"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".
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