#TRADINGDEBATES WHITE PAPERS

Trading insights from top thought leaders

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Introduction
Lars Seier Christensen Co-CEO and co-founder of Saxo Bank Saxo Capital Markets is proud to announce the launch of the #TradingDebates White Papers Insights from Top Thought Leaders. Based on these conversations, we have created the #TradingDebates White Papers a collection of articles and videos to help you to identify new trading opportunities during the next stage of the Eurozone crisis.

The ongoing crisis in the Eurozone, the quantitative easing tapering debate in the US and We invite you to join the debate and share the growing conflict in the Middle East have your views with us. all contributed to the heightened volatility we are experiencing in financial markets. In response, Saxo gathered some of the top thought leaders in the industry at Bloombergs European Headquarters in London on September 13, 2013, to discuss the biggest challenges facing the continent.

INTRODUCTION

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Content #TradingDebates
Chapter 1: Merkels Lack Of Vision Is The AchillesHeel Of Europe
By Lars Seier Christensen, co-CEO and co-founder, Saxo Bank A/S

White Papers
4 Chapter 6: The Euro A Currency With Nine Lives
By John J. Hardy, Head of FX Strategy at Saxo Bank A/S

27

Chapter 2: Europe: The Shattering Of Illusions

By Vclav Klaus, former President of the Czech Republic

Chapter 7: Oil Markets Let The Dust Settle

By Ole Hansen, Head of Commodity Strategy, Saxo Bank A/S

31

Chapter 3: Is The UK Better Off Outside The EU?

By Nigel Farage, Leader of the UK Independence Party

13

Chapter 4: Is Merkels Victory Europes Wake-Up Call

By Steen Jakobsen, Chief Economist and CIO, Saxo Bank A/S

Chapter 8: Confidence In Emerging Markets Expected To Stage A Comeback

By Mads Koefoed, Head of Macro Strategy, Saxo Bank, A/S

35

16

Chapter 5: Has Quantitative Easing Become An Embarrassment?

By Nick Beecroft, Chairman and Senior Market Analyst at Saxo Capital Markets

Chapter 9: Europes Economic Foundation Is On The Right Track

By Peter Garnry, Head of Equity Strategy, Saxo Bank A/S

39

21

Chapter 10: Forward Guidance The Latest Fad

By Nick Beecroft, Chairman and Senior Market Analyst at Saxo Capital Markets

43

CONTENT

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CHAPTER 1

MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

LARS SEIER CHRISTENSEN
Europes piecemeal approach to policy has yielded few positive results. High unemployment and low growth continue to fuel social unrest in southern Europe, while there are signs of cracks throughout the Eurozone. The whole European project, it is argued, is just one bad election away from a serious wake-up call.

MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

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Merkels Lack of Vision is the Achilles Heel of Europe

Lars Seier Christensen

I have met a number of politicians over the years, but lately it has dawned on me that very few of them are seriously prepared to stand up for their beliefs, if indeed they have any. I can just about recall a time long ago when things were slightly different; nowadays, politics is all about solving day-to-day problems and following opinion polls on what voters are prepared to tolerate, rather than leadership and fundamental personal integrity. Ideologies and courage have been consigned to the past and, as I see it, Europes Achilles heel is German Chancellor Angela Merkel, the de facto leader of the EU, and her lack of vision for the single-currency bloc. Merkels lack of vision stands as a striking contrastto the emotional feelings that dominated much of post-war European political thinking. I, for one, believe a more rational approach could have saved us from the mess we are in, but declaring that the EU should be winning the global economic race, which is one reason why Germany wants to keep Britain in the EU, is not a vision. Its a rational goal I support, but one we wont reach unless we come up with a new, realistic vision for Europe in the 21st century. When Saxo Bank opened its new office in Prague in May 2009, my staff requested a private meeting with then President Vclav Klaus. Our application was granted and, a few months later, we sat in a car en route to the beautiful presidential palace, with its air of faded grandeur. Since the fall of the Iron Curtain and even long before that and under particularly difficult circumstances Vclav Klaus has been a beacon for freedom and for confronting state abuse and injustice. President Klaus is a man well worth meeting if you believe in liberalism and capitalism, as I do.

I, for one, believe a more rational approach could have saved us from the mess we are in, but declaring that the EU should be winning the global economic race, which is one reason why Germany wants to keep Britain in the EU, is not a vision.
5

MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

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 There was no shortage of warning voices in the final days of the creation of the Economic and Monetary Union. But even if it was obvious for some, the European heads of state and government chose to get the project started with a foundation as weak as a sandcastle on a beach.
During our meeting, we discussed the Eurozone sovereign debt crisisthat was well under way, although few had noticed at that point. We agreed that the biggest practical challenge facing the EU beyond any comparison the problem at the root of all other problems and the reason why the EU is moving in the direction of economic disaster and increasingly seems to be neglecting the democratic process is the common currency: the euro. When the President last year published his English edition of Europe The Shattering of Illusions about his frustrations with the current situation in Europe, I did not hesitate to publish it in Danish and promote it wherever I could. The book discusses the institutional developments in Europe from the Second World War to the Eurozone debt crisis and it assesses the current phase of instability, which he calls the interim phase. It is essential reading for anyone who cares for Europe, as I do. President Klaus main point is that if Europe wants to restart its economic development, it has to undertake a fundamental transformation and for that to happen, we need a bold new vision for our continent. The idea of a common currency in Europe goes way back, even before the European Economic Community (EEC). It was discussed before the Second World War by the League of Nations, the predecessor of the United Nations. Back then, it was just a grandiose vision. The Werner Report in 1970 finally put it on the agenda of the EEC.

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MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

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 By joining a common currency, countries waive some of the important tools that their national central banks normally would have at their disposal.

Even though the euro is at the root of most of the EUs problems, the idea of a common currency is impressive, ambitious and logical in a best-case scenario. If you can create a comprehensive economic and monetary union with a population bigger than that of the US, then that would also be reflected by the international political power. One should not underestimate the fact that more political influence had been a dream for European politicians for decades. As in many other aspects of the EU, large parts of the common currency project were driven by European politicians feeling of inferiority compared with the US and Russia and later, the real or potential superpowers like China, India and the Middle East. of people in France believe European economic integration has made things worse The central problem, however, was that the for the country, an increase of 14 points majority of European citizens did not have any since last year. desire to create a political union, which must Source: Pew Global Research be the foundation for a monetary union. The citizens of wealthy countries did not want to give up their national identity and tion for a well-functioning common currency. did not want to see their economic achieveThere was no shortage of warning voices in ments become part of a collective pool. In this the final days of the creation of the Economic construction, solidarity with poorer countries and Monetary Union. But even if it was obvicemented their position as permanent conous for some, the European heads of state tributors. and government chose to get the project started with a foundation as weak as Not surprisingly, the greatest enthusiasm for a sandcastle on a beach. this proposition has been expressed by economically weaker countries. They saw They did this, expecting to be covered by an considerable advantages in such a system, but extra appropriation bill, or as it turned out without being ready to throw their national later with a hidden agenda, by creating this states or traditional policies overboard. But foundation piece by piece, without caring the EU is not a horn of plenty from which all much to ask the European populations. the wealth just keeps coming without the That process is also being continued reneed to demonstrate one deserves to be on lentlessly in countries like Denmark, which the receiving end. are not even members of the Eurozone.

77%

The European politicians knew well enough that a foundation in the shape of a political and financial union was a necessary precondi-

MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

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But politicians just want a more wide-ranging integration than many citizens are ready for. To be loyal towards the rulers in Brussels and disloyal towards your own population often equals a great job and plenty of distinctions and stars, along with the illusion of political significance among your friends. But what is the true problem with a common currency when it sounds so practical and meaningful to avoid exchange expenses and rate risks, and when it created a strong central bank that could play an international role? By joining a common currency, countries waive some of the important tools that their national central banks normally would have at their disposal. The most obvious tool is the option to adjust currency rates either through devaluation or revaluation, or to leave the rates to the financial markets, which is the norm for most other asset classes. The second important tool is the option to adjust economic trends by short-term interest rates. Both of these adjustment triggers are critically important and their absence carries the seed of potential disaster for any area or country if there is no agreement that the occurrence of inequalities can be regulated in a different way. This could be common bonds, fiscal transfers and so on just think of what happens within national states. Lolland for example, an island in Denmark, would be in dire straits if it had to find financing for projects in international markets. But as a fully integrated part of Denmark and with national money transfers, its problems are being resolved smoothly. If you imagine a Europe constructed as a national state, many of the problems would be resolved although the overall economy hardly would be something to brag about. But it requires former independent national states to accept the same role as a little Danish island, while the more prosperous areas in Europe must be willing to take on the same responsibility as Denmark with a weaker area in its national state. We are far from having achieved this situation. In addition, the movement of products, services and labour cannot be compared with how this is done within the borders of a national state. Language, education, culture and geographical distances make it a much more difficult task in a European context. Merkels mentor, Helmut Kohl, the great re-unification chancellor, believed one could draw a political line under Europes fractured history, with economics playing a much lesser role. Das Mdchen, as Kohl used to call her, lacks this nave approach to the EU. She is definitely not a girl any more, but has developed a very pragmatic approach to the EU and for that reason socialistic France calls her Madame Non. Merkel has said nein to centralised EU economic governance, a permanent bailout mechanism and the idea of euro bonds, which she called economically wrong and counterproductive. Her handling of the euro crisis explains the French disenchantment with Europe,

which was revealed in a Gallup and Pew Research Center poll in May 2013. When former European Commission president Jacques Delors, who presided over the creation of the euro, regaled a Socialist gathering the following month, he attacked what he called a punitive and alienating Europe. Merkels Europe is not punitive and alienating. Its fair. She wants the EU member states to follow the rules and ensure Europe becomes more competitive. She is a problem solver and theres nothing wrong with solving concrete problems. However, politics is also about declaring new ideas and visions. Its about setting an agenda instead of following a popular sentiment. Merkel has yet to do that. But Germans were clearly in no mood forchange and Merkel won the election on September 22. As the de facto leader of the EU, its future and disaster currency will be determined by this former research chemist. As I see it, the research is done. The verdict is out. We have to re-evaluate the EU.

Decline in Support for the European Project

Economic integration, strengthened economy Favourable of EU

Germany Britain France Italy Spain Greece Poland Czech Rep. Median
Source: Pew Global Research

2012 2013 Change 2012 2013 Change % % % %

59 30 36 22 46 18 48 31 34 54 26 22 11 37 11 41 28 28 -5 -4 -14 -11 -9 -7 -7 -6 -6 68 45 60 59 60 37 69 60 60 60 43 41 58 46 33 68 45 45 -8 -2 -19 -1 -14 -4 -1 -15 -25

MERKELS LACK OF VISION IS THE ACHILLES HEEL OF EUROPE

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