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The Big Read Brexit
The real price of Brexit begins to emerge
FT research shows that the weekly hit to the British economy could be the same £350m that Leave campaigners promised to claw back
by: Chris Giles in London

A big red bus emblazoned with the words “we send the EU £350m a week, let’s fund our NHS instead” is credited as being decisive in Britain’s vote to leave the EU last year.

It promised — in absolute terms — financial gains for the British public if they voted to leave, a stark counterweight to a majority of economists who warned that a departure would hurt Britain. The pre-referendum estimates of the long-term pain ranged from a hit to the economy of 1 per cent to 9 per cent of national income — an annual loss of gross domestic product of between £20bn and £180bn compared with remaining in the EU.

The Leave campaign won the battle of the slogans, and the referendum. But who is winning the economic argument? Almost 18 months on from the Brexit vote and with 15 months of detailed UK data, it is now possible to begin to answer that important question.

Economists for Brexit, a forecasting group, predicted that after a leave vote growth in GDP would expand 2.7 per cent in 2017. The Treasury expected a mild recession. Neither proved correct. The 2017 growth rate appears likely to slow to 1.5 per cent at a time when the global economy is strengthening.

According to economists such as Robert Chote, chairman of the independent Office for Budget Responsibility, which produces the official government forecasts, a more pressing question is to assess the impact compared with what would have happened had the vote gone the other way. “Many PhDs are going to be written on the impact of Brexit over the years to come,” he says.

This work has started, and includes a range of estimates calculated by the Financial Times suggesting that the value of Britain’s output is now around 0.9 per cent lower than was possible if the country had voted to stay in the EU. That equates to almost exactly £350m a week lost to the British economy — an irony that will not be lost on those who may have backed Leave because of the claim made on the side of the bus.

Jonathan Portes, professor of economics and public policy at King’s College London and one of the academics leading publicly funded research into the effects of Brexit, says: “The conclusion that, very roughly, Brexit has already reduced UK growth by 1 per cent or slightly less seems clear.”

Companies are becoming more vocal over the economic hit, blaming the government’s slow handling of the Brexit negotiations for a weaker business climate. In October, the International Monetary Fund highlighted Britain as a “notable exception” to an improving global economic outlook, while the OECD, the Paris-based club of mostly rich nations, has raised concerns about “the ongoing slowdown in the economy induced by Brexit”.

Thomas Sampson and colleagues at the London School of Economics have examined the direct effect of sterling’s depreciation since the EU referendum on prices and living standards. With the pound falling about 10 per cent following the June 2016 result, inflation has risen more in Britain than in other advanced economies. It started with petrol prices and spread to food and other goods, pushing overall inflation up from 0.4 per cent at the time of the referendum to 3.1 per cent last month.

When looking at prices, depending on the level of import exposure of different goods and services, the LSE study estimates that the Brexit vote directly increased inflation by 1.7 percentage points of the 2.7 percentage-point rise in the 12 months after the referendum. And with wage inflation stuck at just over 2 per cent, “the increase in inflation caused by the Leave vote has already hurt UK households”, Mr Sampson says.

He calculates that “the Brexit vote has cost the average worker almost one week’s wages”, but adds the figure could be higher or lower if a complete evaluation of the economic impact was applied rather than just the initial squeeze on incomes from leaving the EU.

Other effects are more apparent. Business investment grew at an annual rate of 1.3 per cent in the third quarter, compared with a March 2016 official forecast for annual growth of 6.1 per cent for the whole of 2017. Exports, boosted by sterling’s depreciation, have proved more resilient. The OBR now expects a 5.2 per cent rise in the volume of goods and services sold abroad in 2017 compared with a pre-referendum prediction of 2.7 per cent.

Net migration to the UK from the EU fell by 40 per cent in the first 12 months after the vote. Professor Portes last year predicted an ultimate decline of between 50 and 85 per cent on net migration levels before the referendum. “Arithmetically, this reduction [of 40 per cent] of net EU migration translates into a reduction in growth of 0.1 to 0.2 per cent,” he says.

Economists working to estimate the overall Brexit impact on the economy need to build a counterfactual scenario — an imagined world in which Britain had voted to remain in the EU — to compare that with Britain’s economic performance since the vote. The counterfactual cannot be known for certain but it is possible to take a number of approaches, in three broad categories.

The first is to compare recent UK economic performance with its past. A worse performance than the UK has achieved over long historical periods or in recent years would support the view that the vote has hurt economic performance. But a shortcoming of this approach is that if the past year was always likely to be rather weak, this method could suggest a Brexit hit when there was none.

Comparing the UK performance with that of other countries is another option. Using its normal position in the G7 league table of leading economies is one possible technique, as is contrasting UK performance with the average of similar economies. A more sophisticated approach is to use a statistical algorithm to devise a historically accurate set of comparator countries, a method recently performed by a group of academics from the universities of Bonn, Tübingen and Oxford. These geographical techniques often smooth out concerns that the recent period might be unusual, but they are vulnerable to variations in other countries, such as a sudden boom in the eurozone that Britain was never likely to match.

A third tactic is to look at forecasts made for Britain’s economy before the referendum on the basis of staying in the EU and compare the actual outcome with these prior forecasts. Its weakness is that there was a wide range of pre-referendum forecasts, while its strength is that the figures reflect the best knowledge available at the time.

Net migration to the UK from the EU fell by 40 per cent in the first 12 months after the Brexit vote.

Jagjit Chadha, director of the National Institute of Economic and Social Research, says each of the methods are reasonable for generating an estimate of the impact of Brexit so far. “We can’t know how the [UK] economy would have responded to the news over the past 18 months, but there have not been any large shocks and the rest of the world has done slightly better than we thought likely a year ago.”

The results vary according to the comparisons made, but all show the UK economy has been damaged even before it formally leaves the EU on March 29 2019.

When the past five quarters are judged against the UK’s historical average growth rate, the 1.9 per cent expansion in GDP achieved between the second quarter of 2016 and the third quarter of 2017 is lower than history would suggest is normal for the UK economy.

Depending on the period of comparison chosen, the UK economy would normally have been expected to expand by between 2.5 per cent and 3.2 per cent over the same period. The lower end of the range comes from more recent history, such as the average since a Conservative-led government came to office in 2010, while the upper boundary reflects Britain’s long-term performance in the 30 years before the financial crisis. The hit to the economy on this comparison is between 0.6 per cent and 1.2 per cent of national income.

Geographical comparisons produce a similar conclusion. Britain’s year-on-year growth rate tended to be close to the G7 upper range of outcomes over the past 25 years. Had that performance continued, British GDP would have grown 2.9 per cent since the referendum. The statistical algorithm produces a significantly larger estimate of what would have been possible, suggesting Brexit has already removed 1.3 per cent from GDP since the vote.

This equates British performance to a weighted average of other countries, with the US, Canada, Japan and Hungary having the largest weights. Asked whether it was reasonable to judge the UK’s performance against that of Hungary, Professor Moritz Schularick of Bonn University says, “like the UK, Hungary is a European economy and integrated into the production chains, but remained outside the eurozone with a floating exchange rate and therefore could use monetary policy more aggressively after the crisis”.

Estimates using pre-referendum forecasts provide a range within almost the exact same boundaries — between 0.6 per cent of GDP and 1.1 per cent. The larger figure is based on analysis from Economists for Brexit, which initially predicted strong growth after the vote.

Professor Patrick Minford, who carried out the forecasts for the group, blames “Office for National Statistics productivity estimates, [which] are not convincing because they have made no real attempt to estimate the growth in quality of services, such as in education and healthcare”. But all of this was known before the referendum.

Companies have been critical of Theresa May's government saying that delays in talks with the EU have hit business

Overall, 14 different counterfactuals estimated by the FT and others give a range of a hit between 0.6 per cent of national income and 1.3 per cent, with an average of 0.9 per cent. With national income of £2tn in the year ending in the third quarter of 2017, it means the UK is likely to be producing £18bn less a year than would have been reasonable to expect and this is directly attributable to Britain’s decision to leave the EU. That is just short of £350m a week.

Brexit-supporting economists say the figures are reasonable. Julian Jessop, head of the Brexit unit at the Institute of Economic Affairs, says: “Lots of sensible Brexiters accept there will be a short-term hit and it is unarguable that the economy is weaker than it would have been, I would say between 0.5 and 1 per cent weaker. As for the longer term, it’s all to play for. Brexit creates lots of opportunities, it is for the government to make the most of them.”

In the referendum campaign the big red bus was making a different comparison, an incorrect one, about the budgetary costs of the EU to Britain. It suggested Britain contributes almost £18bn a year to the budget, when the net cost in 2016 was calculated by the Treasury to be £8.6bn. And this leaves one last comparison that it is possible to make.

Paul Johnson, director of the Institute for Fiscal Studies, says that “for every 1 per cent of GDP you lose, that’s getting on for £10bn a year of foregone tax revenues”. If 0.9 per cent of GDP has been lost over the five quarters for which data exists, there has already been a £9bn hit to the public finances. So even before the UK has left the EU, the referendum result is costing the UK government more than can possibly be recovered by ending net contributions to Brussels.

Inflation has risen more in Britain than in other advanced economies since the Brexit vote rising from 0.4 per cent at the time of the referendum to 3.1 per cent in November

How the Brexit vote has hit the economy

0% - The average worker

After taking inflation into account, pay including bonuses for the average worker in October 2017 was £490 a week. Official figures show that in May 2016 before the EU referendum it was £491, so real pay levels have been flat. This squeeze on real incomes has constrained consumer spending growth and it has increased only because employment has risen and household savings rates have fallen.

<11.5% - A company contemplating investment

Uncertainty over future trading relations with the EU has led companies to postpone some investment projects. Purchases of lorries, vans and other transport equipment in the third quarter of 2017 were down 11.8 per cent on the same period a year earlier, limiting the contribution investment made towards economic growth. The Bank of England’s regional agents report that uncertainties over the UK’s trading ties“continued to deter investment for some firms”.

>1.5% - A retailer facing a tougher trading environment

Sales in John Lewis, the department store favoured by Britain’s middle classes, have been 1.5 per cent higher in the second half of 2017 than in2016. With inflation at 3.1 per cent, this implies a decrease in the volume of goods purchased. To gauge what was possible at this most robust of UK retailers, the equivalent sales growth in the second half of 2016 was 3 per cent, which at the time was well above the 1.2 per cent level of inflation

Copyright The Financial Times Limited 2018. All rights reserved.
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Millions of expats caught in Brexit no man’s land
Negotiating a deal to secure citizen rights faces numerous obstacles
by: Alex Barker in Brussels

When Greenland left the European Community in the 1980s, the legacy rights of expatriate citizens were guaranteed with a legal act of extraordinary simplicity: the operative article runs to just 85 words.

The fate of 4m EU and British expatriates looks far more uncertain and complex. One senior Brexit negotiator fears talks on citizen rights could sink into “a horrible legal morass”.

“It’s immense. Every time you think you’re across it, you turn another corner and find another mess,” said another senior EU diplomat.

Both London and the EU-27 agree on a broad goal: a reciprocal deal to guarantee the rights of 3m EU citizens in Britain, and about 1m British expats within the union. But within the detail of that superficial agreement lies an expat lifetime’s worth of politically sensitive choices.

Residence definitions, pension rights, unborn children, the ability to move, claim benefits, marry, divorce, even commit crime and avoid deportation — an entire cycle of modern life is potentially touched by the Brexit agreement.

“We can’t hide the fact that it is complex,” said Guy Verhofstadt, the European Parliament’s chief Brexit negotiator.

“But if we base ourselves on the principles of reciprocity and a uniform approach by the EU-27 then in my view there is no reason why we cannot find a lasting and equitable solution.”

Here the Financial Times runs through seven obstacles to a deal.

Nothing can be taken for granted

There is no systematic register of when expats arrived in their current place of residence. Worse still, EU officials think it is not feasible to create a comprehensive one before the expected Brexit date in 2019. So even if some rights are guaranteed, citizens will need to prove eligibility. Britain’s 85-page residency form offers an insight on the bureaucracy ahead.

Not all expats are the same

No British politician has questioned the right to remain of legitimate EU migrants. But that is only one small sliver of EU citizen rights. At issue are work rights, welfare access, health provision, discounted student fees, even the ability to draw a UK state pension 50 years from now. And these rights depend on circumstances.

Under EU law, migrant workers have different rights to students, pensioners or jobseekers. Residing in a country for more than five years — and thereby gaining “permanent residence” — is an important threshold for gaining rights. But decisions will depend on proof.

Circumstances change

Managing change will be hard. If an expat marries, what rights would their partner enjoy, and would their nationality matter? Could they bring in-laws to the country? Similarly an expat’s legal status may evolve over time, should they lose their job or move country.

The law, too, will evolve. The EU may legislate to change rights post-Brexit. EU nationals may want to challenge Britain’s application of their rights. Would that be in British courts or European courts? And whose interpretation of EU law would prevail? A big role for European courts would cross a red line for London.

The two sides want to guarantee different rights

The EU-27 want to maintain full rights for EU expats but this could be tricky for Theresa May, the prime minister. If existing welfare rights remain intact, for instance, EU migrants could still claim UK child benefit for dependants in Paris or Warsaw — long a British tabloid bugbear. Full EU rights would also restrict Britain’s ability to deport an EU migrant who has committed crimes after Brexit.

A third example is pensions. At present a Brit moving to Australia can draw their UK state pension, but it would be frozen, and not increased in line with inflation and earnings. A Slovak or German migrant worker who leaves Britain, by contrast, would enjoy better rights: their full UK pension drawn overseas and uprated every year.

There may need to be dozens of deals

Brexit poses two questions on citizen rights: the legacy rights of current expats and what terms future expats may enjoy.

Britain may seek to tackle both in one deal — reciprocated by the EU. That would apply a single, probably less generous, regime of rights to all present and future EU migrants, covering health, benefits and citizenship.

Potential problems will arise from watering down EU rights. That is because the EU-27’s first and foremost concern is preserving full rights for the existing 3m migrants, rather than future flows.

Depart too much from the EU’s legal baseline and EU negotiators warn a citizen rights deal may not be possible under the Article 50 exit clause. Instead country-by-country bilateral deals may be necessary with each of the 27 members. That is hard to negotiate and ratify, and even harder for expats to understand and apply.

Beware the cut-off point

No Brexit deal on rights can be open-ended. Negotiators are looking at various cut-off points: the lifetime of the eligible expats; a period of time, say five or 10 years; or until the point at which the expat gives up their enhanced rights by moving country. All three options have political and technical upsides and downsides.

One complication is that some rights, such as pensions, will be for life and even cover former expats. Then there is the eligibility date. British ministers want to draw a line on EU free movement rights and are looking at three options: the point of the Brexit referendum, the Article 50 notification, or Britain’s exit. EU-27 negotiators see nothing to discuss: EU rights and obligations continue until the point Britain leaves.

Early, late or hard?

Expat rights will be one of the first topics to be discussed in Brexit talks. Both sides want a quick deal but that may be impossible. Diplomats are scrambling to work out what would happen in the event of no deal. Expats would basically be at the mercy of national governments.

But there are some protections. EU law does cover safeguard rights for some third-country nationals. And a raft of dormant UK bilateral agreements with European countries on welfare — superseded by EU membership — may be revived. One such agreement dug up: a 1923 Anglo-Finnish treaty on “the disposal of the estates of deceased seamen”.

Copyright The Financial Times Limited 2018. All rights reserved.
Between GDPR and ePrivacy regulation coming in 2018, and the constant risk of cyber attacks, the FT provides a trusted and reliable source for any changes and regulations implementation around data protection in the coming year.
© Daniel Pudles
Data protection
Companies face high cost to meet new EU data protection rules
Businesses rush to hire staff and invest in software as privacy regulation looms
by: Mehreen Khan in Brussels

The world’s biggest companies will spend tens of millions of dollars to meet new EU data protection laws by next May’s deadline, according to a survey that shows the costs of meeting some of the world’s toughest privacy rules.

Members of the Fortune 500 will spend a combined $7.8bn to avoid falling foul of Brussels’ General Data Protection Regulation (GDPR), according to estimates compiled by the International Association of Privacy Professionals (IAPP) and EY. This equates to an average spend of almost $16m each.

Among the biggest changes being ushered in by the GDPR is the right of individual citizens to request that their data be deleted from a company’s servers. It will also impose strict timelines on businesses to identify and report security breaches. Businesses face severe financial penalties for breaking the new rules: maximum fines will amount to €20m or 4 per cent of a company’s global annual turnover, whichever is largest.

Any business that processes the personal information of European citizens will have to comply with the GDPR.

The EU is already taking a tough stance on personal privacy. Tech giants such as Facebook are facing legal battles in European courts to ensure that they can legally transfer the personal information of their European users to and from the bloc.

Trevor Hughes, president of the IAPP, said companies had been rushing to hire lawyers and data protection consultants, invest in advanced data-processing software and clean up their sprawling databases.

“This is a rolling cost. May 2018 is by no means the end point as companies will have to invest in educating their employees in the new data framework,” said Mr Hughes.

On average, companies in the Fortune 500 will hire five full-time dedicated privacy employees — such as data protection officers — as well as another five employees to deal partially in handling the compliance rules, according to the survey. 

“Data are emerging as the antitrust of the digital economy in the same way that state aid and competition was used to bust trusts in the 1990s,” said Mr Hughes. “This time, data protection has a direct consequence for consumers and citizens who use the digital economy.”

Financial services companies and the tech sector face the biggest compliance bills, according to the survey, which also estimates that medium-sized firms will spend an average of $550,000 to ensure they are compliant on May 28 2018.

Software companies are among the beneficiaries of the EU’s shake-up, which will change the way businesses have to handle, store and process personal data. Microsoft is among those helping companies who use their IT and cloud-based systems to ensure they comply with the GDPR. The company has at least 300 engineers dedicated to making Microsoft products compliant with the EU rules. 

“We expect that the cost of our complying with the GDPR at scale, especially for our cloud services, will be much lower than the costs our customers would need to spend to manage all of their compliance individually,” said a spokesman for Microsoft. “We look at GDPR compliance from a business opportunity rather than a cost point of view.”

Analysts worry that smaller businesses are unaware of the looming changes. “I don’t know of any business which is ready or have said they will be ready by May,” said Lorraine Mouat, a consultant at TCC, which advises small UK financial firms on regulation.

Copyright The Financial Times Limited 2018. All rights reserved.
© B Christopher/Alamy
Data protection
Google faces UK suit over alleged snooping on iPhone users
Country’s first collective action claims internet group breached data privacy
by: Barney Thompson, Legal Correspondent

Google illegally gathered the personal data of millions of iPhone users in the UK, according to a collective lawsuit led by a former director of the consumer group Which?

Richard Lloyd, a veteran consumer rights campaigner, alleges the technology company bypassed the default privacy settings on Apple phones and succeeded in tracking the online behaviour of people using the Safari browser.

Google then allegedly used the data in its DoubleClick advertising business, which enables advertisers to target content according to a user’s browsing habits.

The lawsuit, filed in London’s High Court, alleges Google’s tactic, known as “the Safari Workaround”, breached the UK Data Protection Act by taking personal information without permission.

“In all my years speaking up for consumers, I’ve rarely seen such a massive abuse of trust where so many people have no way to seek redress on their own,” said Mr Lloyd, who has set up a group called Google You Owe Us.

Google said: “This is not new — we have defended similar cases before. We don’t believe it has any merit and we will contest it.”

Google has already paid millions of dollars to US states and the US Federal Trade Commission over the Safari security bypass.

The case is the first time such a collective action — where one person represents a group with a shared grievance, akin to a US-style class action — has been brought in Britain against a leading tech company over alleged misuse of data.

Roughly 5.4m people in Britain had an iPhone between June 2011 and February 2012 and could be eligible for compensation, according to the claim.

Mr Lloyd has secured £15.5m in backing from Therium, a company that funds litigation and has previously backed group claims such as the consumer action against Volkswagen in the scandal over diesel emissions.

The funds cover Mr Lloyd’s legal costs — he is being advised by the firm Mishcon de Reya — as well as insurance in case he loses and has to pay Google’s legal bills.

Although the size of any potential payout would be determined by the court, Mr Lloyd said he expected each claimant would receive several hundred pounds.

“We think there is a massive gap in the law in terms of consumer redress around data rights being breached,” he said. He hoped the battle would end up producing “a clear set of guidelines and precedent” for consumers as to how they could act collectively in similar cases.

Should Mr Lloyd win, those who can prove they were affected by the alleged data breach are likely to have several years to make a claim.

The case will be closely watched by consumer groups and data protection lawyers, with the control, use and security of personal information coming under increasing scrutiny.

In addition, new regulations coming into force across the EU next year include a provision for anyone whose data has been misused to instruct consumer protection groups to bring claims on their behalf.

Copyright The Financial Times Limited 2018. All rights reserved.

Due Diligence is the must-read daily briefing on corporate finance, mergers & acquisitions, and private equity. From Tuesday to Friday at 5am UK time, we’ll send our curated briefing straight to your inbox. In it, you’ll find the most important stories, analysis, and insights from the FT and across the web curated by a team of specialist reporters from around the world. We also break news in the briefings that you can’t find elsewhere.

Due Diligence Mergers & Acquisitions
Has WeWork fooled investors that it’s a tech company?
Welcome to Due Diligence, the FT’s daily deals briefing
by: Due Diligence

What do you do when you are a company renting out office space that is being valued like a tech company? Party like crazy at a summer camp, obviously!

Adam Neumann, co-founder and chief executive of WeWork, and his employees had a great summer party this year to celebrate the phenomenal success of the start-up that provides office space to thousands of millennials across the globe.

Following the decision on Thursday by SoftBank and its Saudi-backed $93bn tech fund to invest $4.4bn in WeWork (read the FT story here), DD expects Neumann & co to party even harder next summer — maybe with Masayoshi Son, founder of the Japanese group, and the former vice-chairman of Goldman Sachs, Mark Schwartz, who will sit on WeWork’s board.

Yet why is SoftBank using its tech fund to back a company that doesn’t really seem like a tech company?

Maybe the answer is that WeWork is unlikely to be profitable in the near future, a defining feature of any respectable tech start-up. (WeWork is private so doesn't disclose its financials.)

Neumann said last year that WeWork, which currently has more than 160 locations in over 50 cities and 16 countries, expects to generate revenues of about $1bn in 2017. If that’s accurate it means that its current price-to-sales valuation is about 20 — a little lower than Snap’s P/S of 29 and a little higher than Facebook’s P/S of 15.

But when compared to Regus, a company that offers a similar service to WeWork’s that has nearly 3,000 locations in 1,000 cities and 100 countries, the valuation of SoftBank’s new investment seems to be somewhat out of whack.

London-listed Regus has a market capitalisation of about $3.5bn and sales nearing $3bn, giving it a P/S valuation of just over 1.

That’s a staggering difference. Maybe it's just a cool factor but that seems a stretch. Who knows if SoftBank’s Son will still be up to partying with Neumann in a few years when his company and tech fund will have to monetise their investment.

Copyright The Financial Times Limited 2018. All rights reserved.
The FT covers a wide range of topics under Technology, Media and Telecoms. Our journalists are publishing the latest news and analysis on the ever-developing world of technology, from AI and Robotics evolution to the Tech Giants rise, as well as its impact on Aerospace, Personal technology, eCommerce and many more.
Opinion Silicon Valley
Big Tech makes vast gains at our expense
Data-driven companies have a licence to print money, with few restrictions
by: Rana Foroohar

Pressure has been growing in the past few weeks for politicians and regulators to clamp down on the monopoly power of Big Tech. In a speech given in Washington DC on September 12, Maureen Ohlhausen, the acting chair of the Federal Trade Commission in the US, tried to pour cold water on the idea. “Given the clear consumer benefits of technology-driven innovation,” she said. “I am concerned about the push to adopt an approach that will disregard consumer benefits in the pursuit of other, perhaps even conflicting, goals."

Her words echo US antitrust policy of the past 40 years: if companies bring down prices for consumers, they can be as big and as powerful, economically and politically, as they want to be. This hugely favours companies such as Google, Facebook and Amazon, which offer up services and products, from search results to self-publishing platforms, that are not just cheap, but free.

Yet Ms Ohlhausen is overlooking a key point: free is not free when you consider that we are not paying for these services in dollars, but in data, including everything from our credit card numbers to shopping records, to political choices and medical histories. How valuable is that personal data?

It is a question of growing interest to everyone from economists to artists. For example, at Datenmarkt, an art installation cum grocery store set up in Hamburg in 2014, a can of fruit sold for five Facebook photos; a pack of toast for eight “likes” and so on.

The bottom line is that it is almost impossible to put an exact price on personal data, in part because people have widely varying behaviours and ideas about how likely they are to part with it, depending on how offers are posed. In one recent study, when consumers were asked straight out whether they would consent to being tracked by a brand name digital media firm in exchange for being targeted with more “useful” advertising, four-fifths said no. Yet another study published this year by researchers from Massachusetts Institute of Technology and Stanford University shows how pathetically little incentive is required to convince people to give up their entire email contact list. Students in the study were far more likely to do it if offered a free pizza.

One might argue that this is simply the market working as it should. Consumers were given a choice, and they made it. And whether or not it was a bad one is not for us to judge.

But as the latter study also showed, companies can nudge users to part with data more freely by telling them it will be protected by technology designed to “keep the prying eyes of everyone from governments to internet service providers . . . from seeing the content of messages”. In fact, the encryption technology in question could not guarantee this.

The bottom line is that big data tilts the playing field decisively in favour of the largest digital players themselves. They can extract information and plant suggestions there that will lead us to entirely different decisions, which results in ever more profit for them.

Not only is that too much power for any one company to have, it is anti-competitive and market-distorting in the sense that the basic rules of capitalism as we know it are being overturned. There is no equal access to market information in this scenario. There is certainly no price transparency.

The personal data we give away so freely are being lavishly monetised by the richest companies on the planet (Facebook’s second-quarter operating margin, for example, was 47.2 per cent). They get their raw material (our data) more or less for free, then charge retailers and advertisers for it, who then pass those costs on to us in one form or another — a dollar more for that glass of wine at the bistro you found via a search, say. They have a licence to print money, without many of the restrictions, in terms of all sorts of corporate liability, that other industries have to grapple with.

These companies are not so much innovators as “attention merchants”, to borrow a phrase from Columbia University law school professor Tim Wu. Economists have yet to put good figures on their net effect on productivity and gross domestic product growth. Surely it is high. Yet any tally would also have to include the competition costs as these firms devour competitors and reshape the 21st-century economy to suit themselves.

Whatever the FTC might say now, there are a growing number of legal cases that could change the ground rules for Big Tech. While American antitrust law has been based on very literal interpretations of the 1890 Sherman Act, lawmakers in Europe take a broader approach. They are trying to gauge how multiple players in the economic ecosystem are being affected by the digital giants.

I am beginning to wonder if we should not all have a more explicit right not only to control how our data are used, but to any economic value created from them. When wealth lives mainly in intellectual property, it is hard to imagine how else the maths will work. We are living in a brave new world, with an entirely new currency. It will require creative thinking — economically, legally and politically — to ensure it does not become a winner-takes-all society.

Copyright The Financial Times Limited 2018. All rights reserved.
The Big Read Amazon
Big Tech and Amazon: too powerful to break up?
While Google, Facebook and Twitter are set for a grilling in Congress over Russia, it is the online retailer that is drawing intense scrutiny
by: David J Lynch in Washington

Amazon executives will not be present on Tuesday when three other major internet companies endure a grilling before Congress. But it may just be a matter of time before Washington’s new appetite for regulating the digital economy reaches the e-commerce giant.

Lawyers for Google, Facebook and Twitter will occupy this week’s spotlight in front of the Senate intelligence and judiciary committees, which are probing the companies’ unwitting role in Russia’s 2016 election meddling. Already, there is talk of legislation requiring them to disclose more about their operations.

The controversy over the industry’s dissemination of Russian “fake news” highlights a broader souring of attitudes toward the online platforms, triggered by unease over their sheer size and power, which spans the political spectrum. From progressives like Elizabeth Warren, Massachusetts senators, to Steve Bannon, President Donald Trump’s former chief strategist, who runs the nationalist media site Breitbart, there is growing support for reining in, or even breaking up, the digital groups that dominate the US economy.

“The worm has turned,” says Scott Galloway, a marketing professor at New York University and author of The Four: the Hidden DNA of Amazon, Apple, Facebook and Google. “No doubt about it.”

Though unaffected by the Russia allegations Amazon — whose $136bn in revenues last year topped the combined sales of Google parent Alphabet and Facebook — is a target of demands for more assertive antitrust enforcement. Its dominance has also raised questions about whether existing legislation needs to be rewritten for the internet age.

Jeff Bezos in 1999, introducing what became the Amazon marketplace

The online retailer’s relentless expansion into new businesses, including groceries and small business lending, and its control of data on the millions of third-party vendors that use its sales platform, warehouses and delivery services, have some analysts likening it to a 21st century version of the corporate trusts such as Standard Oil that throttled American competition a century ago.

“Amazon has big antitrust problems in its future,” says Scott Cleland, a technology policy official in the George HW Bush administration and president of Precursor, a research consultancy. “If there is a minimally interested, fair-minded antitrust effort in the Trump administration, Amazon’s got trouble.”

For now, Mr Cleland’s remains a minority view. Most experts say the company has yet to engage in the classic anti-competitive behaviour that the antitrust laws are designed to prevent. Under the prevailing interpretation of this doctrine, which prizes consumer welfare above all else, champion price-cutter Amazon has little reason to worry. Indeed, US regulators this summer performed only a brief review before approving Amazon’s nearly $14bn acquisition of the upmarket grocer Whole Foods.

Amazon and the other platforms remain popular with consumers, thanks to their low prices or “free” services. But companies that were once seen as avatars of American innovation and achievement are now increasingly treated with scepticism. Mr Bannon has said that companies such as Google and Facebook are so essential to daily life that they should be regulated as public utilities.

The digital platforms “dominate the economy and their respective markets like few businesses in the modern era”, says the bipartisan New Center project of Republican William Kristol and Democrat Bill Galston. It notes that nearly half of all e-commerce passes through Amazon while Facebook controls 77 per cent of mobile social traffic and Google has 81 per cent of the search engine market.

The online retailer stands alone in its cross-market reach, dominating product search, hardware and cloud computing while also serving as an indispensable conduit for other vendors to reach consumers, says Mr Galloway. Last year, 55 per cent of product searches began on Amazon, topping Google.

“They’re winning at everything,” he says. “This company is firing on all 12,000 cylinders.”

Yet even as calls to break up the nation’s big banks after the global financial crisis have faded, talk that the digital giants have grown too large gets ever louder. The downside of economic concentration features prominently in the Democratic party’s “Better Deal” programme for the 2018 Congressional elections. It calls for an intensification in antitrust enforcement and blames stagnant wages, rising prices and disappointing growth on insufficient competition.

An anti-monopoly push will “almost certainly” be a major part of the 2020 presidential campaign, predicts Barry Lynn of the Open Markets initiative.

Silicon Valley’s tradition of funding the party could complicate the Democrats’ anti-monopoly push. In the 2016 election, the internet industry gave 74 per cent of its $12.3m in congressional campaign contributions to Democrats. Internet company executives and their corporate political action committees, which pool individual contributions in accord with the federal prohibition on direct corporate political spending, also gave Hillary Clinton’s campaign more than $6.3m while Mr Trump pulled in less than $100,000, according to the Center for Responsive Politics.

Individuals and the PACs associated with Google parent Alphabet topped the industry’s list of total political contributors with $8.1m while Amazon ranked fourth with about $1.4m.

Amazon in numbers

Jeff Bezos in 1999, introducing what became the Amazon marketplace


The number of Amazon employees


The number of people who worked for the group in 2007


Third-quarter revenues from subscription services including Amazon Prime


Amazon’s contribution to the 2016 US congressional campaigns. Overall the internet industry donated $12.2m — 74% went to Democrats


The amount Amazon is on track to spend on political lobbying this year. Up from $2.5m five years ago

Amazon has moved a long way from its roots since launching two decades ago to sell books and nothing but books. Now, it sells just about everything to everybody: nearly 400m products including its own batteries, shirts and baby wipes. It operates a media studio and provides cloud computing space to customers such as the Central Intelligence Agency while running the Marketplace sales platform for other vendors, a delivery and logistics network and a payment service. The company Jeff Bezos launched in 1994 also now makes popular electronics, including the Kindle ereader and the Alexa voice-activated device.

Its growth has been astronomical. Amazon expects to record at least $173bn in annual sales this year — that would nearly double its 2014 figure. It employs 542,000 workers, more than twice its mid-2016 payroll, thanks in part to the Whole Foods deal, and its $1,100 share price has roughly doubled in just 20 months.

By almost any measure, Amazon is a fantastically successful company. Maybe too successful, its detractors say. Mr Trump has periodically suggested antitrust action against the online giant, saying of Mr Bezos last year: “He’s got a huge antitrust problem because he’s controlling so much; Amazon is controlling so much.”

Donald Trump has frequently targeted the Washington Post, bought by Jeff Bezos in 2013. He called out Amazon on taxation in several 2015 tweets
Donald Trump continued his broadside against Amazon in an August 2017 tweet

In August, the president returned to the subject, taking aim at the company’s impact on bricks-and-mortar retailers. “Towns, cities and states throughout the US are being hurt — many jobs being lost!” he tweeted.

Still, most politicians regard Amazon as a potential economic boon. Some 238 communities answered the company’s request to identify sites for its planned second headquarters. It is not hard to see why: the $5bn project will directly create work for 50,000 people, plus “tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community”, Amazon says.

Even critics of the company’s size, such as Senator Cory Booker of New Jersey, overcame their concerns. “Amazon would make the right business choice by coming here,” Mr Booker told a press conference last month in Newark.

Amazon, which declined to comment for this story, recognises its potential political problem. The company is on track to spend nearly $13m this year on lobbying the federal government compared with just $2.5m five years ago. In 2016 it added an antitrust lawyer, Seth Bloom, with experience on Capitol Hill and in the justice department.

Though the Trump administration approved the Whole Foods purchase, Amazon’s antitrust concerns have not evaporated. Congressman Keith Ellison, deputy chairman of the Democratic National Committee, who favours a break-up of all the digital players, says the online retailer should spin off its $12bn-a-year cloud computing business known as Amazon Web Services.

“I do think they should be forced to sell off huge parts,” he says. “They’re too big.”

William Kristol, a prominent conservative, has criticised the concentration of power gathered by Amazon © Getty Images

The view is echoed by Mr Kristol, a prominent former official in the Reagan and George HW Bush administrations, who says the tech giants’ dominance hurts workers, consumers and the overall economy. His New Center project, aimed at overcoming political polarisation, supports tougher antitrust enforcement to address “monopolistic behaviour” in the technology sector.

Even among pro-market conservatives, sentiment is shifting on the need for greater government intervention. “People are at least open to the argument that concentration of power is a problem even if there’s no immediate cost paid by consumers,” Mr Kristol says.

US law does not prohibit monopolies so long as they arise through legitimate means. But companies are not permitted to exploit their dominance in one market to control another.

Competition authorities in the EU have moved more aggressively to corral the internet groups. Earlier this month the EU ordered Amazon to pay $290m in back taxes to Luxembourg after Margrethe Vestager, the EU competition chief, said the online retailer had benefited from special treatment.

Ms Vestager has also gone after American internet companies on antitrust grounds, levying a €2.4bn fine on Google in June and reaching a negotiated settlement with Amazon over its ebook distribution contracts. In May, Amazon agreed to scrap contract clauses requiring publishers to offer it terms that were as good or better than those offered to its competitors.

Amazon’s critics say that its role as an essential e-commerce platform for more than 2m other vendors and its control of data on their sales warrant government action. Last year, in a speech that ignited the Democrats’ renewed interest in anti-monopoly efforts, Ms Warren said companies like Amazon provide a platform “that lots of other companies depend on for survival”, adding, “the platform can become a tool to snuff out competition.” For its part, Amazon says it faces “intense competition”.

Senator Cory Booker and Governor Chris Christie lobbying for the new Amazon HQ to be in their home state, New Jersey © AP

Critics remain unconvinced. Its control over a vast cache of customer data gives it “unprecedented . . . advantages in penetrating new industries and new markets”, according to Amir Konigsberg, chief executive and co-founder of Twiggle, which sells search and analytics software to Amazon competitors.

There’s no question that the company has grown through innovation and by meeting customer needs. But gobbling up rivals and would-be rivals has also been part of the equation. Since 2005, Amazon has acquired more than 60 companies including some that were at first reluctant to sell, such as Zappos, the online shoe retailer.

“It’s a dominant platform and a vertically integrated dominant platform,” says Lina Khan, author of an influential Yale Law Journal article earlier this year that ignited the debate. “It acts as a gatekeeper . . . It’s closing off the market to new entrants.”

Ms Khan says Amazon also has priced goods and services — such as its unlimited two-day Amazon Prime delivery service — below cost. By prioritising growth over profits, the company has unfairly squeezed competitors, she says.

Though Mr Cleland says antitrust enforcers could make a case against Amazon under the prevailing interpretation of US law, most analysts say a genuine push to break up or constrain the tech giants requires rethinking the antitrust orthodoxy of the past 40 years. The so-called Chicago School of antitrust theory, which focuses on consumer prices and innovation, is ill-equipped to cope with the internet world’s structural tendency to produce winner-takes-all outcomes.

“The rhetoric around consumer prices can disable antitrust law,” says Ms Khan. “These platforms present new issues.”

Antitrust: ‘Consumer first’ laws favour Amazon

It is almost four decades since Robert Bork, a one-time Supreme Court nominee, wrote the book that defines US competition policy to this day.

Mr Bork, a Yale University law professor, relied on Chicago school economics to argue in The Antitrust Paradox that safeguarding “consumer welfare,” not preventing excessive corporate size, should be the goal of antitrust enforcement. Ever since, US antitrust enforcers have concentrated on businesses’ impact on prices and choice — unlike in Europe, where regulators seek to preserve robust competition.

But some analysts say that the Chicago school approach is outdated in a data-rich internet age which encourages natural monopolies. The consumer welfare standard has facilitated the emergence of companies like Amazon, which use economies of scale and remorseless efficiency to drive down prices, and Google and Facebook, which benefit from “network effects” that promote low-cost expansion.

The rise of the online retailer is an “almost poetic illustration of the shortcomings of current antitrust law”, says Lina Khan, who countered Mr Bork earlier this year in an influential law journal article entitled “Amazon’s Antitrust Paradox”.

The prevailing antitrust approach does not recognise Amazon’s ability to crush competitors by pricing goods below cost and to exploit its power in one sector to gain market share in another, Ms Khan argues.

Amazon has used its heft to extract discounts of up to 70 per cent from delivery companies such as UPS, which in turn makes its own fulfilment service all but irresistible to other retailers, Ms Khan says. Its rivals can “either try to compete with Amazon at a disadvantage or become reliant on a competitor to handle delivery and logistics”, she wrote.

But Amazon’s critics have so far been more persuasive politically than legally, says Diana Moss of the non-profit American Antitrust Institute. “They have not yet articulated a coherent case that would gain traction with enforcers and the courts,” she says. “That’s a heavy lift.”

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Opinion Inside Business
The conundrum of Theresa May’s Great Repeal Bill
The prime minister has to decide what she wants from Brexit
by: Jonathan Ford

Assuming that prime minister Theresa May does as she says she will and invokes Article 50 of the Lisbon treaty next month, one consequence will be the need for what has been dubbed the “Great Repeal Bill”.

This in itself is something of a misnomer. Far from repealing anything (other than, in due course, the fact of Britain’s EU membership), the statute in question will principally consolidate into UK law a vast array of European legislation, including that which presently exists only as non-statutory rules and judgments.

According to the House of Commons library, some 13 per cent of all primary and secondary legislation between 1993 and 2004 was EU-related. Add to that the rabbit-like explosion of subsequent laws, regulations and rulings, and you start to get some sense of the scale of the task involved.

Making sense of this mountain is one thing, but behind that already daunting task lies an even bigger challenge, which is how to remould the imported “acquis” so it serves the UK economy after the country leaves the EU. That means deciding which laws to change — and then amending or deleting them. It may also mean writing new ones, or creating fresh institutions to fill any voids the country’s exit leaves behind.

To do so will require hard choices about the direction the UK wishes to move in. So far, this is a subject on which the government has been curiously silent, aside from a public promise by Mrs May to leave workers’ protections unaltered, and a somewhat contradictory remark from the chancellor, Philip Hammond, to a German newspaper. In this he indicated the UK might consider changing its whole social and economic model were its negotiations with Brussels not to bear fruit.

Something more strategic is called for. The government needs, for instance, to determine how far it is willing to use this opportunity both potentially to redesign Britain’s regulatory system, and also to reshape the way it bears on the UK economy.

There is certainly a case for decluttering that goes beyond smoothing the bumps and turbulence of exit. Standing still is not really an option. It makes little sense for a Britain that has just recovered its regulatory sovereignty to stick blindly with its inheritance of EU rules and laws.

Then there is the question of the financial burden. While the full cost of national and European regulation can be overstated, it is both large and growing, and was estimated by the Association of European Chambers of Commerce in 2009 to be some 12 per cent of gross domestic product. True, many of these measures may be sensible and their costs proportionate. But that is high compared with the US where the relevant figure is closer to 10 per cent.

And lastly, there are the gains that come from more appropriate regulation. That means re-engineering what are “one-size-fits-all” measures so they fit better with the UK’s national or even geographic circumstances. There are plenty of these to choose from, such as in the financial sector where small domestic lenders or insurance companies are subject to a host of EU legislation that is really designed for larger systemic or cross border companies.

Take also the energy sector, where measures such as the EU’s renewables directive sit on top of the UK’s climate targets. This separately sets out the proportion that must come from specific technologies such as hydro, solar and wind, irrespective of the country’s natural endowments.

In both cases a measure of liberalisation could not only save compliance costs in the short term, but also unleash innovation that would spur longer-term growth.

Seizing these opportunities will take more than simply appending the odd clause to the Great Repeal Bill, or some analogous legislation. It will require the government to find a mechanism for reviewing and amending this great new wodge of laws that commands the confidence of parliament, and to consult with business on which changes to opt for. On top of that, and perhaps more important, Mrs May and her ministers must find the language that persuades an electorate for whom the very concept of deregulation can tend to bring it out in hives.

Britain’s prime minister sometimes gives the impression of wishing to subordinate everything to having a totally free hand in negotiating Britain’s exit from the EU system — as if this was some freestanding task independent of all other considerations. But domestic politics and its imperatives will not stand still during what will be a multiyear process.

Nor will it be easy to know how to play Britain’s hand in Brussels should the country’s leaders not know what they want to happen when exit is achieved.

Copyright The Financial Times Limited 2018. All rights reserved.
The Big Read Global politics
Martin Wolf: The long and painful journey to world disorder
As the era of globalisation ends, will protectionism and conflict define the next phase?
by: Martin Wolf

It is not true that humanity cannot learn from history. It can and, in the case of the lessons of the dark period between 1914 and 1945, the west did. But it seems to have forgotten those lessons. We are living, once again, in an era of strident nationalism and xenophobia. The hopes of a brave new world of progress, harmony and democracy, raised by the market opening of the 1980s and the collapse of Soviet communism between 1989 and 1991, have turned into ashes.

What lies ahead for the US, creator and guarantor of the postwar liberal order, soon to be governed by a president who repudiates permanent alliances, embraces protectionism and admires despots? What lies ahead for a battered EU, contemplating the rise of “illiberal democracy” in the east, Brexit and the possibility of Marine Le Pen’s election to the French presidency?

What lies ahead now that Vladimir Putin’s irredentist Russia exerts increasing influence on the world and China has announced that Xi Jinping is not first among equals but a “core leader”?

The contemporary global economic and political system originated as a reaction against the disasters of the first half of the 20th century. The latter, in turn, were caused by the unprecedented, but highly uneven, economic progress of the 19th century.

Cold war realities: Moscow parades its ballistic missiles in 1965 © AP

The transformational forces unleashed by industrialisation stimulated class conflict, nationalism and imperialism. Between 1914 and 1918, industrialised warfare and the Bolshevik revolution ensued. The attempted restoration of the pre-first world war liberal order in the 1920s ended with the Great Depression, the triumph of Adolf Hitler and the Japanese militarism of the 1930s. This then created the conditions for the catastrophic slaughter of the second world war, to be followed by the communist revolution in China.

In the aftermath of the second world war, the world was divided between two camps: liberal democracy and communism. The US, the world’s dominant economic power, led the former and the Soviet Union the latter. With US encouragement, the empires controlled by enfeebled European states disintegrated, creating a host of new countries in what was called the “third world”.

Contemplating the ruins of European civilisation and the threat from communist totalitarianism, the US, the world’s most prosperous economy and militarily powerful country, used not only its wealth but also its example of democratic self-government, to create, inspire and underpin a transatlantic west. In so doing, its leaders consciously learnt from the disastrous political and economic mistakes their predecessors made after its entry into the first world war in 1917.

Domestically, the countries of this new west emerged from the second world war with a commitment to full employment and some form of welfare state. Internationally, a new set of institutions — the International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade (ancestor of today’s World Trade Organisation) and the Organisation for European Economic Co-operation (the instrument of the Marshall Plan, later renamed the Organisation for Economic Co-operation and Development) — oversaw the reconstruction of Europe and promoted global economic development. Nato, the core of the western security system, was founded in 1949. The Treaty of Rome, which established the European Economic Community, forefather of the EU, was signed in 1957.

This creative activity came partly in response to immediate pressures, notably the postwar European economic misery and the threat from Stalin’s Soviet Union. But it also reflected a vision of a more co-operative world.

From euphoria to disappointment

Economically, the postwar era can be divided into two periods: the Keynesian period of European and Japanese economic catch-up and the subsequent period of market-oriented globalisation, which began with Deng Xiaoping’s reforms in China from 1978 and the elections in the UK and US of Margaret Thatcher and Ronald Reagan in 1979 and 1980 respectively.

Market proponents: UK Prime Minister Margaret Thatcher and US President Ronald Reagan at a 1982 summit in France © AP

This latter period was characterised by completion of the Uruguay Round of trade negotiations in 1994, establishment of the WTO in 1995, China’s entry into the WTO in 2001 and the enlargement of the EU, to include former members of the Warsaw Pact, in 2004.

The first economic period ended in the great inflation of the 1970s. The second period ended with the western financial crisis of 2007-09. Between these two periods lay a time of economic turmoil and uncertainty, as is true again now. The main economic threat in the first period of transition was inflation. This time, it has been disinflation.

Geopolitically, the postwar era can also be divided into two periods: the cold war, which ended with the Soviet Union’s fall in 1991, and the post-cold war era. The US fought significant wars in both periods: the Korean (1950-53) and Vietnam (1963-1975) wars during the first, and the two Gulf wars (1990-91 and 2003) during the second. But no war was fought among economically advanced great powers, though that came very close during the Cuban missile crisis of 1962.

The first geopolitical period of the postwar era ended in disappointment for the Soviets and euphoria in the west. Today, it is the west that confronts geopolitical and economic disappointment.

The Middle East is in turmoil. Mass migration has become a threat to European stability. Mr Putin’s Russia is on the march. Mr Xi’s China is increasingly assertive. The west seems impotent.

These geopolitical shifts are, in part, the result of desirable changes, notably the spread of rapid economic development beyond the west, particularly to the Asian giants, China and India. Some are also the result of choices made elsewhere, not least Russia’s decision to reject liberal democracy in favour of nationalism and autocracy as the core of its post-communist identity and China’s to combine a market economy with communist control.

Rising anger

Yet the west also made big mistakes, notably the decision in the aftermath of 9/11 to overthrow Iraqi leader Saddam Hussein and spread democracy in the Middle East at gunpoint. In both the US and UK, the Iraq war is now seen as having illegitimate origins, incompetent management and disastrous outcomes.

A destroyed Iraqi tank in August 1991: a coalition went to war against Saddam Hussain after Iraq invaded Kuwait © AP

Western economies have also been affected, to varying degrees, by slowing growth, rising inequality, high unemployment (especially in southern Europe), falling labour force participation and deindustrialisation. These shifts have had particularly adverse effects on relatively unskilled men. Anger over mass immigration has grown, particularly in parts of the population also adversely affected by other changes.

Some of these shifts were the result of economic changes that were either inevitable or the downside of desirable developments. The threat to unskilled workers posed by technology could not be plausibly halted, nor could the rising competitiveness of emerging economies. Yet, in economic policy, too, big mistakes were made, notably the failure to ensure the gains from economic growth were more widely shared. The financial crisis of 2007-09 and subsequent eurozone crisis were, however, the decisive events.

These had devastating economic effects: a sudden jump in unemployment followed by relatively weak recoveries. The economies of the advanced countries are roughly a sixth smaller today than they would have been if pre-crisis trends had continued.

The response to the crisis also undermined belief in the system’s fairness. While ordinary people lost their jobs or their houses, the government bailed out the financial system. In the US, where the free market is a secular faith, this looked particularly immoral.

Finally, these crises destroyed confidence in the competence and probity of financial, economic and policymaking elites, notably over the management of the financial system and the wisdom of creating the euro.

All this together destroyed the bargain on which complex democracies rest, which held that elites could earn vast sums of money or enjoy great influence and power as long as they delivered the goods. Instead, a long period of poor income growth for most of the population, especially in the US, culminated, to almost everyone’s surprise, in the biggest financial and economic crisis since the 1930s. Now, the shock has given way to fear and rage.

Xi Jinping, China's president © Bloomberg

The succession of geopolitical and economic blunders has also undermined western states’ reputation for competence, while raising that of Russia and, still more, China. It has also, with the election of Donald Trump, torn a hole in the threadbare claims of US moral leadership.

We are, in short, at the end of both an economic period — that of western-led globalisation — and a geopolitical one — the post-cold war “unipolar moment” of a US-led global order.

The question is whether what follows will be an unravelling of the post-second world war era into deglobalisation and conflict, as happened in the first half of the 20th century, or a new period in which non-western powers, especially China and India, play a bigger role in sustaining a co-operative global order.

Free trade and prosperity

A big part of the answer will be provided by western countries. Even now, after a generation of relative economic decline, the US, the EU and Japan produce just over half of world output measured at market prices and 36 per cent of it measured at purchasing power parity.

They also remain homes to the world’s most important and innovative companies, dominant financial markets, leading institutions of higher education and most influential cultures. The US should also remain the world’s most powerful country, particularly militarily, for decades. But its ability to influence the world is greatly enhanced by its network of alliances, the product of the creative US statecraft during the early postwar era. Yet alliances also need to be maintained.

The essential ingredient in western success must, however, be domestic. Slow growth and ageing populations have put pressure on public spending. With weak growth, particularly of productivity, and structural upheaval in labour markets, politics has taken on zero-sum characteristics: instead of being able to promise more for everybody, it becomes more about taking from some to give to others. The winners in this struggle have been those who are already highly successful. That makes those in the middle and bottom of the income distribution more anxious and so more susceptible to racist and xenophobic demagoguery.

In assessing responses, two factors must be remembered.

First, the post-second world war era of US hegemony has been a huge overall success. Global average real incomes per head rose by 460 per cent between 1950 and 2015. The proportion of the world’s population in extreme poverty has fallen from 72 per cent in 1950 to 10 per cent in 2015.

Globally, life expectancy at birth has risen from 48 years in 1950 to 71 in 2015. The proportion of the world’s people living in democracies has risen from 31 per cent in 1950 to 56 per cent in 2015.

Second, trade has been far from the leading cause of the long-term decline in the proportion of US jobs in manufacturing, though the rise in the trade deficit had a significant effect on employment in manufacturing after 2000. Technologically driven productivity growth has been far more powerful.

Similarly, trade has also not been the main cause of rising inequality: after all, high-income economies have all been buffeted by the big shifts in international competitiveness, but the consequences of those shifts for the distribution of income have varied hugely.

US and western leaders have to find better ways to satisfy their people’s demands. It looks, however, as though the UK still lacks a clear idea of how it is going to function after Brexit, the eurozone remains fragile, and some of the people Mr Trump plans to appoint, as well as Republicans in Congress, seem determined to slash the frayed cords of the US social safety net.

A divided, inward-looking and mismanaged west is likely to become highly destabilising. China might then find greatness thrust upon it. Whether it will be able to rise to a new global role, given its huge domestic challenges, is an open question. It seems quite unlikely.

By succumbing to the lure of false solutions, born of disillusion and rage, the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested. It is easy to understand those emotions, while rejecting such simplistic responses. The west will not heal itself by ignoring the lessons of its history. But it could well create havoc in the attempt.

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© FT montage / Bloomberg
Can Uber ever make money?
Ride-hailing company’s new CEO will have to stem billions of dollars in losses
by: Leslie Hook

The upheaval at Uber will leave the next chief executive facing an even bigger challenge in how to solve one of the main conundrums about the company: how does the business of booking a car actually make money.

Uber is the most lossmaking private company in tech history, and the next chief executive will be under pressure to accelerate the company’s efforts to reduce losses.

During the past four quarters, Uber’s operating losses were more than $3.3bn on a measure that excludes interest, tax and share-based compensation — a figure that dwarfs other famously lossmaking companies such as Amazon.

The way Uber sees it, booking a car is a commodity product, and the company’s goal is to be the biggest and lowest cost provider of that product.

To achieve that goal, Uber initially focused on supercharging its markets by injecting huge amounts of capital to attract drivers and riders. That strategy has been successful in achieving tremendous growth: Uber’s revenues were $3.4bn in the first quarter of this year, triple the levels of the year prior.

During the past four quarters revenues were $9.1bn, which is more than Twitter or Tesla, and investors valued the company at $62.5bn last year.

However, the challenge now will be to shift Uber’s model from one that has been very successful at revenue growth, to one that is more financially sustainable and, eventually, profitable.

Some economists say there was no obvious way to do that, even before the extra challenges Uber now faces as the company rebuilds its C-suite and tries to recover from a series of crises, including the resignation of Travis Kalanick as chief executive earlier this week.

“There is no clear pathway I can see for Uber to go from a high-revenue growth company to a profitable company,” says Aswath Damodaran, a professor of finance at the Stern School of Business. “Normally the story for start-ups is that as revenues grow economies of scale will kick in, but that story is tough to tell with Uber.”

Furthermore the leadership vacuum at Uber has left a question over one of its main advantages, the ability to raise ample money at low cost.

Uber has between $6.5bn and $7bn of unrestricted cash in the bank, with a further $2.3bn untapped line of credit. This could cover the company’s cash needs for roughly three more years, extrapolating from its losses during the first quarter of this year.

Uber’s path to sustainability will depend on controlling the company’s two main costs: the subsidies for drivers and riders, and general costs such as engineering and research and development.

These general costs benefit from economies of scale — as Uber grows, the overhead becomes less expensive on a per-ride basis.

The subsidies are essential because Uber uses these as levers to maintain a two-sided transportation marketplace, one that balances driver demand and passenger supply. Sign-up bonuses attract new drivers and maintain a sufficient driver pool, while more specific bonuses for certain times and places help steer drivers to places of high demand.

These incentive payments typically come down on a per-ride basis as a new market matures. However, the tenacity of Uber’s rivals has meant that the company has not been able to eliminate them altogether.

Even in the US, its biggest and oldest market, Uber was not profitable last year, partly because it had to fight off a fresh push from its smaller rival Lyft.

That onslaught has continued this year as Lyft raised fresh funds and benefited from the #DeleteUber campaign: Uber’s market share has fallen from 84 per cent at the beginning of the year to 77 per cent at the end of May, according to Second Measure, a research group that analyses credit card data.

The fact that switching costs are so low between one service and the other — both drivers and riders can easily flip between the apps — means that it can be hard for Uber to defend its market dominance.

Nevertheless the company did succeed in narrowing its global operating losses in the first quarter of this year to $708m, from $990m the previous quarter.

One area where Uber and Lyft have been experimenting with a different revenue model is through subscriptions — offering a monthly membership “pack” to frequent riders. (One example might be a $20 monthly fee that buys the rider 20 shared rides for $2 each.)

Subscription models could make sense if — as Uber and Lyft hope — more urban dwellers ditch their private cars and use Uber and Lyft instead, particularly in cities that lack good public transport.

The fantasy for both companies is that car-booking usage will surge, making private car ownership a thing of the past (right now ride-hailing accounts for just 0.4 per cent of passenger car miles travelled in the US, so there is still some way to go).

“Subscription models are always very beneficial,” says Santosh Rao, head of research at Manhattan Venture Partners. “There is visibility, it is a nice recurring revenue model. To the extent that they can get it, that is great.”

As their markets begin to mature, investors in both companies have come to believe that ride-hailing is not a winner-take-all market, but rather one in which multiple companies can coexist.

Mitchell Green, an Uber investor and a partner at Lead Edge Capital, says that his thesis is that the ride-hailing market will keep growing — and both Uber and Lyft will benefit.

He draws an analogy to telecoms companies. “There is absolutely room for multiple players, like AT&T and MCI, there is not going to be one player in the market.”

This shift has become even more paramount after Mr Kalanick was ousted earlier this week by a group of investors who want the company to pursue an initial public offering. “The new management means we are probably a little bit closer to the big IPO than we were before Travis left,” says Rohit Kulkarni, managing director at SharesPost.

As Uber’s new chief executive grapples with the unusual dynamics of the ride-hailing market, they will also have to make sure Uber lives up to investors’ expectations. With a valuation of $62.5bn, there is a lot riding on the question of how ride-hailing can make money.

Uber locks horns with homegrown Asian rivals

After an expensive struggle in China that ended in defeat last year to Didi Chuxing, Uber is now embroiled in another costly strategic battle in south-east Asia, write Michael Peel in Bangkok and Jeevan Vasagar in Singapore.

The world’s most valuable private technology company is vying with homegrown start-up Grab for dominance of the diverse region of 10 countries, home to more than 600m people and some of the world’s highest economic growth rates.

The prize is substantial. A joint study by Google and Temasek last year predicted south-east Asia’s ride-hailing market will grow from revenues of $2.5bn in 2015 to $13.1bn in 2025.

“Exiting China must have been sobering for Uber,” says Adrian Lee, research director at Gartner in Singapore. “South-east Asia will be critical for Uber to claim true global leadership.”

Singapore-based Grab, founded in 2012, appears to have a solid early-mover advantage. It has expanded aggressively and is present in 55 cities across a region that arcs from Myanmar to the Philippine archipelago. Uber is in 35 cities.

Grab says it has 2.5m daily rides across south-east Asia, and 70 per cent of the market for private cars and motorbikes — and it claims an even higher share of the market for taxis summoned by app. Uber declines to give equivalent information.

Valued at $3bn after raising $750m in a funding round in September led by Japan’s SoftBank, Grab has forged partnerships with Chinese giant Didi, Uber’s US rival Lyft, and India’s Ola.

Neither Uber nor Grab has turned a profit. But Uber has a brimming war chest: the American company, valued at $62.5bn, had $7.2bn in cash on hand at the end of the last quarter.

Both have had to improvise repeatedly in south-east Asia to navigate obstacles including sometimes-hostile authorities, severe congestion and rapidly expanding and changing cities. They also have to serve differing client bases in a region of vast income variations.

Grab has pushed into mobile payments as it seeks to bind customers closer. The company aims ultimately to be a dominant force in regional ecommerce for the region, and wants to make more sophisticated use of the large volume of data it is gathering on customers’ movements and their preferences to offer additional layers of service, according to Anthony Tan, a Grab co-founder.

Despite Grab’s early claims of primacy, all remains to play for in south-east Asia — and much information about the performance of both companies is still unclear. But analysts say Uber may face problems if it has already fallen behind in the race for customers in a market where it is likely to be difficult to change people’s preferences given the similarities of the apps.

“If Grab’s lead is in customer usage, and the lead is a substantial one, it is a real moat,” says Ferry Grijpink, a Singapore-based partner at McKinsey, the consultancy.

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China’s online payments duopoly of one
Alipay will lead WeChat Pay thanks to superior shopping and investment options
by: FT Confidential Research
  • China’s online payments market may be a duopoly but it is one in which Alipay dominates upstart rival WeChat Pay, according to FT Confidential Research’s latest consumer survey.
  • We believe Alipay will maintain its lead thanks to its integration with Alibaba’s dominant e-commerce platforms and Yu’E Bao, though regulatory pressure is building on that big money market fund.
  • Alipay stands a greater chance globally than WeChat Pay, which will struggle against the dominance of Facebook and WhatsApp beyond the Great Chinese Firewall.

The story of China’s march towards a cashless society is about Alipay versus WeChat Pay. Among respondents to an FTCR survey of 1,000 urban Chinese, 82.6 per cent chose Alibaba’s Alipay as one of their three main payment methods, while 64.3 per cent picked Tencent’s WeChat (see chart). 

Other forms of payment were also-rans; UnionPay QuickPass, owned by the state-run card payment system, was chosen by just 6.6 per cent. Apple Pay’s popularity may have surged in China during the past year but it was still chosen by just 3.2 per cent of respondents (Apple is now intensifying its marketing push in China in co-operation with UnionPay).

Our survey also found that China has not left cash behind completely, although its popularity as a payment method has fallen sharply since 2016. While we do not believe that China has leapfrogged credit cards in its move to a cash-free society, our survey also suggests that card issuers are not moving fast enough to resist the challenge posed by Alipay and WeChat Pay.

This is big business: Rmb58.8tn ($8.75tn) was transacted via third-party payment platforms in China last year, according to iResearch, an internet research firm in Beijing. That is 50 times the amount transacted in the US, where credit cards remain king. Our latest survey shows the extent to which China’s third-party payments market has become a duopoly as WeChat Pay’s popularity has surged. However, our research suggests Alipay’s dominance is unassailable (see chart).

Settling in at number one

More users said they preferred WeChat Pay for ease of use (see chart) — this is a 900m strong peer-to-peer network in which users can transfer amounts as small as Rmb1. In January 2014, WeChat pioneered the digital red envelope, transforming the traditional lunar new year cash gift into a marketing phenomenon and turning China’s most popular messaging app into a direct Alipay competitor. Since then, WeChat Pay’s growth has been fuelled by transactions between individuals, and with online and offline vendors.

However, more respondents to our survey favoured Alipay’s larger range of online and offline merchants. This reflects the dominance of Alibaba’s Taobao and Tmall in online shopping. These sites have an 83 per cent share of the mobile online shopping market, according to iResearch, and only accept Alipay. WeChat has a tie-up with Alibaba rival, but does not have the exclusivity at the point of sale enjoyed by Alipay. Respondents also said they considered Alipay the more secure service, probably because it is a standalone app, whereas WeChat Pay comes bundled into the popular messaging platform.

Alipay’s trump card

Ant Financial, Alibaba’s financial services arm, established a fund in 2013 to pool and invest funds sitting idle in Alipay accounts. This was a masterstroke; Yu’E Bao — “leftover treasure” in Chinese — has grown to Rmb1.43tn and is now the world’s biggest money market fund. Yu’E Bao offers returns of nearly 4 per cent, incentivising users to move funds from their bank accounts, where the equivalent benchmark rate is 1.5 per cent. WeChat Pay offers a much smaller money market fund and allows users to purchase financial investment products, but Alipay provides a seamless experience allowing users to access their Yu’E Bao funds for on or offline purchases.

Because WeChat users were less incentivised to keep their funds on the platform, users would make transfers to their account, with Tencent absorbing the associated costs. In response, the company began imposing charges last year on transfers to bank accounts above Rmb1,000 (Alipay followed suit but its fees don’t kick in until Rmb20,000). This may have contributed to a slowdown in Tencent’s payments market share in the second half of last year. Helped by rising interbank market rates, Yu’E Bao’s assets have surged in that time (see chart).

China’s traditional banks have not sat idle as Yu’E Bao threatens their core business. In response to lobbying, the People’s Bank of China has warned of the risks associated with Yu’E Bao, prompting the company to lower its investment limit from Rmb1m to Rmb250,000. Given that this is still much greater than the amount in most personal current accounts, the PBoC may take more stringent action to slow the volume of inflows into the fund.

Going global

We also expect Alipay to be more successful worldwide than WeChat Pay. Its current ambitions are more global in scope; it has been concentrating on emerging markets, where credit cards have low penetration rates and the possibility of leapfrogging is greater. It bought a 40 per cent stake in PayTM, the leading payments processor in India, where adoption of services has soared in the wake of the government’s sudden cancellation of most banknotes at the end of last year.

In the US, Alipay has signed an agreement with payments processor First Data to offer its services at 4m points of sale. Although this will predominantly cater to Chinese users overseas, the company’s 10-year goal is for 2bn users — up from 450m now — with 60 per cent to be outside China, versus 10 per cent now.

In contrast, WeChat’s global plans are still firmly limited to those outbound Chinese users. WeChat Pay is in 15 countries and supports 12 currencies but remains bundled within the WeChat messaging app. As such, it faces tough competition from the giant networks of Facebook and WhatsApp, which dominate beyond China’s Great Firewall.

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The Big Read Harvey Weinstein
Harvey Weinstein: how lawyers kept a lid on sexual harassment claims
Zelda Perkins wants to expose legal process that kept her claims secret for 19 years
by: Matthew Garrahan in Los Angeles

Nineteen years ago this month, Zelda Perkins walked out of Miramax’s London offices on Brewer Street in Soho for the last time and went to see a lawyer with a female colleague. They were seeking urgent advice. Ms Perkins, who had worked for Miramax as Harvey Weinstein’s assistant, says she has endured several years of sexual harassment by him but had been spurred to quit after the colleague said the film mogul had sexually assaulted her.

After recounting their stories to solicitors at Simons Muirhead & Burton, a London legal firm that specialises in media work, the two women were advised to seek a damages claim from Mr Weinstein. A negotiation began with Allen & Overy, the heavyweight London firm that was acting for the producer of movies such as Pulp Fiction and The English Patient.

A sum of £250,000 was agreed, to be divided equally between the two women, and a legally binding contract — a non-disclosure agreement — drawn up after several punishing late-night sessions. The women signed it and for almost two decades have not spoken about their experience.

Zelda Perkins with Harvey Weinstein on a yacht in Cannes in 1998, the year she left his company © Zelda Perkins

Until now. Ms Perkins is breaking the terms of that contract in the Financial Times to talk about her time at Miramax working for Mr Weinstein and the “incredibly distressing” experience of negotiating her NDA — a process that pitted a young woman against the legal might and power of one of Hollywood’s most powerful figures. The recent firing of Mr Weinstein and the emergence of dozens of women who have alleged harassment and assault by him has emboldened her to come forward. In an interview with the FT, she says she wants to shine a light on the workings of a secretive legal process utilised by the rich and powerful to silence victims of sexual harassment.

“I want to publicly break my non-disclosure agreement,” she says. “Unless somebody does this there won’t be a debate about how egregious these agreements are and the amount of duress that victims are put under. My entire world fell in because I thought the law was there to protect those who abided by it. I discovered that it had nothing to do with right and wrong and everything to do with money and power.”

Ms Perkins, who now works for the theatre production company Robert Fox, is aware that breaking the contract is risky but says she is prepared to take a stand. She does not even have a copy of her NDA — the agreement that was struck in October 1998 prohibited her from having one — although she does have several pages from it outlining Miramax’s obligations to her, and hers to the film company.

Zelda Perkins signed a non-disclosure agreement after meetings with lawyers working for Harvey Weinstein © Charlie Bibby

There are plenty of clauses in it to direct and curtail her future behaviour, including if she were ever asked to provide testimony. One says that if “any criminal legal process” involving Harvey Weinstein or Miramax requires her to give evidence, she will give 48 hours notice to Mark Mansell, a lawyer at Allen & Overy, “before making any disclosure”.

In the event her evidence is required, “you [she] will use all reasonable endeavours to limit the scope of the disclosure as far as possible”, the agreement says, adding that she will agree to give “reasonable assistance” to Miramax “if it elects to contest such process”.

Mr Mansell and Allen & Overy declined to comment on Ms Perkins’ agreement, as did her solicitors at Simons Muirhead & Burton.

Amid the wave of sexual harassment and assault claims in the US, NDAs and the lawyers who help devise them have emerged as a critical element in explaining why so many of those cases remained secret for so long. These accusations have been directed not just at Mr Weinstein in Hollywood, but also Roger Ailes and Bill O’Reilly, the former chairman and star anchor, respectively, at Fox News.

The producers of 'Shakespeare in Love', including Donna Gigliotti and Harvey Weinstein, accept the Oscar for Best Picture in 1999 © AFP

While Ms Perkins is not the first woman to come forward with claims about harassment from an all-powerful boss, she is one of the first to lift the veil of secrecy to show the invasive process involved in securing such an agreement. Her ordeal included days of gruelling questioning at Allen & Overy’s London office, capped by a 12-hour session before a phalanx of Mr Weinstein’s lawyers that broke at 5am.

“I was made to feel ashamed for disclosing his behaviour and assault, and expected to name those I had spoken to, as if they too were guilty of something,” she says.

Ms Perkins never had any ambitions to work in the film industry. In fact, if she had not followed a boyfriend to New York after finishing university in Manchester she may never have crossed paths with Mr Weinstein.

A television series was being shot on the street where she was staying and a chance meeting led to a job. When it was time for her to return to London a New York colleague introduced her to Donna Gigliotti, a producer who was already working for Miramax — and who would go on to win an Oscar for Shakespeare in Love. That led to a script development job at Miramax’s London office. It was a predominantly female office, she recalls.

Soon after she had started she was called at home by a senior female colleague. “Harvey usually had three assistants working for him in London but one of them had gone Awol. I was asked to step in.”

Michael Eisner, chief executive of Disney, in discussions with Harvey Weinstein in 2004. Disney bought Miramax in 1993 © Bloomberg

Mr Weinstein would regularly stay at The Savoy on his London trips and his assistants would work with him in his suite. “I remember taking a call in the room when another call came through on another phone. He swore at me to ‘pick up the f***ing phone’. I said: ‘I’m already on the f***ing phone!’ It sealed my fate as someone who could stand up to him. It wasn’t bravery, it was naivety.”

“He had a need to annihilate and humiliate men,” she adds. “But with women it was all about seduction and submission. Harvey made you feel in an honorary position of trust and influence which he then used as a tool to exert control.”

Despite these misgivings, when asked to become his permanent UK assistant she accepted. At the time Miramax “felt like the centre of the universe”. She sat in on meetings Mr Weinstein had with stars such as Leonardo DiCaprio and Gwyneth Paltrow and he asked for her opinion on scripts. “He made me feel that he valued my opinion.”

Her first direct experience of sexual harassment by Mr Weinstein was the first time she was alone with him. “He went out of the room and came back in his underwear. He asked me if I would give him a massage. Then he asked if he could massage me.” She declined.

She says he would often walk around the room naked and asked her to be in the room while he had a bath — which tallies with the experience of other women who have come forward. “But this was his behaviour on every occasion I was alone with him. I often had to wake him up in the hotel in the mornings and he would try to pull me into bed.”

The final straw came with the assault on her colleague. They were in Venice for the film festival and were staying at the Excelsior hotel from September 4 to September 7, 1998. She knows the dates are right because she still has her appointments diary from the time.

Late one day her colleague came to see her in distress. “She was white as a sheet and shaking and in a very bad emotional state. She told me something terrible had happened. She was in shock and crying and finding it very hard to talk. I was furious, deeply upset and very shocked. I said: ‘We need to go to the police’ but she was too distressed. Neither of us knew what to do in a foreign environment.”

Ms Perkins immediately confronted Mr Weinstein, who told her nothing had happened. “It was very clear looking at the state my colleague was in and then looking at Harvey that I believed her.” In a statement Mr Weinstein’s spokesperson said: “The FT did not provide the identity of any individuals making these assertions. Any allegations of non-consensual sex are unequivocally denied by Mr Weinstein. Mr Weinstein has further confirmed that there were never any acts of retaliation against any women for refusing his advances.”

On her return to London, Ms Perkins went to see Simons Muirhead & Burton, where she met a solicitor at the firm. “I remember telling her about work and conditions with Harvey and she was incredulous. She said it was sexual harassment. I was slightly embarrassed about how naive I had been.”

Miramax was owned by Walt Disney at the time and Ms Perkins was aware that Mr Weinstein had been clashing with Michael Eisner, Disney’s then chief executive.

“I wanted to expose him [and] thought that we could go to Disney,” she says. “But the lawyers were reluctant. They said words to the effect of: ‘they are not going to take your word against his with no evidence’.”

She says the lawyers told her the only option was a damages agreement. “I was very upset because the whole point was that we had to stop him by exposing his behaviour. I was warned that he and his lawyers would try to destroy my credibility if I went to court. They told me he would try to destroy me and my family.”

Roger Ailes, head of Fox News, and one of his star commentators, Bill O'Reilly, were both accused of harassment in lawsuits © AP

Money was never a factor, she says: in fact, she vehemently stated to her lawyers that she did not want money to change hands. “My driving motivation was to create safeguards to protect future employees. I gave SMB a list of demands aimed at controlling his behaviour, such as a commitment that he receive medical treatment and the creation of a proper human resources complaints procedure at Miramax so that people would be aware of their rights and could complain about harassment if they needed to.”

SMB advised her to seek a year’s salary, which she says would have been a pittance to Mr Weinstein: she was earning around £20,000 at the time. She sought guidance from a senior female American colleague who knew of Mr Weinstein’s behaviour. She told her to negotiate a higher figure because she had “more power than I was aware of”. After some discussion SMB asked for damages of £250,000. They called Allen & Overy and half an hour later the firm called back to accept.

The award, which had been provisionally agreed, initially included a substantial donation to a women’s charity — although Ms Perkins says that donation demand was later shelved. But her demands for the creation of a complaints procedure at Miramax and for therapy for Mr Weinstein — which included her being able to meet his therapist — were written into the agreement.

A letter from her solicitor summarising her obligations states that he would receive therapy “for as long as his therapist deems necessary”: the company confirmed that it would comply with this clause for three years.

Miramax said that within six months of its agreement with Ms Perkins the company would appoint three “complaint handlers” who would investigate future harassment allegations. It also agreed to provide proof of how its staff were told about the new procedures. Crucially, if a complaint against Mr Weinstein occurred within two years of the contract and it resulted in a settlement of either £35,000 or six months’ salary Miramax agreed to report the matter to Disney — or to dismiss Mr Weinstein.

Although these and other obligations ended up in the contract it is not known whether Miramax fully abided by them.

The English Patient, produced in 1996, was part of a purple patch for Miramax which also included Pulp Fiction © Alamy

The negotiation with Allen & Overy took a heavy emotional toll, she says. As part of the agreement she had to tell Allen & Overy every individual she had shared her story with so that it could be written into her contract. “If I had mentioned any individuals to my legal representatives they couldn’t withhold that information. It all had to be disclosed.”

There were several intense negotiation sessions at Allen & Overy’s office in London. “At 24 years old in a room full of lawyers I felt unsupported by my legal team. Looking back I understand they were following correct practice but at the time I felt totally isolated.”

Nineteen years later, memories of that period are still raw. “I was pretty broken after the negotiation process.” Her goal now is to start a debate about confidential agreements like the one she signed. “I’m not saying that they shouldn’t exist. But they need to be regulated in a fair way.” She says she is astonished by a system that prevents her from having a copy of her own agreement.

“I want to call into question the legitimacy of agreements where the inequality of power is so stark and relies on money rather than morality,” she says. “I want other women who have been sidelined and who aren’t being allowed to own their own history or their trauma to be able to discuss what they have suffered. I want them to see that the sky won’t fall in.”

Gretchen Carlson, the former Fox news anchor © Getty Images

NDAs: a legal weapon used to silence and intimidate

Companies, and individuals, have a range of ways to make sure stories about misconduct do not spread.

Most financial settlement agreements between accused and accuser include non-disclosure provisions that bar the person receiving the financial settlement from talking about their allegations or even revealing the amount of the settlement, according to lawyers who have represented women in sexual harassment cases. Non-disparagement provisions, which prevent an alleged victim from speaking ill of the person or company they have accused, are also common.

The penalties for breaking this silence can be steep. “A lot of defendants and the companies they work for are powerful. They can put in draconian liquidated damages provisions in the event there is disclosure,” says one lawyer who has worked on such cases.

For example, an alleged victim might be forced to pay back not just the full amount of the settlement but also an additional financial penalty and the other party’s legal fees. “There is a lot of fear hanging over your head,” the lawyer says.

Many of the women who received settlements after accusing Roger Ailes, the former Fox News chief executive and Bill O’Reilly, one of its key presenters, of sexual harassment do not feel free to speak publicly about their experiences because of NDAs. That includes Gretchen Carlson, who received a $20m settlement in a lawsuit she filed against Ailes in 2016 that set off a cascade of allegations about the cable news network’s most powerful figures.

Ms Carlson has become an advocate for prohibiting forced arbitration clauses and their accompanying NDAs. “We have chosen as a culture to silence the victims either with settlements where you are gagged from ever saying what happened to you or enforced arbitration, which is a part of employment contracts now, and here’s the key — it’s secret,” she told CBS News last week.

However, NDAs cannot lawfully prevent people from reporting claims to law enforcement and government agencies, such as the Equal Employment Opportunity Commission in the US, or responding to a subpoena.

Allegations of sexual harassment or misconduct can also be kept quiet by limiting what employees can say about their workplaces. Employment contracts often include NDAs. Many also require that any complaints, including sexual harassment, be resolved in private arbitration rather than a courtroom. Those arbitration-only clauses — which are being challenged in a Supreme Court case — typically limit what a worker can say about the complaint and the ensuing arbitration.

“All of these operate to silence survivors of sex harassment and sex assault from coming forward and reporting, and they also help shield serial harassers from accountability,” says Maya Raghu, director of workplace equality at the US National Women’s Law Center. “As we’ve seen in the last few weeks, many survivors feel like ‘I’m the only one who this has happened to’ — so they stay silent.” Shannon Bond

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The Big Read Susan Fowler
FT Person of the Year: Susan Fowler
The software engineer who lifted the lid on sexual harassment at Uber and inspired women to speak out
by: Leslie Hook in San Francisco

When Susan Fowler joined Uber in late 2015, the company looked like an unstoppable juggernaut. It was expanding rapidly around the world and becoming the most valuable start-up of all time. For software engineers like Ms Fowler, there was exciting work to be done on the app that was changing transportation. Employees at San Francisco’s hottest company proudly wore their Uber sweatshirts around town.

But two years later, those sweatshirts are no longer visible and Uber is in crisis. Beset by one setback after another, the company has become a symbol of everything that is wrong with the hard-driving tech world. In large part, that shift is due to Ms Fowler.

In February she published a blog about her time at Uber that lifted the lid on a company that was out of control. Ms Fowler described the sexual harassment she experienced, including her boss propositioning her for sex on the first day she joined his team. The human resources department turned a blind eye to her complaints, saying he was a “high performer”. When she wrote about this and other incidents, her post quickly went viral. Ms Fowler had pulled on a thread that would lead to a great unravelling.

In the process, the 26-year-old from rural Arizona who had to teach herself at the local library to get into university, found herself at the centre of three of the most important trends of the year. Her description of the reality of working at Uber generated a crisis that has raised questions about the very viability of the company. They also formed an early part of the growing backlash against the power and influence of the Big Tech companies.

Most of all, her intervention was one of the most important testimonies in what — as the year comes to a close — has become an avalanche of allegations about sexual harassment and assault that have brought down some of the most important men in media, entertainment and business, and which hold the potential to improve the way women are treated at work permanently.

“Women have been speaking up for many, many years, but were very rarely believed, and there were almost never any real consequences for offenders,” Ms Fowler told the Financial Times. “This year, that completely changed.”

Protesters on the Women's March in Washington on January 21, a day after Donald Trump's inauguration as US president © AFP

Inside Uber, her story immediately struck a nerve. The account was so damning because it detailed the complicity of Uber’s HR department and top executives who protected the harasser. A few days after the post came out, employees wept at the company-wide meeting that was held to discuss it. Uber’s board launched several investigations and adopted far-reaching corporate governance reforms. The company set up a hotline for harassment complaints, drawing tips that resulted in more than 20 employees being fired.

Outside of Uber, the reaction was just as dramatic. Investors started to question whether Travis Kalanick, the controversial chief executive (who used to refer to the company as “Boob-er” because it helped him meet women) had created a company whose culture had become poisonous. Low morale inside Uber contributed to a series of damaging leaks, including revelations about the mishandling of a rape victim’s medical records and the existence of Greyball, a technology used to mislead regulators. Mr Kalanick vowed to change, but by June investors demanded that he step down.

“Susan Fowler’s letter was the tipping point for us,” says one Uber investor, Freada Kapor Klein, a partner at Kapor Capital. “We had been trying to get the company to address this behind the scenes. But with Susan’s blog post, it was — that is enough, it has so crossed the line, it is time for drastic action.”

Uber could not have found a more unlikely nemesis than the petite Ms Fowler. She grew up in what she describes as poverty as one of seven children in a small rural Arizona town with just 600 people. Her father was a preacher, prison chaplain and at one stage a high school teacher. Ms Fowler never graduated from high school, instead working as a babysitter and ranch hand, and teaching herself in the local library. Lacking a formal education but determined to go to university, she submitted a list of books she had read as part of her college application.

After winning a place at Arizona State University to study philosophy, she then transferred to the University of Pennsylvania, earning a degree in physics. In her final year at Penn, she wrote a blog entitled “If Susan can learn physics, so can you”, explaining how she caught up despite having no secondary maths education. By the time she reached Uber at age 24, she was a physicist and computer scientist, and wrote her first book about software architecture while working at the company. 

Rose McGowan, one of Harvey Weinstein's most vociferous accusers, with Tarana Burke, the originator of the Me Too movement © Getty

Since leaving Uber last December, Ms Fowler, who now works at the payments start-up Stripe, has kept a low profile. She says she did not imagine the post would have such a big impact. “I expected the reaction to die down, but it never did,” she says. “It became much bigger than me, so much bigger than Uber.” Ms Fowler is currently eight months pregnant and on bed rest and, due to health concerns agreed to a written, rather than a face-to face interview, for this article.

Ms Fowler says she felt compelled to blow the whistle because “it was the right thing to do”. The fact her background is so different from her peers in Silicon Valley may have also played a role, she adds.

“When I was younger, I used to think that my unconventional upbringing was a weakness, but over the past few years I’ve learnt to see it as one of my greatest strengths,” she says. “I never had a single thing handed to me, I had to fight for everything I wanted, like my education. When I was harassed and discriminated against, I fought as hard as I could — because I hadn’t gone through all of that, I hadn’t worked so hard my entire life, just to have someone take it away from me.”

At the time Ms Fowler published her blog post, the Uber sexual harassment scandal might have seemed like an isolated incident. But the ripples travelled well beyond one company. This year has seen an unprecedented number of women speak publicly about sexual harassment — and unprecedented consequences for their harassers.

In Silicon Valley, female entrepreneurs recalled how pitch meetings with potential investors could lead to unwanted groping or propositions. The wave of allegations prompted the firing and resignation of several prominent venture capitalists — including the chief executive of SoFi, the online lender, and Justin Caldbeck, a co-founder of Binary Capital. 

A few months later the tidal wave reached Hollywood. The New York Times and New Yorker revealed in October that Hollywood mogul Harvey Weinstein had a pattern of sexual harassment and assault that went back decades. Mr Weinstein was fired from his eponymous company and is under investigation by police in at least two countries. Among the dozens of actresses making accusations were Gwyneth Paltrow and Rose McGowan.

Meanwhile the #MeToo campaign swept across social media, as millions of women and some men shared personal stories of sexual harassment, assault and abuse. The movement has only continued to spread. In November, American television stars including Charlie Rose and Matt Lauer were forced to resign due to revelations about harassing colleagues. In politics, Al Franken in the Senate and John Conyers and Trent Frank in the House of Representatives have announced plans to retire after facing harassment allegations. Congress introduced a bill last month that would change the way congressional employees can report harassment.

“There is a kind of unmasking going on. A lot of these are people who are venerated, people who were taken very seriously,” says Robin Lakoff, a professor of linguistics at the University of California, Berkeley. In the past, a sex scandal might be in the headlines for a few weeks and then disappear. “This one seems to really have legs, because new ones keep cropping up,” she says.

There are many reasons this is happening now but most explanations point, at least in part, to the presence in the White House of President Donald Trump, who was caught on record boasting about sexually assaulting women. In a 2005 recording that was released shortly before last year’s election, Mr Trump says: “When you’re a star, they let you do it. You can do anything . . . Grab ’em by the pussy. You can do anything.” Since then, at least 16 women have come forward to accuse Mr Trump of sexual harassment.

The fact he was elected to the highest office despite those remarks has fuelled a backlash. The day after his inauguration, millions of women across hundreds of cities took to the streets to demonstrate in the Women’s March. 

Social media has also played a part. Ms Fowler, who is constantly on Twitter, says social media had a “very positive role” in the movement. “It has given a voice to many, like myself, who otherwise wouldn’t have had a platform,” she says. “#MeToo is a perfect example of this . . . It made the rest of the world finally understand the true extent of inappropriate behaviour against women, and the damage it causes.”

Another reason why 2017 has been a turning point is simply that there is strength in numbers: women have been inspired by others who spoke out.

“Definitely she was a role model for me,” says Cheryl Yeoh, an entrepreneur who published her own account of assault in July. Like Ms Fowler, Ms Yeoh decided to write her story herself and publish it online, rather than approach a journalist or try to go through a lawyer. She says that watching the impact Ms Fowler had on Uber was very encouraging. “If I hadn’t seen what had happened to Uber after her post, I wouldn’t have dared to write my account,” she says.

The cultural shift that has come about this year is also the result of decades of work by activists and leaders fighting for equal rights. Ms Klein links the wave of allegations back to events like the 1991 testimony of Anita Hill, whose televised account of sexual harassment by Clarence Thomas riveted the country during his confirmation hearing for the Supreme Court, and to the founding of the “Me Too” movement a decade ago by activist Tarana Burke.

“What Susan Fowler and the #MeToo movement have in common is they both stand on the shoulders of giants,” says Ms Klein.

Earlier generations of female leaders often found sexual harassment a complex issue to raise, and instead focused on areas like equal pay or reproductive rights. Women who spoke out about harassment often found themselves blamed, and their careers derailed.

Lilly Ledbetter, the equal pay advocate whose court case on wage discrimination made it to the Supreme Court and resulted in the Lilly Ledbetter Fair Pay Act in 2009, welcomes the #MeToo movement. “I wish this had happened earlier,” she says. “I’ve been so glad that this is all coming to the forefront now."

She recalls her own experience of harassment in the early 1980s — when a manager asked that she have sex with him in order to get a high performance review. She never reported it at that time. “I let that one slide,” she says.

“Things have gotten more open and people have a tendency to support each other better today,” she says. “I think women in the beginning didn’t trust each other and didn’t support each other, and now they are better at that. There are companies that are looking at their policies and changing, and being a lot more supportive,” she says. One policy change that would make a difference is ending the widespread practice of making employees seek arbitration for harassment claims, and Congress is currently considering a bill that would end that practice. 

President Barack Obama with campaigner Lily Ledbetter before signing the Lilly Ledbetter Fair Pay Act in 2009 © Getty

At the same time, some are concerned the movement could end up backfiring in subtle ways, or result in discrimination against women in the workplace.

“The percentage of men who will be afraid to be alone with a female colleague has to be sky high right now,” wrote Sheryl Sandberg, chief operating officer at Facebook, in a recent post. “I have already heard the rumblings of a backlash: ‘This is why you shouldn’t hire women.’ Actually, this is why you should,” she wrote.

Ms Fowler is expected to give birth to a little girl. At Stripe, she is the editor-in-chief of a quarterly magazine called Increment, which is geared towards software engineers. She is also working on a book and a movie about her experiences.

The fortunes of Uber, on the other hand, have changed more drastically than anyone could have imagined. The company that once looked invincible has seen its valuation fall from $71bn to $54bn and it has lost market share in the US. “Would Uber have changed if it weren’t for Susan’s blog post? I don’t know,” one senior executive admits privately. “Certainly her post gave us the resolve that we needed to change.”

The contrast between the plaudits for Ms Fowler and the crisis at Uber is perhaps the clearest sign of how much things have changed for women who speak up about harassment.

Yet it still comes at a cost. “The most difficult [thing] has been that being a whistleblower displaces and dwarfs all of your other career aspirations, all your accomplishments. You’re no longer the engineer, or the physicist, or the writer — you’re the whistleblower,” says Ms Fowler. Nevertheless, she says, it is “a badge of honour”.

Copyright The Financial Times Limited 2018. All rights reserved.
© Getty

Timely and authoritative commentary and analysis written by the FT's award-winning columnists and global network of specialists, to give readers a head start in understanding the implications of big breaking stories of the day.

Opinion Instant Insight
Flynn’s indictment tightens the noose on Trump’s White House
Indictment on a relatively minor count suggests retired general has juicy information to share, writes Edward Luce
by: Edward Luce

It is hard to say which is worse for Donald Trump. On Friday, Michael Flynn, his former national security adviser, became the fourth Trump associate to be indicted by Robert Mueller, the special counsel. That tightens the investigative noose around the White House. Late on that night, the Republican Senate passed Mr Trump’s tax cuts. Having helped clinch the one reform that binds Republicans, Mr Trump is no longer so useful to them. The odds that he will be impeached have risen sharply.

The most ominous aspect to Mr Flynn’s plea bargain is how generous it was. The fact that Mr Mueller indicted him on the relatively minor count of having lied to FBI investigators suggests the retired general has juicy information to share. Mr Flynn could have been nailed on several other counts, including undisclosed work for a foreign government, Turkey, which paid him $530,000 in fees. That Mr Mueller kept the charge relatively light speaks volumes. Mr Flynn has something to give in return. This is likely to include two elements.

The first is to advance Mr Mueller’s case that the Trump campaign colluded with Russia. Mr Flynn was in the thick of the Trump campaign’s Russia communications. According to his indictment on Friday, Mr Flynn took directions from a senior member of the Trump campaign in his conversations with the Russian ambassador, Sergei Kislyak. That could be Jared Kushner, Mr Trump’s son-in-law and the president’s all-purpose consigliere. If, as many suspect, Mr Kushner is the next figure to be caught in Mr Mueller’s net, the Trump administration could start to disintegrate. 

The second element is to help Mr Mueller prove that Mr Trump tried to obstruct justice, which is also an impeachable offence. Indeed, the evidence for this is already compelling. James Comey, the former director of the FBI, whom Mr Trump fired in May (on the strong advice of Mr Kushner), has already testified that the president pressured him to drop his investigation of Mr Flynn. Were the latter to reveal why Mr Trump was so keen for the FBI to drop its probe, that could seal the case. As America learned during the Watergate hearings, the cover up is often worse than the crime. Obstruction of justice was the first item on the impeachment charge sheet against Richard Nixon. As the intended beneficiary of Mr Trump’s cover up, Mr Flynn can tell Mr Mueller what it was he was trying to conceal.

Even then, however, impeachment would be a leap. Mr Mueller can indict anyone he likes except the sitting president. That job belongs to Congress. While Capitol Hill remains in Republican hands, the chances it will begin proceedings are slim. There is as yet no revelation on the scale of the Oval Office tapes that turned Republican senators against Nixon. But Mr Trump is a combustible figure. In the build-up to Mr Flynn’s plea bargain last week, Mr Trump’s behaviour was unusually erratic. Among other moves, he triggered a row with the UK after retweeting Islamophobic videos produced by a British far-right group. He implied a well-known television anchor should be investigated for the death of an intern. He also exhumed the “birther” claim that Barack Obama was not born in America.

Might he fire Mr Mueller? The last time Mr Trump contemplated sacking the special counsel was in July when the FBI raided the home of Paul Manafort, Mr Trump’s former campaign chairman, who was indicted on several counts in October. As the investigative noose tightens, that temptation will return. Axing Mr Mueller would be an obstruction Congress would be hard-pressed to ignore. Yet Mr Trump may find it hard to resist. As the quip goes, Mr Trump’s Maga slogan — “Make America great again” — is turning into something different: “Many are getting arrested”.

Copyright The Financial Times Limited 2018. All rights reserved.
Throughout the year, we run a special series of articles on current trends that get behind the headlines. We spoke to Trump about Twitter and Junker about the Brexit bill as well as the people suffering ‘Shit Life Syndrome’ and we investigated the murky world of London’s spies for hire and the ownership of China’s most aggressive deal maker.
Lunch with the FT Life & Arts
EU chief Jean-Claude Juncker on the Brexit bill and the eroticism of power
Over carpaccio and veal, the politician tells Lionel Barber history will be harsh on the PM who took Britain out of the EU
by: Lionel Barber

Four black-and-white photographs line one wall in the private dining room of the president of the European Commission. Each pays homage to past office-holders: Roy Jenkins, Labour party reformer and grand gourmand; Gaston Thorn, plucky Luxembourger; and Jacques Delors, the French philosopher king who helped to build the single market and the euro.

The fourth picture catches the eye. The year is 1966. Walter Hallstein, German law professor, diplomat and first Commission president, is entertaining President Habib Bourguiba of Tunisia. Here is a snapshot of the original, intimate club of Six in the European Economic Community. Today’s sprawling, squabbling European Union of 28 members, soon to be 27 with the departure of the British, seems a world apart.

This week marks the 60th anniversary of the founding Treaty of Rome. The clinking of champagne glasses will be muted. Europe remains battered by low growth and high unemployment, a migration wave from the Middle East and north Africa, not to mention Brexit and Donald Trump. If Jean-Claude Juncker is feeling depressed, he masks it well. The current president of the European Commission, another Luxembourger in the top job, has agreed to have lunch to mark the Rome anniversary. He arrives on time at 12.30pm, all smiles behind a sober dark suit, white shirt and dashing pink tie.

“How come it has been so long?” he says in French, embracing me warmly. It’s been 15 years since we last met. Back in the 1990s, when I was the FT’s bureau chief in Brussels. Juncker was his country’s prime minister, a mini-power-broker between France and Germany and a trusted source.

At 62, he has been near the centre of power for more than three decades, present at the creation of the modern EU. Today, he is the last man standing.

“I’ve been elected 14 times in my life, nine times to the Luxembourg parliament, four times to the European Parliament,” he says, omitting the last controversial vote when “Buggins’ turn” dictated he was the centre-right’s candidate for the Commission job. “Being described as a stupid bureaucrat with no link to representative democracy is difficult to take. We are not in an iron tower.”


As we take our place at a pristine dining table set for two, I begin with a few short sharp questions: what went wrong with Europe? Was enlargement a mistake? What about the original mission, to exorcise the demons of nationalism and war?

Juncker says enlargement was an inevitable consequence of the end of the cold war. More than 20 new countries took their place on the European map. Border conflicts posed a huge risk. Yet he admits the message of war and peace no longer resonates with the younger generation.

“I [also] explain Europe with a future perspective . . . we are losing weight economically and demographically even if we think we are still masters of the world. By the end of this century, we will be 4 per cent of Europeans out of 10 billion people. This is not the time for new divisions. We have to stick together.”

The president sips from a glass of wine, a crispy white from Languedoc. “My father was a steelworker and he told me about a new beginning in Europe [in the 1950s]. He had been forced to join the German army, along with three of his brothers. That was a terrible period in the lives of my father and uncles, which impressed me for the rest of my life.”

His father was wounded in Odessa on the eastern front and taken prisoner by the Russians. During the Brexit referendum campaign, British tabloids reported that his father was a Nazi, a slur that deeply upset the president and his father, who passed away shortly afterwards. “It was unjust and disgusting,” says Juncker, “even [Nigel] Farage [leader of Ukip] apologised.”

Now in the twilight of his career, Juncker has been criticised as low-energy, a relic of a bygone era who delegates too much to Martin Selmayr, his Machiavellian chief of staff, and who spends too little time in the “newcomer” member states in central and eastern Europe. (“I accept this,” he says of the last point.)

Over a two-hour conversation, he is determined to show he is on top of his brief, rattling off statistics ranging from the minimum wage in Bulgaria to the declining number of telephone kiosks in Germany, all delivered effortlessly in English, French and occasionally German. Food is a tiresome distraction. The president barely touches his starter, a tasty if stringy Carpaccio de Saint-Jacques in sesame and soya oil.


A waitress arrives with a bottle of red wine, a 2005 Pomerol. “No, no,” says the president, waving away the claret. “I cannot mix white and red. We will have major events.”

The president’s weakness for alcohol is well-known. Today, he is on best behaviour. I ask him how he survived all those late-night councils. By his account, the worst was a budget meeting in Brussels in late 1985 ahead of Spain and Portugal joining the EU.

“I was chairing the meeting. It started on Monday morning at 11am and finished on Thursday 11pm, without going to the hotel, without having a shower. They [still] sent me the bill.”

“So what’s the secret of getting through the all-night sittings?” I ask.

“Coffee and water.

“You can’t be serious.”

“No whisky, nothing of that kind.”

“No brandy?"

“No, no, no.”

With one eye on Brexit, I ask the president to name the most brutal negotiations he was involved in.

“Greece continuing to be a member of the euro,” he shoots back.

Between 2004 and 2013, Juncker was on another Brussels jobs merry-go-round, chairing the eurogroup, which by 2011 comprised 17 members. “I had to be supportive of Greece because no one else was. I had to take in my compromise . . . and I had to tell the third group [the Slovaks and Slovenes]: ‘I will no longer listen to you because you are not in the right mood.’ Those were really difficult moments.”

In 2015, the same drama played out, this time with the new Greek government led by Alexis Tsipras, the radical left-winger. By now Juncker was Commission president and keen to cut a deal on Greek debt restructuring. “It took a moment to convince him I was partly on his side. All this was very difficult because the Commission was not really in charge; it was the eurogroup. We were taking all the initiatives. And the Germans and others were saying: ‘What are you doing there? This is not your job.’ ”

Juncker has irked member states by insisting he is running a “political” Commission not a bureaucracy. They fear a power-grab but the president has a point: the Brussels-based executive has the right of legislative initiative, it enforces the rules, it keeps the show on the road.

I first witnessed Juncker in action in Dublin Castle in 1996 when he helped to broker a deal over the German-inspired Stability Pact to enforce budgetary discipline in the future eurozone.

“Chirac started the meeting by saying the pact was an invention of German bureaucrats, pointing very directly at Theo Waigel, then finance minister, who refused to speak to Chirac. It was the very first time I played a role at head of state level. And when I could say to myself: without me, it would have been a collapse.”

Helmut Kohl was even more influential. Juncker describes the German chancellor as “a modest giant, a little saint in a great church” who understood the “secret psychology” of making the smaller countries feel he was listening. When everything went wrong, he would say: ‘Listen, friends, I am going to be strongly attacked in Germany. But it does not matter; I am doing this for European reasons. I am not playing the national card; I am playing now the European card. Please do the same. Today and next time.’ That happened three or four times. And the others were in fact ashamed.”

The waitress brings more Pomerol to wash down the veal fillet that is tender, if a little overcooked. By now, Juncker is dropping his diplomatic mask. France’s inability to stick to budget discipline was a big problem and “it still is”. Those who believe the Dutch elections show populism has peaked are wrong. “Fruchtbar ist der Schoss (the womb is still fertile),” he says, citing Brecht’s warning about fascism returning to Europe in the 1950s.

Can Marine Le Pen win the French presidential election?

“I don’t think so . . . I cannot imagine the whole of France shifting to the extreme right. But they have a solid Sockel (pillar) of support.”

I suggest the danger lies in the collapse of the traditional centre-left and centre-right parties. Juncker agrees: “That is the problem of France . . . the French are not used to coalitions. They hate each other.”

By contrast, postwar Germany has a different political tradition. “The German system was never driven by extremists, whereas the French system was driven by communist extremists and now by the extreme right . . . the best thing to happen in France would be bridging these abnormally huge differences. Will it happen? I don’t know.”

This hints at a preference for Emmanuel Macron, the centrist newcomer with no party, but Juncker says he has no intention of meddling.

The coffee and chocolates arrive. It is time to tackle Brexit, which he describes as “a tragedy, and people do not know that this tragedy will lead to conclusions”.

Before last year’s referendum the then UK prime minister David Cameron and his close ally and the then chancellor of the exchequer, George Osborne, were desperate to appease Tory hardliners. “Cameron always said: ‘I have one major problem. If Theresa May [the then home secretary who succeeded him as prime minister after Britain voted last June to leave the EU] publicly says that she is for Brexit, then we are lost.’ ”

Juncker describes May as a Brexiter and predicts Cameron will not be judged kindly by history. “I have met in my life two big destroyers: Gorbachev, who destroyed the Soviet Union, and Cameron, who destroyed the United Kingdom to some extent, even if there is no wave of Scotland to become independent.”

The exit bill for the UK will be at least €60bn and Britain’s departure will also change the balance of power in Europe, says Juncker. The UK always defended new members from central and eastern Europe. Germany cannot replace the British nor can it supplant Britain’s role in the transatlantic relationship.

Juncker is visibly agitated about President Donald Trump’s delight in Brexit. When US vice-president Mike Pence paid a recent visit to Brussels, he did not mince words. “I told him: ‘Do not invite others to leave, because if the EU collapses, you will have another war in the western Balkans.’ The only possibility for this tortured part of Europe is to have a European perspective. If we leave them to themselves — Bosnia and Herzegovina, Republika Srpska, Macedonia, Albania, all of these countries — we will have a war again.”

Will Trump galvanise Europe to be more united? Juncker is cautious. Trump has made Europeans think twice about American intentions, especially given the “very serious, though overestimated” threat from Russia. “When it comes to security, Trump is pushing them more and more in the direction of European integration.”

With two-and-a-half more years left in his five-year term, Juncker knows that any new political initiative must await the outcome of this September’s German election. Still, the president does hint that there may be moves in 2018 to a more formalised “multi-speed” Europe where, say, a euro core group moves ahead with greater integration. He rejects the notion of a new “Iron Curtain”, which segregates the “newcomers”, the slightly ambivalent term he repeatedly uses to categorise the central and east Europeans.

He also condemns the idea of a united federal Europe built against the nation states. “Forgetting the importance of national landscapes, cultures, national behaviours, reactions and reflexes is a big, big mistake. I am against nationalists, but I am very much in favour of patriots.”

As we sip our coffee, I remind Juncker that he once said that power had an erotic quality. After 35 years of Euro-building, does he still find power erotic?

“I find it more and more exciting and less and less erotic."

How so?

“You are enthusiastic because the challenges are there and because you are part of a system trying to give a response. But after several years you stop being irrational. Eroticism is irrational; explicable but irrational. Why are you in love with a person? The day you know means that you have stopped being in love."

But surely there is always room for intuition, whether in love or politics.

“Yes,” says the president, “these are the fucking moments.”

Whether this refers to a Euro-summit or something else is left unsaid. We adjourn to the president’s spacious office down the hall. He is a ferocious reader (especially newspapers, much to the frustration of his staff). He tells me he is thinking in retirement of writing a history of the euro, based on 50 metres of original documents he has accumulated since 1986.

And he has one more story to tell.

Back in the early 1990s, when European monetary union was still a distant prospect, the Luxembourg government secretly ordered the printing of a new national currency, 50bn new notes as an insurance policy. The Grand Duchy was part of a monetary union with Belgium but clearly did not have full confidence in the Belgians staying the course to the single European currency. On the launch of the euro on January 1 1999 Juncker had the notes destroyed, keeping one for himself and the other for the Grand Duke.

The president chuckles, checks his watch and rises from his chair. We walk out of his office, past photographs of all the Commission presidents, ending with José Manuel Barroso of Portugal. There is one last space for Juncker’s own portrait, next to a large exit door.

Après lui, le déluge? Let’s hope not.

Copyright The Financial Times Limited 2018. All rights reserved.
The Big Read UK trade
After Brexit: the UK will need to renegotiate at least 759 treaties
FT research reveals that agreements with 168 countries must be redone just for Britain to stand still
by: Paul McClean in Brussels

In the early 1970s the Queen’s Messengers delivered a historic parcel from London to Brussels, stuffed with enough documents to fill a tea-chest.

Since the 15th century these diplomatic couriers have carried the affairs of state. This time the delivery included scores of treaties, all bearing Royal Arms, which stretched back decades and traced the UK’s commercial arteries around the world. The arrangements were largely to be subsumed by the European Community when Britain joined its trade bloc; this was, in paper form, part of a handover of power.

Forty-six years on, when Britain leaves the EU in 2019, the UK stands to lose far more than it brought over to Brussels that day. The treaty chest has swollen into a small archive of EU agreements, running to hundreds of thousands of pages and spanning 168 non-EU countries. Within them are covered almost every external function of a modern economy, from flying planes to America and trading sows with Iceland to fishing in far-flung seas.

On Brexit day, that will all fall away. By law Britain will overnight be excluded from those EU arrangements with “third countries”, entering the equivalent of a legal void in key parts of its external commercial relations. Some British officials are even peering into the pre-1973 chest again to see whether some seemingly obsolete treaties might gain a new lease of life from a disorderly Brexit. “It is dusty in there,” jokes one Whitehall official.

It poses a formidable and little-understood challenge for Britain’s prime minister after the June 8 election. While Brexit is often cast as an affair between Brussels and London, in practice Britain’s exit will open more than 750 separate time-pressured mini-negotiations worldwide, according to Financial Times research. And there are no obvious shortcuts: even a basic transition after 2019 requires not just EU-UK approval, but the deal-by-deal authorisation of every third country involved.

“The nearest precedent you can think of is a cessation of a country — you are almost starting from scratch,” says Andrew Hood, a former UK government lawyer now at Dechert. “It will be a very difficult, iterative process."

Britain finds itself at the diplomatic starting line, with the status quo upended and all sides reassessing their interests.

To Brexiters this is a liberation that allows Britain to negotiate better, more ambitious deals with trading partners, shorn of the encumbrance of Brussels dogma and politics. At worst, they say, existing arrangements would be continued through drafting tweaks replacing “EU” with “UK”; at best they would be improved. Boris Johnson, foreign secretary, said nations were “already queueing up” to do deals.

Even if it were this simple, critics still fear it will open a bureaucratic vortex, sapping energy and resources. Each agreement must be reviewed, the country approached, the decision makers found, meetings arranged, trips made, negotiations started and completed — all against a ticking clock and the backdrop of Brexit, with the legal and practical constraints that brings. Most inconvenient of all, many countries want to know the outcome of EU-UK talks before making their own commitments.

“We are talking about an enormous number of complex acts that we rely on today,” says Lord Hannay, Britain’s former EU ambassador. “The challenge of replacing them falls in the same category as Alice in Wonderland running furiously to stand in the same spot.”


At its most granular level, the sheer administrative scale of the “third country” question is striking. Through analysis of the EU treaty database, the FT found 759 separate EU bilateral agreements with potential relevance to Britain, covering trade in nuclear goods, customs, fisheries, trade, transport and regulatory co-operation in areas such as antitrust or financial services.

This includes multilateral agreements based on consensus, where Britain must re-approach 132 separate parties. Around 110 separate opt-in accords at the UN and World Trade Organisation are excluded from the estimates, as are narrow agreements on the environment, health, research and science. Some additional UK bilateral deals, outside the EU framework, may also need to be revised because they make reference to EU law.

Some of the 759 are so essential that it would be unthinkable to operate without them. Air services agreements allow British aeroplanes to land in America, Canada or Israel; nuclear accords permit the trade in spare parts and fuel for Britain’s power stations. Both these sectors are excluded from trade negotiations and must be addressed separately.

Others agreements are less material, at least to the UK: swordfish conservation in Chile, or the “rules of procedure of the International Rubber Study Group”. Such interests are imperceptible compared with what is at stake with Brexit, but ultimately the housekeeping must be done.

All the agreements must be sifted, creating a huge legal tangle. With Switzerland alone there are 49 accords, while there are 44 with the US and 38 with Norway. Even in potentially consequential areas, some countries are barely aware of Brexit implications. When asked by the FT about a specific customs agreement, one sanguine Indian diplomat first denied it existed, then said it would not matter anyway: “I’m sure people have forgotten it.”

“The logistics are terrifying, even just to go through these commitments and treaties and scope them out,” says Hosuk Lee-Makiyama, a former trade official for Sweden and the EU now at the European Centre for International Political Economy. “Do you want revisions? Do they? Do you go there? How many visits to Chile will this take? That’s a massive logistical operation in itself.

The simple: Horizontal aviation agreements

A 2002 European court ruling forced Britain to revise its bilateral aviation agreements with third countries such as New Zealand to ensure they treated all EU airlines equally on issues such as ownership rules. It affects around 40 UK deals, but the process is straightforward.

“There will be a lot of countries with a beef with the EU or the UK and will see this as a golden opportunity to bring up a nuisance issue. They might not get anything, but they have to try,” he adds. “There will probably be an accident in areas you cannot predict.”


Most prominent — and economically significant — are the trade deals. Liam Fox, the UK trade secretary, has promised “zero disruption” by securing transition agreements to continue old trading terms post-Brexit. Britain will in effect repurpose its EU inheritance, re-activating the existing free-trade deals, Mr Fox says. “It is hardly a picture of splendid isolation,” he told parliament this year.

For the most part there is a shared interest in continuing arrangements, since many nations will not want to lose preferential access terms to the UK. Some bigger economies see Brexit as “a window of opportunity”, in the words of one ambassador to the EU. Mr Fox has started preliminary discussions with a dozen-plus countries that want to further liberalise their existing arrangements; South Korea, Switzerland and Norway fall into this category.

“We’d like the best possible terms for our fish. There is a complex web of tariff quotas and red tape, and we’d like to reduce that,” says Oda Helen Sletnes, Norway’s ambassador to the EU. But in a nod to the difficulty of negotiating this while Brexit terms are still uncertain, she added that fisheries discussions would “be complicated by three-way discussions between EU-Norway-UK”. In other words, this is not a straightforward trade-off but a three-dimensional game.

Other countries may be less impressed by the disruption caused, especially on WTO terms. There will need to be give and take. New Zealand, for instance, wants its current quota of lamb sales to the EU to be preserved after Brexit, even though the size of the market will shrink. On top of that, it wants an additional quota for the UK so it can make up for the impact Brexit will have on its flexibility in making sales.

The missing

Absent from the FT’s calculations are agreements that the UK will not seek to replace. Among them are treaties with Canada promoting ‘mutual understanding’ of the languages, cultures and institutions of the EU and environmental deals with the US to cover energy efficiency labelling for office equipment.

The political danger for Britain is that any WTO member can veto such revisions. It may be possible for the EU and UK to collaborate on finding a smooth transition at the WTO. But it will require consensus at some point, a vulnerability open to exploitation.

“It is a hell of a task. Trade will keep them very busy,” says Vladimir Chizhov, Russia’s ambassador to the EU. “All the quotas will have to be recalculated, and I assume anti-dumping calculations should be changed at some point. There are 164 members at the WTO. And all of them will have to agree.”

Asked whether this presented Moscow with a weakness to exploit against Britain, he said with a smile: “The Russian diplomatic service has been known for its tough negotiators. We are very proud of that.”


Perhaps the hardest task will be outside of the sphere of trade. Some of Britain’s most important external agreements — nuclear, airline access, fisheries and financial services are either entirely, or in large part, handled by the EU.

To merely stand still in these areas, Britain not only needs external agreements, but the national regulators to negotiate and manage them. If Brexit talks involve a clean separation from EU regulatory agencies, for example, that requires regenerating a UK capacity to safeguard nuclear material, currently handled by Euratom, or certify and maintain airline parts or pilots licences, all at potentially breakneck speed.

The ridiculous: We need to talk about swordfish

The agreement with Chile to preserve swordfish in the southeastern Pacific came after a dispute in the early 2000s that banned EU vessels from landing any of the fish, caught in international waters, in Chilean ports. Both parties exchange data on fish stocks, and agree to co-operate on marine research to preserve swordfish numbers.

Here the US poses one of the biggest technical and political challenges. Some treaties, such as the EU-Euratom nuclear accord, require Congressional approval — usually a delicate and time-consuming process. Meanwhile other arrangements, such as the EU-US Open Skies accord for airlines, were agreed when the forces of liberalisation were at their peak. The political mood has hardened considerably since then.

John Byerly, the former US lead aviation negotiator who secured the Open Skies deal, says “talented lawyers could work it out easily” if Washington and London want to maintain current terms. “But there can be slips between lip and chalice. I’m hopeful but let’s see.”

The timing is tight. The US needs to know the UK’s arrangements with the EU before it can commit, and that may not be clear until late 2018.

“I don’t think there are many precedents for doing so many agreements so quickly. Airlines load schedules months in advance,” says Mr Byerly. “It is not as if you can wait until March 2019 to see what the regime will be. You probably need clarity by the early summer or spring of 2018.”

It puts tremendous strain on Whitehall. In the months after the Brexit vote, Britain had just three people dedicated to negotiating aviation agreements. The FT estimates they will need to renegotiate 17 existing EU agreements with third countries, as well as around 40 UK bilateral deals that include EU clauses. This may need to be done in the space of a few months, once the EU-UK terms are clear and Britain decides how much of its aviation regulation will be repatriated.

For Mr Chizhov, the potential for bureaucratic overload has echoes of another time and place — Soviet Russia. “Brexit means Brexit is a very interesting expression,” says the Russian ambassador, referring to Prime Minister Theresa May’s mantra on exit. “It reminds me of Leonid Brezhnev saying, ‘the economy should be economical’.”

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Apple-Amazon race tightens, US Treasury yields and tech to reap dollar rewards
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Your “springboard” guide to current market concerns, presented in a logical and concise manner, with direct links to more details.

  1. Apple-Amazon race tightens (new)
  2. US Treasury yields and break-evens (new)
  3. Tech set to reap falling dollar rewards (new)
  4. Gold breaks key link with real rates
  5. Brent-WTI narrowing signals US shale progress

Apple is huge. But Amazon is growing . . . and fast.

A sharp rally in Amazon’s share price has rapidly narrowed the gap in enterprise value between the ecommerce company, and Apple, the world’s biggest publicly traded company.

Amazon’s enterprise value, which is seen by investors as a more accurate gauge of a company’s worth than the more commonly cited market value, has hit $698bn, according to FactSet data. That leaves it within $190bn of Apple.

While the absolute difference is still large, the chart above shows just how fast Amazon has been playing catch-up. Indeed, at the end of last year, the gap was $326bn.

Amazon’s shares have raced higher by 71 per cent over the past year. Amazon has, of course, benefited from the boom in ecommerce. But it has also lured investors in with other businesses, particularly Amazon Web Services. The unit hosts a cloud computing platform that is used by many large companies, from Hulu, the video streaming service, to Expedia, the travel search company.

Apple is no slouch. The stock is up 37 per cent over the past 12 months. It has managed to buck concerns that it had gotten too big to continue growing. But the relatively slower growth has meant that Amazon has been able to rev up its enterprise value much more quickly.

Enterprise value gives a snapshot of what it would cost, theoretically, to take a company over. It is calculated by adding market value, debt, preferred equity and minority interest, and subtracting cash and investments.

The tussle between the two companies could well be settled later this week when both companies report their quarterly earnings. Adam Samson

The growling of bond market bears is getting louder as the 10-year Treasury yield has popped above 2.70 per cent, while Germany’s five-year yield has tasted life above zero for the first time since late 2015.

As investors gauge whether a 3 per cent or higher 10-year yield looms and what that may entail for equities, the performance of real yields warrants a look. Almost all of the rise in the nominal 10-year Treasury yields can be accounted for by a rise in break-even inflation expectations. As seen here, the bond bear market is barely lukewarm when comparing the 10-year break-even number (the gap between Treasury Inflation Protected Securities and fixed-income yields) from the 10-year yield.

The 2013 “taper tantrum” saw a very sharp move away from negative real yields, but there is no great belief, as yet, that bonds need to be priced on the assumption that yields will rise significantly ahead of inflation.

So there is still ambiguity over the point at which bonds finally move into a secular bear market. It is still plenty possible to deny that that has happened — and to date the sharp move up in bond yields has had negligible effects on the great rise in equities. John Authers

Coming into 2018 one question facing investors was whether the expected rise in interest rates and uptick in US economic growth would mean gains in the US dollar — and with that a headwind to growth for US multinationals.

With the dollar instead continuing its slide, areas that stand to benefit are those with the highest amount of sales outside the US. By sector, that puts tech on top followed by materials companies and energy. Nicole Bullock

Gold is well known as a hedge against inflation. But, in fact, its price has a stronger relationship to real yields — bond yields minus the rate of inflation — than headline inflation data.

That’s because gold doesn’t provide any yield to buyers, so becomes less attractive when real yields on bonds rise. It’s a relationship that has been key to gold market for the past few years.

But the dramatic decline in the dollar to a three-year low has disrupted that longstanding relationship. The dollar plunge has sent traders scrambling to buy gold, sending its price to a 17-month peak of $1,366 a troy ounce last week.

The move has been driven mainly by speculators buying gold futures on the Comex exchange in New York, according to John Reade, chief market strategist at the World Gold Council, who used to work for John Paulson’s hedge fund.

“Gold is now following the dollar and ignoring real interest rates in ways it hasn’t done for the last 18 months,” Mr Reade said. “It seems likely that Comex-trading speculators have jumped on the dollar-inspired move higher in gold, helping push gold higher.”

Still, Mr Reade said he expected real rates to remain the most important driver of the gold price, “although perhaps the relationship has been reset at a higher gold price following the recent move.” Henry Sanderson

The so-called Brent-WTI spread, measuring the difference between the world’s two main oil benchmarks, is one of the clearest gauges of the health of the US shale industry.

US barrels have been trading at a steep discount since June last year, when the need to increase exports to help draw down surplus stocks became apparent. But since the start of this year the spread has started to narrow, moving from about $6.50 a barrel to just $5 a barrel in recent days.

The reason, traders say, is that it is becoming easier to get barrels of crude out of the massive storage tanks at Cushing, Oklahoma, the delivery point for the West Texas Intermediate contract.

The start-up of a 200,000 barrel a day pipeline running from Cushing to Tennessee has seen stocks at the key oil hub fall rapidly at the start of this year, dropping 12m barrels over four weeks or 23 per cent since January 1.

Compared with a year ago, inventories at Cushing stand at 39.2m barrels or down 40 per cent. That suggests rising supplies of US shale are having more success getting to refiners, both in the US and overseas, and narrowing the discount at which WTI needs to trade.

This has the potential to shift oil funds’ focus towards WTI over Brent — a reversal of the trend seen towards the end of last year.

It also suggest US crude producers will get more cash for their oil, and not just from the broad rally that has lifted oil prices to levels not seen since the 2014. David Sheppard

Copyright The Financial Times Limited 2018. All rights reserved.

An aid to investment decision-making. The Lex column provides concise and impartial financial analysis of company results, market developments and macroeconomic themes.

Opinion Lex
Bitcoin ETFs: making a bomb
Amid the fervour, remember that cryptocurrencies lack a legitimate function

The guy who brews Lex’s morning latte wants to get into bitcoin. Because of him — and thousands like him — retail fund managers want to get into bitcoin too.

The advent of bitcoin futures creates an opportunity. It also creates a headache for regulators. Should they approve retail funds that make leveraged bets on cryptocurrencies, which are illiquid and susceptible to manipulation?

In March, the US Securities and Exchange Commission squashed an application from the Winklevoss twins, clean-cut cryptovangelists, to list an exchange-traded fund. This autumn, an ETF platform run by the New York Stock Exchange shelved plans to quote the rival Bitcoin Investment Trust.

How long can the SEC resist? Cboe Global Markets has launched bitcoin futures contracts. CME, another exchanges group, will follow suit. Morningstar says there has been an anticipatory “gold rush” of filings to list ETFs in bitcoin futures.

ETFs could give bitcoin a makeover. Investors spooked by numismatic nerdery would happily buy the funds. The cash-settled futures could become easy for managers to trade too. Unlike bitcoin — the base asset of the Bitcoin Investment Trust — they are regulated.

A bomb in a gift box is still a bomb. Cryptocurrencies are speculative assets that lack a legitimate function. The SEC will have to balance that against two arguments. First, that adults do not need nannying. Second, that adults want the funds.

The Bitcoin Investment Trust has been wildly popular. The trust, traded over-the-counter, has this year risen in value from $165m to $4.3bn. The shares usually trade at a 45 per cent premium to assets. The gap is sometimes 100 per cent.

Such enthusiasm, combined with deregulatory pressure, could leave the SEC looking like an embattled Cassandra. The irony is that the prophetess was not the reflexive pessimist of popular misconception. Her prophecies were accurate, but doomed to be ignored.

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