A new year is once again upon us, and invariably people's thoughts are drawn to what is going to happen during the course of 2012. Now that the Australian test team finally seem to have found some bowlers capable of taking 20 wickets and no Australian of either gender has anything more than a remote chance of winning the Australian Open, there is little immediately of concern on the sporting front, so it's perhaps not surprising that minds turn towards the global economic situation. Will the USA start to recover, as recent data suggests it might? Will China continue to prop up Australia with its demand for our resources? And perhaps most importantly, what is the fallout from the current mess in Europe going to be?
The last one in particular is a question I find myself discussing a lot with colleagues in the industry, probably because funds management depends a lot for its prosperity on investor confidence and when a major part of the world's economy like Europe keeps imploding, confidence takes a battering and investors tend to put their money under the bed instead of riskier assets like shares or property. The short answer of course is that no-one really knows how the situation in Europe is going to play out over the course of the coming year and probably the only accurate prediction one can make is that there is going to be a lot more volatility in the market before a clear direction emerges. However as a student of history, I do have a growing sense of alarm at some of the measures that are being imposed on the PIIGS countries by the stronger European nations, as they are eerily reminiscent of the 1930s thinking that led to the Great Depression.
Before I elaborate on that last statement, I have to confess that I find the whole concept of European economic union quite intriguing. For a bunch of countries as socially, politically and economically diverse as the Europeans to suddenly put millenia of fighting and arguing with each other in the space of 50 years after World War 2 is quite remarkable when you think about it. This is especially when you consider that a key reason for the success that each of the major European nations like Britain, Spain, France and Germany had with their empire building was because they were all so diverse and competitive, and continually strived to outdo each other both in an economic and military sense. To all of a sudden cede what made each of them great and throw their lot in with each other is quite puzzling on one level. However, assuming everything went according to plan, you can understand the logic as together the Euro countries represent a formidable trading bloc.
The problem is now though that despite being joined economically, the political and cultural diversity of each of the member states lives on and is probably the major reason why there are serious concerns about the whole Eurozone unravelling. I think it is far too simplistic as the media have done to paint a picture of the industrious north having to bail out the indolent south, but equally it is true that the wildly disparate domestic policies of the different member states have had, and will continue to have, a major effect on how the whole crisis plays out. The fact that the governments that are most in trouble like Greece, Italy and Ireland don't have control over either their currency or fiscal policy just exacerbates the problems they face.
So, what's to be done? Well, thus far the leaders of the more prosperous member countries have done a lot of "tut tutting" and insisted on the likes of Greece and Italy passing significant austerity measures and raising taxes with a view to bringing their debt levels under control. On the face of it, this seems sensible to most people - after all, what is the course individual households take when facing tough financial times? They cut back on spending and work harder to try and make more money to help make ends meet. The problem with that thinking though is that when you apply it on a more macro or even national level, it usually winds up in a vicious spiral of unemployment and deflation that is very hard to break out of. Which is why it took an economic genius like John Maynard Keynes to demonstrate the folly of depression-era governments and show them the pathway back to prosperity.
Central to his thinking was the concept that during economic downturns, instead of scrimping and saving, governments needed to become relatively bigger spenders of money in order to generate employment and help fill the economic void left by the shrinking private sector. This way of thinking eventually became economic orthodoxy - even today governments generally take the view that during booms, they need to run surpluses and during downturns, they need to run deficits. Although watching Julia and Tony wringing their hands about Australia's infinitesimal debt, you kind of wonder whether this is still the case.
The only problem with this idea is when governments themselves go broke like they have already in Greece and are threatening to do in Italy, Spain, Portugal and Ireland. It's hard to spend money to support your flagging economy when you haven't got any of your own to spend and you can't borrow any more except at prohibitively high interest rates. This is the reason I think there is going to be no quick fix to the problems in Europe - the tried and true methods of dragging the economies out of depression simply aren't available to the leaders of the affected countries. Small wonder then is it that you are suddenly seeing a plethora of young Europeans in Australia working in pubs, restaurants and other service-related jobs. When there's no career for you back home, you might as well travel. It's also small wonder that the austerity measures are proving deeply unpopular in the countries that are being forced to impose them. Anyone with half a brain can see what the ultimate effect is going to be, and it isn't going to be pretty.
European leaders therefore find themselves on a very sticky wicket, with precious little economic ammunition to deal with the problems. This I acknowledge, but at the same time what I find a little frustrating is the lack of creativity being brought to bear on the situation. Clearly, countries like Greece need to take their medicine to an extent and implement political reforms which will help stop this sort of thing happening again. But to simply give these countries a spanking and make them tighten their belts is not going to lead the way out of recession.
Creative solutions for boosting economic activity and bringing liquidity back to credit markets are desperately needed, but the leaders could do a lot worse than simply starting with one of Keynes's basic principles. Right now, instead of working out how they can save money, they need to focus on how the hell they can spend it.
Over to you, Merkel, Sarkozy et al. Maybe start by having a little chat with the Chinese. They seem to be doing all right.
