It’s only been a couple of weeks since British voters decided to leave the European Union in a referendum, but they are already starting to feel the consequences.
Away from Westminster — where apparently nobody anticipated nor prepared for the “wrong” outcome — local governments are bracing for years of financial hardship, the Financial Times reports:
Many fear that the billions of euros from EU development funds channeled into some of the most deprived areas of the country will not be replaced by Westminster, just as the slowing British economy is set to hit council budgets that are already stretched.
The newspaper cites estimates of £8.6 billion in regional development funds being lost between now and 2020. Read more
Reading Bloomberg Businessweek‘s interview with Barack Obama, I get the sense the president understands the big economic and social challenges of our time but still underestimates the impact of regulation on businesses. Read more
Tata’s decision to put its British operations up for sale has predictably triggered calls for state aid.
Sajid Javid, the Conservative business secretary, has fortunately ruled out nationalizing the Port Talbot steelworks in Wales, but he is leaving the door open to some form of government assistance.
The “steel industry is absolutely vital for the country,” said Javid. “We will look at all viable options to keep steelmaking continuing in Port Talbot.”
He would be wrong on both counts.
Steel represents just .1 percent of Britain’s economic output and 1 percent of its manufacturing output. The Port Talbot site employs 5,500 people. Tata, the Indian company that owns it, has 15,000 workers across the United Kingdom. This is not a “vital” industry no matter how you look at it.
As for the suggestion that all Tata needs is a little more help from the British government — it’s had plenty of help already.
As Vince Cable, Javid’s Liberal Democrat predecessor, writes in the Financial Times, the last government introduced compensation payments to energy-intensive industries like steel. It was clearly not enough.
Cable laments the absence of a long-term commitment from the industry, but the same newspaper points out that Tata has invested £3 billion in its European operations since it acquired them in 2007 for £6.2 billion.
No, the real reason British steel is uncompetitive is not a lack of investment; it’s — and Cable hints at this — that steel is made cheaper elsewhere. Specifically in China.
Blame the Chinese
The BBC’s Kamal Ahmed reports that the country produces half the world’s steel. Its exports have risen more than tenfold in the last decade.
That hasn’t happened by accident. China subsidizes its own steel production and keeps foreign companies out.
It is unfair and the thousands of Tata workers in Britain may lose their jobs as a result. But the benefits for the United Kingdom as a whole in the form of cheaper steel and steel products should far outweigh those job losses.
And it’s not as though protectionism is doing well in China. The Financial Times notes that its subsidies have led to an overcapacity in the steel market, causing Chinese mills to close and thousands of workers to lose their jobs — with little or no compensation, unlike their counterparts in the West.
For Britain to follow the Chinese model would be folly. Better to let the steel industry die than pour more money, public and private, into it.
German businesses are largely dissatisfied with Chancellor Angela Merkel’s immigration policy.
In a survey conducted for Handelsblatt by the Forsa Institute, 68 percent of managers said they were unhappy with Merkel’s open-door policy against 32 percent who support it.
The owners of small and medium-sized companies are the least satisfied whereas 45 percent of executives are large corporations agree with Merkel’s approach.
Business leaders big and small nevertheless blamed her resistance to more stringent measures for the rise of the Alternative für Deutschland, an anti-immigrant party that made gains in state elections this weekend.
The survey, coming on the heels of a disappointing election result, is a wakeup call for Merkel, whose Christian Democrats rely heavily on the support of businesses.
High immigration might seem welcome news for enterprise. Germany’s working-age population is projected to shrink from around 49 million in 2013 to 34-38 million in 2060, according to government figures. Foreigners could fill the gaps.
Except, as we reported in January, many are not so readily employable in a rich and developed economy like Germany’s.
The Nuremberg-based Institute for Employment Research has found that less than 15 percent of refugees from Syria and other countries have completed vocational training or a university degree.
According to the Organization for Economic Cooperation and Development, the average eighth-grader in prewar Syria had reached a level of education only similar to that of a third-grade pupil in Germany.
“Let’s not delude ourselves,” Ludger Wößmann, the director of Ifo Center for the Economics of Education in Munich, told Politico earlier this year. “From everything we know so far, it seems that the majority of refugees would first need extensive training and even then it’s far from certain that it would work out.”
Merkel got ahead of public opinion last year by letting in around one million immigrants. She has since backtracked by freezing family reunifications and speeding up deportations. But she is still resisting recommendations to cap the number of asylum requests Germany will process, a step neighboring Austria has taken and one polls suggest would enjoy broad support.
Other policies are making it harder to integrate the people who have already arrived.
Most immigrants may not have the skills needed for a high-paying job, but they could do menial work — if only regulation made it easier.
Only five of Germany’s sixteen states recognize foreign technical qualifications. In the others, a construction worker from Iraq, say, could not run a business or even get a job without getting a German certificate first.
Other impediments to hiring include the national minimum wage Merkel’s government has introduced and her decision to limit temporary work contracts to eighteen months. Both reforms were concessions to the left-wing Social Democrats with whom she govern in a coalition.
Are there another people in Europe so determined to shoot themselves in the foot as the Greeks?
Against all the advice of other euro states, they elected — twice — in recent years leaders who vowed to reverse what little progress had been made to liberalize the Balkan nation’s economy. Labor market reforms came undone last year. Privatizations were canceled or pushed back.
The country only agreed to sustain reforms in return for a third, €86 billion bailout this summer when it, once again, teetered on the brink of default.
Now promises have already been broken and targets missed. Greece is typically slow to implement the economic policy changes it commits to undertake. Yet there seems to be no holdup in policies that make things worse.
The Economist reports that the latest brilliant idea to come out of Alexis Tsipras’ far-left coalition is a 20-percent rise in the levy on companies’ profits that goes toward pensions.
Whereas other crisis countries, like Ireland and Portugal, have deliberately kept businesses taxes low to stir job growth, Greece has raised its time and again: from 20 percent in 2012 to 29 percent in 2015.
The result is predictable: By some estimates, more than 200,000 businesses have closed or in some cases left Greece in the last five years. The taxable profits declared by companies has fallen by a third.
“Carry on in this vein and there will not be many businesses, or much profit, left to tax,” the newspaper laments.
The bosses of large German companies see dark clouds on the horizon as the world economy slows down this year.
Handelsblatt cites Heinrich Hiesinger, chief executive of the steel giant ThyssenKrupp, saying there is “massive overcapacity” in the steel market. Kurt Bock, chairman of the BASF chemicals group, said that “key markets are not growing as fast as expected.” And Wolfgang Büchele, head of the industrial gas company Linde, has complained that customers are afraid “to sign new contracts.”
These three companies are part of a wider trend, according to the business newspaper. The thirty companies that make up the DAX index were expecting sales of €80 billion but will make just €63 billion in 2015, down 5 percent from year before. Eighty of the 306 companies listed in the Prime Standard segment of the Frankfurt Stock Exchange have reduced their profits or sales.
The last time the situation was this bad was in 2009, when the German economy shrank by 5 percent during the financial crisis.
Much of Germany’s woes can be attributed to a slowdown in emerging markets, especially China.
Cheap oil, while beneficial to consumers, is also hurting the shale gas industry in the United States, which affects German companies like Siemens and metals trader Klöckner.
Handelsblatt reports that German businessmen are also worried about a political trend away from globalization on both sides of the Atlantic.
In Hungary and Poland, two of Germany’s biggest trading partners, Euroskeptic parties are in power. In France and the Netherlands, even bigger German trading partners, nationalist parties that want to withdraw from the European Union are ahead in the polls.
In the United States, little unites presidential candidates Bernie Sanders on the left and Donald Trump on the right except their skepticism of free trade.
By Handelsblatt‘s calculation, the hundred largest listed companies in Germany generate two-thirds of their sales abroad. “German bosses might be smart to be scared.”
Germany could boost internal demand to make up for the headwinds abroad, but — as we have reported — the current coalition government is letting competitiveness languish in some ways.
While unemployment is low, the ruling Christian and Social Democrats have made the labor market less flexible. They limited temporary work contracts to eighteen months last year and have introduced a national minimum wage of €8.50 per hour that economists and employers fear will slow jobs growth.
Whereas most other European countries are raising the retirement age, Germany has made pensions more generous. Workers can now retire after 45 years on the job even when they’re only 63 years old — four years below the statutory retirement age.