Sunday, 20 February 2011

Weekly Brief on Greece, Commodities, Long Term Investments, Fuel for Van Drivers and Pensions.

Last week, I travelled out to Strasbourg via Frankfurt to spend a morning with the European Central Bank (ECB) and back via Paris for a conference of politicians, central bankers and financiers discussing priorities for France’s presidency of the G20.

Not surprisingly much of the conversation with the ECB was about the situation in Greece, Ireland and Portugal. The ECB has been buying debts of these countries over the past year and now owns 17% of the total but, when asked, they would not disclose what average price they have bought the debt at. They say that Greece should be able to reduce its debt burden by selling off government owned real-estate. I then leant that the average Greek household already owns more than 1.5 properties and the two Greek MEPs present were rather more skeptical about the state of their property market.

In Paris the big debates were on commodity prices and trading, the impact the new rules for bank capital and liquidity will have on the wider economy including long term investment, whether this will create a larger “shadow banking” culture and what to do about systemically important financial institutions. There are some who thought that the new banking rules were done and dusted when agreed at previous G20 meetings and then finalised during the debates at the international Basel committee - but it is actually very clear that the ink is far from dry on the detail.

Commodity markets will be in the spotlight during the French G20. There was a very divergent view between those who would like to see all commodities derivatives markets closed down and others who believe that these are useful for hedging risks for manufacturers and food producers - most East Anglian farmers I know have sold their grain long before they harvest it. Everyone agreed that there is a lack of transparent information in commodity markets, both on production levels and traded markets, as well as a need to address long term shortfalls in food supply and raw materials.

It was helpful to listen to a discussion on long term investment, in the UK as well as across Europe there is a desperate need for investment - for infrastructure and especially energy infrastructure. UK and European companies are much more reliant on bank lending than for example their US counterparts with 75% of EU capital coming from banks as opposed to 25% in the US. There is little doubt that if we push banks to hold much more liquidity we will reduce their long term investments. Pension funds which should be longer term investors are also being forced by regulation to hold more liquid shorter dated investments.

In Strasbourg this week we voted on long term targets for fuel emissions from vans. A big issue in the East of England not just for the thousands of tradesmen and delivery drivers who drive vans, but also because the Vauxhall factory in Luton is General Motors main European production facility. The new targets have taken a year to negotiate and we probably a sensible compromise to levels that the manufactures may be able to achieve. Having spoken to many van drivers during the year its clear that fuel consumption is a major business expense - they would like to see more fuel efficient vans but not if the price of the vehicle itself starts escalating. As ever EU targets won’t be the driving factor that create change this will happen because of the consumer pressure to force manufacturing innovation.

We also voted on a report on pensions. Funding pensions is a huge concern in all 27 countries but conditions such as life expectancy, demographics and savings differ significantly. A lot of MEPs were worried that the EU would try to introduce a standard pension age and minimum pension level. Actually the report says these decisions should stay with individual countries. During my work on this report I discovered that the first state pension was introduced in 1889 in Prussia by Bismark. The life expectancy then was just 45 so really very few people ever got to pensionable age at all.

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