RWE has agreed to complete the sale of North Sea gasfields to a Russian billionaire — with the proviso that the German utility will buy back the UK assets in the event of sanctions against the oligarch.

Philip Pilkington writes:  Does the central bank control the long-term interest rate? Yes. Does it control the spread between the long-term rate and the short-term rate? There is no evidence to confirm this and the evidence that we do have — taking the Fed at its word — suggests that they do not. But regardless, next time some economists tells you that the markets control the long-term rate of interest you can safely tell them that they have absolutely no idea what they are talking about. Interest Rates and Central Bank

It’s somewhat understandable that few politicians want advocate for the massive spending it would take to update and maintain our existing infrastructure. It’s much easier to be a silent and foolish than loud and prudent. But if the United States fails to take advantage of current economic conditions to reinvest in infrastructure, it’s only going to have to inconvenience itself more in the future. See: the Washington DC Metro.

Brigitee Granville and Hans-Olaf Henkel ask:  In his classic comedy “Tartuffe, or The Impostor,” Molière shows that allowing pride, rather than reason, to dictate one’s actions invariably ends badly. French President François Hollande appears to have an advanced case of Tartuffe’s malady, repeatedly making political pledges that he cannot honor, partly because of factors beyond his control – namely, the European Monetary Union (EMU) – but mostly because he lacks the determination.

For France, the consequences of Hollande’s failures will be much more dramatic than his political downfall. Indeed, the country could be facing catastrophe, as Hollande’s actions risk miring the economy into sustained stagnation and driving an increasingly angry French public to elect the far-right National Front party’s Marine Le Pen as his successor.

France’s economic policies are untenable, meaning that both of the main determinants of those policies, the EMU and Hollande’s approach, must change radically. So far, that does not seem to be happening.

Earlier this month, an opinion poll showed Hollande’s approval rating plummeting to 12% – the worst result for any French president in the history of modern polling.

Consider unemployment, which in September stood at 10.5%, compared to only 5% in Germany. Hollande acknowledged that, despite his pledge, a reversal of the negative employment trend “didn’t happen” this year.

France’s unemployment problem is the result of leviathan labor regulations and a crippling tax burden on labor. Hollande’s main new promise – not to impose any new taxes, beginning next year – might have been an implicit acknowledgement of this.

In the meantime, however, there will be an increase in diesel excise duties, and a 20% surcharge on property taxes will be imposed on unoccupied second homes in densely populated areas.

Hollande’s track record: the tax burden has risen by €40 billion ($50 billion) over the last two years.  A Hollande official stated Christian that more tax hikes could not be ruled out.

EMU places considerable external constraints on French policy.

The euro’s creators were wrong to expect that the common currency would promote economic and political convergence among its members. By ruling out exchange-rate adjustment to address differences in competitiveness, the euro has forced less competitive countries to pursue painful and slow “internal devaluation.”

The deflationary impact of internal devaluation is compounded by the rule, reinforced in the 2012 “fiscal compact,” that eurozone countries are wholly responsible for their own debts and thus must adopt strict budgetary discipline. With demand relentlessly squeezed, not even depressed wages can generate adequate employment.

The only solution, many euro supporters now contend, is full political union, which would allow for fiscal transfers from the eurozone’s more competitive countries to their weaker counterparts. But southern Italy, which has not used the fiscal transfers from the north on which it has long depended to transform its economy or boost productivity, demonstrates how little impact this approach can have. The notion that a eurozone fiscal union could do better is a dangerous fantasy.

Another potential approach would be for strong eurozone economies, especially Germany, to support productivity-enhancing structural reforms in less competitive countries like France and Italy. This is probably what German Chancellor Angela Merkel meant when she reportedly said that, though Germany “cannot afford transfers to the whole of Europe,” it can “help to pay the doctors’ bills.” But, sooner or later, the weaker economies will probably opt out of such reforms, reclaiming their monetary sovereignty as a necessary – though far from sufficient – means of averting economic and social breakdown.

Mohamed El_Erian writes: In the coming year, “divergence” will be a major global economic theme, applying to economic trends, policies, and performance. As the year progresses, these divergences will become increasingly difficult to reconcile, leaving policymakers with a choice: overcome the obstacles that have so far impeded effective action, or risk allowing their economies to be destabilized.

The multi-speed global economy will be dominated by four groups of countries. The first, led by the United States, will experience continued improvement in economic performance. Their labor markets will become stronger, with job creation accompanied by wage recovery. The benefits of economic growth will be less unequally distributed than in the past few years.

The second group, led by China, will stabilize at lower growth rates than recent historical averages, while continuing to mature structurally. They will gradually reorient their growth models to make them more sustainable.

The third group, led by Europe, will struggle, as continued economic stagnation fuels social and political disenchantment in some countries and complicates regional policy decisions. Anemic growth, deflationary forces, and pockets of excessive indebtedness will hamper investment, tilting the balance of risk to the downside

The final group comprises the “wild card” countries, whose size and connectivity have important systemic implications. The most notable example is Russia. Faced with a deepening economic recession, a collapsing currency, capital flight, and shortages caused by contracting imports, President Vladimir Putin will need to decide whether to change his approach to Ukraine, re-engage with the West to allow for the lifting of sanctions, and build a more sustainable, diversified economy.

The alternative would be to attempt to divert popular discontent at home by expanding Russia’s intervention in Ukraine.

Brazil is the other notable wild card. President Dilma Rousseff, chastened by her near loss in the recent presidential election, has signaled a willingness to improve macroeconomic management, including by resisting a relapse into statism, the potential benefits of which now pale in comparison to its collateral damage and unintended consequences.

This multi-speed economic performance will contribute to multi-track central banking, as pressure for divergent monetary policies intensifies, particularly in the systemically important advanced economies. The US Federal Reserve, having already stopped its large-scale purchases of long-term assets, is likely to begin hiking interest rates in the third quarter of 2015. By contrast, the European Central Bank will pursue its own version of quantitative easing, introducing in the first quarter of the year a set of new measures to expand its balance sheet. The Bank of Japan will maintain its pedal-to-the-metal approach to monetary stimulus.

The problem is that exchange-rate shifts now represent the only mechanism for reconciliation.

For the US, the combination of a stronger economy and less accommodative monetary policy will put additional upward pressure on the dollar’s exchange rate.

Moreover, as it becomes increasingly difficult for currency markets to perform the role of orderly reconcilers, friction may arise among countries. This could disturb the unusual calm that lately has been comforting equity markets.

Fortunately, there are ways to ensure that 2015’s divergences do not lead to economic and financial disruptions. Indeed, most governments have the tools they need to defuse the rising tensions and, in the process, unleash their economies’ productive potential.

Avoiding the disruptive potential of divergence is not a question of policy design; there is already broad, albeit not universal, agreement among economists about the measures that are needed at the national, regional, and global levels. Rather, it a question of implementation – and getting that right requires significant and sustained political will.

The pressure on policymakers to address the risks of divergence will increase next year. The consequences of inaction will extend well beyond 2015.

Klaus Schwab writes:  The effects of the most devastating financial crisis in decades have begun to fade. But debate about the fundamentals of the global economy is far from over. Indeed, there has been a new wave of heated discussion about whether companies should put profits or the common good first.

Milton Friedman, a leading proponent of the profit-oriented approach to corporate management, famously declared that “the business of business is business.” Indeed, from this standpoint, there is no contradiction between profit maximization and the common good. The pursuit of profit itself is a socially beneficial goal.

A conceptual basis for the opposing perspective, to which I adhere, lies in the Harvard economist Michael Porter’s theory of shared value creation. In fact, my own publications promote the stakeholder concept as the framework for a modern understanding of socially responsible corporate management.

The theoretical debate could continue indefinitely. But, in terms of practical company management, such ideological polarization is not particularly useful. If managers had to choose between fulfilling the expectations of shareholders and meeting their social and ethical responsibilities, their companies would probably collapse.

Instead, successful managers recognize that any company is both an economic and social entity, and thus that no stakeholder can be neglected. As I wrote more than four decades ago, a company, “like an organism…depends on several arteries,” all of which it must nurture if it hopes to survive and grow.

That sounds straightforward. But it can be very difficult when the demands of, say, the company’s shareholders conflict with the interests of its employees, customers, or local communities.

This requires, first and foremost, that the company is profitable. But profitability should not be an end in itself; it is a tool to help managers determine the most effective use of their resources and gauge the company’s competitiveness and vitality. Profitability, growth, and safeguards against existential risks are crucial to strengthening a company’s long-term prospects. But if these three factors constitute a company’s “hard power,” firms also need “soft power”: public trust and acceptance, won by fulfilling a company’s social responsibility.

In short, the real conflict is not between profit maximization and social responsibility, but rather between short- and long-term thinking.

We are emerging from a period when companies, under pressure to meet shareholder expectations, favored profitability and growth, even if it meant taking undue risks and losing public confidence.

Fortunately, companies are increasingly acting with a sense of social responsibility. By working with governments, international organizations, and civil society, companies are addressing major challenges like social integration, and creating the necessary systems to provide education and health care to those who need it most. These companies are implementing the stakeholder concept on a micro and macro level, answering to the demands of their employees, customers, and communities, and thus strengthening their brands.

In doing so, such companies offer a powerful response to the question of what their role in society should be. More important, they are showing the rest of the corporate sector that the business of advancing the common good is a worthy one.

Ian Baruma writes: The British shadow minister for Europe, Pat McFadden, recently warned members of his Labour Party that they should try to make the most of the global economy and not treat immigration like a disease. As he put it, “You can feed on people’s grievances or you can give people a chance.”

In a world increasingly dominated by grievances – against immigrants, bankers, Muslims, “liberal elites,” “Eurocrats,” cosmopolitans, or anything else that seems vaguely alien – such wise words are rare. Leaders worldwide should take note.

In the United States, Republicans are threatening to close the government down just because President Barack Obama has offered undocumented immigrants who have lived and worked in the US for many years a chance to gain citizenship. The United Kingdom Independence Party (UKIP) wants to introduce a five-year ban on immigration for permanent settlement. Russia’s deputy prime minister, Dmitry Rogozin, once released a video promising to “clean the rubbish” – meaning migrant workers, mostly from former Soviet republics – “away from Moscow.”  Even the once famously tolerant Dutch and Danes are increasingly voting for parties that fulminate against the scourge of immigration.

Retaining one’s job in a tightening economy is undoubtedly a serious concern. But the livelihoods of most of the middle-aged rural white Americans who support the Tea Party are hardly threatened by poor Mexican migrants. UKIP is popular in some parts of England where immigrants are rarely seen. And many of the Dutch Freedom Party’s voters live nowhere near a mosque.

Anti-immigrant sentiment cuts across the old left-right divide. One thing Tea Party or UKIP supporters share with working-class voters who genuinely fear losing their jobs to low-paid foreigners is anxiety about being left behind in a world of easy mobility, supranational organizations, and global networking.  On the right, support for conservative parties is split between business interests that benefit from immigration or supranational institutions, and groups that feel threatened by them.  On the left, opinion is split between those who oppose racism and intolerance above all and those who want to protect employment and preserve “solidarity” for what is left of the native-born working class.

It would be a mistake to dismiss anxiety about immigration as mere bigotry or apprehension about the globalized economy as simply reactionary.  In the new global economy, there are clear winners and losers. Educated men and women who can communicate effectively in varied international contexts are benefiting. People who lack the needed education or experience – and there are many of them – are struggling.
In other words, the new class divisions run less between the rich and the poor than between educated metropolitan elites and less sophisticated, less flexible, and, in every sense, less connected provincials.

Populist rabble-rousers like to stir up such resentments by ranting about foreigners who work for a pittance or not at all. But it is the relative success of ethnic minorities and immigrants that is more upsetting to indigenous populations.  This explains the popular hostility toward Obama. Americans know that, before too long, whites will be just another minority, and people of color will increasingly be in positions of power.

Economic globalization cannot be undone. But regulation can and should be improved. After all, some things are still worth protecting. There are good reasons not to leave culture, education, lifestyles, or jobs completely exposed to the creative destruction of market forces.