I mentioned on the Tuesday post that I had written a note ten years ago about making better use of my life. Before I come to that, let me put my life in perspective. In the 1970s and 1980s I got too caught up in political activity – neglecting my academic position and using my political position (which paid 20 euros a working day) to encourage community enterprise. It was what we might call pro bono work – and I entered my 50th year an exile with virtually no money in my bank account. Fortunately my parents’ minimalist way of life had taught me not only how to survive but to celebrate life on a pittance (I require only wines, a good cooker and books!). And the intellectual challenge of post-communist governance (how I hate that term!) reform, new cultures and consultancy fees were more than enough to sustain me (in all senses) over the next 2 decades. For the first time in my life, I was persuaded to put my (hard-earned) cash into investments – and saw them duly climb, fall and climb again. Ultimately I could not accept what lay behind it all – and pulled all my money from this rotten system just before the post-2005 decline and felt very flush. This was just after I had set out (and briefly explored) the following questions in a note -
• why I was pessimistic about the future and so unhappy with the activities of the programmes and organisations with which I dealt – and with what the French have called La Pensee Unique, the post 1989 “Washington consensus”
• who are the organisations and people I admire
• what they are achieving - and what not
• how these gaps can be reduced
• the role of an individual such as me in that
Part of the problem, I feel, is the sheer richness of analyses, writings and organisations – all dealing with part of what is a systemic problem. Those struggling valiantly with local initiatives often don’t have the time or patience to make sense of what they often see as over-shrill or theoretical writings; and those dealing with the large picture can sometimes be impatient with what they perhaps see as the naivety of the practitioner.Having explored the various questions I then turned to what I should be doing – as an isolated individual.
A noticeable phenomenon is that, when some politicians retire and no longer have the competitive pressures on them, they become more critical about the domestic and global systems they accepted when they were in office. The same is true of many officials. There must be a great potential amongst those who haveTen years on, I pose the question again. What are people such as doing to make a difference - as the world around us implodes?
• Time (now retired)
• Education (higher than any previous generation) and potential understanding (because of the impact of the NGO critique)
• An interest (satisfaction in making a contribution)
• Conscience (“I’ve taken – now I should give a little back”)
• A greater chance of persuasion by virtue of their patent lack of vested interest – and being late converts
Surely a significant number of retired officials, academics and consultants in UK and some other countries can be encouraged to come together; learn from one another – and develop ways of communicating and acting to make their concerns about national and global systems more influential?
Moving to more urgent contemporary concerns, Cicero's songs offers a very good take on the European crisis here.
The fundamental problem is the economic structure of most of the European economies. The standard model of these economies has been to pay for today's bills with cheques drawn against the future. Instead of saving up for things today and acquiring them later, we have chosen to acquire them today and pay for them in the future. To a degree, it has worked: the levels of average prosperity in the present day would stagger most of our forefathers. Yet, there has always been a critical piece of small print: growth needed to continue, and not just economic growth, but population growth too, so that the costs were painless enough for the next generation to carry.
Yet about 40 years ago, the oil shocks created inflation that was not the result of economic collapse or war, but for several years was a normal part of business. In the face of this, real assets, especially property, held their value in real terms, but looked like they were appreciating sharply in nominal terms. Property became more and more popular, and banks began to prefer not only lending to property purchasers, but also lending against property to finance other asset purchases. All the time the central banks, trying to "even out" the cycle, provided excess liquidity in the downturn, while failing to tighten sufficiently in the upturn. Since this helped to erode money as a store of value, property began to look like a one-way bet.
At more or less the same time, we lost sight of another basic issue. People began to retire earlier and earlier, believing that the inflated asset-largely property- values that supported this decision were normal. Even as life expectancy increased into the eighties, people began to stop working in their mid fifties. The time a pension had to cover went from a few years to several decades. The cheques we were drawing against the future grew ever larger.
It was not just in the private sector that saving became a dirty word: States too began to hand out increasingly extravagant welfare packages: for millions of people, it was not economic to work. Skills rotted, and both Western Europe and the USA acquired a burden of the unemployable unemployed who nonetheless made a substantial call on the public purse.
It was a long time coming, but the property bubble finally burst. The result was not merely the failure those of banks most directly involved in property, but also those banks exposed to the ABS market- which in practice meant pretty much all of them.
The impact in Europe was twofold. Those countries most exposed to property: the UK, Ireland and Spain saw large parts of their banking system evaporate. Domestic rescue plans were initiated and guarantees were issued. Meanwhile those countries with large state debts based on an unaffordable welfare state found that their access to the capital markets closed. Populations to pay for the welfare are generally falling- and resistance to immigration is making the problem even worse.
At first it was the poorly structured economies that fared worse: Greece was forced to address its long term deficit. However, the absolute breakdown of the Irish property market increased Irish government liabilities to several times the Irish GDP. The deficit yawned to over 30% of GDP.
At this point the anti Euro crew will argue that had the Irish been able to devalue their currency, then the crisis would have been resolved, because the bubble would have burst far sooner if the demand for Punt, as opposed to Euro, assets had reflected the smaller size of the Irish economy alone versus the Eurozone as a whole. Furthermore, the Irish could have mitigated the crisis, as the UK has done, by devaluing their currency.
Mitigated, perhaps, but as the experience of the UK, which can devalue its currency, shows it is certainly not solved. Devaluation is only ever a temporary solution, and if it is used- as it has been in the UK- simply to avoid painful structural adjustment then it ends up permanently reducing the economic potential of the entire economy as people simply build in higher inflationary expectations. Arguably the reason for the instability in the Eurozone's periphery is a function of the fact Germany- the core Euro economy- has been undergoing a long and difficult restructuring, and has emerged extremely competitive, indeed too competitive for the other unrestructured economies to cope with.
Now the breakdown of the property based savings and welfare system is creating a second meltdown: not only a meltdown of the banking system, but also of the states that have issued guarantees to that banking system.
It is a meltdown that will lead to sovereign defaults, and not just in Europe. The policy of competitive devaluation can not work where China- the worlds largest surplus economy and the worlds manufacturing base- maintains its own artificially low currency level. Without the unlikely prospect of a dramatic Chinese revaluation, even the breakup of the Eurozone and drastic devaluation by the most insolvent economies will not solve anything. The Germans will remain efficient, the Chinese will remain efficient and investors will be more fearful than ever about the prospects of the ex-Euro countries.
The only solution is to do what the Baltic states have done: make a drastic cut in costs by an "internal devaluation", in the case of the Baltic by around 25%. That means wages fall by 30% and house prices by 50%, and the overall level of costs by about 15%. The Balts did in last year. The Greeks propose to do half as much over five years, the Irish by 15%- not 25%- over 3 years. Not enough, and the result is that these Euro-delinquents will require a rescue that is beyond the ability of the rest of the Eurozone to finance. A debt default is therefore now very likely. Only this is where we can criticise the ECB and the European Council: we still do not understand how such a default will be handled.
But after the inevitable default happens, we are in a whole new ball game, and no one knows what happens then. One thing is for sure, very few of my generation and none of the following one will be retiring from work at 55.
The age of austerity that looms before us is set to be measured in decades rather than years.