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Why Europe should celebrate Syriza's victory

The excessive austerity that was imposed on Greece as a condition for the bailout made the debt problem worse, not better, by shrinking Greek GDP by a quarter, even as Greece cut down essential services to finance the build up of a primary surplus. The bailout package was not just financially unsustainable, but also economically wrong-headed, politically tone-deaf and socially callous. It has turned what was an aspiring first world country with third world institutions into a third world country with third world institutions. It has led to enormous personal suffering, triggered the rise of neo-Nazi movements, lain waste to productive capacity and created a cohort of the unemployed and the unemployable - a lost generation. 

It has stretched Greece’s social fabric to a breaking point and perverted the democratic rights of citizens by vetoing their political choices. What is remarkable is not that Greeks have voted for Syriza, a new anti-establishment party that vows to get a better deal for Greek people, take on the powerful Greek oligarchy and stand up to Germany and the Eurozone. What is remarkable is that it took so long for them to do so. 

ECB's Draghi finally delivers on "whatever it takes"...

Today the ECB has finally arrived as a truly “European” Central Bank. It has acted against political opposition to deliver what is by most measures an ambitious programme of quantitative easing. The programme exceeded the predictions of most market participants and analysts, and it lies at the edge of our optimistic predictions. 

In short, Mario Draghi has finally delivered on his “Whatever it Takes” pledge. But suffice to say that this QE will not, by itself, be sufficient to deliver on the ECB’s own target. The ECB has finally, if belatedly, done its part. Now its time for the Eurozone to relax the fiscal constraint.

Objective 

The programme is as open ended in terms of delivering on the ECB’s core target of inflation “close to but under 2%”, as it was politically possible for the ECB to be and promises action all the way into September 2016. 

Everything you wanted to know about the ECB QE

What will the ECB announce today?

The ECB will announce broad outlines of a programme of Quantitative Easing today. The programme itself will focus on the ECB buying large quantities of financial assets, mostly Eurozone sovereign bonds, with freshly created money. The actual purchases will start in March and more details of the programme are likely to follow over the next few weeks.

What is the objective of this programme?

The stated objective of the programme is to increase Eurozone inflation from the dismally low level of 0.6% (in 2014) towards the ECB target of “close to but below 2%”. In December, inflation in the Eurozone actually turned negative at - 0.3% and longer-term market expectations of inflation have also been falling for several months now.

The ECB hopes that the QE will also have a direct impact on increasing investment and consumption in the Eurozone and thus help give a boost to growth. The combination of higher real growth as well as higher inflation, the ECB hopes, will also help improve the sustainability of debt in the troubled countries in the Eurozone.

The yawning gap at the heart of the financial system

Two particularly pernicious and inter-related challenges confront the global financial system. On the one hand, pools of trillions of dollars of savings, particularly in OECD economies, are trapped in sub-optimal investments earning poor returns. On the other, many developing countries face a serious shortage of capital, even for investments that can generate high financial and economic return. The world’s financial system fails to intermediate between the two at any scale. This leads to several perverse consequences.

Long-term investors from rich countries, such as pension funds and insurance firms, have crowded mostly into developed country bonds and stocks. Even truly unconstrained investors such as the giant Norwegian sovereign wealth fund have ninety percent or more of their portfolio invested in such assets. Total allocation to developing countries remains far below the more than 40% (and growing) share of global GDP that they now command. Allocation to unlisted assets in developing countries, which often lack the deep liquid markets that characterize OECD economies, is negligible. Perversely, large pools of savings in developing economies, particularly sovereign wealth funds and foreign exchange reserves, are also after the same listed securities in developed economies.

Norway's Oil Fund - An Infrastructure Investor of Choice

NOTE: This is a longer version of an Oped that appeared in the Norwegian business newspaper Dagens Naeringsliv on 21 March 2014.

The revelation of the Oil Fund’s controversial investment in Formula 1 has led to Ola Mestad, Lars Hakon Sooras and Sofie Mathiasen and other Norwegian commentators to warn against allowing the Fund to invest in unlisted assets. This would be a grave mistake that would cost Norwegians dearly.

Instead, the government should bolster Fund capacity and set up a powerful independent watchdog in the form of a “Stortingets Råd for Oljefondet”.

Critics say that unlisted assets will make it harder to detect unethical investments or exercise oversight. They also warn about the lack of relevant expertise at the Fund and in the Norges Bank board that oversees it. As a reaction to the Formula 1 fiasco these concerns are understandable, but misconceived.

While unlisted investments, private equity and infrastructure disclose less information publicly, they will give NBIM access to hordes of private information. It will also be in a much stronger position to demand private information and to successfully challenge questionable practices. For effective oversight, the SRO should not only enjoy privileged access to all the data NBIM holds, but also have the right to demand more information on any of its investments.

Does anyone seriously think that Formula 1, with the constant whiff of scandal and a controversial promoter repeatedly accused of corruption, would have been an appropriate investment if only it were listed? It did not pass the smell test, period.

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