Comment

Western perceptions of Central and Eastern Europe are shifting, sparking far-reaching change inside NATO and the EU. Judy Dempsey explains why The European Union is changing, and so is NATO. While these changes may not be immediately discernable, they will have repercussions for EU policies, not just in relation to Ukraine and Eastern Europe, but also Russia.  And they will have a lasting impact on NATO, as it focuses increasingly on defending the Baltic States and other Central European members. Russia’s brutal war against Ukraine is the catalyst for these shifts, which have several aspects, not least those rooted in the historical and political differences between Western and Central Europe.  The Soviet totalitarian system was imposed across Eastern and Central Europe after 1945, while their Western counterparts benefited from reconstruction efforts under the Marshall Plan.  Western Europe built this part of the continent on the foundations of prosperity, democracy and a peace project embodied by the European Steel and Coal Community, the precursor to the EU.  It wasn’t until the fall of the Berlin Wall in 1989, and subsequent collapse of the Soviet Union, that Central Europe came back to Europe. The dream of a Europe “united and free” was finally realised, in theory at least.  And herein lies the basis for another shift brought home by the war in Ukraine. Central Europe has never trusted Russia’s intentions, whether in Belarus, Georgia, Moldova, or Ukraine.  They warned their Western European counterparts about the consequences of Russia’s invasion of Georgia in 2008, how Germany’s dependence on Russian gas would give the Kremlin a geostrategic weapon to divide Europe, and how Russia’s first invasion of Eastern Ukraine in 2014 would not stop there.  All the while, several West European countries played down such fears, even suggesting that the Central European attitude towards Russia was outdated and just plain anti-Russia. It was time to move on. Poland and the Baltic States can now confidently say “we told you so” following Russian President Vladimir Putin’s Ukraine invasion, his use of energy to threaten other countries and his ambitions to prevent Ukraine and other countries in the region from pursuing a democratic, pro-European path. These shifts are having an impact inside both the EU and NATO. Successive French and German leaders who forged very close ties to the Kremlin have had to change their perception of Russia’s trajectory.  Since 1989, these two countries have viewed Eastern Europe through the prism of Russia, as if neither was a truly independent sovereign state.  This perception has finally faded as Berlin and Paris now see the defense of Ukraine as being vital to European security—and vital for Ukraine’s survival as an independent, sovereign country. This has strengthened the backbone of the EU in terms of sanctions against Russia and support for Ukraine.  Perceptions of Central Europe have also been essential to NATO’s new emphasis on Northern Europe.  Russia’s war in Ukraine has persuaded Finland and Sweden to join NATO—a move that strengthens the alliance, but also halts, for the moment, the EU’s ambitions for strategic autonomy.  The war in Ukraine has exposed the EU’s lack of common security and defense culture, which explains why the Central Europeans have become even more “Atlanticist” as they seek to bolster the defense of Europe.  Their next task—their biggest policy shift—will be working out how to integrate Ukraine and Eastern Europe into the EU and NATO. And that’s a whole other chapter. Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

ISQM1 has created a valuable opportunity for firms to embrace technology and data management for greater efficiency. Liam Mullane explains why Like Christmas, the 15 December deadline for implementing the International Standard on Quality Management 1 (ISQM 1) has come and gone.  Now, you need to turn your attention to ensuring the System of Quality Management (SoQM) you have designed is operating effectively.  It’s also a good time to look back at all the controls you have designed as part of your ISQM1 implementation and identify any potential opportunities there may be to optimise these processes.  But first, let’s look at one of the significant changes introduced by ISQM1—your firm’s Risk Assessment Process (or RAP) for designing, implementing and operating your SoQM.  The RAP will potentially have led to a significant increase in the number of formal controls your firm needs to implement, monitor, and test.  This new requirement is also iterative, resulting in firms adjusting their SoQM for the new quality objectives and/or quality risks identified. This process gives rise to other opportunities to enhance your SoQM on a yearly basis, including “embracing technology” and “data management”. Embracing technology Most firms will have invested significantly in audit technology over the past decade with continued investment planned into the future.  If you haven’t done so already, however, now is the time to consider whether your firm has invested sufficiently in your internal quality control processes—key components of your SoQM.  Some firms may have a manual process for engagement budgets, for example, and a separate manual process for the assignment of resources to engagements.  There is a risk that these two manual processes may not be consistent in decisions made, and this could have a direct impact on audit quality.  This could, therefore, be the ideal opportunity to embrace technology and merge the two sub-processes into one work stream. Automaton in itself should be a key consideration on a go forward basis. ISQM1 has resulted in most firms creating numerous formal controls across their practice.  If the controls and processes are manual in nature, there is a valuable opportunity for automation.  The benefits of automation include more consistent application and operation, less risk of error and manual input, efficiency and, ultimately, improved compliance.   Data management  ISQM1 has eight components and, as firms design and develop different controls to address the relevant quality objectives, a key input to a lot of these controls will be data.   Data can be a key input to different controls in various processes (i.e. there is an interplay across ISQM1). In order to ensure a coherent and efficient SoQM, this data should be consistent.  Accountants tend to love spreadsheets—but, like everything, there is a time and a place. Where possible, all data should be gathered in a data warehouse, which is checked for completeness and accuracy.  This is a key input to ensuring your SoQM operates appropriately across all components. As they say, “rubbish in, rubbish out”.      Last word The operation of ISQM1 by 15 December 2022 has been a great achievement by all of the implementation teams across the various firms, but the work doesn’t stop there.  Your firm must now continue to develop your SoQM with the iterative process, using the opportunity to embrace new technology to make everyday tasks more efficient, while also considering your approach to data management.  ISQM1 is raising the standard for all—we must grasp the opportunity with both hands. Liam Mullane is a Director with KPMG

The West is now at economic war with Russia and the consequences may well shape our lives for decades to come. Cormac Lucey explains why Enormous change sometimes occurs without us even noticing. The appointment of Paul Volcker in 1979 to head up the US Federal Reserve ushered in a decade of transformation.  Margaret Thatcher and Ronald Reagan took the top political jobs in the UK and US, unleashing four decades of falling interest rates, lower inflation, and rising financial asset prices.  The Berlin Wall came down, China pushed for greater trade with the West, and economic globalisation accelerated. Back in 1979, few could have foreseen the immense change that lay ahead.  By contrast, the Russian invasion of Ukraine last year was impossible to ignore. Vladimir Putin may have expected little resistance to his “special operation”, but the Ukrainian response has been intense and courageous. And the West has shown surprising unity in agreeing a two-pronged strategy: providing advanced weapons systems to Ukraine while also imposing unprecedented economic sanctions on Russia.  In addition to targeting key individuals associated with the Putin regime, western nations are trying to limit Russia’s access to money. Major Russian banks have been removed from Swift, the international financial messaging system.  Russia has been barred from making debt payments using foreign currency held in US banks. And western Europe has frozen the assets of all Russian banks, blocked Russian firms from borrowing money, and placed limits on Russians deposits in European banks.  The EU has banned imports of Russian coal, refined oil products and oil by sea. It is unprecedented for a large power (and permanent member of the UN Security Council) to be subject to such sanctions.  The closest we’ve come in recent history was perhaps US President Franklin D Roosevelt’s attempts 80-odd years ago to curtail an expansionist Japanese Empire.  In 1940, Roosevelt closed the Panama Canal to Japanese shipping. Responding to Japanese occupation of key airfields in Indochina, the US froze Japanese assets the following year and established an embargo on oil and gasoline exports to Japan.  By December 1941, Japan had attacked Pearl Harbour and triggered war with the US.  Today, the West is waging economic war on Russia and the consequences—less evident than the immediate conflict—may well shape our lives for decades to come.  Unlike Japan in 1940, Russia today is a plentiful supplier of commodities and not easily besieged.  It has powerful neighbours in China and India, both of which are quite content to continue trading with Russia, despite the West’s sanctions. But China has its own unsatisfied territorial claim over Taiwan, which could provoke similar sanctions from the West. This has resulted in China seeking to reduce its economic dependence on the West, just as the West scales back its reliance on China.  The result is a new era of deglobalisation, ‘reshoring’ and ‘friendshoring’. Taiwan Semiconductor Manufacturing Company (TSMC)—the world’s leading manufacturer of microchips—is at the epicentre of the resulting tensions.  In a recent speech, TSMC founder Morris Chang observed: “Globalisation is almost dead. Free trade is almost dead. And a lot of people still wish they would come back, but I really don’t think they will be back for a while”.  This is evident in TSMC’s decision to locate its newest fabrication plant in Arizona in the US—a location it would hardly have chosen prior to the Ukraine War.  Has the world of peace, uninterrupted trade and economic globalisation been replaced by one of large trading blocs operating in parallel, but separate from each other? It looks like it. Unfortunately, we will all probably lose out as a consequence. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland

Accessibility is a key facilitator for meaningful inclusion and participation, as set out in the UN Convention on the Rights of Persons with Disabilities. Minister Anne Rabbitte explains why Since being appointed the Minister for Disability in July 2020, tackling barriers faced by people with disabilities in accessing employment has been one of my key priorities.  This, of course, is not a job for just one Minister, but is being managed across a number of different departments. Launched in 2015, the Comprehensive Employment Strategy for Persons with Disabilities (2015–2024) (CES) is the primary disability employment policy initiative in Ireland.  It brings together actions by government departments and agencies to address the barriers and challenges to employment of disabled people. The CES’ strategic priorities are to build skills, capacity and independence, to provide bridges and supports into work, to make work pay, to promote job retention and re-entry to work, to provide co-ordinated and seamless supports, and to engage employers. Four of the key actions progressed through the CES include: Progression of recommendations arising from the Make Work Pay Report (2017), which initially set out actions to help people with disabilities enter the labour force. The production of an online training programme to support employers in becoming “disability confident”, which encourages managers and staff to confidentially interact with disabled people. Provision of grant funding to the ‘Open Doors Initiative’, which aims to assist marginalised people who face higher barriers to employment. The funding will be used to operate the ‘Employers for Change’ information service, empowering employers with information and resources needed to hire and manage staff with disabilities. The development of an Employer Awareness Campaign, which is expected to be launched in 2023. Accessibility is a key facilitator for meaningful inclusion and participation, as set out in the United Nations Convention on the Rights of Persons with Disabilities (UNCRPD).  One way to promote accessibility in the workplace is through the concept of universal design. Universal design is about ensuring that products, services and the environment can be accessed and used by all people.  Universal design is also more sustainable design, as it ensures that products, services and environments will stand the test of time, particularly in the context of an ageing population. Embracing universal design from the outset avoids costly retrofitting. The public sector also provides crucial opportunities for people with disabilities to access employment. The Government has committed to doubling the target for employment of people with disabilities in the public service from three to six percent.  This commitment will be placed on a statutory footing with the commencement of the Assisted Decision Making Capacity (ADMC) Amendment Act 2022. As the UNCRPD itself states, disabled people have a right to the opportunity to gain a living by work freely chosen or accepted in a labour market and work environment that is open, inclusive, and accessible to persons with disabilities.  The Irish Government as a whole is committed to continuing to make progress in meeting all of our obligations to our disabled citizens. Central to this vision is ensuring that people with disabilities are supported to live the lives they want to, and are provided equal opportunity to do so.   Employment and everything that is associated with it, such as gaining independence, confidence and friendships, is a key aspect to improving the lives of people with disabilities and I look forward to continuing to make progress in this area. Anne Rabbitte, TD, is Minister of State with Responsibility for Disability

Wavering over support for Ukraine’s defence against Russia is not an option. The stakes are too high for Europe’s stability and unity, writes Judy Dempsey Russia’s war against Ukraine is approaching its tenth month. Despite Russian President Vladimir Putin’s original aim of conquering Ukraine within days after his 24 February invasion, Russian troops have been forced to withdraw from strategic areas in eastern Ukraine.  It’s too difficult to speculate how and when this war will end, but there is already a sense of war fatigue among some governments and political parties in Europe and the United States—ignoring the fact that Russia has been escalating this war over the past few months and Ukraine must continue to fight for its independence. There is even some suggestion that Ukrainian president Volodymyr Zelensky should be persuaded to negotiate with Putin.  This would be a mistake.  Understandably, several EU countries—especially the Baltic States, Poland, the Czech Republic and Slovakia—do not trust Putin’s intentions. They want Ukraine to continue regaining occupied territory and then negotiate from a position of strength. This kind of victory for Ukraine would have several outcomes for the region and the EU. A Ukrainian victory could deter Russia from spreading its military and political influence in Moldova, Georgia and Armenia. Such a victory would be a fillip to pro-European political movements in these countries.  As for Belarus, there is little chance that the political future of Alexander Lukashenka, who has imprisoned many Belarussians since their failed uprising over two years ago and repressed any kind of opposition, would survive.   A Ukrainian defeat, on the other hand, could encourage the Kremlin to extend its influence over Eastern Europe and consolidate Lukashenka’s regime which would, in the short-term, increase his grip on power. In the long term, this ‘stability’ based on repression would lead to instability.  In short, a victory by Ukraine could increase the stability of Eastern Europe. A Russian victory would lead to instability in the region. As for the EU, a return to Russia exerting its political and economic influence over Eastern Europe would have several consequences.  First, it would lead to new divisions on the European continent.  Second, as many EU countries have taken in Ukrainians, an unstable Eastern Europe would lead to new flows of refugees. Populist movements could exploit such a development.  Third, it would lead to deeper divisions inside the EU. The Central European countries would oppose any negotiations that would allow Putin to save face. Germany and France might be tempted to restore relations with the Kremlin—indeed, neither Berlin nor Paris have called unambiguously for Ukraine to win this war.  Fourth, given these differences, it is hard to see how the EU could ever agree to a strong and united foreign, security and defence policy. Russia’s war against Ukraine has exposed the level of distrust between the Central European and big EU member states. Small EU countries matter. Perhaps, for example, Ireland, Finland and Denmark, could form coalitions of the willing with the Central Europeans to maintain political, military and economic support for Ukraine.  Wavering over support for Ukraine is not an option. The stakes are too high for Europe’s stability and unity. Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

The worse the market sentiment, the better the profit opportunities and, right now, UK equities may represent “the trade of the decade”. Cormac Lucey explains why Diversity is regarded as an unambiguously good thing nowadays. Imagine the reaction you might get if you were to try to assert the contrary among your family or in your social group. But, for all that diversity is pushed and advocated, it can also sometimes be woefully lacking in our public discourse.  More than eyebrows may be raised if somebody states their support for Donald Trump or the UK’s decision to exit the European Union. But, in 2016, millions of sensible people voted for Trump and for Brexit.  Is it not odd that today their viewpoint is so universally dismissed? While being contrary is generally regarded as a negative social habit, it can pay rich dividends from an investment perspective: the worse the market sentiment is, the better the profit opportunities.  This is the credo of contrarian investing. Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets”.  Brexit is widely regarded by “right-thinking people” as a self-inflicted wound. A June 2022 analysis by John Springford for the European Centre for Reform concluded that the UK economy had substantially underperformed post-Brexit compared to how it might have fared if the British public had not voted to leave the EU.  UK gross domestic product was 5.2 percent lower than it would have been if the UK had remained in the EU; investment was 13.7 percent lower; and goods trade was down 13.6 percent.  Since then, Boris Johnson has given way as Prime Minister to Liz Truss, and she has been replaced by Rishi Sunak. And there was that snap financial crisis triggered by Kwasi Kwarteng’s mini-budget.  The UK has seldom looked so bad.  There isn’t exactly blood running on the streets, but it is pretty bombed out as a popular investment destination. That’s one reason why Rob Arnott, Chair of Research Affiliates, has argued that UK equities represent “the trade of the decade”. He states that “UK equities offer one of the most attractive risk-return trade-offs, priced to earn a return a notch higher than emerging market equities with significantly lower volatility”.  In essence, Arnott follows the Warren Buffett dictum about the equities market: “in the short-term, the market is a popularity contest; in the long-term, it is a weighing machine”.  As investor holding periods stretch out beyond five years, realised investor returns increasingly become a function of the price paid. So, while very expensive stocks can become even more expensive over a few years, as more time passes, they will increasingly struggle to generate strong returns.  Conversely, if you buy a deeply discounted asset (such as UK value stocks today), they may not initially show a great return but, over time, they should. In fact, with an asset this deeply discounted, there’s every chance it will outperform even in the short-term.  Arnott wrote his piece in early 2021 when he argued that, among the major equity markets, UK stocks were trading in the cheapest quintile of their historical norms based on both price-to-book and price-to-five-year average cash-flow ratios and in the bottom third, based on price-to-five-year average sales ratio. His previous big call—to invest in emerging market value stocks in 2016—generated returns of 80 percent in its first two years. Since announcing this trade of the decade, UK value stocks have risen by over 20 percent while the S&P index is marginally lower than it was, and the Nasdaq has dropped by over 20 percent.  Sometimes diversity of thought isn’t so bad after all. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland