POLITICO Morning Exchange:World’s most quotable economist — UK’s Wimbledon problem

POLITICO Morning Exchange, presented by BBVA: World’s most quotable economist — UK’s Wimbledon problem

By Francesco Guerrera | Tips to: fguerrera@politico.eu | If you prefer to read on your desktop click here

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BREXIT — UK REGULATORS’ ‘WIMBLEDON’ PROBLEM: British policymakers pride themselves on offering the best environment for financial services. Just like the hallowed turf of Wimbledon’s tennis club, the playing field for financial firms is immaculately prepared for anyone to use, regardless of nationality, they say. The Brits, however, provide the linespeople to police the games. Now, Brexit may turn this “Wimbledon” advantage — as the City of London’s denizens like to call it — on its head.

What if banks start leaving? The most realistic outcome is that a lot of banks will leave “a bit” — meaning that portions of staff, balance sheet and risk will move to an EU base by the time the U.K. splits from the EU. Very few firms will move their entire operations away from London but very few will also preserve the status quo pre-Brexit.

The regulatory dilemma: The problem for British regulators and their European counterparts is how to decide who regulates whom. At present, vast chunks of the global financial system are regulated out of London simply by virtue of the fact that the European headquarters of so many large banks are in the U.K. capital. (And that the Bank of England and other British regulators have a great relationship with their U.S. counterparts.)

‘Wimbledon’ could turn into a ‘World Cup’: By which I mean, instead of being policed by British referees, the European financial game would be officiated by a myriad of people from different nationalities, just like the soccer World Cup. Some might be in Frankfurt, some in Paris and some in Dublin or Luxembourg. Depending on how much balance sheets and people migrate abroad, the British authorities might even completely lose the right to oversee financial firms in the City and Canary Wharf.

M.E. takeaway: I am detecting a bit of concern in regulatory circles at the potential disruptions outlined above. Whatever their shortcomings (and there have been a few … ), British regulators are generally regarded as high-quality. Brexit could strip them of some or all of their powers, to the detriment of the general oversight of the industry. I know of at least one non-U.K. regulator who has told banks his country doesn’t really want them to export their derivatives businesses there because it is too risky and complex. The flip side of the coin is that British regulators don’t want to be completely defanged if a large part of international banks’ business is to remain in London after Brexit. It is an under-reported issue but one that could cause severe headaches to the regulators and regulated entities alike.

Btw, that tennis metaphor is not as effective … now that Britain’s Andy Murray is the world’s number one and has won the Wimbledon tournament twice in the past four years …

**A message from BBVA OpenMind: “Weak productivity growth is a major factor slowing recovery in Europe. This slowdown has broadened from services to manufacturing, which has been a traditional stronghold for productivity in Europe. There is a need to accelerate investment in the most important assets for productivity recovery,” says Bart Van Ark.**

DRIVING THE DAY: Quiet on the data front but there’s a speech by Mario Draghi at a banking conference in Frankfurt that might be of interest.

I AM ON HOLIDAY, BUT STAY IN TOUCH WITH ME AND THE TEAM: This is my last M.E. for a couple of weeks but we have assembled an all-star cast of top reporters to keep the engine humming. Keep them in the news flow and get in touch with them at: morningexchange@politico.eu. I can be reached at: fguerrera@politico.eu, although I apologize in advance if I’m a bit slower than usual in answering your emails. Same goes for Twitter: @guerreraf72.

COFFEE ADDICTS’ NEWS — BRUSSELS IS QUITE EXPENSIVE, COPENHAGEN IS VERY EXPENSIVE: POLITICO’s Silvia Sciorilli Borrelli: Copenhagen is the most expensive city for coffee in the EU28 and Paris and Brussels are high up in the ranks too. The 2016 Coffee Price Index released Thursday by the consultancy Service Partner ONE showed a standard cup of coffee costs on average €6 at a local coffee shop in the Danish capital, €4.44 in the City of Lights and €3.44 in the EU’s capital. These figures compare with Milan’s €1.61 and Valencia’s €1.76, which [according to Silvia] proves that South Europeans know how to enjoy the pleasures of life without necessarily going bankrupt. Surprisingly though, the Finnish are the ones that consume the greatest amounts of coffee per capita: 9.6 kilograms per year.

If you really must go to Starbucks, the index also shows the varying prices of its coffee across EU cities and major world capitals. Again Copenhagen and Brussels, and Stockholm too, are where a Starbucks coffee, latte or frappuccino will cost you the most. Outside the EU on the opposite ends of the ranking were Rio de Janeiro, the world’s most affordable coffee hub, and Zurich, the most expensive. Oh, and for the record, Milan was the only one of the 75 cities in the index where Starbucks isn’t present — yet.

THE M.E. INTERVIEW — STIGLITZ AND THE EURO, HE LOVES IT. REALLY: I had the pleasure of interviewing the Nobel prize winning economist in Brussels this week. We talked about his recent, very critical, book on the euro and his views on how to fix it. Below are a couple of highlights but the whole interview is here.

At heart, Stiglitz believes that the flaws of the single currency are sins of timidity rather than excess. Unlike the Euroskeptic camp, the former World Bank chief economist dislikes the euro project — not because it’s federalism gone mad, but because it’s not federalist enough. Stiglitz’s antagonism toward the single currency is the animosity of the jilted lover, not the vitriol of the non-believer.

Where Stiglitz departs from many other critics is in his belief that the euro needs more Europe and vice-versa. In his view, the euro could only succeed if complemented by a deepening of economic integration, led by ‘Eurobonds’ — debt issued and backed by the whole of the eurozone — a removal of all barriers to financial services and a pan-European insurance scheme on banking deposits.

THE WORLD’S MOST QUOTABLE ECONOMIST ON BREXIT, MAY AND CARNEY: It’s a subjective call, but I am bestowing that title on Willem Buiter, chief economist at Citigroup and formerly on the Bank of England’s rate-setting committee and at the European Bank for Reconstruction and Development. He is not always right but he’s always interesting. I chaired a panel with him on Thursday and here are some notable quotes.

Buiter on the UK economy after the referendum: “This is the lull before the storm. It will get much worse for Britain.”

Buiter on the Article 50 negotiations: “We are looking at a decade of pervasive uncertainty.” The idea that Britain can keep access to the single market while also curbing immigration “is so naïve that it is almost criminally negligent to make such suggestions.”

Buiter on Theresa May’s criticism of the Bank of England: “Mrs. May has discovered that low interest rates are bad for savers.”

Buiter’s own criticism of the Bank of England: “I think central banks should not lecture on fiscal stuff.”

Buiter’s top Dutch proverb: “You can’t pluck feathers from a bald frog.” It can apply to virtually anything. He told me that he tried that and it is very difficult …

CARNEY GETS SOME SUPPORT FROM THE HOUSE OF LORDS … POLITICO’s Silvia Sciorilli Borrelli: Britain should thank the Bank of England for its work, according to Labour peer Simon Haskel. During a discussion in the House of Lords on Thursday on the economic impact of sterling’s fluctuation, the 82-year-old Haskel responded to the apparent criticism of the BoE’s policies by saying politicians should back off and let the central bank do its job. “There is certainly no reason for which monetary policy should be handed back to politicians. Of course interest rates have an impact on the value of the pound, but it’s not in the hands of the politicians.”

Haskel also said the BoE managed to keep the exchange rate steady after the EU referendum. Other factors, including poor business management and a low level of investments, plus the uncertainty created by Brexit, should receive the blame for the sharp fall in the value of sterling. “Where there is a case for political interference is recognizing the danger of another financial crisis … Once the leverage gets out of hand who knows what could happen,” he said referring to complex financial trades such as interest rates swaps and derivatives.

… BUT ONE OF THE ARCHITECTS OF THE BOE’S INDEPENDENCE IS HAVING SECOND THOUGHTS: That would be Ed Balls, one of the Labour brains behind the decision to make the BoE independent in 1997. Balls, who is famous in Britain for his energetically bad dance routines on the TV show Strictly Come Dancing, has co-authored a paper for Harvard’s Kennedy School on the topic. His view, as summarized by the Guardian’s Angela Monaghan: “The bank should retain operational independence — setting interest rates and targeting inflation — it should not have to shoulder the entire burden for maintaining Britain’s financial stability.”

ECB OFFICIAL CAUTIOUS ON TAPERING: Yves Mersch sounded very reluctant to start withdrawing the ECB’s stimulus, according to the Wall Street Journal’s Tom Fairless and Hans Bentzien in this story.

BREXIT I — SCHÄUBLE TAKES TOUGH LINE ON TALKS: What a surprise … the tough-talking German finance minister is, well, tough on Brexit in an interview with the Financial Times’ Stefan Wagstyl and Guy Chazan:

“Germany’s finance minister has set out a tough line on Brexit talks on issues that range from tax breaks to exit costs, dashing British hopes that Berlin would soften the EU’s stance on the U.K.’s departure from the bloc. Theresa May’s government has been looking to Germany, a net exporter to the U.K., to temper French demands that Britain ‘pay a price’ for its decision to leave.

“But Wolfgang Schäuble told the Financial Times that, even after Brexit, the U.K. would be bound by tax rules that would restrict it from granting incentives to keep investors in the country — and would also face EU budget bills for more than a decade.”

BREXIT II — PRIVATE EQUITY FIRMS ARE MAKING PLANS TO MOVE: So said Michael Collins, the head of the trade body Invest Europe, at a conference in Amsterdam. Financial News’ Yolanda Bobeldijk has the story.

EURO-CLEARING — S&P SAYS THE COST OF A MOVE AWAY FROM LONDON WOULD BE MANAGEABLE: In a new report, the credit rating agency says that, should clearing of euro-denominated derivatives move to the Continent after Brexit, the cost for global clearinghouses (CCPs) would be “additional, but absorbable.”

YELLEN WANTS TO RAISE RATES IN DECEMBER, AND TO STAY FOR THE FULL TERM: The Federal Reserve chief struck a quietly defiant tone when appearing in front of Congress in the face of questions about her future following Donald Trump’s election. POLITICO’s Victoria Guida: Federal Reserve Chair Janet Yellen dispelled any notion that she might leave the central bank before her chairmanship expires. In response to a question from Congresswoman Carolyn Maloney (D-N.Y.) at a Joint Economic Committee hearing, Yellen said she does not foresee any circumstances that would lead her to leave before then.

“I was confirmed by the Senate to a four year term which ends at the end of January 2018, and it is fully my intention to serve out that term,” Yellen said.

TRUMP WATCH— WHY CHRISTMAS HAS COME EARLY FOR WALL STREET: POLITICO’s Ben White: A populist candidate who railed against shady financial interests on the campaign trail is now putting together an administration that looks like an investment banker’s dream.

Former Goldman Sachs banker Steven Mnuchin has been seen at Trump Tower amid rumors that he’s the leading candidate for Treasury secretary. Billionaire investor Wilbur Ross appears headed to the Commerce Department. Steve Bannon, another Goldman alum, will work steps from the Oval Office. If Mnuchin drops out, as some rumors suggest he may, JPMorgan Chase CEO Jamie Dimon remains a possibility as Treasury secretary, and will serve as an outside adviser if he doesn’t get the job.

It’s a restoration of Wall Street power — and a potential flip in the way the industry is regulated — perhaps unparalleled in American history. The full story is here (for Pros).

THE ECONOMIST’S COVER — THE NEW NATIONALISM: The magazine muses on the big issue of the day: “Disengaging will not cut America off from the world so much as leave it vulnerable to the turmoil and strife that the new nationalism engenders. As global politics is poisoned, America will be impoverished and its own anger will grow, which risks trapping Mr. Trump in a vicious circle of reprisals and hostility.”

ITALY DEALS SLUMP AHEAD OF BIG REFERENDUM: Silvia again: Mergers and acquisitions in Italy slumped this year. S&P said M&A activity at the end of the third quarter added up to €10.7 billion, a significantly lower level than the €31.8 billion recorded at the same time in 2015.

A report published Thursday by the ratings agency attributes the slump to political headwinds. “While European deal activity is now showing signs of recovery post the Brexit referendum, prospects of a revival in Italy remain bleak at the moment because the upcoming constitutional referendum could be deterring prospective buyers,” said S&P analyst Renato Panichi.

“We also expect that looming political threats and fears surrounding the health of Italian banks will take its toll on the nation’s economic activity,” he added.

Silvia’s sideline: The pace of M&A activity this year has been the lowest since 2009. IPO levels were also significantly lower in 2016 compared to last year and companies’ valuations are falling. Although this could be seen as a buying opportunity for international investors seeking to establish a presence in Italy, the truth is that general interest for Italian assets has dropped, the banks’ difficulties are yet to be resolved and the December 4 referendum might make things worse rather than improve them.

**A message from BBVA OpenMind: BBVA, through its online community OpenMind, has presented the book “The Search for Europe: Contrasting Approaches” at the European Parliament. Francisco González, BBVA Group executive chairman was joined in the presentation by Members of the European Parliament Pablo Zalba, Sylvie Goulard and Jonás Fernández as well as by two of the book’s authors, Alberto Alesina, professor of political economy at Harvard University, and Martin Raiser, country director for Brazil of the World Bank. During the dinner-debate the participants analyzed the difficulties the EU is facing to restore economic growth and the opportunities the digital economy offers to do so. This book is the eighth volume in the annual series published by BBVA, which explore decisive issues of our time, and which can be downloaded for free in different electronic formats in the OpenMind web, which also contains other articles, reports, videos and infographics.**

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