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.

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.

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.

 
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

Welcome back for a second semester at TEC!

In the last months, and despite Obama’s hopeful inauguration parties last week, the news in Europe and around the world are anything but hopeful. Just yesterday, UK economic performance data marked the end of a particularly dismal week in financial markets. The message seems clear enough: there will be no swift recovery in Europe and in the UK devaluation is painfully correcting past excesses – it’s like the bitter British 70s are back. There are some, however, who do not complain. And perhaps that is precisely what Britain needs right now to revive its struggling economy.

And yet, the return to growth seems farther and farther away with each day the stock markets are open. But is the increased monetary flexibility in Britain, when compared to the ECB’s corset on the eurozone, a good or a bad thing? The present crisis will become a case study, one way or another.

Despite the ongoing economic crisis, or perhaps because of it, the FT has an interesting video in its online edition featuring a French ambassador calling, of all things, for more European defense spending. In these days of economic downturn, many people are likely to reject such calls; in economic theory, after all, military spending is considered unproductive and useless. And yet, as most developed countries wake up to the ‘official reality’ of recession, it is important to see further European spending not only furthering the cause of European integration in security spheres, but also helping individual economies through a classic fiscal boost.

Furthermore, military spending in Europe these days does not mean aggressive foreign policy; neither Europe generally nor France specifically could be accused of that as of late. Rather, it would be key to strengthening ineffective efforts for state-building around the world, particularly in places like Afghanistan, where Europe and the US have responsibilities in the long run, if we are to uphold the values that led NATO to take up the task in the first place.

Dear all,

Welcome to European Connection, a blog of the Center for European Studies. First off, I wanted to let you all know how much of a pleasure it is for me to be writing on this new medium. Perhaps it was not the best idea to name a blog after a drug trafficking scheme from the 1960s and 1970s. And yet, it not only serves as inspiration for William Friedkin’s filmic masterpiece, but it is also a fitting symbol of the global connections we all witness today.

‘Globalization’ may have become a clichéd term, but I hope this blog will become a way for members of our community at Harvard and in America to be in touch with news from Europe and European perspectives on global issues. Welcome to TEC…

pb