Trouble Ahead As France And Greece Vote For Economic Chaos

Elections overnight (AEST) in France and Greece raise the prospect of the collapse of the Eurozone and a consequent world recession; voters in those countries might be pleased with themselves, but the rest of us should worry. This could get very, very ugly.

I would begin my remarks today with an observation: nobody really likes or enjoys economic austerity; only a masochist believes that slashing government spending to the point it begins to kill off economic activity is the prizewinning formula on a permanent, ongoing basis by which to govern.

But that observation is tempered by a reality: around the world, in liberal democratic systems of governance, electorates that are politically aware but mostly economically ignorant vote time and again for predominantly left-of-centre governments who engage in profligate spending, accompanied by exorbitant taxation and/or foreign debt.

Eventually the consequences of such governments must be addressed and the damage repaired, but in 100% of cases the same electorates will vote for a return to the spending-based model at the earliest opportunity — irrespective of whether such activity is sustainable or not.

And so it has come to pass in two constituent countries of what is increasingly the basket case that is Europe; in France, a new Socialist president — whose economic pledges essentially boil down to a promise to “let it rip” — has been elected in Francoise Hollande; in Greece, elections have resulted (at this stage) in the election of nobody in particular in a popular revolt against financial measures designed to stop that country from defaulting and going bankrupt underneath a mountain of self-inflicted government debt to other nations.

Back in August last year, in an article entitled “Gathering Storm Clouds,” I examined the very real prospect of world recession in the foreseeable future, and with specific reference to Europe, said this:

“One of the greatest acts of economic lunacy in the late 20th century was the Euro: a currency founded on the noble but idiotic belief that it is possible to federate a couple of dozen disparate countries into an economic and political union and — among other things — give them the same single currency to spend….many of these countries, whose currencies were rapidly appreciated to qualify for entry into the ERM and then the Euro, were left with nowhere else to go except the path of high sovereign debt to compensate for the fact there was less money in real terms to run their economies as a consequence.”

Clearly, those words are more applicable now than they were then, given Greek voters appear determined to throw off the shackles of forced financial restraint, and given the new President of France has essentially promised to spend up with reckless abandon.

In an early (and typically knee jerk) response, share markets across the world — including here in Australia — have recorded sharp losses today, as markets are swept with panic by the prospect of the collapse of Greece and, conceivably, of the Eurozone with it.

It is true that such movements on share markets are sudden, reactive, and often quickly reversed; but on this occasion, some consideration of the wider ramifications of the French and Greek votes should be given.

The immediate problem is Greece, a country known for decades as a byword for slovenly governance, mismanagement, corruption and official incompetence; indeed, at the time the first bailout packages were being devised for Greece last year, this critique extended as far as talk of the “lazy” Greek workforce, its abominable culture, and virtually non-existent work ethic.

It is one of those countries that should never have been part of the Euro project; not because there is anything wrong with Greek people of course, but because its economy was one that was so comparably weak, and its drachmas worth so little in comparison to other European countries, that Greece was hit extremely hard by qualification to join the Euro — and the consequences of that are now being seen all too clearly.

For Greece to collapse — as seems distinctly possible — becomes very tricky on a wider basis, as monies from across Europe (and including from the UK, which isn’t a part of the Eurozone at all) have been poured into Greece in the billions to attempt to stabilise that country.

Remembering that other countries such as Portugal, Italy and Spain also find themselves in debt problems of their own, economic collapse in Greece — not least as a direct consequence of an election result — will rightly make the likes of Germany, France and the UK think twice before throwing good money after bad in additional potentially ill-fated rescue attempts.

And should that occur, the Eurozone as a whole will likely collapse; the tiny handful of economically secure countries in Europe will leave the remainder to fend for themselves under their restored former currencies, but with the final result that Europe as a whole will sink into deep and sustained recession.

Interesting to watch in the context of all of this is the UK. Whilst not part of the Eurozone, it nonetheless counts itself (misguidedly, in my view, where the Euro or the EU generally are concerned) as a financial partner of Europe.

The UK is itself lumbering under £1,400 billion of debt — the legacy of 13 years of borrow, tax and spend Labour governance under Tony Blair and Gordon Brown; whilst the harsh austerity measures put in place by the present Conservative government will eventually fix the British economy, the pain is such that every opinion poll in Britain indicates that the British public would, at a hypothetical election held this week, opt for a return to Labour in a landslide and to its discredited and destructive economic management regime.

The UK is already teetering on the brink of falling back into recession as a result of the current government’s austerity measures; monetary collapse and economic malaise on the continent would suck Britain right into the vortex with it.

Yet this must now be viewed as more likely than not. The new French president is set to repeal those austerity measures in France set in place by his unpopular but competent predecessor, Nicolas Sarkozy; indeed, Hollande promises “growth and prosperity” — both of which can only be delivered in the immediate term by sloshing borrowed money anew through his country’s economy.

Further, he has pledged to renegotiate European deals to bail Greece out from its woes, and to withdraw from agreements (especially with Germany) on binding austerity measures across the Eurozone.

Greece, for its part, has effectively delivered the rest of Europe a one-fingered salute at the ballot boxes over the weekend.

So where will this lead, and what are the consequences here in Australia?

Any collapse in Europe and resultant recession will automatically take the UK, the USA and many other countries with it; the prospect of economic depression across the world emanating from malaise in Europe is one that must be taken seriously.

The so-called GFC may have had its roots in the US, and the contagion from that is an obvious factor — but not the underlying cause — of Europe’s woes; but having precariously navigated that event, developed economies are far more fragile, and far more susceptible to another severe financial event afflicting the global system.

Here in Australia, it is highly likely that we, too, would succumb.

Elements within the Australian public — and, it must be said, among its circles of governance — labour under a pretence that our trading relationships with Asia, and with China especially, will shield us from any sustained world economic slump.

This is a myth, and one which conveniently ignores the fact that whilst China is an important trading partner, so too are the US, Europe, and other markets that would be hit hard by adverse events in Europe.

Australia’s present debt ratios may be low by current world standards, but they are rocketing: by $A100 million per day over the past four years.

It bears remembering that even with the mining sector running on high, the overall Australian economy is patchy, sluggish, and hardly growing at speed.

Yet despite my complete aversion to unnecessary deficit financing and budget deficits born from the sort of mismanagement the ALP in Australia typically engage in and has done in its present manifestation in government, plans by Treasurer Wayne Swan to rip $40 billion out of the economy in one fell swoop in tomorrow’s budget — to meet an arbitrary promise of a budget surplus in time for an election year — are dubious at best, and downright dangerous at worst.

Clearly, there is much at stake, and much for ordinary folk — not just in Australia, but in western democracies around the world — to worry about, and quite literally.

France and Greece have elected new regimes with the promise of inflicting great damage on themselves, and on hundreds of millions of people across the globe who did not have a vote at yesterday’s elections.

It is to be hoped that politicians in those countries are adept at breaking promises; for if they don’t, the consequences will be far-reaching, and nothing short of disastrous.

More From Essential Research

There were more questions from the Essential Research poll at the weekend; last night we covered the headline voting figures, and so tonight I thought we’d have a quick look at the other questions Essential asked of its respondents.

On the question of whether an election should be held now or in 2013, 48% said now, 40% said in 2013, and 12% purported not to know.

It’s true — as Essential noted in its report — that these findings broadly follow voting intention.

I would assert however that such stated intent would leak (i.e. if 49% of the electorate say they will vote for the Coalition, that same bloc of 49% won’t necessarily favour the secondary response — in this case, a fresh election).

So even if the figure of 48% wanting an election now is true, it’s likely made up of a hotchpotch of Coalition supporters, the “don’t knows,” and at least a few ALP and Greens voters as well.

The key finding, extrapolated across the electorate based on this research, is that virtually half the population wants a fresh election now.

Frankly, that’s a bit less than I would have thought.

On the mining tax, Essential finds 46% approval, as opposed to 34% opposed.

The surprising thing with this finding — if it’s accurate — is that it was one of the big issues Julia Gillard used to skewer Kevin Rudd over; if it’s accurate, there’s clearly community support for taxing the mining sector more heavily — despite utter ambiguity as to where the funds raised would be spent.

The terms “Super-Profits Tax” and “Rent Resource Tax” may have something to do with this, as ambiguous and misleading as they are at face value.

Any “mining tax” is a revenue measure, clear and simple; yet phrased in terms that suggest inflated profits are being taxed, or that it’s an impost in the form of rent, it may well market such a measure — at face value — to ordinary electors.

(I wonder if “Carbon Tax” could be presented as a non-toxic brand along these lines?)

Essential talks about trust in individual journalists…I’m not touching that one!

The last of the questions from the Essential poll I want to mention concerns the best leader to handle another Global Financial Crisis — or, as I am wont to avoid beating around the bush, a world recession.

Kevin Rudd and Tony Abbott top this question at 24% and 20% respectively, followed by Julia Gillard and Malcolm Turnbull at 13% each, Joe Hockey at 7%, and the “Don’t Knows” on 22%.

I wouldn’t read too much into that one; ask people what they think of Abbott’s economic credentials and he doesn’t fare well; start asking questions about how Rudd and Swan handled the GFC, and a lot of negative feedback about debt emerges.

If you asked whether the Liberal Party or the Labor Party were the better party to handle a world recession I suspect you’d get a vastly different result (and one that didn’t shine the sun on Kevin Rudd so directly).

I think the response to this question as recorded by Essential is probably more reflective of people’s preferences in terms of the leadership of the prospective parties than it is about any sort of confidence in terms of economic management.

But if you were Gillard (or Turnbull) you’d hardly be encouraged, would you?

Essential Research: Coalition 57, ALP 43. And An Apology!

Let’s get the apology out of the way — and the egg off my face — first; after sitting on the Essential poll last night waiting for Newspoll to appear (and even tweeting that I was waiting…waiting…waiting…) it suddenly occurred to me that I’m a week early where Newspoll is concerned…

So my apologies if anyone was also waiting for Newspoll…Hey, I do know this stuff! Newspoll is published every fortnight outside election campaigns…I know that…which means this time next week, we will have seen one!

Now then, in addition to the Nielsen poll yesterday, we also had an Essential survey with two-party figures of the Coalition on 57% and Labor on 43%. This result is unchanged from Essential’s previous survey the week before.

There has been some movement in the approval ratings of Julia Gillard and Tony Abbott, and the poll shows Julia Gillard ahead again — just — on the question of which of the pair is preferred as Prime Minister.

However, Essential do not ask these questions on every survey, so quantifying the movement it might have recorded in the past week is impossible. I would broadly point out, though, that the approval ratings and the question of preferred PM are generally in line with those recorded in the other polls — give or take the 2-3% sampling error these polls typically fall within.

I was perhaps a bit too eager to see a Newspoll last night (a week early) to see what the three different surveys, lined up against each other, might have indicated.

Even so, the Nielsen figure showing the Coalition at 58% on two-party (after a movement toward Labor of 3%) remains the highest recorded in the current round of the main polls; the Essential figure shows no movement either way.

We will need to see what Newspoll finds next week, but if it too is static (or slightly advantageous to the Coalition) then my thought that Nielsen’s latest result was a correction would probably be about right.

The other interesting aspect of Essential’s findings is that whilst those canvassed generally felt that Australia was in better economic shape than a few years ago (read: since the so-called GFC) and that the ALP had handled the economy relatively well, respondents felt it more likely than not that another so-called GFC (read: world recession) would occur.

And on that point, a small plurality opposed a repeat of Labor’s stimulus spending, by 39% to 36%, and the Liberal Party is preferred by 40% to 31% over Labor to deal with another slump.

It tends to suggest that whilst Australia held up well enough last time, people understand a repeat event is likely to be worse and affect Australia far more adversely.

And it points to the enduring perception of competent economic management established by the Coalition during the 12-year tenure of the Howard government.

It’s a fascinating paradox: respondents felt the ALP handled the first event well enough, but if there is to be a “next time” they’d prefer the trusted hands of the Liberals back on the economic tiller.

Time will tell, although as we discussed last week, the weather on the world economic front is looking decidedly stormy.

 

Storm Clouds Gathering: More Perspectives

Following on from last night’s article, it becomes clearer that yes — indeed — the clouds of trouble are gathering.

The head of the World Bank, Robert Zoellick, has now weighed in; according to him, the problems in Europe are far worse than those afflicting the USA.

That’s a big call, given the US is the largest economy in the world.

Mr Zoellick appears to endorse the course of action the British government has embarked on, but notes the riots could play havoc with that particular strategy.

Yet he also praises Australia’s multilateral approach to world affairs, but describes China as a “reluctant stakeholder.”

The comments of Mr Zoellick are surely just a taste of what will come from senior leadership figures on the international money circuit.

Boiled down, his remarks essentially acknowledge Australia has many fingers in many pies, but one or more of those fingers could be badly burnt at a second’s notice.

I’m sure that other major figures in international economic leadership will — at some point — weigh in here with a little more honesty than has been forthcoming thus far overall.

Last night we spoke about the portents (and they’re there — nobody who has responded as yet has denied that there’s a problem; indeed, the only real dissent is over whether Australia could survive a recession or not).

I’m actually not going to speak for so long tonight; my post is merely to highlight the comments of the head of the World Bank as a pre-eminent figure in international economics who, clearly, is uncomfortable with the direction in which things are headed.

We’ll continue to follow this issue as it develops, and I’m sure we’ll continue to talk about it as it does.

Gathering Storm Clouds…

There’s a word Western governments dare not utter; it’s a phenomenon some thought had been eliminated; and the GFC of three years ago — mild, in the rear-view mirror — lulled many into a false sense of security.

There’s a hard — and unpalatable — economic reality brewing; and this time, the storm is almost perfect.

Recessions aren’t sexy events, and nobody really wants them.

Governments hate talking about the prospect of them, or even acknowledging they exist, and will say and do almost anything these days to will them out of existence.

A recession is as good as a series of interest rate rises in a democratic country these days as a perceived recipe for certain electoral defeat.

But the grand-daddy of world recessions is on its way, and it is largely the fault of elected governments.

I’m going to put a whole stack of indicators down here tonight and I wonder — I just wonder — if anyone can argue the other side; that is, that a world recession is not imminent.

I’m no pessimist, mind; but the perfect storm is brewing, and the storm clouds are gathering.

Innocuously enough, the price of crude oil is falling, and that of gold rocketing; gold is a perceived investor safe haven in troubled times, and the price of oil declines on the back of lack of demand and, in this case, world markets spooked by lack of confidence.

Stock exchanges in the Western world have been on a rollercoaster these past couple of weeks, and whilst there has not as yet been an overall, sustained crash, the stock markets also reflect, as a crude measure, the general sentiment of the wider world economy and reflect broader trends as an element of that.

Governments around the world, for too long, have lived through a vicarious lack of restraint, or appalling fiscal and monetary policies, or a combination of the two.

Market economies are just that: market economies. And they work, and work well, too — when not distorted, interfered with or intervened in by governments obsessed with the political cycle.

And nobody thinks a recession is rollickin’ good fun, either. But there’s a reason recessions appear roughly every seven years in the cycle: it’s to impose a market-driven correction on the system.

In Australia, from approximately 1995 until 2008, we didn’t see a recession. Partly through good economic management and partly by virtue of luck, we missed a turn in the cycle whilst other countries foundered in the late 1990s and early 2000s.

We kidded ourselves that it was a golden Australian age: we were enjoying the greatest prosperity in Australian history.

In reality, it was nothing of the sort. It was simply a repeat of our country missing a turn in the cycle as it did in the 1950s under Menzies. In those days, we “rode to prosperity on the sheep’s back” with a little help from our wheat farmers.

Then, as now, the idea of Australia’s “miracle economy” was a myth.

This brings us to the so-called Global Financial Crisis — or GFC — of 2008.

In the USA, decades of so-called sub-prime mortgage lending had caught up with Uncle Sam. Roughly the equivalent of “no-doc” lending in Australia, mortgage originators (primarily Fannie Mae and Freddie Mac) lent money hand over fist to homebuyers of questionable repayment quality and capacity.

When that bubble burst — and hundreds of thousands of foreclosed mortgages flooded the US property market — it was the US government who bailed out the biggest financial institutions, with others left to wither and die.

Unlike Australia, if one buys a house in the USA, if one is unable to continue to pay a mortgage, there exists the opportunity to simply walk away.

Yes, you lose whatever equity you may have built up; but you also lose all liability in relation to the mortgage when you pull up the stumps and move on.

In Britain, many of its major banks carried large exposure to the US sub-prime market, with the result that again, many collapsed — only to be bailed out by the British government.

This cause and effect pattern was replicated elsewhere.

And as market systems are wont to do, the reverberations from the crisis manifested themselves around the world in plunging share markets, plunging oil prices, plunging consumer confidence, soaring gold prices, and knee-jerk reactions from governments desperate to either avert recession at any cost or to minimise and mitigate the scope and duration of recession should it occur.

The money being thrown around at that time — in the name of governments bailing things out or shoring up their economic interests — originated primarily from Chinese economic growth and Russian petrochemical dollars.

And all the while, a host of unresolved issues rested on a steady simmer on the world economic hotplate.

Certainly, here in Australia, we had “stimulus” which basically amounted to the Rudd government throwing $130 billion of borrowed money at anything and everything that moved — and at some things that didn’t.

Certainly, millions of taxpayers got a $900 cheque just for the sake of sending them one.

But the distorted, inflated property bubble was given another pump from the oxygen bottle, and billions of dollars were thrown at ridiculous programs such as “Building the Education Revolution” and the “Pink Batts” fiasco in the name of staving off a recession.

And so now, well, here we are…

One of the greatest acts of economic lunacy in the late 20th century was the Euro: a currency founded on the noble but idiotic belief that it is possible to federate a couple of dozen disparate countries into an economic and political union and — among other things — give them the same single currency to spend.

Many of these countries, whose currencies were rapidly appreciated to qualify for entry into the ERM and then the Euro, were left with nowhere else to go except the path of high sovereign debt to compensate for the fact there was less money in real terms to run their economies as a consequence.

Britain — which (wisely) stayed away from the ERM under Margaret Thatcher, later joined and then left again under John Major, and never took the Euro as its currency (despite an unprecented push under Tony Blair, which even saw the emergence of Euro trading zones in Britain) nonetheless went on a gargantuan debt and spending binge under the Chancellorship, and later the Prime Ministership, of Gordon Brown; events which also covered the period of the bailout of the British banks during the so-called GFC.

And the USA has been borrowing trillions of dollars for decades to fuel its economy; in the long-term, a completely unstable model.

Now, China has decided it wishes to slow its rate of economic growth from 10% per annum to 7% to deal with domestic inflation in that country, and given a large slice of the West has become dependent on Chinese spending and lending in the last 20 years, the system has arrived at the point where something has to give.

Economies across Europe are collapsing — or at least buckling — under the strain. Ireland and Greece have already needed to be bailed out; Spain, Italy and Portugal are unsteady on their feet; and now we have France with a decided case of the wobbles.

There is only so much Germany can do, and there are even rumblings that Europe’s one enduring powerhouse over the last thirty years is also showing signs of trouble.

In Britain, a Conservative-led government is frantically — and ruthlessly — slashing government expenditure, and with it, the public sector borrowing requirement. The problem is that these painful reforms will take time to produce the desired effect: a lean economy trimmed of fat and primed for growth. In the short-term, the withdrawal of money from the real economy, as part of these measures, may induce another recession there; the difference being that such a recession may actually effect the structural correction required to ready Britain for sustainable economic growth.

China this week, following the first downgrade to the US government credit rating in 94 years, issued a strident rebuke to the Americans about living within their means and not borrowing endlessly from the rest of the world to maintain its culture, artificially inflate its economic position, and maintain its military might.

Ominous words indeed from a country not only a major creditor nation to the West, but a rising and potentially malevolent military superpower in its own right.

Talking of superpowers, and despite its domestic problems (something Russia has papered over for centuries anyway), three years ago — to resolve a dispute over payment terms, Russia shut off the main gas pipeline to most of Eastern Europe to make a point, and show Europe who was boss.

Russia, too, has spent a good portion of the past decade remilitarising and modernising its military hardware.

Most of Europe, as well as Britain, are almost solely reliant on Russian gas and largely dependent on its petroleum production. North Sea oil is a minnow compared to the Russian oil behemoths.

Russian companies — state-owned and private — now own vast business interests in Britain and the rest of Europe across a raft of industry and service sectors, including sizeable holdings in the media.

But returning to the US — its burgeoning debts appear to have caught up with it; indeed, the deal to lift the US debt ceiling struck this week also involved legislated commitments to begin to trim trillions of dollars out of recurrent government spending over the next four years to start to nudge the US toward a more sustainable financial footing.

And for the last three years, the US treasury has maintained a policy of simply printing more money: it devalues the US currency, and helps the US deflate its own economy, but harms every other country with dealings with the USA.

If you doubt this, look no further than Australian exporters struggling under the burden of an Australian dollar worth 35% more than it was five years ago.

And it is a poke in the eye to China, whose investments and debt holdings, in US dollars, become steadily more worthless as the process goes on.

In all of these cases, governments have been serial borrowers, and serial bailers-out of businesses that ought to have failed in the pre-eminent market conditions that existed three years ago.

And what of Australia?

Having come to power with a clean debt slate, the Rudd/Gillard government has already racked up $190 billion in government debt, with a bill before parliament to raise our own debt ceiling to $250 billion — all in the space of four years.

Along with throwing money at virtually everything and anything in 2008-09, the Labor government here achieved a special piece of economic insanity: through inflated subsidies to the property sector, it artificially maintained the ballooning boom bubble in the housing market.

In practical terms, this meant that most people who had borrowed 90, 95, 100 percent — or more — of the purchase price of their properties, and thus leveraged to the hilt, were shielded from the threat of foreclosure and the loss of their asset.

In other words, the financial imbecility of brainless idiots borrowing large amounts of money at the very peak of a property boom — taking maximum risk with little or no equity holding — were protected from the consequences of their own stupidity by taxpayer dollars sluiced around by a government that borrowed heavily on world capital markets in order to do so.

Clearly, this post is a first point in the discussion. At double the normal length of my articles, it’s time to down tools and let people think about these issues.

But the economic storm clouds are building.

This time, unlike 2008, there isn’t a government buyout, or bailout, or handout.

This time, the corrections are going to need to be made, the world over.

If they’re not made now, we will be back at this point in another couple of years.

And racking up more debt to Russia and China is no solution. After all, they’ve both made it known they’re…unhappy…with the West and the way it has handled these things.

We’ll talk more about all of this in the next few days, I’m sure.

In the meantime, what do you think?