Monday, July 09, 2012

Playing the blame game as economic recovery is delayed again

As the economic crisis of the West grinds on, I find myself noting that the mistakes of policy are more and more political mistakes, and that the failures of leadership are more and more failures of political leadership.  Attempting to create a safer banking system by forcing increases in reserves, through Basel III or restrictions in concentration, is in fact having almost the precisely opposite effect to that intended. The increase in reserves has not made banks safer, but it has forced a dramatic shrinking in bank balance sheets. The result is a crash dive in lending- especially to the critical small and medium enterprises sector. This is now getting to the stage where, in the words of a senior banker operating across the Baltic and Nordic markets who I was speaking to over the weekend: "within five years, no bank will be able to afford to take on SME lending". This continued credit crunch carries not only short term implications, but also long term implications, since the creative destruction of capitalism requires a healthy ecosystem of SMEs in order to grow.

I have noted before the failure of political leaders to understand the technical implications of the legislation that they are passing, however the scale of the mistakes at virtually all levels of policy making reflects not only a failure of understanding, but of vision. As the 29th or 30th emergency summit on the Euro passes with repeated failure to engage with the strategic crisis at the root of the single currency debacle, it is easy to become frustrated with the inflexible positions of Germany and France.

To a degree the positions of the EU leaders are now so well rehearsed that it is easy to believe a new stability has already been achieved. In fact the reality is that the gaps remain largely unbridgeable. The alienation between the Germans and the French is palpable, and the determination of France to create more wiggle room for themselves is matched by an increasing German determination to impose an unflagging and inflexible discipline. Meanwhile the British position: half in/half out, attracts opprobrium and contempt for the UK in equal measure from virtually everyone. As much as the British hope that the Germans are seen as the villains of the peace, the fact is that it is the image of the UK that is now the most negative one. Isolated, introverted and largely ignorant, the ability of the UK to project its point of view is now quite weak in economic affairs. "Punching above its weight" is the cliche that British diplomats like to use to describe the position of the UK, yet after the badly mishandled Cameron veto, it is clear that the position of Britain in EU economic debates is rather less than its size admits. Meeting German foreign policy officials in the past few days was a shock: not merely contempt but ill disguised loathing of the "the island" is now the standard view in Berlin.

Yet the need for wide scale political reform is just one more thread in this crisis. The institutions of Western capitalism are being challenged: externally from Chinese state capitalism and internally from the astonishing misapplication of capital that a corrupt and mismanaged banking system has built up over the course of the last twenty years- a disaster which was largely orchestrated in the City of London. Now the politicians in a vain attempt to close the stable door long after the horse has bolted are making further critical mistakes.

Recession is indeed the new normal, and it could be another decade before the situation changes. A ten year depression is on the cards, and at the end of it, Europe will have gone from being about 25% of the global economy to less than 7%. The power and influence of Europe will go the same way. After nearly four hundred years as the cockpit of human history, Europe is poised to become a backwater- and the failure of the political systems at both European and national levels is becoming a major factor in the implosion of Europe. 

And Britain, both for its politicians and its financiers, is getting a lot of the blame.

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