December 17th – The BESA Times

Sixty-Second Edition - Monday, 17th Every week, a complete snapshot of what happened around the world in the past seven days

 

When on Wednesday evening it was announced that British premier Theresa May has survived the confidence vote, cheering shouts amid loud applause were heard throughout the Westminster Palace.


Only on the day after it was discovered that this had been part of a staging lead by downing street strategists in an attempt to make May’s precarious victory more media-effective. This is just one impression of the political chaos that currently reigns over London. Exactly 200 MPs had expressed their confidence in their prime minister, but as many as 117 didn’t, which is a large number given that it took only 48 to introduce the confidence vote in the first place – which her critics view as a big success. Despite the fact that her critics have failed in their attempt to oust May from her position, the fraction of the Conservative party that opposes the results of her negotiations with the EU are now even more present than before. The big divide within the Conservative party seems irreconcilable now.


May is hardly under less pressure than before. She traveled to Brussels on Friday, hoping to be able to fight for further concessions from other EU countries that might help appease those unsatisfied with the negotiated agreement. A central question, which has almost become a symbolism for the vagueness and clarity-lacking ambiguity that has hitherto overshadowed the dialogue, is the so-called “backstop”, a temporary last resort solution for the problem of the Irish border.


The concrete goal is to prevent the reintroduction of border controls at the Irish border after the end of transitional phase in 2022 at latest, by for example allowing for zones with special economic status inside the Kingdom or by having come to a compensating trade agreement until then. If this is not the case, then the backstop guarantees that the whole of Great Britain remains in the customs union and North Ireland in the European Single Market. Yet there is a strong consensus among the EU leaders that the agreement itself will not be altered, and May apparently struggles to clearly express her demands.


This of course makes it even easier for the Brexit hardliners at home, which view the backstop as a trap. It seems as if London is partitioned into many negative majorities: Those who are against the agreement. Those who are against the Backstop. Those who are against the Brexit altogether. Those who are against May. No one really happens to be strongly in favor of anything, at least from what it is that they publicly express and how they present themselves. Maybe this is in line with the political climate of our time, but it does not appear to be very productive and solution-seeking.


Funding by the ECB continues.



The European Central Bank has spent over 2.6 trillion Euros since 2015 on securities, of which 2100 billion were used to buy government bonds or bonds issued by supranational state institutions such as the European Investment Bank.


In 2017 the Federal Constitutional Court in Germany raised doubts about the legitimacy of those practices. They claimed that the purchases were outside of the central bank’s competence, since they were violating the legal prohibition of the monetary financing of national governments.


Last Tuesday a judgement by the European Court of Justice decided that the controversial bond purchases were however within the bounds of the institution.


The programme, which is technically referred to as “Quantitative Easing”, was taken up by the ECB in January of 2015, when the European economy was struggling and the Eurozone was facing signs of a deflationary period. Central bankers and economists feared that the situation might spiral into a more serious economic crisis, which is why the ECB decided to stabilize the economic cycle by taking up the programme.


The countries benefit as the purchases supply governments with cheap money that they otherwise needed to have raised through higher, more attractive interest rates, which indirectly allows them so save hundreds of billions in interest payments and, not less importantly, signalizes businesses and consumers that the economy will not abandon them.


Criticisms on the other hand say that the programme does not only supports governments in making and tolerating even more debt but that it also inhibits necessary reform. The filers of the lawsuit, among them euro-critical German politicians formerly associated with the Alternative für Deutschland, claim that the negligent use of the money printing press makes economically stable countries pay the bill for the rescue of indebted countries banks in Southern Europe.


The recent announcement that the programme would stop at the end of this year has been deemed a “misunderstanding” by ECB-president Mario Draghi. Indeed, UniCredit estimates that next year alone, about 210 billion will be spend in the form of reinvestments, split between German, French, Italian and Spanish government bonds (in decreasing order). It is obvious that such amounts will have a noticeable impact on the markets.


Especially now, amidst all the discussion about respective national budgets, it is worth keeping in mind the forces that govern the movement and price of money in Europe.

 

Did you know:

Christmas gifts are economically inefficient!


It is that time of the year again. The trouble of finding the right gift for family and friends often has people say that they feel Christmas could wait a little longer. From a microeconomist’s point of view however, gift-giving is often very inefficient. In a sense this isn’t really a secret. All of us at some point in their life have received a present that we didn’t really like. It is not uncommon that we receive gifts that we value less than what it cost the giver to buy it. When we buy something for ourselves, the value is created because we value the good that we buy more than what it costs us to buy. But when people give gifts that aren’t wanted, value is lost. Therefore, gift-giving can be a negative trade.


Of course, there are cases where gift-giving can create value. If, for example, you know your friends taste of economics books (or socks, though more unlikely) and you come across something that you for sure know your friend appreciates as much or even more than you, gifting can work, because it lowers the recipients search costs.


Also, sometimes we give gifts for reasons other than value creation, for paternalistic reasons for example. Parents might buy their children mittens or a scarf for Christmas, well-aware that they won’t like it, but it might happen to be cold outside, and they want to make sure their children aren’t freezing.


Finally, we often also give gifts with the aim of signalling our intentions or values. You wouldn’t be very successful proposing to your fiancé with a load of cash in your hand (usually).


However, this doesn’t change the fact that gift-giving with the aim of making people happy (efficiently) often fails. The two reasons for why this is so, is what we can call the incentive-problem and the knowledge-problem. If you buy something for yourself, you have good incentive to buy something that you like, and, generally, you know your own preferences. But when people buy something for someone else, they have less incentive to choose carefully and less knowledge about what the other person really wants.


A study by Joel Waldfogel on a big group of people has found that on average people spend around $50 dollars on gifts that recipients value only at around $40. In the US, around 100 billion are spent every year on Christmas presents, which would mean that Americans are throwing 18 to 20 billion dollars out of the window. If all that money had been given in the form of presents containing nothing but cash, this wouldn’t happen. This shows that whilst some gifts might indeed create value, on average, they seem pretty wasteful, which, especially now, is interesting to reflect on.

 

What to remember from last week:

Kramp-Karrenbauer has taken over the CDU in Germany and will now set the course for the party’s future. Given Merkel’s very pro-European attitude it will be interesting to see if Mrs. Kramp-Karrenbauer will be able to withstand the anti-European sentiments.


In light of the terrorist attack in Strasbourg the French government asked the gilet jaune protesters to suspend their planned “Act Five”, yet on Saturday thousands ignored it.

 

What to expect from the coming week:

The last week before Christmas will first and foremost bring more information about May’s plans for the Brexit agreement and the future of her party. The shifts of power in Europe will make themselves more evident in the coming weeks, shedding light on what the coming months will bring.

 

WRITTEN BY @LASSE VON DER HEYDT PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT

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