Part 2 – Revelations
After the conclusion to what some pundits called a ‘tumultuous week’ for Europe (week ending 11 May 2012), we still find ourselves asking some important questions.
We all know that the question is not around what growth, where growth or why growth. The fundamental question in Europe now is:
For way too long Europe and its leadership had taken its eye off the growth ball. They had taken their eye off that ball focussing instead on creating the conditions for a ‘stable’ internal market, forgetting that it was all actually centred on competitiveness and growth creation!
Too much needless bureaucratically driven regulation, not creating the sustainable conditions for growth, but rather the spiral into debt driven oblivion…and therefore leading to the volatility and the instability we currently experience!
So the choice now comes down to how do we drive growth, in the face of an electorate that favours public sector driven growth, rather than private sector led growth.
It must make common (or at the very least common enough) sense for private sector growth incentives being created, rather than debt fuelled public sector or even Keynesian focused supply side stimulus. But no, the discourse in Europe has not been around stimulating demand by creating the conditions for competitive led export fuelled growth! Instead, the in-fighting and constant politicking around balanced budgets and debt to GDP ratio targets and endless pacts to patch the patient with half-baked policy sticky plasters has contributed to exactly the opposite outcome the leadership tried to create in Europe, namely a stable platform for internal market competitiveness. They forgot about the world changing outside the ‘Chinese wall’ of an expanded 27 member union.
And now the electorate has firmly rejected the austerity programmes, in both Greece and France, because they have not been educated in the dangers of public sector excesses. Nobody in Europe (except for maybe Sweden) realised that giving the “Engine of Growth”, namely enterprise and entrepreneurs an incentive to create businesses and employment opportunities, is actually tax reductions and not increases, combined with tempering public sector growth and reducing labour market inflexibility. Most European countries have youth unemployment; the hungry, tech-savvy and street smart under 25’s, running in double digits, of anywhere between 15 – 50%, depending on which country or statistics you want to believe…
For the sake of yourselves and the rest of the world, we beg you Europe (and off course we mean the leaders of Europe) to think about the following key growth criteria, as part of any ‘Growth Pact’ you might negotiate in the coming months:
And above all believe, think, do, act and (if you must) enact economic GROWTH!
No investor can or should trust institutions without conducting their own due diligence and risk profile / risk appetite assessment first. In the past investors could possibly rely on professional ‘trusted’ advisors to help then navigate the due diligence part, at least in theory. Risk and risk appetite assessment was the more tricky part and not even the professionals had sophisticated enough tools to help their clients through this quagmire landscape.
We believe this is the unintended consequence of over regulation or an over regulated environment. Relational trust has been eroded in favour of ‘legislative trust’ and therefore the impersonal ‘hand of public scrutiny’ is supposed to protect the innocents.
We need to ensure the pendulum swings back to a happy balance between relationship and legislative trust, unburden ourselves from the over regulated and expensive compliance environment we have allowed to engulf and overwhelm us, not adding any value, but stifling innovation instead.
Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.
The first graphic highlights one important issue. We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve. If we cast our minds back to 2 August 2012 two key facts emerge:
The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.
However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.
The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over. The second is the Italian Bond Maturity curve. You will notice just how similar the USA and Italy Debt Maturity profiles are.
From this comparison, the critical question currently for us is:
Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months? QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free. It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.
It is with a little amusement that we scanned through the Economic headlines today, following Standard & Poor’s decision to finally downgrade France’s and other Eurozone nation’s Sovereign Debt rating. France lost its prestigious triple A (AAA) grade to AA+.
Sarkozy and French anger? Indeed!
But the problem is timing as far as Mr Sarkozy is concerned. This is a Presidential election year in France, so this comes as a slight humiliation to Mr Sarkozy. And so it should be! He should be shamed out of office! Therefore, hopefully S&P’s decision will help the voters and tax payers of France sit up and realise that incompetent leadership and decision making in the Eurozone economies now urgently needs to be ‘punished’.
Thank you S&P, for taking this action, because the actions (or rather inaction) of the Eurozone bureaucracy and leadership so far in addressing the root causes of the multiple crises, is continuing to drag the global recovery off course.
Decisions to circumvent exiting (inadequate) European Institutional frameworks and pulling the wool over European Citizens eyes over the inadequate administrative burdens the bureaucrats have imposed on its Citizenry must finally come to an end.
Hopefully, we’ll see some slightly more competent new faces in the Eurozone leadership pool and summit photo call line ups very soon… Innovation in Europe might have to start with a new set of leaders?
We decided to summarise our learning from 2011 into two brief thoughts:
All the best and good luck in 2012.
Yes, it will be more bureaucracy and bigger financial problems down the line…
The inspiration for this comes for the ‘people pulling the wagon versus the people in the wagon’ analogy utilised by Dan Mitchell of International Liberty.
In an article we wrote earlier this year we very clearly called for INNOVATION as an engine of growth in Europe, yet all the politicians and bureaucrats can deliver are bigger EU institutions, hence, more and more people piling into the wagon! Aren’t some of us getting not just tired of pulling the wagon, but frustrated and exhausted too. Are these not some of the ingredients necessary to breed and incubate extremism?
Bigger financial problems?
In another of our earlier articles we mentioned the dangers of Moral Hazard. By not addressing the fundamental problems of big bureaucracy (we are in danger of starting a circular argument here), debt accumulation, regulatory stifling, the ‘EFFICIENCY’ drive will permanently drive INNOVATION (and hence future growth) out of Europe. Let’s face it, if it was not for the expansion of the EU towards the vigour of the Eastern and Baltic states, there would be no growth and opportunity and Europe would not be an attractive place to do business.
Europe’s maturity (and risk averse cultural norms) are now so engrained and an anchor and drag on innovation that attracting Foreign Direct Investment (FDI) (and purchasers of sovereign debt) will come more and more of a challenge in future.
The brave thing to do, in our opinion, was to stand up for a fragmented Europe, as David Cameron was prepared to do, because to be lead blindly down the alley, just to be beaten and bruised by the rest of Europe, would not only be folly, but a disaster for Britain.