The European Connection

On Monday, we may witness the theoretical birth of a new European industrial champion, Fiat/Opel. When Fiat Group star CEO Sergio Marchionne meets influential representatives of the German government, he will push for the creation of a new “car supergroup” with factories all over northern Europe (Opel), Italy (Fiat), and eventuallyt he US (Chrysler).

Put it simply, Marchonne believes in economies of scale in the grandest possible scale. With the new drive toward fuel efficiency and smaller vehicles around the world, he believes that the most profitable car groups of the future will need to produce much more than the 3-4 million cars Fiat currently produces – and the absorption of Chrysler in the US, blessed by President Obama, is just part of the story. Marchionne wants the German government involved (possibly financially) in order to add the operations of Opel (GM’s largest international subsidiary) to the new group. Eventually, this would lead to the spinoff of Fiat Auto from the Fiat group, escinding it from other operations like farming, heavy machinery, and ultra-high-end auto brands (like Ferrari, Maserati).

The protectionist concerns notwithstanding, this is a promising development for European industry – it can lead to better products, more efficient production, the creation of long-term value, and the appropriate positioning of the industry in terms of sustainability concerns. In short, it may prove to one of those rare M&A deals that adds value, rather than destroy it.

A friend of mine raised a good concern: grab three companies that do not work, pull them together, and hope they work is not the right way to go about business. It may not be, but one of those companies (Fiat) has assets that needs to project internationally (efficient engines, good platforms, and profitable operations) and two others have the history and international presence to take it to the next level. And economies of scale are ultimately promising.

The question is – what if Marchionne’s Icarus-like personality gets too close to the sun?

In what promises to be another momentous week in Europe, the FT will publish tomorrow an article sceptical about the new proposed regulations for hedge funds that sell in Europe. The distinction is important: the regulation aims toward hedge funds that sell their products in Europe, and not just those that are based in EU27.

These measures, if they pass, will become intertwined with the Franc0-German battle against tax havens, which has been in the European spotlight at least since the G20. Given the proposed rules of regulatory compliance, analysts project that management costs for off-shore hedge funds (out of Cayman, Luxembourg, or Lichenstein, for instance) will soar, making on-shore funds more efficient. Even those funds that choose to remain off-shore would have to abide by “passport” regulations if they wish to sell in Europe, which de facto means that Brussels will acquire oversight powers in terms of capital requirements, disclosure of investments, and more.

Until the legislation passes, and considering the proposed three years before it becomes binding, it is hard to say how this will impact the industry. Their conflict of interest notwithstanding, it is scary to see embattled fund managers complain so openly in the European press. The danger is an absolute loss of competitiveness for anyone residing in Europe in terms of managed funds – Europe should aim toward enough regulation to ensure security, but not to stifle investment opportunities that can actually help the continent’s economy in the long run.

The difference may seem abstract, but it is nonetheless real.

I wrote a piece on the Crimson last week about the prospect of Eastern Europe joining the euro early. I still firmly believe the essential tradeoff between confidence and giving up monetary freedom makes sense for Poland, Hungary, and the Czech Republic. Granted, not all of these countries have behaved in the same way with respect to foreign funds (read Hungary has been really, really irresponsible – and it is not the first time for the area, even if they were not fully in control back then). But they all need the same thing: Given their trade connections with Western Europe (and specifically, the euro area), they need the market confidence to keep going, reignite their economies, and continue to receive funds with the goal of economic convergence.

The counter-argument about losing monetary freedom does not really make sense for the area (as it did, years before, for Denmark or the UK) because they cannot access funds in international markets when conditions are suboptimal.
These countries’ present is Eastern European, but their future is – as they dreamed in 1989 – just European. And the euro is an essential part of the deal.

It was a matter of time. In a rather obvious consequence of the global economic downturn (particularly acute in Britain), the famous Good Schools list of the best educational institutions in the nation witnessed the rise of state entries in the rankings, usually dominated by what the Brits call “independent schools” (private preparatory schools). 

Although several headmasters and analysts interviewed by the FT were surprised, I am surprised at their amazement. The credit crunch that has been afflicting markets for now over a year, with severe consequences for governments’ fiscal balance around the world, not to mention the high-earning financial sector, has hit the demographic that has always been most likely to send their offspring to elite schools.

As Britain’s top (fee-free) state schools receive more and more applications, it will be interesting to see how this trend impact education enrollment rates in the rest of Europe and in the US, not only in terms of private elementary and high schools, but also when it comes to higher education. 

Fewer and fewer, it seems, can avoid the consequences of the economic malaise, which – if nothing else – reinforces the strength of the phenomenon.

Today I am presenting at the Weatherhead Center for International Affairs on my senior thesis, which addresses the economics of fascist intervention in the Spanish Civil War (1936-1939). The Conference program can be found here. It will take place at the Belfer Case Study Room (S-020) at the Center at CGIS South between 11 and 12 PM.

In a very interesting interview on FT.com, World Bank president Robert Zoellick warns about the dangers inherent in the current global economic downturn. With rhetoric reminiscent to historians’ talk about the 1930s, Zoellick makes an interesting point about Eastern Europe and its relationship with the EU.

Considering the relatively recent openness of these economies and the lack of “strong foundations” in their market and democratic institutions (merely as a function of time, if nothing else), it is important for developed economies to help reduce the volatility associated with Eastern European economies. Given the importance of European FDI and its political stake in the region, Zoellick convincingly argues that it falls on to the EU to act. Unlike where the French and British may be heading, the solution is to help these economies not veer away from the path of market integration, open regulation, and perhaps most importantly, democratic institutions.

Even in the era of the European Union, the Weimar Republic nightmare is never too distant in Central Europe.

To say the Spanish economy has faced a hard landing in the last few months is nothing but an understatement. After the bursting of a real estate bubble only comparable to the United States’ (with prices rising on average 247% between 1998 and 2005), Prime Minister Rodríguez Zapatero has overseen an economy constrained by the euro’s strength and thus hemorrhaging jobs.

In this context, the authorities are trying to get rid of illegal immigrants that for many years flocked into Spain to get jobs very few Spaniards were willing to do. Perhaps most interestingly, now Madrid police trade unions have confirmed that the city’s security forces have “quotas” of sin papeles to catch. This applies mostly to Latin Americans overstaying their (usually) generous visas or North Africans who had traveled across the Strait in barges. 

The internal memo leaked to the press not only addressed quotas, but also a “preference for Moroccans,” which according to the report could be repatriated cheaply and swiftly. Although repatriating illegal immigrants must definitely be an EU priority, to do so with police quotas and preference for a particular nationality (which suffers from discrimination in Spain), is not the way to do it.

Although the NYT has a story today claiming that “Death ends coma case debate that set off furor in Italy,” the debate around Eluana Englaro’s case and euthanasia in general in Italy is just getting started. 

Ms. Englaro had been in a coma for over fifteen years after an accident in 1992, but in recent weeks, her father had successfully moved her to a private clinic in Udine that agreed to remove her feeding tube. As soon as the issue hit the media, the Vatican reacted violently claiming that such action would be euthanasia, a practice illegal in Italy. The right-wing administration of Premier Silvio Berlusconi then first attempted to pass a decree preventing the removal of the feeding tube (until President Napolitano announced he would not sign it into law) and then drafted a four-line Senate bill that was being debated when Eluana suddenly died. 

Although most Italian dailies are as of now focusing on whether or not there will be an autopsy to determine how she suddenly died (some Senators cried: “Murderers!” when the news was first reported during the debate session), the issue will quickly merge into a debate about euthanasia itself, where Italy has very different laws than other countries in Europe. If nothing more, it will be another opportunity for clash between Berlusconi’s conservative government, allied to the Vatican, and the leftist coalition in opposition. 

In this case, convergence with the Northern European norm may never happen with a country with strong Catholic roots like Italy.

This morning US Vice-president Biden gave a speech in Munich that sent a very clear message to Moscow: Rapprochement is not near, not by a long shot. At the foreign policy conference where then-President and now Prime Minister Vladimir Putin first denounced US interventionism two years ago, Biden was explicit about limiting Russia’s influence in the Caucasus: “…the United States will not recognize Abkhazia and South Ossetia as independent states. We will not recognize a sphere of influence.”

The European reaction was between openly positive and cautiously expectant. Whereas German Chancellor Angela Merkel tried to focus on the need to improve dialogue with Russia (which Biden also stressed), French President Sarkozy said it was obvious the relationship with the Kremlin was not great. Specifically, he referred to a “distrust” between the EU and Russia. At this point, rather vox populi. 

The real issue here is how much of an alignment this (new) American stance will bring with Europe, and how hostile the revitalized alliance will be toward Putin (and Medvedev).

 
For several months, it has been clear that the partnership between French President Nicolas Sarkozy and German Chancellor Angela Merkel is an engine for European integration. They have agreed to disagree in some issues, such as France’s mare nostrum idea of a Mediterranean Union, yet in most issues they are together. Examples of that are global warming and how to deal, by and large, with the global economic downturn.

Today, they took it to the next level, publishing a long op-ed in Le Monde, published simultaneously in the German press. As the Gaullist Sarkozy prepares to rejoin the NATO high command, which President De Gaulle abandoned in one of his many acts of self-assertion forty years ago, the op-ed promised increased security cooperation. Quite revealing was the op-ed title: “Security – Our Common Mission.”

Security cooperation is a much-talked about principle since the creation of the Common Security and Defense policy doctrine in the Maastricht Treaty of 1992, but little has been achieved in practical terms, despite the hard work of people like Javier Solana. The new proposition centers around a European defense strategy that actually cooperates with the US, while maintaining a usable and well-stocked military force built upon cooperation.

Without real European federalism, it may be difficult to have French and German soldiers fighting along one another, but the programs proposed by Sarkozy and Merkel – including the stationing of German soldiers in a base in France for the first time since the end of occupation in 1945 – is most definitely a promising first step. With a potentially nuclear Iran and a belligerent Russia in the cards, the world needs a strong Europe, both diplomatically and militarily. The plan foresees that kind of cooperation, as well as a stronger NATO and better ties with President Obama. 

And just like the European Steel and Coal Community sixty years ago, Franco-German cooperation is a useable blueprint for the rest of Europe. Hopefully, one day we may have a European defense policy, a (real) European foreign minister, and a (true) European High Military Command. So that the next time Henry Kissinger feels like calling Europe, he can actually get through.

Attraction May Go Beyond Diplomacy