“World plc” is unwell.
Before anyone gets the wrong idea – this is after all the Finance Column – I’m
not about to stray into areas medical, psychological or spiritual. But after a
period of extreme economic intoxication and dissipation, it seems appropriate
to echo The Spectator magazine which, whenever the lifestyle of its late “low
life” correspondent took its inevitable effect on his health and reliability,
would simply post the notice "Jeffrey Bernard is unwell" in place of
his column.
Conventional wisdom
tells us that the onset of the present financial crisis dates back to 2008. But
that only tells us when the disease presented – the symptoms were certainly
there well before 2008. In Spain’s case, for example, the housing boom that
ended in such a spectacular crash had been building for a decade or more.
It’s clear that World
plc remains on the sick list – and parts of it are still in a critical state.
As with any illness, it took a while before any doctors were consulted and still
longer to think about taking the nasty medicines they prescribed. Second problem.
The doctors were faced with so many competing symptoms when World plc was
admitted for treatment that it was difficult to know what to tackle first. These
and other questions have plagued world markets ever since. Now that we are fast
approaching mid-2012, I thought I would step back and consider where we are now
(My “plain English campaign” also demands that I try to explain, in passing, what
on earth is meant by a “haircut”, quantitative easing and the LTRO).
It won’t surprise
readers that when considering the overall state of World plc’s health, my first
answer is to say that it depends on which bit one is considering. Before
looking at those countries that affect us most here in Gibraltar, let’s start
with the worst European case. Greece’s problems have been gripping the
financial markets. Readers could be forgiven for thinking that Greece is now
sorted. After all, a haircut has been ordered, EU funds lent and austerity in
place. Problem over, right? Err, no – not exactly. Read on.
In March, Greece finally secured backing to cut over €100bn from its total
government debt. The vast majority of Greece’s creditors accepted the terms –
this is the so-called “haircut” on bond yields – and, as a result, the EU and
IMF have agreed to the latest bailout worth €130bn. The objective is to cut
Greece’s government debt from 160% of GDP to a little over 120% over the next
eight years.
All seems well and good.
The Greeks are off the hook and those who have had to take losses on their
bonds seem to have accepted that this is better than a complete default. EU
politicians are preening themselves at a job well done. All jolly useful given
imminent French elections and the fragility of the German coalition.
The problem is that the
crisis hasn’t gone away. Sure the Greeks owe substantially less now than before
– but it’s still a debt mountain that will be impossible to finance in an
economy that is not growing. And Greece is certainly not growing – it is
contracting at an alarming rate. As tax revenues shrink and welfare costs rise,
it is difficult to see how Greece can comply with the new debt restrictions.
Unless of course there is a third bailout and Greece contemplates leaving the
euro. Nothing much changes does it?
Closer to home it is
said that Spain is nothing like Greece, and in many ways that is true. Spain is
quite simply “too big to fail”. The economy is not contracting at anything like
the same rate and the recently-installed Spanish government has just brought in
an austerity budget more radical than anything seen before. As a consequence, officials
admit that 2012 is likely to be the most difficult year yet for Spain since the
onset of the crisis
Normally bullish, in
recent months I have become rather more pessimistic about Spain’s chances and whether
this “austerity” medicine is going to work. Firstly, after 25 years of
spending, the Spanish don’t like austerity. Look at the shiny new airports,
motorways and AVE trains criss-crossing the country at 200 mph. The collapse in
the property market has been astonishing. Literally millions are out of work
with little or no chance of imminent re-employment. In places across Spain one
person in three is out of work. Nationally the official rate is more than 23%.
Aside from increased welfare
costs, another result of all this is that hundreds of thousands of Spain’s
young are moving abroad to find work. London is just one example where the
Spanish diaspora has grown exponentially in the last couple of years. Those
leaving are more likely to be better educated, perhaps bi-lingual and more skilled.
None of this bodes well for the future.
Across much of the
EU, particularly across the Mediterranean, recovery is as far away as ever. The
problems confronting Portugal, Italy and others remain. During a recent
competition aimed at stimulating ideas on what to do about the Eurozone crisis,
11-year-old Jurre Hermans from the Netherlands got it about right. Singled out
for a special mention as the youngest entrant in the recent Wolfson Economics
Prize, his suggested solution for sorting out the crisis in Greece used slices
of pizza as an analogy with Greeks exchanging their euro for “new drachmae”. It
remains to be seen whether this will happen but in an effort to ease the strain
elsewhere, the EU has joined the US and the UK by increasing market liquidity. Oh
dear, jargon time again.
“Quantitative easing”,
as undertaken by the US and the UK, is quite simply the issuing of government
debt that is then purchased by the government. The result is that more money is
pumped into the economy. National debt rises but the idea is that this is
better than the alternative scenario. The EU’s version is called the Long Term
Refinancing Operation (LTRO). Under this initiative, hundreds of billions of
euro are lent to banks at extremely low interest rates for three years in an
effort to facilitate bank lending. Even if the intended lending doesn’t happen,
the banks have at least used the facility to shore up their balance sheets – so
easing the strain during the crisis.
So how about some good
news? There are signs of a fragile recovery in the US and it is perhaps to be expected
that it is in the States that the global recovery will begin. After all, there’s
the small matter of a US presidential election to distract us between now and November.
Another country that has actually taken a strong dose of the austerity medicine
is the UK.
The British
government is faced with a slowing service sector, a limited manufacturing base
and a massive public debt burden. There is little or no room for manoeuvre in
areas such as reducing interest rates or raising taxes. Yet one can point to
several areas where the UK economy is starting to recover – albeit very
gradually and vulnerable to external shocks. The UK’s currency floats freely
depending on the world’s view of how Britain is doing, which is not a luxury available
to the eurozone. This is one reason why all of us in Gibraltar take a keen
interest in the UK and the impact seen on the euro exchange rate.
And in Ireland, there
are some real signs that the recovery may be happening. Earlier this year
Taioseach Enda Kenny said that by nature he was an optimist and that “Irish
people are very pragmatic”. Ireland was the first EU country to approach the EU
for assistance. Its banking system collapsed and several years of painful
austerity lie ahead. But the “pragmatic” Irish are taking their medicine and,
by all accounts, it is starting to work.
We have also come to
realise that the US is no longer the only “superpower”. The effects of China’s insatiable
appetite for natural resources can be readily seen in Australia, Africa and
Latin America. Add to that the impact of Middle Eastern money – “sovereign” or
state funding – that is buying up assets from Western banks and factories to
hotels and football clubs, and we can readily see that the world economic order
has changed for ever.
Contemplating just
these few examples, my conclusion is that the economic prognosis is a very
fragile version of the Curate’s egg – good in parts, but still pretty bad in
others. And here’s the rub. Globalisation means interdependency. Those countries
that are seemingly in better shape than others are dependent on growth
elsewhere to create a market for their goods. There is still a long road ahead
and we’re all in this together. I can’t tell you when the medicine will start
to work but I know it has to work, eventually. As the editors of The Spectator
surely appreciated, it is all very well to say “get well soon” but it may be better
just to say “get well”.
