TIGHTENING THE SCREW ON BIG TECH

The European union’s big battle to keep technology behemoths in check rages on.

 

THE European Union is on a mission to get US tech giants to stop avoiding tax, stifling competition, profiting from news content without paying and serving as platforms for disinformation and hate.

Last month, the European Commission announced that online retail giant amazon had agreed to make changes to its software to end two EU inquiries into its treatment of third-party sellers on its online marketplace.

the EU also warned Elon musk that twitter could be subject to sanctions under a future media law after the “worrying” suspension of several journalists from the messaging platform.

Here is a summary of the tussles between Silicon Valley and Brussels.

Stifling competition

The digital giants are regularly criticised for dominating markets by elbowing out rivals.

Last July, the European Parliament adopted the Digital markets act to curb the market dominance of Big tech, with violations punishable with fines of up to 10% of a company’s annual global sales.

Brussels has slapped over Us$8bil (rm37.7bil) in fines on Google alone for abusing its dominant market position.

In 2018, the company was fined Us$4.3bil (rm20.2bil) – the biggest ever antitrust penalty imposed by the EU – for abusing the dominant position of its android mobile operating system to promote Google’s search engine.

Google lost its appeal against that decision in September 2022, though the fine was reduced to Us$4.1bil (rm19.3bil).

the firm is also challenging a Us$2.4bil (rm11.3bil) fine from 2017 for abusing its power in online shopping and a separate Us$1.5bil (rm7.1bil) fine from 2019 for “abusive practices” in online advertising.

the EU has also gone after apple, accusing it of blocking rivals from its contactless iphone payment system, and fined microsoft Us$561mil in 2013 for imposing its browser, Internet Explorer, on users of Windows 7.

The European Commission is also looking into whether Facebook’s parent company, meta, broke antitrust laws by linking its personal social network to its classified ads service, Facebook marketplace.

Turning to taxation

The EU has had less success in getting US tech companies to pay more taxes in Europe, where they are accused of funnelling profits into low-tax countries like Ireland and Luxembourg.

In one of the most notorious cases, the European Commission found in 2016 that Ireland granted illegal tax benefits to apple and ordered the company to pay Us$13bil (rm61.2bil) in back taxes.

But the EU’S General Court later overturned the ruling, saying there was no evidence the company broke the rules.

The European Commission also lost a similar case involving amazon, which it had ordered to repay Us$250mil (rm1.2bil) in back taxes to Luxembourg.

In October 2021, following extensive lobbying by European countries, the G20 group of nations agreed on a minimum 15% corporate tax rate.

Personal information

Tech giants are regularly criticised over how they gather and use personal data.

The EU has led the charge to rein them in with its 2018 General Data Protection regulation, which has since become an international reference.

Companies must now ask for consent when they collect personal information and may no longer use data collected from several sources to profile users against their will.

Amazon was fined Us$746mil (rm3.5bil) by Luxembourg in 2021 for flouting the rules.

Meanwhile, Irish authorities have gone after meta twice this year.

Last September, they fined Instagram, a meta subsidiary, Us$405mil (rm1.9bil) for breaching regulations on the handling of children’s data.

and in November, they fined Facebook Us$265mil (rm1.2bil) over a massive data leak involving the details of more than half a billion users.

Fake news and hate speech

Social networks, particularly Facebook and twitter, are often accused of failing to tackle disinformation and hate speech.

In July, the European Parliament approved a Digital Services act that forces big online companies to combat hate speech, disinformation and piracy or face fines of up to 6% of their global turnover.

It comes into effect in 2023.

Paying for news

Google and other online platforms are also accused of making billions from news without sharing the revenue with those who gather it.

To tackle this, an EU law in 2019 created a form of copyright called “neighbouring rights” allowing print media to demand compensation for use of their content.

France was the first country to implement the directive.

After initial resistance, Google and Facebook agreed to pay French media, including AFP, for articles shown in web searches.

That did not stop the company from being fined Us$500mil (rm2.4bil) by France’s competition authority in July 2021 for failing to negotiate “in good faith”, a ruling Google has appealed.

Facebook has also agreed to pay for some French content.-AFP/The Star Malaysia 2 Jan 2023

Huawei could end up challenging Google

More details  surface on  Huawei's planned  rival to Google's Play Store TechRadar

Google Ban Huawei 谷歌封杀华为 || Epic Asian

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Surprising Facts About HUAWEI - Is it Evil?

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Interview With Ren Zhengfei, Founder And CEO Of Chinese Telecom Giant Huawei | TIME

  https://youtu.be/Nl2jCWDwE8w

BY imposing restrictions on Huawei Technologies Co, the administration of US President Donald Trump may force the Chinese company to do something that no one in tech has dared to do for a long time: Challenge Google’s control of the Android universe, which earned the US company a huge European fine last year.

Huawei faces two big threats from US technology export restrictions. One is the loss of American components for its products, a blow it cannot parry immediately if it wants to keep making top-flight smartphones.

The other is the potential withdrawal of its Android license, which would stop Huawei from preinstalling the latest Google-approved version of the operating system and some key services Western users see as necessary - above all Google’s Play Store, the biggest repository of Android apps.

This particular obstacle could, under the right conditions, turn into a Huawei strength in Europe, a market that accounts for almost a third of the company’s smartphone unit sales, according to market analytics company IDC.

Last July, the European Commission fined Google €4.34bil for imposing illegal restrictions on smartphone manufacturers. In exchange for the right to preinstall the Play Store, they had to agree, among other things, not to sell devices running versions of Android not approved by Google: so-called Android forks. These operating systems are developed from the open source version of Android, which anyone can use, including Huawei if the US bans it from using American technology. Amazon.com Inc’s Fire OS is the best-known Android fork today, though there are others around.

The commission wrote that by obstructing the development of Android forks, Google and its parent company Alphabet Inc “closed off an important channel for competitors to introduce apps and services, in particular general search services, which could be pre-installed on Android forks.”

In its ruling, it made a strong case for forks as platforms for Google-independent innovation that, if they were allowed to spread widely, could have curbed Google’s market dominance in various areas.

Google has appealed the ruling, but it has also removed restrictions on handset makers to avoid further fines. This, however, hasn’t led to the proliferation of alternative platforms based on open-source Android: Big phone makers are locked into comfortable relationships with Google and see no need to experiment. Days after the European Union fined Google, Huawei, at the time the biggest phone manufacturer that provided an easy opportunity to install alternative Android-based operating systems on its devices, ended the programme without explanation.

If Google takes away the Android license, it’ll yank Huawei out of its comfort zone. The company isn’t likely to give up the European market without a fight, after spending billions of dollars developing a customer base. Consumers in some European countries now appear to be put off Huawei by the US attack, although, paradoxically, it appears to have fuelled the brand’s popularity in France.

France for Huawei

Percentage* of consumers who say they'll consider buying a Huawei device when they're next in the market for a smartphone

Source: YouGov BrandIndex

The company has said it developed its own operating system (likely an Android fork), and it’s been trying to lure developers to its app store.

If the US stops Huawei from preinstalling the Play Store, the Chinese manufacturer probably won’t spend much time educating consumers on how to install it on their own (the way people do now with phones bought in China).

That’s not what most users expect on a new, expensive device. Instead, Huawei will want to offer developers an easy way to sell apps not just in the Google store but also in one preinstalled on Huawei devices - to “multi-home” them.

Huawei hasn’t been eager to get into an open confrontation with Google, which was a valued partner.

But a breakup ordered by the US government changes things. Huawei, with plenty of resources of its own (and most likely with support from the Chinese government, determined to fight back against the US), could soon be investing heavily in the marketing and improvement of an Android fork. Given Huawei’s marketing potential, the effort isn’t necessarily doomed. And it could boost Asian and European developers deterred from competing in some areas - such as mapping, video services or even search - by Google’s enormous power.

Given the pushback in recent years against US tech companies’ relentless data collection and the widespread mistrust of Trump’s administration in Europe, there could well be demand for a Google-free phone from a major manufacturer known for superior hardware.

I know I’d be interested, and the French would probably lap it up, judging by their reaction to the US threats. The EU regulators, too, might be intrigued to see evidence that perhaps the Google antitrust ruling didn’t come too late.

This is something of a utopian scenario, I know. Huawei may never need to go on the warpath against Google: The US and China could strike a trade deal that would make the specter of restrictions go away.

Or, if Huawei is banned from buying US technology, it could find itself unable to produce marketable phones for a while. And, of course, it is a company from Communist China, making it difficult for European regulators, and even for private developers, to embrace it as a savior from the overly dominant US tech companies.

Monopolies in tech don’t last forever, however.

Sometimes they just need a push to start showing cracks. If the US moves against Huawei, it might be unknowingly giving such a push to Google in the smartphone market. — Bloomberg Viewpoint

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China will emerge victorious from US tech crackdown folly

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But it needs a lot of time. During this process, China cannot avoid paying a price and will have a difficult time. But Huawei still has a domestic market of more than a billion Chinese people and the market of the Third World countries. When the Trump administration cracks down on Huawei, the US also goes through hard times. The final victory will certainly be China's, but China must have adequate determination and endurance.

Huawei Accuses U.S. of Bullying as It Seeks Support From Europe - WSJ

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Solar wars threaten climate fight

Amidst gloomy news in the deteriorating climate change situation is this bright spark – the cost of solar energy has been going down dramatically.

 THE source of clean and renewable energy is seen as one of the major saviours that could help power the world without emitting greenhouse gases.

The drawback is that solar energy has traditionally been more expensive to use than carbon-intensive coal or oil.

But in recent years solar power has become much cheaper. Energy experts predict that its cost could match that of conventional fuels in the next few years in some areas.

Solar cell prices have been falling, from US$76 (RM235.52) per watt in 1977 to about US$10 (RM30.99) in 1987 and only 74 cents (RM2.29) in 2013. Between 2006 and 2011, Chinese cell prices dropped 80% from US$4.50 (RM13.95) per watt to 90 cents (RM2.79) per watt.

Factors for this include a drop in price of the main raw material polysilicon (due to oversupply), increasing efficiency of solar cells, manufacturing technology improvements, economies of scale and intense competition.

The use of solar energy has shot up as the cost goes down. Global installed capacity jumped by 28.4 gigawatts (one gigawatt is 100,000 megawatts) in 2012 to reach 89.5GW. The 100GW milestone will be crossed some time this year.

All this is good news for the fight against climate change. Now comes the bad news.

The growing global demand has prompted the rise of solar panel manufacturers, and the competition is fierce, with a number of companies facing closure. China’s biggest solar energy company Suntech is in serious trouble.

But China has even bigger problems. The United States government, receiving complaints from US solar panel manufacturers, has slapped high anti-dumping tariffs on Chinese imports.

Now the European Commission also plans tariffs averaging 47% on Chinese solar products which it claims are selling below cost.

China is taking these threats seriously. Premier Li Keqiang in a visit to Europe last week took up the issue with European leaders.

Senior trade officials say China will retaliate. A full-scale trade war is thus imminent.

In a surprise turn of events, Germany and 16 other European countries have told the European Commission they are against its move.

But EC Trade Commissioner Karel De Gucht will apparently still slap on the tariffs provisionally, which is within his power to do.

So the solar wars between China with Europe and the US will likely proceed. This is a real pity, as the commercial interests of the countries are coming in the way of rapid progress in solar energy and the fight against climate change.

The expansion of the solar panel industry in China has played a crucial role in getting prices down, making solar energy more and more competitive, and driving its explosive growth.

Yes, China subsidises and promotes its solar industry. But the US and Europe also provide massive subsidies and supports.

The US has provided its solar companies with loan guarantees, research grants and tax deductions including investment tax credits and accelerated value depreciation.

European countries have given subsidies to consumers using solar energy, and incentives to producers including through the feed-in tariff scheme, in which solar energy providers are paid prices higher than what is charged to electricity users with the price difference being met by governments.

Without the subsidies, the solar industry would not have grown. Trade protectionist measures taken by one against the other, or by all against others, would be a recipe for disaster – for trade, the solar industry and the environment.

Well known solar energy advocate and chairman of Solarcentury Jeremy Leggett uses the following analogy to illustrate the trade war: “A planet faces an asteroid strike. Its inhabitants manufacture rockets with which to head off the threat. But, as the rock nears, they descend into international bickering over who pockets what from rocket-making.”

No one wins in this trade war, because of global solar supply chain, explains Leggett. Solar ingots, the upstream feedstock, are mostly made in Europe and America. The midstream products, cells and modules, are mostly made in China.

If China is hit on the mid-stream products it exports, it could retaliate with tariffs on the upstream products it imports.

For example, in Europe, the tariffs against China would wipe out thousands of jobs because most are not in manufacturing but in the companies that install the modules, regardless of where they are made.

The solution, he adds, is for the leaders of the few countries where most solar panels are manufactured to make a deal that coordinates the subsidies required in the various parts of the solar chain, and which is required for the few years that some countries need to bring the price of solar energy to parity with that of conventional energy.

An apt conclusion is made by Leggett: “The world will have to embrace common security on a bigger scale. Engaging in international competition while clinging to the illusion that markets always work will never solve our common problems of energy insecurity, poor air quality and resource depletion, never mind development. We will keep on maiming industries that can save us.”

Global Trends
By MARTIN KHOR

Debt crisis in Europe will affect rest of the world

The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.

David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.

The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.

The recent Greek elections saw the citizens proclaiming their anger towards the austerity policies tied to the European-IMF bail-out package, by repudiating the two major parties and giving the small anti-austerity Syriza party second place.

The elections came in the midst of a greatly deteriorating condition. Greece has 22% unemployment, 50% youth unemployment, GNP is falling steeply, and public debt will remain high at 160% of GDP next year despite the recent bailout and debt-restructuring measures.

The leader of Syriza, Alexis Tsipras, who swept to the forefront of Greek politics on the wind of protest against the austerity measures imposed by creditors, wants to re-negotiate the terms of the bailout.

He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the Eurozone.

But many analysts think that the response to this demand from the EU and IMF would be to stop further loans and force Greece to exit the Euro. In a second election in mid-June, Syriza is expected to do even better and a messy Greek loan default and Euro exit are now seen as more than just possible.

In a Eurozone exit, Greece would re-introduce a local currency, and after Greeks change from their Euros, a depreciation of the new currency is expected to happen.

News report indicate that some capital flight from Greece is already taking place, as Greeks fear that their present Euro-denominated assets would lose value after conversion to the local currency.

Meanwhile, Spain was last week desperately trying to avoid a run on banks after the government was forced to partly nationalise Bankia, the second largest bank, followed by rumours of such a run.

The value of bad loans held by the banking sector rose one third in the past year to 148 billion Euro and Moody’s downgraded the credit rating of many Spanish banks.

The Spanish finance minister Luis de Guindos said the battle for the Euro is going to be waged in Spain, implying his country is now in front in trying to prevent the Greek crisis from infecting other European countries and bringing down the Euro.

The spreading crisis throws into doubt the policies in most European countries that have in recent years focused on drastically cutting government spending to reduce the budget deficit in an attempt to pacify investors and enable a continued flow of loans.

This reversed the coordinated policy of fiscal reflation that the G20 leaders agreed on in 2009 to counter the global crisis. It contributed to the rapid recovery.

Since then economists and politicians alike have been debating the merits of Keynesian reflationary policies versus a resumption of IMF-type fiscal austerity.

The movement towards recession in Europe as a whole and deep falls in GNP in bail-out countries like Greece has boosted the arguments of the Keynesians.

But key leaders such as Angela Merkel of Germany and David Cameron of Britain are still convinced of the need to stick to austerity.

The victory of the new French President Francois Hollande and the stunning polls performance of the Syriza party in Greece indicate that the public wind has shifted radically against austerity, and that a change may be on the cards.

The stopping of loans to Greece would lead to an economic collapse, with government debt default, bank runs, re-denomination of local contracts to local currency and default on external contracts denominated in euro, in a scenario painted by Wolf.

A Greek exit could trigger bank runs and capital flight in Portugal, Ireland, Italy and Spain and beyond, causing collapse in asset prices and large GNP falls.



A decisive European response is needed, such as the European Central Bank providing unlimited loans to replace money taken out in bank runs, capping of interest rates on sovereign debt, Eurobonds and abandoning austerity-centred policies.

But if these policies are not taken, the Eurozone may disintegrate, with one study suggesting GNP falls on 7% to 13% in various countries, and if a full Eurozone break up takes place there could be a freeze in the financial system, a collapse in spending and trade, many lawsuits and Europe facing a situation of political limbo.

The impact on the world would be worse than the Lehman collapse. Though the implication is that this should not be allowed, a Greek exit would greatly increase the likelihood of these dangers.

If Greece leaves, the Eurozone will have to change fundamentally but if that is impossible, large crises will be repeated in a nightmare.

There would have to be a choice between a stronger union of European countries (which many do not like) or endless crises in future, or a break up now. No good choices exist, concludes Wolf.

The scenarios and predictions detailed above in the Wolf article are pessimistic, but may also be realistic not only because of the current economic situation, but also the apparent lack of conditions for a political solution.

Watching from the sidelines, with no ability to influence developments, many in the developing countries are disturbed by the turn of events. It will likely lead to a weakening of the global economy at best and a full blown crisis at worst, with the developing countries at the receiving end in terms of trade downturn, financial reverberations, and declining incomes and jobs.

It is apparent, once again, that a global forum should exist where all countries can discuss developments in the global economy and contribute their views on what needs to be done.

In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.

 

 Global Trends By MARTIN KHOR

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WTO rules U.S. unfair subsidies for Boeing illegal

The U.S. is hailing a World Trade Organization ruling on illegal Boeing subsidies as a victory. (Roslan Rahman/AFP Reuters

The World Trade Organization has ruled that U.S. aircraft manufacturer Boeing received $3 billion to $4 billion in illegal subsidies in the form of federal research grants and local tax breaks, the top U.S. trade official said Monday.

But U.S. Trade Representative Ron Kirk called the decision "a tremendous victory" for the United States because he said a separate WTO panel ruled last year that European governments provided $18 billion in subsidized funding for Airbus.

"It is now clear that European subsidies to Airbus are far larger -- by multiples -- and far more distortive than anything that the United States does for Boeing," Kirk said in a statement.

"The United States is ready to address all of the WTO findings, and we expect Europe to do the same. Airbus is a mature, highly capable company with ready access to commercial financing. It doesn't need the launch aid that European governments are continuing to provide," he added.

The WTO appellate body ruling on Monday faulted the United States for research funded by NASA and the Department of Defense that benefited Boeing and for tax breaks granted by the state of Washington and city of Wichita, Kansas.

The United States will have six months to comply with the ruling, once it is formally adopted this month, Kirk said.  

Appellate body rules unfair US subsidies have damaged rival Airbus

GENEVA: The World Trade Organisation has ordered the United States to halt unfair subsidies and tax breaks to planemaker Boeing, judging them to have damaged European rival Airbus.

The WTO's appellate body said that it found that certain subsidies and tax breaks “caused, through their effects on Boeing's prices, serious prejudice in the form of significant lost sales” to Airbus in the market for civil aircraft with 100 to 200 seats, according to a summary of the 700-page ruling.

That segment is for the medium-haul Airbus A320 and Boeing 737, which are their top selling aircraft.

It also found that research and development subsidies skewed competition for larger aircraft of 200 to 300 seats, and that such subsidies for the 787 Dreamliner “caused serious prejudice to the interest of the European Communities.” The United States has six months to comply with the ruling.

An Airbus A380 behind a Boeing 787 plane’s vertical tail. The WTO confirms that Boeing has received illegal subsidies, a decision that is seen as a victory by both the US aircraft maker and Airbus

 

Even before the publication of the WTO ruling, both the European Union (EU) and United States claimed victory in the dispute.

The EU had launched the complaint, claiming the United States gave Boeing billions of dollars in illegal subsidies after Washington had disputed EU aid to European aircraft manufacturer Airbus.

In a ruling on March 31, 2011, the WTO partly upheld the EU complaint, but it was appealed.

The European Commission welcomed the WTO final ruling, saying it confirmed that billions of dollars in US subsidies to Boeing were illegal under WTO rules.

“The ruling vindicates the EU's long-held claims that Boeing has received massive US government hand-outs in the past and continues to do so,” said EU Trade Commissioner Karel De Gucht.

The United States took the opposite stand, saying the WTO decision confirmed that Europe's unfair trade subsidies to Airbus have dwarfed US aid to Boeing.

“This decision is a tremendous victory for American manufacturers and workers - and demonstrates the Obama administration's commitment to ensuring a level playing field for Americans,” Ron Kirk, the US Trade Representative, said in a statement before the WTO appeals panel published its findings.

“It is now clear that European subsidies to Airbus are far larger - by multiples - and far more distortive than anything that the United States does for Boeing,” he said.

The United States highlighted that the WTO had found last May in a separate case that the EU gave Airbus US$18bil (13.7 billion euros) in subsidised funding that resulted in lost market share and sales for Boeing.

“In yesterday's findings, the comparable figures (for Boeing) were between US$3bil and US$4bil in subsidies, and lost sales (for Airbus) of just slightly more than 100 aircraft,” the statement said.

The European Commission said the WTO appeal ruling found that Boeing received between US$5bil and US$6bil of illegal subsidies between 1989 and 2006, and was estimated to have received US$3.1bil more since.

Airbus said the WTO ruling found the effects of the illegal funding were much larger.

“The report confirms the existence of illegal US subsidies to Boeing previously identified by the WTO as at least US$5.3bil' and extended by billions of US dollars as a result of yesterday's decision - resulting in an estimated loss of approximately US$45bil in sales for Airbus,” the company said in a statement. AFP

Euro fallout is bad news for world economy

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Global Trends By Martin Khor

The IMF-World Bank meetings last week confirmed the global economy has entered the ‘danger zone’ of a new downturn and possibly recession. This time it could be more serious and prolonged than the 2008-2009 recession. 

THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.

Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.

Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.

If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.

The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.

As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.

But none has worked so far.

In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.



The costs of austerity are already being seen (by the public at least) to outweigh the benefits.

Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.

The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.

However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.

Instead, the news out of Washington last week was of continued paralysis in European policy.

Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?

Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.

What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.

Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.

Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.

The developing countries should thus prepare to face serious problems that will soon land on them.

We can expect a sharp fall in their exports as demand declines in the major economies.

Commodity prices are expected to climb down; they have already started to do so.

There may be a reversal of capital flows, as foreign funds return to their countries of origin.

The currencies of several developing countries are already declining and it may be the start of sharper falls.

It’s beginning to look like 2008 all over again.

But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.

And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.

It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.

All countries are affected when the global economy goes into a tail spin.

Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.

Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.

As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.

This time there should be a more serious reform process, otherwise more crises can only be expected in the future.

Big Four auditors under pressure

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Big Four auditors under legal, EU pressure

 Authorities considering rules to break them up!

By Dena Aubin and Huw Jones NEW YORK/LONDON | Wed Sep 28, 2011

 

(Reuters) - The "Big Four" auditors face possibly their biggest shakeup since the Enron scandal as European authorities consider rules that could force them to break up, while the firms also are confronting multibillion dollar suits emerging from the subprime crisis.

The European Commission, according to a draft law seen by Reuters on Tuesday, is proposing that auditors be banned from providing consulting services to companies they audit, or even be banned altogether from consulting, a fast-growing business.

EU Internal Market Commissioner Michel Barnier is due to publish the draft in November, targeting what he sees as a conflict of interest when auditors check the books of the same companies from which they reap lucrative consultancy fees.

Leading potentially to break-ups, a ban on consulting would be the most punitive measure yet taken by regulators against the world's largest auditors -- Deloitte DLTE.UL, PwC PWC.UL, Ernst & Young ERNY.UL and KPMG KPMG.UL.

On another front, Deloitte was sued on Monday by a trust overseeing the bankruptcy of Taylor, Bean & Whitaker Mortgage Corp and one of its units claiming a combined $7.6 billion in damages. It is one of the largest lawsuits stemming from the 2007-2009 credit crisis.

Though auditors have been successful at winning dismissals of several crisis-related lawsuits, legal experts said some legal defences used by auditors in the past may have some holes when applied to the Deloitte case.

Deloitte has said the legal claims are "utterly without merit."

The Big Four review the financial books and records of most of the world's large corporations. The firms dodged a bullet during the era of the Enron and WorldCom frauds when U.S. regulators stopped short of an outright ban on consulting.

The 2002 Sarbanes-Oxley audit industry reform laws limited the types of consulting services that auditors can provide to companies they audit, but the post-Enron laws left auditors free to pursue one another's clients for consulting work.



STRICTER MEASURES

The EU has been considering stricter measures since auditors gave clean bills of health to many banks that suffered debilitating losses during the credit crunch.

Auditors, which are privately held, do not disclose their insurance coverage or reserves held for legal awards, though most have been able so far to absorb the legal penalties stemming from the financial crisis.

According to Audit Analytics, the Big Four auditors have been named as defendants in at least two dozen class action cases stemming from the credit crisis through July 2011.

"There is a point at which the reputational damage combined with large judgments can do significant damage to their operations," said Andrea Kim, partner at Diamond McCarthy law firm in Houston.

It is unlikely, however, that any of the Big Four firms would be allowed to fail, given their role in auditing most of the largest companies in key markets, she said.

MONEY-MAKING ENTERPRISE

"You can safely assume that before we reach that level, what you're more likely to see is some legislative action," she said.

Sarbanes-Oxley was enacted after the disastrous meltdown of Enron auditor Arthur Andersen, which had been the fifth of the Big Five audit firms. Sarbanes-Oxley actually helped the remaining four firms by creating more rigid requirements and auditing work for them.

"The biggest beneficiary of Sarbanes-Oxley was the Big Four," Kim said. "It's just a giant money-making enterprise."

The measure being considered in the European Union would be far more stringent. In addition to potentially forcing auditors to split off their consulting businesses, it might include a requirement that auditors be "rotated," or changed, every nine years, forcing them to give up some of their best clients.

Another element of the draft includes the introduction of "joint audits," so the Big Four would share auditing work with smaller rivals.

A ban on consulting would be especially damaging now, as the auditors have been furiously expanding their consulting business to offset slower growth in their core audit area.

"Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms," a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved.

Barnier's spokeswoman said he had made it clear that the audit sector displayed clear failings during the crisis, giving banks a clean bill of health just before they were rescued.