Tuesday, July 3, 2012

Blueprint for Banking Union


Note: this essay draws heavily on “What kind of European banking union?” by Jean Pisani-Ferry, André Sapir, Nicolas Véron, and Guntram B. Wolff. However, the synthesis is my own and does not necessary reflect those authors’ research.

The rationale for a European banking union complementing monetary union is straightforward. To start, there is an inherent contradiction between pan-European banking and exclusive national responsibility for bank crisis resolution. Developments during the recent crisis have exposed further weaknesses: capital is seeking safety rather than moving freely; asset ring-fencing and risk-shifting may actually increase the overall public cost; and finally, the ECB simply cannot address solvency concerns while staying committed to its primary target of combatting inflation. A banking union can address these problems while not veering into the more dangerous fiscal union territory, as Stephen Castle argued in the New York Times.
Consensus on some elements
What would a banking union entail? First, a European banking charter to create a single rulebook for all bank entities. Second, a supervisory body that, unlike today’s EBA, has direct authority over banks. And lastly, European deposit insurance funded by contributions from participating banks. These elements are present in Brussels’ latest plan for a banking union that will take effect in 2013. 
While it is imperative that the banking union include the Eurozone countries, incorporating the entire EU-27 would harmonize the functioning of financial markets with the free movement of goods, capital, services, and people. However, an EU-27 banking union is probably too ambitious given the objections of the UK and other countries.
Decisions to be made
Many aspects of the banking union have yet to be determined. Chief among them are which banks will be involved, who will act as the supervisor and how to structure the deposit insurance. Pisany-Ferry and his co-authors offer the following thoughts on these issues:

Which banks: The union should cover the entire banking sector – if political consensus can be achieved for it – rather than only those banks considered systematically important at a European scale. This would avoid distortions between smaller and larger banks, while also removing the possibility of skirting rules through subsidiaries.
Which supervisor: The ECB is better suited than the EBA to act as the banking union supervisor, due to its greater resources and higher credibility. However, this could place new political pressure on the ECB, interfering with fiscal policy. Therefore, it will likely be necessary to create a new supervisory institution.
What deposit insurance: Deposit insurance will most likely occur through a re-insurance of the existing national deposit insurance schemes, potentially with additional contributions from member states’ governments. To create a fiscal “backstop” for the re-insurance, it is necessary to give the managing entity the ability to draw on additional resources in case of crisis – either through contingent taxation or borrowing. Again, these merely create an “intervention chest” for crisis resolution.

An uphill but important battle
Implementation of a banking union is far from simple. It requires, at the least, increased empowerment of the European Parliament, and at the most, the creation of a new European Ministry of Finance. Authorities must be vigilant so that banks do not hide their losses in the hope that they will eventually be mutualized.
Nonetheless, the failure to move forward on this issue could greatly endanger the viability of the monetary union. The proposed banking union would not only help address the negative feedback loop between sovereigns and banks; it would also demonstrate that the euro area has the political will to draw lessons from the crisis.

Monday, May 21, 2012

Don't Fly Ryanair. Just Don't.

A 12 Euro flight from Barcelona (Girona) to Milan (Bergamo) on a Friday night seemed too good to be true. When it landed 2 hours late in the wrong city, I knew it was. Welcome to Ryanair.

What happened? I arrived on time for my flight on a Friday night from Barcelona (Girona) to Milan (Bergamo), scheduled to depart at 22:35h and land at 23:55h. I had paid 12 Euros for the flight - 0 Euros base fare plus the mandatory taxes and fees.

Boarding was delayed by about an hour in Girona. Once we had boarded, however, the plane did not move. The crew gave us vague updates: mechanical problems, technicians arriving, more senior technicians arriving, calculations being performed in offices. To no avail. An hour later we had to de-board with our carry-on luggage and get on another plane. This one finally took off - 2 hours late.

But that wasn't the end. We were almost at our destination when Ryanair made the announcement that the Bergamo airport was closed. We instead landed at about 2am in Verona, about an hour and a half away by ground.

Upon arrival, passengers were promised a bus back to Bergamo Airport, 100km away. This did not seem particularly appetizing. What ground transportation could we hope to find now that the airport was closed? Would Ryanair still offer the connecting bus to Milan? Nonetheless we waited outside the airport. 45 minutes went by and the bus showed no sign of materializing. We saw the pilot and crew sneak off in a van (so much for the notion of the captain going down with the ship). There was no airport staff anywhere.

At this point my girlfriend and I made a desperation move. We hailed the only cab at the airport and asked him to take us to the Verona Airport Hotel, visible in the distance. We arrived quickly at the hotel and went to sleep. Hotel and cab fare cost 125 Euros.

Parts of the story made sense. Maintenance problems were discovered just prior to takeoff, forcing passengers, crew, and luggage to change planes. Pushing the late scheduled takeoff to 2 hours later caused issues at the destination airport, which diverted the flight to a nearby airport.

But other parts defied logic. What kind of aircraft service operation requires the technician to scurry back and forth to his office inside the terminal to perform some calculations? Why was our flight prevented from changing planes to allow four successive incoming flights to land, when the only chance we had to arrive at our destination airport was to switch immediately? How could the flight crew wait until 20 minutes to landing to notify us that we would be landing not at Bergamo but at Verona? Why did the airline neglect to offer better bus options and why was there no one on hand to answer our questions?

Was it an unfortunate series of bad breaks or deliberate mismanagement and utter disregard for the customer? For me, there is too much evidence in favor of the latter. I understand that maintenance delays are part of air travel but the airline had so many contact points at which to improve both its operations and its service to avoid stranding us unaccompanied at the wrong airport in the middle of the night.

Luckily, passengers have rights. According to European Law (EU Regulation 261 / 2004), airlines are required to reimburse passengers for expenses incurred due to a delay longer than 2 hours. Ryanair's website states that they only reimburse for cancelled flights, in blatant disagreement with the law, but I decided to submit a claim anyway. My first attempt failed; their online claims submission form doesn't work. Eventually I sent a letter through fax. In it, I argued that according to European Law a delay longer than 2 hours amounted to a cancellation and rendered Ryanair liable for the incremental expenses I had incurred.

The response came through a week later (to my email address, oddly), ignoring the distinction between a delay and a cancellation but asserting innocence because factors outside the airline's control had caused the flight to be diverted from Bergamo to Verona.

I interpreted Ryanair's response as denying my first claim automatically with a flimsy justification and hoping I would go away. I had to again reply by fax since Ryanair does not accept customer communications via email even though they had emailed me their response. This time I told Ryanair that ignoring the 2-hour mechanical delay which actually caused the diversion was an unacceptable oversight. It's not as if the flight took off on time and had to change course due to bad weather. The law clearly states that mechanical failure is the airline's responsibility. I asserted my right to elevate my claim to the Italian air travel authority, which could subject Ryanair to a € 5,000 fine.

The next response arrived a few days later. While again denying blame, the airline had decided to pay my claim in full via a check. I had demonstrated that I knew my rights and Ryanair was keen to avoid the investigation and potential fine at the hands of the Italian air travel authority. Victory for the consumer! The check eventually did arrive, though after three weeks instead of the two the airline promised.

Meanwhile, I decided to see if I could verify Ryanair's ever-present claim that it is the "No.1 on-time airline in Europe with the least flight disruptions; as detailed in audited statistics issued by the UK Civil Aviation Authority." I ran some numbers on the 2011 data, analyzing 1.4mn flights, the output of which is below. Ryanair's performance is not bad according to this data. Nonetheless, I believe the claim is wrong for 3 reasons:

1. Ryanair is NOT the most on-time airline in Europe, according to this data. Other airlines that have less flights are more on-time. Ryanair could choose to claim (correctly) that it is the most on-time budget airline, or is better than British Airways, or that it exceeds the UK average of 80% (Interestingly, the US average is 85%, according to a recent FT piece) - instead, they opt for a boast which sounds better but is false.
 
2. It is unclear whether the data is actually audited by anyone, as the CAA says they compile it from various sources (i.e., the airlines themselves) and can neither certify the data's "accuracy, integrity, or reliability" nor comment on any conclusions drawn from it.

3. The UK CAA, as its name implies, publishes data on arrivals to UK airports. Yet Ryanair operates throughout Europe. The agency responsible for compiling Europe-wide delays is Euro Control, which says it cannot disclose data on individual airlines. 

Why would Ryanair consistently make this claim (it is ever present in communication with customers as well as public filings)? First, to counteract well-publicized horror stories and customer campaigns. Or perhaps the airline cites UK CAA data because Euro Control's data is less flattering. Either way, when your flight has been delayed or cancelled the claim is of little consolation.

I won my battle against Ryanair by getting a refund for the expenses I had incurred due to their mismanagement of my flight. I wonder how many consumers in the same situation have had the patience and tenacity to do the same.


Airline
# Flights
On-Time
Late
BRITISH AIRWAYS PLC
277,063
80%
20%
EASYJET AIRLINE COMPANY LTD
200,146
82%
18%
RYANAIR
127,843
85%
15%
FLYBE LTD
110,573
85%
15%
BMI BRITISH MIDLAND
48,558
78%
22%
THOMSON AIRWAYS LTD
40,711
77%
23%
LUFTHANSA
33,679
71%
29%
MONARCH AIRLINES
29,765
70%
30%
AER LINGUS
28,394
83%
17%
THOMAS COOK AIRLINES LTD
27,906
75%
25%
BA CITYFLYER LTD
25,416
86%
14%
VIRGIN ATLANTIC AIRWAYS LTD
19,771
76%
24%
SWISS AIRLINES
18,278
81%
19%
SAS
17,959
84%
16%
KLM
16,428
87%
13%
AER ARANN
16,210
84%
16%
VLM (BELGIUM)
15,935
90%
10%
WIZZ AIR
15,686
72%
28%
LOGANAIR
15,494
88%
12%
CITY JET
14,757
88%
12%
JET2.COM LTD
14,417
61%
39%
BMI REGIONAL
13,859
92%
8%
* On-time flight: Within 15 minutes of stated arrival.

Saturday, May 12, 2012

Ageing and the Financial Crisis

I published this article last week in Fair Observer, working with the noted economist and ageing expert Edward Hugh. Enjoy!

http://www.fairobserver.com/article/ageing-and-financial-crisis-more-meets-eye

Friday, March 16, 2012

Groupon On the Up in Spain

Nursing a beer yesterday at my neighborhood bar while the wait staff prepared for the dinner crowd, I casually eavesdropped to their typical machismo chit-chat about football and motorcycles. Then, my ears perked up at the mention of Groupon.

In the US, Groupon's growth has slowed. Vendors find it difficult to deal with the influx of new clients, and at the same time realize many are unlikely to develop into repeat patrons, which unfortunately influences how they treat Groupon holders. Customers, meanwhile, are frustrated by (among othe things) stringent, often confusing conditions that prevent them from using their Groupons.

But my neighborhood bar was still in the honeymoon phase with Groupon. In one day of Groupon sales in February for a 20€ / pax tapas or seafood menu, they had sold 2,000 Groupons. A month later, only 400 holders had redeemed their Groupon but the increase in traffic was still noticeable. Last night, a Thursday, the restaurant was booked. Same for the next night, and in fact for ever Thursday-Sunday in March. "We're taking bookings through May!" the Maitre-D exclaimed to one of the waiters. I listened in mild shock as he told a customer over the phone, "Nothing for next weekend, no. Yes, maybe there will be a cancellation. Call me Tuesday, 6-8. That's when I can take calls."

I have eaten at this restaurant and I can assure you it's nothing special. If the tapas or seafood prix-fix is anything like a recent meal I had there, diners will be disappointed. But Groupon's 1 million customers in Spain are, for the moment, all too eager to find out for themselves.

Follow me at the Esade MBA's blog

To my 3 loyal readers, just letting you know that I am now posting on the official blog for the Esade MBA. You'll find recent posts about a trip to the Global Sports Forum in Barcelona, the latest Javier Solana lecture, and this year's annual Esade alumni reunion.

http://mba.esadeblogs.com/

Wednesday, February 8, 2012

Spanair - La Deuda de Todos

The Spanair debacle shows that perhaps Catalans' trust in their government is misplaced. The airline ate public money every year since its 2009 purchase and finally went bankrupt last month. Ferran Soriano, the former management consultant installed at the helm, comissioned turnaround studies by management consulting firms BCG and Europraxis which, as consulting studies do, predicted that profits would skyrocket. Meanwhile, the airline was no more operationally sophisticated than any of its peers and did not have a real value proposition besides having a hub in Barcelona.

Whether Spanair did not possess the expertise to implement the consulting advice or whether the profit forecasts were just pie-in-the-sky inventions is impossible to determine. But the government and Soriano were clearly out of their element. You should never buy an airline that costs 1 euro, precisely BECAUSE it costs 1 euro!!!

Even if the operation was somewhat political, as a new regime entered office and cut the faucet, Spanair was clearly not viable, ceasing operations with €350mn in debt and only €100mn in assets (they did not even own their fleet). In my mind, Catalunya owes its citizens an explanation.

For the full story, check out my article on Fair Observer:
http://www.fairobserver.com/article/la-deuda-de-todos-fate-spanair

Friday, January 27, 2012

Bicing Barcelona

Being an MBA student, you can request a meeting with practically anybody as long as your motive is pure (enough). And so I found myself in the Barcelona Serveis Municipals office earlier today to discuss the management of Bicing, the citywide bike share.

Bicing is a fascinating business: 6,000 bicycles, 340 stations, and a network of maintennance and replacements to hold it all together. Barcelona has outsourced day-to-day management to ClearChannel - ostensibly a media company but also a public tansport tactical partner - so city hall has only a skeleton liaison team. ClearChannel evidently has gone from operating these bike share schemes as a favor in exchange for advertising concessions to doing so because they're good at it.

Even with ClearChannel's logistic wherewithal, Bicing places great strain on Barcelona's finances. Membership dues from the roughly 120,000 socios amount to only a fraction of operating expenses so Barcelona city hall has to subsidize 60% of the cost of each Bicing trip, compared to only 40% for other public transport. Claims of indirect environmental benefits may be overly optimistic in view of the 30 maintennance trucks that circulate almost all day repairing and moving the bikes (and polluting). Moreover, lament Bicing directors, too many trips are coming from people who otherwise would simply walk to their destination - not those foregoing a car or moto.

One solution is a tiered fee structure (currently all users pay a yearly flat fee of €35) where riders pay more for traveling at peak times, traveling more often, or traveling "downwards" without a return journey, which is typical of beachgoers. But last year's contentious negotiations of just a €5 fare increase were highly politicized so a broader revision of fees would be difficult. Bicing could also offer day passes like in Paris or London, an idea which would likely find receptive tourists but which would generate more flow to the city center and the beach.

We're hoping to work more with Bicing at Esade, perhaps inviting them to do a case study with the Operations Club.

Thursday, January 19, 2012

An Audience With Solana

About once a month, Esade offers a course on Geopolitics and Global Governance with Javier Solana, the noted Spanish physicist and, more importantly, former secretary general of the EU.

Last night's session focused on nuclear proliferation. First, Solana the physicist reviewed how uranium is enriched to produce an atomic bomb. Then, Solana the diplomat offered a series of stark predictions. Iran would continue its slow but steady progress, he said, until it eventually has the capacity to build and deliver a nuclear weapon. After Iran, Turkey and Saudi Arabia would likely feel pressured to join the club, and would have no problem buying the knowledge from Pakistan.

Solana didn't seem too bothered by the prospect of another rogue state with nuclear weapons. The detente argument still holds water since every country knows that one missile fired would launch a world war. Even the most hopeful disarmament treaties would leave weapon-holding countries with an arsenal sufficient to end the planet.

There is also a practical side to the argument. Developing countries are using much more energy since the 1990 and almost all of the increase has come from gas and coal. With the Stern Review recently estimating that carbon emissions must fall 80% to reach sustainable levels, nuclear energy is a cost effective (albeit dangerous) solution.

It was a pleasure to share time and space with the quick-witted Solana. As Spanish politicians continue to look inward and struggle to communicate in English, he is part of a historic generation of international Spanish diplomats.

Javier Solana - former secretary general of the EU
Rodrigo Rato - former managing director of the IMF
Juan Antonio Samaranch - former president of the International Olympic Committee
Federico Mayor Zaragoza - former director general of UNESCO

In a future post I'll dissect why Spain has a low incidence of English speaking.

Sunday, January 8, 2012

Responses To Rajoy's Economic Policy

Republished from http://www.spainreview.net/index.php/2012/01/17/response-to-rajoy-economic-policy/

A month into Mariano Rajoy’s tenure as Spanish President, his economic policy has crystalized around better governance and austerity amidst the revelation that Spain’s deficit is larger than previously thought. In short, the economy policy contains the following elements:




The crackdown on provincial spending has produced perhaps the loudest political response, with the opposition socialist party accusing Rajoy of using the crisis as an excuse to impose his centrist ideology. Catalonia, Andalucia, and the Canary Islands vow to bring the matter to the Supreme Court. Catalonia in particular has made important strides in the last year through its own austerity measures and a local bond issuance, though its debt still straddles the prescribed limit.

But Rajoy’s tax policy is probably of most interest to European policymakers still searching for the right balance between austerity and stimulus. Rajoy’s hand was forced towards austerity after the finance ministry revealed that Spain’s deficit will reach 8.2% of GDP this year, up from a projected 6%. As late as November, the government estimated the deficit at just 4.8%.

Though the tax increase breaks Rajoy’s campaign promise, a majority of those surveyed by El País prefer this route over the alternative of cuts in social services. The sentiment is likely aided by rhetoric that the taxes disproportionately affect wealthy citizens and that the value-added tax will remain untouched. There is also a plan to recoup €8.17bn a year in unpaid taxes, mostly from corporate offenders – a quick hit that could reduce the deficit by up to 0.7% of GDP.

Meanwhile, the government will raise pensions for the country’s poorest and hold electricity tariffs constant for small consumers. The safety net, however, does not apply to the roughly 5 million illegal immigrants or the estimated 300,000 migrants who have lost working visas.

All told, the policies trim €16.5bn off the government bill and Rajoy is adamant Spain will meet the EU’s deficit target of 4.4% of GDP in 2012.



Pundits’ opinions about Rajoy’s strategy are mixed. An analysis from El País found that, while the top marginal rate had increased 7% to up to 55% in some autonomous communities, “working people” would still bear two thirds of the increase. With that in mind, Joachim Voth at the Barcelona Graduate School of Economics predicted in a blog post that the tax hike “will hardly produce any extra revenue” and that Spain would “repeat some of the Greek experience,” with growth slumping further.

The business journal Expansión simply accuses Rajoy of a political identity crisis since conservative candidates typically opt for supply-side regulation. The previous socialist government had already lowered the small business tax rate from 30% to 20%.