BREXIT TO Dis-United Kingdom?

So here we are, the bleary-eyed evening after the long night of Referendum results. And pandemonium...in politics, financial markets and potentially about the whole EU project going forward.

The UK electorate has voted 52% to 48% to Leave the UK. What next? 

I knew something was mightily afoot some weeks back when my 9-year old put down his Minecraft to ask about migrants, the then upcoming referendum - excellently presented by the BBC's Newsound for children - and then proceeded to tell me it was worse in Germany.

And some of us had outlined risk assessments on what might happen should Brexit become fact, even though the weight of opinion and expert recommendations were very much in the Remain camp. I thought it apt to review these 12 hours on from the momentous decision that sent genuine political shockwaves across the EU and economic spillovers across the world and various asset markets.

1. Political Risk

As expected PM Cameron has tendered his resignation. It was he who had engineered both the Referendum and the timing of it. Alas, for all his good work he'll go down as the PM that took the UK out of the EU. Ex London Mayor Boris Johnson was assessed to be the likely successor pending the formalities and his lodestar remains bright although other candidates could emerge, likely from the Brexit side of government.

The risk of a fresh election is now a real possibility only a year on from the last.

2. Exit Date from EU...uncertainties

Despite the shockwaves the fact remains that the UK will remain an EU Member State until Article 50 of the Treaty is exercised. This requires the UK government to submit a letter to the European Council  when a 2-year period ensues to sort out the dissolution.

In practice there is a chance that a 2nd referendum may ensue and over 2 million have signed an online petition that parliament will review.

Even without any 2nd referendum, the UK Parliament must ratify the referendum and there is a chance this will not happen, again leaving it to a fresh election to confirm the mandate.

Either way, uncertainty will result. PM Cameron will leave it to his successor to do the jolly work of actioning Article 50, which in reality will not happen until after new PM is anointed by the Conservatives at their conference in October 2016, so unlikely until early 2017 most likely.

1b. Impact on Political parties

There are many factors that led to the outcome of the Brexit win. One  was the Blue-on-Blue attacks within the ruling Conservative party that in effect means two groups with a differing world-view of the UK and Europe/EU and which could yet see some form of split.

Another has been the failure of the Labour leadership to explain to working class voters its position. Its leader, Jeremy Corbyn, also an outlier of a selection last year, will face pressure to resign. At the time of writing most of his shadow Cabinet has resigned.

With the pro-EU Lib-Dems essentially marginal in its impact on the Referendum, the main parties are anything but stable internally whilst essentially without any real representation in Scotland where the SNP has most of the seats.

2. Disintegration of the UK?

As expected the SNP, whose political DNA is to seek full Scottish independence, has set in motion a second referendum. The fact that Scotland overwhelmingly voted for Remain will give the SNP the springboard of legitimacy to seek a second plebiscite so soon after the first one in 2014. The risk of both a 2nd Scottish Referendum and the probability of a successful dissolution from the UK is now significantly higher. 

Not expected was calls from Sinn Fein in Northern Ireland for a poll-cum-referendum on Irish unification. The risk is low but Scottish Independence would accelerate demands and support, particularly if there is a significant economic hit from the loss of EU funds coupled with an economic contraction.

And Wales. The Welsh First Minister, Calwyn Jones has already flagged concerns for the Welsh economy and jobs particularly if EU funding for farming and poorer areas ends. There is a real risk now that there will be demands for greater transfers from London.

Spain has already asked for shared management of Gibraltar which is sited on the Iberian Spain but part of the UK and that unsurprisingly voted almost 96% for Remain. Things could get prickly with Spain that in turn could be a risk to the thousands of Brits living in southern Spain. 

Taken together, this raises the risk of disintegration of the UK and increasing incoherence within what then remains were Scotland to seek independence in order to remain in the EU.

3. Economic Impact

One for another time to review separately but the short term shock was partially predictable in terms of direction if not in magnitude.

Sterling has taken a hit which of itself may not be too detrimental as it improves UK competitiveness but will also mean a rise in imported inflation.

Country risk for the UK will rise and in turn the costs of borrowing and financing national debt. 

The stock market has taken a massive hit although markets in the EU have not been immune.

The UK's imbalances on the Balance of Payments and the fiscal accounts remains a concern and which leaves little fiscal space that will be required for the government to weather the expected acceleration in the economic slowdown already underway prior to the Referendum.

The uncertainty will affect business decisions both in the UK and foreign investors who delay or cancel investment into the UK. The pre-referendum doomsday predictions by the Minister of Finance/Chancellor et al. may not have affected the voting but may actually come to fruition through a marked reduction in household expenditure and housing transactions. 

Fiscal and monetary stances may require softening and UK interest rates may fall, although there is a tail-risk that they could in fact rise also if the pound plummets too far.

There remain a lot of ifs and buts on a range of issues such as the impact on current and future EU migrants in the UK that on balance remain a resource that has had a positive impact on the UK economy and net taxes collected. 

Many of the poorer areas from Cornwall to the former mining communities in Wales and England that voted for Brexit are the ones that have benefited from EU Structural Funds and many of these regions are suddenly waking up to the potential loss of these and asking if the UK government....itself in a fiscal bind...will do so. In the short term there will be no change in flow of EU funds but it raises the spectre of further economic disparities in England and Wales in the medium term.

Of course there will be ripple effects in the EU that could lead to another wave of financial market contagion - particularly in Eurozone countries in southern Europe.

Thanks Mr Cameron.

BREXIT – Article 50 - The long goodbye?

So here we go. Six months of waffle, argument, zillions of articles and oodles of persuasion ahead to the Referendum on June 23rd 2016.

A lot has already been written about the emerging taxonomy of the two sides of the argument. Whilst the elite – most of the ruling Conservatives, the opposition and those who run UK Corp and unions are on the side of the “ins”, this may turn out to be a gross oversimplification of the Island mentality that lurks a scratch below many here in the UK, particularly England.

And insurgency against the elites is very much in fashion - both in Britain with the election of Corbyn as leader of the Labour party, in the US presidential race and across the EU where the middle ground of politics is under vociferous attack from both Left and Right.

Brexit risk has already had an effect on the FX markets through a devaluation of the pound against the dollar and the Euro - which the tradeable sector will gladly take and which in effect further loosens monetary conditions in the UK - and where the likes of UBS are forecasting parity with the Euro in case of Brexit (presumably assuming the Eurozone sticks it out...)

But what if the UK votes to leave? What then?

Leaving aside the possible political, economic and military ramifications for the rest of the EU shorn of the 2nd largest donor to the EU budget and a lodestar for many of the smaller more liberally minded economies in Europe, what would it mean in practice for the UK, hmm leaving on one side the further risk of the break-up of the UK should Scotland and/or Northern Ireland decide to stick with the rump EU27?

Unlike in Greece where the Syriza government had made no plans for issuance of Drachmas had Greece been booted out of the Eurozone in the last – or the one-before-last EU crisis – there is a position paper outlined by the UK Government, at least by its laudable Civil Service.

And it all boils down to Article 50 of the Treaty of the European Union. This lays the framework for an orderly exit of a Member State but one that has not been tested as no country has exited the EU (Greenland’s exit was partial as it remains an overseas Danish territory).

The short answer is that there is a 2-year sunset period but in reality this can mutate up to a decade for trade related agreements or re-agreements. It would also require the full EU institutional structures to be in motion – the European Commission, approval of the European Parliament, of all the remaining EU Member States (particularly for an extension to the 2 years) and of the European Council. Good luck...given the European electoral cycle from 2017.

The implications for a more drawn-out exit phase means that a clinical and immediate divorce sought - and assumed - by many of the Little Englanders will be less likely than envisaged. Likely, though not impossible - anyone schooled in history will recognise that disintegrations can happen very quickly, as those old enough to recall the domino effect of the fall of the Berlin Wall in the fall of Communism in Europe from 1989.

It also lends credence to the Conservatives who have argued that a Brexit vote can be a means to a better negotiated end for the UK - through a better bargain with the EU. This view was echoed initially by the current London Mayor, Boris Johnson, and by Michael Howard - who has argued that the EU has "form" with the Danish and Irish rejections of previous referenda...although these were for boring Treaty changes rather than remaining in the EU.

For more analysis and risk perspective please send an email. 

Is the Honeymoon on Ukraine over?

Is Ukraine lost? Again? Is the social contract between state and citizens fundamentally flawed?

We are now well past the "honeymoon period" of the post-Maidan street protests that ultimately led to the rather fast departure of the then president Yanikovich, who fled to Russia in 2014. Has the halcyon beacon of the EU helped to reshape the rampant political and economic corruption?

A spate of ministerial resignations at the start of 2016, an economy in dire straits and with a huge external debt overhang, having lost up to a third of its economic base from the loss of territories and ongoing conflict with Russia and being supported by western-supported IFI packages including dollops of soft EU macro-financial assistance, having witnessed a false dawn with the so-called Orange revolution in 2004 and the Maidan of 2014, which way reform?

Before I answer these questions, I invite you to view this video of a recent Cabinet meeting - it is fairly X rated... and unlike anything many who have attended any Cabinet meeting anywhere will have experienced. And it gives a flavour of the difficulties of copy-pasting a reform agenda without genuine political will and huge conflicts of interest without a fundamental reform of the current political system.

Many will have recognised a certain Georgian, Mikheil Saakashvili,who was former president of Georgia and now part of an "A Team" of former Georgian bureaucrats, fluent in Russian, brought in to help support the reform effort and given Ukrainian citizenships jousting (with glasses of water) with the Minister of Interior responsible for the police and security services,  himself an "oligarch". Oh yes, the Minister of Finance is originally American and the Minister of Economy - one of the key "reformers" Lithuanian-Ukrainian.

Now back to the questions. 

My starting point is to look at the data. And the picture is mixed. The odd-but-thus-far working relationship between the Prime Minister and the president has led to macroeconomic stabilisation - supported by strong western support - and important steps to liberalise the economy and reduce red tape. Global Governance indicators (that basically hoover up all available country risk indicators published) do show that Government Effectiveness has risen as shown in the figure below.

But Rule of Law?

Not so good - in fact its even worse. And the picture is the same when looking at Regulatory quality or perceptions of corruption. 

Ukraine’s minister for economic development and trade, Aivaras Abromavicius, announced his resignation in early February, citing corruption levels in the state.

“Neither me, nor my team have any desire to serve as a cover-up for the covert corruption, or become puppets for those who, very much like the ‘old’ government, are trying to exercise control over the flow of public funds,” effectively saying what many have been complaining about, that there are too many bent officials trying to continue their corrupt ways - and of more significance, that things aren't really getting any better.

There is now a real political risk that the government will fall, possibly through a vote of no confidence. Polls have given it approval ratings of less than 10%. And there is scant evidence, despite a flurry of ad-hoc measures, that there is a clear roadmap of reform  - which is worryingly familiar territory given previous false dawns and stabilisation plans effectively written at the IMF.

Despite a huge groundswell of popular support in what remains of Ukraine for a pro-EU direction of travel, it is not an EU candidate country forced to go through hoops and checklists to comply with the EU body of law, the acquis.  

And the EU's efforts beyond financial help has led to little material effect thus far. The European Commission is great if there is a natural disaster that requires fast response or when there are longer-term structural adjustments through sector plans and the like as witnessed in the enlargements of 2004 onward for the former central and eastern European economies. Less so in dealing a country that is in need of a mix of quick-win reforms and deep reform, often painful for vested interests.

It is perhaps too early to assess if the social contract is broken. But walk past the parliament in Kiev, the Rada, and the side street and its car park are full of Bentleys, Rolls Royces and Porsches when the average salary is a few hundred dollars. 

The disconnect between the elite and the rest is the effect, but the fusion of political and economic control in the hands of this narrow elite that is an unfortunate legacy in most of the ex-Soviet space is THE core root cause. 

What then are the choices for the West? One for another day, but ultimately, the sad truth is that ultimately, political ownership for reform cannot be imposed. On the other hand, if there is a serious set of governance concerns and dysfunctional system that effectively limits democratic voice and accountability then a further Maidan cannot be ruled out. For the West, the EU and the US, we have to be more sanguine and realistic of expectations, but to have more targeted conditionality - political and economic. 

QE2, Pyrrhic Monetary Policy and a Rise in Inequality

Are Central Banks running out of firepower?

And is the second bout of QE or QE2 leading to both an arms race in competitive devaluations and more worryingly, actually accelerating inequalities?

With policy rates close to zero and years of money printing under the snake-oil terminology of "Quantitative Easing", moribund fiscal stances and private sector balance sheets in rehab zone, what more can central banks do to kick start inflation, if not growth trajectories?

No sooner had I suggested that I was against-trend in forecasting a baseline of no change in UK interest rates this year than we're faced with a change in mood music across the developed world and forecasts of more monetary easing or QE and even negative interest rates set by central banks.

Whilst the aim is to get cash to shift to production, investment and consumption by effectively taxing cash balances held by banks, in reality we are seeing plenty of unintended consequences:

1. a greater incidence of financial and asset bubbles as cheap dosh chases higher yields - from property to stocks and financial assets (the short term excluded). This most will go with.
2. this in turn is I would argue actually widening the gap between the haves and the have-nots, be it within countries and globally.
3. for another day...a rise in competitive devaluations: a falling Yen, a falling Chinese currency and others will follow - from SE Asia to commodity producers. 

We hear plenty of research analyses that highlights a global phenomena - from the US through to the emerging economies - of an increasing inequality of wealth creation and ownership to a narrow group of economic players. Be they the kings of Silicon Valley, robber barons in Eastern Europe or the industrial titans of Asia, the pattern is uniform.

Oxfam's recent report came out with stark figures by countries but a headline one that is numbing to review - 1% of the global population have a wealth greater than that of the rest of the 99% in the world. The same conclusion came out broadly in the OECD's recent 2015 paper and notes "Income gaps are even more striking when it comes to the highest earners. In the 1980s, the top 1% of earners commanded less than 10% of total pre-tax income in every OECD country bar one. Thirty years later, their share was above 10% in at least nine OECD countries and above 20% in the United States."

 There are fundamental reasons in terms of basic governance, fundamental democracy and rule of law that explain many of the fissures in developing and emerging economies that prevent citizens from having rights to education, restricted access to financial capital and in some cases, as we see in north Africa and middle East,  access to education but limited opportunities to find employment. But we also see great strides by countries such as China and SE Asia on the back of growth and growth-based economic models.

Rising inequality is somewhat counter-intuitive when we think of the global reforms since the nineteenth century and following the two world wars, the rise and fall of communism and the rise of the welfare model in the post-war period. And whilst it may be less of a relative issue in the EU, rising inequality is a factor that may explain the political counter reactions from the anti-capitalist Occupy Movements in Wall St and the City as well as the drama that is the US election cycle. 

What are the policy lessons?

• The OECD's focus on structural issues - gender, health, education et al - is the classical development tool kit. They are longer term.
• A clear lesson in today's 24-7 world is that interconnectivity is here and exponentially increasing- be it in ideas, news or alas, contagion - financial fear and medical as we witness for the Zica virus. The corollary of this that international co-ordination cannot be ignored - be it in terms of global efforts to tame disease or economies. It also means sector and country risks are subject to a wider set of risks.
• Loose Monetary Policy is ultimately pyrrhic without a looser fiscal stance in an environment, as a century before, to take up slack. 
• Openness to innovation and growth and allied reward for risk takers cannot be compromised - but it needs to be complemented by efforts to ensure equity and fairness so that "everyone eats a bigger slice of a bigger cake"  - moves in the EU to tackle the Googles, Amazons and Cafe Neros of this world on dodgy tax affairs is part of this.

Divergence in Monetary Policy and Macro-Risks for Emerging Markets

Are we entering a great divergence between the developed world and Emerging Markets, particularly for oil-fuelled economies and currencies?

In the UK the pound has taken has fallen off its perch by 6% against the dollar in the last few weeks alone - is it the spillover from the travails of the markets or in part a response to increasing country risk amidst a rise in chatter of Brexit?I was contra-market in my projections for UK base rates for 2016 and with the continued - possibly sustained - low oil prices, the arithmetic for inflation has changed and in turn the likelihood of tighter monetary stances.

Whilst the Fed's rate rise of 25 basis points was expected and arguably sound given its inflation target of 2% the landscape in the Euroland remains positively soporific. Again, more recent data shows that a lower inflationary perspective whilst Super Mario has in recent days sought to allay fears of an end to QE.

There is a deeper question for another day whether central banks role of de facto lenders-of-last-resort is now the norm and whether markets are addicted. Or what further can policy-makers more generally do in terms of firepower and tools, at least in the developed world, given near zero (or in some instances negative) interest rates and at least in the EU self-imposed strait jacket of fiscal restraint.

And the risk that the debt overhang that began in 2007 and mutated into various forms, has yet to play out.

And the Divergence?

In part this great Divergence is - like many of the economic-cum-financial narratives of the last decade - being affected and driven by developments in the middle Kingdom. China.

Anyone with experience in transition countries and a grounding in National Accounts will tell you how data can be massaged. I suspect that real activity is probably 40%-60% of what is being officially reported. And this in turn is affecting demand for commodities and hydrocarbons despite official orders to maintain production (and more importantly politically - employment) targets although the Chinese are making fantastic efforts at Energy Efficiency and switching away from hydrocarbons.

Three Major Implications I see:

1. In the last couple of weeks we have seen a queue of oil producers, from the big cheese of them all Saudi Arabia, through to Russia, Azerbaijan, Nigeria through to Equador and even Venezuela facing huge macro-instability on the back of falling oil revenues that fuel both external and internal accounts. Saudi is talking of fiscal reforms to cut subsidies and even privatising part of ARAMCO, its oil genie. Azerbaijan is talking to the IMF for a possible support. Whilst most of these countries have followed sweet-talking consultants and set up whizzy wealth funds, these and the FX reserves will quickly deplete if authorities try to beat the markets (Soros or no). So expect tighter monetary policy, falling currencies and higher imported inflation in EM space - particularly for commodity-based economies, but with spillovers to neighbouring satellite economies (Russia and CIS par example).
2. Debt Overhangs in EM. Deja vu 1990s? EM FX loans, particularly dollar-based will mean currency mismatches, although Russia's corporate sector is largely immune following the financial sanctions (although it's still in a macro-mess that will impede Mr Putin's foreign policy aims).
3. Low Income countries haven't really had a mention but those of us who have worked across investment and risk analysis and development will be aware of the potential risk to vulnerable economies and the potential counter-cyclical hit it will have on public finances for economies most exposed. The EU successfully pushed through a package to aid 30 odd countries in 2008 in Africa and the Pacific by helping to ringfence critical public expenditure in health, education and public services - more of the same may well be required.

Forecasts, Monkeys (with keyboards) and UK Interest Rates: a case for no change

I was tickled by a comment by the RBS reported in last week's weekend newspapers - who evidently came top in the Wacky Races of would-be forecasters for 2015 for the British economy who used an apt (except perhaps to its number crunchers) riposte about "monkeys with keyboards".

With monkeys of my own in our household, I thought it only fair to get their take on the key forecasts for 2016!

Alas they were too interested in the latest I-Phone and Japanese Animes as target-forecasts than that of something called GDP or seismic developments in the FTSE 100. So we stuck to one indicator...UK interest rates.

With  that UK base rates at 0.25% for the last 7 years and most folk again writing about a definite rate rise this year, the "consensus monkey forecast" at chez nous was a dead-heat: up, down and one flat. I particularly enjoyed the outlier of the forecast for a reduction...(forecaster age 8 mind!). So the average or mean is no change.

Which is essentially my own personal view: ie no change in 2016 with a 70% probability and a 30% chance of a rate increase - and if so, yes by 25 basis points.

Sound UK Fundamentals but plenty of Geo Political and Economic Volatility

The consensus is that UK interest rates will go up later this year and by a quarter of a percent.

The Bank of England typically takes its cue from the trend in US interest rate setting and and the recent rise in the US Feds Funds rate by 0.25% would normally suggest a reaction this side of the "pond". Both the US and UK economies are now in a growth phase, as indeed is much of the EU. But there are lot of downside risks that suggest that the economic take-off in the UK may yet be more subdued than envisaged.

Things are extremely fluid and gittery geo-politically and are not only causing havoc in the financial markets in January but will also pose a sustained and growing risk that the consensus forecasts may not yet have fully factored in further potential volatility and resultant caution on the part of the Bank of England to hold off further monetary tightening, particularly if there will be further deflationary pressure.

Key factors

1. the slow-down and convulsions of the Chinese economy could yet reveal some nasty black holes (quasi-fiscal liabilities) whilst driving a general softening in external demand that will hit SE Asia and in turn is lead to what looks like more than a cyclical depression in commodities - particularly that of the black gold. With China responsible for about a third of global growth in trade in recent years, cooling external demand and in Emerging Markets will together hit external demand for the EU, including the UK.
2. A devaluation of the Chinese exchange rate is now likely and this in turn will continue to mean cheaper Chinese imports in the UK and elsewhere.
3. A Chinese devaluation may set off further devaluations in SE Asia in particular as the Asian tigers seek tor retain competitive edge in the tradeable sector...maybe good for imported inflation into the EU and the UK but also likely to add to FX risks in these countries given the increasing prevalence of dollar borrowing (deja vu late 90s?).
4. With investment houses now rushing to reverse previous gilded forecasts that we were living in a new normal of above USD 100 per barrel just a couple of years back, they are now rushing the other way to come up with ever lower sub-50, 40 or even 30 dollars per barrel. Whatever the macro reasons in terms of underlying demand and supply and alternatives (shale gas) and substitution effects (solar, hydro, wind et al) that explain the decline in the price of hydrocarbons, the fact is that this is clearly a positive external shock and deflationary for the UK. If it is sustained then the deflationary impact will be higher than anticipated - ie imported inflation will be lower.
5. Within the UK the efforts taken by both the fiscal and monetary authorities to cool down the housing market will have a pronounced effect from April 6 when a further 3% transaction tax (Stamp Duty) kicks in for anyone buying an additional property and lending criteria are further tightened by the central bank.

So, as in 2015, I'm forecasting a baseline that UK base rates remain unchanged in 2016.

Budget Support in the Western Balkans: a catalyst to the EU?

“Aid modalities” to use the jargon, is a bit like men’s fashion. Rather like flared trousers and loudly coloured ties, they come around in fashion every so often. Same with the fashions in aid effectiveness.

Having sat on several national and OECD level talking shops, I now conventionally start with a quip of adding the negative…so aid effectiveness becomes ‘aid ineffectiveness’ which is often closer to the reality on the ground in recipient countries where despite well meaning declarations, foreign donors more often-than-not have their own peculiar pet ideas and vision.

One delicious example was when I came across a reasonably well designed and operational fiscal system in a particular transition economy and a certain Nordic donor insisted that its support in the area was conditional on the budget being gender based! Hmm, the average Public Finance Management expert may ask: what if budget programming is sound and based on a reasonable identification of needs and priorities?

… back to Aid (In) Effectiveness.

The EU’s aid budget is managed through its euracracy, the European Commission (EC). And in recent years there has been a marked shift to align its aid dollops through an increasing share of budget support operations or cash transfers to the national Treasury via generally its account at the central bank although they are now aimed to be 25% or so of the total aid pot.

Traditionally a tool favoured for developing and emerging nations, Budget Support has now found its way to the Aid menu for would-be accession countries of the EU’s periphery, including bits of the Western Balkans not already in the EU.

One of the interesting developments has been whether budget support operations meets the wider goals of development aid and in turn whether the tool is relevant for what is left of the Enlargement-seeking countries – relevant for either their broader development or for guiding and accelerating EU aspirations.

Leaving aside the outlier that is Turkey – it being recipient of a cool $4.8bn aid over 6 years from the EU over 2014-20 and a further $3.something bn commitments late in 2015 to Turkey “manage” Syrian refugees – the question has become focal for the Western Balkans – Albania and the 4 Yugo successor states not yet in the EU: Serbia, Montenegro, Macedonia and Kosovo.

Picture a situation where anything up to 90% or more of aid flows are from the EU into a recipient country in the Western Balkans that is earmarked to be €1.6bn in 2015. Sounds a lot but if budget support takes about a small portion of €20-40m then this is small change for the Western Balkan budgets.

So can budget support – essentially cofinance for existing budget lines for line ministries – be conducive to reform in the Western Balkans (where reforms have stalled) particularly where convergence to EU norms is concerned?

Time will tell.

One thing is for sure – Budget Support for Sector Reform is a well-meaning approach relevant for development more generally and it does in principle meet the broader aims of national ownership by allowing recipient nations to use own systems and procedures. It means funds go through the national Treasury and in effect imply a potential boost to Aggregate Demand through a rise in government expenditure.

On the other hand, anyone who has worked in EM or in other developing countries will wonder if the use of often bent national procurement systems really does lead to meaningful impact of those hard earned (and argued in austerity-hit donor countries) transfers of Euros, pounds, dollars or any other currency.

In summary, Budget Support is not a panacea in aid delivery. It is a tool or modality and one amongst a family of tools that range from classical Technical Assistance from the private sector or from national administrations in the EU (twinning as it’s called) to continued use of EU or other donor procurement systems but where the beneficiary country or authority (such as the Road Fund or Railways or Border Control Management) is given the right to make a transparent selection based on verifiable criteria.

Budget Support does make Ministers of Finance and other key ministerial folk sit up and take notice because its pure cash rather than some woolly project where foreign experts eat up most of the sum from consultancy fees. And as such policy conditionality works if the programme is well designed. Equally if it is but a substitute for a better option such as a standard Supply Contract then its impact and value-for-money will be lower.

This in turn opens up perhaps the critical path for potential reform. Via the budget.

The share of government in Western Balkan economies remains relatively high and so fundamental reform in key sectors will be credible only if the piles of donor funded sector plans and fancy Medium-Term Expenditure Frameworks (MTEFs) are subject to genuine Public Finance Management through much improved budget programming, better expenditure management and improved financial accountability.

Having designed the one main General Budget Support package for Serbia in 2009-10  and a pilot Sector Budget Support in the Western Balkans in the last two years, I remain cautiously optimistic about the potential of the new modality as a conduit to more effective governance, rule of Law and government finances.

The latter three tick boxes toward the Copenhagen criteria that defined the initial basis of meeting the entry requirements to the join the EU.

That said, the Jedi Knights of the Acquis Communautaire may wonder if the Force is really with them if this does not lead to meaningful real convergence at the geek-level EU Chapters….from statistics to agriculture and veterinary control to financial control.

For this and more see my blog, www.aid-finance.com