The Great Debate UK
–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–
Having been bullied into swallowing European monetary union in 1998, the Germans are today being pressured on all sides into agreeing to one or more of a range of reforms – burden-sharing, Eurobonds, fiscal union, debt mutualisation, a banking union, joint deposit insurance – all of which amount to the same underlying reality: Germany foots the bill.
But beyond the economics of these different proposals, there are more important concerns. If a political explosion is to be avoided, Germany must extricate itself from the mess as quickly and cheaply as possible, recapitalising the country’s own banking system and selling euro zone exit to its voters as a loss-cutting exercise: sunk-costs, a salutary lesson.
Many members of my own profession, who should know better (e.g. Howard Davies on this morning’s Today programme on Radio 4) argue that Germany derives enormous export benefits from having a fixed exchange rate with its neighbours. Not only are these short term benefits grossly exaggerated in the current situation where Germany finds itself selling goods to its neighbours in return for worthless IOU’s, and the future situation where Germany has to lend money to the other euro zone members so that they can buy its exports, but the point that Howard Davies and co are ignoring is at some point going to be obvious to Germans: they are being taken for a ride in the euro zone.
Wednesday’s panic in the bond markets drove yields down to unprecedented lows in U.S., UK and Germany. The stampede into British and American debt is no surprise, since both countries represent a rock-solid guarantee of repayment in their own currency (though heaven knows how much lenders will be able to buy with the money in ten or twenty years’ time), but why the rush into Bunds?
One possible interpretation, which can never be discounted, is pure panic, based on nothing more rational than faith in Germany’s sleek cars, orderly cities and conservative bankers. But that is unlikely to be the whole story, if only because the trend has been apparent for too long to be put down to knee-jerk reaction.
Seeing the dewy-eyed kids at the post-election celebrations in Paris, I couldn’t help thinking how crazy it all was. The youngsters were plainly convinced they had a president to take their country forward into the new dawn - after all, he campaigned under the slogan “Le changement, c’est maintenant”. In reality, Francois Hollande’s programme is unambiguously regressive, with its stop-the-world-we-want-to-get-off determination to go in the opposite direction to every other country, its refusal to countenance any erosion of the country’s ruinously expensive welfare state and its complacent confidence that there is nothing to stop France carrying on as before. What better place to greet the return of the Ancien Régime than the Place de la Bastille?
Of course, the new President promises that he is going to balance the budget in 2017 with the familiar prayer of tax-and-spend governments the world over: “Oh Lord, make me solvent! – but not yet…” Now, even allowing for the fact that France’s deficit is only 5 percent of GDP, it still means he is going to keep on borrowing until the national debt is more or less as large as GDP. (Remember: a balanced budget means no need for more loans, so the national debt is constant. To start paying off its debts, a country needs a surplus, something France has not managed for more than forty years).
Never make forecasts, especially about the future – wise advice, which I’m reluctant to ignore. But I will say I think the risk of a panic in the financial markets at some point in the next three or four weeks is extremely high. Wherever you look, there are icebergs on the horizon – small ones, like Greece, Portugal and Ireland, and giants, like Spain and Italy, and now most menacing of all, France.
If the opinion polls turn out to be correct, the French election will mark a turning point in the euro zone crisis. It is not just because the new president will be committed to leading the nation in the opposite direction to every other developed country, increasing government spending, reducing the pension age and the working week, raising the minimum wage by more than inflation and introducing a 75 percent tax rate, all of which are bound to threaten France’s creditworthiness which is already so low that it is paying nearly 3 percent to borrow compared to Germany’s 1.75 percent rate. More important in my view is what a Socialist victory will mean for the balance of power inside the euro zone.
It was bound to happen. You could see it waddling into view from a long way off. We are now being told by the medics that we should seriously consider a tax on fatty foods, in order to combat the scourge of obesity. How appropriate that, according to The Independent, the Deputy PM is planning to recruit 65,000 “State Nannies”!
One wonders how the new tax will be computed. Will it be a higher rate of tax on higher fat-content foods? Will chicken breast be taxed at a lower rate than chicken legs? Will omega-3 fats be taxed at a lower rate than omega-6? Either way, we can look forward to a tabloid feeding frenzy which will make pastygate look like a Cornish picnic.
Like many of the current government’s proposals, the announcement that the Education Secretary is planning to hand over control of ‘A’ Levels to the universities leaves me mystified. The only thing to be said with any confidence is that he is doing the same as each of his predecessors over the last half century: only fix the parts that ain’t broke. Be sure not to touch the worst bits.
The ‘A’ level system has two awful features which explain why our youngsters today are so poorly educated, whether judged in terms of their ability to compete in the global jobs market – it is global, wherever you actually go to work – or whether judged simply in terms of their levels of literacy, numeracy and culture in the broadest sense.
By Laurence Copeland. The opinions expressed are his own.
In 1997, when Alan Greenspan famously pointed to “irrational exuberance” in the U.S. stock market, he nonetheless failed to follow up by doing what, according to an oft-quoted predecessor, is the critical task of a Fed Chairman: “taking away the punch-bowl just as the party gets going.” In fact, when the tech stock bubble burst in early 2000, he cut interest rates, and did the same again, more forgivably, in the aftermath of 9-11. The result of this laxity, emulated by the UK and Japan, was a new global bubble, this time mainly in real estate.
When the new bubble duly burst in 2007-8, the preferred “cure” for the hangover was the same as before – only a far far bigger headache required a far far bigger dose, newly bottled and relabelled QE. The result has been predictable – a reinflated bubble, this time in commodities (especially oil and precious metals) and in nominal assets: short term debt (Treasury Bills etc), long term debt (gilts, some corporate debt), and worst and most menacing of all, in money itself, which is now grossly overvalued too.
Last November, at the time of the Chancellor of the Exchequer’s Autumn Statement, the two men in charge of our fiscal and monetary policy together delivered the gloomiest peacetime message in our history. Those of us who have been pessimistic all along were totally outflanked.
The governor of the Bank of England was absolutely right to decry the sudden vogue for technocracy. As he says, the problems in Europe are not fundamentally about a shortage of liquidity, as many commentators suggest and as politicians are only too happy to agree. They are at root about solvency, about the ability and the willingness of countries like Greece to pay their debts, and as such they are political problems which require political solutions. It is simply wishful thinking to imagine that an economics PhD somehow provides access to the secret of how to balance the books of a society which has long been living beyond its means, as have the majority of euro zone members. If it is hard for a Government with a sound electoral mandate to deliver painful medicine, it is likely to be even harder for one with no mandate at all.
When the Greek crisis began, there was much talk of contagion as the greatest short-term risk. In my view, this worry is almost irrelevant because bondholders are in any case facing a haircut of over 70%, so the question of default or bailout is now merely a technical detail.
From a longer term perspective, there is also little reason for the Germans to panic over a Greek default, even if it ultimately leads to the disintegration of the euro zone. The line peddled by a number of commentators and politicians that Germany has “done very well out of the euro zone” begs the question of how well it would have done without the euro zone, a question to which I do not know the answer – but nor does anyone else.