Capitalism in the West and other myths…

June 19, 2012

The West’s claim to be a capitalist society has been eroded throughout the European sovereign debt crisis. If we were truly capitalist then the markets wouldn’t expect Germany to step in to solve the euro zone’s problems or to eradicate the excess debts of Europe’s periphery. The prospect of this safety cushion provided by Berlin has kept the euro propped up even though Spanish bond yields are hovering around 7%, even after it received the go-ahead to get a bailout for its banks.

The same is true the other side of the pond. Since the financial crisis, the central bank in the U.S. has stepped in to prop up stock markets and other asset classes with quantitative easing when volatility has spiked. Some people in the markets now just expect officials to step in and save investors when the going gets tough.

Surely that is the exactly the opposite of the principles upon which capitalism was founded? One of the central tenets of this social system is to limit state intervention and give individuals the freedom to work and reap the fruit of their own labours. That means that people are free to prosper, but also free to fail. Many could argue that the bailout of Spanish banks’ is another perversion of capitalism. If the 50% of young people who are unemployed in Spain are allowed to go without a job then why should Spain’s banks get bailed out when they were the ones that extended unsustainable loans leading to one of the biggest economic disasters in Spanish history? No wonder nearly 40% of Harvard graduates in 2010 went into a career in investment banking – you win, you get paid a fortune, you lose you might also get paid a fortune. If that 40% became entrepreneurs then they may have found out that if you lose, you really lose.

So the sovereign debt crisis in Europe is yet another economic disaster in the West that highlights the holes in our capitalist façade, but it is not the only one. An intriguing article on Marketwatch about the myth of perpetual growth in America got me thinking about Europe. There has been a lot of talk that bailouts etc. won’t help Europe’s periphery, what it really needs is growth: growth to pay down the debt and growth to build its economy on a surer footing for the future. However, I have two problems with this theory. The first is that growth in the last decade in parts of the currency bloc was the negative kind, fuelled by debt and thus not really growth at all. Hence why Spain and Ireland’s banks needed bailing out: strong growth rates were fuelled by unsustainable lending to the construction sectors, which eventually imploded. Greece lived on a public spending binge for a decade that was also fuelled by another form of borrowing – sovereign debt.

When people talk about new growth models for the currency bloc they should include a giant caveat. The new growth model based on hard graft and exports etc. won’t be as easy to achieve as the previous decade of growth, it will be harder to find and probably reap lower rates of economic expansion than we had grown used to during the noughties.

Another condition for growth is people. Population growth is something that Europe may also struggle with. Greece, Italy and Germany, for instance, have pretty dreadful demographics and by 2040 there is expected to be less than two people of working age for each retired person in Germany, about one person less than there is currently. Aging demographics is anti-growth as the pool of productive people gets smaller. Thus, when people talk about growth as the solution to this crisis it seems to be the sort of short-term sticking plaster to try and eradicate debt quickly and bring down borrowing costs. But that only encourages more borrowing, which is just what Europe’s economies don’t need.

This may be a fairly bleak post, but the answer is that economic pain is the new norm. There is a strong chance that children in the West will have worse standards of living compared to their parents as lifestyles and economies recalibrate to very different conditions from a decade ago.


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Gosh, how hard is it to post comments on Reuters site? Answer very hard.(Which may explain why there are seemingly so few).Kathleen’s article is so true in principle that it’s scary, in order for markets to work markets have to be allowed to work – a case in point being yesterdays FOMC’s decision to continue operation twist but not to switch on the printing presses – yet. Markets are going to open down on the back of this, why? because company’s are making less profit? No, because demand has substantially decreased? No, because costs have risen dramatically? No. Because a government decided not to print money and buy gilts, which would feed into higher stock prices for no reason other than the existence of that money. Investment is supposed to be a calculated risk decision – which is becoming impossible to assess because who knows when or why politicians do what they do? Trying to second guess Washington, London or Frankfurt is close to impossible, add that to all the ‘normal’ risk metrics you have to deal with and it’s little wonder there aren’t many takers at the moment.

Posted by GraemeL | Report as abusive