The Commission is on track to complete 95 of its 101 targets by 2015. Here is an overview of the good and the bad.

The Digital Agenda is part of the 2020 reform, which is a 10-year strategy proposed by the European Commission for advancement of the economy of the European Union. It wants “smart, sustainable, inclusive growth” with greater coordination of national and European policy. It is actually the next step of the Lisbon Strategy.

The Digital Agenda is a flagship initiative that is part of the 2020 project. Together with Innovation Union and Youth On The Move it is part of the Smart Growth pillar. The commissioner in charge of the Digital Agenda, and thus the internet, is Neelie Kroes.

The Commission published a press release on May 28 (2014) to give an update on where the project stands. The project is four year underway so we are nearly at half time. Let's see how the EU is progressing.

As always, there is good news and there are some remaining challenges.

Here is the good news.

Regular Internet use up

The number of people who use the Internet at least once per week has increased from 60% to 72% since 2010. The most improved countries are Greece, Romania, Ireland, the Czech Republic and Croatia.

The best performers, with over 90% of the population using internet, are Denmark, Sweden, Netherlands and Luxembourg.

Big progress among disadvantaged groups

Internet usage by unemployed people, low educated and older groups, is up to 57% from 41% four years ago. On current trends the target of 60% will be reached before 2015.

Non-users are down a third

Only 20% of people living in the EU have never used the Internet. That number is down a third since four years ago. If the current trends persist, the DAE target to get the number down to 15% by 2015 will be met.

Online shopping is booming

47% of EU citizens are now shopping online. That number is up 10 points and it means that the target of 50% by 2015 is likely to be achieved.

Everybody has access to the internet

100% of Europeans now have access to broadband. This often includes several options like fibre, cable, ADSL or 3G/4G mobile access. And most Europeans now have affordable access to satellite broadband as a minimum.

Fast broadband technologies: 4G mobile broadband availability increased sharply to 59%, up from 26% a year ago. Fixed lined internet of at least 30 Mbps is available to 62% of EU population, up from 54% a year ago and 29% in 2010. Fast broadband is already available to 90% of homes or more in Belgium, Denmark, Lithuania, Luxembourg, Malta, the Netherlands and UK.

Most Europeans now live digital lives and they are hungry for more. We have solved the internet access problem. But the digital skills gap persists. Unless we all do more, we will face a digitally illiterate underclass in Europe.

— Neelie Kroes

That was the good news. However, there are also challenges that the EU is facing. In the next year the commission will put extra emphases on the following problems.

Small businesses are missing out

Only 14% of businesses with under 250 employees are selling their products online. Across the EU, not one country comes close to achieving the EU average target of 33% by 2015.

Europe’s rural areas at risk

The rural areas are offline. Only 18% of rural households have access to high-speed broadband. This number has to go up quickly before it becomes a problem.

eGovernment services in 2013 stagnated

These services were used by only 42% of the EU population. Continuing at this rate will not see Member States achieve the target of 50% by 2015.

Kroes worries about a digital illiterate underclass. But by 2015 more than 60% of disadvantaged groups will be using the internet. Sure, it is important to keep these numbers growing and it is still far from 100%. But we are only four years underway. If the EU keeps working the way it is now all targets should be reached by 2020.

Europeans like to complain about the `lack' of progress the union is making. The startup scene is eagerly waiting for the first European Google or Facebook. OK, the continent has not delivered such companies yet, but if we look at the overall development of the union it is fair to say that our flagship tech companies are coming soon.

Have some patience.

The seeds are being planted. Do not step on them before they have had a chance to grow.

If you enjoyed this article, please hit the recommend button or share it on Twitter. I would really appreciate it! Hans

A look at various economic indicators

In March 2013 Cyprus made international headlines. The EU decided on a radical solution to resolve the perfect crisis that was brewing in Cyprus. Bank deposits were raided to restore banks’ capital buffers, draconian capital controls were put in place and the government was to undergo strict fiscal consolidation.

In the ensuing months, the Cypriot economy showed signs of unexpected (and indeed welcomed) resilience, adapting faster than anticipated, beating even the most optimistic forecasts.

This will be a graph heavy post as I attempt to quantify the deposits raid impact on various sectors of the economy. Data obtained from the Cypriot statistical Service Cystat and from the Central Bank of Cyprus.

Construction

Cystat has set 2010 as the reference year (100 points)for measuring the Construction production index. Therefore the data do not accurately reflect the drop in construction (construction peaked in 2008).

Consumer Price Index

CPI was increasing till 2013 despite the overall decline in the economy and the increase in unemployment. The trend reversed in 2013.

Retail total Volume Value

Retail Value decline began in 2011 and continued to fall throughout 2012 and 2013.

Tourism

Admittedly the bad press Cyprus received in 2013 had an impact on tourist arrivals especially from Western Europe. However Tourism Revenue continues to grow as the drop in revenue from Western Europe tourists is offsetted by heavy spenders from Eastern Europe and Russia.

Average Monthly earnings

This indicator is a bit misleading as CyStat does not make the distinction between public sector and private sector workers. The 2nd group saw their earnings decline earlier than their public sector counterparts. Upon signing the MoU the republic of Cyprus decreased public sector wages on a progressive scale.

Unemployment

Unemployment continues to increase at a steady pace and has reached alarming unprecedented levels by end 2013. Construction and Retail related professions are the hardest hit categories making up close to 1/3 of all unemployed. Additionally the financial services sector (excluding banks) seems robust and is the only sector that continues to add new jobs.

Total Trade (EU and the rest of the world)

Cyprus does not export much and its trade deficit is the largest of the EU’s 28 member countries. Due to the ongoing crisis total imports have dropped dramatically while Cypriot exports held steady or marginally increased.

Government finances

In 2013 there is a noticeable drop in government revenue which was off-setted by the government’s fiscal consolidation drive. Overall the primary deficit was narrowed to 332mn in 2013 from the lowest in 5 years.

Monetary and Financial Statistics

Cyprus has yet to lift the draconian restrictions on capital imposed in 2013, although these measures have gradually eased since. According to a road map drafted by the Cypriot Ministry of Finance,the Central Bank and the Troika certain banking milestones have to be achieved before lifting restrictions altogether. In recent interviews the Minister of Finance Harris Georgiades has said that by end of 2014 restrictions on movement of capital within Cyprus will be lifted.

Total Deposits

As per the bailin-out agreement between Cyprus and the Troika, Cypriot banks’ Greek operations were carved out, insulating Greece from the Cypriot crisis. As a result deposits from Greece were completely wiped out from the system.

Despite capital controls there was a steady deposit outflow as people feared more bailins. The situation has somewhat stabilised in the last few months of 2013 but remains critical.

Total loans

Banks have embarked on a consolidation drive. Households and businesses are slowly delevaraging as credit availability remains scarce.

According to Hellenic Bank and Bank of Cyprus preliminary financial results for 2013, a massive 46-49% of all loans (46% for Hellenic, 49% for Bank of Cyprus) are classified as non performing, up 22-27 percentage points from 2012.

Emergency Liquidity Assistance Funding

Since March 2012 the now defunct Laiki bank (also known Cyprus Popular Bank ) was constantly drawing liquidity from the Cypriot Central Bank. ELA funding peaked at 11.4bn euro in March 2013. Under the bailout agreement Laiki was split into a bad and a good bank. The bad bank is now under liquidation while the good bank was absorbed by its competitor Bank of Cyprus which is now liable to repay Laiki’s ELA.

In June 2012 Republic of Cyprus debt was downgraded to junk status by all three major credit rating agencies. Thus Cypriot debt was no longer acceptable as collateral by the ECB, consequentially Cypriot banks had to rely exclusively on ELA.

In late summer of 2013 the ECB announced it was reinstating the freshly recapitalised Bank of Cyprus as an eligible counterpart for monetary operations. Additionally the ECB announced that it was accepting Cypriot debt as collateral (subject to a haircut) for bank funding.

As a result, ELA decreased to 9.55bn euro while ECB funding increased to 1.6bn by the end of 2013.

Summary

Upon receiving the news of the terms of the Cypriot bailout many people thought (including myself) that Cyprus was going to sink faster than the Titanic. The data show that the deposits raid did little to exacerbate an already bad situation.

Some sectors of the economy exhibit profound resilience (financial services, tourism) while others continued their decline that began long before the events in March 2013 (construction, retail).

In addition, the government’s strict adherence to budget targets have helped to off set the steep decline in revenue and thus stave off the danger of new fiscal measures (either taxes or expenditure cuts) for the foreseeable future.

Banks continue to be an on going concern as the increase in unemployment and the decline in economic activity, means that more loans will turn sour eroding the banks’ capital base.

Updates

1. 25 April 2014: Final Data on Government Expenditure.

Cyprus economy one year after the deposits raid was originally published in Economic thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Published on www.replacementengines.co.uk/blog

· EU taking UK to court for having too high levels No3 from diesel engines

· EU’s target was supposed to be met by 2010

· UK government expects to meet it by 2025

The United Kingdom is in trouble over its failure to meet EU limits on nitrogen dioxide in the air by 2010 and the European Commission is taking the UK to court for having too high levels of this harmful gas from diesel engines. The UK Government doesn’t expect the country to fulfil this standard until 2025. EU claims that levels of nitrogen dioxide; primarily from diesel engines of cars and trucks, are “excessive” in many British cities, and this can cause fatal respiratory illnesses and premature deaths. Britain has found it really hard to control this gas, and this is the first time EU is taking action against any member state for such a breach.

Recently the University of Nicosia proudly announced that it intends to become the 1st university in the world to accept Bitcoin for tuition payments.

Additionally the university announced the launch of a new MSc programme on digital currencies.

The university’s vice rector says in his introduction to the course:

While digital currency is a relatively new concept, currency is one of the oldest human inventions.

Actually it’s not as new as people think. The 1st instance of a digital currency appeared during the dot.com bubble in the mid 90s.

E-gold was the first digital currency (or the first digital commodity to be more precise) to appear online in 1996 (older than google.com) that was shut down by the US government over fraud allegations, identity theft, enabling criminals to whiz funds anonymously.

At its height e-gold had a market capitalisation of 2bn USD and over 5 million users.

Sound familiar?

E-gold is no more, however there is a new crop of digital currencies with Bitcoin being the best known and by far the largest digital currency in terms of market capitalisation. As of Nov.25 around Bitcoin had a market capitalisation of 9billion USD, for reference the second largest cryptocurrency Litecoin, has a market capitalisation of around 230million USD.

There is one (and only one) fundamental difference between e-gold and Bitcoin and Bitcoin imitators (30+ as of the time of writing). They are decentralised, systems, meaning that unlike e-gold no one single entity regulates/controls the process.

And as an aside Bitcoin would never see the light of day had it not been for the economic crisis and people losing their faith in national currencies.

Advantages

1. Bitcoin is relatively immune with issues plaguing fiat currencies (such as the dollar, the pound sterling or the euro). The Principal-agent/conflict of interest issues are non existent as no one single entity can control the entire system.

Note* The University of Cornell in a recent paper states that there is a possibility that eventually Bitcoin will cease to operate as decentralised system as private groups can take over. Takeaway phrase The Selfish Miner.

2. Unlike Online transaction clearing houses such as Paypal, bitcoin does not charge fees to its users. Merchants using the Paypal platform to sell their wares pay a fee per transaction (not to mention bank fees) resulting in additional cost.

3. Bitcoin is currently unregulated (for how long remains to be seen) and as such is not subject to any form of restrictions such as capital controls or quotas. As such Bitcoins can enter and exit any country in the world, even places such as Cyprus or Argentina.

In fact Bitcoin’s meteoric rise is mostly attributed to Chinese users. As the Financial Times indicate, Bitcoin’s appeal to the Chinese is a matter of our cleanest dirtiest shirt. The renminbi is not a freely floated currency and as the Chinese people amass more wealth they seek to invest their money abroad, the chinese government controls are a hindrance so Bitcoin is a way to bypass the obstacles.

4. Bitcoin is akin to cash and carry, transactions are processed with only minimal delays of 10 minutes. Transactions processed through banks/Paypal/credit cards may take several hours if not days to process.

Disadvantages

First off we have to tackle this issue once and for all. Bitcoin is a very poor construct to run an economy with.

There is no point in mentioning the FACT that bitcoin is deflationary by design, that much has been documented and known from the onset. The bitcoin protocol has a ceiling of available Bitcoins that can be mined set arbitrarily at 21 million BTC’s, ergo a supply limit with no possibility of ever expanding the monetary base.

Additionally if any country were ever to use bitcoin as its monetary unit, it will in effect deprive policy makers essential tools for resuscitating their economy during a crisis. Consider what’s going on in the Euro area right now. Greece needs to devalue the euro to become attractive but it ceded their monetary policy tools to the ECB.

I do not think Bitcoin creator/creators ever espoused their construct would ever replace real currencies. As such I shan't consider these arguments any longer.

Bitcoin exists online and online only but even in its natural habitat it is far from being a safe heaven.

1. Bitcoin is highly susceptible to fraud and theft. Consider that during the last 4 weeks hackers stole a total of 5-6million worth of bitcoins from online exchanges in China.

While 6 million is not a lot consider the scale we’re discussing, 6 million stolen out of a total of 5 billion worth of bitcoins or 0.12%.

The percentage is simply staggering.

To put things in perspective let’s imagine a real life scenario.

According to the ECB ‘s balance sheet, money supply for September 2013 was 9,852 billion euro. Had the euro been as vulnerable as Bitcoint then at 0.12% robbers would have stolen from Europe 11 billion euro in just 4 weeks.

There is already a dedicated blog registering major bitcoin thefts globally, the numbers are alarming!

Here’s where regulation and having a centralised authority may be useful. Individuals who lost their Bitcoins due to the theft from online Exchanges/e-wallets etc can expect no reimbursement of their funds ever.

In your traditional brick and mortar bank various savings schemes guarantee your funds and in the event of a bank robbery the bank will reimburse.

And it gets worse. A gaming company software engineer from the czech republic inserted a bitcoin mining botnet into one of the company’s download clients (legitimate software). The botnet once installed on the end user’s computer mined for Bitcoins. The scam resulted in creating 3.47 million worth of Bitcoins that ended up in the bank account of a company employee.

Unfortunately this is a persistent and sticky issue that won’t go away. A central clearing house might do away with these fears but that’s tantamount of creating the Bitcoin Central Bank defeating the currency’s initial purpose.

2. Bitcoin is volatile vis a vis other currencies.

Bitcoin is highly volatile take the pair BTC/USD in mere hours Bitcoin went from 800 Dollars per Bitcoin Unit to 500 Dollars per Bitcoin Unit.

Such volatility if not careful may cause damages to both parties on any transaction using the Bitcoin platform.

In addition it is worth noting that Bitcoin trippled in value against the dollar in just 10 calendar days.

Some argue that this is because bitcoin is a new currency and there is bound to be some volatility to it. However this is a wrong approach. Bitcoin behaves unlike any other new currency mostly because it’s unlike any other currency out there (decentralised, p2p). All models that applied with the Dollar Euro etc don’t apply here. Bitcoin is uncharted territory as currencies go.

As any savvy investor will say such high yields are nothing less than a speculative bubble and with Bitcoin it is even more speculative due to the secretive nature of the currency. That being said the final decision on how to treat Bitcoin rests with the individual investor.

In the words of Warren Buffet

Risk comes from not knowing what you’re doing

And

Never invest in something you don’t understand

In conclusion

For this author at this stage Bitcoin benefits (no restrictions, no fees) do not outstrip its disadvantages (theft, volatility). It’s still too early to tell whether Bitcoin is a fad but one thing is certain.

Bitcoin cannot continue AS IS. The currency is still in its nascent phase and some volatility might be expected but at this stage, it is too dangerous to even contemplate having Bitcoin as the primary currency even inside the Web. Furthermore there are obvious security issues that stem from the fact that the currency is decentralised and unregulated.

This entire debate over the future of bitcoin reminds me of the whole dot.com bubble in the mid 90s when people and tech firms were evangelising that a bright future lays before them,with early adopters were praising and fiercely defending their gadgetry.

Then it all came crushing down.

Bitcoin: A fad, a bubble, the future, or something else was originally published in Economic thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

In layman’s terms the ECB is trying to inflate Germany

On November 7th 2013 the ECB surprised many economists with a rate cut of 25bps to its marginal lending fascility.

What does this all mean though?

It is well known (or rather well established) that the Euro area is NOT an optimum currency area,in a nutshell 17 (now 18) very different economies share one currency (compare with the USA which is a currency union of 50 federated states).

As a result this rate cut won’t trickle down equally across the euro area and there is ample evidence to support this theory.

Examine the EONIA and ECB’s marginal lending facility rates historical data

If the rate cuts (marginal lending facility) were equally felt across the euro area then it stands to reason that we should observe similar if not identical patterns in lending rates offered by banks.

In this example we’re comparing lending rates for 1 year business loans up to 1mn euro for Germany Greece and Spain.

Notice that only Germany’s pattern resembles EONIA and ECB lending rate patterns. Greece and Spain followed similar course until 2010 and then all of a sudden regardless of ECB’s rate cuts there was no effect on interest rates in these countries.

The reason is ofcourse the euro crisis (which won’t be analysed here). Everyone who’s been reading the news will notice that there is a shortage of affordable credit in the periphery of the Euro area that forces small and medium enterprises (SME’s) to close shop. No matter how many rate cuts the ECB does those won’t trickle down to the real economy and even ECB’s own board members agree!

The Cypriot Central banker issued a statement commenting on ECB’s decision to cut rates

The transmission of monetary policy in Cyprus, however, depends crucially on the health of the financial system.

Substitute Cyprus for whatever country in the periphery and the above statement still holds.

In an ideal world a rate cut by the central bank would make credit affordable and businesses would start expanding regardless of where the bank is located. Evidently the eurozone is not an ideal world.

So the above beg the question:

Why did the ECB proceed with a rates cut?

On October 31st the European Statistical Service Eurostat announced its inflation flash estimate that came in well below ECB’s target of 2%

Looking at Eurostat’s inflation data for Sept.2013 on a month to month basis (individual country data for October is still unavailable but it will be a similar picture).

Notice that the euroarea’s 2 biggest economies are in disinflation territory. Note that Germany’s inflation rate has essentially flat lined. In fact German inflation has remained unchanged since last July!

And we all know that Central Banks like their inflation!

So let’s add the two together. It has been established that German bank interest rates strongly correlate with those of the ECB. Therefore a rate cut by the ECB will have an impact in Germany. As credit gets cheaper (hopefully) consumption by the private sector will pick up causing inflation.

In essence the ECB is trying to inflate Germany.

ECB reacts to below target inflation with a rate cut was originally published in Economic thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Cut them off and cut our losses!

Under the terms of the Cypriot bailout the government is to proceed with the sale of state owned enterprises and state owned real estate.

From the MoU (updated on Sep.13 )

The Cypriot authorities will initiate a privatisation plan to help improving economic efficiency through enhanced competition and encouragement of capital inflows, and to help restoring debt sustainability

And further down

This plan should consider the privatisation prospects of state-owned enterprises (SOEs) and semi-governmental organisations (SGOs), including, inter alia, CyTA (telecom), EAC (electricity), CPA (commercial activities of ports), as well as real estate/land assets.

As it is often the case, leftist parties and union groups are up in arms protesting over the sale of SOE’s and SGO’s . Some claim that overall as an investment portfolio, these companies generate positive cash flows to the state.

To this day there was no effort to back up these claims.

So I decided to examine these claims using audited data from the biggest SOE’s and SGO’s. For this exercise I’ll be examining only the SGO’s due to data availability via the Cypriot General Auditor’s Office.

Additionally I won’t be examining the market in which these SGO’s operate (whether it’s a monopoly or otherwise). This is important because state monopolies are profitable by default, whereas if they were to operate in a competitive environment they may falter.

Understandably, I shall disregard any taxes paid but I shall only be looking at dividends paid to the republic.Taxes are going to get paid anyway whereas dividends only go towards the owners. Also any investments made by the SGO’s in government bonds or other government entities shall be disregarded.

Furthermore to examine the cost to the tax payer only state endowments towards the SGO’s running costs are included (state guarantees are not included).

I have also excluded SGO’s that have been abolished or are in process of merging, however, these are so small in size so they will not affect the final result.

The results

Overall the exercise showed that over the past 8 years SGO’s as a portfolio investment netted a loss of 64 million euro.

Arguably the only SGO that paid substantial dividends to the state is CyTA the Telecom Company.For the record the dividend amount is regulated by law for both EAC and CyTA and will be paid upon request by the council of ministers of the Republic of Cyprus. From 2012 onwards dividend payements to the state are capped to 10% of net profits materialised the previous year. Before 2012 the ceiling was at “no more than half of net profits materialised the previous year”.

Both the state broadcaster CyBC and the Cyprus Sports Organisation expenses are covered by 70-90% from state aid, while revenue inflows from commercial activities is negligible.

What should Cyprus do next

The minister of finance told Reuters

The sale of individual stakes in state-owned companies, he said, would be taken on a case-by-case basis

To be honest I don’t know what he means but I do know that it is not prudent to sell assets under duress. These SGO’s should have been sold long ago to improve state finances. At this point I would prefer closing down loss making SOE’s/SGO’s and handing over the management of the remaining organisations to an external consultant.

The consultant will be tasked to restructure the SGO’s and privatise at the 1st opportune moment.

Cyprus bailout: Privatisation of semi governmental organisations. was originally published in Economic thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.