Friday, 19 September 2014

Scotland's NO vote changes everything

The people of Scotland may have voted NO to independence in yesterday's referendum, but the UK will never be the same again, thanks to the panicked promises of additional devolution that Westminster-based politicians made in the final days of the campaign. As a very articulate Tory MP told Canada's news channel before the results were announced, the outcome of a NO vote stands to be much messier for the whole UK than a YES would ever have been.

As a veteran of two referenda in Quebec and one-time resident of the UK (and partner of a half-Scottish wife), I've blogged a number of times about the similarities between the Quebec and Scottish separatist movements.  However, to understand why yesterday's vote will make things so complicated for the UK in the future, we need to look at the differences between the two cases.

The driving force behind the Quebec and Scottish nationalist movements is very different. In Quebec, it's all about ethnicity.  Oh sure, the Parti Quebecois was once broadly left-leaning, but those days are gone. The recent Quebec provincial election, which the PQ hoped would set the stage for a third referendum, saw the party adopt a thoroughly nasty stance toward English Canada and the Province's own non-francophone minorities.  Mercifully, this was soundly repudiated by the voters.  In truth, however, the mean-spirited tone was nothing new: recall former PQ leader Jacques Parizeau's somewhat inebriated concession speech after the 1995 referendum, which began "Yes, it's true that we lost, but to what?  To money and the ethnic vote".

In contrast, although there's obviously an ethnic underpinning to Scottish nationalism, the movement as it presently stands is much more about different ways of viewing the economy and society. Scots see themselves as much more collectively-minded than their neighbours to the South.  There was a telling campaign placard that copped up late in the day: "Vote YES and be rid of the Tories for ever".  Pro-YES supporters included groups like "South Asians for Scottish independence", something that could never be imagined in modern Quebec.

This is both good news and bad news for the UK government as it tries to deal with the post-referendum situation. In Quebec, ethnicity will always be a divisive issue, which is why the "neverendum" nightmare of repeated sovereignty votes remains a real possibility.  In Scotland, it should in principle be possible to forestall a rerun of Thursday's vote by devolving the powers that Scotland needs in order to achieve the kind of society it wants, without overweening interference from London.

Here, however, we run up against the second key difference between the two cases: Canada is now and has always been a confederal state: its ten Provinces have broad-ranging powers which are jealously protected from interference by the Federal government.  The UK has, until recently, been mostly a unitary state.  The devolution of power over the last two decades has awarded vastly different degrees of autonomy to assemblies in Edinburgh, Cardiff and Belfast, with no comparable level of self-rule for England, which is by far the dominant entity, in terms of population and economic clout,  within the UK.

One of the ways that Canadian federal governments have sought to combat Quebec nationalism has been to give the provincial government there additional powers that help to address the ethnic grievances of the francophone population.  Thus Quebec is allowed to have its own language laws giving priority to the use of French; it has a degree of control over immigration to the Province; and its legal system is still based on the Code Napoleon rather than the English common law-based system in the rest of Canada. These rights -- characterized as Quebec's "distinct society" -- are largely cost-free for the rest of Canada, and do not threaten the basis of the federal system.

This would be all but impossible to reproduce in the UK without far-reaching reforms of the nation's entire governance. The powers devolved in the past to Scotland, Wales and Northern Ireland have already led to stirrings of discontent in the English regions. If, as now seems likely, Scotland gets a whole host of new taxing powers and control over social programs, this discontent can only grow. To take but one example, Scotland is likely to get the right to set its own corporate tax rate.  Politicians in the north of England have already voiced concern that this will place them at a serious disadvantage in attracting new businesses or retaining existing ones.

Whatever specific powers are agreed for Scotland in the next few weeks, it's all but certain that Wales and Northern Ireland will also want the same for themselves. This would potentially leave England, while still the dominant partner in the Union, in a weakened position, unless a way is found to devolve similar powers to some form of English assembly. But how would that work?  London's dominance of the national economy means that an assembly for the whole of England would be all but useless. London can fend for itself against all comers; Liverpool, Hull and Newcastle, not so much.

And then there's what's known as the "West Lothian question".  As Scotland has acquired more powers, there has been a lively debate about whether Scottish MPs at Westminster should be allowed to vote on matters that only affect England. Deputy Prime Minister Nick Clegg has already said that this issue needs to be addressed as part of the next round of devolution. If all three of England's Celtic partners in the UK wind up with greater powers, answering the West Lothian question will become even more of a priority.

We've recently been learning in Canada, courtesy of the excellent Chantal Hebert, just how unprepared the Federal government was for the possibility of a YES vote in the 1995 Quebec referendum. Scotland may have voted NO this week, but it remains to be seen whether David Cameron's government is any better prepared to deal with the vastly changed world that it now faces.

Monday, 15 September 2014

Off the air

There are lots of little annoyances about being a TV viewer in Canada. The main regulator, the CRTC, imposes mandatory Canadian content requirements on local broadcasters, which results in a lot of sub-standard, highly parochial stuff making it onto the air.  (If you are reading this outside of Canada, I will make a sizable bet that you will never have the joy of seeing such comedies as "Corner Gas" or "Little Mosque on the Prairie").  Stations broadcasting US programming at the same time as just-across-the-border US stations are required to substitute local commercials for those from the US, which both angers the US stations and leads to regular technical issues. And cable TV providers have a nasty habit of "bundling" services in a way that forces most viewers to pay for stuff they never watch, in order to get the ones that they want.

All of this, and a whole lot more, is up for debate as the CRTC holds hearings on the future of Canadian TV.  One media commentator has characterized the hearings as "The Netflix Show". The broadcasters and cable companies are running scared of Netflix,  which is not subject to as many pettifogging rules as traditional content providers are.  In the time-honoured way are looking at how they can wrap it up in regulatory knots, rather than figuring how to compete with it.

As for the bundling of cable services, the cable boys are responding to the CRTC's suggestion of allowing viewers to "pick and pay" for only the channels they want with something like an open threat.  They are insisting that the amount they would charge for individual channels under such a system would result in many or most people paying more than they currently do with bundling.

The public broadcaster, CBC, made its pitch to the hearings a day or two ago.  There's a lot of technical stuff about who pays for what, but there's also this little bombshell:

"The CBC is also recommending that TV stations no longer be obliged to offer over-the-air services to the 5 to 7 per cent of households without cable or satellite."

Got that?  No more fuddy-duddy, old-style TV over the airwaves, if CBC gets its way.  If you're one of those nasty folk who've invested in a bigger antenna in order to pick up better signals while ditching your cable contract, and even worse, if you're evil enough to be supplementing that with a Netflix subscription, why, you're undermining the entire foundation of Canadian broadcasting, if not of the country itself. It remains to be seen whether the CRTC will go along with the CBC's recommendation, or with any of the other bilk-the-consumer schemes that have been laid before it, but right now, there doesn't seem to be anyone speaking up very loudly for the interests of the general public.  

Thursday, 11 September 2014

Empty threats

With referendum day just a week away, the campaign over Scottish independence has suddenly taken a nastier turn, after months of remarkably civil debate.  Recent polls have suggested that the pro-independence side has gained momentum late in the campaign, and a YES vote is a genuine possibility. This has lit a fire under Westminster politicians, prompting a last-minute charm offensive (to the extent that David Cameron et al can actually do charm), coupled with dire warnings about what Scotland stands to lose if it opts to go it alone.

A lot of the most divisive rhetoric has surrounded the question of the pound Sterling. Scotland's First Minister, Alec Salmond, has always stated that his first preference would be for Scotland to continue to use the pound after independence.  Politicians in London have always warned that this would not be acceptable, and those warnings have become louder as the polls have shown the YES side gaining ground.  The last few days have seen some harsh rhetoric and threats over this key issue.

Chancellor George Osborne has said there are "no ifs or buts": if Scotland goes it alone, it will not be allowed to keep using Sterling. Bank of England Governor Mark Carney, who as a Canadian must feel a little uncomfortable dealing with this topic, says that for Scotland to retain Sterling would not be compatible with sovereignty.

I'm no lawyer, but it's not entirely clear to me that the rest of the UK can prevent Scotland from using Sterling if it chooses to do so.  Who actually owns the currency?  Surely, as part of the United Kingdom since well before the Bank of England was created, Scotland has just as much claim to ownership as England or Wales does.  To use an analogy, modern legal practice does not discriminate against the instigator of divorce in dividing up the assets of a marriage. Why should the legal breakup of a union between states be any different?

A further threat has also emerged at this late stage, with several banks, including Royal Bank of Scotland, warning that they would feel compelled to move their head offices from Scotland to London in the event of independence.  It's not clear that this would be anything more than the unbolting of a nameplate in Edinburgh and its reattachment in London: no operations or jobs would move south. In that sense it may be a bit of an empty threat, but that hasn't stopped the NO side from sounding the alarm.  One argument being advanced for the banks to move south is that they would need to be close to the Bank of England as regulator and lender of last resort, but this seems far-fetched.  No French or Italian banks have felt the need to move their HQs to Frankfurt in order to be close to the ECB.

Not all of the threats have come from the NO side. Alec Salmond has responded to the warnings about Sterling by vowing that Scotland will refuse to assume its share of the UK's national debt if it is not allowed to retain the pound.  This may be the emptiest threat of all: as a new country and an untested credit, Scotland could not afford to alienate capital markets by simply walking away from the UK's obligations in that way.

It's hard to know how seriously to take all of this posturing.  If there really is a YES vote, there will certainly be hurt feelings on both sides of the border, but Edinburgh and London have agreed a timetable that allows a full eighteen months for negotiations on the precise terms of separation.  It's not in anyone's interest to make economic relations between Scotland and the rest of the UK more difficult, so in the end, it's probable that some sort of arrangement over Sterling (and the UK's national debt) will be reached.  Too bad this rather technical issue has introduced a last-minute element of element of rancor into what has been, for the most part, an exemplary democratic exercise.

Friday, 5 September 2014

Not again, surely?

For the second month in a row, Statistics Canada has announced employment data that are wildly out of line with market expectations.  The agency reported today that the economy lost 11,000 jobs in August, as opposed to analysts' consensus forecast of a 10,000-job increase.

The details of the data are puzzling a lot of the experts, with at least one bank's economists calling the report "fishy".  Specifically, StatsCan claims that the number of private sector jobs fell by 111,800 in the month, the largest decline ever recorded. In the absence of any large layoff announcements in recent months, this looks improbable, at the very least. Meantime, the number of Canadians who are self-employed supposedly jumped by 87,000 in August, which is also an all-time record for a single month.

After the release of its July employment report, StatsCan was forced into a hasty retreat when it realized that the numbers were wrong.  It subsequently issued a much-revised set of numbers, blaming human error.  The same thing surely couldn't have happened again in August, could it?  You wouldn't think so, but today's data are again so counter-intuitive that the possibility can't be ruled out.

In any event, US non-farm payrolls data were also released today and showed that the American economy added 142,000 jobs in the month.  Even if the Canadian data had been in line with the market consensus, that would mean that the Canadian economy is still underperforming its larger neighbor in creating jobs.  At the end of the day, that's more significant than any snafus in StatsCan's data collection methods.

Thursday, 4 September 2014

Eurozone weakness: desperate measures

The ECB took markets by surprise today, cutting its already microscopic rate even further as the Eurozone continues to struggle. The Bank's reference rate is now 0.05%, down from 0.10%, while its deposit rate is now minus 0.2%. The ECB also announced that it will start buying asset-backed securities next month, although a full QE-type program that would involve buying sovereign debt is still not in the cards.

Will any of this help? The cut in the reference rate is surely no more than symbolic. As for the deposit rate, the linked article notes that the ECB hopes that by making it more expensive for banks to park their cash, it may persuade them to lend more to businesses and consumers. It's equally or more likely that the ECB's evidently dire view of the Eurozone's economic prospects will scare lenders into being even more cautious. And as for the ABS purchases, which are intended to free up balance sheet space, it's not clear who would want to sell relatively secure assets of this type to the ECB and then deposit the funds with the Bank at a negative interest rate.

As in the US, UK and Canada, the balance of monetary and fiscal policy has been wrong for the last several years.  Monetary policy is too loose, fiscal policy unnecessarily tight. What sets Europe apart from the other three economies is that while each of the latter has seen at least some resumption of growth in the last couple of years, the situation in the Eurozone only seems to be getting worse. There really does not seem to be much that ECB Governor Draghi can do about it, short of a full QE program, which would not go down well in Germany.... and now there are growing fears that sanctions against Russia and the possibility of disruptions in gas supplies in the coming winter will make things even worse.  

Sunday, 31 August 2014

Please tell me you're not serious!

The current Federal Government in Canada, led by arch-conservative Stephen Harper, is generally unwavering in its advocacy of "free" markets.  Generally, but not always: Harper's Tories have shown a surprising proclivity to intervene in foreign takeovers of Canadian business. It even turned down a couple of big transactions -- the London Stock Exchange's proposed acquisition of the Toronto exchange, and BHP Billiton's planned purchase of Potash Corp. -- on the grounds that they would not have served the national interest.

This might be unexpected behavior for a right-wing government, but hostility toward foreign investment has always been a touchstone for Canadian nationalists -- a grouping which includes, among others, the Maple Leaf-waving folks at the Toronto Star.  Even so, it's hard to credit this totally bizarre column by the paper's business columnist, David Olive, about the merger deal between Burger King and Tim Hortons.  Olive argues that the deal is illegal under Canada's vague and convoluted foreign investment rules, because it will not bring any net economic benefit to Canada. It's not clear how he knows that, but that's not the most amazing thing in the column.  Right at the outset, he describes the deal as "yet another blow to Canadian economic sovereignty"!

Whaaaat? I mean, you can maybe make a case that it's important for the country's leading financial exchange to be locally owned, and you can perhaps say that potash reserves should be developed at a pace determined by Canadians rather than Australians. But to make the same case about a downmarket purveyor of coffee and fast food shows an almost comical lack of perspective.

Canada is already a laughing stock south of the border thanks to the antics of Toronto Mayor Rob Ford.  You can only imagine how much fun the Kimmels and Fallons of the world would have if the government actually tried to block the deal.  That's not going to happen: the Harperites are crowing that the takeover proves that "Canada is open for business".  That's only slightly more true than some of David Olive's assertions -- just ask BHP Billiton or the LSX, neither of whom will be in any rush to commit capital here any time soon.  Still,  it should at least mean that the country avoids an embarrassing international spat over a bunch of coffee shops.  

Monday, 25 August 2014

Baking bad

Recent months have seen a lot of so-called "tax inversion" deals, in which US corporations merge with foreign companies and then relocate their head offices offshore in order to avoid the 35% US corporate income tax rate.  Today we hear of another such deal: Burger King is in merger talks with the Canadian "coffee" chain Tim Hortons.  If the deal goes ahead, the combined company would be headquartered in Canada, where the corporate tax rate is currently 15%.

I don't presume to tell Burger King how to run its business, but may I point out the downside to this deal?  OK, you may save a whole heap of tax, but you end up owning Tim Hortons.  Has any one at Burger King ever tried a Timmy's "coffee"?  A friend once commented that it tasted like water that's been used to wash coffee cups. It's no accident that the most popular brew at Tim's is the "double double", in which unhealthy quantities of cream and sugar are added to the paper cup in the hope of making the contents palatable.

Then there's the food. The chain has moved beyond the range of stodgy donuts that it started out with, and now offers a range of unpalatable breakfast and lunch items.  Sliced bread toasties masquerading as "paninis", dry muffins, things like that.  In trying to expand into the US, Tim's has styled itself as a "cafe and bake shop" rather than a coffee shop, but it's having trouble winning market share.

At a time when older fast food outlets like Burger King and even Mickey D's are losing business to more upscale offerings like Chipotle, it makes no operational sense whatsoever for BK to acquire a mature business that ranks as low on the quality scale as Tim's.  As if to emphasize that the deal is purely tax driven, the companies have already made it clear that if the merger goes ahead, the two businesses will operate separately.  Some consolation there for the BK customer, then: they're not going to force you to drink Tim's coffee.