Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the EU: getting free markets wrong, getting vaccines wrong, the economics of Nord Stream 2, bubble update, troubles for wind-power financing, and the economics of climate change. To sign up for the Capital Note, follow this link.
Vaccines, the EU, and the ‘Anglo-Saxons’
Whatever some of its defenders might like to claim, the EU has never been a bastion of (classical) liberal economics. The nearest it came to being that was in the mid 1980s when the influence of Thatcherism was at its peak. The EU’s (British) trade commissioner, Lord Cockfield, was, more than anyone else, responsible for pushing through the EU’s Single Market, a tremendous achievement, even if the momentum that came with it was, as is so typical with Brussels, taken further than it should have been for reasons that owed everything to politics and nothing to economics. Both the euro (and the catastrophe it brought in its wake) and, eventually, Brexit flowed from that overreach.
But Cockfield was an exceptional man operating at an exceptional time (yes, I miss the 1980s). These days, the EU is driven once again by the mid-century dirigisme that has, for the most part, been its hallmark. And with that comes a distrust of “Anglo-Saxon” economics and the “finance capital” (not a complimentary term in Brussels) with which it has long been associated.
We saw quite a bit of this during the euro-zone crisis a decade or so ago. At the time, I wrote this:
The scapegoating of Wall Street and the City [of London] may be a diversionary tactic but there is nothing fake about the animus that lies behind it. The great majority of the EU’s political class disdains the Anglo-Saxon market capitalism that is, in its disorderliness, brutal competitiveness, and unembarrassed pursuit of profit, the product of an economic and political tradition that is the antithesis of its own. Americans expect that sort of thinking on Europe’s left, but it’s present on the continent’s right too.
Outside the U.K., the dominant strain of thinking amongst the EU’s establishment right is in the Christian Democratic tradition. Its origins lie in Roman Catholicism-a creed never entirely comfortable with the free market. The mixed “Rhineland” model of capitalism is its model and “solidarity” its lodestar. For a very French example of this thinking, check out Nicolas Sarkozy’s Testimony (2006), where the future president attacked “stock market capitalism” and “speculators and predators.” (Note the date: Sarkozy was not one of those who kept quiet when times seemed to be good.)
Thus the rejection of the Wall Street way by European elites is philosophical and aesthetic as much as it is party political. Its roots are deep and its expression, sometimes, ugly. In November 1942, a French official wrote a piece for a pro-Vichy magazine (interestingly, the same issue features an article by one of the future architects of the euro, François Mitterrand) bemoaning those who would live “free” (his scare quotes) in the “soft, comfortable mud of Anglo-Saxon materialism.”
But however much the EU might have tried to blame wicked “Anglo-Saxon” speculators for the euro-zone’s predicament, a better explanation lay elsewhere. Establishing the euro was a massive and reckless gamble. It was an exercise in central planning driven by politics, not economics, and made even more dangerous by the way that the euro was launched half-finished (it’s a long story). What is more, the very existence of a single currency smothered the market signals that would have come from, say, a separate drachma or lira, market signals that have averted or lessened many disasters in the past.
Now we come to an even more lethal fiasco, the mess that the EU has made of arranging for the supply of COVID-19 vaccines to those who live within its borders. Those looking for some background should read what Pieter Cleppe wrote about this for Capital Matters last month. NR also discussed this matter in an editorial yesterday.
Writing for The Daily Telegraph, Russell Lynch:
Despite a litany of procurement failures by the European Commission, MEP [Member of the European Parliament] Phillippe Lamberts became the latest politician to pour petrol on a raging diplomatic row when he accused AstraZeneca of a “culture of dishonesty, overpromising and underdelivering by massive amounts” and added: “Everything points to a company that cannot be relied on.”
A combination of panic over a third wave and lingering bruises over Brexit may be behind the latest slurs, but critics say Astra – an Anglo-Swedish firm run by a Frenchman – is also bearing the brunt of decades of deep-seated suspicion over Anglo-Saxon capitalism on the Continent.
Even though he withdrew the remarks, Boris Johnson gave succour to that phobia this week with his comments to MPs over the role of “capitalism and greed” in driving the UK’s vaccine success.
That is anathema to the far different models of capitalism practised by the French and Germans, which makes the fury all the more acute. As City grandee Sir Mike Rake – albeit no supporter of Brexit and with decades of experience on the Continent – puts it: “There’s that slight suspicion that we’ve proven that the Anglo-Saxon model of capitalism is the best.”
As Lynch notes, and I mention above, this distrust of Anglo-Saxon capitalism goes back a long way.
Johnson, a politician not known for his spine, should not have withdrawn his comments.
Writing in The Daily Telegraph, Andrew Roberts explains why:
The reason we have vaccine success is because of capitalism,” the Prime Minister told the 1922 committee of Tory backbenchers. “Greed, my friends.” He is right. It was the capitalist Big Pharma firms, operating ultimately out of their own self-interest, that created a vaccine in less than 12 months when it usually takes over four years. And it was the venture capitalist Kate Bingham who understood the need to work with the grain of the market to ensure that the UK secured such a ready supply of the jabs.
The response to Boris’s remarks, however, has been all too predictable, especially because with his customary ironic wit, Boris chose to laud “greed” in what was obviously a reference to the 1987 movie Wall Street, in which Michael Douglas playing the financier Gordon Gekko praised greed as a driver of capitalism. Labour politicians, Anglican bishops and Left-wing commentators have fallen over each other to denounce Boris, and we haven’t even heard from the Duchess of Sussex on the subject.
Yet perhaps Boris meant “greed” in the sense of the dictionary definition given by his namesake Samuel Johnson, meaning “eagerness of appetite or desire”, for that is what has happened with Pfizer, AstraZeneca and Moderna: they have shown a commendable eagerness of appetite to fight Covid. Their competitive greed for our estimation (as well as well-deserved profits in the long term) has been a life-saver for millions. The genius of capitalism is that it makes serving the public a matter of self-interest.
In sheer economic terms, it is doubtful whether greed in the sense of accumulation is ever wholly damaging. When money is hoarded, it tends to be invested somewhere in something, thereby boosting employment, wages, dividends and pensions for others. In a functioning capitalist system, where capital is ceaselessly on the lookout for profits, it tends to be put to better use than in any other economic system yet devised, and certainly much better than the models admired by the Prime Minister’s detractors.
The calamity befalling the EU, meanwhile, has been caused in part by its distrust of capitalism. From the start of the pandemic, they treated Big Pharma with suspicion . . .
The EU’s latest move to restrict the export of vaccines destined for other countries is greed of a less virtuous sort, and further indication that Brussels has no instinctive understanding of sanctity of contract, which lies at the heart of the trust on which capitalism is based . . .
In its desperation to ensure that Big Pharma was not greedy, Brussels managed to get its vaccinations at a lower price than Britain, and their negotiators were proud that they chiselled down AstraZeneca to €1.12 per shot. But the benefit to the economy of each shot has been estimated at €1,500 per person immunised. So the cost from mishandling the rollout is over one thousand times more than the benefits that Brussels gained from driving down the price. Moreover, AstraZeneca announced at the start that it would not be making money out of Covid in the short term, so Brussels’ paranoia that it was being rooked by an evil capitalist enterprise was redundant.
Yet even if they were not being financially greedy, the reason that AstraZeneca and the other Big Pharma firms were so successful in the Covid crisis was that they have the profit motive embedded in their corporate DNA. Companies increase the capital available for productive investment; they allow investors to spread risk by buying easily marketable shares; they impose efficient management structures on organisations . . .
Those in the investment world (or elsewhere) pushing for companies to be run in a manner that downplays shareholder return might want to contemplate that. I doubt they will. If anything, they are using the pandemic to reinforce their arguments for change, arguments that reveal how little they have understood about the last year.
An essential element in the successful operation of a free-market system is, as Roberts writes, trust. Part of that is, as he makes clear, the belief that private contracts can be relied upon, and that, in the event of their breach, impartial courts will decide who is right, who is wrong, and what remedies should apply. Other than (and it is a big “other than”) providing the basic framework for such laws and such courts, the state ought to have no role to play.
Free markets do not flourish in situations where the state (or its equivalent) can arbitrarily change the rules, particularly when it does so in its own interest, or those of a ruling clique embarrassed by their failings.
Writing in The Spectator, about the possibility (still real at the time I write) that the EU might effectively seize vaccines destined (under the terms of an earlier contract) for the U.K. but being manufactured within the EU, Steven Barrett, an English attorney, writes:
Very occasionally and in a very limited sense which has not been tested in the modern age, there may be a reason for the state to take things which do not belong to it. The flaw here is that this would generally require an emergency. Is there one?
Vaccine supplies lie gathering dust in EU warehouses. . . . No help has been requested. And we might expect help to be asked for because . . . they are vaccines for a deadly illness.
Further, the EU’s plan is not to impose a blanket ban or introduce a blanket seizure of property – the stuff you do in an emergency. Instead, it plans to give the Commission the power to selectively seize things that do not belong to it based upon criteria it applies, at whim. That’s not an emergency, that’s shopping.
It is a fiction to paint some countries as hogging all the vaccines while the poor little EU struggles to get to the front of the queue. By signing vaccine deals early, countries like the UK pledged to fund vaccine development. The EU in signing late helped everyone less. The world has less vaccine because the EU failed. The EU has less vaccine because the EU failed.
It is not even clear the EU can use the vaccines it seizes. Because one of the problems the EU has displayed is it often won’t authorise things on time and takes longer to process any paperwork. Whole factories churning out vaccines other countries said were good enough for them did not make vaccines for the EU, because the EU had not yet approved them.
Lawyers across our country will now dread the inevitable question from clients planning to do business in the EU. They will ask, ‘will the EU not simply take our property if it wants to?’
We will have no answer to that question. When a state begins to act this way there is no protection the law can give you – this is why the rule of law actually matters.
And this is why it is essential for the development (and the maintenance) of a healthily flourishing free-market system, and, of course, the benefits that flow from it.
Even if this matter is resolved without the EU taking the sort of measures that it has floated, the fact that they have been floated is message enough. If they can be floated once, they can be floated again, and not just when vaccines are involved. If I were an entrepreneur looking to invest in the EU, it is (as Barrett alludes to) another risk to be priced in.
That wicked Anglo-Saxon model is looking better and better, I reckon.
Around the WebThe Economics of the Nord Stream 2 pipeline:
The adult argument for Nord Stream 2 is that it helps to bind Russia into the Western system and therefore to head off the strategic dangers of a deep Sino-Russian pact; and that it also provides badly needed gas as a transition fuel to displace coal.
It sounds plausible. It is untrue. “The pipeline is purely diversionary. It does not supply a single molecule of extra gas,” said Professor Alan Riley from the Atlantic Council.
Instead it enables Russia’s monopoly Gazprom to circumvent the Ukrainian Brotherhood pipeline, depriving Ukraine of its chief source of revenue and its strategic leverage. The pipeline is operating far below capacity and can meet any plausible gas needs in the future.
Nord Stream 2 has only two purposes: one is to isolate and suffocate Ukraine, and also to injure Poland by diverting the flows from the Yamal pipeline. It is an instrument of Mr Putin’s revanchiste ambitions. Far from locking him into the West, it makes him more dangerous.
The other purpose is made clear in a withering (and brave) report by Russian lender Sberbank entitled Tickling Giants. Gazprom is a device to steer boondoggle contracts of no economic logic to Vladimir Putin’s circle, destroying value on an epic scale in the process. “Nord Stream is a plunder project,” said Prof Riley.
We learned why Berlin is so eager to do Putin’s bidding in a leaked EU report in 2018. It revealed that Gazprom had been selling discount gas to Germany at €200 per 1,000 cubic metres while Poland was forced to pay €350, and Bulgaria was treated as a colony.
It concluded that Gazprom had infringed EU laws systematically, engaged in “abusive behaviour”, charged “unfair prices”, leveraged its “dominant position”, and acted as a foreign policy enforcer for the Kremlin. Commission officials wanted to impose huge fines.
What happened? Brussels covered it up. Competition chief Margrethe Vestager, lionised for confronting Apple and Google, was a pussycat with Gazprom. Berlin prevailed. Rarely do you get such an unvarnished display of how the EU really works.
Bubble, what bubble?
HONG KONG — Sophia the robot has interviewed Germany’s chancellor, appeared at New York Fashion Week and performed on “The Tonight Show.”
Now Sophia has made a splash in the art world — by auctioning off a digital work that it produced in collaboration with a real-life Italian artist. It sold on Thursday for $688,888.
“I think this was a big success,” Sophia said, speaking during a livestream from a Hong Kong studio. “I am so happy that my works are so valued and appreciated.”
The sale was the latest twist in the frenzied market for ownership rights to digital art, ephemera and media called NFTs, or “nonfungible tokens.” A company affiliated with the robot’s manufacturer said the sale — which took place on Nifty Gateway, a site for buying and selling NFTs that was founded in 2018 — may also have been the first NFT sale of an artwork produced in part by artificial intelligence.
NFTs are stamped with a unique bit of code that marks their authenticity, and stored on a blockchain, the distributed ledger system that underlies Bitcoin and other cryptocurrencies.
The NFT market is exploding as cryptocurrency enthusiasts try to cash in on the trend, even as skeptics warn that the market is a bubble. Some recent sales have eclipsed prices fetched for physical artworks by some of the world’s best-known painters.
Notably, a JPG file made by Mike Winkelmann, the digital artist known as Beeple, was sold by Christie’s in an online auction this month for nearly $70 million — up from a starting price of $100. That beat auction records set by painters like J.M.W. Turner and Georges Seurat.
Other hot sales this winter include Nyan Cat, an animated flying cat with a Pop-Tart body leaving a rainbow trail, which sold for roughly $580,000, and a clip of LeBron James blocking a shot in a Lakers basketball game that went for $100,000.
Beeple > Turner. Okey dokey.
Wind-power-financing arrangements blown:
Renewable energy investors are reassessing their plans in Texas after last month’s winter storm froze some wind power projects and left their complex financing arrangements in a shambles.
The disarray threatens to hold back development in the largest American wind power market, undermining US goals to drive down carbon emissions.
The reason: derivatives that were designed to protect so-called tax equity investors have blown up spectacularly, threatening funding that was worth upwards of $17bn to the US renewables industry last year.
“It is feasible, but it’s going to be more difficult” to do these types of tax equity deals in future, Rubiao Song, head of energy investments at JPMorgan Chase, told a webinar on Texas energy financing that drew 3,000 listeners last week.
Tax equity investors — mainly big banks, but also companies ranging from Warren Buffett’s Berkshire Hathaway to the Swiss chocolatier Nestlé — can use the capital they put into renewables to offset their US tax liabilities, thanks to wind and solar tax credits.
But to guarantee the investors get the credit they are expecting, they commonly require wind farms purchase a swap from a bank to lock in the selling price of electricity. Swap contracts require that the wind farm deliver a set amount of power every hour in return for receiving a fixed payment from the bank, usually about $20 a megawatt-hour.
These fixed-volume hedges blew up when almost half of Texas’s power generation went out in February. Wind farms whose deliveries fell short were forced to purchase power on the open market at $9,000 a MWh for hours or days, generating huge losses and putting some into default.
The Economics of Climate Change:
Climate change is real and its impacts are mostly negative, but common portrayals of devastation are unfounded. Scenarios set out under the UN Climate Panel (IPCC) show human welfare will likely increase to 450% of today’s welfare over the 21st century. Climate damages will reduce this welfare increase to 434%.
Arguments for devastation typically claim that extreme weather (like droughts, floods, wildfires, and hurricanes) is already worsening because of climate change. This is mostly misleading and inconsistent with the IPCC literature. For instance, the IPCC finds no trend for global hurricane frequency and has low confidence in attribution of changes to human activity, while the US has not seen an increase in landfalling hurricanes since 1900. Global death risk from extreme weather has declined 99% over 100 years and global costs have declined 26% over the last 28 years.
Arguments for devastation typically ignore adaptation, which will reduce vulnerability dramatically. While climate research suggests that fewer but stronger future hurricanes will increase damages, this effect will be countered by richer and more resilient societies. Global cost of hurricanes will likely decline from 0.04% of GDP today to 0.02% in 2100.
Climate-economic research shows that the total cost from untreated climate change is negative but moderate, likely equivalent to a 3.6% reduction in total GDP.
Climate policies also have costs that often vastly outweigh their climate benefits. The Paris Agreement, if fully implemented, will cost $819–$1,890 billion per year in 2030, yet will reduce emissions by just 1% of what is needed to limit average global temperature rise to 1.5°C. Each dollar spent on Paris will likely produce climate benefits worth 11¢ . . .
To sign up for the Capital Note, follow this link.