On Brexit, the UK and what would happen if…

When it comes to the prospect of the UK voting to leave the European Union, it’s hard to keep a balanced view.

I am privileged to trust Erik F. Nielsen highly. As this Open Thinking did on another occasion (that time we were debating rating agencies and a little bias they might have against Italy), we love to let Erik’s “Sunday Wrap” of 24 April 2016 speak clearly, about why the so-called Brexit would be a much worse prospect for the UK than it would be for the EU.



“The number one topic – by a mile – among investors, policymakers and anyone else I come across these days, in London and across the Continent, is the issue of Brexit. The key questions I hear are: Will they or won’t they? And what happens if they leave?  Let me summarise:


(i)       I still think the UK will vote to remain in the EU.

While I worry about the impact of the Panama Papers on Cameron’s ability to persuade people on the issue of Europe and prevent the vote becoming about him, on balance, I continue to think that the Brits will vote to stay in the EU. This past week, the “Remain” campaign received what ought to be a big boost from Obama. 
Opinion polls continue to suggest a close race, but with a large number of undecided voters. Interestingly, when the undecided voters are asked which way they are leaning, they tilt quite heavily towards staying, they say. 
But we have seen several referenda on European issues turn into a de facto vote on the sitting political leadership (in Denmark it has happened virtually every time, as it did in the Netherlands and France), so if Cameron has been more severely damaged by the Panama Papers, we may have a problem. Comfortingly, the UK bookmakers keep making odds with an implied probability of staying in the EU of about 70%.
More fundamentally, while the Brits still struggle with their perception of their own place in today’s world, I just cannot believe that a majority is so deluded that they think they would be better off outside the EU, thus ignoring the opinions of practically all the UK’s foreign allies as well as the vast majority of UK business leaders and UK and international economists.
Latest, this week President Obama killed any claim by the “Leave” campaign that there would be an easy way for the UK outside the EU to a trade agreement with the US. As he said, the US would want to negotiate with the bigger economies, like the EU, while the UK would be “at the end of the queue” (note his use of the British version of what they call “the end of the line” in the US – either because he wanted to be sure the Brits understood him, or maybe because he used a line suggested by Cameron?) He later suggested that it might take about 10 years to get to such a trade agreement. That seems a reasonable (if not even optimistic) estimate when you recall that it took seven years for the EU to get a trade agreement with Canada – and no free trade agreement in the world comes close to the Single Market for services, which is crucial to UK trade and the City of London.
Obama’s clarification of trade, as well as his elegant response to Boris Johnson’s claim in a newspaper column on Friday that the placement in the White House of a bust of Winston Churchill somehow reflects Obama’s anti-British bias, left the London mayor, and leading Brexit campaigner, on the back foot as poorly informed – and that’s to put it politely. If you are interested in a more robust rebuttal of Boris Johnson’s attack on Obama, Nick Cohen’s piece in The Spectator (which Johnson used to be the editor of) is worth reading: http://blogs.spectator.co.uk/2016/04/barack-obama-wants-boris-johnson-prefer-gutter/
That said, a YouGov poll after Obama’s and Cameron’s press conference (curiously asking what people thought of Obama’s “intervention in the EU referendum campaign”, rather than e.g. “how the US thinks of the issue” or “how the US would react to Brexit”) suggested that 41% of Brits were “angered” or “annoyed” by Obama’s “intervention”, while 28% were “pleased” or “inspired” (22% didn’t care and just 3% hadn’t noticed.) However, I suspect the 41% “angered” or “annoyed” are those who anyway had decided to vote to leave.
After having had a nice cup of tea with the Queen and the royal family to celebrate her 90th birthday, Obama continued today to Hannover, Germany, where he’ll join Merkel tonight when they open the 2016 Hannover Messe – the world’s biggest industrial technology fair. I suspect the conversation on Airforce One on the short flight today will have been along the lines of “now we have helped pull Cameron’s political chestnuts out of the fire, let’s get down to the more important, forward looking, business in Germany.”
(ii)      But what if it all does go wrong, and the UK votes to leave the EU?


To be sure, nobody knows for sure what exactly will happen following a vote to leave, but here is our best guess:
Cameron will announce his resignation, which will trigger a Conservative leadership election, which will take 3-6 months to complete. (Cameron will remain during this period as caretaker PM.) The next leader could be Boris Johnson, who’ll claim he won (after having switched from being generally pro-Europe to lead the Brexit campaign), or it could be Theresa May (who used to be quite anti-European, but switched to the “Remain” side, after a similar considerations as Boris Johnson’s – but with the opposite outcome.) Or it could be someone else, less well known.
The new government will face a dilemma on how to start the exit negotiations. 
On the one hand, they may be keen to get down to business and would therefore probably invoke Article 50 of the Lisbon Treaty very quickly after taking office; i.e. formally notify the EU that they want to leave, which starts a clock allowing two years to negotiate what will surely be very complex withdrawal agreement with the remaining (now probably not very friendly) 27 EU member states. If they don’t manage to complete negotiations within the two years, it’ll require a unanimous agreement by all 27 EU states to extend the talks. This would put the UK in a very difficult – and indeed commercially and economically dangerous – position because without an agreement it would well leave the UK on their own with no arrangements for trade and other commercial interactions with anyone. (EU legislation will continue to apply to the UK during the time it takes to negotiate a new agreement, or for two years after Article 50 has been invoked, whatever comes first.) 


Alternatively, the new UK government could delay Article 50, while trying to start exit negotiations on a technical level, and only invoke Article 50 when they are confident that an agreement is in sight. But then again, the rest of the EU would know this game just as well, and might very well refuse such “theoretical” negotiations until Article 50 has been invoked. My point is this: Whichever way the UK plays it post-Brexit vote, they’ll be in a very uncomfortable spot, and de facto at the mercy of every single other 27 EU member state.
Our UK Lead Economist – and laser-beam focused Brexit Watcher – Daniel Vernazza argues that the outcome of exit negotiations will likely leave the UK trading under World Trade Organization (WTO) rules; that is, outside the European Single Market where goods and services trade freely. As he notes, access to the Single Market is incompatible with the “Leave” campaign’s desire to end the free movement of people, contributions to the EU budget, and EU regulation. The only two large non-EU countries with access to the Single Market, Norway and Switzerland, both have free movement and both pay into the EU budget.
So there you have it: Huge uncertainty for years – my guess would be a massively weaker pound (20% down in trade-weighed terms – probably less against the euro?), massively weaker UK equities (10%-20% down?), lower house prices in London – and a big sell-off of gilt, which would be countered to some extent by a new dose of QE, which, with the inevitably larger budget deficit, would come about as close to helicopter money as you’ll ever see. The wealth destruction would almost certainly send the UK back into recession (which means that the fear of Brexit leading to other countries wanting to follow the UK out seems widely off the mark to me.)


The long-term economic impact for the UK of leaving the EU is surely negative. We estimate it would be a net cost to the UK economy equivalent to around 6% of GDP over the next 10-15 years, a similar magnitude to that of the UK Treasury’s estimate.  If you don’t think that’s a lot, then I encourage you to suggest realistic policy measures, which would lift GDP by that amount in perpetuity.


I hear a lot of suggestions that the rest of Europe would suffer significantly as well, and maybe even as much as the UK – although this is an argument more often heard in the UK than on the Continent. I don’t buy it. Europe would be hit by volatility for sure, but the longer-term negative effects would disappear in noise. After all, the EU would maintain all its external trade agreements (apart from with the UK), and possibly trade at a weaker euro. The UK would left for maybe 7-10 years with no trade agreements with anyone, which is not easily compensated for by a weaker pound.”

Thank you Erik.

Tommaso Arenare


Ambassadors of merit (reloaded)

In July 2012 Valore D, the Italian association of businesses to support the talent of women, launched “In the Boardroom”, a programme to select and train the best Non-Executive Directors.

In the Boardroom was designed by Valore D, with the support of GE Capital, at the initiative of Linklaters and Egon Zehnder, our Firm. Together with Linklaters, we selected and provided all key faculty members.

In The Boardroom was meant to select and promote “Ambassadors of Merit“, ready to change Italy’s corporate governance for the better, as a result of the huge opportunity represented by a super modern law (that came into effect in 2012) fostering gender diversity in the boardroom (read here for the beneficial effects of this law).


Italy is today a positive example of an improving corporate governance in Europe and beyond. Women as a crucial factor of positive change have given such a strong contribution to this that we are well beyond the turning point.

On 20 and 21 November 2015, we celebrated the conclusion of In the Boardroom, which was launched in July 2012. Ever since, it has helped well over 500 talented women prepare for the role of Non Executive Director.

Of those, a significant number are now Non-Executive Directors.

I feel humbled by the exceptional contribution of so many talented women. They have set the example for everyone in terms of dedication, willingness to prepare for roles where now merit and competencies have replaced “word of mouth” as a key to rigorous selection. Women mean merit, competence and better corporate governance. In summary, more women in leadership means huge change for the better.

The next step is now to continue to work to foster the benefits of gender diversity, and diversity at large, also when it comes to executive positions. “In The Boardroom” has been an exceptional factor and its effects will be felt for many years to come.

Tommaso Arenare


Identify, Involve, Inspire: How Successful Leaders Build an Effective Relationship with Stakeholders

In my profession, I have been privileged to see many great business leaders succeed in their role.


Many traits mark a great business leader. This one I want to explore now:

How can successful leaders establish a fruitful relationship with all key stakeholders, which will in turn determine their own success in a new role?

We have already written that, in many ways, the week before a new job starts is crucial for its long-term success. Preparing our own analysis of the role and the company’s situation and mapping the stakeholders is the basis of a pre-work that anyone appointed in a position of leadership will need to do before the new job even starts.

Doing this effectively and with purpose requires, in essence, the ability to build effective relationships with the relevant stakeholders through identifying, involving and inspiring them. Let’s see how.

1. Identify

Let us ask ourselves first of all this question:

Who are the people that have a clear say in determining whether I am successful in the new role?

Part of them will be shareholders, part of them will be team members, part of them will be peers in and outside the company. In most cases, a significant group of those will include external stakeholders like influential journalists or industry experts.

When it comes to identifying stakeholders, a typical mistake would be to focus exclusively on colleagues or people that may have a sort of guidance or leadership role towards us. So, for example, a Chief Executive would only focus on the Chair of the board or on other fellow board members, as well as stakeholders, but without paying attention to their own team members. Instead, including our own direct reports is crucial. So many CEOs have lost their job as a result of not identifying crucial stakeholders amongst their own reports.

We want to map them carefully, thoroughly and prioritise them so that we get to a list of no less than ten and no more than about twenty of them. I often recommend a very simple spreadsheet, listing all of them by name, role, with one line of comments and “next actions” just next to their name. Most importantly, I recommend one column with a priority number next to each of them. This is a very simple tool which will help us keep our list fresh, change it, re-prioritise it, always making sure that we can add new stakeholders, remove some old ones and manage their expectations effectively and timely.

2. Involve

Once we have identified and prioritised them, we want to involve them, by doing the following:

  • Listen to them carefully. We want to learn from them and to make them feel involved in our own success. This implies, before we start in the new role, that we take the time for a personal interaction with each of them. We need to sit with them and ask such questions as:

If you were to consider me very successful in my role, what would you expect to happen within the next 12 months?

  • Inform & involve them regularly: as all of us, stakeholders want to feel involved and do not like surprises, ever less so if negative. Keeping them involved will require regular “check-ins” with each of them separately. This can happen by a conversation in person as well as by phone or other form. Yet, it will all depend on what type of relationship we’ve been able to build with each of them. Hence, the more we invest in building trust and relationships upfront, the better and the easier it will become to keep our stakeholders involved. Also, the type and form of involvement will depend on the level of priority that we will have been able to attribute to each of them.

3. Inspire

Great leaders become such also as they are able to inspire their own stakeholders. A very prerequisite for accepting a new leadership role is that the overall group of stakeholders who’ve engaged us needs to consist of people we like and we can inspire. Otherwise, we would have rather not taken the job in the first place.

Hence, building a relationship of trust and substance with them will need to be something we aspire to do as well as something we like to do. Inspiring our own key stakeholders will take our greatest ability to build bridges of trust with them, as well as nurturing our relationship with a regular dialogue of substance.

We will inform them, but we will also seek their advice when appropriate. In some cases, it will  be crucial to be able to show our own vulnerability, which can result into a sign of greater strength. As we dialogue with them, we will realise that we will also strongly contribute to influencing and defining the very same criteria they will use to define our own success. This will lay a much more solid foundation for our long term future in the role.

It is difficult to overemphasise how many great people have failed as Chief Executives (and even more so in different roles) for lack of thorough identification, involvement and inspiration of key stakeholders.

As we do the above, we lay the foundation for a much easier and more secure path to our own success as executives and leaders.

Tommaso Arenare


This post was also published on LinkedIn.

“Four reasons to quit your job” (& a fifth to find and keep a good one)

This is Jack & Suzy Welch’s “Four reasons to quit your job”.

It makes interesting reading.

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I would add a fifth, perhaps even simpler thought, by just reversing the point. We want to achieve, and keep, a job that helps us address the one fundamental question, which I call “the positioning question”:

“Who do we want to be, and, most importantly, for whom? Whose needs we want to address in what we do everyday?”

This, we know, will relate ever more to “people”. We want to keep a job where we address the needs of people we like, as this will, almost inevitably, turn out to make us happy.

Good luck with that.

Tommaso Arenare



This post originally appeared at LinkedIn. Follow the authors here.

What criteria can you use to determine if you have been with the same company too long?

A friend of ours—an investment manager at a highly regarded company in the Midwest—drove to work one morning, parked his car in the usual spot, and then found he simply could not bring himself to get out of the car. “I guess I stayed on the farm one day too long,” he joked later. When we asked him what went wrong, he answered, “It wasn’t one thing. It was everything.” No wonder he drove home and called in his resignation.

Obviously, most people don’t decide they’ve overstayed at their companies in such a dramatic fashion. Usually, angst about work creeps in, and then builds until it consumes you. And that can happen early or late in a career. Gone are the days…

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On sovereign ratings of Italy, perhaps a little, unconscious bias & a rare economist I trust

…if you had paid any attention to the ratings these past few years you would have lost a lot of money…

Erik F. Nielsen’s “Sunday Wrap Up” tackles, today, Italy’s sovereign debt downgrading.


Once again, I love Erik’s clarity on the subject. I will let him speak, then:

S&P downgrades Italy

On Friday, Standard & Poors cut Italy’s sovereign credit rating from BBB to BBB-, citing weak growth and poor competitiveness, which are seen as undermining the sovereign debt sustainability. (Little appreciation for the fact that some of the growth problems should be temporary due to recent years’ ambitious fiscal policies.)

It is a peculiar decision, which does not reflect any new hard information, but rather the lack of visibility in that smoky room in which the rating agencies’ credit committees over-ride the analysts’ objective data input.

In a paper Daniel Vernazza, Vas Gkionakis and I published in March (“The Damaging Bias of Sovereign Ratings”; UniCredit Global Themes Series; 26 March 2014) we documented how systematically wrong the agencies’ “subjective component” (i.e. the committees’ over-riding of the “objective input”) has been over the years. (As you may recall, our paper received a lot of media attention, and has since been quoted by several academics. The three major rating agencies received plenty of invitations to respond, which they didn’t do beyond some brief statements to the FT that this couldn’t be right … well, it is.)

But here is the biggest picture: Having been badly burned during the Asian crisis, the three major agencies took no chance once the European crisis emerged, massively downgrading the periphery between 2009-11 – de facto running after markets, of course. Of course, if you had paid any attention to the ratings these past few years you would have lost a lot of money.

There were two key consequences of those massive downgrades: First the tragic one. Because regulations remain tied to ratings (that regulation indeed ties its policy to judgements by a for-profit oligopoly with terrible track records remains beyond me), a whopping USD 1.5 trillion was withdrawn from the periphery during this period, seriously worsening the crisis.

Second, having ignored their own data input during those three years, the ratings for the Eurozone periphery ended up 4-5 notches below what the three rating agencies’ own published data input for the ratings told them the ratings should have been. Since then, we have seen several upgrades of the periphery as the process of reparation of their past mistake got under way. Struggling to understand Italy keeps Italy 3-4 notches under-rated compared to its fundamentals, as defined by the rating agencies’ own manuals.

Italy surely has a lot of issues, but the rating agencies’ obsession with the public debt numbers is out of proportion. First, they ignore that the debt is owed primarily to domestic Italians (vastly reducing the amount of resources having to be transferred abroad, and vastly reducing any government’s incentive to restructure). Second, they ignore the fact that the Italian government’s contingent liabilities (including future pensions and healthcare) are among the lowest in the OECD. Indeed if you add explicit and implicit liabilities, the Italian government is about the least indebted government in the OECD (I am not arguing that a simple addition is appropriate, but ignoring contingent liabilities surely isn’t appropriate either.)

We economists all make mistakes, and when we meet at various conferences most of us usually have a good discussion of what went right and what went wrong – and we learn something from it. We all know it’s a probability game, but here is the point: The probability of getting it right improves when you stick to the data input. When you don’t, well then its “just an opinion” based on little facts – and, hey, that’s fine too, if anyone cares to listen. That our policymakers continue to tie regulation to “just opinions” by a few for-profit-agencies (with quite limited budgets for macro research), thereby impacting systemically important capital flows, is a travesty.

Until they change this link, we’ll live in a world with unnecessary volatility and systemic risks – and “real money” guys struggling to make a return for their pensioners.

Thank you Erik.

Tommaso Arenare


“Il confronto”

This time a little exception. I wish to reblog a post, in Italian, I had the honour of writing for LeadingMyself, a blog on a number of topics very dear to me


Cosa ci piace della diversità di genere? Cosa porta beneficio a tutti e ci fa essere grati alle donne per il contributo che danno a una leadership migliore?

La mia risposta è semplice: dalla diversità di genere viene una spinta quasi inesorabile a uscire da quella che chiamiamo “zona di comfort” ovvero zona di comodità. Cos’è la zona di comfort? Cosa c’entra, poi, con le donne e la leadership?

Ho più volte avuto modo di dire che il cervello degli esseri umani, il nostro cervello, si è formato nel corso di molte migliaia di anni. È ancora lo stesso cervello che ci aiutava, quando vivevamo nelle savane e in piccoli gruppi familiari, a riconoscere il pericolo che ci veniva presentato negli incontri con altri esseri umani o con animali. In quelle circostanze, la nostra priorità era decidere, in una frazione di secondo, se accogliere l’essere vivente che avevamo di fronte…

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Italian reforms: The naysayers are at it again, but they are wrong.

This time, I will entirely borrow from a person I trust and consider highly. Erik F Nielsen is Unicredit’s Global Chief Economist, someone whose vision and insight has proven super valid in many different instances.


Here’s a short and punchy excerpt, from his most recent “Sunday Wrap”

 …the Italian growth story is different from – and considerably more complex than – the other big Eurozone countries. Italians who work (but too many don’t) put in plenty of hours, indeed broadly at par with the US and Japan, but they produce less per hour worked than the US, Germany and France – although considerably more than what’s produced per hour in the UK (and Japan), so its far from hopeless.

I am not going to write here the entire prescription for why that is so, but just note that to fix it and to transform Italy into a modern and globally competitive economy, a comprehensive reform agenda is needed – and that the Renzi government is on the case, rolling out an impressive set of reforms.

Part of the popular media and many of the commentariat continue to seem confused, or to demand unreasonably fast implementation. Let me just highlight two areas which receive a lot of attention right now, and where I think a lot of people don’t get it, namely labor market reforms and tax compliance:

First, on Thursday, the Italian government agreed to PD backbenchers’ demand that the change to the infamous Article 18 (that you cannot be fired for discriminatory or unjust disciplinary reason) will be formalized with an explicit amendment to the enabling laws for the incoming single Job Act. This “concession” led the usual gang of naysayers to suggest that Italian labor reforms have been watered down to a meaningless level. Never missing an interesting twist to the news, Euro-Intelligence claimed that “Renzi makes another important concession to the PD rebels in the debate on labor reforms”.

With all respect, I think this interpretation is nuts. If you disagree and see this change as a troublesome concession, I suggest that you remind yourself of the countries in the world that allow dismissal of workers based on discrimination or as an unjust disciplinary action – and maybe consider whether those are countries you’d like to live in – or invest in.

Second, with the Renzi government’s recent high-profile crackdown on tax cheaters, you hear a lot of nonsense about tax compliance and Italy’s supposed inability to collect revenues, which then – supposedly – is a cause of fiscal problems.

So, let’s set the record straight: On IMF data, the Italian (general) government collected 51.5% of GDP in revenues last year, which compares with, e.g. 44.7% in Germany, and 49.7% in Austria – and, not to put a too fine print on it, 33.7% in Ireland and 43.6% in Luxembourg, both presently under investigation for having agreed to competition-distorting tax cuts for companies, or 44.4% in the Netherlands, presently under investigation for allowing Starbucks strangely high write-offs for the risk associated with their coffee roasting operations (call me if you want to hear my view on the real issue with Starbucks roasting technique!)

My point is this: Italy has no problem collecting taxes; if anything, it collects too much, not too little, from the economy. The problem lies with the difference between what should be paid, according to the law (and by whom), and what actually is being paid – and by whom. In other words, it’s about fairness, and the possibility of lowering tax rates on the economy as a whole, if everyone pays what they are supposed to pay. Raising the tax compliance ratio without cutting other taxes would imply another fiscal tightening, which is hardly what Italy needs now.

Of course, making society comply with the law also requires a well functioning judiciary system, which is another Italian weakness – and another area where the Renzi government is making good progress.

Rome wasn’t built in one day – but once it was done, man, what a beautiful place it was…

Tommaso Arenare