Eurozone Crisis - graphic

[PaulB]

There have been a few threads on the recession/deficit etc. but I'd like to draw a few of them together (and hopefully learn something in the process as there seem to be people here who know about these things.)

The G8 have just met in the US and from reading the headlines, it would seem that the Obama/Hollande argument has won out over the Merkel/Cameron one as the summit is proposing more emphasis on growth.

There's an interesting graphic on this BBC web page, showing that by and large the same thing has happened to all Eurozone countries to approximately the same extent.

A few, Eire, Spain, France, Luxembourg and most notably, Estonia, did manage to grow in 2010-11, whilst Greece shows as being the most badly affected. Did those that managed growth do anything different to the rest to achieve that and why is Estonia so different to the rest, seemingly being hit harder in the recession, but recovering faster? I guess the key bit of data is missing. We really want to know what happened the following year (ie last year.)

Thinking about a couple of other things.... in the Facebook valuation thread on here, Flyin'Dutch' suggets that the markets have short memories (having overvalued internet stock previously). It's a sort of short term view with an eye on a quick profit that happens quite often. Conversely, there also a prog on telly last week about the Euro crisis introduced by Robert Peston. He also made a program a year or so ago and the same point was made in both. In the recent prog, the boss of Karcher appeared and said that the company was a family company investing for the long term. The previous prog mentioned the Mittelstand, which I understand to be a term for small to medium sized enterprises in Germany that some say are responsible for much of German success and they employ a large proportion of the German workforce. The same point was made about them investing for the long term.

Many of these (German) companies seem to be family run "in it for the long term" as opposed to the shareholder run companies here that demand quick profits for exec bonuses and dividends for shareholders. I'm attempting to link FD's market amnesia comment (if FB does fail, some with still gain, and not just MZ) with the situation of non-growing companies here where fat bonuses are still paid out. Both, in different ways seem to be taking a short term view when we really need a longer term view to ensure success.

I'm not sure that there's much (or indeed, any) merit in my argument, but there are those here who understand these things, so at least I may end up better informed.

[bar shaker]

Paul, the vast majority of UK employees work for privately owned SMEs.

It may come as a surprise but Germany has a stock market (called the Dax), share holders and even some that want to see a return on their investment... Just like the UK.

If we want to talk about differences between our two business worlds, it is more that German unions have worked with owners to help make companies efficient and so safe guard jobs and conditions. They do this by having a seat on the board of companies over a certain size and by working with managers and owners. In the UK we have Bob Crow.

[PaulB]

Paul, the vast majority of UK employees work for privately owned SMEs.

The point was made (certainly in the first of the 2 programmes) that the proportion of such companies (and consequently employees) was much lower in the UK than in Germany.

It may come as a surprise but Germany has a stock market (called the Dax), share holders and even some that want to see a return on their investment... Just like the UK.

No surprise at all..... It was more a comment about proportions of the different types of enterprise.

If we want to talk about differences between our two business worlds, it is more that German unions have worked with owners to help make companies efficient and so safe guard jobs and conditions. They do this by having a seat on the board of companies over a certain size and by working with managers and owners. In the UK we have Bob Crow.

I'm not sure that tarring all union folks with the same brush as Crow is fair. Hasn't a seat on the board for union/employee representatives been suggested here?

[johnm]

In my experience management gets the kind of unions it deserves and management in the UK and America is simply not as professional as much of the European management. Too many with MBA after their names fulfil its alternative interpretation as Mediocre But Arrogant.

The major issue is the management of sovereign debt. It doesn't actually matter if it's never repaid as long as the interest payments come through, so paying back debt by borrowing more money is perfectly sustainable as long as the interest remains within the bounds of taxation revenue. It then looks very like an interest only mortgage. When sovereign deficits reach the point where money is being borrowed to service earlier debt there is cause for concern, but the fact that the capital could never be repaid in full is of no great consequence.

There's also a simple minded attitude to GDP and growth. Public sector GDP is not all good and not all bad and the same is true of private sector GDP, the value add needs to be considered. So there's no value add in the DSS there's a little value add in the NHS and quite a lot of value add in research and education for example. So growth needs to be the right sort of growth and that's what Gordon Brown and Ed Balls choose not to understand.

[kanga]

In my experience management gets the kind of unions it deserves and management in the UK and America is simply not as professional as much of the European management. Too many with MBA after their names fulfil its alternative interpretation as Mediocre But Arrogant.
...

Further aggravating factors are, IMHO:

- in UK and US, management (and MBA teaching) traditions are that maximum short-term shareholder dividend is the only proper goal. In US, it is accepted that this is what both institutional (eg Mutual Funds) and private investors (investing privately or through MFs) demand (and will sell shares rapidly if they do not get it). In UK, it appears that this is what institutional shareholders do (eg Pension Funds, Unit Trust managers) do demand. In Germany, by contrast, investing for the long term by both institutions and individuals seems to be commoner

- In Germany part of the Mittelstand is local/regional banks. Local individuals invest/save in these, and they lend to local businesses. Oh, and like other businesses, they have employee representation on their Boards. It is routine for lending decisions at such banks to be based on considering 'what will be good for the medium- to long-term prosperity of the localty/region ?' Failures by borrower SMEs are acceptable risks. By contrast, in UK, banks have national or global investor outlook and priorities, and are likely to want indissoluble collateral (eg property; or for aviation/marine/transport enterprises, the expensive vehicle (aircraft, ships, trucks) as collateral) as a condition for the loan. [The US is not quite so bad: there are still local (1 State only, which used to be a required limitation until Reagan scrapped Roosevelt-era Federal banking laws) banks. these may be more prepared to lend to local SMEs which may fail; and such loans are less likely to require borrower's private real estate property as collateral]

- UK banks (and institutional investors) seem, by default, to watch and take short-term decisions on business sectors rather than individual businesses. I had an acquaintance flying for a small but successfully growing regional airline. Their bank had lent them money for the deposit on their leased aircraft and other start-up costs, and they were meeting the projections in the agreed Business Plan. Then another UK regional airline (another part of the country, a totally different customer profile) went into receivership. The bank (based in London, of course, with no local nor aviation knowledge) immediately demanded repayment of their loan because (as their loan manager told them) 'regional airlines were clearly not a good prospect'. Airline failed; quite a few jobs were lost, prosperity of their region (to which the airline's new services were clearly contributing) was adversely affected. Oh, and bank lost money, and start-up airline directors lost their homes.

[Paultheparaglider]

[- in UK and US, management (and MBA teaching) traditions are that maximum short-term shareholder dividend is the only proper goal.

That just isn't true.

In UK banks (and institutional investors) seem, by default, to watch and take short-term decisions on business sectors rather than individual businesses.

Banks, quite correctly in my opinion, have credit policies that segment in many different layers. One of which is obviously by business sector. The whole point of the balance sheet management process is to diversify risk. That said, the individual lending decision - for corporate lending as opposed to retail - is to analyse the company, and the lending risks, on a stand alone basis. A wise bank does not want to simply make profits in the short term - it wants to select and support businesses over the long term as that is ultimately in the best interests of the bank, the companies being lent to, and the economy in general. If you look at really successful banks, such as HSBC, it has been built on successful long term relationships. Know your customer is key to banking success - not short term screw the customer thinking.

I also find a lot of what Johnm has written above, unusually, quite disturbing. The notion that provided you can repay the interest out of taxation you don't have to worry about the principal repayment is suspect in my book. It has long been the stategy of US sovereign lending to let inflation eat away the original debt, but this policy is not without its long term risks. Over the longer term, inflation is not good for an economy, and you also rely on the goodwill of lenders for further financing. You only have to look at how China attempted to diversify into the Euro to realise just how vulnerable even the US is to such a strategy over the long term. Further, you only have to look at the relative performance of the eastern versus the developed western economies to realise that high borrowing strategies lead to long term economic decline. To suggest that you don't have to worry about repaying sovereign debt assumes both long term growth and lender acquiescence. Every chicken comes home to roost.

Comparing long term sovereign debt to an interest only mortgage is a fair comparison, but even with such a mortgage at some point the principal has to be repaid. And it is very vulnerable to interst rate changes.

In the long run, as with your own personal financial position, the best strategy is prudence. You only borrow what is needed to build your future financial wellbeing, and in the good times you retire as much of your debt as possible. Anything else leads to exactly the sort of mess we find ourselves in now, and whereas it may be technically correct to advance the notions put forward by Johnm, it is, at best, extremely dangerous thinking. Far too short term thinking for your average MBA like me.

[kanga]

[- in UK and US, management (and MBA teaching) traditions are that maximum short-term shareholder dividend is the only proper goal.

That just isn't true.
.. Far too short term thinking for your average MBA like me.

my apologies. I am not a MBA nor a banker; and my 'evidence' is only anecdotal ..

[Paultheparaglider]

No apologies needed, Kanga. It is true that a lot of people think and act short term. It just isn't true that management theory teaches or encourages this.

At any economic level, whether it be country / company / individual, there will be more benefits from a long term approach. Unfortunately, this is much easier to state in theory than it is to achieve in practise.

A typical MBA term is goal congruence. The concept is that you align the interests of the individual with the interests of the organisation. You can achieve this by strong corporate governance and well thought through remuneration and other personnel policies. This has been sadly lacking in recent years, to the extent that senior management often act in a much more short term manner than is ideal, primarily because they have been allowed to get away with it.

Equally, at country level what is needed is political structures that encourage long term strategic thinking. Unfortunately, the incentives are heavily weighted towards short term economic stimulus in order to get voted in at the next election. Maybe we need longer terms in office, but that works against accountability.

If only I had easy answers to these problems, I would be a very rich man. Unfortunately, I don't. That is why I'm paultheparaglider and not paulthelearjetdriver.

[Bill McCarthy]

Cameron has a bluddy nerve - suggesting that the Greeks have a referendum on EU membership during their repeat elections when they shot through on the deal to give us one !

[mo0g]

What point was there having (and paying for a referendum) when Labour already signed up?

Had they not already signed up (without the referendum the people wanted), then Cameron would have gone through with his pre-election (and pre-labour signing) promise.

Put another way, he promised to have a referendum about signing that bit of paper. It got signed by labour.

[peterh337]

The stuff about German business thinking more long term is true, but the bottom line is that most of the current German economic strength is the result of very successful exports, and in that department Germany has done extremely well out of the weak Euro.

It's all very well for the boss of Karcher to be all smug in his nice suit but the fact is that there is nothing in his product which the Chinese could not make for less, and just as well. They could just copy it; there is no significant IP in a car washer. So why is he successfully selling the product? Because the Euro is weak.

Why is the Euro weak?

Because most of the other countries that are in the Euro (that are significant) are bankrupt.

It is very much in Germany's interest for the Eurozone to continue and to continue to be full of bankrupt countries. This devalues the Euro and helps German exports.

If the Eurozone broke up and Germany reverted to the DM, it would kill Germany's export performance...

I am not necessarily suggesting this situation has been rigged at the outset by Koln & Co, but they cannot be unaware of its significance.

If the proposed solution to the European crisis - a Federal Government - was implemented (which will never happen because there is absolutely no political support, thank gawd) that would hurt Germany massively, both via direct costs of another "East German unification" (which cost Germany a reputed trillion Euros) and via the trashed exchange rate which would kill the German golden goose.

When it comes to Greece, the country has always been corrupt at every political level, as is all of southern Europe and all of the 3rd World. While it would be quite wrong to say that a significant part of the German success story has been achieved by shafting Greece (because it accounts for only ~ 8% of EU GDP but Germany exports worldwide) it is nevertheless true that Germany has done very well out of corrupt Greece, and out of corrupting Greek officials. Google is your friend as usual
http://www.focus.com/briefs/bribery-scandal-siemens-ag/
and that massive bribery scandal (which makes British Aerospace's recent adventures look like tipping a lap dancer) will be just a tip of the iceberg, as most of the goods which Greece spent the cheap Euros on came from Germany. Start with the 3 submarines, bought for the price of a dozen

It is in German interest for Greece to stay bankrupt and stay in the Euro because it ensures the Euro value is continually undermined. What Germany does not want is for it to get any worse i.e. any of these outcomes

- Greece to leave the Euro and stay bankrupt
- Greece to leave the Euro and become a successful export-driven economy (which it likely would be, after the initial shock)
- Spain and Italy to leave the Euro

and obviously Germany doesn't want to bail anybody out because that will cost them money

[davidair]

peterh337, I do find it odd, that you consider the Euro week... I don't follow exchange rates very much, but the only one that I have seen fall considerably is the Euro/yen rate. The last time I bought pounds with DM, I paid nearly DM3, now I would only have to pay about EUR1.15. The exchange rate to the USD has been between 1.25 and 1.35 for the past few years, at the introduction, it was down to 0.80 and less for a while...

that a new DM would be considerably stronger is true and would ruin a lot of what is running well in Germany now.

Germany went through a lot of structure reforms in the last decade, and that is a large part of why things are still going well here. Whether these structure reforms could help other countries, is a big question, though...

[Keef]

When we sold G-UTSY and accepted payment in Euros, we did well to get £1=€1.12

In Germany a couple of weeks ago, the hole-in-the-wall gave us £1=€1.24.

The German currency rate is also confused by the effects of Wiedervereiniging.

[Gerard Clarke]

The circular and feedbackish nature of the financial markets is apparent today. You might think that the markets would want Spain to be stable, and therefore would want Spanish banks to be stable, but instead they keep increasing the cost of borrowing for the Spanish government, which is seeking to bail out a Spanish bank, and therefore increase the likelihood of bank collapses, sovereign default , and so on. Hey ho, sentiment, crowds, herds, and all that.

[Lowtimer]

Gerard

What you say above is very much the picture as repeatedly painted by the mainstream news media and the political establishments of Europe, and while superficially reasonable rests on a fundamental fallacy. It is very unhelpful to perpetuate this seductive fallacy of "the markets" having some sort of animus. It is media and political shorthand. The media use it because of ignorance and limited word counts. Politicians use it to evade their own responsibilities, and perhaps also to avoid facing up to the reality that they have over-promised to electorates ever since the end of WW2: in blaming "the markets" they seek to create a scapegoat, a nameless and mysterious force. They are very happy to allow this nebulous concept to be interpreted as the enemy of the people.

Markets are not actors, by which I mean they are not agents making decisions. Markets are the outcome of the aggregate decisions of actors. There are two principal kinds of actors in these transactions: borrower and lenders.

You propose: "You might think that the markets would want Spain to be stable, and therefore would want Spanish banks to be stable, but instead they keep increasing the cost of borrowing for the Spanish government, which is seeking to bail out a Spanish bank, and therefore increase the likelihood of bank collapses, sovereign default , and so on".

Let me express this sentence in a more reality-based way. What you describe as "the markets" are actually lenders. When you say "stable", what you mean is "capable of servicing and repaying its debts". Lenders would love to feel that Spain is likely to pay the promised interest on its previous borrowings, and repay the capital when due. What takes away their confidence is the sheer arithmetic. Individual lenders are not really raising the cost of capital for the Spanish government. Those previous lenders, feeling burned and at risk of losing the money already lent, are generally withdrawing altogether from further lending. They feel they are throwing good money after bad and repeating the errors of previous lending will only make matters worse. In this they are correct.

There are however other lenders around, who are prepared to take a much riskier gamble for a much bigger interest rate. The more responsible lenders withdraw, the more reckless lenders therefore set the price. I think they are lending irresponsibly.

You talk about the increasing risk of bank collapses, sovereign default and so on. When these things are already inevitable, which they are, no-one is increasing the risk. The only issue is the timing, and the severity of the eventual impact (the later it is, the worse it is).