Portfolio Business Economy
Long haul
Will Peakin Business Correspondent
The recovery will be a drawn-out process but companies should be investing now in skills and emerging markets
Our current tendency to take our economic blood pressure every few minutes, and then confuse short-term events for significant trends, obfuscates thought on many problems, wrote former Citicorp chief executive Walter B. Wriston 25 years ago. In his book Risk and Other Four Letter Words, the pioneering banker said that our compulsion to turn every scrap of bad news into a full-blown crisis distorted our perspective and “neglects
Beyond the headlines
Threat to the eurozone
Eurozone finance ministers will convene this Sunday (3 July) to discuss the parameters of a new financing strategy for Greece to prevent it from defaulting on loans. Greek prime minister George Papandreou won a crucial vote of confidence last week but he still needs to push £25bn-worth of spending cuts, tax rises, fiscal reforms and privatisation plans through his parliament this week. The parliament must approve Papandreou’s austerity plan to qualify for an immediate £10bn lifeline, and then a second bailout worth more than £90bn. There is doubt, though, over whether the measures can be imposed on an increasingly discontented population. Greece has been blighted by a series of violent clashes between protestors and riot police. According to the head of Pimco, the world’s biggest bond trader, the country is still likely to default on its debts. Mohamed El-Erian said other eurozone members could also follow Greece: “For the next three years, we’re going to see different economies work out different problems. For European economies, especially Greece, it would be through default.” Former UK foreign secretary Jack Straw told a Commons debate that the euro currency was facing a “slow death”, the 17-member eurozone “cannot last” in its current form and the UK Government should be preparing for its collapse.
56 Holyrood 27 June 2011
to remind us that trouble may be news but it is by no means new.” Wriston noted that there was more than a
little truth in the remark of a former British Chancellor of the Exchequer that there was no balance-of-payments problem in the nineteenth century because there were no balance of payments statistics: “Just as we find it increasingly difficult to determine when we know something, so it is also more difficult to decide what we know, for the line has been blurred between random information (otherwise known as “data”) and the reality about which we need to be informed. Te incessant production of new data and its instantaneous communication create a paradox: information, the thing that eliminates uncertainty, now increases everybody’s feeling of insecurity because of the failure to convert data into knowledge.” Te perils of economic forecasting are well-
known, yet we still demand insight. It is in this fraught dynamic that the likes of David Muir, senior economist at the Confederation of
British Industry (CBI), who is responsible for the organisation’s quarterly macroeconomic forecast, operate. “It’s difficult at the present time because conditions are more uncertain than usual. It’s even more difficult to ascertain what the underlying trend is within the economy because we have various unforeseen things – weather-related distortions or the tsunami in Japan – which have had an impact. Trying to look beyond those things to see what the underlying trend is [is] difficult. “You have a central view of where you think
the forecast is going. Say a number is going to be, say, 1.5 per cent but we don’t truly know it’s going to be that; it’s all about providing a guide and so there are risks around that. Trough our economic modelling it’s possible to run scenarios – for example, if oil prices run higher and faster than expected or if the US Federal Reserve increases interest rates sooner and more sharply than expected – that can show the likely effects of that on the world economy and the UK economy. It’s possible to think around it and get a ball-park idea.”
However, former chancellor Alistair Darling said the eurozone’s strongest economies need to do more to help out Greece. He told The Times: “If the eurozone carries on with its patch-and-mend approach, it is doomed to fail. The richer, stronger economies who have benefited from the euro should help out their weaker neighbours.” Darling said the eurozone could “carry on treating Greece, Portugal and Ireland as bad boys” imposing “punitive” conditions that would not work – or it could “face the fact that, as with any other single currency, the stronger parts of the economy have to help the weaker parts to make the reforms they need”.
While Greece had to do its bit, “a reparation-style austerity programme” would not work, he said. If Greece defaults on its debts it would mean “massive losses for many of Europe’s banks” and if it were forced out of the eurozone, there was a risk of “chaos in the markets”. He added: “Instead the richer, stronger economies who have benefited from the euro should help out their weaker neighbours. After all, that’s the approach that the IMF has applied to other countries in distress. That means making the political argument: if they want a single currency, they’ve got to make it work. The consequences of failure would be profound for years to come.” If Greece defaults it would be bigger than Russia’s default in 1998, when the rate of inflation reached 84 per cent and the country had to appeal for humanitarian aid, and Argentina’s default in 2001, when its government was forced to stop people taking money out of their bank accounts and the president ultimately fled by helicopter. Bigger, in fact, than those two defaults put together. It could bankrupt Greek banks, which together are reckoned to hold about a quarter of the Greek sovereign debt. Consequences would be felt mainly by the big EU economies that have lent to Greece. German and French financial institutions are thought to hold up to 70 per cent of Greek debt and would be severely hit. The credibility of the European Central Bank would suffer and that could hurt international investment in the eurozone. The fear is of contagion – the weaker eurozone countries would find it more expensive to borrow in commercial markets and the Irish Republic and Portugal might need further bail-outs.
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