Financial Mirror 2015 04 01

FinancialMirror Issue No. 1128 €1.00 April 1 - 7 , 2015

JEAN PISANI-FERRY

JEFFREY SACHS

Europe is facing a stage of unnecessary instability - PAGE

Why the Sustainable Development Goals matter - PAGE 20

9

“Let’s get the Brits and Germans back”

CYPRUS TOURISM CHIEF APPEALS FOR MORE FUNDS

Which are the worst S&P 500 stocks so far in 2015?

PAGE 14

- PAGES 10- 11

April 1 - 7, 2015

2 | OPINION | financialmirror.com

FinancialMirror

Do ‘essential services’ even exist?

Published every Wednesday by Financial Mirror Ltd.

EDITORIAL

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Judging from the inability of the present (supposedly pro-business) administration to tackle trade unions that go on strike in sectors considered as “essential services”, this government is giving out the worst signals to potential investors – either to those keen to pump money into the economy or even take up some of the to-be privatised enterprises.

Employers in the private sector, who have been struggling to rebuild their business on their own without any significant help from any person, organisation or bank, are now faced with increasing cases of strikes in public utilities and services that are essential to the recovery of the economy.

With cash-flow still at its lowest ebb and affordable credit just trickling into the economy, businesses are once again seeing their reserves being depleted.

But for economy to recover, we need to see stability, a factor that will not come out of favourable rating agency upgrades or a Troika pat on the back.

A sense of normalcy, stability and credibility of those in charge will only come when not every

idiot is allowed to go on strike, simply because they want to keep a number of privileges.

On the one hand, we had strikes in the ports over reasons that everyone is still confused about, while on the other hand, the trade unions at the electricity producer EAC threatened with rolling strikes if the government was to go ahead with the privatisation of the utility.

Once again, the administration buckled (due to parliamentary elections just 14 months away) and is now having a re-think if the EAC needs to be split up or even privatised. Why did this administration about-turn on its policies, based on which it was elected just over two years ago?

Surely, if there are other options, why are these only being discussed now?

As the employers federation OEV has rightly declared, the government should determine what are essential services (almost all sectors, actually) and how the right to strike should be regulated in these sectors, just as the previous administration hesitantly did when air traffic controllers went on strike in December 2012.

No trade union should stand in the way of progress.

And progress will only come through the privatisation of all semi-government enterprises, including the EAC.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

Telecom shake-up, growth at 3.7% The telecoms regulator is expected to announce radical changes to pricing tariffs as competitions heats up between Cyta and rival operators, while domestic demand is seen as the main reason that pushed GDP growth to 3.7% in 2004, according to the Financial Mirror issue 613, on March 23, 2005.

Telecom shake-up: The Telecoms Regulator is expected to announce new directives fixing the price range for retail packages that Cyta will be allowed to charge, as well as the inter-connectivity rates that

20 YEARS AGO

EU accession by 2000, transparency boost EU membership could come as early as the year 2000, according to an expert on the matter, while new regulations on the stock exchange will lead to transparency in the market and boost investments, according to the Cyprus Financial Mirror issue 105, on April 5, 1995.

EU membership: European affairs expert Phedon Nicolaides, also General Secretary of the Cyprus Shipping Council, said that the decision to fix the start of the Cyprus-EU accession talks six months

Cyta will charge other service providers, while it also came under fire for stalling on approving Cyta’s fixed and mobile rates in order to give areeba a bigger foothold in the market.

GDP growth: Real GDP growth in 2004 recovered to 3.7% from 1.9% in 2003 and above government estimates.

Private consumption, which accounts for two thirds of the economy, grew 6.1% having seen a meagre rise of 1.9% in 2003. Cystat data showed spending was concentrated on new cars which surged after the steep cuts in excise duties, and on furniture and household items.

CDB scandals: A parliamentary debate heard that

the Cyprus Development Bank has been rocked by multiple scandals involving deals made by its previous General Manager that resulted in CYP 20 mln in losses in 2003, as well as a dubious involvement in the shares of AremisSoft and a dispute with Bank of Piraeus.

Russia investments: Cyprus is among the top main foreign investors in Russia with Cypriot investment reaching USD 2 bln, while bilateral trade is rather moderate, said Ambassador Andrey Nesterenko.

Suphire fallout: Provident fund managers and investor groups were running for cover from the fallout of Suphire Securities that mismanaged CYP 11 mln from EAC staff fund assets, while other firms were quickly cutting their ties to the ill-reputed firm.

after the conclusion of the intergovernmental conference in the middle of 1996, drastically improved chances of membership within about five years.

Transparency in stocks: New regulations on the establishment of the official stock exchange aim for more disclosure and transparency which will boost investor confidence and attract more players in the market, said Yiannis Kypri, president of the Cyprus Association of Public Listed Companies (Sydek).

Regional hub: US Ambassador Richard Boucher said that the men and women who represent American products in Cyprus and the offshore companies have an important role to play in future

Cyprus-US economic relations and in the long-term development of the Cyprus economy. He was presenting the 3rd annual awards for excellence to local companies and American firms based on the island and said that after the new GATT trade tariffs agreement that the future lies in Cyprus’ potential role as a regional hub.

Cyta GSM: Cyta launched its CYTAGSM digital mobile phone system with subscribers now able to make or receive calls while travelling overseas to some countries. Annual subscription costs CYP 120 plus a fixed CYP 25 fee and the cost of local calls at 5.7c a minute from 7am to 8pm and 4.1c at night.

EAC plans underway: The EAC development plan until 2003 will cost CYP 785 mln and will include two new 37.5MW gas turbines at Moni and a new oil-fired power station to be built at Vassiliko with two 120MW units, raising output capacity to 720MW.

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April 1 - 7, 2015

financialmirror.com | CYPRUS | 3

BOCY losses revised up by €5 mln Any buyers for Uniastrum?

The Bank of Cyprus released its audited results for 2014 showing that its losses for the year were revised up by 5 mln euros to EUR 261 mln, with its Russian subsidiary Uniastrum, now appearing in its books as “discontinued operations” and headed for disposal.

The total loss of discontinued operations for the year amounted to EUR 303 mln, of which a loss of EUR 299 mln relates to the Russian operations, EUR36 mln to the Ukrainian operations disposed in the second quarter of 2014 and a profit of EUR36 mln from the Greek operations due to the reversal of a provision recognised initially in 2013, following a recent development in court procedures.

However, the bank has raised its provisions for impairment of customer loans in Russia by EUR 30 mln “due to further information which became available.”

Other figures remained generally unchanged, with the benchmark Common Equity Tier 1 capital (CET1) ratio at 14% at December 31, 2014, compared to 15.4% at

the end of the third quarter.

Gross loans and deposits stood at EUR 23.8 bln and EUR 13.2 bln, respectively, with the net loans to deposits ratio improving to 141% from 148% at September 30, 2014.

During the fourth quarter of 2014, deposits in Cyprus increased by EUR 71 mln, the first quarterly increase following the events of March 2013.

Total assets were reduced by 12% from EUR 30.3 at the end of 2013 to 26.8 bln at the end of 2014.

Emergency Liquidity Assistance (ELA) has been reduced to EUR 7.4 bln, compared to 9.6 bln at the end of 2013 and a high of 11.4 bln in April 2013, a month after the bailin decision and the forced merger with nowdefunct Laiki Popular. ECB funding was

reduced to EUR 880 mln on December 31, 2014 from 920 mln at September 30. As at March 31, 2015, ELA and ECB funding were further reduced to EUR 6.9 bln and EUR 800 mln, respectively.

Loans in arrears for more than 90 days decreased by 3% during the fourth quarter of 2014 and totalled EUR 12.65 bln at December 31, 2014, representing 53% of gross loans. The bank said its provision coverage ratio of 90+ DPD improved to 41% (compared to 38% at September 30, 2014), while taking into account tangible collateral at fair value, the 90+ DPD are fully covered.

Net interest income (NII) for the year was EUR 967 mln, while the net interest margin (NIM) was 3.94%. NII for the fourth quarter of 2014 declined to EUR 225 mln, compared to EUR 231 mln for the third quarter of 2014, mainly due to deleveraging. The NIM for the fourth quarter of 2014 was 3.81% compared to 3.82% for the third quarter of 2014.

Total income for the year was EUR 1.17 bln.

Total income for the fourth quarter of 2014 was EUR 281 mln, compared to EUR 263 mln for the third quarter of 2014.

Total expenses for the year were EUR 426 mln and the cost to income ratio was 36%. Total expenses for the fourth quarter of 2014 increased to EUR 114 mln (compared to EUR 103 mln for the third quarter of 2014), mainly due to advertising, regulatory and ECB Comprehensive Assessment related costs, listing costs and other advisory fees. The cost to income ratio for the fourth quarter of 2014 was 41% (compared to 39% in the third quarter of 2014).

Profit after tax excluding restructuring costs, discontinued operations and net gain on disposal of non-core assets for the year totalled EUR 31 mln, down from 42 mln in the preliminary results announced in February.

Loss after tax excluding restructuring costs, discontinued operations and net gain on disposal of non-core assets for the fourth quarter of 2014 totalled EUR 107 mln,

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compared to a profit of EUR 44 mln for the third quarter of 2014.

Restructuring costs for the year ended 31 December 2014 totalled EUR 36 mln, while the bank also recorded a net gain of EUR 47 mln from the disposal of non-core assets.

“The results of the fourth quarter were negatively affected by increased provisions and impairments in Russia, as well as the classification of the Russian operations as held for sale,” CEO John Hourican had said in a statement on February 25.

Hourican’s two main objectives had been to shrink the bank back to its core activities by selling off unprofitable assets and to reduce the bank’s high risk exposure to non-

performing loans, currently running at a national average of 50% of all loans.

In statements released to the media, the bank said it has deleveraged its balance sheet

by EUR3.5 bln, disposing of its Ukranian operations, its investment in the Romanian Banca Transilvania, its loans in Serbia, assets in Romania and the UK loan portfolio acquired from Laiki Bank.

“The bank is running a process to dispose of its operations in Russia,” the statement added, suggesting that Uniastrum, itself at the heart of a struggle by control by its former owners, will no longer burden the Group with a deterioration of its loanbook and deposits.

April 1 - 7, 2015

4 | CYPRUS | financialmirror.com

MPs push insolvencies vote to after Easter S&P raises outlook to ‘positive’ Standard and Poor’s (S&Ps) has revised the Cypriot economy’s outlook to ‘positive’ from ‘stable’, maintaining the economy’s “B+/B” rating based on a faster than expected reduction of the general government debt, supported by less adverse economic growth prospects than before.

The government welcomed the S&P decision with Deputy Government Spokesman Victor Papadopoulos saying on Saturday that “it is important for the outlook of the Cypriot economy to be rated as positive by the particularly strict rating agencies that are also important for the international markets.”

He said that “it is the duty of all of us not only to safeguard this positive outlook but also to strengthen it, collectively and responsibly.”

The rating agency estimates that following the EUR 10 bln economic adjustment programme concluded with the Troika of international lenders in March 2013, the Cypriot economy will bottom out in 2015 and then slowly strengthen, based on a resilient business services sector, a solid tourism sector, and gradually recovering private consumption.

However, S&P warns that “investment growth will remain negative, as the process of deleveraging by domestic banks continues.”

S&Ps estimates that the general government position was at close to balance in 2014 (-0.3% of GDP), excluding statistical accounting for the costs related to the recapitalisation of the cooperative banking sector, which all implies a substantial budgetary improvement.

“As a result of the government’s past and expected budget deficit reductions and a gradual recovery in economic growth over 2015-2017, we expect the general government balance will average about -0.7% of GDP over 2015-2017, compared with our previous projection of -2.4% of GDP,” the agency said.

Acknowledging that its projections are subject to uncertainty, due to various potential shocks to Cyprus’ small, open, services-based economy, the agency notes that the economy will begin growing again in 2015, for the first time since 2011.

S&P’s cites the depreciation of the Russian rouble and the expected contraction of the Russian economy, alongside the EU sanctions imposed on several large Russian commercial banks and companies, as the factors which may weigh on the prospects in key sectors, including tourism and business services.

“Still, despite an estimated 4% decline in nominal GDP growth last year, Cyprus’ budget deficit narrowed by nearly two percentage points of GDP to about 3% of GDP, to below the outcomes we expected for many eurozone economies that saw positive growth,” the agency added.

S&P said that financial stability continues to remain a key risk as the banks’ asset quality deterioration continue and non-performing loans (NPLs) amount to almost 55% of total assets in November 2014.

“Although the new legislation regarding foreclosures and insolvency procedures adopted this year could improve conditions, the outcome is still uncertain,” S&P said, adding that “we continue to consider that the economic adjustment program’s EUR 1 bln financial sector support buffer provides the government with leeway to address financial sector stability risk.”

The vote on the insolvencies bill, the final part of the framework to conclude the foreclosures legislation, has now been pushed to after the Easter break as the House Finance and Interior Committees said they did not have time to properly review the bills in order to put them to a vote at the plenary on Thursday.

An extraordinary session will be held on April 16.

The latest delay, after opposition parties first raised obstacles last September and continued to postpone the implementation of the parallel foreclosures bills, is now due to “grey points” over the constitutionality of the bills, as well the different interpretations of guarantors that parties want to absolve of any responsibility of the mortgage holder is

declared insolvent.

The House Finance and Interior Committees will meet on Easter Monday (April 13) to discuss the parties’ various amendments, with parliament expected to vote on the foreclosures package before the Eurogroup meeting on April 23.

With the ruling DISY’s 20 votes and former coalition partners DIKO’s eight, not enough to pass the bills, singleseat EVROKO leader Demetris Syllouris wants the foreclosures to determine that if the property is less than 80% of the initial value then guarantors should be exempted. If the value is more than 80%, then the guarantor should undertake to repay the balance without becoming insolvent.

Coop Central Bank sees profits at €41mln from €1.7bln loss The Cooperative Central Bank announced net profits of EUR41.2 mln for 2014, a major turnaround from the EUR1.7 bln losses at the end of 2013 that had prompted the government to rescue the bank with EUR1.5 bln and impose a radical reform programme.

The bank said its profits were achieved despite an increase in accumulated provisions of EUR2.97 bln and sustain a satisfactory level of liquidity, already seen after the ECB’s stress tests last October when it reported a capital surplus of EUR331 mln.

“Last year, we saw a satisfactory rate of confidence returning to our customers and members who have embraced this change with a significant inflow of new deposits,” said CCB Chairman Nicholas Hadjiyiannis.

Income from interest dropped from EUR411.7 mln in 2013 to EUR378.4 mln last year, while net revenues rose from EUR377.8 mln to EUR392.3 mln. Thus, operating profits were 10.2% higher at EUR192 mln from EUR174.3 mln in 2013, while the cost to income ratio was lowered to 37.4% from 40.6% the year before after cost-cutting,

reduction of the franchise network and merger of branches.

The bank’s balance sheet stood at EUR13.94 bln, including own funds of EUR1.25 bln, boosting the capital adequacy ratio to 13.5%, safely beyond the ECB’s minimum requirement of 8%.

The bank’s loanbook was reduced from EUR10.8 bln to EUR10.1 bln as part of a deleveraging process, with nonperforming loans outstanding for more than 90 days at EUR6.7 bln or 51.1%, while the total of all NPLs was at 55.8%.

Deposits were reduced by just over a billion euros to EUR12.4 bln from EUR13.5 bln at the end of 2013, but the bank said that after the ECB stress test results, new deposits reached about EUR500mln. The CCB said that the ratio of loans to deposits was at “a very healthy 81.6%” which allows it to proceed with further low-cost lending.

After the government rescue, the bank was nationalised and merged all 93 Cooperative Credit Societies into 18 SPIs with 292 branches and reduced the workforce to 2,703.

Jobless rate edges up to 16.1%, Q3-Q4 unchanged The rate of unemployment for the whole of last year averaged at 16.1%, marginally up from 15.9% for 2013, while in the fourth quarter it was 16%, unchanged from Q3, and up from 15.4% in Q2, according to the statistical service Cystat.

The Labour Force Survey for the fourth quarter of 2014 showed that the number of employed persons reached 368,772 (186,871 men and 181,901 women), up from 366,307 in Q3, and the number of unemployed was 70,267 (37,941 men and 32,326 women), up from 69,895

in Q3.

Unemployment among men was still higher at 16.9% (Q3: 16.8%) than for women at 15.1% (Q3: 15.2%).

Also the unemployment rate for young persons aged 15-24 was marginally up at 33.7% from 33.4% in Q3, but lower than the corresponding quarter of 2013 (39.4%).

The employment rate for persons aged 20-64 was 68.4% (males 71.9% and females 65.2%) recording an increase from the previous quarter of 2014 (67.9%) and the corresponding quarter of 2013 (67.0%).

Petroleum sales fall 4% in February, as pump prices rise Sales of petroleum products fell by 3.9% in February from the previous month, according to the statistical service Cyprus, with the drop in almost all categories due to a rise in retail prices at petrol stations.

Cystat recorded a decline in the provisions of aviation kerosene and in the sales of heavy and light fuel oil, liquefied petroleum gas (LPG), motor gasoline (petrol), kerosene and gasoil (diesel).

An increase was recorded in the sales of low sulphur gasoil (diesel) and in the provisions of gasoil (diesel) for marine use. The total stocks of petroleum products at the end of the month recorded a monthly increase of 0.8%.

During the two-month period of January-February, the total sales of petroleum products rose 7.4% from the same year-earlier period.

Emporiki and Alpha merged The merger of Emporiki Bank Cyprus Ltd and Alpha Bank Cyprus Ltd, as well as the transition of the Emporiki Bank Cyprus platform into the Alpha Bank Cyprus system was concluded over the weekend, the two banks said in an announcement. As of Monday, March 30, all Emporiki customers in Cyprus will be served by the Alpha Bank Cyprus systems, ATMs and retail points, while online services have transitioned to the Alpha Express Banking platform www.alphabank.com.cy.

April 1 - 7, 2015

financialmirror.com | CYPRUS | 5

EBRD to pump €200 mln in financial, energy sectors “Small glimmer of economic hope is emerging”

The European Bank for Construction and Development, the EU’s development bank, plans to pump about 200 mln euros into the Cyprus financial and energy sectors in 2015, as part of the 600 mln programme until the end of the decade.

Visiting EBRD Vice President Phil Bennett said on Monday after a meeting with President Nicos Anastasiades that investments to date include 107.5 mln injected into the Bank of Cyprus last September as part of a 1 bln capital raising programme and that EBRD plans to buy BOCY bonds as well.

Bennett added that the review of private sector projects is in a final stage with a focus on investments in the financial sector, energy, privatisations and providing finance to projects of individual companies.

Anastasiades said that the EBRD’s role is crucial as its investments also help to reinstate confidence in the Cyprus economy, sending out positive signals to the international markets and foreign investors.

“The EBRD’s experience and know-how in areas where there is a vacuum in financing, such as the restructuring of banks and the support to small to medium sized enterprises (SMEs), significantly contributes to the recovery of economies where the bank is present and active,” he said.

Also present at the meeting were Finance Minister and EBRD Governor Haris Georghiades and Under Secretary to the President in charge of public sector reform, Charalmbos

Petrides. Bennett was accompanied by the EBRD’s Resident Director Libor Krkoska.

The bank had said when it opened its resident office in Nicosia last December that the goal is to support the recovery of the country’s economy which is suffering from a protracted recession following a deep financial crisis.

Cyprus became a recipient country for EBRD investment following a decision by the bank’s shareholders in May 2014.

Its engagement on the island is temporary and envisaged to last until 2020 by when the bank expects to invest at least 100 mln euros per year in the country.

Bennett’s schedule also included meetings with the business community and representatives of civil society, as well as Privatisations Commissionair Constantinos Herodotou.

In an article published in February, Krkoska suggested “a small glimmer of economic hope is emerging in Cyprus.”

He said that “Cyprus is defying the broader trend. Now we see a rebound - a modest 0.7% rise - but a rebound all the same.”

Libor Krkoska had pointed out that Cyprus is a small and flexible economy “and its agile response to its economic problems has led to this better-thanexpected performance.”

He said the key to the successful turnaround has been a determination on the part of the Cypriot authorities to drive through necessary reforms.

Meanwhile in the banking sector the biggest challenge remains reducing the debilitating level of non-performing loans that are close to 50% of total loans.

“The EBRD is also prepared to support the work by banks who are already beefing up their loan recovery departments.

We look forward to seeing NPLs dropping back to the average level for the eurozone.”

April 1 - 7, 2015

6 | COMMENT | financialmirror.com

Should we take down Georgiadis?

What does Cyprus really owe to Greece? µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

Those among us who are not supporters of any political party and for those who have minimal education in economics, should probably be wondering if Cyprus suffers from a syndrome of self-destruction.

As if the problem created by the last four Governors of the Central Bank, as well as the scandals at the various semigovernment and other organisations was not enough, in addition to mayors and other public officials ending up in prison, we seem to have created other problems as well.

Some seem to have set out against our admittedly remarkable young Finance Minister, Haris Georgiadis, who tirelessly tries to correct the ills of our distressed economy.

So, instead of praising him and his efforts, political opponents have set about to get rid of him because it suits them, whether they are political opponents, trade unionists or otherwise. He is the only one who repeatedly warns us about the incongruities, he is then blamed, but most MPs who have turned his critics have yet to apologise for the “heroic NO” they told the Eurogroup in the first round of the pre-bailout talks, as a result of which we got a second, worse bailout plan and the destruction that ensued. These are the same political leaders who declared that the only way towards recovery is to observe the Memorandum with the Troika and then forget everything and become opponents of memorandum and so much more. And so what, one political leader said, if we lose the 500 mln euros from the ECB, not caring about the contradictory picture we give out abroad, while on the other we are all trying desperately to attract foreign investors.

I support MP Nicos Tornaritis’ proposal for a horizontal vote in order to elect the best from each political faction, instead of vertically elected by political party list regardless of quality, while God forbid if political leaders are elected based on the true number of votes they have garnered. So far, a party leader who may not enjoy wide support, will remain there, as a shepherd to guide the political “sheep” (of MPs), while there may be better candidates within the same faction that are worth more and are therefore obliged to step down.

Even though I may disagree with some of the views of EuroMP Eleni Theocharous (DISY), she has a valid point in that whoever enjoys the majority votes in the elections, should also take the chair of that party. There is of course the solution that a party could have a Chairman (regardless of elections) and somebody else would be the parliamentary group leader, but is this possible? Hardly, because some people will lose the chair they seem to be stuck to.

Getting back to Mr. Georgiadis, AKEL reported us to Greece because our minister did not support Greece’s demands regarding the latest antics in the economy. And what did the minister say? He said that he did not comprehend what Greece really wanted and that Athens had presented the Eurogroup with generalities, without concrete and detailed proposals and the Eurogroup rightly has demanded to be told of the details of the plan, which it still has not received. Any budget surplus that was created by the previous New Democracy government has already been spent by newly-arrived communist-socialists of Mr. Tsipras, while the overall conduct of the Government of Greece is being termed as that of a “henchman” in the European Union. The EU subsequently shut the door to these antics and we hope that the lack of professionalism in dealing with the economy will become a lesson, while Chancellor Merkel has told PM Tsipras that no one can be on good speaking terms with the Greek Minister of Finance.

Without second thought, the new government of Greece increased the minimum wage to 750 euros a month and is demanding grants and loans from other European states where the minimum income is less than 600 a month. With what logic?

A hand of friendship has always been forthcoming from Cyprus, expecting nothing in return. It’s about time Greece got serious over how to deal with its crisis and left Cyprus out of it.

So, we do not support Greece’s economic measures (some measures are ridiculous such as spies to catch tax evaders, including tourists, which has become a joke on comedy talk shows abroad). And yet, do we owe anything to Greece?

Even if we set aside, for a moment, the support of the then junta to EOKA B that led to the treacherous invasion, what else is there?

- Former Finance Minister Vasos Shiarlis was asked if Greece supported us during the Eurogroup discussions on the economy that resulted in the haircut of deposits in March 2013. The answer was that only the Italian Finance Minister had supported us, while the Greek finance minister kept silent.

- Cypriot branches were sold to Greek banks with billions in profits for them and billions in losses for us.

- In the form of blackmail, the then Greek government “asked” the Bank of Cyprus to buy bonds (which were being sold) in order to support Greece, as it was suggested that Cypriot banks could not operate there without supporting the Greek economy.

- We asked on several occasions from the Greek parliament to provide Cyprus with the minutes of the hearings surrounding the invasion in 1974, without any response.

- Despite our financial troubles, the spendthrift Defense Minister of Greece asked Cyprus to buy 5-6 warplanes (which suggests the quality of the man), while we have been unable to make use of a free warship offered to us by Qatar.

- Even the President of the Greek Parliament visited us last week and tried to chastise Haris Georgiadis, and this was the same person who offered her support to the extremist Golden Dawn in Parliament, until she was told off by the Prime Minister. While the same group of henchmen beat up MP and veteran journalist Kanelli on live TV, with the anchorman Papadakis trying to clam down the situation from a safe distance.

And there are so many other examples that makes us think, what do we really owe to Greece?

Cyprus must immediately distance itself from the Greek economy, as this is a country that has failed in endless cases due to a lack of vision and inability to implement government policies. Unfortunately, Europe continues to link the Cyprus economy to that of Greece and Haris Georgiadis, quite rightly, has tried to cut our dependence from Greece and introduce a limited economic relationship.

Many Cypriot enterprises that dared to expand to Greece have burned their fingers, ranging from hotels (with most now sold by their Cypriot owners) to commercial enterprises. And to top it all off, the administration in Athens has imposed a 26% tax on all Greek companies based in Cyprus. Thus, on the one hand Prime Minister Tsipras places in the same basket with other jurisdictions, ignoring the negative impact this would have on the Cypriot economy, but on the other he demands the support of our Finance Minister. Obviously, we cannot support any move that would be to the detriment of the economy of Cyprus and those heroes who said ‘No’ to the first Eurogroup proposal, cannot dare tell us that we are wrong.

If we want real progress to return to the economy Cyprus and to attract investments, the stance of our Minister was the wisest, evident from the recent upgrade by rating agencies.

We should all urge our Finance Minister to keep on with his policies, undeterred by sentimentalism, because by doing so we are looking after the interest of the nearly 60,000 unemployed citizens and the future of the economy of Cyprus. He should ignore the nonsense thrown about by the local politicians (the ones who received kickbacks from Focus), even if President Anastasiadis seems to be maintaining a neutral stance, perhaps rightly so.

You are not alone, Mr Minister. www.aloizou.com.cy , ala-HQ@aloizou.com.cy

April 1 - 7, 2015

financialmirror.com | COMMENT | 7

Last chance for Ukraine and Europe accelerating. The financial collapse of which I had been warning for months occurred in February, when the hryvnia’s value plummeted 50% in a few days, and the National Bank of Ukraine had to inject large amounts of money to rescue the banking system. The climax was reached on February 25, when the central bank introduced import controls and raised interest rates to 30%.

Since then, President Petro Poroshenko’s jawboning has brought the exchange rate back close to the level on which Ukraine’s 2015 budget was based. But the improvement is extremely precarious.

This temporary collapse has shaken public confidence and endangered the balance sheets of Ukrainian banks and companies that have hard-currency debts. It has also undermined the calculations on which Ukraine’s programmes with the International Monetary Fund are based. The IMF’s Extended Fund Facility became insufficient even before it was approved.

But EU member states, facing their own fiscal constraints, have shown no willingness to consider additional bilateral aid. So Ukraine continues to teeter on the edge of the abyss.

At the same time, a radical reform program within Ukraine is gaining momentum, and slowly becoming visible to both the Ukrainian public and the European authorities. There is a stark contrast between the deteriorating external situation and the continuing progress in internal reforms. This gives the situation in Kyiv an air of unreality.

One plausible scenario is that Putin achieves his optimal objective and Ukraine’s resistance crumbles. Europe would be flooded with refugees – two million seems to be a realistic estimate. Many people expect that this would mark the beginning of Cold

War II. The likelier outcome is that a victorious Putin would have many friends in Europe, and that the sanctions on Russia would be allowed to lapse.

That is the worst possible outcome for Europe, which would become even more divided, turning into a battleground for influence between Putin’s Russia and the United States. The EU would cease to be a functioning political force in the world (especially if Greece also left the eurozone).

A more likely scenario is that Europe muddles through by drip-feeding Ukraine.

Ukraine does not collapse, but the oligarchs reassert themselves and the new Ukraine begins to resemble the old Ukraine.

Putin would find this almost as satisfactory as a complete collapse. But his

George Soros is ready to invest $1 bln in Ukraine if Western countries help private investment there, the billionaire told Austria’s Der Standard.

Soros has previously urged the West to increase aid to Ukraine, outlining steps towards a $50 bln financing package that he said should be viewed as a bulwark against increasingly aggressive Russia.

“The West can help Ukraine by increasing attractiveness for investors. A political risk insurance is necessary. This could take the form of mezzanine financing at EU interest rates - very close

to zero,” he said in an interview published on Monday.

“I stand ready. There are concrete investment ideas, for example in agriculture and infrastructure projects. I would put in $1 bln. This must generate a profit. My foundation would benefit from this ... Private engagement needs strong political leadership.”

“Under those conditions, Soros said he would review investments in the energy, agriculture and information technology sectors.”

(Source: EurActiv.com)

By George Soros

The European Union stands at a crossroads. The shape it takes five years from now will be decided in the coming 3-5 months.

Year after year, the EU has successfully muddled through its difficulties. But now it has to deal with two sources of existential crisis: Greece and Ukraine. That may prove too much.

Greece’s long-festering crisis has been mishandled by all parties from the outset.

Emotions now are running so high that muddling through is the only constructive alternative.

But Ukraine is different. It is a black-andwhite case. Vladimir Putin’s Russia is the aggressor, and Ukraine, in defending itself, is defending the values and principles on which the EU was built.

Yet Europe treats Ukraine like another Greece. That is the wrong approach, and it is producing the wrong results. Putin is gaining ground in Ukraine, and Europe is so preoccupied with Greece that it hardly pays any attention.

Putin’s preferred outcome in Ukraine is to engineer a financial and political collapse that destabilises the country, and for which he can disclaim responsibility, rather than a military victory that leaves him in possession of – and responsible for – part of Ukraine. He has shown this by twice converting a military victory into a ceasefire.

The deterioration in Ukraine’s position between the two ceasefire agreements – Minsk I, negotiated last September, and Minsk II, completed in February – shows the extent of Putin’s success. But that success is temporary, and Ukraine is too valuable an ally for the EU to abandon.

There is something fundamentally wrong with EU policy. How else could Putin’s Russia have outmaneuvered Ukraine’s allies, which used to lead the free world?

The trouble is that Europe has been dripfeeding Ukraine, just as it has Greece. As a result, Ukraine barely survives, while Putin has the first-mover advantage. He can choose between hybrid war and hybrid peace, and Ukraine and its allies are struggling to respond.

The deterioration of Ukraine’s situation is

victory would be less secure, as it would lead to a second Cold War that Russia would lose, just as the Soviet Union lost the first. Putin’s Russia needs oil at $100 a barrel and will start running out of currency reserves in 2-3 years.

The latest chapter in what I call the “Tragedy of the European Union” is that the EU will lose the new Ukraine. The principles that Ukraine is defending – the very principles on which the EU is based – will be abandoned, and the EU will have to spend a lot more money on defending itself than it would need to spend helping the new Ukraine succeed.

There is also a more hopeful scenario. The new Ukraine is still alive and determined to defend itself. Though Ukraine, on its own, is no match for Russia’s military might, its allies could decide to do “whatever it takes” to help, short of becoming involved in a direct military confrontation with Russia or violating the Minsk agreement. Doing so would not only help Ukraine; it would also help the EU to recapture the values and principles that it seems to have lost. Needless to say, this is the scenario I advocate.

George Soros is Chairman of Soros Fund Management and of the Open Society Foundations. © Project Syndicate, 2015. www.project-syndicate.org

Juncker cancels Kyiv visit, EU-Ukraine summit to be held instead European Commission President Jean-Claude Juncker cancelled his visit to Ukraine on Monday due to health reasons. Instead, an EU-Ukraine summit will take place on April 27 in Kyiv, with the participation of EU heads of state and government, according to EurActiv.com.

Juncker, accompanied by EU foreign policy chief Federica Mogherini, was expected in Kyiv on what was going to be his first bilateral visit abroad since he took office last November.

However, the website of Ukrainian President Petro Poroshenko published a press release according to which Juncker and Poroshenko had spoken by phone, and that the Commission President had said he had to postpone his visit “due to unforeseen health conditions”.

Juncker had undergone a minor operation to treat kidney stones, according to his spokesman.

“The parties have agreed to coordinate (a) new date of the visit via diplomatic channels, and confirmed that the Ukraine-EU summit would be held on April 27,” the press release said.

The news about the summit, expected to take place in Kyiv, comes amid a shaky ceasefire between Kyiv forces and pro-Russian separatists in the country’s east, which came into force on February 15.

The holding of annual summits was set down in the association agreement signed by the European Union and Kyiv’s pro-western government after it came to power in June 2014.

That followed the fall of the pro-Russian president Viktor Yanukovych in February 2014, who left the country following three months of bloody protests sparked by his decision to suspend preparations for the signing of the EU agreement.

The April summit is expected to address Poroshenko’s request for European peacekeepers to help monitor the truce between Kyiv and pro-Russian rebels, aimed at ending nearly a year of fighting.

The European Parliament on Wednesday formally approved new economic aid worth EUR 1.8 bln for Ukraine, two-thirds of which could be disbursed by the end of the

2015. The EU cash was offered as part of an International Monetary Fund programme aimed at mobilising up to $40 bln. The IMF has already approved a $17.5 bln loan as part of the package in exchange for the government’s successful implementation of political and economic reforms.

This week, two top officials were arrested for corruption on live TV at a government meeting. Also, powerful oligarch Igor Kolomoisky, widely credited for helping halt the rebel advance, lost his job as a regional governor following a row over his role at two state oil companies.

Armed men believed to be working on Kolomoisky’s behalf temporarily took over the Kyiv headquarters of both firms, forcing Poroshenko to sack the billionaire from his political role in the key central region of Dnipropetrovsk.

President Poroshenko told Ukraine’s Inter TV on Saturday that he was in the process of weakening the oligarchs’ grip on the country, adding that he “would not allow a repetition of the chaos in Kyiv in any city”.

April 1 - 7, 2015

8 | COMMENT | financialmirror.com

From Dubai to Philadelphia…

Cyprus Food is “In” Pitsillides should be spread far and wide. Namely, that a national cuisine has to move on. And Kanela’s cuisine itself is doing that: the dishes Giles Coren writes about in 2015 are noticeably different from those reviewed by Matthew Stowell in 2010.

I can only repeat what our review concluded with then: “Philadelphians are extremely lucky to be hosting Mr. Pitsillides and his culinary talents. I should like to launch a campaign to lure him back to Limassol”. But maybe we are too devoted to the tahinilounza-halloumi-kebab syndrome for him to flourish here?

Many readers will remember John Wood from his days as general manager of Le Meridien.

That was when he and I crossed paths quite frequently: wine tastings, the annual Beaujolais Nouveau bash (I thought Le Meridien’s was one of the best on the island), gala dinners, exhibitions, conferences…. Oh, and lots more. Now he is one of my regular correspondents, sending me newsy snippets and ideas. He reports, proudly, of his daughter Samantha, resident in Dubai, who created and runs a very good food website. It’s lively, creative and full of info. Try it at www.foodiva.net

Patrick Skinner

Enquire within…

Following in our footsteps Where Cyprus Gourmet leads, others follow, it seems. In the September 2011 issue of our sadly short-lived Cyprus Gourmet Magazine, Matthew Stowell wrote about a thriving – and exciting – Cypriot restaurant in Philadelphia, U.S.A. called “Kanella”.

Now, the BBC America website has done a rave write-up, by Giles Coren. Again, I have to thank John Wood for drawing this to my attention. It’s worth looking it up, because the owner, Konstantinos Pitsillides, is a chef to be reckoned with. I quote Giles Coren: “For here I had a traditional Easter sheep’s head soup, in which a traditional avgolemono contained also spoon-size chunks of tongue, cheek and eyebrow, awesomely authentic and very faintly daunting. Great regional cooking is often a little bit scary, and I welcome it.

Then there were two grilled octopus tentacles on huge borlotti beans, a great fattoush salad, home made merguez sausages wrapped in filo pastry, three fresh, plump “manki” dumplings and the best fried pork chop I have ever had. Simple, perfect”.

All too often a nation’s food, when transplanted into another country, rests in a time-warp, in which the food stays exactly the same, year after year. I remember one such Cypriot restaurant, close to my old London office, which served exactly the same variations on the kebab-mezze theme every day for more than 20 years, until the owners sold up and retired.

It was good, by the way, every day!

Here in Cyprus, there are so many “restaurateurs”, who, if they could no longer open jars of tahini, and packets of lounza, halloumi and pitta bread, or if their barbecue broke down, would be hard put to actually cook anything. For this reason the gospel of Philadelphia’s Mr.

Q: “Patrick, how can I liven up a shrimp cocktail?”

A: Simple! For each serving: 1. In a small bowl put 1 tablespoonful of mayonnaise.

2. Very finely chop a scant teaspoon of capers, 2 pitted black olives, a tiny sprig of parsley and a few chives or a piece of the green part of a salad onion.

3. Combine the mayo and the capers etc., and mix well, then put it into a large red wine glass.

4. Take two wooden kebab sticks and impale three cooked king prawns on each.

5. Insert the loaded kebab stick into the glass, add a sprig of rosemary to the top and a few bits of chopped black olive to the top of the mayo mix.

6. Serve with a glass of chilled dry white wine. Since my photo was taken by William Fèvre, producers of very fine Grand Cru Chablis, preferably it should be that! Available for shoppers (personal and on-line) at 31 euros, from Oenoforos, Limassol.

Send me your news! To be published in Cyprus Gourmet, here and on-line. Email: editor@eastward-ho.com

Spectus ‘En Primeur’ of 2014 M. Chapoutier wine futures Ever thought of diversifying your investment portfolio? Spectus has started this year’s campaign of pre-selling 2014 wines in a process also known as “Wine Futures” or “En Primeur” in French, with wines by M. Chapoutier from the French region of Rhone valley.

Prices range from 29 euros (“Les Varonniers”, Red, Crozes Ermitage) to 159 (“Le Pavillon”, Red, Ermitage) and Spectus will only accept orders for a minimum six bottles.

“Most of these wines are produced in extremely small quantities (some less than 3,500 bottles per wine) in the finest and most famous parcel vineyards of the house known as “Selection Parcellaire” and represent Michel’s Chapoutier ultimate expression and art of wine making,” explains George Hadjikyriacos, Managing Director of

Spectus in Limassol and Nicosia.

“The best wine critics of the world, including Robert Parker, classify these wines among the best in the world while emphasising the fact that these wines represent some of the best value wines money can buy,” he adds.

The investment opportunity is based on the fact that 2014 is widely considered as an exceptional vintage, producing both excellent red and exceptional white wines and that buyers in Cyprus are on equal footing with other markets, such as China, that is taking the wine world by a storm.

Only trouble is, these ‘assets’ can only remain liquid for a while. It is a shame not to consume them!

Last date for orders is April 30. For info call Spectus on 25370027 or visit www.spectus.com.cy .

April 1 - 7, 2015

financialmirror.com | COMMENT | 9

Unnecessary instability

By Jean Pisani-Ferry

In normal life, technicalities are better left to technicians.

A car owner does not need – or usually want – to bother to find out what exactly goes on under the hood. But when the car breaks down, he or she often has no choice.

What is true of cars applies to the economy: arcane issues are for specialists. Yet in recent years, topics about which most people had never heard or cared – for example, securitisation, credit default swaps, and the European payment system known as Target 2 – have imposed themselves on public debate, forcing ordinary people to grapple with their intricacies.

The same has started to happen with the notion of “potential output growth.” Originally a concept created by economists for economists, its use for determining when, and by how much, a public deficit must be corrected is becoming a matter for wider discussion. Indeed, its unreliability is seriously weakening the EU’s fiscal pact – which makes it necessary to open the hood and look inside.

The aim of the concept of potential – as opposed to actual – GDP is to take into account that, like an engine, an economy often operates below or above potential. In a demand-driven recession, actual output falls below potential, which results in a rise in unemployment. Similarly, a creditfueled construction boom drives output above potential, resulting in inflation.

The gap between actual and potential GDP is thus a gauge of an economy’s spare capacity. The distinction is also useful for policy purposes: weak potential growth cannot be addressed by demand-side initiatives; supply-side measures are needed.

But potential GDP can be only estimated, not observed.

Estimates are based on the amount of labor and capital available for production and an assessment of their joint productivity. And, because estimates differ, depending on the data and methods used, the concept is clear whereas its value is imprecise.

Moreover, the global financial crisis has created new puzzles. GDP in nearly all advanced economies is currently far below pre-crisis projections, yet few expect the gap ever to be bridged. Policymakers struggle to get their assessment right. Some wonder what is left of the notion of potential

output.

The European Union has an additional problem: in response to the sovereign crisis, most of its members agreed in 2011 to a “fiscal compact” requiring them to keep their structural budget deficit – the one they would record were output equal to potential – below 0.5% of GDP. Failure to converge on this target may open the door to financial penalties.

The virtue of such a framework is to take into account the impact of temporarily weaker output on fiscal outcomes.

Thus, a deficit is acceptable when it results from abnormally low tax revenues, but not when revenues are at their normal level.

Indeed, a major flaw in the initial European Stability and Growth Pact was that it did not include such corrections (I was among those advocating its reform in a 2003 report to the president of the European Commission). The 2011 treaty actually built on a series of previous reforms that put increasing emphasis on potential-output-based assessments of the fiscal situation.

The problem is that an unobservable and imprecise variable – whose estimates are too inexact and volatile to provide more than a rough roadmap for a country’s journey toward fiscal rectitude – has become part of an international treaty and the national rules (sometimes of constitutional status) through which it is implemented.

Estimates of short-term or current potential output are also constantly reworked, implying continuous change in the assessment of the underlying fiscal situation. For example, the European Commission’s projection of the Netherlands’ potential growth for 2013 was 0.9% in spring 2012, when the government started preparing its budget. By that autumn,

when a real-time assessment of fiscal performance was carried out, it had been revised sharply downward, by 0.2%.

For France, the estimate fell from 1.2% to 0.9%, and for Italy it went from -0.1% to -0.4%. The estimate of Spain’s potential growth rate fell from -1.2% to -1.4%, but the Commission later changed its mind and now says it was -0.7%. These are not exceptions.

For actual GDP, such frequent and large forecast revisions are inevitable. Potential GDP, however, is supposed to be more stable, as it does not depend on demand-side developments.

True, there are reasons to reassess a country’s potential growth in line with new information on labor-market conditions, investment, and productivity. But relentless attempts at accuracy easily result in noise.

Furthermore, instability confuses the policymaking process. Even a downward revision by 0.2% of GDP is meaningful: it implies a deterioration of the structural deficit by about 0.1% of GDP – not a trivial number in a fiscally constrained environment.

Members of parliament – who are not technicians – are understandably disturbed when they are asked to pass a revised budget in response to an updated estimate. Not knowing the whys and wherefores, they end up perceiving such revisions as a source of artificial instability.

The purpose of the European fiscal framework is to lengthen the time horizon of policy and to make decisionmakers more aware of the debt-sustainability challenges that they face. This requires consistency. Yet volatility in the assessment of potential growth prevents politicians from “owning” the already abstruse structural deficit and causes volatility in the policies based on this assessment, paradoxically resulting in a shortening of decision-makers’ time horizon. The focus of policy discussions should not be the latest potential GDP revision, but whether a country is on track to ensure public finance sustainability.

Too often, the European fiscal pact is perceived by national policymakers as an external constraint, not as a framework conducive to better decisions. A greater degree of stability in the assessment of an economy’s potential would strengthen decision-makers’ awareness and appreciation of longer-term challenges, thereby putting policymaking on a sounder footing.

Jean Pisani-Ferry is a professor at the Hertie School of Governance in Berlin, and currently serves as the French government’s Commissioner-General for Policy Planning. © Project Syndicate, 2015. www.project-syndicate.org

April 1 - 7, 2015

10 | TOURISM | financialmirror.com

“Let’s get the Brits and Germans CTO chief appeals for more funds as annual budget slashed to half from 2009

Cyprus should return to its traditional markets of Germany and the United Kingdom, without ignoring new arrivals from Russia in recent years and the rise in the number of new tourists from other ‘emerging’ markets, the island’s tourism board chairman Angelos Loizou said on Monday.

During his first press briefing after a tumultuous 15 months at the helm of what is probably the biggest contributor to the economy, the Cyprus Tourism Organisation board Chairman said that we need to rediscover the tourist brand, yet remain focused on the quality of holidaymakers who reach the island.

“Cyprus has the second highest number of tourist arrivals per capita in the EU, after Austria and the first (at 7.8%) of the employment of the labour force in the hospitality industry.”

“We are also the biggest contributor to

Board Chairman Angelos Loizou (second from left) said the CTO must become more flexible and its staff efficient the economy, per capita, with tourism accounting for 11.4% of GDP or around EUR 2 bln in annual revenues,” Loizou said, adding that Cyprus attracts higher-spending tourists than other destinations.

“Why, then, are our arrival numbers stuck at present levels, and even retreating in the past years,” he asked.

Flanked by the CTO’s new Deputy Director Annita Demetriades, after her

predecessor left unceremoniously due to diverse differences in management and other issue, Loizou said that apart from looking and planning ahead, the CTO itself is also undergoing changes of its own, in order to become more flexible.

“We need to put the right people in the right place,” he said, adding that the initial restructuring plan did not go ahead as expected, but is being implemented now as

part of the government’s wider public sector reform.

Appealing to the state to increase its budget, that has been slashed from EUR 60.5 mln five years ago to the present 23.5 mln, Loizou said that the CTO and its network of staff and overseas contributors, such as tourist offers and diplomats, need to focus on niche sectors, such as themed holidays, religious and medical tourism, sports and

April 1 - 7, 2015

financialmirror.com | TOURISM | 11

back to Cyprus” even oenogastronomic attractions.

However, as with fellow board members Costas Koumis and Xenia Loizidou, the Chairman was confident the sector will recover and will not feel the impact so much from the demise of the rouble and the Russian economy.

Acknowleding that the Russian market had recently risen to command a 25% market share of all arrivals, Koumis said that Russian holidaymakers to the rest of Europe had fallen by 50% due to the crisis in Ukraine and the economy, but also due to the collapse of smaller tour operators.

“But in the case of Cyprus, this fall has been overturned and we have a 4.5% increase (to 640,000) from 2013 figures.”

Loizou also spoke of a new CTO, a new effective organisation which will become more modern and flexible by reducing bureaucracy, simplification of procedures, modernisation of the legislative framework, exemplary cooperation between board and staff, and implementing of good governance.

He stressed that there will be “transparent, impartial and full legitimacy procedures and full independence.”

The new CTO, he said, will have excellent cooperation with the Ministry of Commerce, the Ministry of Finance, the Auditor General and the Treasury for the procedures to be followed. Decisions on contracts will be taken by the Tenders Committee and the Internal Audit Service.

“We are closely monitoring the rouble because that is what will probably determine the outcome, which seems to have stabilised.

The messages we are receiving is that there will be some reductions from tour operators, but this seems to be at a level that we can handle”, he said.

The gaps from the reduction numbers from the Russian market will be be replaced from the U.K., Israel, Germany, Poland, France, the Czech Republic, central Europe, Scandinavia and Arab countries.

Referring to the German market, Loizou said he was confident that with the adition of

Per capita revnue among ETC countries - excluding Luxembourg

flights operated by Germania and Germanwings, the numbers will be good.

There is also interest from France, he added, due to events in countries such as Tunisia, Morocco, Egypt, with the French looking to Cyprus as a safe destination.

The most encouraging, he said, is that although Cyprus depended on some countries, this is changing and other countries are put on the spotlight such as Israel, Poland and the Arab countries.

Based on the results of the Passengers Survey, arrivals in February totalled 50,709, compared with 45,227 in February 2014, while January 2015 was also up 2.7%, yearon-year.

Tourist arrivals have been on an upward trend since last December after a drop in September, October and November, suggesting that there is a huge market for winter tourism.

April 1 - 7, 2015

12 | PROPERTY | financialmirror.com

Cordea Savills acquires SEB Fund Savills has acquired SEB Asset Management from its Swedish parent SEB for 21.5 mln euros, and will merge the company with its investment subsidiary Cordea Savills.

The merger will create a real estate asset manager with approximately 17 bln euros under management.

Thomas Gütle, Managing Director of Cordea Savills, intends to focus on and expand the institutional sector in the wake of the acquisition, the German press reported.

The merged company has approximately 11 bln euros under management in this segment, economies of scale being one of the reasons he quoted for the takeover. In the context of the sector’s ongoing consolidation, he said that property service providers without a certain size, regional reach and specialisation are no longer even being considered by institutional investors.

Secondly, Cordea Savills wants to expand its expertise in the office sector where SEB Asset Managament invested about 80% of its fund volume.

Thirdly, Cordea Savills is interested in the Asia platform of the SEB subsidiary “that nicely complements our acquisition in Japan last year.”

The supervisory authorities have yet to approve the takeover. Once the deal is approved, Savills intends to present its new management team. The German monopolies and mergers commission and the BaFin supervisory authority for financial services are expected to consent to the deal. The private investor fund SEB ImmoInvest is being wound up, and will have to have sell off its 112 buildings by spring 2017.

Easter offers at Louis Hotels Louis Hotels is offering special Easter rates for its properties in Limassol and Paphos.

The Louis Phaethon Beach in Paphos starts from 79 euros per person, all inclusive, with the first child at 20 euros and the second at 39.50. The Louis Ledra Beach

also in Paphos has an offer from 84 euros per person, all inclusive, with the first child free and the second at a 50% discount. In Limassol, The Royal Apollonia is available at 80 euros per person at half board, first child free and second child at 50% discount.

For info visit Louishotels.com

Power to the (tenant) councils!

Berlin is contemplating introducing a law to deny public housing companies credit checks and evictions over arrears

By Dr Rainer Zitelmann “All power to the soviets!” ran the slogan touted by the Bolsheviks during the October Revolution in Russia. And since the days of the Paris Commune that Karl Marx admired, Germany’s left, socialists and Greens have been intrigued by the idea of a democracy based on the council system.

Lately, that fascination has inspired the idea to more or less turn control of the municipal housing companies over to so-called tenant councils. At least that is what a referendum initiative intends to accomplish.

Berlin’s Senator for Urban Development Andreas Geisel already praised the proposal, while admitting to misgivings about the massive inroads the scheme would make on the state coffers. He let it be known that the Senate of Berlin is already working on many of the proposals included in the draft bill. The Greens and the Left are in favour of the scheme.

In a first step, the required 20,000 signatures for a referendum application will be collected. There is no doubt in my mind that they will get enough people to sign up, not least because they have the backing of Berlin’s tenant associations with their 100,000 members. And I am sure that the referendum has every chance of success. As a reminder: roughly a year ago, Berlin’s residents voted against the development of the periphery of the former airport grounds in Tempelhof – willfully exacerbating the housing shortage in Berlin by doing so.

A 53-page draft bill for a “Berlin Housing Supply Act” is already on the table. It proposes that the municipal housing companies degewo, Gesobau, Howoge, Stadt und Land, WBM, and Gewobag be turned into statutory corporations.

The State of Berlin would be liable for all debts of these corporations. This means that tenants and employees of the public housing companies will get to say whether and when to raise rents or to modernise, while the State of Berlin will shoulder the entire risk. Ultimately, tenants will treat themselves to a low rent (it is supposed to be as low as 5 euros per square metre) at the expense of the state budget.

A board of directors is to play a key role in these statutory

corporations. Half of the board members are to be policymakers, the other half will be council members: - Four members will be representatives of the general tenants’ council; - Two will be representatives of the advisory board composed of tenant initiatives and interest groups representing social services and welfare organisations; - Two members will be employee representatives from the housing companies.

Naturally, the scheme will have strictly regulated quotas.

The legislation will define how many council members will have to be German citizens, how many of them should have a migrant background, how many should be disabled, and so on. And yes, of course, the council members will be obliged to act along the lines of feminist gender ideology. The corporation will agree pursuant to Art. 28, Sec. 2, “to apply the gender mainstreaming strategy to all measures and on all levels,” and will have to file reports on the matter, too.

Business acumen, by contrast, is not required and probably not desired either, even though the councils will

have to approve every measure taken (such as sales, maintenance, modernisations, rent increases, etc.).

None of the measures will go ahead without the express approval by the “general tenants’ council”. Implementing the law would quickly get the housing companies into serious financial trouble.

The draft bill also stipulates a de-facto right of rent-free residence for all because it says that tenants not paying their rents will not have to worry about consequences. That will naturally make it superfluous (or even illegal) to run credit checks on tenant leads before signing lease agreements.

It says verbatim: “Requesting evidence of creditworthiness from a private credit reference agency as precondition for signing a lease is not permitted…

Households receiving benefits under the German Social Security Codes II or XII, the Asylum Seekers’ Benefit Act, or basic subsistence income for the elderly are exempt from forced evictions for rent arrears.”

An acquaintance of mine who owns several residential properties in Berlin commented on the proposal by saying, “If a referendum is held, I will vote in favour of it. Because if it is adopted, the municipal housing companies will take all the troubled tenants off my hands, and make my life as private landlord easier.”

While I appreciated the argument, I had to contradict him.

That is not the way I see things. Not least because the taxpayer will have to foot the bill when everything is said and done. Moreover, I’ll bet you that the bill is only paving the way for the next demand, to wit, that such rules (ban on credit checks and on the eviction of defaulting tenants) not be limited to municipal housing companies but be expanded to include private property companies as well.

Dr. ZitelmannPB. GmbH is Germany’s leading consulting company for the positioning and communication of real estate companies and fund companies. www.zitelmann.com

April 1 - 7, 2015

financialmirror.com | PROPERTY | 13

PGS re-launches LED “Pay As You Save” save energy scheme

Asty hotel wins Trip Advisor award The recently-renovated Asty hotel, in the quiet Ayios Dhometios area of Nicosia, has won the Trip Advisor “Travellers’ Choice 2015” award from the well-respected travel site, based on reviews and favourable comments by thousands of customers.

“Your property belongs to a very exclusive group. This year, less than 1% of all accommodations listed on Trip Advisor

received Travellers’ Choice Awards,” a letter received from the site said.

The Asty hotel is a family run small and medium size enterprise, conveniently located near the U.S. and Russian embassies, has been winning similar awards since 2012.

“We believe this success, that is an honour not only to us but also for Cyprus and our capital city Nicosia, is to a great extent due to our constant efforts to offer customers value for money,” said Michael Antoniades, one of the hotel owners, after receiving news of the award.

PGS Lighting Electrical, the electrical supplies and lighting equipment with 11 stores islandwide, has re-launched the LED “Pay As You Save” scheme, which, since 2013 has helped reduce the cost of electricity bills in a large number of buildings in Cyprus. The scheme offers multiple advantages with the most appealing feature being the flexible payment terms: monthly installments equivalent to the saving that will occur after the implementation of the scheme.

Light-emitting diode bulbs (LED) are spreading rapidly and are being used more and more as an ecological and economical solution for houses and business premises, road lighting and state buildings. Other than the remarkable energy saving of up to 80%, LED lamps have a longer lifespan, low maintenance cost, do not contain harmful substances like mercury, attract less insects and are available in a wide variety.

Before the scheme is implemented, PGS conducts a feasibility study to identify spaces in the building where an investment in LED lamps would be beneficial and to specify the size of the saving which will

result from the replacement of highconsumption bulbs with LED type lamps.

The company then presents the findings of the study to the customer, including an indicative payment time plan for the full cost of the investment. Payment is split in equal monthly installments with no applied interest, equivalent to the amount of the monthly saving, which means that a household’s monthly budget will not be affected. In addition, PGS offers three years guarantee for lamps that may burn out.

“Buildings in Cyprus are energyintensive. This fact -in combination with the relatively high cost of electricity compared to other EU countries- is a financial burden for the Cypriot citizen and harmful to the environment,” said Managing Director of the company Neophytos Neophytou.

“Through the LED “Pay as you save” scheme we managed to contribute to a solution to this problem and that is why we have decided to re-launch it as an ecoservice that our company is capable of offering”, he added. www.pgses.com

April 1 - 7, 2015

14 | WORLD MARKETS | financialmirror.com

China cautious over signs of deflation

By Oren Laurent President, Banc De Binary

China’s incredible economic growth has long been the envy of the stagnating and slowly recovering, post-recession, western nations. The ‘Made in China’ trademark has become synonymous with manufactured goods and the number of Chinese companies spreading their strong wings internationally has been making headlines.

After all the hype about this new superpower, last week’s revelation that the Chinese leadership are now anticipating the slowest growth rate in a quarter-century has brought about mixed reactions from investors.

The country’s leaders announced a new economic target of 7% growth in 2015, lower than their 7.5% goal last year.

The Governor of the Central Bank, Zhou Xiaochuan, then warned on Sunday that China is “cautious” about the declining commodity prices globally and should be closely watching for the warning signs of deflation. His remarks

raised eyebrows and led to further nervousness among investors and policymakers that the economy is losing its powerful momentum.

President Xi Jinping, however, expressed a more positive outlook. He was keen to stress on Friday that a 7% growth is impressive by any standards and will drive China’s robust economy forwards. Since coming to power in 2011, he has focused on structural reform and prefers to take a long-term view on the country’s future growth.

So what’s behind these seemingly mixed signals?

Chinese investors are right to be wary about the current level of debt. Although borrowing allowed the country to fuel its past growth, debt now stands at 250% of gross domestic product. That’s a burden that the government need to account for and pay. However, in many other respects, the slowing growth is merely a reflection of the country’s steep climb.

Various economic and social factors contributed to the rate of growth. The country’s working-age population reached record numbers in 2012, and investment also peaked at a phenomenal 49% of GDP. Yet these were never going to be sustainable forever. Plus, as China has caught up to the technological advances of Western countries, the gap in its growth potential is also slowing.

At some point a correction to sustainable levels was bound to happen. This isn’t automatically a negative thing. It happens in large economies and businesses alike. Consider that a 7% growth now, given the size of what is now the world’s second largest economy, equates to a greater output in real numbers than the 14% growth back in 2007. The reality is that although the current growth target is lower than China’s usual rate, China’s past ‘normal’ was extraordinary.

If you only look abroad, it’s clear that Xi is right to point out how good 7% growth is. Yes, China has entered a new stage in its economic cycle. It is unlikely to enjoy double digit growth again, at least in the next decades ahead. But if it can find and maintain sustainable growth levels, it will surely continue to be an economic force to be reckoned with.

Ralph Lauren, SanDisk, Chesapeake worst S&P 500 stocks

By Jon C. Ogg This past week was yet another one that took some of the charge out of the bulls. The Dow posted marginal gains on Friday, but the week’s drop ticked the Dow ever so slightly into the red for 2015. The close of 17,712.66 put the index down 0.6% year to date. The S&P 500 index closed up almost five points at 2,061.02 on Friday, giving the S&P’s year-to-date return as a whopping 0.1% for 2015.

The S&P 500 is more widely representative of the economy than the Dow, so, some of the losers are just what you would expect: energy with four of the ten laggards, and three in technology.

Interestingly enough, three of the biggest losers have lagging consumer themes that you might not have expected.

SanDisk Corp. (NASDAQ: SNDK) has had its problems with guidance of late, and the move to SSDs and flash memory is currently passing SanDisk by. Its most recent close of $64.59 gave it a year-to-date performance of -33.83%. SanDisk has a 52-week trading range of $63.56 to $108.77 and a consensus analyst price target of $82.66 — although that consensus target is rapidly coming down.

Ralph Lauren Corp. (NYSE: RL) was shocking to see on the list. Perhaps its U.S. pricing is making it harder to sell the goods now, but much of its materials and manufacturing is outside of the United States. The higher-end apparel shares are now down 28.87% so far in 2015. Its $131.22 close compares to a 52-week range of $127.29 to $187.49. Ralph Lauren also has a consensus price target of $148.95.

Ensco PLC (NYSE: ESV) is the third largest loser of the S&P year to date, but it is the worst performing of all S&P 500 stocks tied to oil and gas. Trading at $21.28, its share performance is -28.49% so far in 2015.

Ensco has a 52-week range of $19.78 to $55.89 and a consensus price target of $26.48. Its market cap of $5 bln makes it smaller than many large oil and gas players in the red this year.

Chesapeake Energy Corp. (NYSE: CHK) may no longer have Aubrey McClendon to kick around and blame for its woes, but it is the fourth biggest loser of the S&P. Its focus

Mover over Barbie: Mattel has seen sales of its top toy diminish over the years

on natural gas just cannot escape the current oil and gas sector climate. With shares at $14.03, its market cap is now down to $9.3 bln. Chesapeake has a 52-week trading range of $13.38 to $29.92 and a consensus target price of $18.84.

Diamond Offshore Drilling Inc. (NYSE: DO) is the fifth worst S&P 500 stock so far for 2015, with its share performance of 27.25%. Oil and gas, with more expensive offshore costs — what more needs to be said? They see the same oil and gas prices as the market. Trading at $26.62, it has a 52week range of $26.02 to $55.37. The consensus analyst price target is $26.42.

Fossil Group Inc. (NASDAQ: FOSL) may have jewellery, handbags, small leather goods, belts, sunglasses, soft accessories and selected apparel, but its exposure to watches may make the company enemy number one for investors now that the smartwatch craze is coming. The real outcome remains to be seen, but investors have exited in droves, and Fossil now is the sixth biggest loser of the S&P 500. At $81.76, the stock is down by 26.17% year to date. Fossil has a $92.07 consensus price target and a 52-week range of $79.50 to $119.35.

Mattel Inc. (NASDAQ: MAT) may seem like a surprise loser here. After all, toys being

a top loser? It turns out that Barbie has given up her lustre, and the company is probably not a big fan of the success of Frozen and other franchises that have taken from its sales. With shares at $22.61, its performance is -25.92% year to date. Mattel has a 52-week range of $22.44 to $40.79 and a consensus price target of $25.94. Also, is Mattel’s 6.7% dividend yield sustainable at $1.52 per year?

The consensus analyst earnings estimates are $1.55 per share for 2015 and $1.60 for 2016.

National Oilwell Varco Inc. (NYSE: NOV) is on the very heavy equipment side of the oil and gas sector. It makes massive rigs and structures, and the rig count has been getting slashed for more than just the month of March. Trading at $49.25, this is the eighth worst S&P stock with performance of -24.16% year to date. It has a 52-week range of $46.08 to $86.55, yet it still has a $20 bln market cap. Its consensus price target is $55.10.

Micron Technology Inc. (NASDAQ: MU) is the king of DRAM and has expanded with flash and other memory products. Still, its big turnaround days have passed by and now it has to be considered a value stock. Its shares now trade at $26.67, which makes its performance -23.8% so far — the ninth

worst S&P 500 stock. Micron’s 52-week range is $21.02 to $36.58, and it has a consensus price target that still is all the way up at $41.47. Some bulls will need to temper expectations here it seems, but Micron does trade at less than eight times the consensus 2015 earnings estimates.

Hewlett-Packard Co. (NYSE: HPQ) is the tenth biggest loser in the S&P 500 so far in 2015. The personal computing, printing and information technology services giant just cannot get its breakup to happen soon enough. With shares at $31.49, its performance this year is so far -21.1%. HP has a 52-week range of $31.03 to $41.10 and a consensus price target of $40.22. A recent dividend hike just does not matter to investors right now, and neither does a P/E ratio of less than 9.

24/7 Wall St. would remind readers that investors have used every single pullback for the past three years as an opportunity to buy stocks. They may not buy the biggest losers, but they have used pullbacks as buying opportunities.

One day that will not hold true. Until then, keep in mind that the Dow and S&P 500 have not had a formal 10% correction in quite some time. (Source: 24/7 Wall St.com)

April 1 - 7, 2015

financialmirror.com | MARKETS | 15

Where has the Modi Magic gone?

Marcuard’s Market update

by GaveKal Dragonomics India has fallen out of favour with investors lately. Over the last four weeks, the Nifty stock index has dropped 4.6%, a fall that included eight consecutive sessions of declines, the market’s longest losing streak in more than 18 months.

Investors blamed the collapse of lofty valuations following poor earnings results, with the fall exacerbated by rising tensions in the Middle East. But critics of India’s government say the problems go deeper. Ten months after his landslide election victory, Prime Minister Narendra Modi is struggling to deliver his bold promises of economic reform. Has the much-touted “Modi magic” vanished?

Not quite. Criticism of Modi comes mainly from the metropolitan elite, never natural allies of Modi’s Hindu nationalist Bharatiya Janata Party. But hundreds of millions of ordinary voters still believe in the prime minister, who has kept his promise to cut inflation and tackle corruption. His government has certainly benefited from falling oil prices, but it has also kept itself admirably scandal free. Modi’s supporters in the business community admit that his larger promises to reform the economy remain unfulfilled—but they are willing to give him time to deliver.

Until recently, even liberal Delhi-wallahs willed Modi to

succeed. After nearly a decade of political paralysis, they were desperate for a capable leader who promised to cut red tape, invest in infrastructure, encourage foreign investment, and pave the way for India to become a manufacturing powerhouse. They looked at Modi’s impressive record in his home state of Gujarat and saw a man who could unleash India’s vast, unfulfilled potential. With half of the nation’s 1.25 bln population aged under 25, India’s dreams of double digit growth are surely not unrealistic.

With these promises still unmet nearly a year after his election, scrutiny of the Indian prime minister is intensifying. And although Modi’s reforms last year were underwhelming, progress is picking up.

Notably, the government has begun to target India’s sprawling and deeply inefficient state monopolies. Take Indian Railways, the grand daddy of the state sector. A government report is set to recommend the biggest reform of the network for 100 years. The government intends to separate ownership of the track from those who run the trains. Foreign investors will be allowed to own and operate services. The government also proposes to funnel savings from lower oil prices—which could amount to as much as INR 1 trln over the two fiscal years ending in March 2016— into a special fund for railway and highway construction. Its commitment to improving infrastructure seems genuine.

Fiscal reforms are also gaining momentum. Critics

complained with some justification that February’s budget was not sufficiently bold. But in one respect it was truly radical, granting individual states real spending autonomy, for the first time. The majority of public funds will now be disbursed directly to state governments to be spent as local areas need (in return for strict deficit caps and a centralisation of revenue-raising). “State governments no longer need to come to us with a begging bowl,” Arun Jaitley, India’s finance minister, told a forum in the capital last week.

Modi’s critics doubt how deep these reforms will really go.

They question the capacity of his cabinet and complain that power is over-concentrated in the prime minister’s office, which employs fully 355 staff.

“Modi’s bureaucrats are regressive morons—they’ll never beat the system,” one seasoned observer told us in Delhi last week. Other critics argue that Modi’s reformist credentials have been overplayed. For all his success in creating a business-friendly environment in Gujarat, the public sector continues to reign supreme in India’s most entrepreneurial state. Such carping is par for the course in India’s rambunctious democracy. And time may prove these critics right. But for the next year or so, Modi deserves to be given the benefit of the doubt. This is the first Indian government in living memory to put business, growth and jobs at the top of the agenda. The Modi magic may have faded a little, but cautious optimism remains the order of the day.

The road to Eurozone rebalancing Marcuard’s Market update

by GaveKal Dragonomics At a record 7.8% of GDP, Germany is running the largest current account surplus in the world. To put that into perspective, in absolute terms Germany’s surplus over the last 12 months amounts to EUR 218 bln. In contrast, China’s current account surplus last year was a relatively modest EUR 161 bln. With the European Central Bank’s printing presses operating at full steam and depressing the euro’s exchange rate, Germany’s current account balance is acting as a powerful deflationary force for the world beyond the eurozone. But it also adds to the disinflationary forces at work in the rest of the single currency area, exacerbating the economic struggles of the eurozone’s southern periphery.

In the short term, the German surplus is likely to get even bigger, as euro weakness sharpens the competitive edge of Germany’s exporters while boosting the country’s net income from foreign investments. In the longer run, however, shifting dynamics in Germany’s domestic economy should drive a contraction of the current account surplus, assisting a long-awaited internal rebalancing of the eurozone’s economy.

The causes of Germany’s record current account surplus are clear enough. The Finance Ministry’s hardline fiscal rectitude has restricted government spending, while German consumers have reacted to uncertain economic times by keeping their wallets firmly in their pockets. That has depressed demand, which in turn has deterred German companies from investing. The upshot has been high savings

rates across the economy, and a fat surplus which has only been widened further by cheap oil imports and a weaker euro.

Unfortunately, while many at home regard the surplus as a sign of virtue, Germany’s weak demand—and the resulting disinflation—has only made life more difficult for the crisisstruck countries of Southern Europe as they strive to close the competitive gap with their northern neighbour.

With the ILO standard unemployment rate at a postreunification low of 4.7%, German wages are edging higher both in nominal and real terms, helped by a new minimum wage introduced at the beginning of the year. As a result, consumer confidence has recovered, and both individual spending and lending to households are on the increase as demand picks up.

Ultra-low—even negative—interest rates and recovering demand should encourage corporations to save less and invest more. Lending to the private sector is now growing at the fastest pace in ten years, albeit from a low base.

The government has announced a beefed up programme of infrastructure investment this year, as higher tax revenues and low government bond yields give the Finance Ministry elbow room to increase spending without damaging the budget balance.

Stronger demand, weaker saving, and greater investment all imply a narrowing of the German current account surplus, which is encouraging news for Southern Europe.

Against the backdrop of a weak euro, rising consumer demand in Germany will disproportionately benefit exporters elsewhere in the eurozone over those in the rest of the world.

And as the one-off deflationary impact of the recent oil price collapse runs off, stronger demand could lead to a pick-up in

Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance.

Investments in foreign currencies are subject to exchange rate fluctuations.

Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.

www.marcuardheritage.com

The Financial Markets Interest Rates Base Rates

LIBOR rates

CCY USD GBP EUR JPY CHF

0-0.25% 0.50% 0.05% 0-0.10% -0.75%

Swap Rates

CCY/Period

1mth

2mth

3mth

6mth

1yr

USD GBP EUR JPY CHF

0.18 0.50 -0.02 0.07 -0.85

0.22 0.54 0.00 0.09 -0.84

0.27 0.57 0.02 0.10 -0.81

0.40 0.68 0.07 0.14 -0.72

0.70 0.97 0.20 0.26 -0.60

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.82 0.88 0.09 0.16 -0.70

1.13 1.07 0.13 0.18 -0.58

1.37 1.22 0.19 0.22 -0.44

1.56 1.34 0.26 0.27 -0.30

1.82 1.52 0.40 0.39 -0.07

2.05 1.68 0.58 0.57 0.17

German inflation relative to the rest of the eurozone—a key step on the long road towards narrowing the competitiveness gap and correcting the long-standing imbalances within the eurozone economy.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

Belarussian Ruble British Pound * Bulgarian Lev Czech Koruna Danish Krone Estonian Kroon Euro * Georgian Lari Hungarian Forint Latvian Lats Lithuanian Litas Maltese Pound * Moldavan Leu Norwegian Krone Polish Zloty Romanian Leu Russian Rouble Swedish Krona Swiss Franc Ukrainian Hryvnia

BYR GBP BGN CZK DKK EEK EUR GEL HUF LVL LTL MTL MDL NOK PLN RON RUB SEK CHF UAH

14620 1.4785 1.821 25.6313 6.9553 14.5687 1.074 2.225 278.91 0.65439 3.2149 0.3997 17.75 8.1164 3.8061 4.1042 57.972 8.6463 0.9722 23.4

AUD CAD HKD INR JPY KRW NZD SGD

0.7614 1.2735 7.754 62.545 119.95 1108.17 1.3371 1.3741

BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED

0.3770 7.6285 27993.00 3.9737 0.7081 0.3009 1513.00 0.3850 3.6410 3.7509 12.2106 3.6726

AZN KZT TRY

1.048 185.65 2.6160

AMERICAS & PACIFIC

Australian Dollar * Canadian Dollar Hong Kong Dollar Indian Rupee Japanese Yen Korean Won New Zeland Dollar * Singapore Dollar MIDDLE EAST & AFRICA

Bahrain Dinar Egyptian Pound Iranian Rial Israeli Shekel Jordanian Dinar Kuwait Dinar Lebanese Pound Omani Rial Qatar Rial Saudi Arabian Riyal South African Rand U.A.E. Dirham

Exchange Rates

ASIA Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

1 USD

Opening Rates

1 EUR

1 GBP

1 CHF

100 JPY

1.0738

1.4783

1.0285

0.8336

1.3767

0.9578

0.7763

0.6957

0.5639

0.9313 0.6765

0.7264

0.9723

1.0441

1.4374

119.96

128.81

177.34

0.8105 123.38

Weekly movement of USD

CCY\Date

03.03

10.03

17.03

24.03

31.03

CCY

Today

USD GBP JPY CHF

1.1142

1.0746

1.0507

1.0876

1.0742

0.7245

0.7123

0.7087

0.7279

0.7266

GBP EUR

133.19

130.69

127.43

129.98

128.96

1.0643

1.0628

1.0583

1.0509

1.0405

1.4783 1.0738 119.96 0.9723

JPY CHF

Last Week %Change 1.4942 1.0876 119.51 0.9663

-1.06 -1.27 +0.38 +0.63

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira Note:

* USD per National Currency

April 1 - 7, 2015

16 | WORLD | financialmirror.com

Why sanctions on Russia don’t work

By Andrei Kolesnikov The Western approach to Russia is predicated on the supposition that continued pressure on the country will cause President Vladimir Putin’s regime to make concessions or even crumble. Nothing could be further from the truth.

The assumption underlying the efficacy of Western sanctions is that the sharp economic deterioration that results from them will turn the Russian public, particularly the financial and political elite, against the Kremlin. Putin will not be able to withstand mounting dissent from affluent urban areas and the country’s burgeoning middle class.

Meanwhile, the thinking goes, military pressure – in the form of potential lethal aid to Ukraine – will similarly mobilize ordinary Russians against Putin. Unwilling to see their boys die for the Donbas, they will form an anti-war movement that will force him to rein in his territorial ambitions. Pressed at once from above and from below, the

Kremlin will be have to change its policies, and perhaps even begin to democratize.

What Western policymakers fail to understand is that such an approach is less likely to undermine the regime than to cause Russians to close ranks behind it. Opinion polls show that Russians perceive Western pressure and sanctions to be aimed not at Putin and his cronies, but at Russia and its citizens. In January, 69% of Russians supported the Kremlin’s policy in Ukraine, according to a poll by the independent Levada Center.

To be sure, Putin’s support is not rocksolid; indeed, there is widespread suspicion about corruption in his government. But Russians have a long tradition of defending their compatriots from outsiders. And in this case, the compatriots under attack are Putin and his government.

Russian propaganda taps a deep well of nationalism, artfully playing off sentiments and imagery from World War II. Known in the country as the Great Patriotic War, the effort to defend the country from German invasion remains sacred to many Russians.

That is why the Kremlin has repackaged derogatory historical terms like “Nazis” to refer to Ukraine’s current political elites.

Russian society has been militarized for decades, if not centuries. Military

preparedness was one of the most important shared values in the Soviet Union – a sentiment captured in the slogan emblazoned on the badges issued to children who excelled in athletics: “Ready for Work and Defense.”

It is in this context that Putin has been able to use Western pressure as a tool to regain the support of many Russians, who only a few years ago would have felt detached from, if not alienated by, his government.

Presented with a real or imagined threat to the fatherland, the average Russian supports the country’s leaders.

Nor is the Russian middle class, which makes up some 20-30% of the population, likely to pose much of a threat to Putin. With many of its members owing their recent wealth to high oil prices and the economic recovery of the 2000s, loyalty to the Putin regime is one of the Russian middle class’s abiding characteristics.

Russian opinion polling and sociological research tends to show that the higher one’s position in society, the more likely one is to vote for the incumbents. The motives behind such voting patterns may vary – some voters made a fortune during the economic recovery, while others are simply satisfied with the status quo. But the bottom line is that such voters demonstrate a fundamental

loyalty to the state and the regime.

Indeed, only a small portion of the middle class attended the protests that gathered force in late 2011 and early 2012, most of them concentrated in Moscow. And, in any case, Putin’s clampdown on dissent was predictably ruthless. He tightened legislation aimed at throttling civil society, pursued lawsuits against protesters, and blocked the activity of Alexei Navalny, a promising opposition politician. These efforts have had a lasting effect on the groups that were at the heart of the protest movement.

Russians of all walks of life have shown that they prefer passive adaptation over protest. In the face of growing economic pressures, Russia’s middle class is steering clear of political involvement. The working class is no different. The more the West increases its pressure, the less likely it becomes that this will change.

Andrei Kolesnikov is a senior associate and the chair of the Russian Domestic Politics and Political Institutions Program at the Carnegie Moscow Center. © Project Syndicate, 2015. www.project-syndicate.org

Secular stagnation for free

By Ricardo Hausmann Something is definitely rotten in the state of capitalism.

Despite unprecedentedly low interest rates, investment in most advanced countries is significantly below where it was in the years prior to the 2008 crisis, while employment rates remain stubbornly low. And even investment in the pre-crisis period was unimpressive, given low prevailing interest rates.

For some reason, achieving a level of investment that would generate full employment seems to require negative real (inflation-adjusted) interest rates, which is another way of saying that people have to be paid to invest. But in a world of low inflation and zero nominal interest rates, getting to the required negative real rate may be a challenge. This is the ailment that Larry Summers, recalling a 1938 paper by Alvin Hansen, has dubbed “secular stagnation.”

The policy consequences of this state of affairs remain open to debate (the issues are well summarised in an e-book edited by Coen Teulings and Richard Baldwin). For Keynesians, the answer is unconventional monetary policy (for example, quantitative easing), fiscal stimulus, and a higher target inflation rate. But, as Summers and others point out, lax monetary policies may trigger asset bubbles, and prolonged fiscal stimulus may end in a debt crisis.

Moreover, the Keynesians’ preferred policies address only the consequences of secular stagnation, not its causes – about which there is even less agreement. For some, the problem is a savings glut associated with slower demographic growth, rising life expectancy, and static retirement thresholds – a combination that forces people to save more for their old age. But, as Barry Eichengreen points out, the rise in savings appears to be too small to explain this.

For others, the problem is lower investment demand, caused partly by the fact that machines are now much cheaper and that technological progress has slowed since 1970. Economists like Robert Gordon and Tyler Cowen argue that the technological breakthroughs of the past, including piped water, air conditioning, and commercial air travel, had a greater social impact – giving rise to the suburban lifestyle of cars and shopping malls, for example – than many of today’s advances.

This assessment bothers optimists like Joel Mokyr or Erik

“Lax monetary policies may trigger asset bubbles, and prolonged fiscal stimulus may end in a debt crisis” Bryjnolfsson and Andrew McAfee, who do not believe that technological progress has slowed. Instead, they argue that the traditional concept used to measure economic output and growth, gross domestic product, understates that progress. After all, our lives have been made dramatically more productive thanks to Google, Wikipedia, Skype, Twitter, Facebook, YouTube, Waze, Yelp, Hipmunk, Pandora, and many other companies. But all deliver their services for free, which means that the benefits they provide are not counted in GDP. As Edward Glaeser has argued, it is hard to believe that the median family in the United States, which supposedly is worse off than in 1970, would be willing to give up its cell phones, Internet access, and new health technologies in order to return to that halcyon era. Thus, the GDP numbers must be excluding much progress.

The fact that so much innovation is given away for free does not only create a measurement problem for economists; it is also a real problem for those trying to find investment opportunities. In the good old days of the post-World War II boom, if you wanted an air conditioner, a car, or a newspaper, you had to buy one, making it possible for producers to earn money by providing them.

Information-intensive products – typical of today’s technologically advanced economies – are different. Because the cost of providing an extra copy is almost nil, it is hard to

charge for them.

Broadcast radio and television were the first to confront this problem, because they could not prevent those with a receiver from getting the signal. They had to develop an advertising-based model, making it possible for others to pay for the benefits received by the consumer. This is supposedly what makes Google so profitable, though I have trouble believing that the enormous benefits I receive as an assiduous and happy user are paid for by my rather infrequent Internet purchases.

So we live in a world where much of the progress that new technology permits is embodied in products that must be given away for free. A somewhat haphazard sub-set of potential products can, with the right business model, be profitable – say, through advertising or by selling the information that they passively collect from users.

But many others, like Wikipedia and public radio, have trouble making ends meet. Free products also depress the value of close substitutes. While it may require charging $100 per ticket to recover the costs of a $1 mln theater play, some filmmakers can make money on a $200 mln film by selling $10 tickets to consumers who are unwilling to wait a few weeks until their cable TV provider offers it.

The e-book mentioned above, which prompted this column, is available to you, the reader, for free (as is this column). No wonder so many people have trouble making ends meet. But the Center for Economic Policy Research, which published the e-book, and Project Syndicate, which distributes this column, are both (at least to some extent) donor-funded.

This may not be a coincidence. To harness the possibilities of new technology, we may need non-market forms of payment for valuable contributions. The traditional capitalist model may have made Bill Gates rich, but his foundation now finances valuable technological breakthroughs in unprofitable ways. As with negative real interest rates, but in a more targeted and efficient manner, we may have to pay to make valuable investments happen.

Ricardo Hausmann, Director of the Center for International Development and Professor of the Practice of Economic Development at the John F. Kennedy School of Government at Harvard University, is a former Venezuelan minister of planning. © Project Syndicate, 2015. www.project-syndicate.org

April 1 - 7, 2015

financialmirror.com | WORLD | 17

Sustaining the unsustainable Eurozone

By Yannos Papantoniou When the eurozone was established, its creators envisioned gradual progress toward an “optimal currency area,” characterised by fiscal integration, the free movement of labour, and political union. But this process has not occurred, and, as the interminable Greek crisis has shown, the eurozone remains rife with structural weaknesses and extremely vulnerable to internal shocks. This is clearly not sustainable.

Despite efforts to promote fiscal-policy coordination, eurozone members’ budgets still fall under the purview of separate national authorities, and northern Europeans continue to oppose transfers from more to less prosperous countries beyond the very limited allowance of the European Union’s regional funds. Moreover, labour mobility is severely constrained by linguistic and cultural barriers, as well as administrative bottlenecks. And “ever-closer” political union has ceased to attract public support – if it ever did – and is thus not feasible today.

A growing number of commentators – and no longer only in the Anglo-Saxon world – question the monetary union’s viability.

Some encourage Greece to exit the eurozone, believing that a more restricted and homogeneous currency union would be

stronger and easier to unite. Others consider a Greek exit to be just the start of the inevitable unraveling of a scheme that does not serve the purpose for which it was created.

The eurozone has so far managed to prove the doomsayers wrong. By sheer force of political will, compromise after compromise has been reached, thereby sustaining a historic project that is not, in its current state, sustainable.

The need to maintain this commitment to European unity, and overcome the economic difficulties that arise, is reinforced by new geopolitical challenges. Most notably, Russia’s perceived ambition of recapturing its Soviet-era influence is challenging the rules-based order that was established after World War II, and a surge in religious and political extremism is threatening democratic and liberal values.

But the economic difficulties are bound to continue, fostering doubts about the currency union’s future – doubts that could become self-fulfilling by undermining the euro’s ability to function properly. Already, economic pressures have fueled antiEuropean sentiment in Spain, Italy, and even France; if allowed to continue, such sentiment could culminate in secession, with devastating consequences for the eurozone and Europe as a whole.

The first step in such a process would probably be the eurozone’s division into subareas, comprising countries of relatively equal resilience. As it becomes increasingly

difficult to pursue coherent fiscal and monetary policies, the risk of the eurozone’s complete dissolution would grow. Greece’s exit could shorten this timeline considerably.

Though such a scenario was inconceivable five years ago, when the Greek crisis first erupted, the term “Grexit” entered the European lexicon soon after, when the crisis reached a new peak. But European leaders seemed to recognize the implications of allowing a country – even small, crisisstricken Greece – to exit the eurozone. That is why, this year, a series of Eurogroup meetings were held with the avowed purpose of averting such an outcome.

The problem is that Europeans have become so accustomed to muddling through that long-term solutions seem all but impossible. Indeed, in recent years, eurozone authorities have introduced several policies for fighting financial crises – including government-backed rescue funds, a partial banking union, tougher fiscal controls, and a role for the European Central Bank as lender of last resort. But most of these policies – with the possible exception of the banking union – are aimed at managing default risk, not eliminating this risk’s root causes.

It is time to recover the capacity, displayed by the EU’s founders, to look ahead and pursue a dream of a better future.

Specifically, eurozone leaders must introduce a mechanism for fiscal transfers from stronger to weaker economies.

In a currency union, individual economies cannot alter their exchange rates

to account for changes in relative competitiveness. The resulting price stickiness tends to delay macroeconomic stabilisation and structural adjustment, leading to rising debt and unemployment in weaker economies. Without free labour mobility, fiscal transfers are the eurozone’s only option to ease debt repayment and, by stimulating economic activity, boost employment.

Establishing such a mechanism will not be easy, as it requires a resource that is in short supply in Europe today: trust. Indeed, the north and south have struggled to overcome cultural differences and unequal economic conditions, preventing them from viewing the situation from each other’s perspective.

Binding the union closer together could prove critical to building such trust. One strategy that combines rationality with the gradualism needed to overcome political resistance would be to increase the EU budget steadily, so that it can ultimately play a macroeconomic role, promoting stability and reinforcing cohesion within the eurozone.

It is a tough sell, but also a vital one.

Yannos Papantoniou, Greece’s Economy and Finance Minister from 1994 to 2001, is President of the Center for Progressive Policy Research, an independent think tank. © Project Syndicate, 2015. www.project-syndicate.org

A window on China’s ‘new normal’

By Martin Feldstein

Every year at this time, China’s government organises a major conference – sponsored by the Development Research Center, the official think tank of the State Council – that brings together senior Chinese officials, CEOs from major Chinese and Western firms, and a small group of international officials and academics. The China Development Forum (CDF) occurs just after the annual National People’s Congress.

At the forum, speakers, including the finance minister and the head of the central bank, summarise the Chinese leadership’s current thinking. Officials then listen to comments and suggestions from Western business and academic participants, including a question and answer session with Premier Li Keqiang.

Although I have been attending the CDF’s meetings for more than a decade, I found this year’s conference substantially different from any in the past. The key difference was the official Chinese recognition that annual real GDP growth has declined permanently from the past three decades’ average rate of nearly 10%. The official estimate is that real GDP grew 7.4% in 2014, and that the rate will probably slow further, to 7%, this year. The Development Research Center presented detailed estimates showing that the growth rate will continue to decline, reaching about 6% by the end of the decade.

Virtually every Chinese official referred to this slowdown as their country’s “new normal.” They all seemed reconciled to slower growth, which was initially surprising, because officials previously argued that China needed rapid growth to maintain employment and avoid political unrest. They now appear to understand that the declining growth rate will not lead to unemployment, because the slowdown reflects China’s structural shift from export-oriented heavy industrial

production to increased production of consumer services, which require more employment to create the same amount of value.

Stronger growth nevertheless remains necessary, because China is still a relatively low-income country with substantial poverty. Although China’s total real GDP is second only to that of the United States (and might be larger when measured in terms of purchasing power), its per capita income is only about $7,000, or roughly 15% of the US level.

And consumption remains low – only about 50% of GDP when government spending is included, and just 35% when limited to household consumer spending. So, China has a long way to go to reach its leaders’ goal of achieving a “modern prosperous society.”

The Chinese see that the “new normal” requires a shift in their growth strategy from factor-driven growth to innovation-driven growth. But it is not clear how that increase in innovation will be achieved. While officials stress reliance on the market, China does not have the venture capital and “angel financing” that facilitates innovation in the US. The authorities may hope that their plan to insure bank deposits will shift deposits from the three largest banks to many smaller banks around the country, facilitating local startups’ access to financing.

Many other economic problems loom. Officials acknowledged at the CDF that the biggest risks lie in the financial sector, particularly owing to local governments’ very large liabilities. In the past, the government dealt with the problems that these liabilities caused for the banking system by injecting funds into the banks.

Environmental problems are another powerful drag on China’s current standard of living. But they also represent a potential way to increase GDP should overall demand decline significantly.

China acknowledges that high levels of air and water pollution create discomfort and harm the public’s health.

Government spending on remedying environmental damage could absorb substantial funds if demand-side weakness exacerbates the expected supply-side slowdown.

Moreover, the very weak performance of state-owned

enterprises, which continue to play a large role in heavy industry and in some service sectors, represents a powerful brake on growth. Although official policy aims to reduce these firms’ role so that “the market can play the decisive role in resource allocation,” shrinking these firms has proved to be difficult, owing to their strong political backing within the Chinese Communist Party.

At the same time, China maintains restrictions on direct investment by foreigners, limiting both the kinds of firms and the share of joint ventures that they can own. The official policy is to reduce the barriers to foreign corporate investment, especially in high tech and the service sector.

There were, of course, a number of subjects that remained just below the surface and were not discussed at this year’s CDF. There was no indication of a slowdown in President Xi Jinping’s anti-corruption campaign, though some private conversations suggested that the campaign has resulted in decision-making delays that are hurting productivity and growth.

There was also no discussion of Chinese cyber theft of Western technology. When that subject was raised in 2014, Li denied that the Chinese do such a thing, but noted that Chinese firms are hacked by domestic sources. And, with the CDF’s emphasis on cooperation, there was no discussion of possible military action by the Chinese to stake their disputed territorial claims in the East and South China Seas.

Meetings like the CDF provide a useful window into a country whose importance for the global economy will continue to grow. The current slowdown to a new normal makes such windows even more important.

Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. © Project Syndicate, 2015. www.project-syndicate.org

April 1 - 7, 2015

18 | WORLD | financialmirror.com

Death and hope on the high seas

By Derek Tittensor Sharks and their cousins, the rays, predate the dinosaurs.

They survived the catastrophic mass extinction that finished off Tyrannosaurus Rex and all the rest, as well the PermianTriassic extinction that wiped out around 96% of marine species. Even the more recently evolved shark lineages, such as the hammerheads, have been around for more than 30 million years.

Yet in just a few decades, a quarter of all sharks and rays have become threatened with extinction. This is our fault – and it is our responsibility to fix it.

Shark and ray populations are not alone. Many other components of marine biodiversity – especially corals, marine mammals, seabirds, and turtles – are also struggling to withstand human pressures. As a result, marine ecosystems are at risk of unraveling and becoming less stable and less productive.

Given the broad range of threats facing marine life – including overfishing, climate change, pollution, and coastal development – it is easy, perhaps even rational, to be pessimistic. Yet this year could mark the beginning of a more robust approach to safeguarding ocean ecosystems, particularly with regard to overfishing, which is responsible for precipitous declines in many species.

The challenge ahead should not be underestimated.

Meeting it will require overcoming one of the most intractable obstacles to marine conservation: ensuring the sustainability of biodiversity in the roughly 60% of the world’s oceans that lie beyond the jurisdiction of individual states.

Within the 200-nautical-mile limit that comprises their exclusive economic zones (EEZs), a few countries have used a combination of strong legislation, good management, and effective enforcement to preserve fish stocks and ecosystems.

(There have also been far too many counter-examples.)

Beyond the EEZs, however, a pernicious problem arises: most living resources are de facto open-access, leaving them vulnerable to overexploitation. While there have been numerous well-intentioned attempts to improve management of these resources, all rely on individual actors’

willingness to concede the short-term economic benefits of intensive resource use for the sake of the long-term common good.

Whenever a cost arises from engagement with an international process, there will always be an incentive not to play by the rules, to enforce them weakly, or not to participate at all. This is especially true for environmental issues, where the political capital required is high; the need for near-unanimous support is crucial; the issues can be contentious; and the benefits are disproportionately distributed and are realised over a long time horizon. A passing familiarity with the Realpolitik of climate change suggests that this is an intimidating – if not intractable – challenge, displaying elements of the most difficult political and social quandaries: the prisoner’s dilemma, the free-rider problem, and the tragedy of the commons.

At present, a web of legislation – including the United Nations Convention on the Law of the Sea, Food and Agriculture Organisation guidelines, and the Fish Stocks Agreement, as well as the Convention on Migratory Species of Wild Animals – governs activities that may affect biodiversity on the high seas. Yet the protection afforded to living resources remains limited – and riddled with loopholes.

For example, because not all countries are signatories to these agreements, vessels can choose which flag to fly to avoid being bound by regulations (a “flag of convenience”).

Some fisheries remain outside the jurisdiction of any of the regional bodies that play a role in resource management. As a result, illegal, unreported, and unregulated fishing is worth billions of dollars per year.

One promising step, recommended by a UN working group in January, is the development of a new, legally binding agreement on high-seas biodiversity, to be ready for the UN General Assembly to review by September.

Such a coordinated and harmonised framework may help to close regional gaps in governance; compel existing fisheries bodies to work to improve outcomes; and ultimately enable the development of new bodies that are focused on management and protection of ecosystems, not only fish stocks. That, in turn, may catalyse the cooperation needed to create high seas marine protected areas, which would enable damaged or depleted ecosystems to recover.

Of course, to be effective, such areas must be monitored.

A promising development has been the use of satellite

technology to detect and address fisheries violations by individual vessels. This could bring about a profound change for the better in ocean management, particularly for countries with large EEZs and limited marine enforcement capacity.

A coordinated system for responding to violations is also vital. Closing ports to vessels that break the rules could be achieved through the Port State Measures Agreement, currently awaiting ratification.

Ocean governance and conservation is at a critical juncture. Marine resources cannot be overexploited indefinitely. The forthcoming “biodiversity beyond national jurisdiction” agreement, underpinned by novel ways of monitoring compliance, could improve ocean management dramatically.

The difficulty is that, in any scenario, better management assumes that we choose long-term sustainability over shortterm profits. Whether we will overcome our inclination to choose otherwise remains to be seen.

Derek Tittensor is Senior Marine Biodiversity Scientist at the United Nations Environment Program World Conservation Monitoring Center, and Adjunct Professor of Biology at Dalhousie University. © Project Syndicate, 2015. www.project-syndicate.org

Companies score better with bottom-up employee engagement Despite the slow economic recovery, a high number of managers and employee representatives in the EU report a good work climate, and say that the growing involvement of employees in companies’ daily decision-making is good for performance and economic growth.

Businesses with direct employee participation score better in terms of performance and well-being according to the third European Company Survey by Eurofound, the European Foundation for the Improvement of Living and Working Conditions, a tripartite EU agency.

About 84% of managers and 67% of employee representatives surveyed reported a “good” or “very good” work climate, despite contracting markets and a resulting labour surplus, said the report, launched at a joint EU Presidency conference in Riga on Monday.

Much of the positives lie in training, work time flexibility, and variable pay schemes opportunities, the survey found.

“The findings are very positive,” said Maxime Cerutti, Social Affairs Director at BusinessEurope. “It means that there is a lot of social dialogue going on, but also that employers and employees are adapting in the post-crisis.” In the context of the Europe 2020 strategy, which seeks to create the conditions for smart, sustainable and inclusive growth, the survey’s findings point to an encouraging trend.

But all that glitters is not gold and the findings need to be taken with a grain of salt.

Managers are more positive than employee

representatives about the changes in the work climate. 31% said it had improved, while only 13% felt it had deteriorated, against 24% and 26% on the employee side.

Some analysts also point out the differences in the statistics. Indeed, the survey involves 24,251 managers and only 6,860 employees.

Moreover, the questions asked to managers are not the same ones posed to employees representatives.

European Trade Union Confederation Deputy General Secretary Patrick Itschert put the figures in perspective, explaining that corporate restructuring has created everything except a positive climate.

According to Itschert, 23 mln people still

used, dialogue increases the prospects of finding solutions to ease stress and workrelated difficulties, like adapting to new technologies, rising competition and changing markets.

TRAINING TO ADAPT AND COMPETE According to the Eurofound survey, the majority of companies provide paid time off for training (71%) or on-the-job training (73%) for at least some of their employees.

“As people will retire, we want to keep that knowledge in the company,” said Gerwig Kruspel, Vice President of HR Trends and Strategy, at BASF. He explained that BASF had adopted a Employee Development Initiative, according to which 7 out 10 people get on-the-job training, while the remaining three get either coaching EurActiv.com sessions or classroom training.

“13% of establishments do not provide any training at all. In this suffer from work-related illnesses in Europe. context, barriers to provisions of training by Previous research by Eurofound has companies need to be addressed, paying shown evidence that the already attention to the ways in which workers learn comparatively high levels of psychosocial risk and develop,” said researchers at Eurofound.

Where companies do not provide any increase with restructuring, especially in the training, the state has a role to play, argued public sector. This said, Itschert concedes Aline Hoffmann, from the European Trade that the companies that are able to fight the Union Institute, pointing to SME struggles crisis are those that have good social to train their employees, so that they can dialogue in place, such as in the Nordic adapt to changing working methods and countries. “That works where workers are avoid stress. confident to talk to managers, because they When it comes to workplace innovation, have the backing from their union,” insisted the companies that seem to boost growth are Itschert. Whatever the collaborative method those that adopt interactive and joint

By Daniela Vincenti,

decision-making practices on daily tasks, directly or indirectly involving employees.

Stavroula Demetriades, Senior Programme Manager at Eurofound, mentioned the case of the Danish textile company Kvadrat. “They asked their employees to come up with utopian ideas,” she said. When you need to compete in the textile world, you need to be innovative, she added. Company managers encourage employees to think out of the box. Kvadrat now produces high-tech textiles for the highend of the design and furniture market.

“You don’t need to bring down wages to compete with China, but rather produce high-tech textiles,” Itschert added to the argument.

Commenting on the Eurofound report, University of Minnesota Work and Organization Professor John Budd stressed the difficulty of reconciling different mindsets, but argued in favour of informal practices of workers and employers dialogue at company level. “Some practices outlined in the report are worth considering, but it is important also to give space to new ideas in every company,” he said, adding one size does not fit all.

Achieving ‘win-win’ outcomes is not guaranteed even when favourable practices are in place,’ says Juan Menéndez-Valdés, Eurofound’s Director.

“Policymakers and the social partners have a role to play in fostering best practice, raising awareness and implementing initiatives at sectoral level.”

April 1 - 7, 2015

financialmirror.com | WORLD | 19

Is jobless growth inevitable?

By Sami Mahroum and Elif Bascavusoglu-Moreeau Ever since the industrial revolution, humans have been ambivalent about technological progress. While new technology has been a major source of liberation, progress, and prosperity, it has also fueled plenty of agony – not least owing to the fear that it will render labor redundant.

So far, experience has seemed to discredit this fear.

Indeed, by boosting productivity and underpinning the emergence of new industries, technological progress has historically fueled economic growth and net job creation.

New innovations accelerated – rather than disrupted – this positive cycle.

But some are claiming that the cycle is now broken, especially in technologically savvy countries like the United States. Indeed, machines are becoming smarter, with innovations like advanced robotics, 3D printing, and big data analytics enabling companies to save money by eliminating even highly skilled workers. As a result of this “productivity paradox” (sometimes called the “great decoupling”), jobless growth is here to stay. We can no longer take human prosperity for granted, however rosy the aggregate indicators for profitability and GDP growth may be.

But are we really in the throes of a Frankenstein’s dilemma, in which our own creations come back to haunt us? Or can we beat the productivity paradox by harnessing the power of machines to support development in ways that benefit more than the bottom line?

There is good reason to be optimistic. Many countries – even technologically savvy ones – can still benefit from the self-reinforcing cycle of technological advancement, rising

productivity, and employment growth. Luxembourg, Norway, and the Netherlands – three innovative and capitalintensive economies that regularly appear in the upper quartile of productivity per hour and employment, according to OECD data from 2001-2013 – are prime examples.

Cynics will suspect that Luxembourg and Norway have managed to sustain this dynamic only because of their peculiar economic structures (a concentration in finance in the former, and in natural resources in the latter). So, let’s consider the Netherlands, which stands out as the only country that recently has appeared in the upper quartile not only in productivity and employment, but also in labormarket participation.

The Netherlands has been a champion of innovation, gaining a fifth-place ranking in the recent INSEAD Global Innovation Index. A striking 85% of large Dutch firms report innovative activities, while more than 50% of all firms are “innovation active.” Dutch firms are also world patent leaders; Eindhoven, the hometown of the electronics company Philips, is the world’s most patent-intensive city.

So what is the Dutch secret for ensuring that technological progress benefits all?

The Netherlands seems to be undergoing a sort of industrial revolution in reverse, with jobs moving from factories to homes. The Dutch labour market has the highest concentration of part-time and freelance workers in Europe, with nearly 50% of all Dutch workers, and 62% of young workers, engaged in part-time employment – a luxury afforded to them by the country’s relatively high hourly wages.

Many young Dutch work part-time as schoolteachers. But a more lucrative – and common – source of part-time employment in the Netherlands is the subcontracting of “white collar” services. Highly skilled or specialized workers sell their services to a wide range of businesses, supplementing the work of machines with human valueadded activity.

Another key to the Netherlands’ success is entrepreneurship. In 1990-2010, self-employment rates fell across the OECD countries, with business ownership in the US, for example, having declined rapidly since 2002. In the Netherlands, however, business ownership has grown steadily since 1992, reaching 12% of the labour force in 2012.

Almost 70% of Dutch business owners were exclusively selfemployed in 2008.

To be sure, rates of business ownership and selfemployment are also high in low-income countries like Mexico. But the Netherlands is much wealthier, and boasts high levels of per-hour productivity, employment, and participation – largely owing to its flexible and adaptive labour market.

In short, the Netherlands has restructured its economic value chain to accommodate a new division of labour between humans and machines, embracing new kinds of economic activity – especially part-time work and solo entrepreneurship – to balance human needs with technological advances. In doing so, it has highlighted the importance of “enterprising skills” – including creativity, entrepreneurship, leadership, self-management, and communications – in enabling humans to keep pace with technology.

Machines may be reaching new heights of intelligence, but they are no match for human resourcefulness, imagination, and interaction. This is a lesson that countries would do well to learn from the Dutch.

Sami Mahroum is Academic Director of Innovation and Policy at INSEAD. Elif Bascavusoglu-Moreau is a senior research fellow at INSEAD’s Innovation and Policy Initiative. © Project Syndicate, 2015. www.project-syndicate.org

What’s an ‘industry’?

Carmakers are afraid of Apple. YouTube, Netflix, and Amazon are upending the television industry. Skype, Facebook, Twitter, Snapchat, and others have changed consumers’ notions of how – and how much it costs – to communicate with one another.

Sectors and industry delineations as we know them are breaking down.

Once upon a time, those delineations established a fairly clear-cut world. Car companies made cars, and they were in the automotive industry. Phone companies ensured that we could speak to one another over great distances, and they were in the telecommunications sector.

Broadcasting companies made television shows, and they were in the media sector.

Everything was neat and orderly. Analysts could easily categorise companies and tell the markets what they were worth, boards could oversee firms with a view to shareholders’ happiness, and all was right in the world. Until it wasn’t.

That world – in which clearly defined sectors enable easy classification of what a company does – is disappearing before our eyes. Is Apple a technology company or a luxury watchmaker? Is Google a searchengine firm or an up-and-coming car company manufacturing driverless vehicles?

But, for every Apple or Google, there are companies that seemed innovative but became obsolete or fell behind. Kodak and Nokia, for example, provide a cautionary tale for companies that began life as innovators.

Nokia, in particular, was long held up as a case study in corporate reinvention – the very epitome of constant, top-to-bottom change. Here was a company that entered

and exited sectors as needed: paper, tires, rubber boots, and telecoms. And yet it has lost its way; with the sale of its mobile-phone business to Microsoft, many doubt that it can recover and reinvent itself yet again. (Of course, even if Nokia has run out of road, its loss may be Finland’s long-term gain, as startups begin to blossom from the minds of the company’s highly skilled ex-workers.)

Many traditional companies, too, have fallen behind because they hewed too closely to their traditional definitions. Like Kodak, other storied brands have not innovated: Polaroid, Radio Shack, Borders,

By Lucy P. Marcus Aquascutum, Blockbuster, and the list goes on. Their managers thought they were doing the right thing: not losing sight of the “core business.” Their board members knew the industry and had all the right credentials to oversee the managers.

But both managers and board members were wearing blinders. They did not make room around the table for those who could see that the company’s destiny did not lie only straight ahead, but also off to the side.

Too many companies are too slow to have tough conversations about strategy and to ask whether the right people are in place to push them hard enough and far enough, showing them vistas that are not visible from where they feel most comfortable.

Complacency has never been an option; but in an environment in which startups can

overturn an entire sector in the space of a few years, what once seemed like sound strategy can now amount to resting on one’s laurels.

Traditional companies are only now coming to terms with the reality that earlystage companies might challenge them in a serious way. Swiss watchmaker Tag Heuer, for example, has just announced that it will create a partnership with Google to catch up in the high-stakes battle for the world’s wrists.

Many traditional companies, however, continue to believe that being toppled by upstarts can happen only in the “technology” sector. But what sector does not rely on technology? How many companies that could be classified as technology companies could also be classified as something else? As the ecommerce website Etsy prepares for its IPO, should analysts call it a technology company or a retail company? The biotechnology company 23andMe is moving beyond genetic spit tests and into the competitive and pricey world of drug discovery. Pharmaceutical companies ignore that at their peril. Banking and finance, oil and gas, higher education – no sector is immune.

Perhaps inevitably, even those firms that are most responsible for blurring the lines between sectors are not immune to the consequences. In a legal case between Apple and A123, a manufacturer of batteries for electric cars, A123 accuses Apple of violating a non-compete agreement that its engineers signed. One defense strategy that Apple is using is to argue that it is not violating the agreement, because it is in a different industry.

But, in a world in which a computer

company that has already revolutionised the music business and the telecommunications sector, and that now makes watches, could soon start manufacturing electric cars, one can only ask, “What is an industry?”

Obviously, Apple has been asking that question for years. Traditional companies must learn to ask it as well. An idea catches on, money piles in, and before anyone can check their analogue wristwatch, the ground has shifted.

Lucy P. Marcus is CEO of Marcus Venture Consulting. © Project Syndicate, 2015 www.project-syndicate.org

April 1 - 7, 2015

20 | BACK PAGE | financialmirror.com

Why the Sustainable Development Goals matter

By Jeffrey D. Sachs Following the progress made under the Millennium Development Goals, which guided global development efforts in the years 2000-2015, the world’s governments are currently negotiating a set of Sustainable Development Goals (SDGs) for the period 2016-2030. The MDGs focused on ending extreme poverty, hunger, and preventable disease, and were the most important global development goals in the United Nations’ history. The SDGs will continue the fight against extreme poverty, but will add the challenges of ensuring more equitable development and environmental sustainability, especially the key goal of curbing the dangers of human-induced climate change.

But will a new set of goals help the world shift from a dangerous business-as-usual path to one of true sustainable development? Can UN goals actually make a difference?

The evidence from the MDGs is powerful and encouraging. In September 2000, the UN General Assembly adopted the “Millennium Declaration,” which included the MDGs. Those eight goals became the centrepiece of the development effort for poor countries around the world. Did they really make a difference? The answer seems to be yes.

There has been marked progress on poverty reduction, disease control, and increased access to schooling and infrastructure in the poorest countries of the world, especially in Africa, as a result of the MDGs. Global goals helped to galvanise a global effort.

How did they do this? Why do goals matter? No one has ever put the case for goal-based success better than John F. Kennedy did 50 years ago. In one of the greatest speeches of the modern US presidency, delivered in June 1963, Kennedy said: “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it and to move irresistibly towards it.”

Setting goals is important for many reasons. First, they are essential for social mobilisation. The world needs to be oriented in one direction to fight poverty or to help achieve

sustainable development, but it is very hard in our noisy, disparate, divided, crowded, congested, distracted, and often overwhelmed world to mount a consistent effort to achieve any of our common purposes. Adopting global goals helps individuals, organisations, and governments worldwide to agree on the direction – essentially, to focus on what really matters for our future.

A second function of goals is to create peer pressure. With the adoption of the MDGs, political leaders were publicly and privately questioned on the steps they were taking to end extreme poverty.

A third way that goals matter is to spur epistemic communities – networks of expertise, knowledge, and practice – into action around sustainable-development challenges. When bold goals are set, those communities of knowledge and practice come together to recommend practical pathways to achieve results.

Finally, goals mobilise stakeholder networks. Community leaders, politicians, government ministries, the scientific community, leading nongovernmental organisations, religious groups, international organisations, donor organisations, and foundations are all motivated to come together for a common purpose. That kind of multistakeholder process is essential for tackling the complex challenges of sustainable development and the fight against poverty, hunger, and disease.

Kennedy himself demonstrated leadership through goal setting a half-century ago in his quest for peace with the Soviet Union at the height of the Cold War. In a series of

speeches starting with his famous commencement address at American University in Washington, DC, Kennedy built a campaign for peace on a combination of vision and pragmatic action, focusing on a treaty to end nuclear tests.

Just seven weeks after the peace speech, the Americans and Soviets signed the Limited Test Ban Treaty, a landmark agreement to slow the Cold War arms race that would have been unthinkable only months earlier. Though the LTBT certainly did not end the Cold War, it provided proof that negotiation and agreement were possible, and laid the groundwork for future pacts.

But there is nothing inevitable about achieving large-scale results after stating a goal or goals. Stating goals is merely the first step in implementing a plan of action. Good policy design, adequate financing, and new institutions to oversee execution must follow goal setting. And, as outcomes occur, they must be measured, and strategies must be rethought and adapted in a continuing loop of policy feedback, all under the pressures and motivations of clear goals and timelines.

Just as the world has made tremendous progress with the MDGs, we can find our way to achieving the SDGs. Despite the cynicism, confusion, and obstructionist politics surrounding efforts to fight poverty, inequality, and environmental degradation, a breakthrough is possible. The world’s major powers may appear unresponsive, but that can change. Ideas count. They can affect public policy far more profoundly and rapidly than detractors can imagine.

In his final address to the UN in September 1963, Kennedy described contemporary peacemaking by quoting Archimedes, who, “in explaining the principles of the lever, was said to have declared to his friends: ‘Give me a place where I can stand – and I shall move the world.’” Fifty years on, it is our generation’s turn to move the world towards sustainable development.

Jeffrey Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is Special Adviser to the United Nations Secretary-General on the Millennium Development Goals. His latest book is The Age of Sustainable Development. © Project Syndicate, 2015. www.project-syndicate.org

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