Is London’s status as Europe’s main financial hub under threat?

Reading time: 6 minutes

For years, London has been the primary financial centre in Europe, but Brexit may allow Amsterdam and others to have a go at that title.

On the 1st of January of 2021, the United Kingdom (UK) finally left the EU. Immediate consequences could already be seen in the first days of UK’s exit. However, only now are we starting to have enough data to assess the true consequences of Brexit. One of the most interesting is the fact that London is no longer the largest share trading centre in Europe, having been surpassed by Amsterdam in January, which begs the question: “Is London’s status as the continent’s main financial hub under threat?”.

Before delving into the question, it is important to understand why London has been the dominant financial centre in Europe in the first place.

How did it happen?

First, it is worth disclosing that the city has always been an important trading hub, ever since the Roman founding, and, in the 19th, century, it was the political centre of the largest empire in History. But this is where most people get something wrong, as London is the composition of two cities that have their own two, distinct political entities. There is London, the one everyone thinks of as London, and then there is the less well-known City of London which is entirely surrounded by the former. The latter was founded by the Romans, and it has acquired a myriad of special privileges throughout its existence, due to its importance to the various kingdoms and nations that followed the collapse of the Roman Empire, privileges that it maintains to this day. In fact, the City had so much influence that, in the Middle Ages, Edward, the Confessor, built a new seat of royal power around an abbey he had founded in Westminster, in order to draw away power and wealth from the City. For centuries, the two cities were geographically quite distinct, only becoming indistinguishable in the 16th century.

Figure 1 – Map showcasing the City of London being surrounded by its wider sister, London. Source: Wikipedia

However, the old city of London still maintains some privileges, some of them being that certain laws passed in Parliament do not apply to it. This special status is one of the reasons why so many financial services concentrate in this small area, as it has much more friendly business regulations than the rest of Europe.

On top of that, business regulations in the UK are more like the US’s than those in continental Europe, allowing for different practices in the Private Equity market, for example, and more easily attracting the financial juggernauts across the Atlantic. Combined with the language bridge, it is almost as if they are doing business in America, whilst being in Europe. Furthermore, its location allows for investors and traders to catch the end of the Asian trading day and the beginning of Wall Street’s, a privileged position in terms of currency exchange trade. Moreover, the fact that so many financial institutions decide to operate in London only attracts more institutions, as they can better harness economies of scale, by having almost all necessary complementary services and skilled human resources concentrated in the city.

The Impact of Brexit

Now, Brexit is threatening London’s envied position, as it is putting more constraints in the flows of capital and financial assets to and from the European bloc. In fact, the EU expects banks to move their euro denominated trades into the bloc by 2022, and some have already complied.

Furthermore, the UK’s financial services sector was able to provide these services to their many clients in the EU, thanks to the system of passporting for members of the European Economic Area (EEA), until Brexit was concluded.

This system consists of several different passports for various service categories that financial institutions can apply for and that allow them to provide these services to any member of the EEA. These passports also allow institutions to setup branches in the territory of other member states with much greater ease and simplicity than would otherwise be possible. Many financial institutions rely on several different passports at once to provide the range of different services that their clients depend on.

After Brexit, with the UK’s exit from the single market, the passporting system is no longer available to the UK’s financial institutions. Instead, they will need to depend on individual licensing in each EEA country they wish to operate in. These licenses, often, are not as comprehensive or as easy to obtain as the previous passporting system. Furthermore, it forces institutions to setup branches in other countries that they might not otherwise need, creating needless costs and inefficiencies.

Figure 2 – Areal picture of the City of London and its surroundings. Source: Evan Evans Tours

Nevertheless, there is a potential agreement that would solve some of the problems the loss of passporting brings, which is an “equivalence” agreement in which Brussels and London would both agree to recognize some aspects of the other party’s financial supervision rules as equivalent to their own, and that would alleviate some of the frictions that have been registered since the start of the year. However, so far, there has been no agreement on equivalence.

Due to this, London’s trading markets of shares were hurt in January, as EU-based financial institutions were unable to trade, due to the lack of equivalence. Subsequently, trading of shares and other instruments has been flowing out of London into other European and American markets, with Amsterdam emerging as a clear winner and surpassing the City in share trading volume. “The city’s sudden dominance in European equity transactions goes back to Brexit contingency plans drawn up months ago. Both Cboe and the London Stock Exchange Group Plc’s Turquoise platform chose the Netherlands as their alternative site for EU share trading”, Bloomberg states, which is likely due to its business-friendly environment. Notwithstanding this, the more probable outcome in the long run is that many of the European operations that were previously done in London will be spread out through many cities besides Amsterdam, such as Frankfurt, Milan, Paris, Madrid. There probably won´t one single winner.

Figure 3 – Average daily trading volume per city in billions of euros. Source: Financial Times

A potential agreement on equivalence would not return to the City the ease of access to EU markets it had with the passporting system, as it covers fewer areas and services and is a unilateral agreement that could be withdrawn by the EU at any time. But even the prospect of full equivalence that many UK-based financial firms are hoping for is unlikely, since the EU wants to assert its financial independence and fears the UK may try to deviate its financial rules from those of the EU.

Still, even though it may seem that the EU can only gain with this outcome, one cannot forget that the EU’s financial activities were mainly conducted in London for a reason, and, with Brexit, firms’ access to capital markets and liquidity will not be as straightforward as it was prior to it. These added inefficiencies could hurt the EU, but the extent of the harm is still uncertain.

Final remarks

Despite Brexit, London will most likely remain a very important financial centre, perhaps even maintaining the status as Europe’s main financial hub, but the gap between it and its rivals will be smaller. Moreover, an agreement on equivalence in certain specific sectors is a likely option, but, given the more protectionist attitude of the EU, it is not probable this will be an agreement that ensures full equivalence.

All in all, the fears of London’s financial centre disappearing altogether are a bit exaggerated, but the city will also not come out unscathed, as many would hope. London is not just an important financial hub for Europe. It is important for the whole world, forming a crucial part of the current daily financial cycle of the globe, that encompasses other squares, like Tokyo and New York. But its importance for Europe will most likely decrease in the long run. As usual, reality is neither black nor white, but greyish.

Sources: Bloomberg, Financial Times, Investopedia,, The New York Times, Wikipedia.

Rodolfo Carrasquinho

João Baptista

Four Golden Rules to Achieve Lasting Economic Growth

Reading time: 7 minutes

Economic growth is verified once in a while in virtually every country across the globe. As a matter of fact, economic growth as it is is almost as unavoidable as an economic recession at least in a point in time. What is truly hard to achieve is lasting economic growth, as it demands some features which seldom coexist in a country. In this article, four of them are analyzed, in an attempt to shed a light on why some economies thrive, while others seem doomed to failure.

Economic diversification

When Botswana grew at an average rate of 13% per year during the 1970s and 1980s, soon after conquering independence from the United Kingdom, people thought they were in face of the ultimate economic miracle (Graph 1). Economic expansion in the Southeast African country just seemed unstoppable. This period coincided, however, with a world high in the price of diamonds, which the Botswanan economy heavily relied on (diamonds account for about 60% of government revenue). When prices fell in the 1990s, they were not able to sustain the remarkable expansion they had registered until then.

Graph 1 – Constant GDP per capita annual growth for Botswana (1960-2019)
Source: Federal Reserve Economic Data

In turn, other countries such as Angola and Venezuela, have shown a great dependence from oil prices to improve their general living standards, facing deep recessions whenever there was a trough in this market.  

Graph 2 – Constant GDP per capita annual growth for Venezuela (1980-2014) and Angola (1980-2020) vs. annual growth of Brent Crude (1990-2020)
Source: Federal Reserve Economic Data

As a matter of fact, these countries have other structural problems, which will be explored throughout the article, but it is undeniable that the lack of economic diversification exposes them to large fluctuations in commodities’ prices.  

On the other hand, if we look at a set of developed countries which are also world leaders in oil reserves, such as the United States, Canada or Norway, one can understand that they are much more insulated from the evolution of commodities’ prices (Graph 3). Even though one can spot a significant correlation between the growth rate of these countries’ GDP and the trough in oil prices in 2008 and 2009, for instance, this does not imply causality, as this was also the time of the great financial crisis. Furthermore, all these countries were able to grow steadily, for example, in the beginning of the century, when the oil price was everything but favorable. This must mean they have other sources of growth, as opposed to countries like Venezuela or Angola. When an economy is not diversified, people are subject to wider income variations, leading to social unrest and, therefore, to greater difficulty in implementing the so-needed structural reforms.

Graph 3 – Constant GDP per capita annual growth for the United States, Canada and Norway (1960-2019) vs. annual growth of Brent Crude (1990-2020)
Source: Federal Reserve Economic Data

These conclusions allow us to hereby distinguish Group 1 (Botswana, Venezuela, Angola) from Group 2 (United States, Canada, Norway) countries.

Productivity expansion

Beyond resource endowment dependence, Group 1 countries exhibit stagnant productivity levels. Despite widely discussed among economists, the true nature of the term productivity is fairly unclear to the common reader.

Taught in virtually every business school, Robert Solow (1987 Economics Nobel Prize) came up with a model which allows one to better understand the concept. Put simply, he argued that a country’s GDP could increase via mere labor (workers) and capital (machines) accumulation. Nonetheless, he sustained that long-term economic growth could only be achieved as long as the output each worker or machine produced increased as well – that corresponds to a productivity improvement. Otherwise, growth would not be sustainable in the long run, as inputs depreciate, meaning they lose value (e.g.: the likelihood of a machine needing to be fixed increases with its useful life). Productivity is, therefore, a measure of efficiency of production, which, when high, can lead to greater profits for businesses and income for individuals. Conversely, when low, a country cannot aim at achieving lasting growth.

Comparing Group 1-alike countries (this time, focusing temporarily on Ecuador and Nigeria, due to the lack of data for Angola and Botswana) with Group 2 countries, one can clearly observe that growth in labor productivity is once more very dissimilar (Graph 4). This difference is also embodied in the remarkable dissimilarity in absolute productivity levels, but that fact directly departures from different growth rates. In fact, in the 1970s, absolute levels were not that different – a great divergence only arose when Group 2 nations consistently outperformed Group 1 countries.

Graph 4 – Productivity per hour worked in the United States, Canada, Norway, Venezuela, Ecuador and Nigeria (1970-2017)
Source: Our World in Data

Incipient productivity growth is, therefore, one of the reasons why some countries do not thrive, but it is also a direct consequence of another flaw – lack of openness to trade.

Openness to trade

The benefits of free trade go back to David Ricardo. He defended that it allowed countries to specialize and increase their productivity, translating into a higher national welfare. More specifically, trade made it possible for countries to access goods which otherwise would not be reachable and sell products whose production they were relatively more productive in (concept of comparative advantage). The greatest advantage from international trade is, nevertheless, the exposure of national firms to greater competition, forcing them to constantly improve production processes, which has a direct positive impact on productivity.

When comparing Group 1 with Group 2 countries, one can, once again, identify quite decisive differences between them in this regard. This time, however, Botswana is spotted half-way through to Group 2 countries. The African country exports mainly beef and diamonds and, although the products it sells abroad are not particularly diverse, it does not seem eager to avoid foreign, more efficient firms to access domestic markets. The same cannot be said regarding Venezuela or Angola, where barriers to trade are enormous. Speaking about Venezuela, oil exports have been steadily decreasing since the highs of 2014. Also, the fact that the country has the world’s largest oil reserves makes gasoline shortage today a bit ironic. On the other hand, Group 2 countries have historically been great supporters of international trade, allowing firms to access cheaper raw materials and to find new markets. Consequently, this set of countries proves it is possible to be blessed with natural resources, while still having organized societies and developed industrial and service sectors. All in all, embracing world trade is highly correlated with long-term economic growth. In reality, the great economic boom after World War II was mainly pushed by an increase in the relative importance of exports in the global scenery, as shown by Graph 5.      

Graph 5 – Value of exported goods as a share of GDP
Source: Our World in Data

Inclusive institutions

Despite being needed to achieve economic diversification, productivity growth and greater openness to trade, structural reforms are only possible to implement as long as national institutions support them. This is a major problem in Group 1 countries, especially in Venezuela and Angola. Indeed, there is a notorious lack of democratic institutions in these countries, which are also characterized by high corruption levels.

As a matter of fact, in the 2019 Corruption Perceptions Index, which ranks countries in terms of corruption from 0 (very corrupt) to 100 (very clean), they registered very low values, while the United States, Canada and Norway scored relatively higher values (Graph 6). Botswana is in the middle. It is, therefore, of no coincidence that Botswana is the best-performing country among Group 1 countries.

Graph 6 – Institutions’ inclusiveness as measured by corruption and economic freedom
Data sources: The Heritage Foundation, Transparency International

Overall, corruption results in lower levels of capital productivity. As corrupt government favor private interests, it often gets stuck in a state of inefficiency (no incentives to control costs), led by wasteful rent-seeking (manipulate economic conditions to generate profit) and distorted public decision-making. The side-payments involved and hidden within each transaction create an unstable amount of uncertainty, which not only serves as an incentive not to engage in economic exchanges and disincentivizes investment, but promotes of these corrupt transactions. Moreover, the misaligned incentives result in an inefficient allocation of resources.

Another dimension in which institutions can be evaluated is through the 2020 Economic Freedom Index, where results are similar to those regarding corruption (Graph 6). In this regard, empirical data support the fact that liberalization induces growth, despite significant gaps in the levels of productivity and economic freedom index between groups of countries. So, the patterns verified across these countries are once more consistent with the existing data.

This reaffirms the importance of inclusive institutions – a term coined by Acemoglu and Robinson in Why Nations Fail – where property rights are respected, justice is effective and government spending is wise and clean-fingered. Only institutions providing the right incentives to individuals and businesses can bring continuous prosperity.

Heading towards lasting economic growth

Sustainable prosperity directly relies on economic diversification, productivity expansion and international trade. However, these three golden rules demand a fourth – inclusive institutions. This explains why some people get very rich and other struggle to accumulate some wealth across the globe. As long as institutional flaws persist, so will economic stagnation. This is perhaps the most important problem developing countries face nowadays.

Sources: Federal Reserve Economic Data, JSTOR, Our World in Data, ResearchGate, Statista, The Heritage Foundation, The Independent

Scientific revision: Patrícia Cruz

Gonçalo Silva

Mariana Soares

Nuno Sampayo

Rodolfo Carrasquinho

Breaking the gender glass ceiling in South Korea

In the 1960’s, South Korea’s fertility rate displayed an impressive and even slightly concerning population growth, leading the government to implement restrictive population policies. Nowadays, the scenario is significantly different, with the country’s fertility being one of the lowest worldwide. Combining that with an increasingly ageing population, South Korea is currently facing a decline in its population growth, with the natural replacement of generations being at stake. This concerning new demographic paradigm has led the government to take action, committing to increase the country’s birth rate, albeit unsuccessfully.

With these failed attempts, the solution may revolve around changing the women’s role in society, incentivising an active participation in the job market, granting them the same rights and benefits to those of men.

However, this raises the question: is South Korea’s society ready for such a drastic change?

Historical roots

South Korea was established as a nation with the division of the Korean Peninsula after World War II. In the aftermath, an invasion by North Korea of its southern counterpart´s borders triggered an armed conflict between the two, which was only solved by 1953 through the signing of an armistice agreement. Today, South Korea is one of East Asia’s most influential countries, with an economy ranking just behind Japan and China and a population of around 51 million people, of which more than 25 million are established in its capital, Seoul.

In recent years, South Korea has experienced a rapid industrial growth, as well as a vast economic modernization, contributing to the shrinking of the income gap that for many years separated it from the developed Occidental economies and, in some cases, to overcome some of them in GDP per capita (Graph 1). Nevertheless, even if in economic terms this gap is now practically non-existent, when it comes to gender equality and the women’s role in society, South Korea is still very far from the Western standards.

Graph 1 – Real GDP per capita comparison    Source: Federal Reserve Economic Data

Graph 1 – Real GDP per capita comparison

Source: Federal Reserve Economic Data

Window-dressing gender action

With the ever-growing role of women in society after the late 1960s, as they increasingly sought and integrated the job market and pursued higher levels of education, the government enacted the Equal Employment Act in 1987, in order to guarantee equal and fair treatment across the two sexes. However, this proved to be ineffective in practice, as women continued to be victim of lower wages and sexual harassment in the workspace. As a matter of fact, South Korea is still today the worst-performing OECD country in terms of gender wage gap (median wage earnings of women are, on average, 32,5% lower than men’s, as shown by Graph 2).

Graph 2 - Gender wage gap across OECD countries (difference between median men’s and women’s wages)    Source: OECD Data

Graph 2 – Gender wage gap across OECD countries (difference between median men’s and women’s wages)

Source: OECD Data

This discrimination in the labour market is still deeply rooted on the misconception that women are less desirable as employees, as they may require maternity leave in the future as well as leave to take care of their children, should they fall ill. Related to this is the patriarchal view that women are the ones responsible for the care of domestic affairs, leaving men to work to provide for the family. While efforts have been made in changing this current of thought (particularly, with the 2005 decision of South Korea’s Constitutional Court to abolish “hoju”, a family registry system that identified the head of household as a male and that obliged family members to be registered under him), it is still far from reaching the desired effects. In fact, the World Economic Forum and a United Nations report have recently ranked South Korea´s gender empowerment among the lowest in the developed world.

Therefore, this discrimination of women in the job market, centered around their role in the society, has forced many women to choose between professional success and family life, with many opting to forego entirely marriage and children. This is part of a rising social phenomenon in South Korea called the Sampo Generation, with the word ‘sampo’ meaning giving up three things: relationships, marriage and children.

A demographic winter

As a result of the Sampo phenomenon, birth and fertility rates plummeted in recent years, causing demographics in South Korea to take a concerning tumble. In fact, South Korea’s fertility rate has been declining steadily, not being able to reach the minimum threshold (2.1 children per woman, so as to ensure the replacement of the generation) for more than 30 years, nowadays reaching only 1.1 children per woman (an astounding contrast with the impressive rates registered in the 1960s, as seen in Graph 3).

Graph 3 - Total Fertility Rate in South Korea (1955-2020)    Source: Worldometer

Graph 3 – Total Fertility Rate in South Korea (1955-2020)

Source: Worldometer

Moreover, longevity has also been improving in South Korea, with the country displaying one of the highest life expectancies in the world (around 82 years old), a value that the United Nations predict will continue to grow, estimating that, by the end of the century, an average baby born in South Korea will live to the age of 92.

This two effects combined result in an ageing population, with a population growth rate that has been significantly decreasing over the years (Graph 4), a fact that reinforces the notion that, even though a reduction in the country’s population is not yet a reality in the short-run, it seems to be an unavoidable scenario in the long run (Graph 5).

Graph 4 - Rate of population growth in South Korea (1960-2020)    Data source:

Graph 4 – Rate of population growth in South Korea (1960-2020)

Data source:

Graph 5 - Estimated population of South Korea (2021-2050)    Data source:

Graph 5 – Estimated population of South Korea (2021-2050)

Data source:

Promoting population rejuvenation

In order to combat this concerning demographic framework, various measures have been taken by the government in recent years, with a significant $70bn made available to be channelled into incentivising childbirth, marking it as one of the largest childbirth incentives worldwide, encompassing subsidies, facilities, as well as multiple perks for working parents and large families. For instance, in regards to subsidies, 500 000 won (around $500) are awarded to expectant parents so as to help covering prenatal expenses, as well as a monthly allowance  of around 200 000 won ($200) during the infant’s 1st year.

Also, in recent years, the government has been working in providing free day-care services for everyone, implementing more flexible pick up and drop off hours,, as well as allowing for exceptions in which children of both working parents are attributed priority in long day-care waiting lists.

In addition to all these national measures, some specific cities, like Seoul, have applied localised measures such as subsidising fertility treatments, providing free parking or even offering housing assistance.

However, as of today, these measures appear to have had little impact in boosting birth rates. This is probably due to the fact that the issue of the problem lies not in monetary concerns, but on the deeply rooted mentality of South Korea’s society, which attributes primacy of work over family, making it hard for women to conciliate the two realities (inevitably leading them to choose one over the other).


Paving the way through the correction of a historical problem

The solution to this demographic problem seems to revolve around increasing women’s participation in the labour force, actively incentivising it by granting them the same salary rights as men, as well as offering more benefits for working mothers. In fact, this can only be achieved if women are allowed the proper balance between work and family, leaving them enough time to dedicate to their children, as well as granting them the maternity leave they are entitled to and also not using that matter as a discriminatory selection criterion in job interviews.

In sum, while this seems to be the best course of action to take in order to invert the current demographic situation, there is still a long path ahead when it comes to women empowerment in South Korea. In fact, even if some legal action has been taken towards the goal of gender equality, in practice, this change is yet to be felt.

Bridging the gender gap as the sole way of reinventing South Korea

As long as society’s mentality remains unchanged, it is unlikely that the government will succeed in combining an increase in women’s participation in the labour force with a rise in birth rates, dooming the country to suffer the consequences of a long economic and demographic winter.

Sources:, BBC, Bloomberg, History, JSTOR, Kostat,, The Economist, Wilson Center, World Bank, Worldometer

Is there hidden inflation in a sea of deflation?

Economists around the world are rightfully concerned about inflation trends. Headline inflation does not tell the full story, though.

Extraordinary times, unconventional measures, doubtful results

With the recent economic woes caused by the pandemic, governments and central banks have been called for an unprecedented role of support to the economy, so as to limit the damage it has ravaged. Central banks, in particular, have come up with enormous economic stimulus packages, only comparable to the ones used following the Great Recession of 2008. One of the objectives of these institutions is price stability, normally measured with inflation – a quantitative measure of the rate at which the average price level of a basket of selected goods and services, primarily of interest to consumers, in an economy increases over some period of time –, which has seen great disruption.

At the moment, however, in the Euro Area, countries are experiencing deflation, the opposite of inflation, that is, a decrease in the price level. This is often seen as a bad indicator for the economy, as deflation could cause consumers and firms to delay consumption and investment decisions, so as to buy the same goods and services at a cheaper price in the future, which can lead to increased unemployment and, therefore, to an even greater reduction of consumption, pushing production and unemployment down even further. Thus, it is of no surprise that it is also seen as a sign that wages are not increasing or even worse, decreasing. Because if salaries are stagnant or diminishing this will negatively affect the consumers demand for goods, which could sometimes help to explain part of said deflation. This is the reason why central banks target an inflation rate around 2-3%, neither too high nor too low.

In order to combat this low inflation and bring liquidity to financial markets, so as to allow firms to more easily find credit to finance their day-to-day operations and their short-term cash flow strains, the European Central Bank (ECB) has embarked on a massive stimulus program.

Nonetheless, the purpose of this article is to assess whether or not the reported headline deflation, measured by the Consumer Price Index (CPI), seen in the indicators is not perhaps “hiding” inflation of substantially important goods for consumers and, therefore, turning  the well-intended actions of the ECB and other Central Banks to bring inflation up in order to help households, ending up hurting them.

Hidden inflation?

One of such “hidden” inflation phenomena can be seen primarily in the price evolution of food products, as seen in the graphs below.

Source: Trading Economics

Source: Trading Economics

Source: Trading Economics

Source: Trading Economics

 As it can be observed, food products inflation in the US has not always been above CPI inflation throughout the past year, but there was a large spike of the former, right when COVID-19 started spreading around the world and lockdowns began being enforced, which ground to a halt almost all economic activity.

Whilst CPI inflation decelerated, food inflation experienced the opposite. Focusing on the Euro Area in particular, even though there were some differences (in the Netherlands and Germany, the CPI has actually grown since March), in most countries, the correlation between CPI and food inflation was considerably negative, reinforcing the notion that the two evolved oppositely. Consequently, it would seem plausible that central banks could be emphasizing too much the low rates of inflation as measured by the CPI, but ignoring the increase in prices for food products, which are considered essential goods and represent a significant amount of an average household’s disposable income. So, central banks could be hurting households whilst trying to help them. And there is a valid argument to be made here, as in times of crises people tend to buy more food products as a proportion of their income and low-income families have a greater percentage of their income being spent on these products.

Breaking down inflation

Nevertheless, before making any hastily conclusions, we should first acknowledge that there are sectoral differences in inflation, meaning that different sectors in the economy tend to experience different inflation levels. For example, in terms of inflation, goods can be divided into non-tradable goods and tradable ones. The former group includes goods that can only be consumed in the economy in which they are produced in or that are not able to be exported or imported and, thus, face less exposure to international markets and price fluctuations. The latter group encompasses goods that are free to be traded between countries and are, thus, more susceptible to international price fluctuations. In the case of non-tradable goods, their prices can be greatly influenced by increases in productivity in the tradable sector, because such improvements will lead to higher wages. Also, as the intrinsically less globalized sector is more dependent on labour, it will result in higher prices of the produced goods.

However, one only ought to go to the nearest supermarket and check the origins of products on the stalls to realize the food sector is most likely a tradable goods sector, as much of the food we consume is imported from elsewhere, meaning it is exposed to international shocks, such as the one we are currently experiencing. But it is a special subsector, in the sense that, in developed countries, it enjoys a certain degree of isolation from the outside world, due to the higher health and safety requirements of these countries. Moreover, it is traditionally a sector that experiences higher inflation, because of the above-mentioned characteristic, but also due to an increase in living conditions in emerging countries, which are causing increases in demand, not fully matched by increases in the supply side. Besides this, the costs of storing, transporting and distributing have also risen and, in some cases, climate change has played a role in affecting the supply side (example: recurring droughts in California, that increase the costs of irrigation and loss of crops for farmers, largely as a result of the increased activity of the El Niño effect).

The effect of the pandemic on food prices

All this goes to show that inflation is traditionally higher in food products, but the levels that have been observed this year have been particularly high. This is majorly the result of the stress the pandemic has put on supply chains. As countries went into lockdowns, very little production was happening and trade between countries sharply decreased as well. As a matter of fact, in Europe, for instance, many nations closed their borders during March and April, which increased the costs and time of transporting goods between countries, resulting in an over-supply of some goods in some countries, which were destined to foreign markets, and in a shortage of other goods. Adding to this strain on supply chains, there is also the observed behaviour of consumers increasing sharply their spending on food products during crises, as they fear supply chains may be at risk or that prices might increase rapidly. However, this is almost a self-fulfilling prophecy, because, by increasing demand so dramatically in such a short period of time, consumers can make a “secure” supply chain of food, suddenly becoming overwhelmed due to the supply side not being able to meet such levels as rapidly.

Graph 3 – International trade has been suffering a severe hit in 2020     Source: World Trade Organization

Graph 3 – International trade has been suffering a severe hit in 2020 

Source: World Trade Organization

Besides the stress on the supply chain, farmers also have to deal with another problem resulting from the pandemic – the low availability of workers for harvesting crops –, either due to travel restrictions, little possibility of meeting the safety requirements or by people simply not feeling comfortable enough to work. This last occurrence has been especially problematic in the American and German meat industries, as slaughterhouses have had major out-breaks of COVID-19, which have caused prolonged and recurring shutdowns, contributing to even greater prices of meat comparing to other food categories, something notably concerning, as it is a very important part of average consumer diet.

A final verdict

In conclusion, is there “hidden” inflation? Yes, there is, mainly in the products which are of most importance for consumers, which are also having to deal with higher unemployment and decreases in income. So, it is reasonable to ask if central banks are not perhaps too focused on overall inflation levels to be able to notice an already high inflation level that greatly affects families, which might be causing an inadequacy of stimulus programs to revamp inflation, in terms of improving people’s situation. Even so, as we have seen, it is mainly a matter of problems of the supply side in meeting demand, something that should be smoothed out in the coming months as producers tackle the problems of the new working environments and consumers realize that supply chains are not as in danger as previously feared.

Sources: Centre d’Etudes Prospectives et d’Informations Internationales, Economics Help, European Central Bank, Food and Agriculture Organization of the United Nations, Investopedia, Norges Bank, Taylor & Francis Online, The New York Times, Trading Economics, tutor2u, World Trade Organization.

Imposto Mortágua – a hated property tax in Portugal, but why?

Imposto Mortágua (Portuguese for Mortágua Tax)  is a type of property tax that was implemented in Portugal in 2017. Its formal denomination is AIMI, Adicional ao Imposto Municipal sobre Imóveis (Portuguese for Additional Property Tax). It gained popularity as Imposto Mortágua, due to the Portuguese congresswoman and economist who created this tax, named Mariana Mortágua. As such, what is this tax about?

In short, this is an additional tax to the common Portuguese property tax IMI (Imposto Municipal sobre Imóveis) in Portugal. It is only imposed on individuals and corporations with luxury properties – which can vary from urban housing buildings to construction fields. However, regarding corporations, this tax only considers property that is not being used for production, while households’ property used directly for housing is not accounted nor taxed too. Furthermore, all revenue collected from this tax is directly allocated to the Portuguese Social Security.

More specifically, AIMI is only imposed on citizens that own property whose tax equity value is above a certain threshold, this being 600,000 € in 2019 for non-married individuals and 1,200,000 € for married individuals benefiting from joint taxation. Moreover, this tax is progressive and, therefore, divided in three brackets, with tax rates ranging from 0,7% to 1,5%, coming from the less valuable properties to the more expensive ones, respectively. This information regards the year of 2019, and a more visual and detailed representation of this tax methodology can be seen in the figures below.


Figure 1 – Tax brackets and absolute amounts imposed on singular, non-married individuals, owning properties valued at that respective amount. The values on the left column show the possible Valor Patrimonial Tributário (Portuguese for Tax Equity Value) of a property (as one can see, properties valued at bellow than 600 000 € are not taxed), the values on the middle column show the marginal tax rate for each property value and the values on the right column show the absolute amount an individual has to pay, marginally.

Source: Banco Montepio


Figure 2 – Tax brackets and absolute amounts imposed on properties owned by married individuals with joint taxation.

The interpretation for this is equivalent to the one in Figure 1, except that the tax only applies to properties valued at more than 1 200 000 € owned by married individuals with joint taxation.

Source: Banco Montepio

It is also important to state that these tax rates, since they are marginal, are therefore imposed on the difference between the next threshold value and the extra income above the previous threshold/bracket. For example, on a singular household with a property valued at 1,100,000 €, the following taxation will be imposed: for the first 600,000 €0.7% will be deducted from 400 000 (i.e. 1,000,000 € – 600,000 €), and then on the extra 500 000 €, a marginal tax rate of 1% will be imposed on the 100 000 € (i.e. 1,200,000 – 1,100,000 €),. As such, the absolute amount paid by this household on a 1,100,000 € property will be:

(400,000 € * 0.7%) + (100,000 € * 1%) = 2,800 € + 1,000 € = 3,800 €.

This tax created an interesting phenomenon – it is highly disliked by the Portuguese population, despite the fact that the vast majority of the people not supporting it are not affected at all by the tax itself (indeed, less than 1% of all Portuguese taxpayers are obligated to pay AIMI).

As such, one might ask: but why? Is it a problem of just misinformation of the population about the tax methodology or are there more complex political economy behaviours underlying such phenomenon?

Evidence shows that taxes on wealth (such as AIMI) are known to combat inequality in a very effective way. Indeed, wealth inequality shows a much larger gap compared to income inequality. Therefore, if an economist/politician has as main priority the reduction of inequality, a wealth tax might be the way to go since it tackles the main problem of wealth inequality directly.

AIMI is a great example of this, since taxing property is one of the most effective ways to tax wealth – not only it taxes directly the rich, who might have large inheritances and wealth stocks that are generating no flow to the economy, nor contributing to economic growth in any way, but it is also very difficult (if even impossible) to deviate from this tax, since property cannot be moved. This means that the likelihood that this tax generates a reflexive outcome is very narrow.

As such, it is also important to clarify that wealth taxes are levied on the wealth stock (therefore, the total amount of net wealth a taxpayer owns), while an income tax is imposed on the flow from the wealth stock. The income earned from returns to wealth becomes part of the wealth tax base for the next year, as the wealth stock grows.

This might very well be the reason why people dislike Imposto Mortáguathey feel as though they are being double-taxed. Indeed, wealth is a stock generated by the accumulation of income flows throughout one’s life (and also possible inheritances generated from income flows of past generations) and such income flows have been, for the most part, heavily taxed by income taxes. Accordingly, many people disagree with the policy of taxing wealth, since they view it as though such wealth has been taxed already through the taxation of income flows that ultimately generated such wealth. Considering AIMI specifically, this reasoning may widely apply too. People might view their properties as an accumulation of the income they generated throughout life, that was taxed accordingly and, therefore, they believe that owning such properties should not be upon the obligation of paying an added tax.

Thus, coming back to the initial question of why AIMI was so disliked when created, one might believe the answer to be a combination of the following reasons – not only because of a general dislike for wealth taxes, as many people view it as being unfair, but also due to misinformation about the respective tax methodology, thus believing AIMI would apply to any individual owning any kind of property or land (which is not the case).

As such, one might question what are the motivations to apply such tax as Imposto Mortágua in Portugal. The answer relates to the trade-off the government makes between efficiency and equity considerations, being this a purely normative discussion and, therefore, harder to reach fair conclusions.

For every public policy the government makes, a trade-off must be done between the effect on market efficiency and the effect on income and wealth inequality that such policy would make. How to compute the optimal trade-off is a hard task to ask and one can even say it depends more on politics rather than economic reasoning. The creation of AIMI is, therefore, a policy that prioritizes the latter – its ultimate goal is to reduce wealth inequality in Portugal – but, as one can see, it comes with some consequential hurdles. Nevertheless, in 2019, this tax generated revenues of 151,560,000 €, which were around 8,52% of the state’s tax revenue. This might benefit the activity of Social Security, which could ultimately help lower classes by giving them the needed resources and, therefore, reduce inequality.

Concluding, morally speaking, it is very ambiguous to objectively state whether this public policy is good or bad for the country, since it mainly depends on one’s motivations. When creating Imposto Mortágua, the government considered the economic impacts and may have disregarded eventual discontents among the population. Nevertheless, the government believes its economic outcomes show a clear positive social impact for many citizens. But, as seen above, people’s expectations, motivations, and consequent behaviours are highly heterogeneous.

Sources: Banco Montepio, Economia ao Minuto,, Idealista, Portal das Finanças, Tax Foundation, ZAP Notícias

Are central banks still capable of influencing economic activity?

In the past decades, monetary policy has played a major role in addressing macroeconomic fluctuations. Recently, interest rates have dropped to historically low levels, turning negative in some countries, calling into question the most basic foundations of economics. But how have we come this far and what can we expect? 

The goal of lowering interest rates

Central banks act as smoothers of the economy. When it gets overheated, they can, for instance, increase reference interest rates, making credit more expensive and slowing down economic activity. Contrariwise, in times of little confidence, they lower interest rates, facilitating access to loans and stimulating consumption and investment. Even though their action may jeopardize growth in expansion times, it is essential to avoid heavy recessions. Therefore, central banks are key in keeping stable confidence levels.

They can impact the economy by directly changing reference interest rates, reserve requirements or performing open-market operations. In this regard, they may engage in expansionary monetary policy (Image 1), in which case they might, for instance, buy assets, through open-market operations, from financial institutions, injecting liquidity in markets. As aforementioned, this suits recession times and has been taken to extraordinary levels since the COVID-19 outbreak started to dent economies across the globe. Contractionary monetary policy works the other way around, but it is far from being a reality during these times. So, the focus of this article will be on the expansionary side, trying to figure out whether or not monetary policy will be effective in smoothing the economic catastrophe brought by the pandemic, taking the past into account.

Image 1: Expansionary monetary policy tools    Source: Corporate Finance Institute (adapted)

Image 1: Expansionary monetary policy tools

Source: Corporate Finance Institute (adapted)

Monetary policy and how it has changed over time

Adequate management of money supply has not always been the main driver of policy-making towards achieving economic growth. As a matter of fact, Monetarism, as this school of thought later became known, only grew dominant in the 1980s, when inflation and unemployment rising together raised some skepticism about Keynesianism. It was applied by Paul Volcker, Fed’s chairman, as a remedy to slow down inflation in the USA, during Jimmy Carter’s presidency. Similarly, it was put into practice with Margaret Thatcher in the UK. In both countries, the decrease in money supply prevented prices from continuing their seemingly unstoppable escalation.

Image 2: Milton Friedman, the father of Monetarism    Source: Hoover Institution

Image 2: Milton Friedman, the father of Monetarism

Source: Hoover Institution

Nonetheless, as alternative regimes had and have their shortfalls, Monetarism also presented downsides. On the one hand, tackling inflation came at the cost of high unemployment (correlation coefficient between both variables of -0,62) (Graph 1). On the other hand, in 1980 and 1981, money growth targets in the UK were largely missed, worsening monetarism’s reputation, as (Pepper, 1998) noted in his book Inside Thatcher’s Monetarist Revolution.

Data source: World Bank

Data source: World Bank

These attempts to tie monetary policy to nominal anchors (being them money growth, as discussed, or gold and fixed exchange rates) and the fact that they failed proved that economic relationships (such as between inflation and unemployment or money growth) are often too unstable to serve as drivers of policy-making. Acknowledging their limitations in understanding the economy, most central banks devoted their efforts into keeping low and stable inflation, avoiding setting a particular exchange rate or money growth rate. Adopting this approach, they found out they had more flexibility to adapt their policies in the pursuance of their inflation target, which is set at just below 2% by the ECB.

Since the full adoption of the euro took place back in 2002 and until the outbreak of the 2008-2009 financial crisis, the ECB had been relatively successful in achieving close to 2% inflation (Graph 2). Nonetheless, in 2009, inflation accompanied the drop in Euro Zone GDP and decelerated significantly, with prices rising only marginally. In 2010 and 2011, inflation recovered a bit, responding to economic growth, but it would end up slowing down dramatically with the aftermath of the sovereign debt crisis, even when the economy started accelerating again.

Data source: World Bank

Data source: World Bank

As a result, in March 2015, the ECB engaged in non-standard monetary policy measures, implementing Quantitative Easing (QE), hoping to bring inflation back to the target and to enhance economic growth. The program is similar to the one tried by the Fed in the US or the Bank of Japan, being based on the acquisition by the ECB of financial assets (namely, bonds) from banks, which will increase their prices and consequently decrease yields. This decreases funding costs for both individuals and corporations, which is expected to stimulate consumption and investment. In the medium term, inflation should speed up and follow economic growth. Nevertheless, this shifts risk to central banks, whose balance sheets inevitably spike (Graph 3).

Data source: OECD

Data source: OECD

Looking at Graph 2 and considering its time frame, this program seems to be linked to economic growth. However, it is difficult to establish causation, as QE coincides with the recovery from the sovereign debt crisis, which by itself should have a positive impact on GDP. However, when it comes to inflation, success is yet to be a reality. This can be a result of two factors. On the one hand, the liquidity trap environment (interest rates close to 0% since 2009 and lately even lower) makes monetary policy less effective – the ECB cannot drop interest rates much further to stimulate  the economy. On the other hand, uncertainty – which has risen to another level with the pandemic – leads to higher investment/savings rather than greater consumption – instead of reaching the real economy, inflation is deviated to financial markets, as it will be further developed in the next section.

Monetary policy by the ECB and the Fed during the pandemic and how it has been impacting economic recovery 

The COVID-19 economic shock is one of the biggest since the Great Depression of the 1930s (Graph 4). It is particularly meaningful in the sense that the world as a whole – and not just some economies, as during the financial crisis of 2008-2009, for instance – has been heavily impacted. Supply-related disruptions and a substantial fall in demand led governments across the globe to design never-before-witnessed stimulus packages. At the same time, central banks have been engaging in an even more expansionary policy, reflected in their financials (Graph 4).

Data sources: European Central Bank, Federal Reserve Board

Data sources: European Central Bank, Federal Reserve Board

In the words of the former ECB’s President Mario Draghi, both the ECB and the Fed have been doing “whatever it takes” to help the European and American economies during such hard times. On the one hand, the ECB, besides loosening reserve requirements and setting lower interest rates, has launched its Pandemic Emergency Purchase Program (PEPP) (similar to QE), amounting to 1.35 trillion euros in the purchase of assets, just since March 2020. On the other hand, the Fed has also been undertaking a massive asset purchasing program, alongside direct support to mutual funds, banks, corporations and state and local governments.

The main problem stemming from monetary policy during these past few months is that, as briefly mentioned in the last section, it has not been particularly efficient in addressing supply and demand issues, since the high level of uncertainty channels funds to financial markets instead of the real economy. Especially in the US, this has induced an extreme asset overvaluation – the American stock market is worth, as of September 17, 2020, more than 175% of the US GNP (Graph 5).

Graph 5: Buffet Indicator     Source: GuruFocus

Graph 5: Buffet Indicator 

Source: GuruFocus

More evidence on the ineffectiveness of monetary policy in facing the wreak havoc by the pandemic is provided by the relationship between money stock and money velocity – despite the quantity of money has soared, the velocity at which it circulates struggles to increase, reflecting very low economic activity (Graph 6).

Graph 6: Money stock  versus  money velocity (US)    Source: Federal Reserve Economic Data

Graph 6: Money stock versus money velocity (US)

Source: Federal Reserve Economic Data

What lies ahead?

Monetary policy has faced complex challenges throughout time. Nowadays, policymakers are being forced once again to think outside the box, which has resulted in the non-standard measures discussed above. For now, policy transmission seems to be struggling, which may lead central banks to increase their stimuli, but maybe this is the time to focus on increasing efficiency rather than on pure money printing.

Sources: Corporate Finance Institute, European Central Bank, Federal Reserve Board, Federal Reserve Economic Data, GuruFocus, Investopedia, OECD, SpringerLink, The Brookings Institution, World Bank

India: the biggest lockdown in the world

The COVID 19 pandemic stopped the world. Most of the globe entered in quarantine to prevent the spread of the new coronavirus, some with great success, others not so much. Now, we witness the consequences of the pandemic  in one of the most populated countries in the world: India. The country is famous for its colossal population growth, low living standards, questionable working conditions and a bad public health system. A terrible recipe to face an epidemic.

The first confirmed case was reported on the 30th of January and  many others in the months that followed. . It was on the 24th of March that the government implemented a countrywide lockdown, with 519 confirmed cases, forcing 1350 million people to stay at home in quarantine. Out of those, 280 million live under the poverty line.

Everyone is highly advised to stay indoors and commuting between and within cities or villages is  either greatly conditioned or prohibited. Some neighbourhoods in big cities are completely blocked by fences. Even movement of goods, some essentials like food, are conditioned.

A great number of Indians lost all sources of income due to the confinement. It wasn’t long when people started disobeying it. Not because they do not fear nor understand the threat of the virus, but because they have no other choice. If the markets do not open, suppliers can’t sell their products and  earn the little income they need to survive, and consumers are unable to obtain essential goods like food and health protection equipment. Also, because of the movement restrictions, the markets that do open have a shortage in supply. Therefore, prices for food and masks have inflated by around 30% according to Público.

Citizens are desperate as they can’t lose their sources of income as, if they do, they’ll most likely starve. Nevertheless, the lockdown and confinement are being enforced by the police, many times resorting to violence. There are reports of police forces beating up big crowds and drivers that are passing where they shouldn’t. They were probably just trying to deliver food to shops or driving to the only market opened for miles.

In the big cities, the situation is much worse. In Mumbai, for example, there are 27000 people per square kilometre. Many live in slums: enormous neighbourhoods with streets no more than 3 meters wide and exposed sewers, where many houses are just composed of one room. Families of 5 members cook, eat and sleep in that one room. How did they get there? Most of them are people from rural areas, brough to the city to work. They accept the job for a low salary and one of those houses in the slums that are generally provided by the company.

During this crisis, the majority either lost their jobs, did not receive the full monthly wages or both. These people now have no income, no home, and no food supplies, being their survival very dependent on food charities. This is the reality for a great number of Indians,  having the unemployment rate reached 23.5% last April, according to the Centre of Monitoring Indian Economy (CMIE).

Unemployment rate in India (Source: CMIE)

Unemployment rate in India (Source: CMIE)

Some try to leave the city on foot  as trains and buses are non-operational. If found, the police will beat them and force them to go back, which they do, just to try again by a different route. When they are able to pass, these families carry their children for hundreds, sometimes thousands of miles to return to their home regions. They walk right next to the highways. 180 people, including a 2 years old girl,  already died on these routes, either by exhaustion or run over by a passing car. When they reach another settlement, the police will probably try to keep them out.

In the middle of all this, the government has tried to help, but with no success. It has provided buses and train rides between cities, but there aren’t enough for so many. It correctly informed the population about the threat of the virus and why it is so important to stay at home, and acted quickly when more positive cases were being confirmed. But instead of sustaining the confinement by supplying the population, they lockdown cities by all means necessary.

Everything they have to show for their hard efforts, both from part of the government and the people, are the statistics. By the time that this article was written, India had a number of confirmed cases and confirmed deaths that put the mortality rate in 0,03%. Relatively speaking, that is not bad. Many call it a miracle or, at the very least, a mystery. It also has a great number of recovered people. It is true that India has a young population and a generally hot climate, both factors contributing positively to ease the severity of the proliferation of the virus. But that does not tell the full story.

Testing in India has not been enough in comparison with the rest of the world. The hospitals seem completely full of COVID-19 cases. Some became so restricted that other patients cannot get treatment for other diseases, like HIV/AIDS. India is also full of other dangerous illnesses. Pulmonary Tuberculosis, a disease eradicated in so many countries, still exists there and has very similar symptoms as the coronavirus like persistent cough, fever, fatigue and breathlessness. Of all deaths in India, only 22% are medically certified, and wrong diagnosis are often. Hence, many deaths are not being registered as COVID-19 caused, when some most likely are. Many deaths happen at home in India. A family member reports it by phone, and then authorities conduct a “verbal autopsy”.

“Counting deaths has always been an inexact science in India.”


Under-reporting of COVID-19 cases and deaths is not uncommon amongst infected countries, but India already has a reputation of a terrible account of its diseases and deaths. All of this makes you wonder: how viable are those “miraculous” statistics?

Map of cases per million in India by states (source: Ministry of Health and Family Welfare)

Map of cases per million in India by states (source: Ministry of Health and Family Welfare)

What is more dangerous, the disease or the lockdown preventing it?

Many specialists are studying to get an answer for this question, but for the time being, we just don’t know. Until we have a better understanding and a better system to deal with the pandemic in India, the disease will continue to spread and people will die, let it be by the disease, starvation or another cause related to the lockdown. And as it was shown to us this year, the world can always get worse. A new strain of the coronavirus was found in India, resulting from a mutation, that experts say there is still no reason for alarm, but it can lead to the ineffectiveness of a potential COVID-19 vaccine. Not only that, but the strongest storm ever recorded in the Bay of Bengal, the Cyclone Amphan, is about to hit India and Bangladesh.

The people of India are in need of international help now more than ever. If you think you can help, please consider donating to a charity institution, such as Kolkata Relief.

Instagram: @kolkatarelief

Sources: Público, RTP, ABC, South China Morning Post, BBC, CNN, CMIE, MoHFW.

Margarida Gomes - Margarida Gomes João Rodrigues - João Rodrigues

Is TAP worth taxpayers’ money?

The nationalization of TAP Air Portugal (hereby simply referred to as TAP) has been a hotly discussed topic recently. In this article, the major pros and cons of such a move by the Portuguese government are put into perspective, during a time in which taxpayers cannot afford to cover a bad decision from those in charge.

Founded back in 1945, under the Estado Novo dictatorship, TAP was initially a private company. During the first three decades of existence, its development occurred at a slow pace, mainly due to the fact that Portugal was a poorly internationalized country by the time. With the deposition of the regime, which led to the nationalization of the company (along with many other businesses), and a further global integration of the country, TAP could grow, expanding its routes and reaching more points on the globe. The fact that TAP took almost 20 years to reach the one million passengers milestone, compared to the 17 million attained in 2019, is a proof of the tremendous development registered not only by the company, but also by the sector as a whole.

What’s the company’s current situation?

Despite the pronounced long-term growth of the aviation industry, TAP exhibits long-lasting liquidity/solvency problems, presenting, year after year, worrying financial statements. As a matter of fact, the incapability of the firm to deliver sustainable results throughout decades led to its reprivatization (2015) in the aftermath of the financial crisis that hit Portugal.

Before diving into the numbers, let us proceed with a brief characterization of the firm’s organization nowadays. In fact, the aviation company itself, TAP SA, belongs to a holding, TAP SGPS, founded in 2003. Besides TAP SA, the group owns eight additional subsidiaries working on related businesses, such as catering, maintenance, cleaning services and computer engineering.

In 2015, under Pedro Passos Coelho’s government, the group was privatized and the Atlantic Gateway consortium, headed by David Neeleman and Humberto Pedrosa, acquired a participation of 61%. Later, in 2016, António Costa’s office partially reverted the process and secured a 50% share to the state, assuring an even split across private and public ownership. This ended up translated into an ambiguous shareholder structure, which has remained unchanged since then. But for how long?

TAP SGPS is in severe financial distress. The graph below says it all. In 2008, owners’ equity became negative and net income simply disappeared, almost never to be seen again. To make things even worse, the level of indebtedness is currently at dangerous levels (above 200%) and, even though the expansion of the aircraft fleet has been contributing to increased assets, liabilities struggle to be reduced. In finance, such analysis should ideally be conducted via peer comparison, but the values presented (namely, those relative to income) are intrinsically poor and are a good portrait of the group’s frightening financial situation.

Data Source: Sabi Nova SBE

Data Source: Sabi Nova SBE

Should TAP become a state-owned company again?…

In this dramatic scenario, one may wonder what factors could be a justification for state ownership, as the financial situation does not seem to be one. Consequently, on the one hand, nationalization’s supporters argue that private management would only care about profit and this would potentially mean the elimination of important routes for the Portuguese community, such as the links with Guiné-Bissau or Cabo Verde. On the contrary, the state would defend the best interests of citizens, even if they led to inefficient outcomes. In this domain, the fact that most European countries have state-owned airlines is often used as an authority argument to back nationalization.

Another idea in favor of state control is the role of ambassador of the Portuguese culture that TAP is believed to play abroad. The defendants of this thesis argue that, by becoming private, the brand would lose connection to its Portuguese background and start to be seen as just another airline, which would harm Portugal’s international exposure. In fact, this is one of the main concerns of António Costa’s government, which considers TAP as a «strategic company». Taking into account that the aviation industry is among the most affected by the COVID-19 pandemic, he says that the government will avoid its bankruptcy at all costs. Also, TAP employs more than 10,000 people nowadays and many believe that privatization, a merger or an acquisition by a competitor would mean many jobs lost.

Could thousands of employees fill unemployment claims in case of privatization? 

Could thousands of employees fill unemployment claims in case of privatization? 

… Or should it be effectively privatized?

On the privatization side, people argue that the state has no right to arbitrarily inject taxpayers’ money into a company near bankruptcy and which can well be run by a private entity with no prejudice for national interests. If for a bank that is admissible due to systemic risk, an airline company is not believed to be worth of taxpayers’ effort, especially considering that there are loads of similar companies providing the same kind of services, many times at a lower cost for the client.

An interesting counterargument to that of national interests is precisely that, as opposed to the theorized, TAP does not defend the interests of Portuguese citizens, but rather those of Lisbon. The company is accused of regionalism, namely owing to the fact that it announced the re-establishment of more than 70 routes from Lisbon and just 3 from Oporto after the lifting of containment measures. So, if the company only serves one city, it is argued not to be fair that all taxpayers are equally liable for it.

To rebut the vision of job posts loss, the apologists of privatization argue that, if TAP goes bankrupt, other companies will come over and fill its place. This would mean that, despite scale advantages, most workers will not lose their jobs, but will rather be hired by other companies. In the context of Lisbon’s airport, given TAP’s large share, this could mean lower fees in case of bankruptcy, as competition would increase. The case of the United States of America seems to support this theory. After World War II, the country deregulated airlines market and, despite Pan American (their public company by the time) went bankrupt, the increase in competition led to lower fees and routes’ expansion.

What does the future hold?

At this moment, there is no certainty about the future of TAP and, even though state’s help (through convertible bonds, for instance) is a possibility, nationalization is unlikely to happen, as the burden it would imply on households during these times would be massive. Extraordinary times demand extraordinary policy action, but taxpayers could well not be able to deal with a questionable public rescue to TAP.

Sources: ECO, Jornal de Negócios, NiT, Notícias ao Minuto, Sabi Nova SBE, Showbiz Cheat Sheet, TAP, Wikipédia

The Federalist Papers: Short overview and considerations about the future of fiscal federalism in the EU

“After full experience of the insufficiency of the existing federal government, you are invited to deliberate upon a New Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences, nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire, in many
respects, the most interesting in the world.”

— Alexander Hamilton as Publius, Federalist No. 1

Following the American Revolutionary War, and the drafting and ratification of the Articles of Confederation by the 13 states, it soon became obvious that the young confederate government was severely hindered in its functioning by an overall lack of power. Indeed, without an executive or judicial branch, the new government lacked the power and authority to tax, for example. Since it could only request money from states but didn’t have any ability to enforce these requests, both the government and the U.S. army were majorly underfunded.

It was, therefore, to evaluate and, possibly, amend the Articles of Confederation and improve the current situation that delegates from the 13 states gathered in Philadelphia, in 1787, in what was called the Philadelphia (or Constitutional) Convention. Even though a new constitution was drafted and signed in this convention, it was not with this goal in mind that these delegates joined in assembly. However, since many were convinced of the inadequacy of the current system, the convention soon evolved into an effort to redesign and rebuild the whole political structure of the union from a loose confederacy into a more solidly cemented federal union.

However, the drafting of the new constitution and its signing in the convention was only the first step. Next, and most critically, to enter into force, the new Constitution needed to be ratified by 9 of the 13 states. It was to lobby votes in favor of ratification that Alexander Hamilton, one of the convention delegates from the state of New York and the 1st Secretary of Treasury of the United States of the future government, wrote, along with James Madison, one of the most central figures in the drafting of the new Constitution and the Bill of Rights and future president of the U.S., and with John Jay, future 1st Chief Justice of the Supreme Court of the new government, a series of essays whose collection is referred to as The Federalist Papers.

Alexander Hamilton

Alexander Hamilton

The Federalist Papers

The Federalist Papers

James Madison

James Madison

These essays, 85 in total (1), were published as serial installments in newspapers and discussed topics ranging from the benefits of a federal union under the Constitution on matters of war and taxation to the discussion of the principles of separation of powers, how it is upheld by the Constitution and how the system of checks and balances between the three branches of government works under the Constitution, all the while attempting to refute many of the anti-ratification arguments of the time.

Although their effect in promoting the ratification of the Constitution is unverifiable, they certainly are a window into the political and historical framing of the federalists vs anti-federalists debates of the time and can prove useful in understanding some of the debates and arguments employed with regards to federalism in the European Union.

In Federalist No.11, Hamilton talks about the advantages of a common commerce policy, as achievable by federalization with, for example, the ban on inter-state tariffs, echoing many of the free-trade ideas that helped create and develop today’s European Union’s common market.

In Federalist No.30, Hamilton describes the poor situation of the government’s revenues under the Articles of Confederation and argues, namely, that the state of public debt of such a government will be extremely precarious. Indeed, while talking about the future creditors of the government he says:

“to depend upon a government, that must itself depend upon thirteen other governments, for the means of fulfilling its contracts, (…) would require a degree of credulity, not often to be met with in the pecuniary transactions of mankind”

— Alexander Hamilton as Publius, Federalist No. 30

The solution to such a problem, he argued, lied in giving the new Congress the general power to tax and levy tariffs.

However, federal revenues were mainly dependent on tariffs until the beginning of the 20th century, before the creation of the income tax (2). As this new tax was being levied and grew in size, federal fiscal policy also grew in scope, with the creation of the New Deal during the Great Depression, for example.

Both Hamilton’s arguments at the time for a more energetic government, empowered by the power to tax, and the expansion of the scope of federal fiscal policy after the Great Depression timed with the creation of the income tax provide insights into the current discussions on the expansion of centralized fiscal responses by the European Union.

Indeed, for the central institutions of the European Union to be able to provide a more timely and powerful response to a crisis such as the present one, they must also be able to access bigger sources of revenues.

If we want more powerful central institutions in the EU their budgets must also increase.

In 2017, EU budget expenditures were about €137,000 million. These paled in comparison to the U.S federal government’s almost $4,000,000 million in outlays. In Europe, where countries’ governments are already very fiscally active, it is hard to imagine a scenario where an increase of the central EU budget to levels more comparable to those of the U.S. federal government would not come at the cost of shrinking national government’s budgets.

Whether a more centralized response by the EU would, then, be net-beneficial is not something I’m arguing for or against. Indeed, the question that I desire to pose is whether this response, at the expense of member-states’ fiscal power, is politically achievable. Such a question is impossible to definitively answer. On one hand, emergency situations, like the Great Depression in the U.S., seem to be breeding grounds for centralization, on the other, the shifting political landscape in Europe, namely with the rise of Euro-skeptic parties, may foresee a grimmer fate for European federalism.

(1) You can find The Federalist Papers at: or listen to public domain recordings of it by LibriVox at:

(2)-  Even though Clause 1 of Section 8 of Article 1 of the U.S. Constitution gave Congress the ability to levy taxes it was only with the creation of the 16th Amendment to the U.S. Constitution that Congress was able to levy country-wide income taxes.

The Impact of Globalization on Inequality

Since the European discoveries, several waves of globalization have shaped the way we live today. The most recent one started around the 80s/90s of the previous century and was pushed by several circumstances. First of all, the economic reforms implemented in China around that time by Deng Xiaoping, who ruled the country as paramount leader* between 1978 and 1992 and the fall of the USSR in 1991 brought economic development and openness to vast territories, changing its interaction with the rest of the world. In addition to these two events, the improvements in communication and transportation technologies were key aspects that enabled all the process, boosting global trade and movement of capital between countries. For instance, according to the World Bank, exports of goods and services grew from US$4.1 trillion in 1980, to US$23 trillion in 2015, at constant on 2010 prices

Since the beginning of the process until now, globalization is said to have taken a lot of people out of poverty due to those infusions of foreign capital and technology in less privileged areas of the globe, bringing them economic development and spreading prosperity. Stil according to the World Bank, the global population living with less than US$1.90 per day in this condition decreased from 36% in 1990 to 10% in 2015. The two countries that most contributed to this outcome were China, where this indicator fell from around 66% to 1% in the same time-frame; and India, where poverty affected almost 49% of the population in 1987, shrunk to 21.2% in 2011. Undoubtfully, this is clearly positive and a major advance towards the United Nations’ sustainable development goal of eradicating poverty.

However, even though poverty has shrunk at a global level, the fact is that the increasing wealth that is created and the benefits of globalization are said not to be distributed fairly.

Global real income growth (1988-2008)

Source: Equitymaster

Source: Equitymaster

This chart was elaborated by Branko Milanovic, an economist recognized for his work and research in inequality and income distribution, and depicts the variation in real income according to each percentile of the global income distribution between 1988 and 2008. It can be clearly seen that, during this time frame, the ones who saw their income increase the most was the population living in emerging countries and also the richest citizens of the world. On the other hand, the middle classes of developed countries and the extremely poor virtually remained the same, with some even getting worse off. 

When looking for answers that may explain why this has happened, the novelties brought by this recent wave of globalization should be taken into consideration. The reductions in transportation costs and trade barriers created an atmosphere of incentives for capital owners to move the production segment of the supply chain from developed countries to others with better cost advantages, mainly regarding labor, in order to pursue competitiveness. Therefore, these new opportunities have benefited the global elite, as well as the population of where these jobs were created. On the other hand, this has led developed countries to experience major job losses and its working class to see their real wages/income stagnated overtime, and even decreased.

Even though globalization may have contributed for more inclusiveness and less poverty at a global level, smoothing differences between the richer and the poorer countries, the fact is that, when considering the internal situation of each nation, it may be a different story. 


Distribution of pre-tax national Distribution of pre-tax national income in the United States income in China

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Source: World Inequality Database

Source: World Inequality Database

These graphs clearly show that inequality in the United States as well as in China increased. In both countries, independently of whether real incomes increased or not, the share of national income received by the bottom 50 percent of the population fell, while the top 10 percent saw their share of income increase. This being said, it is quite clear that inequality should be a priority for national governments.

*Paramount leader: informal term for the most prominent political leader in the People’s Republic of China, not necessarily involving an official position.


Sources: Forbes, The World Bank Data, Equitymaster, World Inequality Database