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5 The world this week Leaders 7 GLobaL finance Save the City
27 Bosnian politics Finally, a gover n ment
28 Turkey and the Kurds Death upon death
29 Charlemagne A gloomy 2 0 1 2 for Europe
8 Hugo Chavez Cancer and the body politic
8 The world economy Self-i nduced sluggi s h n ess
9 Hungary's government To Vi ktor too many spoils
10 Citizenship On the cover Britain is home to the world's capital of capital but no Longer prizes it. That is a mistake: Leader, page 7. The City's continued success is far from certain, pages 16-18. The race to run London, page 19. Hatred of bankers is one of the world's oldest and most dangerous prejudices: Schum peter, page 58
In prai se of a seco nd (or third) passport
Letters 1 1 On religion in America, Canada, Britain and Europe, Martin Luther Briefing 16 Britain's financial industry Death by a thousand cuts
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Britain 19 The London mayoral race Back i nto t h e fray
20 British and American rowing Rowed scholars
20 Stephen Lawrence Cri m e and consequences
22 Stopping burglary On your mark
22 Burglars as consumers Not worth nicking
23 The Big Issue magazine H e lp the h o m eless!
23 Telef6nica London calli n g
Volume 402 Number 8766
2 4 Bagehot A murder that changed Britain
First published in September1843
to toke port in "a severe contest between intelligence, which pressesforward, and an unworthy, timid ignorance obstructing our progress. " Editorial offices in London and also: Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Hong Kong, Johannesburg, Los Angeles, Mexico City, Moscow, New Delhi, New York, Pans, San Francisco, Sao Paulo, Singapore, To kyo, Washington DC
Europe 25 Hungary's government The Long march of Fidesz
26 Germany's president Lone Wulff
United States 30 The Republicans On to New Ham pshire
31 The economy and the states Less of a drag
34 Restricting abortion Unintended issues
34 Election Laws H o lder v states
35 Economic diversification Reimagi n i n g the future
The Republicans M itt Ro m n ey wins very narrowly in Iowa, page 3 0 . If Rick Santo rum wins, consenting adu lts s h ould Lock their bedroom doors: Lexi ngton, page 3 7 . Raising m o n ey online is harder than it sounds, page 5 2 . Arguments about w h o can vote, page 34
36 Diversifying Nevada Rolli n g the dice
37 Lexi ngton Rick Santorum a n d sex
The Americas 38 Venezuela's election campaign C h avez shuffles the pack
39 Bolivia's j udges Roug h justice
39 Canadian history The 1812 overture
40 Rebuilding Haiti Open for busi ness
The Strait of Hormuz Despite its sabre-rattli n g in the Gu lf, Iran's opti o n s are Limited, page4 2
40 Jamaica's election Go, sista
Middle East and Africa 4 1 Egypt's elections Steady n erves required
42 Iran v the United States Raisi n g the stakes
43 Syria and the Arab League No negotiations in sight
43 Syria's minorities Jangli n g sectarian n erves
44 Somalia and Ethiopia Might thi ngs get better?
44 South Africa and alcohol Don't touch a drop
Citzenship Multiple identities are natural. Citizenship Laws should catch up: Leader, page 10. Governments are i n creasingly tolerant of dual nationals. But some states continue to abhor them, page 50
26 Austerity in Spain Tur n i n g the screws
27 Austerity in Italy Terrorisi n g the taxman
�� Contents continues overleaf
4 Contents
I
The Economist January 7th
Asia 45 Reviving Kolkata
World GOP % change on previous year
The city that got left behind
46 Singapore politics Falling on their wallets
46 Damming the Mekong Repri eve for a river 2001
05
10 *Estimate
12 tForecast
World economy This year will probably be a pretty bad one. It doesn't have to be: leader, page 8. For central bankers i n the rich world, u n conventional i s the new conventional, page 6 2 . The i m provi n g fina nces of American local government, page 3 1. Being beari s h about India's econo my, page 6 3 . Tou gh ti mes i n Spain, page 26 and Italy, page 2 7 . Europe's e n d less sum mits: C harlemagne, page 2 9
47 Lifting martial law in Fiji A gift from the Com mander
48 Thailand's politics Waiti ng for the man
48 Chinese broadcasting Entertai n i n g the masses
49 Banyan The Fukushima black box
Finance and economics 62 Central banks Crazy aunt on the loose
63 India's slowdown The case for the defence
64 Spain's banks Hor n s of a di lemma
64 China's economy An odd contracti o n
65 B uttonwood H edge-fu n d mirage
66 Bank capital Half-cocked Basel
66 Swiss central banking Called to account
Dutc h m e n grounded
5 1 Collecting global garbage Effluence of affluence
52 Social media One th ousand poi nts of "like"
52 Scientology Thetans at war
Fast but i n efficient
Intel v ARM America's chip giant a n d its Briti s h rival have lo n g domi nated different bits of the global semi conductor market. N ow each is attac ki n g t h e other's stro n g h old, pages 59- 6 1
55 Ethanol A boost for Brazi l
55 B Corps Firms with benefits
56 Chinese condoms Reds in the bed
56 European transport policy Gree ni n g the skies
57 Selling cars online The TrueCar challenge
58 Schu mpeter
Fi ddli n g with the mi nd
69 Evolution The value of a good editor
69 Power from the sea Seco n d time arou nd . . .
70 A new island in the Red Sea
59 The semiconductor industry Space i n vaders
Condoms A Chi nese start-up with XL a m biti o n s, page 5 6
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International 50 Dual citizenship
2012
80 Economic and financial indicators
An Economist Group business
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5
Politics
The process of selecting a presidential candidate for the Republican Party got under way, with Mitt Romney eking out the narrowest of victories (by eight votes) in the Iowa caucuses over Rick Santorum, hitherto a no-hoper in the race. Ron Paul came a close third and Newt Gingrich was some way behind in fourth place. Mr Santorum won the support of many social conservatives and evangelicals. Those who said they were looking for the best candidate to beat Barack Obama opted for Mr Romney. Michele Bachmann, a tea
party favourite, ended her bid for the presidency after com ing sixth in Iowa. Asserting some new-found presidential backbone as he enters an election year, Barack Obama appointed several people to executive positions over the heads of the Senate, which is in recess and where Republicans have held up the nominations. Chief among Mr Obama's recess appointments is Richard Cordray as boss of the new and controversial Consumer Financial Protec tion Bureau.
Enter stage Left The opposition People's Na tional Party won a landslide victory in Jamaica's general election. Its leader, Portia Simpson-Miller, becomes prime minister again, four years after losing the j ob. Argentina's president, Cris
tina Fernandez, was said to be recovering well after an oper ation for thyroid cancer. She is expected to return to work on January 24th
An international arbitration tribunal awarded Exxon Mobil $908m in compensation for assets nationalised by Venezuela's government in 2007. Exxon had demanded more than $10 billion, but P DVSA, Venezuela's state oil company, said it will pay Ex xon just $255m. Exxon is pur suing a separate case against Venezuela at the World Bank's arbitration panel. An appeals court in Ecuador ratified an award of $9.5 billion in damages against Chevron for oil pollution. The American oil company said the judgment was fraudulent and politicised; it is taking action against the plaintiffs in international courts.
A Chinese man died of bird flu in the port city of Shen zhen, the first reported case of human infection for 18 months. Chinese health au thorities urged calm as nearby Hong Kong culled 17,000 birds.
Some kind of justice Two men were convicted of the 1993 murder in London of Stephen Lawrence, a black British teenager. His killing led to much soul-searching in Britain a bout racism and the criminal-justice system. The original investigation was marred by police ineptitude and one of the men had previ ously been acquitted.
A Long walk to freedom
Myanmar released hundreds
of prisoners, and shortened prison terms for others, to mark the 64th anniversary of its independence from Britain, and just ahead of the first visit by a British foreign secretary to the country since 1955. Democ racy activists claimed that only a handful of those freed were political prisoners. An Ameri can spokeswoman said the clemency wasn't enough to merit lifting sanctions. Pakistan experienced its first
terrorist attacks of the year, when two bombs killed five people in the north-west Khy ber Pakhtunkhwa province. Meanwhile, the Pak Institute for Peace Studies in Islamabad reported that there were 1,966 terrorist attacks in Pakistan last year, which killed 2,391 people and injured more than 4,300. Both the number of attacks and the casualty count were lower in 2011 than in the two previous years. The Commonwealth respond ed cautiously to an announce ment by the prime minister of Fiji, Commodore Frank Bainimarama, that the Pacific island state would lift a state of emergency and draft a new constitution. Fiji was suspend ed from the Commonwealth in 2009, three years after Mr Bainimarama seized power in a coup.
Concerns mounted over the state of democracy in Hunga ry as tens of thousands took to the streets of Budapest to protest against a new constitu tion. Critics say the document entrenches the power of the ruling Fidesz party at the ex pense of formerly indepen dent institutions. European officials said that they would not return to Hungary to re sume financial-aid talks until the government withdraws a law that increases state influ ence over the central bank.
watchers by forming a govern ment. Bosnia hopes the deal will help it on the road to wards EU membership.
Unpersuasive A team of observers under a mandate from the Arab League arrived in Syria in an effort to persuade Bashar Assad's regime to withdraw his troops from towns, to free all political prisoners and to talk to the opposition. But the death rate stayed as high as before, some but by no means all troops were withdrawn, a minority of prisoners were freed, and no talks took place. As Egypt's three-stage general election drew to a close, with final run-offs expected on January nth, assorted Islamists were exp ected to win three quarters of the seats in the lower house of a new parlia ment, but the relatively moder ate Muslim Brothers continued to say they would prefer to form a coalition with secular parties rather than with the extreme Salafists. Israeli and Palestinian negoti ators met in Jordan and had their first talks for more than a year. No breakthrough oc curred but the two sides said they would meet again soon.
Thousands of Nigerians protested against a doubling of fuel prices after the govern ment withdrew a costly subsi dy. As trade unions threatened to strike, President Goodluck Jonathan's cabinet held an emergency meeting.
Christian Wulff, the German president, faced calls for his resignation after it emerged that he had tried to stop a tabloid newspaper publishing a story about a personal loan he had accepted. If Mr Wulff is forced out it would be an embarrassment for Angela Merkel, who backed his candi dacy in 2010 against the wish es of some in her party. After more than a year of political deadlock leaders of Bosnia's quarrelsome Bos niak, Serb and Croatian com munities surprised Balkan-
Youssou N'Dour, a well known musician, said he would run for the Senegalese presidency against Abdoulaye Wade, the incumbent, in elec�� tions next month.
The Economist January 7th
6 The world this week
Business For the first time in its 13-year existence the European Cen tral Bank chose a non-Ger man to head its economics division. Peter Praet is Belgian (though he was born in Ger many). He takes over the role of preparing policies on in terest rates and other areas from]iirgen Stark, who stepped down as the ECB's chief economist in December. It is widely believed that Mr Stark, in line with other Ger man officials, did not support the central bank's contro versial policy of buying up bonds from distressed euro zone economies.
Shining a little lig ht
The Federal Reserve said it would soon start publishing detailed forecasts on interest rates. Until now the Federal Open Market Committee has given generally rough guid ance about which direction rates are likely to take, but from this month the specific projec tions from each of the FaMe's members will be made avail able. It is a big move towards greater transparency, though some argue it could cause confusion if the rate forecasts are interpreted as monetary policy interventions. The Swiss National Bank published its internal regu lations on staff transactions to try to dampen allegations swirling in the Swiss media that Philipp Hildebrand, the central bank's president, and his wife acted wrongly by buying dollars prior to the SNB setting a ceiling for the Swiss franc last year. The SNB also published the results of an investigation into the trades, which found that the transac tions did not breach SNB rules. India decided to allow "qual
ified" foreign investors to invest directly in equity mar kets; foreign capital has hither to been restricted to investing in India's listed companies through mutual funds and overseas derivative instru ments. The easing of the rules comes soon after the govern-
ment backtracked on its deci sion to open Indian retailing to foreign competition, following a political backlash, raising questions about whether India is open for business.
New year's resolution
Spain's new centre-right gov
ernment predicted that the country's budget deficit for 2011 would probably reach 8% of GDP, higher than many analysts were expecting and above the target of 6% agreed with the European Union. At 8%, Spain's deficit would be the third-biggest in the EU, behind those of Greece and Ireland. The new Spanish government has embarked on an emergency programme of spending cuts and tax rises. Inflation in the euro zone fell to 2.8% in December, the first fall in five months and another consideration for the ECB as it mulls further cuts to interest rates.
Foreign energy companies offered further evidence of their huge appetite for Ameri can shale gas. Total, based in France, announced that it would pay $2.3 billion for a 25% stake in a shale-gas ven ture in Ohio. China's Sinopec is to invest a similar amount in various shale projects.
� PhRPHllAL MOTION
MACHINE
Boeing's decision to close its 83-year-old factory in Wichita, Kansas, caused dismay among local politicians, who accused the company of reneging on a promise to keep the plant open after it won a contentious contract to build new air-force tankers. Boeing used to em ploy 40,000 people at the Wichita facility, which works on defence contracts, but last year it warned of "limited prospects for future work". Yahoo! appointed a new chief
executive, poaching Scott Thompson from PayPal to fill the position. Last September Yahoo! sacked Carol Bartz from the j ob after she failed to revive the internet firm's sag ging fortunes. Fiat increased its stake in Chrysler to 58.5%, after it
completed a task set by the American government to help Chrysler develop a car that gets 40 miles to the us gallon (the average fuel efficiency of passenger cars in America is currently around 34mpg). Fiat has now achieved that with the Dodge Dart, which it will assemble in America. New figures showed that
2012
already surpassed Las Vegas as the gambling capital of the world. A recent report from PWC forecast that Asia will soon overtake the United States as the biggest casino market, generating revenue of $79.3 billion in 2015.
Another turbulent year ahead?
I
Stockmarkets % change Jan 1st-Dec 30th 2011 30
20
10 - 0
+
10
Dow Jones S&P 500 FTSE 100 DJ STOXX so• Nikkei 225 Shanghai A index Bombay SE Source: Thomson Reuters
*Euroarea
Stockmarkets started the year on a positive note, buoyed by strong manufacturing data from America, Britain and China. Investors will be hop ing that 2012 proves kinder than last year, when most markets fell. It was no surprise that the euro area's benchmark index fared badly in 2011, though the once-hot stock markets of Brazil, Hong Kong, China and India did even worse. One of the world's best performers, oddly enough, was Venezuela's main index.
Macau's revenue from casino
gambling rose by 42% last year, to $33.5 billion. Macau has
Other economic data and news can be found on pages 80-81
7
Save the City Britain is the home of the world's capital of capital but no longer prizes it. That is a mistake
A TTACKS on bankers by profi testers from Occupy Wall
Street, Occupy London and Occupy any city where a financier might have the temerity to turn a quick buck have spiced up the dreary economic news of the past year. Yet hostility is not confined to the left. Even the bankers' supposed allies are putting the boot in-and nowhere more so than in Britain. The prime minister, David Cameron, has promised to "end excess" in the City of London. His ministers boast about their efforts to "rebalance" the economy away from dodgy finance to honest manufacturing. Sir Mervyn King, the governor of the Bank of England, has made a habit of lambasting the Square Mile's short-term "profits next week" culture. In continental Europe the City is viewed with a mixture of loathing (on the ground that it single-handedly caused the euro crisis) and covetousness (on the ground that all those clever French and Italian financiers should ply their trade in Paris and Rome instead). The European leaders' attacks, at least, should have an upside: their hypocrisy and self -interest should serve to remind Britons what is at risk. London is by many measures the world's biggest financial centre, and weakening it is in nobody's interest-least of all Britain's. Better regulation of banks is certainly needed, especially to protect British taxpayers. And so far the City-bashing has been mainly rhetorical. But running down one of the world's most successful (and mobile) commercial clusters is folly-and it is surely not the legacy Mr Cameron would wish to leave his successors. Strangely, California doesn't talk down Silicon Valley
Finance-the funnelling of savings to their best use-is a vital industry. Britain is very good at it, leading the world in various financial markets, including foreign exchange and over-the counter derivatives. The City's comparative advantage is clear from Britain's trade balance. The export surplus in financial services and insurance was 2.6% of GDP in the first three quar ters of 2011. Add in the exports of related ser vices, such as law, accountancy and consulting, and the trade surplus rises above 3% of GDP. An industrial cluster that can generate foreign earn ings on such a scale is enviable. No other country, not even America, comes close to matching Britain's trade balance in fi nance. And with its domestic economy floundering, Britain needs all the exporting power it can muster. Yet the City is in danger (see page 16) from two sorts of threats-ones that you can do nothing much about, and ones that you can. Even with wiser politicians, the City would be likely to shrink over the next few years. New mortgages are be ing approved at half their pre-crisis rate, which means less business for retail banks. The number of employees working in finance across Britain is 7% below its level three years ago. The rich world's economic funk and mostly lifeless asset mar kets mean the outlook for trading and the deals that bring in fat fees is the worst for years-perhaps decades. Tighter regulation also means thinner profits. And there is bound to be some drift
in dealmaking towards the emerging world, whose govern ments are trying to develop their own financial centres. Still, Asia also presents an opportunity. China and India have underdeveloped financial markets; Britain has the exper tise. If London could become a global centre for dollar trading, why not for yuan dealings, too? Continental Europe's under developed personal-finance market should be another target. But the City can compete successfully with other financial centres only if Britain has the right policies on regulation, tax and immigration. On regulation, there is an understandable fear that an outsized financial-services industry means an out sized risk for taxpayers. The proposals from Britain's Vickers Commission go a long way to deal with this, dividing a tightly regulated domestic banking system (the bit that puts taxpayers at risk) from a more freewheeling international market for glo bal capital. By contrast, the thrust of many of the proposals coming out of Brussels looks harmful. Some, such as the finan cial-transactions tax, can be blocked by a British veto. The rest are subject to majority vote, and Mr Cameron's stand-off with his European partners last month-supposedly to protect the City, but really to avoid having to sell a more integrated Europe to Tory Eurosceptics-has now given London's rivals the ex cuse to hamstring the City. The British government's own policies on tax and immigra tion are also doing a lot of damage. The so% tax rate, intro duced by the previous Labour government in 2010, brings in little money and has made London the most taxed out of ten financial centres for high net-worth individuals. The present generation of financial bosses, who live in and like London, may tolerate it for a while, but younger ones are feeling the pull of Switzerland, Hong Kong or Dubai. As for immigration policy, the best way to win Asian business is to lure the young Asian financiers to London. Tight limits on talented immi grants damage the City's prospects-and indeed the prospects of every bit of British business. Let stockbrokers make cars-and other mad dreams
The politicians and regulators have all sorts of excuses. Abol ishing the so% tax rate is now politically dangerous. Immi grants are unpopular. And, they maintain, the risks of attack ing the City are small, for it has formidable advantages that are hard to replicate quickly. London's long business day bridges the close of Asia's markets with the opening of New York's, making it a convenient location for global asset managers and traders. Trading attracts liquidity and skills in a virtuous circle. But even the strongest incumbent is vulnerable to competi tion. Each decision to locate a new trading desk somewhere else compounds over time to a loss of the critical mass that has sustained the City as a leading financial centre. Economies work best when they reflect a country's innate competitive advantages. Britain should, therefore, host a rela tively big financial sector, and policymakers should celebrate it, rather than deride it. If they continue their policy of malign neglect, Britain will one day wake up to discover that it has lost one of the world's most successful business clusters, and the best hope the next generation has of earning a decent living. •
8
The Economist January
Leaders
7th 2012
Venezuela's presidential election
Cancer and the body politic Before voting this year, Venezuelans have a right to know the state of Hugo Chavez's health
V E N by the standards of one
E of the world's great conspiracy theorists, it was wacky stuff. On hearing the news that Argentina's Cristina Fernandez had become the fifth left-of -centre Latin American leader to be diagnosed with cancer in the past three years, Venezuela's Hugo Chavez, himself unlucky enough to be one of them, mused that the United States might have developed technology to "induce cancer" in its political foes. "I don't want to make any reckless accusation," Mr Cha vez said disingenuously, "but it's very, very, very strange." This could be just another piece of self -evident nonsense from Mr Chavez. After all, several of the other stricken leaders have friendly relations with the United States and the health scares have thus far increased the popularity of both Mr Cha vez and Ms Fernandez: Latin American politics has featured a maudlin streak ever since the early death (yes, from cancer) of Eva Peron. But Mr Chavez may have been putting up a smoke screen. The recent cancer cases offer not just stories of perso nal suffering but also a striking contrast in the way that the leaders affected have handled the news about their health. Four have been exemplar y in releasing timely information about their condition, overcoming the human instinct for se crecy in such matters. Brazil's president, Dilma Rousseff, was diagnosed with lymphatic cancer in 2009 on the eve of the campaign in which she was elected. Paraguay's president, Fer nando Lugo, was equally open when treated for the same ill ness. In October, when Ms Rousseff 's predecessor, Luiz Inacio Lula da Silva, was diagnosed with throat cancer, he made a point of ordering his doctor to release full details of his condi tion to the press. Ms Fernandez, who this week underwent sur gery for thyroid cancer, has behaved similarly.
The odd one out is Mr Chavez. He has said that he had an operation in Cuba in June to remove a lump from his pelvic area; he insists that, after four sessions of chemotherapy, he has been cured. But he refuses to reveal what kind of cancer he had, nor have any of his doctors appeared in public to offer a prognosis. The obvious inference is that the problem may be more serious than he is letting on. Some foreign intelligence sources suggest that Mr Chavez has an untreatable sarcoma. Democratic accountability should trump medical secrets
If this is true, he would not be the first political leader to try to hide a medical problem. Franr;ois Mitterrand ruled France for 11 years while nursing prostate cancer. John Kennedy had daily injections of steroids for a rare endocrine disorder. But it is hard in today's more open societies for such secrecy to be maintained. For instance, Indian officials have been tight lipped about the illness afflicting Sonia Gandhi, uncrowned queen of the country's ruling party; and the cloud of unknow ing contributes to government paralysis in Delhi. As for Mr Chavez, having largely misgoverned his countr y for the past dozen years, he is running for yet another six years as president in an election due on October 7th. Venezuelans have a right to know whether his health is good enough for there to be a reasonable prospect of his serving out his term. Cheery official assurances count for nothing unless backed with medical detail. This is especially important since Mr Cha vez has systematically concentrated power in his own hands. His sidekicks are jockeying for position and he has started shuffling the pack of top jobs (see page 38). Is that mere coincidence? Venezuela's constitution, inspired by Mr Chavez, allows the president to change his vice-presi dent at any time. He should now make it clear who he sees as his political heir. Continued silence will provide Venezuelans with yet another reason to vote for the opposition. •
The world economy
Self-induced sluggishness This year will probably be a pretty bad one for the world economy; it doesn't have to be
OLITICIANS like to promise
World GOP % change on previous year
P better times ahead. But these
days many are peddling gloom. In her new year's address, Ange la Merkel, Germany's chancel lor, predicted that 2012 would be more difficult for the euro zone 1o 12 2001 05 'Estimate !Forecast than 2011. Nicolas Sarkozy, France's president, spoke of "the year of all risks". Half a world away, Manmohan Singh, India's prime minister, warned Indi ans not to take fast growth for granted. In one way this pessimism looks a little overdone. The worst outcomes-a collapse of Europe's single currency or a
hard landing in China-are avoidable. The latest crop of statis tics, particularly better-than-expected figures on global manu facturing prospects, argue against a sudden slump. America may do a bit better than forecast. The overall effect should be sluggish, not dire: global output may grow by 3%, the slowest since 2009 and well below the average of the past decade. But in another way, the sombre warnings are apt, and pro foundly depressing. One reason why the outlook is so lacklus tre is that politicians-especially in the West-will do little to help (and may harm) their economies. It could be better. Begin with Europe, the weakest cog in the global engine. The euro zone has almost certainly already slipped into reces sion, which most forecasters expect to be short and shallow: a ��
The Economist January 7th
Leaders 9
2012
�group of seers polled regularly by The Economist estimates that output will fall by 0.5% in 2012. The case for a mild down turn assumes that Europe's policymakers, however haltingly, are on course to solve their debt crisis; that the European Cen tral Bank (ECB) has reduced the risk of a debt calamity with its recent provision of three-year liquidity to banks; and that the impact of fiscal austerity on growth will be brief and modest. Those hopes may be misplaced. Uncertainty about the euro zone's future is still acute, not least because its politicians are more focused on preventing future profligacy than sup porting embattled economies today. Despite the ECB's liquid ity injection, banks seem reluctant to buy many government bonds. And since Italy and Spain alone need to roll over €150 billion ($195 billion) of debt in the first three months of this year, the odds are that worries about sovereign debt will inten sify. A pernicious circle of weak growth, bigger deficits and more austerity is setting in. Look at Spain, where the new gov ernment revealed that the 2011 budget deficit would be worse than expected (8% of GDP rather than 6%) and immediately announced new spending cuts and tax increases to compen sate (see page 26). If these contractionary forces feed on them selves, Europe's downturn could be ghastly. Some emerging concerns
The euro zone is thus the darkest shadow hanging over the world economy; but it is not the only one. Emerging markets may stumble. China's economy is clearly cooling. And even if, as seems likely, Beijing loosens macroeconomic policy deftly enough to prevent a sharp slowdown, growth this year is like ly to be no more than 8%. Slower growth in China is dampen ing commodity prices, hitting exporters in Latin America. Add in some home-grown problems (India, for example, faces a big budget deficit, declining confidence and high inflation-see page 63) and the ripple effects of the euro crisis (which will hit
growth in eastern Europe and Turkey hard) and it is plausible that emerging economies will grow by only about 5%. That would be their weakest performance in a decade, aside from the global slump of 2009. If there is a positive surprise, it is likely to come from the Un ited States. That is not because growth there will soar, but be cause expectations for the world's biggest economy are so low. The consensus among professional forecasters is that Ameri ca's GDP will grow by 2% in 2012, below its underlying speed limit, and far too slow to bring the jobless rate down. That could prove a bit too gloomy. Unlike Europe, America has moderated the pace of its fiscal tightening, thanks to the temporary extension of the payroll-tax cut. Household-debt burdens have fallen, the housing market shows signs of stabil ity and the labour market is showing flickers of life. But Ameri ca's outlook, like Europe's, is darkened by political uncertainty. The payroll-tax cut has only been extended for two months, ensuring that the rest of the year will be punctuated with fiscal skirmishes, even as nothing is done to deal with America's medium-term fiscal mess, or to smooth the huge tax hikes and spending cuts that loom at the end of 2012 under current law. It is a recipe for crushing confidence and scaring off investors. History teaches that financial crises are followed by years of weakness. But some of the current pain is unnecessary. There is no excuse for the lack of clarity around the euro zone's future, nor for America's fiscal paralysis. Europeans do not need to compound the peripheral economies' problems with even deeper austerity. A more calibrated approach with more financing and more structural reforms makes far more sense. Inept politicians have placed a big burden on central banks, which will have to take more unconventional measures, such as quantitative easing (see page 62). That will ease the agony, but it won't make up for politicians' mistakes. It looks like 2012 will be the year of self-induced sluggishness. •
Hungary's government
To Viktor too many spoils Europe could do more to stop Hungary's erosion of democratic norms
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seems an unlikely villain. A fire brand dissident in communist . �. times, he had already served one term as a respectable if ,? somewhat populist prime minister before he led his Fidesz party back into power in 2010. Yet with the implementation on January 1st of a new Hungarian constitution, accompanied by a barrage of new fundamental laws, Mr Orban stands accused by his critics at home and by Hungary's friends abroad of steering his country back in the direction of a new autocracy. Mr Orban's supporters claim that the need to sort out an economic mess, clean up corruption and eradicate remaining traces of communism justify his radical approach. They main tain that, because Fidesz won the 2010 election with a two thirds majority, the government has a mandate to push through big constitutional changes, even if some of these ap pear illiberal and nationalist. Yet democracy is not just about
...
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winning elections. Even a two-thirds majority should not enti tle Fidesz to grab power over supposedly independent outfits such as the media regulator, the judiciary, the central bank and the budget and audit watchdogs, still less to twist the electoral rules in its favour (see page 25). These developments should be embarrassing to the Euro pean Union (Eu), whose proudest claim is to have entrenched democracy as well as prosperity on the continent. However, there are limits to what it can do about Hungary's behaviour. It has more leverage over countries that want to join the club than over those that are already members. In the late 1990s Brussels got the politicians in Slovakia, then a candidate coun try, to dump the nationalist Vladimir Meciar as prime minister. But an attempt in 2000 to ostracise Austria, an EU member, for includingjorg Haider's far-right party in government, failed. Still, the EU could do more, especially where Mr Orban's machinations threaten Hungar y's economic stability. As cen tral Europe's biggest debtor, Hungary desperately needs sup port from foreign investors, yet they are spooked by the politi cal risks that the government has itself increased. The EU and ��
The Economist January
10 Leaders �the IMF have pulled out of talks over a precautionary line of credit for Budapest because they believe Fidesz is undermin ing the independence of the central bank and national fiscal council. Not surprisingly, Hungary's credit rating has just been downgraded to junk, short- and long-term interest rates have been rising and the forint has been falling. Don't make the Berlusconi mistake
As well as refusing the country a credit line, the European Commission should take Hungary to the European Court of Justice over the new law that seems to contradict its treaty commitment to an independent central bank. If the Hungar ians were to ignore an adverse judgment, the commission should also be ready to invoke provisions in the treaties to sus pend a country's voting rights in Brussels. The commission is often hesitant about confronting national governments head on, but in this case it should hold firm.
7th 2012
European leaders should condemn Mr Orban's anti-demo cratic behaviour loudly and clearly. Yet Hillar y Clinton, the American secretary of state, has taken the lead in censuring him. The problem is that EU leaders, who nowadays hold sum mits almost every month, are often too chummy to be ready to criticise each other. Too few ever complained about Silvio Ber lusconi's grip on Italy's broadcast media, for instance. More should follow the example of Alain Juppe, the French foreign minister, who this week criticised Mr Orban's power grab. Mr Orban's fellow centre-right leaders, who include Ger many's Angela Merkel and France's Nicolas Sarkozy, have more leverage over him than other European politicians, and therefore a particular responsibility to take him to task. Fidesz is proud to belong to their umbrella group, and the biggest po litical family within the EU, the European People's Party. Threatening to chuck Mr Orban out of the EPP could be the best way of steering him off the path towards autocracy. •
Citizenship
In praise of a second (or third) passport Multiple identities are natural. Citizenship laws should catch up
S
EEN from the state's point of view, multiple citizenship is at best untidy and at worst a menace. Officials would prefer you to be born, live, work, pay taxes, draw benefits and die in the same place, travel on one passport only, and bequeath only one nationality to your offspring. In wartime the state has a unique call on your loyalty-and perhaps your life. Citizen ship is the glue keeping individual and state together. Tamper with it, and the relationship comes unstuck. But life is more complicated than that. Loyalty to political entities need not be exclusive: indeed, it often overlaps. Many Jews hold Israeli passports in solidarity with the Jewish state (and as an insurance policy), alongside citizenship of their na tive country. Teutons may be proud to be simultaneously Ba varian, German and European. Irish citizens can vote in British elections. The old notion of one-man, one-state citizenship looks outdated: more than 200m people now live and work outside the countries in which they were born-but still wish to travel home, or marry or invest there. The wrong response to this is political protectionism, with states forcing citizens to choose one nationality only, or ham pering their right to multiple passports. This seems an odd ap proach, given that citizenship is so easily acquired. In some countries it is, in effect, on sale. In others, such as America, it may be an accident of birth, with no conscious choice in volved. Rather than making a fetish out of passports, a better approach would be to use residence (especially tax residence) as the main criterion for an individual's rights and responsibil ities. That encourages cohesion and commitment, because it stems from a conscious decision to live in a country and abide by its rules. The world is gradually moving in this direction. But many states (mostly poor and ill-run) resist the trend and some rich democracies like the Netherlands and Germany are trying to curb it (see page so), offering a variety of excuses.
One longstanding worry, the security of the state, seems out of date in modern countries. Citizenship mattered in the days when defence relied on conscription. But modern war fare does not require armies of ill-trained conscripts. Few countries now rely on mandatory military service and those that do are mostly winding down the draft. Citizenship is no guarantee of loyalty: history's worst traitors have been true born citizens. Many of those ready to fight most enthusiastical ly for a flag will have gone through hell to get to their countr y. That leaves a host of political and financial problems that governments associate with non-citizens: they dodge taxes, grab benefits or retain retrograde habits from their countries of origin. So they sometimes do. But countries that want to clamp down on tax evasion, protect their national language, or deter such foreign customs as forced marriage, should do so through specific laws tailored to these ends, rather than relying on the symbolic power of citizenship. America's policy of taxing its citizens wherever they live seems especially perverse; it is an accountants' charter. As for benefits, residency is surely the key. Live and pay your taxes in a country-and you should then be treated in the same way as any other resident, and better than a citizen who has lived overseas and not paid up. Vote often
The thorniest problem for a residency-based system is vot ing-a right that has long been linked to citizenship. But there is room for compromise here. In France and Italy, for instance, citizens who live permanently abroad (often with dual nation ality) have voting rights. That makes sense. Conversely, coun tries should give long-term resident non-citizens the right to vote, at least in local elections. European Union countries al ready allow that to each others' citizens. But looking at multiple citizenship purely on the basis of costs and problems is wrong. It also encourages links between diasporas (often wealthy and well connected) and their home countries (usually poorer), to the benefit of both. Multiple citi zenship is inevitable and, at heart, rather liberal. Celebrate it. •
11
America's founders
S I R - Although informative in many respects, your article on religion in America at the time of independence ("The faithand doubts-of our fathers", December 17th) seemed to suggest that "freedom of conscience was first established" in post-independence Virginia. But in 1682 William Penn, the founder of Pennsylvania, provided for the absolute right of religious freedom in his framework of government for the new colony. As an English Quaker who had often been imprisoned in England for his writings and preaching, Penn was a passionate advocate for toleration in matters of belief, and made Pennsylvania a refuge for many persecuted religious groups of the 17th century, including Amish, Mennonites, Jews, Catholics, Huguenots and various Eng!ish nonconformists. Penn's thinking and writing about religious freedom and government were highly influential among the founding fathers, and were probably an inspiration forJefferson and the other Virginians who eventually secured the passage of a bill for religious freedom in their state in 1786. G REGORY GUY
Professor of li n guistics New York U niversity
S I R - In the debate about what religion meant for America's founding fathers Thomas Jefferson's rejection of Christian orthodoxy is a secondary issue. What matters is that Jefferson and his peers believed that a republic could not exist without virtue, and that virtue in turn depended on a belief that human beings are possessed of rights not granted by the state. As your essay recalled, Jefferson once asked whether a republic could be secure without "a conviction in the minds of the people that these liberties are a gift from God." This was not a one-off throwaway line. You should have looked anew at the De claration of Independence, written by Jefferson, which makes the same point: "We hold these
truths to be self evident: that all men are created equal, and are endowed by their creator with certain inalienable rights." This is our founding document, and Jefferson's words are a statement of our founding principle. JAMES TRACY Mendota Heights, Minnesota
S I R - It is true that religious conservatives see history as a "sacred narrative", but the interest of these revisionists is not history. It is instead a much broader attempt to realign facts to comport with ideology. This attempt threads its way into all aspects of public education in Texas. In 2009 the battle at the board of education was school science. As one of six appointed experts chosen to evaluate proposed revisions drafted by teams of science teachers, I found myself in a constant fight to preserve scientific accuracy in a heated debate about the teaching of evolution. The objections to evolution, it turned out, had little to do with the science behind the theory, but were instead focused on the incompatibility of evolutionary and biblical narratives. Since law forbids the teaching of creationism (intelligent design) in schools, the opponents of evolution, like the opponents of standard American history, resorted to attempts to reinterpret the evidence and the arguments, respectively, in order to challenge the validity of the former and rationality of the latter. Fortunately for good science, the Democrats and moderate Republicans on the board largely forestalled that effort, and the resulting standards retained, for the most part, scientific integrity. But it is a constant battle in Texas, as elsewhere in a country with a rising evangelical fervour that favours ideology over reality whenever the two conflict. To paraphrase a favourite saying, all narratives are true; some of them actually happened. RONALD WETHE RI N GTON Director Centre for Teachi n g Excellence Southern M eth odist University
Dallas
S I R - It is not true that "Maryland had always been a comfortable place for Catholics" at the time of independence. The Catholic Calverts founded Maryland and brought in religious freedom, but by 1700 Maryland's legislature, influenced by Anglicans from Virginia, had passed laws forbidding all Catholics from holding office, voting, attending mass, or receiving higher education. Rock Hall and other fine Catholic estates in Maryland had priest holes that hid clerics from the sheriff. Many sons of prosperous Catholics had to be sent to France to be schooled, including Charles Carroll of Carrollton, a signatory of the Declaration of Independence, and Thomas Bennett Willson, my own ancestor. This continued until the revolution, when Catholics in Maryland fought for liberty. You completely missed the irony that, by granting rare religious freedom, Catholics in Maryland suffered oppression, and were very far from being "comfortable". RICHARD COALE WILLSON J R
Palm Harbour, Florida
reflects the ebbing competitiveness and relevance of Europe and the rising imp ortance of the rest of the world. Such Eurorealism is supported by an overwhelming maj ority in Britain. Fully 54% of Britons say they want withdrawal if they can't get renegotiation, with just 20% resigned to the status quo. So, the real question for our European partners is: would you prefer to renegotiate with Britain, or lose her from the EU altogether? DOMINIC RAAB
Mem ber of Parliam ent for Esher and Walton
Dogmatic principles
S I R - You proposed that there are similarities between the effect of social networks during the Arab spring and the use of the printed word by Martin Luther sao years ago ("How Luther went viral", December 17th). If that is true, perhaps we should be concerned that the Arab spring may turn out to be similar to Luther's reformation i n other ways. Will Durant, a historian, once wrote that: It is instructive to observe how
Canada's carbon emissions
S I R - You painted a bleak picture of Canada's response to climate change by reporting that its carbon emissions increased by 20-4% between 1990 and 2009, and concluding that it will "eventually have to find something more than a do-next-to-nothing policy" ("Kyoto and out", December 17th). Are Canadians really doing next to nothing? During those same years Canada's population increased from 27.5m to 34m, a rise of 24%. Thus, carbon emissions per head have actually decreased. I RVIN G SALM E E N Ann Arbor, Michigan
A place in Europe
S I R - You suggested that I support leaving the European Union ("In with the out crowd", December 17th). I have consistently advocated a renegotiated British relationship, not withdrawal. Far from a bid for "splendid isolation", this
Luther moved from tolerance to dogma as his power and certainty grew .. .it was difficult for a man of Luther's forceful and positive character to advocate tolerance after his position had been made relatively secure. A man who was sure that he had God's Word could not tolerate its contradiction.
The unhappy fact is that Lord Acton was correct. Power really does tend to corrupt. Those admirers of the Arab spring who don't want to believe that the apparently democratic movement can be corrupted are simply living in a wished-for world, which never was and never will be. PALM E R HANSON Largo, Flo rida •
Letters are welcome a n d s h o u ld be a d d ressed to the Editor at
The Eco n o mist, 25 St J a m es's Street, London SWlA lHG E-mail:
[email protected] Fax: 020 7839 4092 M o re letters are available at: Economist.comfletters
Talib HQ
Bouquets and brickbats
The Tali ba n's decision t o open a " p o litical
Surprises, s h ocks and sport as our central
A handbook for tyranny How does one beco m e a di ctator? It's easy,
office" in Qatar to faci litate negotiati o n s
and eastern European blog delivers its
says A lastair S mith, t h e author of a n ew
suggests a change o f tack b y Paki sta n ,
an nual rou n d-up of the regi o n 's wi n n ers,
book on the subject. First, reward a coteri e
whose support i s n eeded for any talks. A s
losers, stars and bogeymen . Who wi ns the
o f devoted su p p orters who know t h ey are
t h e Afg han state conti n ues t o gain
coveted G o lden Swot? Which i nitiative
easi ly replaced; then tax everyone else
strength, it makes sense for the i n surgents
Crashed and Burned? A n d w h o will take the
hig h ly, s o that basic n eeds must come from
to make a deal sooner rath er than later
dreaded M ordor Dark Star?
the state . S h edding b lood also helps
Economist.comjnode/21542349
Economist.comjnode/2154 2 3 3 2
Economist.comjnode/21542299
United States: A new year in ethanol
Business education: Joining t h e executives
Culture: More than Murakami
America's least favourite distilled spirit
The demands of a full-ti me M BA are n othi n g
Japan's oth er artists are starting to get some
finally gets its comeuppance
compared with those of an executive M BA
attenti o n
Economist.comfnode/21542287
Economist.comfnode/21542318
Economist.comf node/ 2 1542 280
Africa: Music kept me alive
Travel: The push for clearer air fares
Economics: A layaway to save
After arrivi n g i n South Africa in 19 50, Jurgen
America's trans port departm ent takes steps
Not all sensi b le purchases make sense fro m a
Schadeberg began p h otographing the
to make air fares easier to understand
stri ctly financial perspective
country's diverse and divided culture
Economist.comfnode/21542298
Economist.comfnode/2 1542304
Economist.comfnode/21542348
Business: Masters of Management
Technology: Difference engine
Business: Baltic green sh oots
The lo ng-term evoluti o n of wireless
Animal spirits have lo ng been feeble i n the
Our management editor discusses the i m pact
co m m u nicati o n s mea n s that the days of the
European Union, but t h ey are vibrant i n o n e
of t he intern et a n d the rise of the e m ergi n g
fixed li n e are fina lly n u m b ered
o f its sma llest countries. In Estonia more
world o n busi n ess culture
Economist.comjnode/215423 20
than 14,000 enterprises registered in 2011.
Technology: Scan and deliver
i n dustrialised world Economist.comfnode/21542322
That's 40% more than in 2008, a record i n the
Economist.comjnode/21542338
Finance: Charting the year
The i nternet's u n official archivist presses the
An i nteractive s lideshow reviews 2011 in just
American gover n m ent to digitise and release
n i n e charts
its docum ents
Economist.comfnode/21542191
Economist.comfnode/21542135
Lin ks to all these stories can be found at Economist.comjnode/2 1542346
Executive Focus
13
President and
Chief Executive Officer
Internet Corporation for Assigned Names and Numbers www. icann .org ICANN
is
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public
Degree Progra m mes a n d Career Servi ces
ICA N N
interest-minded
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combination of financial management, diplomatic and organizational skills. He/she will report to, serve as a Member of, and work closely with the Board of Directors. ICANN's global public interest mission is to promote the stability and security of the Internet through coordination of its naming and addressing systems.
It is a global organization with over 1 30 staff
working in offices in the United States, Belgium and Australia, or
living and working across 1 0 other countries. Most employees work at the principal offices of the organization in Los Angeles, California. ICANN's mission touches all countries on every continent and is fulfilled by engaging with a global community of thousands of actively participating stakeholders ( governments, businesses, academia, NGOs,
technical operators and individuals), all of whom have a role in keeping the Internet secure, stable and interoperable . The I CANN website
provides extensive information about the organization and the way it works (www.icann.org).
The Role
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Post of Executive Director of the APEC Secretariat
Asia-Pacific Economic Cooperation (APEC), with 21 Member Economies, is a unique cooperative, multilateral economic forum that has been successful in promoting regional economic growth through trade and investment liberalisation and facilitation, and capacity building since its inception in 1989. It has achieved this through open dialogue, consensus-building and voluntary commitments. The APEC Secretariat, based in Singapore, fulfils an important role in coordinating and supporting the APEC process, including policy, technical and communications services to an extensive range of stakeholders.
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APEC is l ooking to recruit a dynamic Executive Director for a 3-year term (with the option for a 1-3 year extension) to lead the Secretariat from 2013. The successful candidate should be from an APEC Member Economy and must government and I or semi-government organizations), senior management
possess: strong leadership qualities, extensive public sector experience (in
experience; proven public communications skills; high political acumen; and multilateral work experience, preferably in trade or economic related areas. He/ she should hold / have held the rank equivalent to that of a senior public servant - Deputy Permanent Secretary or Ambassador or higher.
more ir*lrrNIIDn '* ill the
job description, accountability and information on APEC are available at
wwwapec org. A competitive expatriate package will be offered to the
successful candidate.
Applications should reached us no later than
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or address to Executive Director, APEC Secretariat, 35 Heng Mui
Keng Terrace, Singapore 119616, Fax: (65) 6891-9690. Your application must indicate how your experience and qualifications match those required.
Only short-listed candidates will be notified.
The Economist January 7th
2012
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its skills and history, its networks of firms and the liquidity of its markets enough to keep it the world's pre-eminent interna tional financial centre, even as the weight of global economic activity shifts to Asia? Dividing the house
Death by a thousand cuts
The City is one of Britain's great export industries. Yet its continued success is far from certain
F 90,000
ROM high up in their towers some bankers look down on the Thames as it meanders past what was, in living memory, the world's busiest port. Six decades ago these shores saw a daily tide of vessels from the world's biggest merchant fleet, built in the world's most productive shipyards and supported by the world's major shipping insurers, bank ers and lawyers. Today, little of this great port remains beyond the colourful names of the docks and piers where steamers and clippers once moored: Canary Wharf, Canada Square, or the West India Quay. That Britain's most successful indus try-its biggest exporter, taxpayer and pro vider of well-paid jobs-has risen from the ashes of another is an accident of history. Yet it is also a reminder that market domi nance can be ephemeral. And it explains much of the anxiety in the City, as Lon don's financial district is called, that finan-
cial services are under attack. The City faces a deep downturn in many of its main markets as credit be comes scarcer and as Europe's crisis drags on, slowing investment and trade. It also faces an onslaught of regulation, some of it home-grown, such as Britain's proposals to make banks split their retail banking arms from their freewheeling investment banking business; and it is threatened by higher taxes on the rich and tougher rules on immigration. Even more regulation comes from abroad, whether it is the new rules agreed in Basel that will force all banks everywhere to reduce the leverage that inflated their profits before the finan cial crisis, or the rules being drafted by the European Union that seem suspiciously designed to hobble the City and to shift some of its activities to rival financial cen tres in Paris and Frankfurt. The City also faces a fundamental set of challenges: are
Regulators are naturally obsessed with the financial crisis of 2008-09. In Britain, fol lowing the Vickers Commission report, they want to construct a "ring-fence" around the domestic, retail arms of British banks that will separate them from the banks' international, wholesale and capi tal-markets businesses. These ring-fenced banks will contain the bits of banking that are essential to the health of the rest of the British economy, such as payment systems and loans to people and small businesses. They will have to hold much more capital than they do now, and will be barred from many sorts of risky or international busi ness. In short, they are meant to be boring and heavily regulated utilities with little scope for racy profits but also much less chance of blowing up. The bits of banking outside this ring fence will be allowed to take all sorts of risk, but will also have to prepare detailed "living wills" that will help bank supervi sors wind them up if they fail. The propos als are intended to ensure that British tax payers never again have to bail out a banking sector that dwarfs the national economy (see chart 1). At the height of the financial crisis Britain feared not only the collapse of banks that were too big to fail, but the terrifying risk of having to bail out banks that might have been too big to save. The proposed ring-fence has been furi ously opposed by many of Britain's biggest banks, which are seeing their own borrow ing costs rise steeply alongside the steady withdrawal of the implicit government guarantee that had underpinned much of their borrowing. The cost to banks of im plementing Vickers is likely to be signifi cant: perhaps £3.5 billion to £8 billion ($5.4 billion to $12.5 billion) a year, or even high er. Costs this big will probably force banks to trim their wholesale banking business es. Royal Bank of Scotland, now majority state-owned after being bailed out during the crisis, has largely abandoned its ambi tions to be big in global investment bank ing. Barclays, which has a big British retail bank alongside an international invest ment bank, may also find itself forced to cut back some of its trading businesses. British bankers protest that rules restricting the global scope of British-owned banks would dent London's ability to attract in vestment and maintain its share of the trade in equities, bonds and currencies. "How can we expect anyone to come here if we aren't here?'' grumbles one. Such complaints, however, may soon wear thin. Clipping the wings of British- ��
The Economist January 7th
Briefing
2012
� owned banks would force them to con tract. It need not, however, cripple the City as a financial centre. Most of its growth over the past six decades has come from in ternational banks choosing to do business in London rather than from the growth of British-owned banks. TheCityuK, a lobby group, reckons that 251 foreign banks have branches or subsidiaries in London and that over half of all British banking assets are owned by foreign banks. This "Wim bledon effect", in which Britain provides the courts but not necessarily the players, is especially pronounced in trading and other wholesale-banking businesses. Some 40% of currency trading and 46% in OTC derivatives (those not traded on ex changes) takes place in Britain (see table). Yet Barclays is the only British bank among the world's five biggest investment banks (by revenue from trading bonds, curren cies and commodities). Another of the top five is Deutsche Bank, a German bank with its headquarters in Frankfurt that conducts most of its trading in London, where it em ploys more than 8,ooo people. A swarm of rules from Europe A more worrying threat to London's finan cial district is posed by a swarm of new regulations being devised in Brussels and farther afield. Many of these rules will hobble all of European finance, notjustthe City; but because the City is the centre, it will suffer most. Most pernicious of all is a proposed fi nancial transactions tax, which would levy a small charge on transactions involv ing financial institutions based in the Euro pean Union. The tax aims to raise money (the EU thinks it could fill its own and na tional coffers with as much as €55 billion a year, some 60-70% of which would be col lected in Britain) while also discouraging the trading and speculation that many
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European politicians blame for the finan cial crisis. The European Commission's own impact assessment reckons that it could force 90% of some sorts of trading activity simply to move from the EU, with the loss of hundreds of thousands of j obs. Such a tax could not be imposed on Britain, however, without its consent. Another European threat to London comes from proposals that would force clearing houses that handle euro-denomi nated derivatives to be based within a country that uses the euro. Combined with rules forcing OTC derivatives onto ex changes and clearing houses, these rules would threaten a market that Britain dom inates, to the benefit of centres such as Par is or Frankfurt. They are, however, such a blatant violation of Europe's single market that they are unlikely to survive. The more insidious threat facing Lon don's financial-services industry comes from a thousand smaller regulatory hur dles that will make it incrementally more difficult or expensive for financial firms to conduct business or enter new markets. The number of new rules is staggering, as is their reach. Some, such as Europe's pro posals to bar national regulators from forc ing banks to hold more capital than the European standard, would in fact weaken regulation of British banks. Others may prevent European fund mangers from buy ing the assets they choose, or prevent the use of ratings produced by the foreign branches of rating agencies. Many are also at odds with one another. One set of rules is intended to press banks to issue more long-term bonds. But another set of rules aimed at insurers, traditionally the biggest buyers of these bonds, will penalise them if they hold them. These sorts of muddles in Europe are nothing new. In the past Britain played an important role in improving much of Eu rope's financial regulation, mainly be cause the size of its financial markets at home means it has some of the region's most experienced regulators. Yet many
bankers in Britain now fret that a row in December 2011, when David Cameron, the prime minister, threatened to veto changes to EU treaties, has reduced its influence in Brussels. "Anything we argue for now will be ignored on principle," says one banker. The cumulative impact of all these rules is difficult to assess. But when they are combined with a 50% tax rate on higher incomes introduced in 2010, curbs on the immigration of skilled employees and reg ular tongue-lashings delivered against fi nance by politicians and policymakers, they will probably weigh against financial firms moving to or expanding in London when other financial centres beckon. On a rough calculation for The Economist by KPMG, getting out of London would be ad vantageous for high earners (see chart 2). Tighter regulation is not the City's only headache. It is also battling with falling de mand for its services in its main markets. The economic funk in Europe and America has meant that the industrialised world's e quity markets have been fairly moribund. The immediate outlook for trading, capi tal-raising, merger deals and for the fees they yield to City firms is the worst it has ��
I
The biggest take Take-home pay of high-net-worth individuals* $m 0.4
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Hong Kong Dallas Kusnacht, Switzerland San Francisco New York Zurich Tokyo Berlin Paris
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'Married persons with no children earning $1m in salaried income, a $1m share portfolio yielding 2% and a $1m mortgage
1 8 Briefing
The Economist January
Britai n 's financial ind ustry
� arguably been for decades. Finance grew fat during the rich world's long credit expansion, and it is inevitably shrinking now that boom has turned to bust. The share of Britain's GDP accounted for by insurance and finance, including re tail services like arranging mortgages, has already dropped to just under 8% from above 9% in 2007. The number of people employed by the industry in Britain fell by 7% in the three years to the third quarter of 2011. More jobs losses are likely as the City adjusts to a gloomier economic outlook and the pressure on revenues. There is a broader threat to the City's status as a financial hub: it may struggle to remain relevant when the biggest engines of economic growth are half a world away. The shift in global economic power to the big emerging countries in Asia means pros pects look much brighter for the newer breed of financial hubs, such as Hong Kong and Singapore, than for established centres like London or New York. London has hung on to its top ranking in the closely watched Global Financial Centres Index published twice a year by z/ Yen, a consultancy. But the gap between London and New York, in first and second place, and Hong Kong and Singapore in third and fourth has narrowed in recent surveys. This has sharpened the anxiety among some City folk that the Asian up starts will not only capture the lion's share of the fast-growing demand for finance on their doorstep, but will also take a big bite out of London's established businesses. The City is not helpless in meeting this challenge. Incumbency is a powerful bar rier in industries, such as finance, where there are strong network effects. Trading at tracts liquidity and thus more trading. A steady supply of skilled financiers adds to the virtuous circle. The use of English around the world gives London an edge over other European centres. London goes to work in the middle of the global trading day: the City day starts just as Asia's financial markets are closing and its financiers are still at their desks when the New York market opens. That makes it an ideal spot for global asset managers. One-third of the £4.8 trillion of funds managed in Britain is on behalf of foreigners, according to TheCitym
