Lunch with Dr. Theo Weigel

On the first of October, Professor Michael Czinkota hosted a private lunch with Dr. Theo Weigel at the McDonough School of Business, in collaboration with the Washington D.C. office of the Hanns-Seidel Foundation. Dr. Weigel served as the German Minister of Finance from 1989 to 1998, in the Cabinet of Chancellor Helmut Kohl. He was instrumental in the creation of the European monetary union, and the common currency. He was accompanied by a team of delegates that included his wife, Irene Epple-Weigel, the former alpine skier and Olympic medalist, and their son, Konstantin, a law student in Munich. Also part of the delegation was Richard Teltschik, the Director of the Hanns-Seidel Foundation in Washington. Georgetown University was represented also by Professors Thomas Cooke, Ricardo Ernst, Charles Skuba, David Walker, and Lee Pinkowitz. Also in attendance were three students – one from the McDonough School of Business, and two Masters candidates from the Walsh School of Foreign Service. Additional visitors came from the Hanns-Seidel Foundation and the German Embassy.

The lunch was inaugurated by Professor Czinkota, who gave a welcome address that included an introduction of Dr. Weigel’s many accomplishments. Following this, Dr. Weigel addressed the attendees of the lunch. He discussed his experiences with the creation and establishment of the Euro, relating both facts and anecdotes. One such story was of how the common currency came to be known as the “Euro,” rather than the other alternatives under consideration at the time, such as the Frank, Mark or ECU. He vehemently denied the common perception that the Euro was Germany’s reward of others for support of reunification, asserting that the two momentous events were planned and executed separately. Dr. Weigel talked about the fall of the Berlin Wall and the reunification of West and East Germany, at what was the eve of the 25th anniversary of the reunification. Yet it was not only German history that was discussed at the lunch, but also contemporary German politics and European current affairs. The issue of the refugee crisis in Europe was explored by Dr. Weigel as well as the other participants. Dr. Weigel believes that Germany can absorb the current volume of incoming refugees, approximately 800,000, for one year (possibly two). This will help the German economy, which is currently facing a demographic shortage of working-age and job-seeking citizens. Any absorption of refugees beyond this number, however, would end up harming the German economy.

For more than an hour, issues such as U.S.-Germany relations, collaborations and perceptions by the youth of the two countries, and Germany’s leadership role in the world were addressed in the question and answer session following Dr. Weigel’s speech.

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Saving Europe’s banks: EU gets landmark deal

European Union leaders meeting in Brussels Thursday will sign off a compromise deal hammered out overnight by their finance ministers after months of difficult negotiations. It will then go to European lawmakers for final approval before May 2014.

The banking union is central to the eurozone’s response to future financial crises.

The aim is to stop bank collapses from trashing national economies — a fate Ireland suffered in 2010 — and destabilizing the euro. By establishing a common set of rules for managing failing financial institutions, the EU hopes to avoid the kind of chaos seen in Cyprus this year.

So what exactly does it mean, and how will it work?

The first step, agreed a year ago, was to set up a common regulator for the eurozone’s biggest banks.

A Single Supervisor: The EU agreed in December 2012 to give the European Central Bank responsibility for supervising the eurozone’s biggest lenders. It will oversee some 85% of eurozone bank assets. Smaller banks will continue to be regulated by national authorities.

As supervisor, the ECB will able to force banks to raise more capital if needed. But before the central bank takes up its new role in November 2014, it wants a clearer picture of the risks the banks are carrying and their resilience to economic shocks.

Related: EU fines banks record $2.3 billion over Libor

To that end, it began reviewing the quality of the assets held by 128 banks across 18 countries, including major players such as Deutsche Bank (DB), Santander (SAN)and Unicredit (UNCFF)in October. The review will culminate in a series of stress testsnext year.

ECB President Mario Draghi hopes the tests will lift a cloud of suspicion hanging over European banks and encourage more lending to businesses and households.

Read more here (CNN Money)

Are You Prepared For A New Surge of Countertrade?

International exchanges of goods and services are typically conducted with currencies, the value of which is settled by the four legs of trust, demand, supply, and risk. If any of these legs are weakening, substitute exchange methods emerge, based on precious metals, commodities or even cigarettes. In light of economic and financial volatility in the U.S., Europe and parts of Asia, we may again be heading for such substitutions in the global market.

Interest rates now underprice the true cost of capital. Global financial shifts around the world are frequent, easy, and large scale. Government debt repayment is uncertain. Currency blocs such as the Euro are exposed to significant stress. The choice of the U.S. dollar as reserve currencies may be shifting. Financial debt and exposure are increasingly imbalanced. As a result of all these instabilities, barter, buybacks, offsets and other forms of countertrade re-appear in the global market, offering new efficiencies in the conduct of trade. Companies need to understand how such international shifts will affect them, and learn to adjust their marketing and financing approaches to these new opportunities.

Countertrade is the use of goods, services, and other non-monetary resources as payment. Recent discussions with the Global Offset and Countertrade Association indicate that countertrade is on the rise due to government and company requirements.

Governments are concerned about the influence of large transactions on their country’s balance of payments. They increasingly demand ‘offsets’ which are designed to reduce such influence. For example, in order to help pay for the acquisition of military airplanes, a country may demand that the seller of the planes encourages tourism to the country – as done by Egypt. Concern is also growing about structural trade deficits. Governments and companies make countertrade a condition for importers. For example, Zaire and Italy exchanged scrap iron for 12 locomotives. China traded Russia 212 railway trucks full of mango juice in exchange for a passenger jet.

We like to think that only the free market sets prices. However, government influence and international necessity often build result in significant barriers to international exchanges. Countertrade agreements have shown that an exchange of goods for goods can overcome currency problems. Historically, countertrade was used by soft currency countries, particularly in times of the Soviet Union. It has begun to rise again since the 2008-2009 financial crisis, bridging currency gaps and helping to reduce vast inventories. On a global scale, countertrade capability provides firms with a competitive edge. It keeps transactions alive and reduces the fear of high currency volatility. Many firms just want to carry on their business, rather than become currency speculators.

Companies know that an acceptance of non-cash payments can affect product values negatively. But as an alternative to no trade at all, countertrade looks better every day. Take the realities of a recent countertrade deal between Argentina and South Korea. Argentina reported a trade deficit of $6 billion in 2010, driven in part by high automotive imports. Argentinean imports from the South Korean car company Hyundai alone amounted to $91 million with consumer demand for cars growing. Historically, the government handled such situations by simply refusing more imports. But international agreements and negotiations have sharply reduced this option.

The Financial Times reports that Argentinean Hyundai distributors will utilize countertrade to compensate for the negative effects of car imports from Korea. They will stimulate the Argentinean sales of agricultural goods, specifically peanuts, wine, and soy flour to South Korea. Economic hardship is not the only incentive to countertrade. Bilateralism plays a large role in the acceptance of a countertrade offer. A country may encourage its companies to accede to barter requests from foreign trade partners and allies. The link between business and politics encourages such accommodation, even though doing so may be inconvenient. In the future, trading partners may reciprocate.

After decades of dormancy, countertrade is on track to again become a vital part of the global market. In a world of economic hardship, parsimony, and growing currency uncertainty, countertrade emerges as a viable solution for market and political shortcomings. Companies are well advised to re-cast their strategy to reflect countertrade expectations and requirements. On the outreach side, new marketing and financing packages need to be prepared in order to remain ahead of the competition. Internally, personnel needs to be hired and trained, to initiate such transactions, supervise them and see them through to long term completion. Banks need to prepare for countertrade based financing and get ready to help clients use countertrade.

In sum, we all need to get out of the headlight of currency weaknesses and changes, and prepare for the resulting shifts in the conduct of international business.