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Trade fears: Ireland may be caught in crossfire if President Trump ramps up rhetoric after midterms

When President Donald Trump tweets, he moves markets. Last week’s upbeat comments on the possibility of a deal with China to call a halt to a trade war between the world’s two largest economies helped stock markets rally from the bloodbath of ‘Red October’.

By Friday, however, his officials were backpedalling, and not for the first time.

While it is rarely clear precisely what the US president wants from trade negotiations, apart from applying media spin to headlines, his belief that the size of America’s trade deficit means other countries are “cheating” is long-held, despite flying in the face of basic economics.

Given that the US trade deficit has surged to a seven-month high, his logic would dictate there is even more cheating going on. With anti-trade Democrats set to take seats in today’s elections to the House and Senate, Mr Trump will have yet more allies for his protectionist agenda.

This is a clear risk to Ireland, one of the world’s most open economies and a favoured place for US investment, which could yet find itself buffeted by a trade storm between the EU and the US if a temporary ceasefire struck in June does not hold. His target is Germany which, along with China and Japan, accounts for almost two-thirds of the US trade deficit.

Prior to June’s agreement, Mr Trump had threatened to keep the pressure on “until no Mercedes models rolled on Fifth Avenue in New York” and the deal struck with the EU also included pledges to import more US agricultural goods – a move that enraged France.

Given that he has now threatened to apply tariffs to everything America imports from China and has struck deals with Mexico and Canada as well as South Korea, re-opening that conflict with Europe would appear attractive, especially as there has been no progress in negotiations.

The administration is only bound by a pledge not to implement swingeing duties on car imports while the talks with the EU are going on.
And Brussels may be stoking Washington’s ire with a proposed digital tax on tech giants’ revenues, a move Treasury Secretary Steve Mnuchin has already termed “unilateral and unfair”.

Collateral damage does not seem to matter to Mr Trump very much.

In his attacks on German carmakers, for example, he ignored the fact that the largest single car exporting plant in the United States is BMW’s Spartanburg operation in South Carolina – it employs 9,000 people.

Mr Trump’s negotiating tactic is to keep ramping up the pressure, as he did with China, moving from $50bn of sanctions to $500bn-plus.

So no sector of industry is immune.

Any hit to chemicals and pharmaceuticals, which were high on the list of US tariffs imposed on China would be enormously damaging to Ireland, as they account for 60pc of exports to the US.

In addition to tariffs, the Trump administration’s trial and error approach to sanctions has had unforeseen consequences.

Blacklisting has emerged as a favourite tactic of the US Treasury with 1,000 additions to Washington’s list in 2017 – 30pc more than Mr Obama did in his last year in office, according to ‘The Economist Magazine’.

One unintended consequence was that 650 jobs at the Aughinish Alumina in Limerick have been placed in jeopardy by US sanctions on a Russian oligarch.

If there’s any good news, it is that Mr Trump settles cheaply.

Talks with Canada and Mexico that lasted almost 18 months changed little in the North American Free Trade Agreement apart from its name.

And in the Korean dispute, Mr Trump settled what he had termed “the worst deal ever” with Korea without tackling major issues in cars and agriculture.

The problem is that getting there causes a lot of real economic damage.

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EU digital tax could backfire – Donohoe

The EU’s success as an exporter leaves it vulnerable if tax norms are torn up, which would include creating the digital services tax sought by France and others, Paschal Donohoe has warned.

He denied France had offered to make-up for any tax loss to Ireland to win support for its plan.

“No such offer has been put to me or to the Irish Government,” Mr Donohoe said in Brussels yesterday.

Ireland is among a handful of EU members resisting the push to create an Europe-wide levy on a share of sales of large technology companies. Unlike most corporate tax it would be based on a share of revenue, not profit, and paid in the country where sales are made.

The Finance Minister says if that principal becomes established, it could ultimately backfire – because EU members currently benefit from taxes on companies that make their sales abroad.

“I believe that tax changes that shift the incidence of tax to markets in which the service or good is consumed are difficult for the European Union overall, as an exporting economy,” Mr Donohoe said in Brussels, where he was attending a meeting of EU finance ministers yesterday.

“I think the European Union should take great care in putting in place a measure that shifts the tax point to where the good or service is sold. At the moment the tax model is designed on the basis of where value is created,” he said.

The minister said he agreed that large companies should be better taxed, but that change should be on the basis of global consensus and co-operation through the Organisation for Economic Cooperation and Devemlopment (OECD).
Last week the UK announced its own digital services tax. It will apply a 2pc a year levy on UK digital revenues from April 2020.

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Sick pay delay ‘down to move to new system’

Thousands of people face delay in sick pay, causing unnecessary suffering, the Government has been warned.

Fianna Fáil’s welfare spokesman Willie O’Dea has urged Social Protection Minister Regina Doherty to intervene and ensure that every citizen entitled to illness benefit gets their full payment on time.

“The issues related to disagreements between GPs and the department are well documented over filling out of new forms. Now we are told the problems are down to computer software difficulties,” Mr O’Dea said.

A Government spokesman said the problems arose from moving to a new system where benefits were paid for the current week. This was a change from the old system that paid benefits a week in arrears.

He acknowledged that there were technical problems that led to a backlog and people either being paid too much or too little, but insisted there were moves to correct these and everybody would get their entitlements and could apply for supplementary welfare in cases of hardship.

Mr O’Dea said the money was a welfare entitlement based on PRSI.

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Good news for mortgage holders: Rates to stay low as the eurozone flounders

Slowdown: Tracker and standard variable loan-holders to benefit
Brexit woes: No deal will pitch Britain into long-lasting recession

Hundreds of thousands of mortgage-holders, as well as small businesses, are set for a reprieve on anticipated higher repayments.

A slow-down in the economies of countries in the eurozone means an interest rate rise next year is now less likely.

Adding to the economic concerns, a no-deal Brexit would be likely to tip Britain into a recession that could last as long as the downturn that followed the global financial crisis, ratings agency Standard & Poor’s has warned.

That’s bad news for Ireland, a key trading partner.

The European Central Bank (ECB) has signalled September 2019 as the likely start of rate increases.

Raising rates would be a ­signal of strength for the economy, but would hit borrowers here in the pocket.

The more than 300,000 Irish households with a tracker mortgage are among those who benefit most from the current low rates.

Their mortgage rate can be increased when the official ECB rate goes up, so the longer it is delayed the better for home-owners. Borrowers with a standard variable rate loan are also at risk of an increase, if rates go up.

The eurozone economy grew at its slowest pace in more than four years in the three months to the end of September, dragged down by near-stagnation in Italy and likely a weaker performance in Germany.

The euro area grew 1.7pc from a year earlier, according to the latest official data, far slower than expected.

Last year’s growth of 2.7pc had been the fastest expansion in a decade and sparked hopes Europe was set for a sustained upturn.

Now a slowdown casts doubt over whether the ECB can begin to normalise super-low interest rates at all before the next downturn.

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US stocks stagger back from correction

US stocks staggered back from a rout that took the S&P 500 Index into a correction, though major averages remained lower for the day in afternoon trading yesterday.

The S&P 500 cut a loss that approached 3pc by more than half, but remains on track for the worst month in eight years.

The tech-heavy Nasdaq indexes bore the brunt of selling after Amazon and Google parent Alphabet sank on disappointing results.

The Chicago Board Options Exchange Volatility Index shows price swings are the greatest since February.

Investors got a brief reprise after a report showed the US economy expanded at a higher-than-forecast 3.5pc pace last quarter.

“It’s a very treacherous environment because you see these big up days and then they get their heads handed to them,” said Donald Selkin, chief market strategist at Newbridge Securities.

“There’s no consistency. It’s vicious, it’s nerve-racking.”

In Europe, the Stoxx Europe 600 Index continued its retreat, heading for the biggest monthly drop in three years.

Asian shares sank deeper into a bear market earlier. Core European bonds gained as the risk-off mood spread.

Markets remain on edge after more than $6.7trn was lost from global equities’ value since late September, as lofty expectations for earnings were tested amid heightened trade tensions and tightening financial conditions.

Meanwhile, West Texas oil briefly dipped back below $67 a barrel and copper headed to close the week lower.

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Three investment lessons learned from the global financial crisis

Ten years on from the global financial crisis is a good opportunity for investors to reflect on what we’ve learned from this seismic event.

Lesson 1: Minsky was right

Hyman Minsky’s financial-instability hypothesis examined how long stretches of prosperity have tended to sow the seeds of the next crisis.

In good times, market participants become inattentive to assessing, quantifying, and managing risk, says Minsky. The discipline of risk management wastes away; risks are underestimated and under-hedged. Imbalances and vulnerabilities gradually build up within the system, which eventually culminates in a crisis.

Lesson 2: Active and independent central banks are important

When the global financial crisis hit, we may consider ourselves fortunate that it was a student of the mistakes of the Great Depression who was sitting in the world’s hottest seat. Federal Reserve chairman Ben Bernanke and his colleagues at the US central bank deserve considerable credit for the role they played in averting a depression.

The policy mistakes which played a role in the economic and social horrors of the 1930s were not repeated. Aside from aggressively slashing interest rates, the Fed famously undertook the unconventional monetary policy of quantitative easing in order to lower long-term rates.

Importantly, central banks also took a much more active approach in regulating the financial sector. Higher capital requirements, multi-agency stress tests on systemically important banks, and prohibitions on proprietary trading are some of the regulatory changes which followed the crisis. As a result, the financial system’s most systemically important institutions are more resilient to sudden shocks compared to the past decade. The crisis reinforced the incredible importance of a competent central bank with the ability to deliver the right dose of monetary medicine and the scope to play party pooper if needs be to avert future financial crashes.

Lesson 3: Take a long-term view

Even if you had been unfortunate enough to invest in the Standard & Poor’s 500 (a stock market index which contains 500 of the largest stocks in the US) at the index’s highest level – and ahead of the crisis in the last three months of 2007, you would still have doubled your invested capital by today. Of course, if you had skipped the crisis and invested right at the bottom in 2009, you would have multiplied your investment five times.

However, in spite of the golf course boasts to the contrary, there were few such investors.

Ironically, it was the severity of the crisis which set the stage for the market’s dramatic rebound. The crisis led to massive write-downs of financial assets at banks, insurers and some large manufacturers with substantial financing departments, resulting in the largest proportionate fall in corporate earnings on record.

However, when the write-downs stopped, some very large negative items disappeared from profit and loss statements, resulting in a proportionally faster rise in corporate profits.

Today, US corporate profits are now 15 times higher than the low point reached in 2009, as companies have benefited from a world economy which has consistently confounded its many detractors. The performance of the US stock market 10 years on from the crisis is a testament to the virtues of taking a long-term view of investing as the longer your time horizon, the higher the investment odds are stacked in your favour.

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UK targets tech giants with new digital tax in Budget

The UK is targeting the likes of Google and Facebook by introducing a digital services tax that aims to raise £400m (€450m) a year for the government.

Chancellor of the Exchequer Philip Hammond unveiled the measure in his Autumn Budget in London yesterday.

He said it was designed to hit the largest internet businesses – not consumer or internet startups.

It would affect companies that were profitable and with annual revenues of at least £500m, he said.

“We will consult on the detail to make sure we get it right, and to ensure that the UK continues to be the best place to start and scale-up a tech business,” he said. “It will come into effect in April 2020.”

The tax follows the Chancellor of the Exchequer’s comments during a speech at the Conservative Party conference on October 1 that the UK would “go it alone” if an EU version of the tax continued to stall.

Controversially, the UK tax targets revenue linked to UK users, not profits, according to tax practitioners, potentially making the country a less attractive place for large tech firms to supply their services.

The EU version of the tax, which would require the unanimous support of the bloc to be passed, is being opposed by a number of countries, including Ireland.

Ireland has said that it has concerns about taxing revenue rather than profits, and that the best place for reforming the way multinationals pay tax is via the Organisation for Economic Co-operation and Development (OECD).

Mr Hammond’s bold move will probably put more pressure on Ireland and other countries which are against the EU plan.

Last week, French Finance Minister Bruno Le Maire claimed EU countries were “very close to an agreement” on implementing the deal.

“There’s a vast movement to progress in this direction, but as always in Europe the most difficult is the decision… we can achieve unanimity.”

He said concerns about double taxation – being taxed twice for the same activity – that had been raised by Ireland, Sweden, and Finland – were a “smokescreen”.

Startups will not be in line for the tax, Mr Hammond emphasised yesterday.

In his Budget speech he said it would be aimed at “search engines, social media platforms and online marketplaces”.

Russ Shaw, founder of Tech London Advocates, an industry body, said the digital services tax was “a prudent step” but “the wrong approach”.

“Tackling the digital tax question without coordinating efforts with the US and EU as key global partners will only further entrench Britain in an isolationist position we cannot afford,” he said.

Mr Hammond said yesterday that the tax will be a temporary measure until an international framework for corporate tax reform is agreed.

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Net alert: Ireland reports high rates of online crime as half of users affected by illegal activity

Half of Irish people have come across illegal activity on the internet, according to the latest European Commission barometer.

In 17 countries across the EU, scams, frauds, subscription traps or other illegal commercial practices were found to be the most common form of illegal content encountered.

In the other EU countries, hate speech or pirated content were more likely to be encountered.

Subscription traps are where a person signs up for a free trial, or low-cost offer, and then finds themselves locked in to high-cost repeat payments.

In a survey of all 28 member states in June, the vast majority of people across the EU agreed that arrangements need to be in place to limit the spread of illegal content on the Internet. Similarly, a large majority of respondents (85pc) agree freedom of expression needs to be protected online.

This comes at a time when criminals are using social media to check when customers are contacting banks about problems, and then posing as the bank in order to hack people’s data.

That’s according to the head of the Garda National Cyber Crime Bureau, who said gardaí have had multiple incidents of this activity reported to them.

Speaking at the Irish Independent’s Information Sec earlier this month, Detective Superintendent Michael Gubbins said cybercrime will become increasingly stealthy and hard to detect in the coming years.

He added that businesses need to educate their employees to be conscious of cybersecurity best practice.

“You’ve got to let them know what’s happening out there … it’s not all about technology or having the best IT equipment, because it doesn’t capture everything,” he said. “Co-operation among all relevant actors is key.”

Social engineering – using manipulation and deception in order to obtain the information being sought, like the example of calling people who have been interacting with banks online – remains “at the very top” of potential threats, he said.

Meanwhile less than half of the respondents in the EU (44pc) believe that internet hosting services – which allow organisations and people to have internet pages – are effective in tackling illegal content.

That being said, amongst respondents who notified the hosting service provider about illegal content that they had encountered, almost two in three said that they were satisfied with the response they received.

For content that has been flagged as illegal by the public or law enforcement agencies, 90pc agreed that internet-hosting services should immediately remove it, while a similar number agree internet hosting services should process all notifications they receive and assess the legality of the content.

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European shares fall to lowest levels in nearly two years

European shares fell to their lowest levels in nearly two years on Tuesday as a new batch of third-quarter earnings failed to offset growing concerns on Brexit, Italy’s budget, Saudi isolation, trade wars, Chinese growth and US interest rates.

The pan-European STOXX 600 was down 1.1pc at 0826 GMT, its lowest level since December 2016 as it headed towards a fifth day of losses after a negative close in Asia and on Wall Street.
Other benchmarks sustained heavy losses, such as Germany’s DAX down 1.4pc, also at December 2016 lows.

“Risk off the table as geopolitical tensions remain,” was the message from LCG analyst Jasper Lawler to his clients ahead of the open.

The European tech sector posted the worst performance, down 2.2pc after chipmaker AMS tumbled and lost 17pc after its outlook failed to convince investors.

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Behind the rosy headlines, Ireland still trails behind its peers in the EU

If you just read the headline numbers it looks as though the Celtic Tiger is roaring back, economic growth is surging, wages are taking off as unemployment levels head back to pre-crisis levels and Finance Minister Paschal Donohoe’s coffers are bulging as the State heads for a balanced budget.

Underneath it all, however, Ireland’s economy shows many of its historical weaknesses. While productivity among the foreign multinationals here is well above EU averages, the domestic-owned economy lags and an investment regime based on low levels of corporation tax has failed to feed into improvements in the wider economy, according to the Nevin Economic Research Institute.

Development is skewed towards a handful of cities while the rest of the economy has barely felt the effects of surging foreign investment. Even though productivity – measured by gross value added per worker – is well in excess of EU average, most of the measures are flattered by the distorting effects of tax planning – the booking of items like intellectual property here as a result of Ireland’s low corporate tax levels, the union-backed think tank said in its latest quarterly report on the economy.

The corollary of a low-tax economy is one that is failing to invest enough in education and research and development. “Overall, the Republic of Ireland will remain a low-tax economy and low-spend economy with the second-lowest level of per capita spending amongst the group of 11 high-income EU countries,” the report said.

If things are not as rosy as they look in the State, they are dire for Northern Ireland, where Brexit risks further damaging an economy that has underperformed its southern neighbour.

“The scale of foreign direct investment into the Republic of Ireland has dramatically altered measures of economic output and opened a chasm between the two economies in terms of output per capita,” it added.

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