN Amro;
• Lex Hoogduin, professor in Monetary Economy at the University of Amsterdam and the University of Groningen. 

The official subject of this week’s show was ‘Growth in The Netherlands in 2014’. Officiously, however, there was only one subject in the show: the article that professor Lex Hoogduin had written in Het Financieele Dagblad at the very beginning of 2014.  

In this rather short, but nevertheless groundbreaking article, Hoogduin objected against the ‘lazy’ muddle-through scenario that the Dutch government had been following since the beginning of the crisis in 2008. 

And he objected also against the lackluster reaction to the downgrade of The Netherlands by Standard and Poors, which flabbergasted Hoogduin.

Lex Hoogduin, former crownprince of Dutch national bank DNB, power-twitterer (‘@lexhoogduin’ is always a good read) and very eloquent professor, was in reality the guest of the evening. 

The other guests were only the 'supporting program', to put it somewhat bluntly. Although the other guests – with one exception, in my humble opinion – had sometimes quite interesting things to say, I therefore write this article solely upon the statements of Lex Hoogduin. 

It was an outstanding interview by Paul van Liempt and Hoogduin had very important things to say. 

The only objection that the objective listener could have had against this particular radioshow, was that one of the most important enablers for growth – the Dutch consumer – has hardly been discussed in it. I gave it a serious try, but that was all.

Here is the integral interview with Lex Hoogduin during BNR Newsroom and the snippets of an interview, held by Elfanie toe Laer of Het Financieele Dagblad, moments after the show:

Paul van Liempt: What was the reason for you to start this discussion about the Dutch growth the way you did it? 

Lex Hoogduin: The reason for me was the downgrade for The Netherlands by Standard and Poors. That event scared me. 

What also annoyed me was the lackluster reaction of the Dutch politicians to this gamechanging event: "What does that one stupid A change for us?! We have economic recovery now and we are not going to pay one cent more in interest rates, actually"

Lex Hoogduin, professor Monetary Economy
Picture copyright of: Ernst Labruyère
Click to enlarge

Well, it wasn't indeed that single A, but rather the report that came with it. A relative outsider, like Standard and Poors, stated that only in 2017(!) The Netherlands would be back at the economic level of 2007. 

When this prediction would indeed come true, then it will mean ten 'lost' years of economic stagnation in The Netherlands! People reacted so lackluster to this shocking conclusion.

My opinion was: "Wow, this is urgent". 

During the last few years, we had discussions in The Netherlands about the Japan scenario. Well, here you had your Japan laid down before you! Ten years of stagnation!

Paul: What is Dutch politics doing wrong?

Lex: It is not so much about what politics has done wrong. You can react to the current events in two ways: 

• You could argue that economic recovery is now on its way and that everything will be hunkydory soon. Serenity and stability on a national front and the market will do its work by itself. 

• However, you could also argue that we have to solve a number of structural problems in The Netherlands. That is my opinion. We had years and years of societal change and - as a matter of fact - a paradigm shift in The Netherlands. This shift will continue in the coming years, but until now, we reacted much too slow to this societal paradigm shift. 

Paul: This explains the urgence for this necessary change in attitude?

Paul van Liempt of BNR News Radio
Picture copyright of: Ernst Labruyère
Click to enlarge

Lex: Yes, normally I'm very much in favour of gradual change, but we, as a country, took so many fundamental societal changes for granted that the Dutch economy is seriously lagging now.

We cannot avoid the fact that we have to make more decisive choices right now. The Dutch political landscape and society have changed during dozens of years, but the Dutch governance model is still struggling very much with these changes.

Paul: You had an argument with Wouter Bos, the former finance minister, who does now have a column in the Volkskrant. He quoted Thomas Friedman from the New York Times, who argued in favour of gradual change, and wondered why you didn't understand Friedman's lessons?!

Lex: Wouter Bos did not understand me. I'm not against compromises and I'm not in contempt for Dutch politicians. Rather to the contrary.

Nevertheless, I notice that the Dutch political landscape has become so volatile, fragmented and polarized on main issues and ideas, that it has almost become impossible to reach a viable compromise between different groups.

Paul: You stated about the Dutch labour party PvdA and the liberal-conservative party VVD - and I quote - that: "these parties became faceless, amorphous clubs, who only deal with the partial interests of special interest groups". You still stand by this quote?

Lex: Yes, indeed I do. Over the years political parties became advocates of partial interests. Since then, it has become very difficult to discover the various conservative, religious or social-democrat origins in these parties.

An example about the liberal-conservative VVD. Before the elections, the VVD promised tax reduction, but after the elections they refused to do so. 

Initially you could argue, that this was a result of their coalition with the social-democrat PvdA and understand the logic behind it. 

However, one day both PM Mark Rutte and VVD chief whip Halbe Zijlstra stated in unisono that the VVD could not have avoided tax increases: even when the party would have governed the country on its own. 

Do you understand that? It is not an event caused by mother nature, isn't it?!

Lex Hoogduin, professor Monetary Economy
Picture copyright of: Ernst Labruyère
Click to enlarge

The cabinet states that it wants to get the state budget in order. That is a clear goal by itself. However, even with respect to this goal, the cabinet is opaque.

The agreement with the EU is that we not only should reduce the state budget deficit to 3% max [Stability and Growth Pact - EL], but that we should totally resolve this deficit eventually. Every politician knows of the existence of this agreement.

Why does the cabinet not create a clear roadmap, in which it explains, which future steps we should take to reach this 0% budget deficit?

Politicians could do more than they do at the moment. Take for instance the Dutch pension system: we are now five years after the start of the crisis, but these days we will start yet another discussion about the pension system.

Where is the speed and where is the urgency?

Paul: And what about poldering and the famous Dutch 'polder model' [a governance model in which all societal stakeholders and interest groups have discussions with each other and decide about the road ahead for The Netherlands - EL]?

Should the polder model be left behind in The Netherlands?

Lex: What I'm talking about is the fact that the largest Dutch parties represent less than 20% of the Dutch voters population. This simple fact makes it virtually impossible to sketch a long-term perspective in The Netherlands.

Ernst: How can we enable economic growth in The Netherlands, when the consumers don't get more purchase power? During the last five years, our purchase power only diminished, as a consequence of wage restraint and (largely) government-spurred inflation. The Dutch export can't supply the whole economic growth, can it?!

Lex: I know what you mean... 

What stands out blatantly when you look at the development of wage expenses in The Netherlands, is that this development has been extremely moderate during the last thirty years.

In the eighties, the reason for this moderate wage development was crystal-clear. With our soaring wages in those days, we had outpriced ourselves. This had a very negative influence on the profitability of companies.

However, such is not the case at all nowadays. Nevertheless, the wage increases are still extremely moderate, which has negative effects upon the income development in The Netherlands. Hence, it has definitely negative effects on Dutch consumption too.

Paul: You said that politics is too much influenced by lobby clubs like labour unions and employer's organizations: people of whom it is not clear at all, who they actually represent these days.

What should happen with the polder model, which officially institutionalizes this influencing process by these lobby clubs?

Lex: The polder model worked fine in the eighties, when it brought indeed serenity and stability towards the Dutch political landscape.

However, for such a model to be widely accepted, it should represent people from all layers of society. That is not the case anymore these days. 

The labour unions go through a very rough time nowadays, with rapidly diminishing numbers of members. When you look at the people who are still member, then you see an overrepresentation of older, white men in traditional industries in the labour unions. Freelancers are seldomly member of these unions and they are hardly represented, with only two seats in the executive structure of the unions.

Paul: Together, the labour unions and employers' organizations - both institutions with diminishing and unclear grassroots - form the basis of the Dutch Social-Economic Council (SER). What should you do with this council? 

Continue with it 'till the end of time?

Lex: You simply can't go on, like we do today. To quote an old remark by ex-European Commissioner Frits Bolkestein (VVD) in the early nineties: it is not an social-economic council anymore, but a social-economic "handbrake".

We should make a clear choice now: either we revitalize the SER, with new representatives for all different grassroots in society, or we should abolish it and leave its work to the politicians, like it happens almost anywhere else in the world!

People - even the guests of this show tonight - are reluctant to get the bull by the horns and change things. When you like the SER, than revitalize it!

On the other hand, politicians should really ask themselves how the enormous polarization and volatility in Dutch society could be reduced to more sustainable levels. In my humble opinion, it would help when the ridiculous number of (small) political parties would be brought back to a few stronger and more moderately aimed parties.

Parties of which the Dutch people know what they stand for. And parties that could form a viable coalition, instead of being at war with each other all the time.

This was the end of Hoogduin's impressive stake in this week's BNR Newsroom. 

As I promised earlier, here are the snippets of Hoogduin’s interview with FD reporter Elfanie toe Laer, moments after the show:

Elfanie toe Laer: Do you have doubts about the 'reason for being' of the Dutch Social-Economic Council (SER) these days?!

Lex Hoogduin, professor Monetary Economy
Picture copyright of: Ernst Labruyère
Click to enlarge

Lex: You either have to revitalize the social-economic council and make sure that all groups of grassroots  in The Netherlands will be represented in it, to make it effective again. 

Or you have to simply abolish this council, due to it being obsolete.

Elfanie: Do you consider it a viable plan to revitalize the SER or will it probably be in vain?!

Lex: That strongly depends on the desire of the people in charge there. 

Anyway, it will be darn hard, in my humble opion. The underlying problems is that there are no clearly identifiable groups of grassroots anymore, which can be represented in the SER.

For instance, the freelancers are not represented in the SER yet. Besides that, the common workers should normally be represented by the labour unions. 

However, the current labour unions do actually represent quite few common workers and employees, as most workers don't bother to

become a member anymore. 

The demography among the union members is totally uncomparable with the demography of the population of workers on the Dutch labour market. Today's labour unions mainly represent older men from the 'traditional' industries and also higher educated people are very poorly represented within the unions.

Summarizing, it will be very awkward to revitalize the SER.

Elfanie: How much time would you give the SER at this moment?

Lex: I think that the problem should be solved urgently, instead of the muddle through scenario that has been chosen years ago.

Elfanie: Would it not be a shame to abolish a respectable institute like the SER?

Lex: That would be true, if only this abolishment of the SER would happen and politicians would not do anything to enhance the support for politics and political parties among the Dutch population.Then it would indeed be a shame. 

When there are people that still entrust the SER with its social-economic tasks, they should do anything to revitalize this institute. 

Personally, I don't see it happen, but who am I?! Anyway, we should start this now and not hesitate any longer.

Ernst in the London City

Last weekend, I paid a short visit to London with my wife Olga.

We had booked a cheap ticket at a Dutch auction site and off we went, last Friday evening. After a nightly bus drive and after the ferry trip from Calais to Dover, we had the whole Saturday in front of us for being in the London city.

My wife had never been to London and my last (and first) visit had been in 1986. We were in for a sort of culture shock.

The British Parliament and the Big Ben
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

Although the heart and the classic landmarks of the city (Piccadilly Circus, Whitehall, the Big Ben and Buckingham Palace) were all still there, a number of new landmarks had showed up in the city.

The Shard
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

The most prominent new landmarks were the Shard and the Gherkin: two radically designed and (for me) extremely beautiful buildings. Still, you could argue whether the Gherkin, and the other highrise buildings close to it, didn’t detonate next to the older, much lower buildings below them. 

Of course, beauty is in the eye of the beholder and some people might find that these new buildings fit in perfectly.

The Gherkin and other highrises near Fleet Street
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

What is more important, however, is that these impressive new highrise buildings and the other highrise buildings on Canary Wharf mostly belong to banks, insurance companies and other financial institutions.

These landmarks stand there to witness about the importance of the financial industry for the London City. Hardly any politician, who enters the House of Commons, will be able to oversee those landmarks and the industry they represent.

One of the newly built highrises in the London City
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

The London City is the undisputed heart of the European financial industry. In spite of the fact that Frankfurt hosts the ECB and the head offices of the most important German banks, there is no doubt whatsoever, which city is the topdog in financial Europe: London.

The London City skyline at night
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

London is the city where the brightest financial wizards and the hardest working bankers meet each other and earn billions of Euro’s, in deals that stretch across the whole financial spectrum; from stocks and fixed income to derivatives and gold.

People in the London City work hard – often too hard – and they have to deal with pressure – often too much pressure – to stay in their job. At many occasions these bankers operate close to the edge of ‘legal banking’ and sometimes they skim over it: f.i. during the recent Libor-gate scandal and other financial scandals.

The London City skyline at night
Ernst in the London City
Picture copyright of Ernst Labruyère
Click to enlarge

The winners celebrate their success and fortune on the (in)famous ‘bonus day’ – the day when the annual bank bonuses are paid out – by throwing money around like Christmas candy and by spreading their vast wealth all over the city.

And the losers of this system?

A few months ago, there was the story of the German banking intern Moritz Erhardt, who worked himself to death at Merrill Lynch, while trying to keep up with the pace.

And during the last two days, both the German banker Bill Broeksmit – former risk manager at Deutsche Bank – and Gabriel Magee – an American banker of JP Morgan – committed suicide: Broeksmit by hanging himself in his London home and Magee by throwing himself from the 33rd story of the JP Morgan office building.

Were they two victims of this London-based world of splendour and fast money? Or did they commit suicide for personal reasons?!. Their reasons for doing so will probably never be disclosed, but the constant working pressure and stress might be one of the causes for their untimely end.

Still, whether you like it or not, the London City is of the utmost importance for the United Kingdom. To show you just how important and extraordinary the London City is for England, here are two charts based on 2012 data by the British Office for National Statistics (ONS).

Gross Value Added per region to the English GDP (2012)
Data courtesy of: www.ons.gov.uk
Chart by: Ernst Labruyère
Click to enlarge

Gross Value Added per capita per region Data courtesy of: www.ons.gov.uk
Chart by: Ernst Labruyère
Click to enlarge

To give you an impression: the London City alone yields 22.35% of the whole British GDP – based on the 2012 ONS data. Most of this impressive percentage comes undoubtedly from the financial wizards in the City. Without the City, the GDP per capita of England would only be €22,516, against €26,544 including London.

This is the reason that British PM David Cameron continually argues with the EU, in order to preserve the privileges and special financial regulations for the London City. Not only against the EU and ECB regulators, but also against the competition in Frankfurt, Paris and Amsterdam, who all want their share of the vast financial pie.

By itself, I cannot blame Cameron for doing exactly that, as it would be very unwise from him to let his most important cash cow being slaughtered.

The big disadvantage of Cameron’s strong focus on the London City, however, is that the rest of the United Kingdom – traditionally a strong and versatile industrial nation – is clearly lagging in comparison with the competition in f.i. Germany, Italy and France. In production quantities, as well as in the quality of many of their products. 

Besides that, Germany, France and Italy are all countries with a clearly higher GDP per capita, when London would not be part of the equasion for the UK.

Ernst in the London City
Picture copyright of: Ernst Labruyère
Click to enlarge

Still, London – although we were there for only one day – made an unforgettable impression on both Olga and me. This is the reason that I share this (not so economic) blog and a few pictures from our short, but impressive trip to the financial centre of Europe. 

China meets George Orwell on the British Virgin Islands, according to the International Consortium of Investigative Journalists: “All animals are equal, but some animals…”

Dear readers in China,

This could be the last time that you can read my blog. I noticed that some of you did indeed read this blog. There is a chance that after publishing this article, this account will remain closed for you. If it will be the last time indeed that you read this blog, I thank you in advance for doing so.

Yesterday, I learned from the International Consortium of Investigative Journalists (ICIJ) that many relatives of (former) Chinese leaders and Chinese ‘Noblemen’ are offshoring massive amounts of money to offshore companies on the British Virgin Islands (BVI) and Samoa.

I don’t know if this money is honorably earned, or stolen from their countrymen. And I don’t know if the Chinese leaders themselves are involved in it, but I guess they are.

However, one thought is haunting me: I always thought that communism/socialism meant sharing the pleasures AND the burdens together of living in a communist country. And that people would not try to get rich at the expense of others. And that people would be fair and square to each other.

And although I’m much more social-democrat than socialist, for me this basically didn’t sound like a bad idea. Maybe I’m a romantic fool, albeit a disappointed one. I already didn’t have many illusions about China or the Chinese leadership. Just like I didn’t have many illusions about the former Russian communist leaders.

The most important thing for the Chinese communist party and its leaders is protecting the communist party and its leaders… at all costs.

The Chinese communist party is like the dragon that destroys every man or woman it doesn’t like, in case of someone standing in its way. And its leaders are like the animals in George Orwell’s famous book Animal Farm: “some animals are more equal than other animals”.

I was born in a family where fairness, honesty and honour were important things. And although I didn’t live like a saint and made my share of mistakes, I can look most people in my life straight in the eye. I didn’t make me rich, but richness is not something that I pursue per sé.

This is the reason that I print a substantial part of this important report by the ICIJ, however, under the constraint that I can’t prove whether the contents of it are correct.

However, I have reasons to believe that the contents are indeed correct.

If you want to receive the integral version of it, please mail me or tweet me. You know where to find me…

Leaked Records Reveal Offshore Holdings of China’s Elite

By Marina Walker Guevara, Gerard Ryle, Alexa Olesen, Mar Cabra, Michael Hudson and Christoph Giesen January 21, 2014, 4:00 pm

Files shed light on nearly 22,000 tax haven clients from Hong Kong and mainland China.

Note: A Chinese version of this story is available here

Close relatives of China’s top leaders have held secretive offshore companies in tax havens that helped shroud the Communist elite’s wealth, a leaked cache of documents reveals.

The confidential files include details of a real estate company co-owned by current President Xi Jinping’s brother-in-law and British Virgin Islands companies set up by former Premier Wen Jiabao’s son and also by his son-in-law.

Nearly 22,000 offshore clients with addresses in mainland China and Hong Kong appear in the files obtained by the International Consortium of Investigative Journalists.  Among them are some of China’s most powerful men and women — including at least 15 of China’s richest, members of the National People’s Congress and executives from state-owned companies entangled in corruption scandals.

PricewaterhouseCoopers, UBS and other Western banks and accounting firms play a key role as middlemen in helping Chinese clients set up trusts and companies in the British Virgin Islands, Samoa and other offshore centers usually associated with hidden wealth, the records show. For instance, Swiss financial giant Credit Suisse helped Wen Jiabao’s son create his BVI company while his father was leading the country.

The files come from two offshore firms — Singapore-based Portcullis TrustNet and BVI-based Commonwealth Trust Limited — that help clients create offshore companies, trusts and bank accounts. They are part of a cache of 2.5 million leaked files that ICIJ has sifted through with help from more than 50 reporting partners in Europe, North America, Asia and other regions.

Since last April, ICIJ’s stories have triggered official inquiries, high-profile resignations and policy changes around the world.

Until now, the details on China and Hong Kong had not been disclosed.

The data illustrates the outsized dependency of the world’s second largest economy on tiny islands thousands of miles away.  As the country has moved from an insular communist system to a socialist/capitalist hybrid, China has become a leading market for offshore havens that peddle secrecy, tax shelters and streamlined international deal making.

Every corner of China’s economy, from oil to green energy and from mining to arms trading, appears in the ICIJ data.

Xi Jinping and Wen Jiabao: relatives appear in ICIJ's data.

Chinese officials aren’t required to disclose their assets publicly and until now citizens have remained largely in the dark about the parallel economy that can allow the powerful and well-connected to avoid taxes and keep their dealings secret. By some estimates, between $1 trillion and $4 trillion in untraced assets have left the country since 2000.

The growing onshore and offshore wealth of China’s elites “may not be strictly illegal,” but it is often tied to “conflict of interest and covert use of government power,” said Minxin Pei, a political scientist at Claremont McKenna College in California. “If there is real transparency, then the Chinese people will have a much better idea of how corrupt the system is [and] how much wealth has been amassed by government officials through illegal means.”

Top-level corruption is a politically sensitive issue in China as the country's economy cools and its wealth gap continues to widen.  The country’s leadership has cracked down on journalists who have exposed the hidden wealth of top officials and their families as well as citizens who have demanded that government officials disclose their personal assets. 

In November, a mainland Chinese news organization that was working with ICIJ to analyze the offshore data withdrew from the reporting partnership, explaining that authorities had warned it not to publish anything about the material.

Princelings go offshore

China's Politburo Standing Committee is the all-powerful group of seven (formerly nine) men who run the Communist Party and the country. The records obtained by ICIJ show that relatives of at least five current or former members of this small circle have incorporated companies in the Cook Islands or British Virgin Islands.

China’s “red nobility” — elites tied by blood or marriage to the current leadership or Party elders — are also popularly known as “princelings.” Ordinary Chinese have grown increasingly angry over their vast wealth and what many see as the hypocrisy of officials who tout “people-first” ideals but look the other way while their families peddle power and influence for personal gain.

The leaked offshore records include details of a BVI company 50 percent owned by President Xi’s brother-in-law Deng Jiagui. The husband of Xi’s older sister, Deng is a multimillionaire real estate developer and an investor in metals used in cell phones and other electronics. The records show the other half of Excellence Effort Property Development was owned by yet another BVI company belonging to Li Wa and Li Xiaoping, property tycoons who made news in July by winning a $2 billion bid to purchase commercial real estate in Shenzhen.

Since taking over as the Communist Party’s top official in 2012, Xi has sought to burnish his image with an aggressive anti-graft campaign, promising to go after official corruption involving both low-level “flies” and high-level “tigers.” Yet he has crushed a grassroots movement that called for government officials to publicly declare their assets. Wen Jiabao, who stepped down as premier in 2013 after a decade-long tenure, also styled himself as a reformer, cultivating an image of grandfatherly concern for China’s poor.

The ICIJ offshore files reveal that Wen’s son Wen Yunsong set up a BVI-registered company, Trend Gold Consultants, with help from the Hong Kong office of Credit Suisse in 2006. Wen Yunsong was the lone director and shareholder of the firm, which appears to have been dissolved in 2008.

Bare-bones company structures are often created to open bank accounts in the offshore firm’s name, helping obscure the relationship to the real account owner. It isn’t immediately clear from the documents what Trend Gold Consultants was used for. A U.S.-educated venture capitalist, Wen Yunsong co-founded a China-focused private equity firm and in 2012 became chairman of China’s Satellite Communications Co., a state-owned firm that aspires to be Asia’s largest satellite operator.

The ICIJ files also shed light on the BVI’s previously unreported role in a burgeoning scandal involving Wen Jiabao’s daughter, Wen Ruchun, also known as Lily Chang. The New York Times has reported that JPMorgan Chase & Co. paid a firm that she ran, Fullmark Consultants, $1.8 million in consulting fees. U.S. securities regulators are investigating the relationship as part of a probe into the bank’s alleged use of princelings to increase its influence in China.

Fullmark Consultants appears to have been set up in a manner that obscured Wen Ruchun’s relationship to the firm, the ICIJ files indicate. Her name does not show up in any of the incorporation documents in the ICIJ data, though a 'Lily Chang' is CC’d in one August, 2009 email correspondence about the company. Her husband Liu Chunhang, a former Morgan Stanley finance guru, created Fullmark Consultants in the BVI in 2004 and was the sole director and shareholder of the firm until 2006, the same year he took a government job at the agency that regulates China’s banking industry.

Liu transferred control of the company, the ICIJ files show, to a Wen family friend, Zhang Yuhong, a wealthy businesswoman and colleague of Wen Jiabao’s brother. The Times reported that Zhang also helped control other Wen family assets including diamond and jewelry ventures. 

The ICIJ files show that offshore provider Portcullis TrustNet billed UBS AG for a certificate of good standing for Fullmark Consultants in October 2005, indicating a business relationship between Fullmark and the Swiss bank. In response to ICIJ’s questions, UBS issued a statement saying its “know-your-client” policies as well as procedures to deal with politically-sensitive clients are among “the strictest in the industry.” Liu and Zhang did not respond to ICIJ's requests for comment.

A 2007 U.S. Department of State cable passed along a source’s tip that Premier Wen was “disgusted with his family’s activities,” and that “Wen’s wife and children all have a reputation as people who can ‘get things done’ for the right price.” The cable, part of the Wikileaks document dump, reported that Wen’s kin “did not necessarily take bribes, [but] they are amenable to receiving exorbitant ‘consulting fees.’ ”

The records also include incorporations by relatives of Deng Xiaoping, former Premier Li Peng, and former President Hu Jintao.

China experts say that the growing wealth and business interests of the princelings, including offshore holdings, are a dangerous liability for the ruling Communist Party but that people in leadership positions are too involved to stop it. 

Profits and corruption

Things have changed dramatically for China since it first dipped its toe into the offshore world. The country is wealthier and offshore centers serve increasingly as channels not only for capital that “round-trips” out of the country and back again, but also for overseas investment and accessing markets for metals, minerals and other resources.

Defenders of China’s offshore push say the offshore system has helped boost the country’s economy.

“I think we should face the reality, which is that Chinese capital is flowing out. I think it’s actually a beneficial thing,” said Mei Xinyu, a researcher at China’s Commerce Ministry. “Of course I support the idea that a company should incorporate in its host country. But if the host country can't provide the right environment, then incorporating the company in an offshore center is actually a practical choice.”

With markets in China often hamstrung by red tape and government intervention, incorporating offshore can smooth the way to do business, said William Vlcek, author of Offshore Finance and Small States: Sovereignty, Size and Money.

There’s also evidence, though, that many Chinese companies and individuals have used offshore entities to engage in illicit or illegal behavior.

In September Zhang Shuguang, a former high-level Chinese railway executive, pleaded guilty to criminal charges in the wake of allegations that he’d funneled $2.8 billion into offshore accounts. An internal government report released by the Bank of China revealed that public officials — including executives at state-owned companies — had embezzled more than $120 billion out of China since the mid-1980s, some of it funneled through the BVI.

Portcullis TrustNet helped state-run shipping giant Cosco incorporate a BVI company in 2000. Among the numerous directors of Cosco Information Technology Limited were current Cosco Group chairman Ma Zehua and Song Jun, an executive who would stand trial in 2011 for embezzlement and bribery. After Cosco sent Song to help oversee a Qingdao subsidiary in 2001, he set up a fake BVI joint venture partner and used it to siphon millions from the building of Qingdao’s gleaming Cosco Plaza, prosecutors said. State news service Xinhua said he embezzled $6 million, took $1 million in bribes from a Taiwanese business partner and purchased 37 apartments in Beijing, Tianjin and Qingdao with his ill-gotten earnings. His trial was adjourned but no verdict was publicly announced.

China’s corruption-plagued oil industry — which recently has been the target of criminal investigations that have led to the suspension of key oil executives — is a big player in the offshore world. China’s three big state-owned oil companies, which are counted among the largest companies in the world, are linked to dozens of BVI firms that show up in the ICIJ data.

Former PetroChina executive Li Hualin, who was dismissed in August after coming under investigation for alleged “serious violations of discipline”, often a party shorthand for corruption, was the director of two BVI companies, the ICIJ files reveal.

While some of these offshore firms are disclosed in corporate filings, several others linked to individual executives — including Zhang Bowen of PetroChina’s natural gas distribution arm Kunlun Energy and Yang Hua of China National Offshore Oil Corporation — appear to operate in the dark, and their purpose is not clear. PetroChina and CNOOC did not respond to ICIJ’s repeated requests for comment.

Other scandal-tainted Chinese who have used the BVI to do business include Huang Guangyu, once China’s richest man. The ICIJ records show that he and his wife Du Juan set up a maze of at least 31 BVI companies between 2001 and 2008 as they built the largest consumer electronics retail chain in China.

The husband, Huang, was sentenced to 14 years in prison in 2010 after Chinese courts convicted him of insider trading, bribery and stock price manipulation. Du Juan was convicted of related charges but was released from prison in 2010 after serving a brief time.

While Huang is in prison and many of his assets are frozen, his business empire survives through his offshore network of companies. In 2011, one of his BVI firms, Eagle Vantage Assets Management, made a bid for a retired British aircraft carrier that Huang wanted to turn into a luxury shopping mall (the Brits in the end decided to scrap the ship).

He still owns more than 30 percent of Gome, his electronics retailer, via two companies in the BVI, Shining Crown Holdings and Shine Group.

Offshore’s future

As concerns grow about the wealth of corporate oligarchs, government officials and their

families, some Chinese have braved the government’s anger by raising questions about corruption.

A grassroots group, the New Citizens Movement, uses the Internet and small demonstrations to press for greater transparency. “How can you fight corruption if you don’t even dare to disclose your personal assets?” the group’s founder, legal advocate and activist Xu Zhiyong, wrote last spring.

After years of inaction, the U.S., the U.K. and international organizations have begun pushing reforms that, they say, would reduce offshore abuses. China has been less aggressive in pressing for changes in the offshore system.

Big loopholes in tax laws have allowed Chinese individuals to operate with relative freedom offshore. They weren’t required to report their foreign holdings.

A 2013 industry-sponsored poll of 200-plus bankers and other offshore professionals found that “China-related demand” is the key driver in the offshore market’s growth. The chief of a BVI offshore services firm said in the survey: “China is the most important location for client origination for business in the next five years.”