Why is Brexit Like a Soap Opera?
- At an informal summit in Salzburg, Austria, the 27 other European Union leaders rejected Prime Minister Theresa May’s Chequers plan for the UK’s exit from the EU. The UK proposal calls for a free trade zone and common rule book for goods between the UK and EU with greater divergence allowed for services. However, it was seen as unworkable because it crosses an EU redline by violating the principle of a single market of goods, services, capital and labor. They also rejected the UK’s plans to make sure that the border between EU-member Ireland and the UK’s Northern Ireland stays open. The EU has proposed that Northern Ireland remain under EU economic oversight thus eliminating the need for a hard border but May has said her government would not accept any plan that has separate arrangements for different parts of the UK. It is expected that little progress will be made before May’s Conservative Party annual conference at the end of September. Her Brexit plans have faced opposition from members who want a more complete break with the EU and who have begun to advocate instead for a Canada-style trade accord.
- Implications: The path forward is unclear at many levels and a regurgitation of even the major issues would consume this commentary. Given the unyielding deadline of March 29, 2019 and the current muddle, the dynamic will need to change in some probably-unpredictable fashion. One scenario being floated is a new Brexit vote in Britain. Brexit would likely fail in a second vote. Whatever the eventual path, Britain will ultimately be fine. The more important questions going forward relate to the European Union. Were Britain to remain in the union (an unlikely event at the moment), the country could provide an important force for positive change, thus helping the union make necessary reforms to ensure its survival and ultimate success. Stay tuned for the next episode.
Does Attacking Populism Help or Hurt?
- On September 12, the European Parliament voted to censure Hungary for eroding democracy and failing to uphold fundamental European Union values. The decision by parliament to initiate a process for disciplinary action cleared the required two-thirds majority. It was the first time that the EU Parliament had considered launching this process against a member state. The parliament report accused Hungary of threatening the rule of law by hampering press and academic freedoms, cracking down on NGO funding and denying rights to minorities and migrants. These proceedings could lead to the suspension of Hungary’s EU voting rights, but Poland has said it would veto any attempt to impose sanctions on Hungary. Likewise, Hungary has promised to veto any sanctions against Poland as it undergoes a similar process, which was initiated by the European Commission last December.
- Implications: As long as the Polish-Hungarian pact remains in place, it is unlikely that actual penalties will be applied to either country. These punitive efforts could actually be counterproductive as it may exacerbate the partisan divisions between the populists and members of traditional parties across countries of the EU.
Integrity Lost at the Edges
- Danske Bank’s Estonian unit may have been used to launder as much as $234 billion between 2007 and 2015. A report from the bank included more than 6,200 client accounts it deemed suspicious. Nearly a quarter of the funds originated in Russia before entering Danske’s Estonia branch. British companies thought to be part of known Russian and Azerbaijani money-laundering networks were also identified. Danske Bank’s tiny Estonian branch accounted for as much as 10 percent of group profit during the period in question, and it is believed employees may have colluded with customers to circumvent background checks. Bank Chief Executive Thomas Borgen resigned after the investigation exposed control and compliance failings. The European Commission has called on the EU banking regulator to determine if Danske’s supervisors in Denmark and Estonia followed the rules in handling the case. In addition to criminal probes in Denmark and Estonia, the United Kingdom and United States have both also opened investigations.
- Implications: The paths used by Russian oligarchs to move money out of Russia are increasingly evident. From this Estonian unit to Cyprus banks to non-financial-services companies in Britain, Russian oligarchs (and others) have found ways around the exact controls designed to prevent such activities. While the integrity of Danish markets is very high, the Estonian subsidiary is subject to the laws of Estonia. The Danske Bank does not appear to have sufficiently strong internal governance to extend strong Danish controls onto foreign subsidiaries. Magni has previously downgraded the UK’s market integrity for weaknesses across non-financial-services companies (e.g., art dealers, collectibles dealers, real estate agents, lawyers). As countries improve market integrity, corrupt people will shift to other countries where opaqueness provides cover for their activities.
Japan Abe Reelection
- Japanese Prime Minister Shinzo Abe won his third straight three-year term as head of the ruling Liberal Democratic Party. If Abe serves until November of next year, he will become Japan’s longest-serving prime minister. Abe has benefited from Japan’s strongest period of economic growth since the 1990s. He has promised to focus his next term on building up infrastructure to counter natural disasters. He also hopes to achieve his long-held goal of amending Japan’s pacifist constitution. However, so far, he hasn’t delivered on his stated goal of implementing broad structural reform. These steps are imperative given the country’s aging and shrinking population. The economy still depends on unprecedented monetary and fiscal stimulus. Gross public sector debt is currently estimated at 225 percent of the economy, and the Bank of Japan currently owns nearly half of government bonds outstanding. Abe will be meeting with President Trump in New York on the sidelines of the United Nations General Assembly. Exports are one of the main drivers of Japan’s economic growth, so any progress on resolving trade disputes with the US would be welcome.
- Implications: Currently Japan comes in just behind Italy and Ireland in the Magni ranking of countries in the developed world. Strengthening Market Integrity and shareholder rights as part of Corporate Governance could have a significant impact on its ranking as it would move past several European countries, including Belgium. If Abe is successful in this, he will probably be remembered as a transformative leader.
Incremental Improvement in Thailand
- Magni completed a review of Thailand with a focus on the Economic Standard of Market Integrity. Market integrity is the ability to conduct everyday business transactions in an open, honest, transparent and efficient manner. Magni evaluated whether enough meaningful progress had been achieved in implementing prior Thai reforms. While some progress was evident, there was not enough to justify an upgrade. Thailand remains ranked in the middle of the countries of the emerging markets with the same score as a year ago.