Brexit and Airlines

About a week before the UK government triggers Article 50, and the stories are just rolling out about taking control how difficult untangling the UK from the EU is going to be, how much business is going to head across the Narrow Sea (and to a much lesser extent, across the Irish Sea), and how very little influence the UK government is going to have on the process.

EU chiefs have warned airlines including easyJet, Ryanair and British Airways that they will need to relocate their headquarters and sell off shares to European nationals if they want to continue flying routes within continental Europe after Brexit.

The Guardian adds a little British understatement, “The ability of companies such as easyJet to operate on routes across the EU has been a major part of their business models.” Indeed.

Some airlines have started to seek headquarters within the EU and to restructure their ownerships. EU holding requirements could include “the forced disinvesting of British shareholders.” At least some business leaders were hoping the problem would go away. Because reasons, I suppose. “EU officials in the meetings were clear, however, about the rigidity of the rules, amid concerns at a senior EU level that too many in the aviation industry are in denial about the consequences of the UK’s decision to leave the bloc.”

Getting a new agreement won’t be easy, either. At present, the European Court of Justice is the final arbiter of disputes that arise under the agreements that cover air travel within Europe. The current UK government has signaled that it wants to leave the ECJ’s jurisdiction entirely. And of course undoing a multilateral agreement opens the door for some states to assert their individual interests in negotiating a new one: Spanish diplomats have said that they will not sign on to any international accord that recognizes the airport in Gibraltar. Somebody might be taking back control.

This is shaping up to be a very good couple of years for corporate relocation businesses, and possibly for people looking to sign on at the new headquarters locations replacing folks who were unwilling or unable to leave the UK when their jobs picked up and went.

Greg Mankiw Wakes Up: Demography Does Matter

I recently berated Greg Mankiw (and the top ten world economists he pretends top cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.

Now since dependency ratios are really a function of three factors – fertility, life expectancy and net migration – it is hard to deny the obvious: that fertility is important.

Mankiw also cites approvingly the opinion of US economist Jeremy Siegel to the effect that the “way to finance the baby boomers’ retirement is persistent capital inflows and trade deficits with developing countries”. Now Siegel doesn’t quite have this right here. The way to finance a high old-age dependency ratio, is through a high level of saving, and running persistent capital *outflows* and trade *surpluses*. This, of course, is precisely what Germany and Japan are now doing, (and also, incidentally, steering the currency down to reduce deflationary pressure, which is again what has been happening in Japan) and this is one of the reasons I give so much importance to this phenomenon. It is also one of the reasons why I discount the likelihood of domestic-demand-driven growth in these countries.

So all I can say is, well, well, well, welcome onboard Greg. As is well known both time consistency and cognitive dissonance are phenomena which constitute important problems for economic theory, but normally not in the sense that we can see them at work here.

A topic whose time has finally come? We will see. To quote the evolutionary biologist Linda Partridge (in another context) “there is much to do”. Would that economists were as aware of this as theoretical biologists seem to be.

Update: the problem is more perplexing than I initially imagined, since I now discover that on July 20th Greg approvingly cites a paper by Nir Jaimovich and Henry Siu. The title of the paper is The Young, the Old, and the Restless: Demographics and Business Cycle Volatility , and the extract he cites is this one:

changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies“.

Greg says that this was the most intriguing hypothesis he had heard all day (he was at the NBER Summer Institute), which is fair enough, and I don’t expect him to agree with the hypothesis simply because he finds it intriguing, but I *am* stumped to understand how he can then go on on August 26 to describe the idea that low fertility posed a serious economic problem as one of the most wrong headed ideas he had heard recently, since, obviously, it is fertility levels which in part determine age structures which in part influence volatility in business cycles (according to the intriguing hypothesis). So come on Greg, which is it, wrong-headed or intriguing?

Seriously though, my point here is not to have a go at Greg Mankiw (although I have rather done that haven’t I?). My point is to draw attention to all the confusion which is knocking about on this topic. Material not unrelated to all of this is to be found in a recent article in the FT by John Kay. Kay asks hijmself why it is that Eureka moments seldom happen to economists. Basically he suggests that the reason is down to the difference between the natural and the social sciences. I don’t buy that, and I think that we social scientists sell ourselves too cheap if we succumb to it. But by the by Kay touches on another point, and it is one which brings us back to the struggle Greg Mankiw is having with the recalcitrant phenomena, since:

“It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat.”

Well sorry John, but we have just found one that is: the neo classical account of steady state growth, there is no real factual basis for this theory, and theoretically it isn’t hard to see that it must be flawed, if, that is, the ‘intriguing hypothesis’ which Greg was scratching his head about is a valid one, and thus, since age structures constantly change, so must rates of economic growth. In which case both steady state growth and convergence theory go quietly west, off into the sunset. The intriguing question is then of course what exactly it is which modulates the changes in age structure. This is, of course, just the kind of problem that Archimedes was toiling away with in the relatively unturbulent waters of his bathtub. Aha, now I know why it is economists seldom have Eureka moments: they all take showers.

Now just let me step outside a moment, what is going on out there, is that the sun going round the earth, or could it just be that somehow or another the earth – unbeknownst to me – is actually turning round the sun.

Why reform has become a dirty word.

This anniversary guest post was written by the indispensable Jérôme Guillet, who normally writes for The European Tribune.

Laurence Parisot, the head of MEDEF, the French business
organisation, recently complained that:

There is one word who meaning for the public has changed in the past 25 years: “reform”. It used to be synonymous with progress, and now it means social regression.

One wonders why. Or not. As I’ve written incessantly over the past year at European Tribune (for instance here), “reform” has come to mean only one thing: less regulation of corporations, lower wages, fewer rights for workers, and weaker unions, i.e. the elimination of anything that can impede corporations’ freedom to make profits in the short term.
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Overdue Evaluation (The Prize, by Daniel Yergin)

There is not much market for reviews of books published almost a decade and a half ago, so without further ado, my thoughts on The Prize, by Daniel Yergin. This evaluation is overdue because I started reading the book when I bought it, back in 1997. I put it down around page 400 (which is a little more than halfway), so this review is likely, very likely, to be stronger on the second half of the book.

Yergin’s subtitle is The Epic Quest for Oil, Money & Power, which gives both theme and thesis. The title, if I am remembering an early part of the book correctly, comes from a statement made about oil by Winston Churchill: “The prize was mastery itself.” The argument is that understanding oil is central to understanding the twentieth century and, by extension, the world today. To complaints that the war in Iraq is “all about oil,” the only proper answer is “Of course.” The last century’s major conflicts, and many of its smaller ones, were driven by oil, determined by oil, or both. Without an understanding of oil, much of the period will remain opaque.
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Flexicurity – a working model for Europe?

Before moving in to the nitty-gritty of flexicurity; what it is and whether it can work as a universal European labour market model I should take the time to thank the AFOE team for allowing me a spell as a guest-writer here at the blog in the coming two weeks. In terms of presentation my name is Claus Vistesen and I am a Danish student at the BLC program at Copenhagen Business School. For further info I invite you to visit my personal blog Alpha.Sources, which deals with a wide range of topics of my interest.

There is a lot of talk and flurry at the moment about labour market reforms in Europe, notably in France, but also Germany has been struggling with how to reform the labour market and here as well as here.

Looking to the north we find the Nordic countries who seemingly have the best of two worlds; low uemployment coupled with a high degree of security but what is it exactly that the Nordic countries are doing, and could others potentially follow their example?
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Es Lebe Das Exportventil!

Chris “Stumbling and Mumbling” Dillow has a very interesting post on signs of German economic recovery. Interestingly, the bellwether Ifo confidence index has shown a dramatic uptick, reaching its highest level since 1991. Dillow proceeds to examine its correlation with the DAX stock market index.

Now, as Chris points out, DAX-constituents are likely to be the most globalised German businesses. The DAX tracks the Ifo with about a three month lag. This all suggests that a) the most globalised German businesses are feeling chirpy, as you’d expect in an economy struggling to raise domestic demand that trades with several raging boomers, and b) that some things never change.

Back before the Second World War, before the Nazi seizure of power, there was something known as the Exportventil in German. This means something like “export safety valve” in translation. What it meant in practice was that German industrialists believed that exporting was a hedge against the economic and political instability at home, and duly specialised in exporting as much stuff as possible. That is pretty much exactly opposite to what you’d expect – after all, you normally assume that German businesses know more about Germany than Country X and therefore face lower risks at home, not to mention the foreign exchange risk involved.

There were good reasons for this, though – economic conditions inside Germany were dire, the devaluation of the mark was helpful – and alternatively you could price your products in hard currency and thus protect yourself against the hyperinflation. It also helped that you had a stream of foreign-denominated revenue, which meant you could borrow in the US. The downside of the Exportventil, though, was that German businesses were highly operationally geared with respect to world trade, and German banks tended to have long-term German assets and short-term US and sterling liabilities.

The onset of the great depression, of course, slashed demand for German exports – and the beggar-your-neighbour policies drained world trade of liquidity, which hit the Germans twice as hard because of export dependence. So the safety valve turned out to be more of a seacock that let more water into the ship. Germany, however, still seems to love exporting – which perhaps explains the strong “home bias” that Chris claims to have identified.

In a tangential theme regarding historical legacies and the way things don’t change, check out this post at Veronica Khokhlova’s. Seems the Ukrainian electoral map divides along the ancient border of Kievan Rus..

The End of the Dolce Vita?

Are the good times and the good life still going to continue to roll in the Italy of the twenty first century? This is the core question the Economist’s Europe editor John Peet asks in the latest Economist Survey: Italy, Addio, Dolce Vita. As Peet says:

Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today’s Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.
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A modest proposal for CAP reform

I’ve been in Canada for the last month, getting in my last family visit before settling in to the serious business of either going back to school or collecting unemployment checks. My family is large – Great-Grandpa had 25 children, and Grandpa had 9 – so it takes a while if you go to see my family. Ours is a large, disorganised, occasionally frightening clan who, depending on pure whim, identifies itself as either German-Canadian, Dutch-Canadian, Russian-Canadian or Ukrainian-Canadian. Our tribal language is an obscure dialect of Low Saxon (Platt for the actual Germans out there) spoken primarily in Paraguay, Mexico, Central America and Saskatchewan, and whose most famous speaker is, arguably, Homer Simpson. It’s a long story, don’t ask. It not being much of a literary language, we all just say our ancestors spoke German – the liturgical language of my clan’s particular sect.

In contrast to Europe and the US, Canadians are a lot less disturbed about asking people about their ethnic identities or expressing some loyalty to them. I guess the main reason is that Canada has never really pretended to be a nation built atop an identity, but rather a place where an identity of sorts has slowly built up from the existence of a nation. There is no Canadian myth of the melting pot, and as our soon-to-be new Governor General has demonstrated, no serious demand for nativism in public office. Michaëlle Jean, who is slated to be the powerless and unelected Canadian head-of-state when the Queen is out of the country – e.g., practically always – when she is sworn in on the 27th, is no doubt the most attractive candidate we’ve ever had for the office. And, like her predecessor, she is a former CBC/SRC reporter and talking head.

Ms Jean and I share an endemically Canadian charateristic: We both can and do identify ourselves shamelessly as several different kinds of hyphenated Canadians. She is French Canadian, but that’s hardly strange. She is also Franco-Canadian – Ms Jean has dual citizenship with France, making her the first EU citizen to be Governor General of Canada and the first French citizen to be acting head of state of Canada since 1763. But more unprecedentedly, she is Haitian-Canadian and – as logically follows – African-Canadian.

Yes, Ms Jean is black, and furthermore in an interracial marriage. Well, that’s Canada for you. America puts black folk in squalid emergency shelters, we put ours in Rideau Hall.
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