Cityam%202013-05-16

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20 THEFORUM THE Bermuda Triangle has long captured the imagination of millions, not least my own. But now the global economy appears to have developed its own black hole, and this time it’s not just a legend. This economic triangle is a place where rationality is replaced by hope and superstition, and by pundits pretending to understand the real drivers of the economy. And the result? We see the sorts of figures announced yesterday: the Eurozone is now in its longest recession since the euro was launched in 1999. This economic triangle runs from record stock market valuations to high unemployment, from low growth to stagnant productivity. And just like the real triangle, there is plenty of scientific evidence to explain most, if not everything, driving the current situation. The black hole is modern monetary theory. This involves printing and spending money, then waiting and praying for better weather. It’s happening in a variety of forms across the world. But everywhere modern monetary theory is getting harder and hard- Agree? Disagree? Got a sharp comment? The Forum wants you to join the debate. THE end is in sight for the era of too-big-to-fail. Earlier this week, George Osborne and the other EU finance ministers met to discuss the Resolution and Recovery Directive (RRD) – the key to ensuring that banks will never again have to be bailed out by the taxpayer, and a measure which the banks have thrown their full weight behind. RRD will give the regulator the power to step in and take over a bank if it stops being financially viable. The centrepiece is bail-in, a new tool to ensure that shareholders and creditors – not taxpayers – bear the cost if a bank fails. And because taxpayers will not bear the cost, the link between banks and their host country’s financial health will be broken, reducing the THURSDAY 16 MAY 2013 The stock is market rising, but the winners are only big companies and the top 10 per cent Twitter: @cityamforum on the web: cityam.com/forum or by email: theforum@cityam.com ‘ cityam.com/forum Only structural reforms not more liquidity can rescue the Eurozone STEEN JAKOBSEN er to justify – if for no other reason than because the constant reminder that we are in a crisis makes investors reluctant to commit to any investment beyond the next quarter. In today’s economy, unemployment is reaching record highs (19m in the Eurozone are now out of work), disposable income continues to fall, growth is ever lower, tax revenues come up short, and productivity growth and innovation have taken a back seat. The problem is that the idea behind printing money and hoping it will be spent is based on a historical relationship known as the wealth effect; previously when the stock market went up, sentiment also rose and spending and investment mirrored the move. But today, while the stock market is ANTHONY BROWNE In association with chance of another sovereign debt crisis. It will also mean that investors – particularly big, sophisticated investors like hedge funds and pension funds – will have to take more responsibility for the health and conduct of their banks. And the management, if they want to borrow cheaply, will have to make sure their bank is a safe one to lend to. Moreover, bail-in will ensure a failed bank can continue to offer the critical clearly on an upward trajectory, not everyone is benefiting from the rise. Stock ownership almost exclusively centres on the top 10 per cent of the population, and the social divide is much higher than before the crisis. Further, 85 per cent of jobs and growth come from small and medium-sized enterprises (SMEs) – meaning that while the top 15 per cent of listed stocks are benefiting from the equity market boom, growth-driving SMEs are not. Global monetary policy is boosting the largest beasts in the corporate world and the richest 10 per cent who own stock. The Fed and the Bank of Japan may talk about the wealth effect, but what they really mean is the elite effect. Their premise is flawed. However, this experiment may be in its final phase and the gloom could be coming to a end. Policymakers are realising that the growth they expected is unlikely to materialise. We are therefore seeing increased currency manipulation (always the last stage of macro policies). But we’re also seeing the previously close political relationship in Brussels between Germany and France functions that businesses and households need – like working ATMs and direct debit facilities. It will also reduce the chance of contagion as the resolution process happens much faster than bankruptcy, preserving rather than destroying much of the value of creditors’ investments. RRD builds upon a raft of measures to fix too-big-to-fail. For example, banks are fast increasing their capital and liquidity. UK banks already hold three times as much of the safest form of capital as before the crisis. In fact, the main UK banks alone have already increased their capital by £165bn since 2008, and are now among the best capitalised in the world. On top of this, all customer deposits up to £85,000 are now 100 per cent guaranteed by an becoming strained. The EU’s North South divide is now bigger than it ever has been. The problem is that only failure will create a mandate for change – or even for small reforms. So far, real reforms in Europe have been few and far between, and austerity drags on. Real change could happen once the German elections in September are over. Chancellor Angela Merkel will likely win, but probably lose the broader war. There is an increasing expectation that she will step up to the challenge of saving Europe, but these hopes will likely be dashed. She cannot afford this. Bailing out other countries would hurt Germany’s credit rating, while current industry-funded scheme. Combined, these measures should make the banking system more stable, make depositors’ savings safer, and reduce moral hazard – ensuring those responsible for risks pay the costs when they go wrong. But the ministers are also close to creating a new moral hazard. There was broad support – though not from the UK – for a pre-funded “resolution fund” that risks undermining much of the progress so far. Depending what the fund is used for, a pre-funded “resolution fund” could provide banks with a pot of money that will be used to bail them out, meaning banks and their investors will not have to take as much responsibility for their risks because they can simply turn to the fund. European policies will damage the country’s exports and growth over the long term. Merkel will likely fail to reconcile these two problems, and Germany will not be the saviour of Europe. Each country in Europe must realise that their recovery comes from their own political willingness to reform. Unless we get a wake-up call in the form of a more severe crisis, then Europe is destined to repeat Japan’s mistake of an aggressive monetary policy resulting in a structurally weaker currency. The good news, however, is that things can only improve. As we enter the next phase of this global slowdown, politicians must test their wrong premises and face the fact that growth is not around the corner. This summer, the Federal Reserve, the Bank of England, the Bank of Japan, and the European Central Bank will have to go back to their drawing boards. What the world is short on is innovation, appetite and risk, not liquidity. Steen Jakobsen is chief economist at Saxo Bank. Top responses will be reprinted in The Forum. Too big to fail is nearly over but regulators must avoid new moral hazards The proposed fund – which will be around €10bn (£8.4bn) in the UK – also pales into insignificance compared to the €1.1 trillion total of bail-in-able debt across the EU. This is a loss absorbing capacity 10 to 15 larger than the resolution fund. The banks are committed to making sure they are not again bailed out by the taxpayer. But the disorderly collapse of banking in Cyprus shows what happens if we don’t get bank resolution right. There is much to welcome in the new RRD package, but legislators should be aware that the unintended negative consequences of the proposed resolution fund might be to undermine much of the rest of the reforms. Anthony Browne is chief executive of the British Bankers’ Association. ST ANDRE Win the ultimate golf break for two – stay at the 5* Fairmont St Andrews and play on one of
EU referendum [Re: Cameron needs to lead on the EU to open Labour splits, yesterday] Turning the question of an EU referendum into a party political game is exactly why more and more people have had enough of all three major parties. This row over Europe is just more water to Ukip’s mill. For us voters, this is not a game of who remains in power or who will win a Parliamentary vote. It affects our lives – Europe influences everything from rubbish collection to council tax. It’s strange that, even after May’s local elections, the party leaders still don’t get it. David Evans Andrew Lilico is right. MPs are split on the EU. That’s why a referendum is the answer. Michelle Brewster Independent Scots [Re: An independent Scotland could be a testing ground for monetary theory, yesterday] Paul Ormerod’s caricacture of the SNP’s policies gets about everything wrong. An independent Scotland would receive its geographical share of North Sea oil and gas, public spending per capita is higher in Northern Ireland, and the EU will not offer an opinion on Scotland’s position after a yes vote unless Westminster asks for one. Also, Ireland had monetary union with the UK for nearly 60 years, before breaking the tie and then joining the euro. Some of Ireland’s monetary policies were more successful than others. But as an independent nation, it was able to choose. John Caskie, Glasgow THURSDAY 16 MAY 2013 As Boris Johnson proposes giving the capital more control over taxes, who would benefit? Alex Jan LONDON For London to fuel its growth and succeed internationally, it needs far greater control over its own financial destiny. Only 7 per cent of taxes raised in London are truly local. The figure for New York is seven times higher. Fiscal devolution would create a virtuous circle of incentives to boost economic growth and accountability. Tax competition between authorities will help to ensure efficiency. London’s revenues would rise and fall with the fortunes of the city, making growth to sustain revenues a top priority. With London’s population heading for 10m by 2030, the case for change in how the city secures its future infrastructure investment is more urgent than at any time since the war. With a globally competitive and dynamic economy, London is the engine-room of UK growth. After decades of micro-management, its leaders are asking to take control of the city’s destiny. Ministers should heed that call. Alex Jan is head of transport, strategy and economics at Arup. WE WANT TO HEAR YOUR VIEWS E: theforum@cityam.com | Comment: cityam.com/forum | @cityamforum LETTERS to the editor 4th Floor, 33 Queen Street, London, EC4R 1BR Tel: 020 3201 8900 Fax: 020 7248 2711 Email: news@cityam.com BEST OF TWITTER Bank of England governor Sir Mervyn King declares UK recovery in sight. Question is: how strong are his glasses? @GCGodfrey A cautiously optimistic final statement from Sir Mervyn King, and the first inflation report since 2007 to paint a brighter future. @bill_nxn_maven Asked whether France is the new sick man of Europe, Francois Holland replies: “Are our German neighbours in better shape?” @LondonerVince Nick Clegg says EU referendum is a question of “when, not if” because of changes in the Eurozone. A sense of inevitability. @AndrewLilico ALL REGIONS Tom Papworth The London Finance Commission suggests London be given a greater say over its taxes. Good. Any reform that brings taxation and spending closer to the electorate is welcome. But why limit this to the capital? UK local authorities raise just a fraction of the money they spend: most of it comes from central government. This makes Westminster the organ grinder. Meanwhile, small commitments to spending have apparently large impacts on council tax. Far more tax raising should be localised and local authorities should be free to experiment with different ways of raising revenue. Beyond finance, we should do away with statutory duties and land use restrictions that constrain local government. If we are to allow and encourage communities across the UK to grow, we should free them from Westminster diktat, require them to raise their own funds and encourage them to innovate and grow their tax bases. Tom Papworth is an associate director at CentreForum. Why the Bank will struggle to keep to its inflation target THERE is one thing that can be guaranteed whenever the Bank of England releases its quarterly Inflation Report – in two years’ time, its central projection for consumer price index inflation is at or very close to the 2 per cent target. Yesterday’s report was consistent with this tradition. Inflation is expected to rise to 3 per cent or so in the short term. But by 2015, it is forecast to be back around 2 per cent. Recent experience, however, does not inspire much confidence that this will be the case. Since the onset of the financial crisis, the only time when UK inflation was close to the 2 per cent target was when it was artificially suppressed by a cut in the VAT rate to 15 per cent in 2009. Otherwise, it has been persistently above target, rising to over 5 per cent in 2008 and 2011, and averaging over 3 per cent. There have been three main reasons for this persistent above-target inflation. First, surges in energy and commodity prices – including the price of oil – have pushed up the cost of imports. Second, the decline in the value of the pound has added to these imported inflationary pressures. And third, services inflation has remained stubbornly high – averaging close to 4 per cent in the past five years. The Monetary Policy Committee’s (MPC) latest forecast of inflation coming back to the 2 per cent target requires all these sources of above-target inflation to subside. This seems quite unlikely. First, the Bank of England forecast assumes that the world economy picks up over the next two years. When the world economy picked up in 2003-4, 2006-7 and in 2010, stronger growth was followed by a surge in energy and commodity prices. With strong growth expected to continue in resource-hungry Editorial Editor Allister Heath | Deputy Editor David Hellier | Managing Editor Marc Sidwell News Editor Elizabeth Fournier | Business Features Editor Tom Welsh | Lifestyle Editor Steve Dinneen | Sports Editor Frank Dalleres Creative Director Gavin Billenness Commercial Sales Director Jeremy Slattery | Commercial Director Harry Owen | Head of Distribution Nick Owen ANDREW SENTANCE 21 emerging and developing economies, it is quite likely that a pick-up in global growth will be accompanied by a similar price surge in 2014-15. Second, we cannot be sure that we have yet seen the full effects of the 20 to 25 per cent devaluation of sterling since 2007. As the UK economy recovers, importers and domestic producers may seek to pass through import costs to consumers, which they have been absorbing until now. And we cannot rule out the possibility of a further decline in the value of the pound if investor confidence shifts against the UK economy and sterling. Third, it will be very difficult for consumer price index inflation to fall to 2 per cent if the prices of services – which make up around half of the consumer basket – continue to rise at close to 4 per cent. The MPC has been waiting for some time for low wage growth and spare capacity to feed through into lower services inflation. But this has not happened. One explanation is that inflation expectations in the services sector are running significantly above the target – which would point to services sector inflation remaining stubbornly high. For all these reasons, it looks as if the inflation risks are still to the upside of the latest Bank forecast. The MPC will struggle to get inflation back to 2 per cent over the medium term without some change in monetary policy. Andrew Sentance is senior economic adviser to PwC, and a former member of the Bank of England’s MPC. Distribution helpline If you have any comments about the distribution of City A.M. please ring 0203 201 8955, or email distribution@cityam.com Editorial Statement: This newspaper adheres to the system of self-regulation overseen by the Press Complaints Commission. The PCC takes complaints about the editorial content of publications under the Editor’s Code of Practice, a copy of which can be found at www.pcc.org.uk Printed by Trinity Mirror Printing, St Albans Road, Watford Herts, WD24 7RG WS LINKS its two famous courses. Visit cityjet.com/win COMPETITION CLOSES 7 JUNE. Winner will be selected at random. Based on 2 people sharing and subject to availability of hotel/fl ights. Valid until 21 December. No cash equivalent.
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