The Stalwart

It Works

They made it seem so easy. The article is about Korea, but refers to an interesting statistic:

Ireland, a country that, about 15 years ago, embraced economic freedom with pro-growth policies that encouraged entrepreneurial activity and investment. Thanks to this turnabout, Ireland has gone from the Sick Man of Europe, with double-digit unemployment, negligible growth and a declining tax base, to a net importer of workers and the continent's healthiest economy.

With barely 1 percent of the European Union's population, Ireland receives a third of all U.S. investment in Europe and now stands as the world's largest exporter per capita. [emphasis added]

This figure seems a bit surprising, to the point that maybe its worth checking on, even if we do agree that Ireland has indeed seen great success. If anyone has any insight, feel free to leave a comment.

High Margin Corporate Taxes

It is startling the degree to which major companies are taking advantage of Ireland's low tax status. Ireland is competing to lure intellectual property as well. Link found initially at RGE.

The more traditional form of tax avoidance used by multinationals in the Republic was to manage the accounting so that the most valuable part of their chain of production would show up in the country and be taxed at a low rate. This meant that there was at least some physical production taking place in the country, which would show most of the company's profit (e.g Coca Cola). But now the real action is not in the actual production, but in the intellectual property to software and pharmaceuticals. So Microsoft, for example, structures its operations so that its physical manufacture and sales outlets don't make much money, because they are paying huge licensing fees to company subsidiaries -- and those subsidiaries happen to be located in the Republic. Example:

Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004.

Ireland's citizens may not have heard of Round Island One, but they benefit greatly from its presence. Last year the unit handed the government of this small country of four million citizens more than $300 million in taxes ... Microsoft routes the license sales through Ireland and Round Island pays a total of just under $17 million in taxes to about 20 other governments that represent more than 300 million people.

But Microsoft does some real stuff in Ireland, so at least you can drive by one of their facilities and see the buzz of activity at Round Island? Errr.. No:

Round Island's legal address is in the headquarters of a Dublin law firm, Matheson Ormsby Prentice, that advertises its expertise in helping multinational companies use Ireland to shelter income from taxes. It represents other U.S. technology companies including Google Inc., which recently set up an Irish operations center that the firm credits in its SEC filings with reducing its tax rate. A Google spokesman said the company set up in Ireland to be close to its European customers. "Because that business is done outside of the U.S. it is taxed according to international law," he said.

$300 million is pretty good considering demand for national services must pretty be low given that its a shell company.  Thus $300 goes pretty much straight to the Irish bottomline. The article also explains why Ireland has beat out other tax havens- mainly because its populated status makes it easier to justify as a legitimate place for a subsidiary's profits.

It helps that those pesky regulations about timely annual reports are enforced in a business-friendly manner:

Round Island ... filed its annual report in Ireland on Oct. 27, some seven months late. When asked, Microsoft attributed the delay to the need to finish routine audits of subsidiaries. In the U.S., such a late filing would require an explanation to regulators and possibly large penalties. In Ireland, regulators don't even ask. The penalty for late filing: $3.60 a day.

Ouch! $3.60 per day. Cut back on the morning coffee.

Non for Europe, Oui for America

French investment in  the US has skyrocketed ever since a majority of French voters may have voted "Non" in terms of accepting an EU constitution. From Barrons Online:

Indeed, capital inflows from France have jumped sharply since May -- the same month the French citizenry voted "No" in the European Union constitutional referendum. Through the first eight months of 2005, net purchases of U.S. assets by French investors totaled $16.8 billion, greater than cumulative inflows over the entire first half of this decade ($16.4 billion). Apparently, despite tense U.S.-Franco relations, the French appetite for U.S. assets has never been greater.

Not exactly a vote of confidence in their referendum outcome. It also lends insight into the demographics of the vote. Those with money thus probably wanted a yes vote.

It's a fairly strong economic vote of confidence in the US, at least as a safer haven than France or Europe,  since A) it comes at a time when the general French opinion of the US is quite negative given the war in Iraq and B) it's happening even in the face of recent dollar strength. The article continues, pointing out that while the French are investing, "petrodollars" aren't being reinvested into the US like they used to:

We keep reading about all those petrodollars being recycled into the U.S., yet contrary to what's being reported in the media, petrodollar purchases of U.S. securities slowed dramatically in the second quarter. In fact, U.S. capital inflows from the oil producing nations totaled a miserly $3.5 billion in the second quarter of this year, a fraction of inflows in the first quarter ($21.5 billion) and fourth quarter of 2004 ($23 billion). Even Brazil, a market not typically known for its purchases of U.S. securities, sunk more money into U.S. dollar assets during the second quarter ($6.4 billion) than did the oil producers.

So while US investors are increasingly looking abroad, the US is still a foreign capital magnet thanks to far too much money just sitting around idle:

Given the massive global savings glut and the increasing ease by which capital transfers around the world, the U.S. remains a magnet for foreign capital. To say that the end is near for this debt-stretched nation is to disregard just how diverse U.S. capital inflows really are. U.S. capital inflows are not only about Japan, China and lately, petrodollars. The global savings pool is deep and diverse, a dynamic that keeps the world's largest debtor nation afloat.

That Dangerous DAX

Germany may have to wait a bit longer for its first female president, as well as the economic reform it badly needs. After quite a rally in anticipation of a liberated German economy, 12% just recently, we may have hit a snag. Fasten your seatbelts. Even if Ms. Merkel wins against Schroeder, her plans for reform could be significantly weakened.

Merkel likely will have to water down plans to shake up Germany's labor market and reform its tax system to gain a majority with a party to her left. To woo the Greens, she likely would have to soften plans to halt the outgoing government's program of shutting down nuclear power plants. Her opposition to Turkish membership in the European Union also is up in the air. ...

Frankfurt's DAX index of blue chip stocks was down 1.1 percent in early afternoon trading.

And here it is, that Dangerous DAX:

 

The DAX is Back!

Yep, somehow we missed it, but the German market has been on a rampage.  And everyone's starting to talk about it.  First, The German economy made the cover of The Economist (congratulations):

Thanks to the intense pressure that they have been under in the past few years,  Germany's big companies have restructured and cut their bloated cost base. This process has for once been helped by the trade unions, which had been a stubborn obstacle to change. German workers have belatedly recognised that change has become essential, which is why they have been ready over the past year or so to accept such innovations as more decentralised pay bargaining, longer hours and even wage cuts. Thanks in part to this new flexibility, unit labour costs, a benchmark of competitiveness, have fallen sharply relative to other countries. In the past five years, Germany, long the most costly place in Europe in which to do business, has won a new competitive edge over France, Italy, the Netherlands and even Britain. That is a big reason why, last year, it regained its position as the world's biggest exporter.

Mahalanobis has some charts showing exactly how far Germany has come in reducing per unit labor costs.  They also summarizes the "five shocks" that have hit the German Economy:

Recently, Hans-Werner Sinn, head of Ifo, a Munich-based economic research institute, pointed out that Germany is battling the consequences of five economic shocks: globalisation; the European Union and its enlargement; the introduction of the euro; the opening up of central and eastern Europe; and German re-unification. Each one of these big events has been good for the world as a whole, but has posed particular problems for Germany. It is perhaps remarkable that the country has weathered so many unanticipated blows so well, a tribute to the economy's resilience

And from The Telegraph in London:

Foreign buyers are snapping up German equities at a record pace, betting on the re-awakening of Europe's slumbering giant as the Christian Democrats edge closer to power.

Data released by the Bundesbank show that foreigners bought €71billion (£48billion) of German shares in May and June, propelling Frankfurt's DAX stock index to four-year highs in a burst of investor euphoria. Foreign equity funds, insurers, and oil trust funds among others now hold majority stakes in eight of the top firms that make up the DAX30, many of them treasured national icons.

The list includes the technology empire Siemens, where 57pc is held by foreigners, Adidas sportswear (68pc), BASF chemicals (52pc), Schering medical equipment (52pc), Commerzbank (52pc), and Deutsche Bank (51pc), as well as Deutsche Bourse (68pc). Others may soon cross the 50pc threshold, notably car giant DaimlerChrysler (45pc) as Deutsche Bank trims down a bloc holding of 12pc dating back to 1926.

Happy hunting, let us know if you find any bargains.

And Another One

Minister Says Italy Should Consider Leaving Euro

An Italian minister said on Friday the country should consider adopting its own currency again, adding fuel to recent talk of a possible break-up of the euro zone which EU leaders dismiss as "absurd."

Welfare Minister Roberto Maroni, from the euro-skeptical Northern League party, said Italy should hold a referendum on whether to revert to the lira currency it abandoned when 12 nations started to use euro notes and coins in 2002.

Analysts said Maroni's comments should be seen as populism typical of the Northern League. They do not represent the government as a whole and are not the harbinger of any dramatic political initiative.

While these comments can be dismissed as being outside of the mainstream, they are actually quite serious.  Eventually one won't be able to dismiss it as absurd, and while a race to the door isn't likely, it's got to spook investors in a range of Euro denominated assets.

Sad Days for the Euro

Asymmetrical Information: Euromania
After resounding 'Non' votes this past week against the European Constitution, The European common currency is becoming the whipping boy:

There is a rumour going around, based on a report by the German magazine Stern, that the German government's new electoral strategy is to blame the euro for all the nation's economic woes.

There is some truth to the accusation. The ECB monetary policy is wildly inappropriate for Germany, which currently has low inflation and slow growth. Fiscal policy is pretty much tapped out; the German budget deficit looks much like the American one. And as the article points out, "The introduction of the euro has cost Germany its former advantage of lower financing costs, which partially explains why it's lagging behind the other euro members".

It makes sense that if different countries face different fiscal and economic situations then they should require different monetary policy--but why do interconnected free-market economies face such radically different economic situations?

But the rest of the explanation as to why it's lagging behind euro members has to do with its sclerotic labour market, moribund regulatory system (ever tried to buy milk in Germany after work?), and lunatic decision to apply same to East Germany. Since East Germany is much, much less productive than West Germany, this has combined to produce unemployment rates that, IIRC, often top 20%. This is not the fault of the euro, and dissolving the currency union will still leave Germany a slow-moving economic has-been with a looming pensions crisis unless it gets its regulatory act together.

The Eurozone may have it's problems but it's here to stay.  Blaming the Euro as an electoral strategy is one thing, but refusing to rectify structural flaws is a disaster.

Italy Has Fallen Into Recession

Italy in economic recession again | newratings.com.

German Economic Malaise

There are many factors contributing to Germany's economic malaise. A few possible examples: From here.

As minor examples of the bureaucracy, consider that only at railway stations can a baker bake bread on a Sunday, a shop may have sales for only two, two week, periods a year, the amount of discount allowed is controlled by law and shop opening hours are still controlled nationally.

Textile Quotas Equal French Votes

Europe's call for renewed Chinese textile quotas partly a gambit aimed at winning a Yes vote from the French voter.

What's more clear is that Brussels' willingness to make noises about textile imports is in part driven by its desperation to win approval from French voters in next month's constitutional referendum. French politicians didn't hesitate yesterday to paint a connection between the impending investigation and the merits of supporting the European project. French Industry Minister Patrick Devedjian reportedly told Europe 1 radio: "This is precisely the objective of the constitutional reform: get out of bureaucracy to get to a much quicker decision-making system." He added that, when it comes to issues such as negotiating trade terms on textiles, a large industry in his country, "An isolated France, on its own, stands no chance. It's only with the European Union that we manage to be heard on international issues."

Read the full WSJ article here.