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Economic governance

Swiss franc reaches for sky as snow falls on Davos

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SwissWhew!  I got out just in time. Two weeks ago I was in Davos, skiing with former MP colleagues from Britain and Switzerland. For six decades UK and Swiss politicians and ministers, retired or active, have been meeting for a week on the slopes.  All pay their way but the chairlift diplomacy that takes places helps forge one of the strongest inter-parliamentary relationships that exists  between two of the most enduring democracies in the world.

Now Davos has become a whole lot more expensive. The sudden, unheralded decision by the Swiss National Bank (SNB) to unpeg the Swiss franc from the Euro has been one of the biggest upsets on the forex markets in years. Already firms have had to stop trading as they were caught on the wrong side of the suddenly rising Swiss franc.

Just as there were hopes that banks and related financial service firms were leaving the instability of the post-2008 era, the Swiss decision has produced headlines about new currency wars.

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A week ago €1 bought CHF 1.20 the rate decided in 2011 as Switzerland was flooded with Euros as people sought a safe haven from the Eurozone crisis. Now the euro is at par with the Swiss franc – a 20 per cent revaluation of the Alpine currency. World Economic Forum participants have already paid for their stay but from the beginning of February Davos, Zermatt and Verbier will be much more expensive.

Swiss exporters are furious as overnight the cost of a Swatch, Swiss chocolate or pharmaceuticals went up by 20 per cent. Swiss tourism will see a drop in customers especially as Russians who have been a major mainstay of the Swiss tourist business in recent years are already staying away as a result of the weak rouble.

There is panic in East Europe where mortgages in Swiss francs at low interest rates are common but overnight the monthly repayments have got more costly. Croatian banks have rejected a suggestion by the government in Zagreb to fix a rate between the franc and the Croatian kuna. The Polish government has ordered an inquiry into the zloty-franc rate as angry mortgage holders may vote out the Civic Platform government as their monthly payments rise sharply.

The SNB promised to buy euro to maintain the peg and even charged banks a fee – a negative interest rate – to deposit money with the national bank. With today’s quantative easing announcement by the European Central Bank likely to lead to a lower euro the hunt for safe currency havens was growing stronger and it became impossible for the SNB to keep buying up euros.

In a country that is home to the Mont Pélerin Society created to honour the teaching of Friedrich Hayek and Milton Friedman, it sounded odd to so crudely buck the market by deciding a value of the currency independently of those who wanted to buy it.

That said this is a massive decoupling of Switzerland from all its Euro using neighbours. Berne has just signed a tax disclosure deal with Rome and along with similar agreements with other major European countries and with Washington, the days when Swiss banking secrecy was the main reason in addition to conservative banking traditions that attracted massive post-war inflows are well and truly over.

This time last year Switzerland voted to impose a cap on the number of EU citizens who could come and work or live in Switzerland. 34 per cent of the Swiss population are first or second generation immigrants from elsewhere in Europe. On the whole the Swiss have handled the problem of outsiders coming into the country firmly but fairly.

This is changing. If in Britain or France the EU immigrant is seen as a poorly paid worker in Switzerland it was rather the massive influx of German-speaking professionals and German money buying houses and apartments that provoked resentment.

Now Switzerland has to find a way of solving its repudiation of the core EU principle of free moment of people. Brussels and the 28 member states have made clear Switzerland cannot unilaterally dictate the terms of its relationship with the EU.  If Swiss banks and firms want full market open access to the EU then the Swiss have to accept EU access to Switzerland.

Until last week, the Swiss immigrant cap decision was the subject of professional bi-lateral discussion with neither Bern nor Brussels looking for a show-down. Now that the SNB has ended the link to the euro the temptation for many Germans and citizens of northern Europe with memories of relatively hard currencies that maintained their value may be to hedge by shifting into Swiss francs. Switzerland’s relationship with the EU will need careful handling after the SNB’s decision.

Switzerland exports half its GDP and imports 40%. Swiss exporters have become used to the €1-CHF1.20 link and will now scramble over what prices to charge for goods and services. Ten per cent of Swiss GDP is based on commodity trading and with the slump in prices of metals, oil, and other globally traded goods it is not clear how de-pegging the franc will effect this sector which has grown to be worth more to Switzerland than tourism in recent years.

Will Greeks, Portuguese, Italians and Spaniards be now temped to move their euro into Swiss francs as an insurance against more eurozone difficulties?

The abrupt way the SNB announced its decision was a throw-back to days when government decided changes in national currencies during the pre-ERM and euro era. The Swiss franc going up sharply may swell Alpine chests with pride but the move does not add stability to Europe’s financial arrangements as a Greek election and a major ECB move on monetary easing begin 2015 with headaches for the European and wider banking community.

Denis MacShane is the former UK minister for Europe.

Economic governance

Discussions kick off among MEPs and national MPs on #EconomicGovernance

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The opening, chaired by Economic and Monetary Affairs Committee Chair Irene Tinagli (S&D, IT), saw interventions from top European politicians leading the implementation of economic governance and its reforms.

Tinagli highlighted the areas where progress is most pressing and on which the European Parliament is working, including completing the banking union and the capital markets union, reforming the architecture of economic governance and more particularly, making economic governance more democratically accountable.

Commission Executive Vice President Dombrovskis and Commissioner Gentiloni presented the institution’s plans to review the architecture of economic governance. Eurogroup President Centeno laid out what finance ministers would be prioritising in the coming months. Zdravko Marić, the current ECOFIN chair, presented the priorities of the Croatian Presidency of the Council.

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Fabio Panetta, Executive Board member of the ECB also presented the Eurozone’s monetary outlook and described the actions that the ECB still deems necessary to complete the economic and monetary union (EMU).

You can watch the opening debate here.

The meeting will continue on Tuesday and Wednesday with debates among parliamentarians on taxation, financial services as well as the fight against poverty and the EU long-term budget (MFF).

All information on the gathering can be found here, including all links to the different webstreams of the sessions. The programme is here.

Background

The European Parliamentary Week, as the gathering is known, brings together Parliamentarians from across the EU, candidate and observer countries to discuss economic, budgetary and social matters. It consists of the European Semester Conference and the Interparliamentary Conference on Stability, Economic Coordination and Governance in the European Union.

The aim is to increase democratic oversight of EU economic governance and provides an opportunity to exchange information on best practices in implementing the Semester cycles.

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Banking

#Cryptocurrencies: To use or refuse?

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On November 29 bitcoin has cracked another record by reaching $11 000 in price. The largest digital currency has risen to a staggering amount of more than 1,000 percent this year. This has increased total cryptocurrencies capitalization to $300 billion, including $161bn bitcoin capitalization. Second largest digital currency Etherium owns another $46bn of the total share.

The ever-growing cryptocurrencies’ growth rate is directly connected with digital fund-raising campaigns (initial coin offerings, ICO). More than 200 of them took place while 10 months of 2017, with the total amount of investments around $3.5bn.

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Regulating bodies pay more attention as the amount of blockchain transactions increases both on national and transnational levels. Global stance with regard to the digital currencies slightly varies: Gibraltar, Isle of Man, Cayman Islands, and Mauritius are the open partisans of the cryptocurrencies development, while others like China, South Korea and Vietnam ban internal circulation of digital money.

The European Union haven’t yet developed a common approach towards the regulation of crypto currencies and ICO procedures, but national and European bodies consider development of the private investors and national economies fraud and speculation safety frameworks.

Bank of France governor Francois Villeroy de Galhau said in June that no public institution can provide Bitcoin’s confidence, mean those who use cryptocurrencies today do so at their own risk. Bundesbank board member Carl-Ludwig Thiele described digital currencies and Bitcoin as more of a speculative plaything than a form of payment. At the same time, the Bundesbank has been actively studying the application of the blockchain technology in its payment systems due to the PSD2 directive coming into effect. De Nederlandsche Bank, the central bank of the Netherlands, therewith created its own cryptocurrency called DNBcoin for internal circulation to understand how it works and then cited blockchain might be naturally applicable within the financial transactions system.

Ewald Nowotny, European Central Bank governing council member, mentioned in November that legislators and central bankers are discussing the models of cryptocurrencies regulation. However, actual legal frameworks provide for the ICO projects correspondence with financial and investment regulation. The European Securities and Markets Authority (ESMA) highlighted the risks related in its statements for investors and firms.

"There are the mechanisms that let cryptoinvestors assess potential risks with regard to the ICO projects. The most significant of them is the initial coin offering project’s compliance assessment to the regulatory requirements, including such directives as 2003/71/EC (Prospectus directive), 2015/849/EP (Fourth Money Laundering Directive), 2004/39/EC (Markets in financial instruments directive – MiFID), 2011/61/EU (Alternative Investment Funds Managers Directive - AIFMD)," explained Alexander Zaitsev, executive director of the Threesixty Elements, S.A. investment company that brings to the European market RAISON, the AI-based mobile platform designed to handle investments and personal finance.

"Other factors that may approve ICO project’s due diligence are the expert executors team and elaborated step by step action plan described in comprehensive white-paper document," added Zaitsev. "In addition to that, it is worth reminding that venture investments are connected with risks and projects that hold large income promises in short time periods are the junk ones a priori. Reasoned approach and thorough project background examination are vital to secure crypto investments."

Thus, developer’s accountability to the financial regulatory frameworks and professional advisor engagement are the parts of a simple strategy that will secure European ICO projects investments within the operational EU legal system.

International expert community and digital currencies market players suppose that the global trend for the common regulative approach development is answering current needs and may play crucial role in securing cryptoinvestors’ interests. According to the chief executive officer at U.S. Global Investors, one of the largest international technological investment firms, society will soon put more trust in digital currencies: "What bitcoin has done, it has woken up everybody to the power of the blockchain technology (the underlying ledger that supports bitcoin), like emails woke everyone up to the internet. At the beginning people didn't trust the internet."

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Economic governance

#Eurozone: Autumn 2017 economic forecast - continued growth in a changing policy context

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The eurozone economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%). The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).

According to its Autumn Forecast released on 9 November, the European Commission expects growth to continue in both the eurozone and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the eurozone, 1.9% in the EU).

The full press release is available in all languages here.

The Autumn 2017 Economic Forecast is available here.

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Commissioner Moscovici's remarks are available here.

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