Country Ranking Trends
- Magni completed a review of each country’s regulation of the corporate governance environment. Both Japan and China were upgraded for progress in implementing reforms to ease the rules for businesses. The upgrades were small and did not affect relative country rankings. The Chinese upgrade is significant as it has been more than a year since its last one.
Monty Python Foreshadowed the Future of British Politics
- Having seen her plans for Brexit repeatedly fail to pass Parliament, Theresa May has followed through on her commitment to step down as Conservative Party leader. This started a race to succeed her, and after five rounds of voting by Conservative lawmakers, there are two candidates remaining: former foreign secretary Boris Johnson and the current foreign secretary, Jeremy Hunt. Because the Conservatives are the ruling party, the winner of the contest will become the next prime minister. Boris Johnson is seen as the heavy favorite. His message is that Brexit will happen as scheduled on Oct. 31, even if it means a no-deal exit. Mr. Hunt has said he would ask for a short extension beyond the October deadline if a deal were in sight. The EU, however, insists it won’t fundamentally renegotiate the agreement made with Mrs. May. The final round will be a postal ballot of around 160,000 Conservative Party members with the winner to be announced on July 23.
- Implications: Brexit remains a mess. British politics remains a mess. Monty Python’s Silly Party skit from the 1970’s foreshadowed the situation. Magni’s view remains unchanged: Britain will muddle through and will eventually be ok, though the country does seem to want to make the process as messy as possible. As previously mentioned, “Hail Mary” passes (e.g., revotes on May’s deal, a second referendum) continue to get thrown; so far, none of the passes have been caught.
The Real EU Action is in Italy
- European Union finance ministers have concluded that Italy is in breach of EU fiscal rules. Italy narrowly averted a sanction procedure last year based on fiscal promises, however public debt did not decline as promised. Italy’s public debt stood at 132.2% of GDP in 2018, more than double the EU’s 60% limit, and its annual deficit to GDP ratio limit of 3% could also be exceeded by 2020. The EU Commission is recommending that an “excessive deficit procedure” be launched. Italy’s Prime Minister Giuseppe Conte has pledged to abide by EU fiscal rules, but he has also urged changes to the bloc’s growth and stability pact, which he considers is more about stability and less about growth. Italy objects to the EU’s reliance on structural deficit calculations, which critics say leads to pro-cyclical policies. The final decision by EU finance ministers is expected in early July. Italy faces an initial penalty of as much as €3.5 billion and stricter oversight of the country’s fiscal policies.
- Implications: While Brexit remains a distraction for the EU, key issues regarding the core role of the EU remain unresolved. The Italian budget battle is a symptom of these issues. The political dynamics of the EU make resolution more difficult. The Italian government is a coalition of populist parties from both the left and right. It remains popular when it shows gravitas to its base by standing up to the EU. Conversely, if the EU attempts too tough of a crackdown, it risks fueling anti-EU sentiments across the continent.
- At the same time, Italy’s relatively low Magni Country Score for a country in the developed markets derives from weaknesses in regulations of its financial services industry. Better reforms and complete implementation of such reforms would move Italy into the top half of the countries of the developed market.
“Groundhog Day” in Turkey
- Erdogan’s decision to push for a rerun of the Istanbul mayoral election backfired, resulting in the biggest setback of his long political career. Ekrem Imamoglu of the opposition CHP not only repeated but expanded on his earlier victory with almost 55% of the vote, while the candidate from Erdogan’s ruling AKP garnered only 45%. Many observers see the second CHP victory as a direct rebuke to Erdogan, who started his own political career with his election as Istanbul mayor 25 years ago. There is speculation that newly elected Mayor Imamoglu could similarly use Istanbul as a platform to challenge Turkey’s president in the 2023 parliamentary and presidential elections. However, governing won’t be easy for the opposition since the AKP will continue to hold the majority of seats in the municipal council. Monitors from the Council of Europe praised the vote as “…well-organized and transparent, albeit under tense circumstances.”
- Implications: Some pundits are calling for Erdogan to change his policies. That may be wishful thinking. Turkey continues to be in a very complex and difficult geopolitical environment. Adding to the challenges have been Erdogan’s populist actions that in actuality hurt the economy. If Erdogan does change his policies, Magni hopes he returns to the reform agenda of the early part of his administration when Turkey improved significantly. Currently it retains a relatively low score and the gap with countries such as Malaysia is growing.
Reform Doesn’t Appear to be on the Thai Menu
- Former general Prayuth Chan-och, who led the military coup against the government in 2014 and became prime minister, has secured a continuation in office, this time as a nominally civilian leader. After an election widely seen as flawed, the military has managed to engineer its continued hold on power. The military represented by the Palang Pracharath party and a coalition of smaller parties, together with the 250 appointed members of the senate, voted to confirm Prayuth’s continued premiership. However, the vote does not indicate overwhelming popular support for the military and its main party. Even with all of their systemic disadvantages the opposition coalition earned more votes overall. With the ruling coalition having only a four-seat majority in the lower house and a determined opposition, it will be difficult to pass legislation and undertake economic reforms needed to revive slowing growth.
- Implications: The Magni Country Score for Thailand places the country in the middle of the countries of the emerging markets. The score is unchanged for more than two years. Nearby countries such as Indonesia, India, and Malaysia are improving. It is not clear whether reform will be on the agenda of the ruling coalition. Continued stagnation will cause the country to drift down in the rankings.