Nigel Farage accepts Clegg’s challenge to debate Britain’s EU membership
Ukip leader says ‘I’ve spent years being told I’m a nutcase. I’ve got to say yes’, after Lib Dem leader proposes head-to-head. Read more…
Cameron’s EU referendum ‘timebomb’ could undermine UK position say lords
Former cabinet secretary Lord Armstrong says PM should follow Thatcher’s example by being patient in EU negotiations. Read more…
Strong services data signals UK growth on track to outstrip rest of Europe
PMI survey’s all-sector reading hits 15-year high, with order books growing at fastest pace since Tony Blair became PM. Read more…
Obama tries to ease NSA tensions and insists – Europe spies on US too
President says intelligence services all over the world use spying programs but admits US could be damaged by revelations. Read more…
President of the European Central Bank rebuts criticisim of his Outright Monetary Transactions programme, ahead of data showing how Europe’s manufacturers fared in May
Plan A is now acknowledged to be a failure; yet it remains the default option, just extended far into the future
The economist Yanis Varoufakis has an apt metaphor for Europe’s latest approach to its economic crisis. Imagine, he says, that your neighbours demanded you do a 100m sprint in under 10 seconds. They whip you, and threaten dire sanctions for flunking. But as August looms and with your times getting worse not better, your taskmasters change the regime. The target remains in place, the threats are just as grave – but the deadline is extended to December. So, have your neighbours loosened their grip? Of course not, says Mr Varoufakis, they have simply extended into the future their “maddened misanthropy, making a virtue out of abject policy failure”.
So it goes in the EU too. The European Commission has confirmed what was already widely suspected: that France, Spain, Portugal, the Netherlands, Poland and Slovenia will all be allowed extra time to complete their austerity plans. In some quarters this was greeted as “Europe in retreat”. It is nothing of the sort. There has been no relinquishing of the actual budget targets, let alone a move towards replacing the cuts with other economic policies. Put at maximum strength, this decision allows Paris and the other capitals to bring in the automatic stabilisers: to spend more on unemployment and other benefit bills, which are rising fast amid this ferocious economic slump. That tweak alone will help take the edge off the pain of the crisis, but it will do nothing to resolve the underlying crisis. It is a palliative, and no more.
The policymakers of Europe have now formally adopted the same position as George Osborne’s Treasury. Plan A is now acknowledged to be a failure; yet it remains the default option, just extended far into the future. For the sake of fairness, we should concede that such a policy is better than some of the alternatives, and certainly better than trying to double down on austerity and cutting even harder. Neither Mr Osborne nor the top brass in Brussels are foolhardy enough to do that; and should they ever be tempted they can merely look down to Athens to see the political, social and economic turbulence it can cause.
And yet the European economy is in a deep enough hole already. For evidence of that, just look at the OECD’s grim assessment of the continent’s prospects. The thinktank of rich nations expects the eurozone’s GDP to shrink by 0.6% this year, a sharp downgrade from the 0.1% contraction predicted just six months ago. Even that is an average across the 17-member club and so masks just how bad the recession is in some countries, especially along the southern periphery. Joblessness across the euro-area is expected to keep rising from its current rate of 12%. Compare these dismal figures with those projected for the austerity refuseniks. Having adopted extraordinary stimulus measures, Japan’s forecasts have improved sharply. Six months ago, OECD economists expected it to rack up growth of 0.7%; now they’ve chalked it up for 1.7%. The US is predicted to continue its weak recovery and clock up 2%. From this shaming contrast, one might expect the OECD to call for imaginative policies to get the coalition out of its deep rut. Sadly, its policy prescriptions were cautious and conservative. They will not upset any politicians’ apple carts; nor will they help ease the crisis.
European leaders acknowledge the scale of the problem. This week, French president François Hollande called on fellow leaders to “act urgently”. “Six million youngsters are out of work in Europe,” he pointed out. “Close to 14 million are without work, study or an apprenticeship.” The chorus was joined by Wolfgang Schäuble, the German finance minister. He warned of “catastrophe” if jobs were not found for Europe’s young. “We will lose the battle for European unity.” Fine words and all the better for being plausible. Polls show that Europeans are increasingly mistrustful of the EU. No surprise there. A grand political project increasingly resembles the interwar gold standard: a mechanism for increasing social suffering and hobbling the economy.
There can be no solution to the European Union’s crisis without restructuring economic and monetary union
Economic prosperity and social progress are key European Union goals. But for the past five years it has delivered neither. It has been in a double-dip recession since mid-2011, with unemployment now at a record high of 11% and no tangible improvement in sight.
The crisis has lasted longer in Europe than in the US or the rest of the world mainly because of poorly designed monetary union, without an appropriate framework of rules for banks and other financial institutions or sufficiently robust budgetary instruments.
So far the EU has only deployed the minimum collective response necessary for the euro’s survival: conditional emergency loans to troubled countries, conditional bond-buying by the European Central Bank, tougher economic policy co-ordination, and tighter restrictions on governments’ debts to assure markets of countries’ responsibility.
However, the reality of today’s eurozone is far too many people out of work, falling internal demand, increasing polarisation within societies – and a yawning chasm dividing relatively prosperous core countries from a periphery destined for depression. Without boosting macroeconomic demand, making labour markets more flexible in troubled EU countries – while often necessary – will not in itself create sufficient jobs.
Moreover, the pressure to make far-reaching “adjustments” often means that there is limited time to discuss reforms with trade unions and employers’ organisations before they are introduced, undermining reforms’ sustainability and sometimes leading to social unrest. Many citizens feel increasingly disconnected from national politics, and even more so from European decision-making, over which they feel they have little influence.
The real economy is being stifled by debt incurred by poorly regulated and supervised banks and other financial institutions in the pre-2008 age of easy money. As banks need to shrink their balance sheets, they are reluctant to lend to companies in the real economy. Meanwhile, the recession is pushing more households and companies into serious financial difficulties. All in all, Europe has not yet succeeded in eliminating uncertainty, and its people have paid a high price for this. The conclusion is clear: we will not recover through incremental steps that just appease the financial markets for a few months.
In the past year the EU policy debate has rightly shifted towards growth, as opposed to “austerity only”. But we still lack a robust recovery strategy worthy of the name. Such a strategy would require a new policy mix based on the following elements.
First, we must urgently set up an EU-level banking union to restructure or close down failed banks. Companies need access to more credit, under better conditions, to invest and grow. Europe’s financial sector must cut its debts faster, including through greater debt write-offs and shaking up banking structures.
Second, consolidation in weaker member states needs to be balanced by higher consumption in stronger EU countries. The monetary union cannot rely solely on squeezing troubled countries, which depresses overall demand. “Symmetrical rebalancing” requires structural measures in stronger countries, such as allowing wages to catch up with productivity and adequate minimum wages to prevent in-work poverty.
Third, if weaker member states are to regain competitiveness while keeping the euro, they need investment in the real economy. This must be based on sophisticated industrial policy and support for entrepreneurship, so that restructuring produces sustainable business models. If used wisely, EU funds such as the European social fund can be a major source of financial support, together with the European Investment Bank.
Fourth, Europe’s monetary policy must become more expansionary. The ECB has bought Europe time through its bond-buying pledge, turning itself into a conditional lender of last resort. That is to be welcomed. But it is becoming increasingly clear that Europe’s financial crisis cannot be overcome in a deflationary environment, so a different inflation outlook is necessary. We must rethink the ECB’s role and powers.
Fifth, Europe must invest in human capital – creating opportunities for people. EU ministers have agreed a youth guarantee, to ensure that every young person gets a job, apprenticeship or learning opportunity within four months of becoming unemployed. Now individual member states must put it into practice. Similar “social investment” must be boosted across the board – for example, through the provision of quality childcare and the re-skilling of older workers. The target must be full employment.
European leaders should focus on finding a systemic, long-term solution to the crisis, restoring each country’s growth potential and convergence within the monetary union. Europe should convene a Bretton Woods-type conference to put in place an economic and monetary arrangement for the coming decades.
For such a lasting arrangement, a grand bargain between surplus and deficit countries is needed, ensuring a sustainable economic future for each. Some pooling of government debt, and cross-country automatic stabilisers (where, for example, the costs of cyclical unemployment are shared between the member states by using common European funds) should be seriously considered for Europe’s monetary union.
Rebalancing through aggressive reduction of government spending and similar measures in deficit countries (under the euphemism “internal devaluation”) is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration. There is no solution to the crisis without reconstructing Europe’s economic and monetary union, and without shifting the focus on to people’s needs and potential. Austerity could only ever bring us so far. We must now move to the next stage.
Ivo Josipovic says British exit would have negative impact on trade bloc, as Croatia prepares to become 28th member state
The president of the EU’s newest member, Croatia, has urged Britain not to leave but instead to help reform Europe from the inside.
“The reason for us to enter is the same as yours is to stay,” Ivo Josipovic told the Guardian during a visit to London before Croatia’s formal accession on 1 July, when it will become the 28th member state. “It is a great opportunity. I always ask the critics what Greece would look like without the EU. I am a Euro-optimistic.”
Josipovic said his meeting with David Cameron on Thursday left him convinced that Britain would not abandon the EU. “Looking at situation here, I don’t think its going to happen. I heard the prime minister … and I read about the plans of your government. It’s not anti-European,” the Croatian president said.
He added a British exit “would be negative for Europe and for Croatia as well, because UK is an important country with an important economy, with important resources of all kind: the democratic tradition, historical, cultural. So definitely a break with the EU would not be a good thing … I would not like to see it.”
Since Croatia applied for EU membership in 2003, the fortunes of both have fluctuated and are experiencing a downturn. Croatia is in recession with an unemployment rate of over 18% and, in the short term at least, membership could worsen the economic situation.
Croatia will erect a tariff wall between it and some of its major Balkan markets to the east. It will mean that many tourists, Russian and Turkish for example, will require a visa to spend their holidays on the Croatian coast, and it could accelerate a brain drain if the nation’s best and brightest seek work across Europe.
However, Josipovic argued that EU trade and investment would outweigh the downsides to membership, and he pledged to do more to make it easier for European firms to invest in Croatia.
“It is complicated to come to do business – complicated because of the old mentality and the wish to put everything under norms. But the government is doing its best to change these things,” he said. “There are obstacles but day by day we are making it easier.”
Josipovic indicated that Croatia would side with the UK in seeking to focus the EU on its basic functions: maintaining a common market, promoting democracy and peace, while cutting back on what he saw as excessive Brussels bureaucracy.
He also said Croatia would be in favour of lifting the arms embargo on Syria “because in our history we were under aggression and couldn’t obtain weapons. So equal chances should be provided to both sides.”
Croatia has been criticised for the fact that there have been no convictions for the war crimes committed in 1995, when hundreds of Serb civilians were killed during and after Croatia’s Operation Storm offensive.
Josipovic argued that investigators faced obstacles looking into crimes committed nearly 20 years ago, especially as previous nationalist governments had been reluctant to prosecute. But he added that the prosecutors would not give up.
“The war crimes investigations will never be suspended. There are no time limits,” he said, adding that none of those responsible for the war crimes “will sleep peacefully”.
Mario Draghi stresses ‘depth of interconnection’ between UK and Europe, in speech to bankers in City of London
Mario Draghi, president of the European Central Bank, has called for the UK to be “more European” and said the continent’s key institutions could face dissolution if the UK leaves the European Union.
In a speech to bankers in the City of London, Draghi said: “Europe needs a more European UK as much as the UK needs a more British Europe.”
He said he was not about to enter into a domestic policy debate but wanted to remind financiers of the “depth of interconnection” between the UK and Europe.
“With such deep interconnections, the UK and the euro area share a common interest: the stability in the functioning of our economic system and particularly our financial markets,” he said.
Draghi reminded the audience that all major eurozone banks had important branches in the City, and Britain’s banks were leading players in financial markets across Europe.
“More than twice as many euros are traded in the UK’s foreign exchange market [than] in all the countries of the euro area combined and more than in the US,” he said.
He added that the UK accounted for 40% of non-eurozone deposits in eurozone banks, and the single currency area was the UK’s largest export market, accounting for £200bn of exports last year.
The Italian central banker said he saw “encouraging signs of tangible improvements” in the UK, and said Ireland, Spain and Portugal had made impressive improvements in their export performance.
However, he called on Europe’s leaders to focus on “securing economic stability and prosperity for the people of Europe” by forging ahead with deeper integration.
“After a deep financial and economic crisis, we now see the restart of the European process, building on the agreement of the June 2012 summit,” said Draghi. “This process ultimately entails some transfer of national sovereignty in the areas of budget and structural policies.”
The speech, on Thursday night, came almost a year after he vowed to do “whatever it takes” to save the euro. On Thursday night he said: “The answer to the crisis has not been less Europe but more Europe.”
A migrant derivatives trader working in London talks of how he trades on volatility to buy himself financial security
He describes himself as “a third-world migrant in his early 20s from near the equator”. He worked as a derivatives trader in a small European country and now trades for a big institution in London after completing a quantitative degree in continental Europe.
“It’s funny. I am the current public bogeyman – not only am I a migrant, but I am a “banker” (deliberate use of inverted commas) too! Ironically, I can buy financial security by undertaking a job dealing with understanding insecurity and uncertainty. That’s a trade I am prepared to make.
“Fifteen years ago this job was completely different. Earlier practitioners would be standing up for ten hours in the “pit”, estimating option prices by plugging numbers into a basic calculator (big fat finger error risk!), shouting and waving hand signals. These days you sit in front of many computer screens, clicking and updating code. Lunch would occasionally be my left hand drinking soup and my right hand on the mouse. Trading options is ideal for someone who likes being in front of a screen.
“When I was working as a derivatives trader in a small European country my routine went like this: I’d come into the office just before 8am and switch on my seven screens. There are many programs to log into. I sort each data feed to update me preferentially on news in the underlying names I trade and on macro developments. I ensure my connections to all relevant exchanges are functioning. I calculate hedge limits and input them into the order book. I make sure all this is done before 8.45am, as the market opens at 9am. At 9.01am there can be some juicy trades – you want to be fast. I would leave around 6.30pm. Weekends were free.
“It doesn’t matter how much of a mathematical genius you are – when you first come in the challenge is learning how all the systems work. It’s more about systems now than ever before.
“I could trade options without knowing the exact proofs of their pricing. The model does that for you. It’s like trading cars. You don’t need to know every last detail of how, say, the piston works. What the firm wants is someone quick, assertive, mathematically competent, prepared to optimise reward/risk ratios.
“Some derivatives traders take nearly three hours every day to calculate the value of their positions and their P&L – I saw it in inflation instruments, but I don’t know exactly how all of them work. There may be “options on options”, “path-dependent options”, “correlation products” and much more.
“You’re asking how a risk manager would oversee a dozen traders like that, each in his own field. Well, as an options trader you are your own risk manager – particularly at a smaller firm. I wasn’t at a company with a big retail division attached to it. If we screw up then we take the hit (as we should!), as do the (wealthy) investors in the firm. No bailouts for us. In general the more complex and opaque the product, the more a trader needs to act as a risk manager. He may be one of the few people who fully understand the risks, though I think larger institutions have been bulking up with sharp risk managers of late, who don’t just hold their tongues.
“You don’t see people doing this work their whole lives. Trading can take over your life – but only if you let it! It can be surprisingly tiring staring at a screen intently for hours, clicking every few seconds. But being a fisherman in Comoros, a paramedic in Eritrea or a lumberjack in Zaire must be way more tiring, surely?
“Some people in finance can exaggerate a lot. I want to emphasise that to the readers. It’s not that stressful! I had my evenings free. I could relax. I could play sport. Sure – I work hard, but so do many billions of people and for far less pay too. I could basically manage my housework myself too, so it couldn’t have been that draining. Most important to me as a migrant worker was that I could save over 50% of my net salary – this is really lucky coming from a continent where 25% of people in my age group are unemployed and even more have no savings. I am very fortunate.
“Things seem very different in London, where finance is more of a lifestyle and a mentality. In northern Europe (possibly excluding Frankfurt) working in finance did not set you apart from society.
“In London if you don’t join your mates for a drink after work, it can be seen as a signal of disinterest. There’s a big culture of spending and splashing out. And job security is probably worse. Where I worked in northern Europe, people conceal their wealth. Ostentatious behaviour is socially unacceptable. There isn’t any discrimination towards the back office. Seniors don’t make juniors get food orders. No need for pinstripes. “It was completely natural for the secretary to join us for a drink. And it wasn’t like London where sometimes you can’t take your full annual leave without worrying what signal that may send out.
“From a lifestyle perspective I believe you have to be flexible. As migrants we are ideally placed to do that. Big institutions are still prepared to offer us work visa sponsorship. If I stayed in northern Europe for too long I might be pigeonholed. You can live a comfortable life. But at some point in your career you tend to gravitate to one of the “hubs” (London, New York, Hong Kong, Singapore).
“I just can’t plan my career more than two years ahead. The industry can change quickly anyway – for example, suppose you were trading in Sweden before the financial transactions tax came in. After it was extended in 1989 to cover a wider range of instruments, 98% of volumes in bond derivatives in Stockholm went elsewhere. Imagine you had been trading such products, but had married a local woman who insisted on staying put. What do you do? Will you get another similar job in a niche market if you aren’t prepared to migrate? Will you even be the first choice to be hired when volumes come back? Now imagine you are a migrant – probably a single man – no wife, no kids, no house, just savings. It’s easier for us, isn’t it?
“If you’re mid-level and you get laid off, it can be very difficult to get back in. Some financiers in London over-leverage themselves and save virtually nothing, despite their high salaries.
“I don’t understand how they can’t apply the same rules of risk management to their personal lives as they do in their professional lives. How could they be so over-confident?
I don’t think the state steps in to help that much in the Anglo-Saxon world compared to continental Europe (I’m talking about stepping in to help individuals here rather than banks!) Many migrants are from nations where there is no welfare state, so we plan for redundancy. We price it in.
“Let’s dig a little deeper into my job. There is very little information asymmetry anymore. Everyone has the same Bloomberg terminal, same market feed and (nearly) the same variant of the “Black-Scholes” model for pricing options. Making small margins on each trade is critical.
“The “algos” or high frequency computers will always trade faster than a human can. Most of your systems are executing the quick, “scalp” trades for you – your human input is how you programme it to hedge your exposure, and at what level you choose to take on a block trade.
“If you are a market-maker you are obliged to continually make live quotes in a pre-specified range of options, over a range of strikes and expirations. In return for providing this liquidity we can receive a rebate from the exchange.
“Trading options is a reductionist activity: you condense the underlying instrument’s price, the strike (exercise level), contract duration, prevailing market interest rates, stock borrowing rates, dividend expectations and volatility into two numbers – your bid price (where you are prepared to buy at) and your offer price (where you are prepared to sell at). The first three inputs I mentioned are all known – it’s only really the volatility you’re that unsure of.
“That’s essentially what we’re trading – volatility, hence our name – “vol” traders. You want to get as big a spread as possible on each trade – but if you quote too wide your prices won’t be competitive and nobody will trade with you. You need to find a balance between getting execution and minimising your adverse selection probability (that’s your chance of being “picked off” when the market moves uni-directionally).
“There are lots of parameters you need to monitor, and thus lots of ways you can make (and lose) money. Firstly I look at option “greeks” (first-order derivatives such as “delta”, “vega”, “theta” and “rho” and then second-order derivatives like “gamma”, “vanna” and “charm”). When you’re trading “vol” (the annualised standard deviation of returns of the underlying instrument) you’re hypothesising how much an instrument is going to move. You want to optimise your various ratios (gamma/theta) at different strikes to ensure that you have bought and sold optionality at good levels.
“Secondly, I want to make relative value trades between components in the same index or in the same business sector: eg how is volatility priced at the 25% delta put option in this French oil company versus the 25% downside in that Spanish oil company? Does it seem fair? Where has the spread been historically? How divergent are the skews in the volatility smile? How quickly have I noticed this? Can I trade? Have I been fast enough in identifying an anomaly and monetising it? If and when I do, it is back to dynamic hedging, responding to broker requests from our sales traders, coding and repricing in line with new market developments. Depending on how fast your systems are you can implement volatility arbitrage strategies too. It’s like playing Gran Turismo but your gear changes on the controls are manual. Not automatic.
“Vanilla” options are contracts giving you the right (but not obligation) to buy (call) or sell (put) an underlying stock, index future, commodity future or bond future at a particular level and at a particular (series of) moment(s). When the duration of an option contract runs out, it “expires”. When that particular ‘expiration’ moment arrives, it’s incredibly tense. One evening every month I’d be like: “Don’t bother me because I’ll just ignore you.” Imagine having to analyse between seven and ten names between 5.30pm and 5.35pm and ensure that you hedge your “delta” exposure on each one.
Those five minutes are the auction, where market participants determine the closing price. That affects if an option is “in the money” or “out of the money” – ie whether it will be exercised or not.
“Probably the most turbulent time was over the summer of 2011 when it was believed that Greece might default. For three days I just reserved one of my screens to show televised footage of Greek parliamentary votes – that was the market barometer at the time.
“You only saw buyers on the screens – people were too afraid to sell. But I am required to quote prices. I have to react fast enough to keep an offer price at a safe enough level. At times like that it’s not about stocks anymore – what moves markets is macro news. All it takes is for the likes of Ben Bernanke (US Federal Reserve chairman) or Mario Draghi (ECB president) to be a little bit hesitant.
“Sometimes there’s a deep sense of powerlessness. Suppose I have a short gamma position (ie I’ve sold volatility) in an airline company. That company issues a profit warning at 8.58am and the options market only opens at 9.01am. I know that a profit warning means the price will dive (in general, the smaller the market capitaliaation, the bigger the drop), but there’s nothing I can do in those three minutes but re-price my options, my term structure and put in some respectable bids so I can buy back option premium. Oh – and I need to sell some stocks fast to minimise the size of my “long delta” position I get from being short on options.”
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