Innovating Business Models In Berlin
I’m in Berlin. 2009 to 2010 is the year of Germany as the Chair of the rotating EUREKA Presidency and the end of this year is being celebrated with a Ministerial Conference and award ceremony.
In case you don’t know, EUREKA is a network that helps to stimulate and foster new projects. Though they have many member nations (mostly European but also now including South Korea as of last year), the projects are chosen on merit – bottom up – rather than from a government level down.
The award ceremony last night highlighted the work of three projects and put a little glitz and glamour into the world of research and development. German TV business presenter Carola Ferstl provided some of the glitz and glamour, while the great and the good of the world of European innovation policy looked on.
First prize for this first ever Innovation Award was won by the catchily named ONOM@Topic+. Their project, lead by Gemalto of France, is leading the way in developing secure digital smartcards. These cards have many potential uses including payment and access to public transport systems, driving licences, medical records and biometric data and access to a wide range of public services.
It almost goes without saying that they have been addressing political issues and societal concerns whilst also working hard on the technological aspects. The project itself displays many of the benefits to firms in fast moving areas of the use of partnerships.
Jean-Pierre Tual, representing Gemalto, explained that the potential life-cycle of new products in their industry can be as low as two or three years. In such an environment, there is pressure to develop and roll out to market their products simultaneously.
As might be imagined, this puts real pressure on all involved to move and move quickly if their lead into the market is to be exploited and the investment in the project recouped.
Gemalto have actually used this product to move even further forwards it seems. Rather than simply bringing in a range of partners to assist in the R&D, they brought in their competitors as well. This has enabled them to develop a product that also now has industry and government support as being the industry standard.
They have been developing both product and business model on the fly. It is a very impressive achievement and they were clearly worthy winners.
The real question though, is how can more innovators and entrepreneurs be brought into the policy debate to help move issues forward in ways that benefit all? It goes without saying that they have much to do under intense time pressure.
At many of the policy related events in Brussels, it is clear that there are almost exclusively policy, government and lobbying professionals attending and few – if any – people that really innovate. Bringing these experts into the policy making arena in a positive manner seems to be the real challenge.
France And Germany Push Harder For A Banking Tax
The latest news seems to be that most major governments want a bank tax. The reasons behind this are clear to everyone I’m sure, but they do open the prospect of regulatory arbitrage – a subject that this blog has touched upon in recent months.
The problems with a bank tax are obvious though. Any country that has some semblance of a financial services industry, and chooses not to introduce such a tax, could easily be catapulted into the role of a new global financial centre. The massive sums of money at stake virtually guarantee this.
We often hear of the amazing sums of money being earned by the top hedge fund managers. The ‘poor’ ones only bring in a few million dollars each year. The ‘rich’ ones bring in hundreds of millions of dollars annually (some even earn into the billions per year!). In total, there are hundreds of billions of dollars in annual fees paid to hedge funds. If that is the case, and many of them deliver pretty average returns and so rely on their 2 to 3 percent annual management fee, then a global tax of (lets imagine) 0.5 percent, will be huge.
Who would want to avoid paying that???
Yep. Everyone.
And so the global financial centres could be crushed by the wrong tax legislation. That would prove to be terrible for London and New York. But possibly less bad for others (perhaps Singapore and Hong Kong for example). My thoughts on this subject in April can be found here.
So the risks are high and as France and Germany push ever harder for this, they risk turning the financial centres of the world upside down. Or perhaps that is the point?
Do Markets Negate Democracy?
At the end of last week and for part of the weekend, I had the pleasure of attending the Biennale Firenze in Florence, Italy. The event was being hosted by EESC, the European Economic and Social Committee. With a title of “Education To Combat Social Exclusion”, it is not a natural event for a blog about finance and investment…
However, much of the content of the conference was dominated by the role of markets and the financial crisis. Many of the speakers had the financial pitfalls in mind when they spoke about the problems being faced by poorer members of society. (For a definition, please click here – social exclusion .)
There was one speaker though, Josep Borrell, that addressed the issue much more concretely. Mr Borrell is former President of the European Parliament, so I think it is safe to presume he has some knowledge and insight to be applied.
He described the influence of the markets and how they are able to dictate policy to governments – albeit indirectly. This power to influence, by devaluing a currency when the financial policies of a government are not liked, is something that he called the “negation of democracy”.
He also highlighted the terrible inconsistency of large financial organisations and their market behaviour. The ability to punish governments in the financial markets by selling currencies down, having just needed a bailout, and using the bailout money to do it, shows the problems we have with markets currently.
If you would like to hear more, get it from the man himself. I asked him to elaborate:
Will You Help Me Prevent Climate Change?
Regular readers of this blog may recall that at the end of 2009 your author was lucky enough to attend the UN climate change conference in Copenhagen (COP15) for a number of days.
While there, it was my job to interview a number of experts and politicians about the politics, policy and realities of climate change. I cannot lie, it was a fascinating experience.
While I have been a believer for a number of years that we (humanity) need to change our ways, some of the things I discovered there really altered my thinking and understanding of the topic.
The main change for me happened at this side event held by the Committee of the Regions (an EU institution) where I was tasked with conducting a number of interviews after the event ( two of them can be found here and here ).
It was obvious as it was being explained to the room, but had not really crossed my mind before that point, that whatever the heads of government agree (or not!) it all has to be put in place at a local level. Local government, small businesses and private individuals are where the real changes will need to be made. Put bluntly, the future survival of humanity depends upon it.
As I say, it is pretty obvious, but I hadn’t thought about it for even a single second. Even though I was busy trying to do ‘my part’!I know, how stupid am I???
But as the conference continued, it became clear that this is not the focus at all. For now, everyone is still thinking about what government leaders will agree. In the meantime, small island states in the Indian and Pacific Oceans are facing a real and immediate threat to their existence as sea levels rise.
What Can We Do About This?
Several months later, it is clear that many people still seem to doubt if climate change is even real (the scientists all seem to agree though) and remain impervious to change. But really all we can do is try and change one person, business and house at a time. To do that, there needs to be much more education about how and why.
So I have decided to commission an online book about energy efficiency in the home and what householders can do to lower their carbon footprints.
As you may know, I run several websites and currently they generate over 600 unique visitors each day. I plan to simply give the ebook away for free from these websites (they are not all in the right online ‘niches’ but I am presuming that most or all of the people that visit my sites live somewhere…).
Since I am not an energy efficiency expert, I am having to pay for such a person to do the actual writing for me.
What Can You Do To Help?
I am hoping that visitors to my blog(s) and website(s) will be willing to chip in and help me foot the bill for this project. In web-speak, this is called crowd funding and uses the collective power of dispersed individuals online to raise money for projects.
This means that small donations of just a few dollars by a large enough group of people can assist to get a project off the ground. Think of it a little like an ‘angel donation’.
My hope is to raise upwards of US$2,000. The cost of writing the ebook will be close to that value (but in euros). It seems like quite a lot, but I don’t think this is something I can just outsource to an article writer in the Philippines as it needs some pretty specialised knowledge in places.
Any extra raised above this amount, will go towards putting a small website together – and promoting it – that can be used for extra distribution. So if you feel able, please give a little and the more I am able to collect, the more I will be able to promote, more people will be able to read it and, hopefully, less CO2 will be in the atmosphere in years to come!!
Please Click Here To Contribute To This Project.
The Small Print: The site above does not charge a fee for this, but the payment processor does charge a small fee per transaction. Be sure that I have found the lowest cost method of achieving this that I could…
Payments will be sent to a UK Limited company. That is my company and by sending it there, money that goes in can go out as a business expense and I (hopefully) won’t need to pay (much) tax on the money.
Financial Transaction Reforms Explained
Earlier this week, I was able to interview one of the key players and thinkers on the European Commission team for financial reform as a part of the ‘day job’.
As mentioned here, David Wright, Deputy Director of DG Internal Market and Services, is one of the most public voices right now on the direction the the EU is heading in. When it comes to hedge funds, capital requirements, OTC derivative reform, regulatory arbitrage and more, he is the person to listen to.
The interview is separated into two parts. In the first, Mr Wright discusses many of the elements of finance that need to be reformed.
In part 2, I ask about the prospects for increasing transparency and the influence of regulators in financial transactions…
Can The EU Lead On Financial Reforms?
The European Parliament should be leading the development of financial regulation reform. According to MEP Dr Kay Swinburne, member of the Special Committee on the Financial, Economic and Social Crisis (CRIS), many MEPs have the belief that if the European Parliament creates good, workable legislation – and does so first – the United States will follow.
The subject of ‘regulatory arbitrage’ and it’s implications was one of the key themes at Deutsche Bank’s event on 4th May about OTC derivatives in Brussels.
An overriding fear for legislators is that should the new rules be much delayed, on either side of the Atlantic, it will provide an opportunity for financiers to move their operations or trades to the location with the weakest rules. Even if this only happens for a temporary period, it may add further systemic weaknesses to an already weak global financial system.
Dr Swinburne was keen to point out that while the level of understanding in these complex financial instuments was growing rapidly in the CRIS Committee and that much progress had been made, it was still too early to tell what direction their policies would take. She warned participants that second guessing the outcome was pointless at this stage.
Emil Paulis, Director of Financial Services Policy and Financial Markets for DG Internal Market and Services at the European Commission, explained his expectation of the path ahead. Regulating OTC derivatives is clearly a feasomely complex area and since this regulation must start from virtually the ground up, many steps will attempt to bring these contracts in line with other asset classes.
These steps have three main themes. These are:
Counterparty Risk to include the use of the Capital Requirments Directive to help assess counterparty risks and pricing, for central clearing houses to oversee or authorise transactions.
Transparency so that as much information as is possible is available to let regulators and clients see the full terms of contracts. Questions were obviously raised about the competitive nature of these markets and the implications to business models of full disclosure and the usefulness of publishing contracts that are so complex that only those involved will fully understand them.
Increased standards of Market Integrity and the prevention of market abuse. It is likely that corporations using derivatives to hedge the risks in their business will receive exemptions, but for financial firms, the rules currently in place for other asset classes should be applied.
As a part of these measures, a – very – short public consultation process is planned. With the first releases due before the summer break, the revision of market abuse rules planned for the fourth quarter of 2010, and the problems of trying to match rules and progress with the United States, the OTC arena is due for fast and important changes.
Too Big To Fail Is A Thing Of The Past!
Your author was able to attend the 8th Annual European Financial Services Conference in Brussels earlier this week. There were certainly some interesting panelists and contributors, including European Commissioner Michel Barnier.
There were many different perspectives discussed, but as you may imagine, financial services regulations were high on the list.
In the main, these regulations would be aimed at investment banks – rather than retail banks – but ultimately, these guys are major influencers in the stock markets of the world. Even if you happen to be a North American reader, this is important. The US and EU are doing their best to make their legislation comparable. The potential situations are therefore important to any and every investor.
One element that was raised repeatedly was that of stopping ‘regulatory arbitrage‘. In other words, trying to find ways to stop big banks and hedge funds from shopping around to take advantage of the most suitable legal locations. It seems that those at the top of the EU and US financial regulatory agencies believe that this ability to sidestep many rules and responsibilities added to the scale of the financial crisis. They are almost certainly correct.
Another element that ought to make us all worry, was highlighted by David Wright, DG MARKT from the European Commission. Governments around the world do not have the appetite to fix things if they go wrong a second time. In other words, if the structural problems are not resolved, those considered too big to fail will be left to fail. The actual phrase was, “I have it on good authority from very high-level officials in governments around that world that if this happens a second time, all bets are off!”
The sudden resumption in fat bonuses could come back to haunt investment bankers!
These issues have implications for the entire global financial system. Take heed. Think carefully about your personal investments and just how liquid and real they are. Numbers on a screen are just that, numbers on a screen. You can’t eat them if times are tough…
Whilst at the event I arranged an interview with a speaker. Eddy Wymeersch is Chairman of the Committee of European Securities Regulators. I asked him about short selling and the steps required if bankers are to become more responsible.
Ann Mettler: Has the time finally come for Fiscal Sustainability?
The following opinion piece from Ann Mettler, Executive Director of the Brussels based think tank The Lisbon Council is kindly being republished from her blog.
I have had the pleasure of meeting Ann on a number of occassions and I can attest to her knowledge and commitment to seeing Europe become the economy that many of us hope it can be.
Ann writes:
Greek default and the risk of contagion: Has the time finally come for Fiscal Sustainability?
What can I say? There isn’t a person I know who didn’t see the impending Greek default coming. It’s a country that has had no strategy for generating growth, unfunded pension liabilities en masse, a bloated, inefficient state sector, poor educational institutions, and an abysmal demographic outlook. For years, these developments could be softened by borrowing ever more and running up an unsustainable deficit, currently standing at 120% of GDP.
The only real surprise with what’s happening now is the speed with which events are unfolding and how visibly unprepared Europe is, despite the fact that experts have been warning that this would happen for years. It infuriates me that up until now fiscal sustainability has been the exclusive preoccupation of a handful of economists. I have argued for years that just as we taught citizens the need for environmental sustainability, the same can be done for fiscal sustainability. People deserve to know what happens when governments go on spending binges, driving up public debt and shouldering young people and future generations with the expense of today’s excesses. Just like no individual can permanently live beyond his or her means, no state can do so either. And you believe Argentina can’t happen in Europe? You better think again.
What is a mystery to me is why this looming and well-known threat was never communicated to a broader public; why this was never made an issue on par with environmental sustainability; why it had to remain the exclusive domain of academic economists, when the repercussions were so clearly to be felt by society-at-large.
Back in 2006, the Lisbon Council tried to kick off a fiscal sustainability initiative, attempting to broaden the widely accepted concept of sustainability to public finances. There was mild interest and encouragement from the European Commission’s DG Economic and Financial Affairs. We even got to host then-Economic Commissioner Almunia for a keynote speech but it was impossible to sustain any kind of momentum in the ensuing months in the absence of political leadership. None of the subsequent EU Presidencies or the European Commission highlighted the issue of unsustainable public finances in a concerted and ambitious manner. I guess after making the Stability and Growth Pact more “flexible” in 2005, ruining public finances was officially condoned and member states thought they could just go on with their reckless behaviour.
Reading some of my editorials from 2006, I feel angry and ashamed about the path of fiscal ruin that we in Europe subsequently embarked on, and which I back then warned of:
“The [Stability and Growth Pact] has utterly failed to explain to the average citizen the need for future-oriented budget priorities, fiscal discipline and long-term sustainability of public finances. The ultimate price for today’s lack of leadership will be borne by future generations, who – unless something is done now – will inherit a system so loaded with debt and so burdened by interest payments that political room to manoeuvre will be remembered as a luxury of the distant past.” (From ‘Europe must take an honest long-term fiscal view’, Financial Times, 6 November 2006)
“If Europe wants to be a responsible and respected global citizen again, as we were when we embraced and advanced the concept of environmental sustainability, we must urgently take action and kick off a second sustainability movement, one that will prepare our public finances and social security systems for the cataclysmic demographic changes on the horizon. How can we expect the world to listen to our calls for environmental sustainability while we squander the precious fiscal resources of our children and future generations? The time has come to abide by the values and principles we claim to possess.” (From ‘ Now What About Fiscal Sustainability?”, BusinessWeek, 22 November 2006)
Rather than feeling vindication because I knew this crisis would happen one day, I frankly feel anger and frustration at our policy makers and the economists who advise them. It is their closed-shop mentality – either trying to keep bad news from the public in the case of the former or simply believing that it’s not their job to communicate more broadly in the case of the latter – that is coming to haunt us now. Imagine if we had kept the threats of climate change to a closed, secluded group of decision makers and experts. What kind of public action and acceptance could we have expected? The people of Europe will now pay a heavy price for years of denial and acquiescence. And perhaps, just perhaps, we will see broader public movement towards fiscal sustainability after all. It is a pity that we were unable to do this in the mature, pro-active way that advanced democracies should be capable of, and that we are now faced instead with top-down, harsh austerity programmes that will impact our lives for years and decades to come.
- Today (28th April 2010) the Lisbon Council has released an e-brief about the financial situation and the actions required to rescue the situation. The paper has been written by Alessandro Leipold, economic adviser to the Lisbon Council and a former acting director of the European Department at the International Monetary Fund (IMF) and can be found here.
Breaking News: Confidence In Wall Street ‘On The Line’
This story from CNN shows just what denail the United States is in when it comes to Wall Street, financial services, money and reputation.
According to the story, it seems that confidence in Wall Street is ‘on the line’. Which line would that be?
Perhaps it is the final line that an economy will not cross after being corrupted by personal and corporate greed, it has blown up it’s own residential property market, financial services and investment banking industries, borrowed trillions that it can never repay to the rest of the world, failed to regulate and govern and done it’s best to export this ‘business, economic and political model’ to the rest of the world!
Whew! Thank goodness there is a line after all…
When considering words like Enron, Madoff, WorldCom, Andersen, ratings agencies, NINJA loans, Bear Stearns, LTCM, Amaranth, financial crisis, bail out, unfunded liabilities, dollar weakness and many many more that your author cannot be bothered to list, there remains just two questions of interest:
1) Is there anywhere left in the world other than Wall Street where confidence remains in Wall Street?
2) How much of your pension fund, college fund for your kids education or investments in general that you own, are responsible for and can control, do you still have invested in the US dollar or United States?
I bet that feels like too much right now…
Where Will The Next Global Financial Centre Be?
An odd question, I know. Isn’t the global financial centre New York? Why ask if it is changing?
My thoughts are becoming more and more based on the economic realities of life. The regions with the strongest economies have strong financial centres. People go to these places to access capital to help their company grow.
But isn’t that changing? If New York is the global financial centre, why do they have all the debt? Aren’t they meant to have all the money? Perhaps that money comes from an economy that, you know, produces something???
In addition, the US is gathering an ever greater reputation as being the place where wealth is transferred from investor to manager (Enron, WorldCom, Madoff, lots of hedge funds) and where wealth is turned from useable capital into funny money (US$).
Then there are the regulations. Sarbanes Oxley anyone???
For my money, the future of New York as the global financial centre is limited. It might take years for this to change, or if the Dow Jones and dollar collapse, it might take weeks. Who knows?
If this supposition is correct – which I admit it might not be (read probably will never happen) – then where will the money go to? London? Frankfurt? Singapore? Tokyo? Hong Kong? Shanghai?
It is, for now at least, a pretty short list of choices.
This is why I find the many recent pronouncements of new European Commissioner Michel Barnier (in charge of financial services) to be slightly bonkers. He likes the idea of banning prop trading (investment banks trading on their own accounts), fine. He likes the idea of a banking tax, fine. He likes the idea of a tax on financial trades, fine.
But all of them together?
Individually, each idea may prove to be a step towards reigning in the mismanagement of money as we have seen in the last decade. As a group, they would be a mortal wound to the financial services industry in Europe. That would be a disaster. And it would be a disaster that would almost certainly make many funds, fund managers and their ilk to flee to a friendlier part of the world.
It would happen at a time when America and New York’s dominance is waning. Somewhere will benefit if New York perishes.
It seems unlikely that a new centre would be Shanghai, Beijing, Tokyo or Hong Kong. Either would need to use English far more than is currently the case. In Hong Kong’s case, the city would also need to be able to house an extra million or so people…
That narrows the list down a little doesn’t it! And if Barnier’s plans get to be launched, then perhaps Europe would be off the list as well.