The state of the other Union

By Ziad Abouchadi , class of 2017

By Ziad Abouchadi, class of 2017

While an election year is about to end in the US, an extremely vital political year is starting in Europe. With Dutch, French and German general elections scheduled for 2017, voters will decide the future of the old continent. All three elections will be harshly fought with the established parties on one side and populist ones on the other.

In France, after an extremely unpopular first term, socialist Francois Hollande may become the first incumbent President to be absent of the ballot. 70% of voters wish Mr. Holland resigns from the political life forever, making him the least popular president since the war.

He is blamed for the state of the economy, the crumbling of the ideals of the EU and several terrorist attacks under his watch. To his credit, he has begun the process of structural and labor reforms that so many countries desperately need but it was too little and too late to have any effects by the election date.

Consequently, his departure will leave the field open for a fight between the French right (Alain Juppe) and the extreme right (Marine Le Pen). The likely absence of the left from the second round of the elections will focus the political discourse to anti-immigration, anti-trade and anti-EU. Just recently, the government dismantled the refugee camp in Calais as a signal to the UK that French priorities have shifted from the EU to France. Since France will have a strong say in what happens to Europe post-Brexit, the rhetoric may have destabilizing effects well outside the French borders.

Marine Le Pen (left, France) and Geert Wilders (right, Netherlands) lead the European anti-EU wave.

Marine Le Pen (left, France) and Geert Wilders (right, Netherlands) lead the European anti-EU wave.

The results of the elections in the Netherlands and Germany will be based solely on immigration policy, rather than the state of the economy. The right-wing Alternative for Germany (AfD) has moved from a fringe party to a serious contestant for next year’s elections. Since Angela Merkel decided to make the dramatic decision of accepting Syrian refugees, her electoral base has been slowly eroding in favor of AfD. As she has been defeated in many local elections, she is now weakened and increasingly unpopular.

In the Netherlands, the far-right Party for Freedom of Girt Wilders is the most likely to win the general elections since it is the highest polling party at the moment. The party’s manifesto is an interesting read, calling for the closure of all mosques, a ban on the Koran and immigration from Islamic countries. The party is also famously Eurosceptic, calling for a Dutch version of Brexit that would signal the end of the Union.

Uncertainty over politics and the future of the European Union has been the biggest drag on the continent’s investment and growth since 2010. The President of the European Commission, J.C. Juncker said it best: “We all know what to do, we just don’t know how to get re-elected after we’ve done it”. Let us hope next year’s elections will be the catalyst that will unleash the full potential of the European Union and save it from self-inflicted irrelevance.

Ziad is the editor of the Opinion column of Chicago Business.

Brexit means Brexit means…?

By Matthew Mennell,  Class of 2017

By Matthew Mennell, Class of 2017

Britain, Britain, Britain… What have you done!? While the whole world was taken aback by the vote to leave the EU, what does it actually mean? If Brexit means Brexit, then what is Brexit?

This author, like others, believes that Brexit will not be the economic and political apocalypse that many predicted.  Britain will almost certainly retreat to a position within the single market, outside the EU, under a EEA*/EFTA** style arrangement.  Here are five reasons why:

1. There is no democratic mandate for a ‘hard Brexit’, meaning an exit from both the EU and the single market: while 51.9% of Britons voted to leave the EU, it is highly unlikely that 96% of these voters believed Brexit meant leaving the single market.  Many campaigners for Leave - including outspoken MEP Daniel Hannan and the Adam Smith Institute - explicitly argued to remain in the single market prior to the vote.

2. Assuming Britain triggers Article 50 (to commence formal negotiations) at the beginning of 2017, elections in France and Germany will delay any serious talks until the end of the year.  This will not provide sufficient time to negotiate any serious alternative trade agreement. As a consequence, Britain will have to accept an off-the-shelf arrangement at the end of the 2-year negotiation period, which will either be EEA/EFTA or WTO rules.

‘Brexit means Brexit' and will be 'a success' says Theresa May, UK Prime Minister.

‘Brexit means Brexit' and will be 'a success' says Theresa May, UK Prime Minister.

3. Despite key figures in the Conservative party claiming Britain would be just fine under WTO rules (a so-called ‘hard Brexit’), this is nothing more than a negotiation stance.  Britain must maintain a credible threat of a ‘hard Brexit’ to secure any concessions on free movement of labor.  As David Cameron discovered to his peril, these concessions aren’t exactly forthcoming.

4. The financial services sector will almost certainly lose its ‘passport’ if Britain leaves the single market. 1.1 million people are employed by this sector, which contributed 11% of total government tax receipts in 2015.  If just one-third of banking jobs move out of the UK, it will be devastating to the economy.

5. Theresa May needs to call a general election by May 2020, a year after Britain has left the EU.  If she lands a ‘hard Brexit’, the Conservatives will face intense opposition from Labour and the Liberal Democrats who have made it clear that they will fight for single market access. Under a ‘soft Brexit’, her only opposition will come from the UK Independence Party, who struggles to win seats in elections under the first-past-the-post system.

So, was it all worth it?  Will Britain regain lost sovereignty under a single-market ‘soft Brexit’ or will it be bound by the same EU laws and regulations it contended?  Will other countries join Britain and create a two-tiered system of European integration, one static free-trade agreement and one ever-closer monetary and fiscal union?  The next few years will be a fascinating time in European politics

*EEA = European Economic Area, the agreement Norway, Liechtenstein and Iceland have with the EU.

**EFTA = European Free Trade Association, the free trade organization under which Switzerland, Norway, Liechtenstein and Iceland operate, outside of the EU.

Matt is a second year MBA, currently negotiating his departure from the European Business Group

The Brazilian House of Cards

By Bruna Porto, Class of 2017 and Giuliana Reis, Class of 2016

By Bruna Porto, Class of 2017 and Giuliana Reis, Class of 2016

At Booth, some of the most common questions people ask when they have just met you are “what did you do before the MBA?”, “where are you going for your internship / full-time?” and “do you already have Summer travel plans?”. That is not necessarily true for some of us, though. Many times, when we say we are from Brazil, people ask us variations of the very same question: “What the hell is going on in Brazil?”. So that’s how this article was born. We were given the super-human task to explain the unexplainable: our country’s politics.

Brazil is the 5th largest country both in terms of area and population (around 200 million people), and the 7th largest in terms of GDP. Most importantly, of course, Booth has around 40 of us walking around at any one time – with 20 students per year, it is one of the largest international groups on campus. Even though the country has a great reputation for its natural beauty, parties, diversity and tolerance (just to mention a few clichés), it has stolen international media headlines for its political chaos and corruption scandals. When 60% of Congress is facing criminal investigations, we know that there must be something very, very wrong.

Brazil, as it is known today, is a young country. Its capital city, Brasilia, was built in 1956. Its democracy only started in 1989, with the country’s first direct elections ever, ending a 25-year dictatorship era. And we still feel the burden of its young institutions and lack of political leadership – leading now to its worst recession since the 1930s.

The country has never been a model of efficiency – on the contrary, it is a great example of having governments which believed in the growth of the state. Nonetheless, it is not for our lack of management competency that we have been getting so much attention, but for the embezzlement scandal at the state oil company Petrobras. This and other scandals, through many operations (the most famous being called “Operation Car-Wash”), involve the highest rankings of politicians and some of Brazil’s most influential businessmen. In fact, many directors from the biggest Brazilian government contractors were implicated in the process. It is as if Lockheed Martin’s and Boeing’s CEOs were both in jail right now.

Luiz Inacio Lula da Silva was a very popular president, leading the country from 2003 to 2010. His government benefited from great macroeconomic tailwinds, which led to him being able to elect Dilma Rousseff, his former Chief of Staff, as his successor. Nevertheless, she wasn’t able to incite the same levels of popularity as Lula did, leading to a decay of the party in power.

And then comes Petrobras. In this case, large construction firms organized an illegal cartel with the aim of earning overpriced contracts from the oil company. To maintain the cartel and guarantee that only members could win Petrobras’ contracts, the companies bribed Petrobras’ employees, who were mostly selected by politicians. Hence, much of the extra revenue was allegedly funneled to political parties in order to fund campaigns. Investigators have uncovered over $1.8bn in bribes paid and total losses to the state estimated at between $8.3bn and $12.0bn. They have charged approximately 180 people with criminal offenses and secured 93 convictions, including the C-suite executives of the construction companies that composed the cartel. Dilma has not been accused of any crime regarding Petrobras, even though she was a Board member between 2003 and 2010, when much of the corruption allegedly took place.

José Dirceu, former chief of staff, arrested by the Federal Police. Photo: Rodolfo Buhrer/Reuters

José Dirceu, former chief of staff, arrested by the Federal Police. Photo: Rodolfo Buhrer/Reuters

In parallel, the opposition started to articulate the impeachment proposal under the allegations that Dilma used accounting trickery to disguise the size of the country’s budget deficit. But how did we get into so much debt? Well, her “New Economic Matrix” with progressive values of #1 generating deficits to #2 create growth absolutely destroyed the economy. She accomplished #1 brilliantly.

The petition to start an impeachment trial was approved last December by the then-president of the Lower House, Eduardo Cunha, who has recently been removed from office due to involvement in the Operation Car-Wash. As the impeachment process evolved and the probability of being removed from office became more concrete, Dilma progressively lost her ally base. Temer, Dilma’s vice-president, even published a letter, criticizing Dilma for the way she had been conducting her political decisions, signaling the rupture between the two and further fueling the process. One plausible reason for Temer’s party to turn against Dilma is that she was unable to stop Operation Car-Wash – and when many high-profile politicians who were close to her got caught, Temer’s party jumped ship. After a series of appeals in April, the impeachment process was voted and approved by the members of the Lower House of Congress.

With the motion to forward these charges to the Senate approved, Dilma’s remaining political supporters made a final attempt to stop the process, with the current President of the House petitioning the annulment of the impeachment process, adding another dramatic turn to the whole process. However, the request fell through and, on May 11th, with 55 votes against 22, the Senate decided to install the impeachment process and remove Dilma from office for up to 180 days - until the trial (headed by the Brazilian Supreme Court chief of justice) is over. Then, the Senate votes again, needing 54 out of 81 votes for Dilma to be impeached. If that is the case, Temer will likely serve as acting president until the end of the term, in 2018.

Even as a young democracy, Brazil has faced an impeachment process before. In theory, Dilma is being judged for accounting trickery - but in practice, most of the Brazilian population wants her out because of the Petrobras scandal and her lack of competency in managing the country’s economy. The problem now is that her successor Temer and his party members have also been involved in many corruption scandals. And so has the president of the Lower House. And the president of the Upper House. And many of the Ministers, outgoing and incoming. And their wives, and children, and old friends. To get rid of everyone, we would need at least a few hundred impeachment trials. Yes, Brazilian politics make House of Cards look like child’s play. We told you it was unexplainable.

Bruna is a worried Brazilian. Giuliana is an angry one.

ChiBus Explains: A guide to the Panama Leak

By Ziad Abouchadi  Class of 2017

By Ziad Abouchadi
Class of 2017

Beginning in early 2015, an anonymous source under the pseudonym "John Doe" made batches of documents available to the German newspaper Süddeutsche Zeitung, starting the largest data leak in history by far. The documents, which date back four decades, contained terabytes of information from a Panamanian law firm specialized in setting offshore accounts and shell companies that the rich and the powerful have been using to conceal wealth and to presumably commit crime.

To this day, only a fraction of the documents that came to be known as the “Panama papers” have been published, with astounding effects all over the world. The Prime Minister of Iceland has just resigned a week ago. Ukraine’s president Petro Poroshenko, who is already on an ejection seat, had promised to sell his business interests on taking office and now seems to have merely transferred assets to an offshore shell. The freshly elected president of Argentina, Mauricio Macri, will have to appear before a federal prosecutor to defend his case. Calls for the resignation of British Prime Minister David Cameron have been voiced both inside and outside the parliament. The Chinese government has been censoring any reference to the documents since they have tied China’s top leader to offshore companies at a time when he is leading a full-scale war against corruption.

It is vital to keep in mind how tricky it is to have an appropriate response to these revelations when the subtleties of tax havens and offshore accounts are not fully appreciated. For instance, the IMF defines an offshore center as a low tax jurisdiction that provides services to non residents while requiring little disclosure (The big seven are Hong-Kong, Ireland, Lebanon, Liberia, Panama, Singapore and Switzerland). As such, they can be used for perfectly legitimate and economically beneficial purposes, and can thus be completely legal, both in the offshore and onshore jurisdictions.  For example, when two firms set up a cross-border joint venture, they may choose to incorporate it on neutral turf to avoid favoritism.

It is hard for leaders to justify their personal questionable arrangements at a time when they are asking for more and more sacrifices from their populations. Courtesy of the New York Times

It is hard for leaders to justify their personal questionable arrangements at a time when they are asking for more and more sacrifices from their populations. Courtesy of the New York Times

The opponents of these arrangements raise the valid concern that, while the accounts in themselves are legal, the opacity and lack of disclosure encourages the holder of these accounts to commit crimes. One can hardly commit money laundering, tax evasion, fraud or any white-collar crime without one of these offshore accounts to a point where holding one is now equated with ill intention.

All the power players involved have strongly denied any wrongdoing, insisting that they have not done anything illegal. Their pleas for mercy have fallen on deaf ears since it appears that the public uproar is more about fairness and equity than it is about justice and legality. While it would  come as a surprise if these revelations set in motion a global fiscal reform, they certainly will shed  light on the gap between a population that is increasingly being asked to make sacrifices and leaders that seems desperately out of touch with reality.

Ziad is an MBA student who has come to realize that the full-time epithet is to be taken literally.