Before you read my post, you must read this Economist article.
Are you done? Do you now understand how terrible the future looks not only for the periphery of Europe but for Germany as well? Is it clear that as we stand we are headed for the perfect storm? OK, let’s move on to what I think Europe should do to get out of the crisis, which is basically to start the United States of Europe.
Consider this: it will cost Germany and all of Europe more if there is a wide default, and if Spain and Italy leave the Eurozone. So I think it’s time for Europe to unite and risk inflation as the USA did before.
If you had to summarize the reaction of the FED to the multi-trillion default of 2008, you’ll find that the FED risked inflation and won. That the FED stood there providing unlimited credit, and so did the Treasury. And that thanks to a gigantic state intervention, the US banking system, car industry and many other industries along with the economy as a whole were saved. And there was no inflation. Europe needs to do the same now, but for that, it needs to become the United States of Europe from a regulatory point of view. The other choice is the end of Europe, massive defaults and devaluations and possibly a tremendous shock to the global economy.
How does EU become the United States of Europe?
1) Europe starts the European Treasury. An agency that regulates how all tax revenue is distributed, and can give or withhold government expenditures from EU member nations depending on revenue. Short of that, I don’t see how the EU can prevent a country like Greece from meeting its deficit targets, for example. This European Treasury has to set 5 year objectives for all European nations to go into fiscal surplus to begin paying down European debt.
2) This European Treasury needs to consolidate all European debt into one debt pool regardless of nationality to eliminate risk spreads and with a credible deficit reduction package to bring down all euro interest rates to something slightly higher than Germany’s rates today.
3) The European Central Bank needs to become the regulator of all European banks and offer deposit guarantees for all European banks to stop the massive South to North capital flight that is taking place. All European banks would subject to the same rules, regulators and bank deposit guarantees.
As I see it, the future in Europe is United we Stand, Divided we Fall.
Do countries want to lose so much sovereignty? I think given the alternative, they should. As it is, Europe is a continent in which each country is married but it can mess around. That regime won’t work. It’s either Europe or divorce. Europe needs to unify a lot more as a result of this. One European traffic control, one European army, one European anything that is managed at the Federal level in USA. The USA has found a balance between cities, states and federal that Europe needs to emulate. Otherwise, the euro will not hold.
The enemy? Local powers. But if we were able to do away with tons of people who worked at European borders, European currency agencies we can do away with local patent offices, local traffic controllers, local air forces, local armies, local 100 other things, imagine how efficient we would be. How much better off. How much better prepared to compete globally.
PS: This is a first draft, will be modifying/improving this article as I do more research and get comments.
There is a myth going around that Greece went bust because of the size of its welfare state. And the extension of this myth is that sound finances are incompatible with a sizable welfare state. That it is the welfare state itself that is making other countries such as Spain and Italy approach bankruptcy. But this is not true, many European countries have a bigger welfare state in relation to GDP. Greece did not go bust because of the size of its welfare state in relation to GDP but because of the size of its debt in relation to GDP. Countries can choose to be more or less socialist. What they cannot choose is to be socialist when they can’t afford it. Nordic countries are more socialist than Greece, but they provision for their generosity.
Fon is off to a good start in 2012. Just after announcing 5 million hotspots, I am now happy to share that we have announced our first partnership this year. It is with Netia, one of Poland’s largest telcos. Together, we will create Poland’s largest WiFi community. Netia is Poland’s most innovative telco, and we couldn’t have chosen a better partner to help us spread the Fon vision in the country.
The goal is to have over 100,000 hotspots all around Poland available by spring. As always, the new hotspots together with all of Fon’s 5 million hotspots will be open to the Fon network and of course to Netia customers. It’s always good to see the Fon network open up to so many people at the same time. Poland is a big country, with almost 25 million internet users, and there is lots of potential there.
More and more, 2012 is looking like a great year for Fon. For sure, this is the first of many more partnerships to come this year.
I wonder what many wonder, and that is whether Angela Merkel’s insistence with austerity is wise. I think that what Southern Europe needs is not to reduce the overall level of spending. Doing so it risks to make the economy shrink and budget deficits expand without end in sight. What we need to do instead is to keep the level of spending and investment but change its nature. We have to tweak with the economy, not kill the economy. Focus on what works, kill what slows us down.
I agree that in the South of Europe there was a lack of reform and a great deal of waste. In Greece, Italy, Spain, Portugal a lot of privileges were given to people who did not deserve them, growth was built on credit, and the economies collapsed as a result. There was and there is corruption in most of Southern Europe, more than in the North, and many white elephants were built, airports that are not used, high speed train lines that are not needed.
But a drastic stop to a lot of economic activity without reasonable alternatives to generate growth will only exacerbate the problem. This is happening in Spain right now. We are cutting spending, we are not focusing on intelligent credit creation and we are making many viable businesses suffer or die of credit starvation. We need to create emergency credit lines for all businesses who are hiring. We have to find the pockets of growth and support them. We can’t indiscriminately cut spending.We have to move workers from dying industries to growing industries, we have to reeducate the population for the globalized economy of this century. The challenges of evolving from an industrialized economy to a service economy are not new, but now we have to deal with the challenges of evolving from the service economy to the digital economy. None of these problems are financial or monetary, they are real and require real intervention. Fiscal tightening is akin to chemotherapy, we can’t kill all cells because some are bad. We have to have a smart bullet approach to economic intervention. Which if you think about it this is what Germany did to itself. Because Germany is making the same mistake as the large shareholders of the IMF did. They applied for themselves much more elaborate and detailed growth policies that worked and ask Latin America to implement simplistic, “chemo” type policies. The results were disastrous.
Germany is doing to Southern Europe what the IMF did to Latin America for decades and this is dangerous for Germany and Southern Europe. In Latin America by preaching austerity at all cost the IMF created failed policies and a decade of stagnation. Moreover as its failure became apparent the IMF ended up being mostly hated by Latin Americans and around the world. Germany could end up in the same spot. This would be sad because in the end we all know that Germany means well, it is just applying the wrong economic model as the IMF did. The USA, closely associated with the IMF lost most of Latin America sympathy in the last 15 years. It is sad to see how many Latin Americans now think that China is a better country and economic model than USA and have emulated China with regimes such as that of Venezuela, Nicaragua, Ecuador and Bolivia. Same could happen to Germany and the German model if it insists in implementing wrong policies. The European Union could fall apart and Southern Europe could end up experimenting with populist political regimes that only make the whole situation for Europe much worse.
There’s an active debate on this post in Google+ you may want to comment here.
One of the reasons Latin America is doing better this decade is because a lot of its elite has been educated at the best universities in the world, mostly in the US. One example is Marcos Galperin who built Mercado Libre into a multibillion dollar market cap Nasdaq giant, something that I think would have been hard for him to do without a US education. And there are many, many others. For decades now the Latin American elites were educated in the US and now they are finally in charge of the most productive sectors of the local economies.
Maybe Spain should do the same. The Spanish education system kills the imagination of the best and brightest students. I know this because we have had to re educate many of these students at the companies I started in this country including Jazztel, Ya.com and Fon. We have companies that are also universities in a sense, whose graduates go and build other companies that are more in tune with the digital era. There are some exceptions, especially in business studies with IE and IESE ranking very well globally but the average education available to Spaniards is very mediocre with no Spanish Universities in global rankings.
Now it so happens that it is not that expensive to send Spanish students to study abroad. Some Spanish corporations already give grants for this. Indeed just today I signed a recommendation letter for a Fon employee to study at Stanford partly financed by Caja Madrid and I hope they take him. But this could happen at a much more massive scale if the focus was Northern Europe. Studying in the UK with a pound at 1.19 is not as expensive as it used to be. Tuition is low for the quality of education they give. Indeed you can get a whole education in the UK for the cost of a year of studying in the US. Sending thousands of Spanish students to study in the UK, in the Netherlands, Germany and other Northern European countries who are doing better than Spain, could be a way to leapfrog many of the antiquated and dated Spanish professor body who with some notable exception is destroying a generation of Spaniards. It is also a good investment since education runs a big deficit and an 18 year old who studies abroad gains this education. Yes, there is a risk that they may stay but if they do it is not brain drain which is what happens when a country invests in a university education, as India many times does, for the graduates to end up in the US or other nations.
We live in an era in which industrialization is being superseded by digitalization, and Spain is not ready to educate its population for this change. The result is the highest unemployment rate in the OECD: 22%. A structural unemployment that is based on a misfit between the skills of the population and the jobs available in the marketplace. There is no unemployment in the tech sector in Spain, but there are not enough highly educated candidates for those jobs. We have to fix that and fix it before this country falls apart. Sending our best and brightest abroad could be part of the solution. We can’t wait for the education system to be fixed. Not with the lifetime jobs that we have provided to the mostly incompetent and untrained professors who populate it. And this is not true of Spain alone but of a lot of Southern Europe.
This is the year in which Europe will either fall apart or emerged stronger. I give it 75% that it emerges as a stronger union but the risk of collapse is still there. Germany has the key to solve the problem because of the size of its economy, its saving rate and its export volume. Germany has to decide on whether it continues to transfer some of its wealth in order to create markets for its exports or it let’s Europe fall apart and ends up with an overvalued currency and deteriorated markets. Already today it started paying negative interest rates which is a prelude in my view to a huge rise in the DM should it be born again. Tough choice. I think Germany can actually both save Europe and make money by buying underpriced Italian and Spanish bonds and selling them after stabilization. It can do what the FED did with many financial institutions, make a profit by providing much needed liquidity at a critical time.
I am testing a Nokia Lumia 800 that I got thanks to Hans Peter Brondmo a friend at Nokia. It is a beautiful phone. My favorite hardware right now, even better than an HTC, Samsung or iPhone in terms of look and feel. One hardware drawback though is the lack of a front facing camera which is not Nokia’s fault but Microsoft’s. The Nokia Lumia 800 feels pretty solid, whatever material is made of looks better than the Samsung plastic or the iPhone metal/plastic combination. WP is also beautiful but it does have many missing features that I need. If you are used to Google you’ll be annoyed as WP forces you to use Bing, it makes it very hard to use Google Maps and forces you to use Nokia Maps which have awful graphics although work pretty much like Google maps. There is no app for Tumblr, and the Youtube “app” is a joke (it’s simply a shortcut that takes you to the Youtube homepage). In general, the availability of apps and games is very limited compared to iPhone and Android.
What is great about WP is the Xbox Live integration which enables connectivity with Microsoft’s Xbox 360 console with Kinect. You can see an example of how this works in this video. For all users with a strong interest in gaming, this unique feature should be a strong argument to get a device with WP.
Sharing websites from the Internet Explorer is complicated when you want to share only on one social network (by default it will share simultaneously on Twitter, Facebook and an unknown network called Windows Live, unless you manually select only the network you want). If you live in a multilingual world as me, Swiftkey is the best keyboard for Android to do predictive multilingual typing. WP also has predictive multilingual typing but you have to switch from language to language with a key that is just in the wrong place. At least the iPhone has a globe but Android is best for that. Hitting the right keys on the Lumia when typing is difficult, and it’s disappointing that there is no way of activating haptic feedback (small vibrations) when you type.
Android is very well integrated with Google photos and Google+ and whatever pictures you take go to the “Google cloud”. iPhone has the same feature. WP does not have a photo cloud nor automatically sends pictures to a photo cloud that is good. There is some kind of Microsoft cloud but its workings are obscure to me. Also in iPhone and Android you just log in for Apple and Google but for the Lumia you have to log in to Microsoft and Nokia with two sets of passwords and more accounts to open. People used to have Microsoft passwords, now few do. I have yet to find an app or setting that allows me to easily turn on and off different wireless connections like bluetooth, WiFi or 3G to increase battery life. Now what is great about the Lumia is the short time the phone takes to boot and the overall speed at which apps work.
If Nokia and Microsoft manage to get the 500 or so most popular iOS and Android apps onto the WP platform and correct some of the shortcomings I mention above, their strategy might be successful after all. I argued earlier that Nokia only had a 20% chance of surviving, but after seeing what they accomplished in the past months I now think they have a higher probability of succeeding. It would be great to see Nokia regain some of its old strength. More competition always improves the ecosystem. My last comment is that when I hold the Lumia 800 I wish it ran Android!
As demand for WiFi continues to grow, we are continuing to grow our network with the help of our community and partners, in fact, we’re having conversations with telcos all around the world.
Other than giving customers the benefit of being part of the world’s largest WiFi community, there are important benefits for telcos when they partner with Fon. The main one is offloading significant mobile traffic through WiFi. This is becoming increasingly important as the number of internet enabled devices is driving an important (and growing) portion of internet traffic. This is why at Fon we are proud of having the largest WiFi network in the world, with over 4.5 million hotspots. With the help of partners like Belgacom, we can grow even more, helping people stay connected regardless of their location.
What each Southern European country needs now is not to spend less. Spending less alone will only exacerbate the recessions and make the countries insolvent, default and leave the euro. This is true even if the cuts in spending are made in areas in which today there is corruption and waste: less spending leads to less consumption and so on. Austerity, if it’s used as the only medicine, could have the opposite effect desired and lead to an economic depression. What Southern European countries need to do is “selective austerity” in areas where there is clear waste complemented with increased spending in areas that have a strong multiplier effect for the economy. What these countries need more than austerity is economic reform. The following is a list of random ideas for Spain that will accelerate economic growth. Portugal, Italy and Greece should make their own lists many of which will be similar.
Measures to promote economic growth:
-allow companies not to pay social charges for increased payrolls during 2012, then normalize the situation of these workers gradually over 4 years. Make 2012 “el año del trabajo” the year of employment creation and move 1 million unemployed into the labor force. This is the proposal that I presented to both Rubalcaba and Mariano Rajoy via Luis de Guindos. It was well received and so far publicly endorsed by the PSOE.
-until unemployment falls below 12% have the government should guarantee forced severance pay (indemnización) so entrepreneurs and businesses risk hiring them. This measure should be applied only for increased payrolls or new employees additional to 2011 payroll.
-have credit available for new companies. The government has to make Spanish bank create a category of lending at high interest rates for new companies, it is acceptable that loans be offered at 18% for say half the funds necessary to start a new business if the entrepreneurs and investors are willing to risk the other half. If Spain said that from now on any business that raises say 1 million euros in equity gets another million at 18% default rate would still be reasonable as people don’t want to blow up their equity and at 18% winners could pay for losers. High interest rates for risky businesses makes sense and since the Spanish government has saved so many banks it can also force them to do this type of lending. Soon the banks may discover that it is a good line of business.
-make it much easier to open a pharmacy, now pharmacies in Spain make absurd profit margins and underserve the population. In fact, all required permits to open any type of business should be simplified as much as possible.
-make it easier to become a notary another profession with absurd profit margins, allow lawyers to do a lot of the work that notaries do. Believe it or not in Spain I have to leave my office and go and see a notary to go ahead with most transactions in business. The notary system is archaic.
-create a new company employment regime that allows new companies of up to 10 employees not to pay social charges nor pay forced severance pay in case of failure during the first 5 years of its life. Recognize that you cannot have the same labor laws for start ups than for established profitable companies.
-make it easier to get a driver’s license, currently absurdly hard compared to other countries and car sales are at an all time low. Making it hard for people to get their driver’s license won’t help to change this situation for the better. Also make it easier to get a boating license. Just as with the driver’s license, this is currently absurdly hard compared to other countries, and it likewise negatively affects boat sales which are at an all time low. The yachting industry is very important for Spain. Other countries like the UK or USA don’t have more accidents than Spain, even tough it’s much easier to obtain a license. In general, licenses and degrees in Spain, including teaching degrees or licensed interpreters, seem to be disconnected from the original purpose of the license. In order to become a pilot in Spain, I had to pass a total of 11 exams. In the US, it would have taken only 3 exams which are easier than those in Spain. There are many more pilots in the US than in Spain (relatively speaking), and in general they are better than their Spanish peers. The conclusion of my thoughts is: less theory, more practical experience.
-eliminate the 12% matriculación tax on yachts and planes that make both Spaniards and foreigners keep yachts and planes in other countries like Portugal, Italy and France destroying Spanish employment. In those countries, boat owners only pay VAT on their vessels. Instead, the Spanish government forces boat owners residing in Spain to pay VAT, and on top the 12% special tax. This has many negative consequences for Spanish companies in the boating industry, and also for tourism in general. A shipyard like Astilleros de Mallorca is getting much less contracts and has to cut jobs since many boat owners from Northern Europe end up sending their boats to France or Italy instead of Spain. The Spanish government’s intentions of increasing tax income have backfired completely, now the total income is lower than before. A higher property tax, on the other hand, would be a viable solution. While boats come and go, it’s not possible to move real estate. So instead of going against the current and weakening Spain’s attractiveness for boat owners vs. other countries, it would be much better to simply raise property taxes.
-allow companies and workers negotiate the right retirement age, not everyone ages the same way, companies may want to keep workers beyond retirement or negotiate early retirement for some.
-allow tenants and landlords on all NEW rental contracts to freely pact conditions of rent and make courts work fast on vacating apartments of those who don’t pay. Currently Spain has more vacant apartments in proportion to all apartments than any other country. People are still afraid of renting.
-allow anyone who has a work contract with a salary of over 50K euros a year to get immigration papers to come to Spain in 30 days. Right now it is very hard for companies to bring high paid employees from outside the EU. If a company wants to do so it’s because it can’t find the same talent in Spain. Bringing talented foreign workers will increase employment in Spain.
-as employment in the private sector grows reduce employment in the public sector. Reform the whole funcionario (public servant) system that is perverse in which state workers have benefits that are unheard of in the private sector. They basically get contracts for life, firing is almost impossible. Make it much easier to fire funcionarios who underperform. Allow citizens to dodge complains on funcionarios and after a certain number of complains have funcionarios lose their jobs. Promote good funcionarios, fire bad ones. Do a review periodically throughout the career of a public servant.
-drastically reduce military spending. In general I think it’s absurd that each European country retains an army. Europe should have one great European army and not many national armies. There would be a great economy of scale in one European army. But other than that I think that other than firing military personnel something that should be done with incentives but not actual reductions that Southern European countries should stop buying weapons for 5 years. Military spending is the spending with least social consequences for the rest of the nation. Military spending is in great part what brought Greece down.
-charge 10 euros for any visit to any medical facility in Spain. 10 euros is a symbolic amount but it will deter some people from going to seek medical care when they truly don’t need it. Allow all the unemployed to continue going for free. Of course it would be better not having to charge anything, and for some people even 10 euros are a lot. There should be a way to identify those and exclude them from having to pay. But we all know that the healthcare sector in Spain is broken. Doctors don’t get paid, the healthcare providers don’t get paid and go out of business. This is an emergency situation, so we have to make sure that the public health sector can generate some income to improve its situation and that doctors won’t have to worry about their salaries and can concentrate on helping people.
-raise property taxes in Spain accross the board on all properties by 20% but eliminate the controversial wealth tax that is so much harder to collect. Property taxes are fair as they are paid in relation to the value of the property and are easy to collect. The state of Florida collects so much tax via property taxes a lot from out of state residents that it is then able not to charge its own taxes as NY and California and many other states do. And since we are going through exceptional times, it would even be possible to levy an additional tax of 2000 euros per year for all secondary residences. In addition to Spaniards, many foreigners would end up paying this additional charge. To provide a simplified sample calculation, 1 million secondary residences would translate into an extra income of 2 billion euros. The wealth tax, instead, would only generate an estimated income of 500 million euros.
-raise taxes on all cars with engines bigger than 2000cc or a certain amount of HP by 20%.
-raise taxes on tobacco and all liquor except wine and bear by 20%.
-liberalize opening hours of all shops in Spain, allow shop owners to decide when they open and close.
-allow the construction of one homes of up to 1000m2 per every 10 hectares or 100,000 square meters in the countryside of Spain. Right now no homes can be build in the countryside but one home every 10 hectares is an ultralow density and it may still create a lot of new jobs both in construction and in home maintenance. Spain has traditionally forced clustering of new homes not being able to enter the “estate home” market which is ecologically sound and creates a lot of employment. Moreover many foreigners do not like to buy clustered homes. Allow countryside hotels of no more than 15 rooms every 20 hectares of land.
-create a category of summer employment in Spain for jobs no longer than 90 days a year and people under 27 years old that is completely unregulated that would allow students to earn extra income in the summer without employers having to pay social charges or students having to report their income. It is important that jobs would last a maximum of 90 days in order to prevent abuse of the system. Also jobs like this can only be had in June, July and August and cater to Spanish largest industry, tourism.
-copy the tax resident non dom system of UK and make it applicable to all of those who do not have a Spanish nationality. This system is perfect for Spain because many want to retire or live in Spain and now do but illegally. The law is never enforced but I can see why many law abiding foreigners would not want to move permanently to Spain for fear of being taxed. Spain already has the Beckham law but a non dom tax resident system such as the one of the UK may make it easier for more foreigners of means to move here.
-implement stricter controls on corporate and individual tax evasion. It is well known that in Spain many people with jobs also collect unemployment insurance, and that many companies hire employees off the books. Especially these two sources of evasion should be stopped.
-legalize and tax the sale of soft drugs, thereby taking this business away from organized crime. A part of the resulting income could be used to combat addition to hard drugs.
-Spain has been too generous with its banks, who on the other hand have not been generous with their own clients. It’s time to completely restructure the rules and laws governing mortgage lending. The new system should be like the one in the USA, where borrowers who are unable to meet their mortgage payments should simply be able to get rid of their debt by giving up ownership of their house. If the bank loses money with the sale, it’s the bank’s problem, not the borrower’s. Government should save banks, but not the banks’ shareholders. Spanish banks engaged in irresponsible lending and as a consequence, millions of people are now trapped in their own homes, resulting in a high rate of labor immobility. People can’t afford to live anywhere else but in their own properties, thus they can’t move to the regions where the jobs are. Unemployment in Spain is therefore distributed very unevenly, the unemployment rate in the north being about half as high as that of the south. But many people simply can’t afford to move out of their own home due to their mortgages. Losing a house alone is already a tough loss, but losing the house and everything else on top is simply intolerable.
-tax energy progressively. What Spain and other Southern European countries need to do is to publicly announce a plan to progressively tax energy with a clear 10 year strategy. In order for the economy to adjust and become more energy efficient, the taxes on all forms of energy coming from fossil fuels like electricity, gas, gasoline, diesel, etc. should be increased gradually over a decade. The first measure should be to take advantage of the decreased oil price and fix the prices of gasoline and diesel at a certain level by introducing a flexible tax rate. As a result, consumers would always pay the same price of gasoline regardless of the oil price and the country could earn more taxes when oil prices go down. But on top of that, all fossil fuels should be subject to an annual tax increase of 10% over the next decade, so even if oil prices go to $30 per barrel consumers and businesses alike will know in advance exactly what energy will cost them and the government can get a great deal of its revenues from energy taxes. In addition, energy consumption will be greatly reduced. Consequently, energy consumption per unit of GDP will decrease and the country will be greener. People will automatically buy more energy-efficient light bulbs, cars, etc. As an early investor in Eolia and other alternative energy companies, I know that confusing pricing scenarios kill those kinds of projects. So this proposed measure of long-term price stability would be a great help for the entire alternative energy sector. If people know in advance how much more they will have to pay for energy in the future, they will start much earlier to demand more energy-efficient solutions. The result will be reduced energy consumption, a market pull that will accelerate development of energy-efficient products, and at the same time governments implementing this measure would benefit from the increasing spread between the crude oil price and the price paid by the end customer.
A debate is going on on this post in Google+
If I were Germany and the Northern European countries that do well with the euro, and do not have spreads against Germany, I would tell all the countries that need rescuing, particularly Italy and Spain and in a smaller proportion Greece and Portugal, that Europe will guarantee their sovereign debt but in exchange they have to cut spending where it hurts less.
One area that can easily endure spending cuts is military. Why should these countries buy any weapons for the next 5 years? Greece for example has an absurdly high military budget because of unreasonable fears of a potential war with Turkey. Other than the military, these countries have to cut government spending and increase tax collection in general.
The alternative is that Northern European countries tell Southern European countries that they are on their own. In that case, those countries would default, need to restart their own central banks and go back to their own currencies. For Northern Europe this would mean enormous losses for anyone who owns Southern European bonds, and assets. Northern Europe would also lose export markets and the overall ability to consider Europe its domestic market.
I still think that Northern Europe has a lot to lose from this happening and that a deal will be reached.
Let’s say at this point I give 80% probability to a deal that saves Europe and 20% that Europe falls apart.