#TRADINGDEBATES WHITE PAPERS Trading insights from top thought leaders

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Introduction

Lars Seier ChristensenCo-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.

The ongoing crisis in the Eurozone, the quan-titative easing tapering debate in the US and the growing conflict in the Middle East have all contributed to the heightened vola- tility we are experiencing in financial markets.

In response, Saxo gathered some of the top thought leaders in the industry at Bloom- berg’s European Headquarters in London on September 13, 2013, to discuss the biggest challenges facing the continent.

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.

We invite you to join the debate and share your views with us.

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Content #TradingDebates White Papers

Chapter 1: Merkel’s Lack Of Vision Is The Achilles’Heel Of EuropeBy Lars Seier Christensen, co-CEO and co-founder, Saxo Bank A/S

Chapter 2: Europe: The Shattering Of IllusionsBy Václav Klaus, former President of the Czech Republic

Chapter 3: Is The UK Better Off Outside The EU?By Nigel Farage, Leader of the UK Independence Party

Chapter 4:Is Merkel’s Victory Europe’s Wake-Up CallBy Steen Jakobsen, Chief Economist and CIO, Saxo Bank A/S

Chapter 5:Has Quantitative Easing Become An Embarrassment?By Nick Beecroft, Chairman and Senior Market Analyst at Saxo Capital Markets

Chapter 6: The Euro – A Currency With Nine LivesBy John J. Hardy, Head of FX Strategy at Saxo Bank A/S

Chapter 7: Oil Markets – Let The Dust SettleBy Ole Hansen, Head of Commodity Strategy, Saxo Bank A/S

Chapter 8: Confidence In Emerging Markets Expected To Stage A ComebackBy Mads Koefoed, Head of Macro Strategy, Saxo Bank, A/S

Chapter 9: Europe’s Economic Foundation Is On The Right TrackBy Peter Garnry, Head of Equity Strategy, Saxo Bank A/S

Chapter 10: Forward Guidance – The Latest FadBy Nick Beecroft, Chairman and Senior Market Analyst at Saxo Capital Markets

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MERKEL’S LACK OF VISION IS THE ACHILLES’ HEELOF EUROPE

CHAPTER 1

LARS SEIER CHRISTENSEN

Europe’s 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.

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Merkel’s Lack of Vision is the Achilles’ Heel of EuropeLars Seier Christensen “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.”

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, Europe’s Achilles’ heel is German Chancellor Angela Merkel, the de facto leader of the EU, and her lack of vision for the single-currency bloc.

Merkel’s lack of vision stands as a striking contrast to 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. It’s a rational goal I support, but one we won’t 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 request-ed a private meeting with then President Václav Klaus. Our application was grant-ed 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 – Václav 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 capi-talism, as I do.

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Nein

Nein

Nein

During our meeting, we discussed the Eurozone sovereign debt crisis that 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 ne-glecting the democratic process – is the common currency: the euro.

When the President last year published his English edition of Europe – The Shattering of Illu-sions 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.

“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.”

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Even though the euro is at the root of most of the EU’s 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.

The central problem, however, was that the majority of European citizens did not have any desire to create a political union, which must be the foundation for a monetary union.The citizens of wealthy countries did not want to give up their national identity and did not want to see their economic achieve-ments become part of a collective pool. In this construction, solidarity with poorer countries cemented their position as permanent con-tributors. Not surprisingly, the greatest enthusiasm for this proposition has been expressed by economically weaker countries. They saw considerable advantages in such a system, but without being ready to throw their national states or traditional policies overboard. But the EU is not a horn of plenty from which all the wealth just keeps coming without the need to demonstrate one deserves to be on the receiving end.

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

77%of people in France believe European economic integration has made things worse for the country, an increase of 14 points since last year.

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

tion for a well-functioning common currency. 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 obvi-ous 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.

They did this, expecting to be covered by an extra appropriation bill, or – as it turned out later – with a hidden agenda, by creating this foundation piece by piece, without caring much to ask the European populations. That process is also being continued re-lentlessly in countries like Denmark, which are not even members of the Eurozone.

Source: Pew Global Research

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Decline in Support for the European Project

Source: Pew Global Research

2012 2013 Change 2012 2013 Change

% % % %

Germany 59 54 -5 68 60 -8

Britain 30 26 -4 45 43 -2

France 36 22 -14 60 41 -19

Italy 22 11 -11 59 58 -1

Spain 46 37 -9 60 46 -14

Greece 18 11 -7 37 33 -4

Poland 48 41 -7 69 68 -1

Czech Rep. 31 28 -6 60 45 -15

Median 34 28 -6 60 45 -25

Economic integration,strengthened economy

Favourable of EU

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 re-valuation, 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.

Merkel’s mentor, Helmut Kohl, the great re-unification chancellor, believed one could draw a political line under Europe’s fractured history, with economics playing a much lesser role. “Das Mädchen”, as Kohl used to call her, lacks this naïve 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.

Merkel’s Europe is not punitive and alienating. It’s fair. She wants the EU member states to follow the rules and ensure Europe becomes more competitive. She is a problem solver and there’s nothing wrong with solving concrete problems. However, politics is also about declaring new ideas and visions. It’s about setting an agenda instead of following a popular sentiment. Merkel has yet to do that. But Germans were clearly in no mood for change 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.

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