by Damon de Laszlo, ERC Chairman
In August, when I last put pen to paper, the final sentence read: “There are dramatic changes afoot in the world order.” Since then the US politicians decided to add a further layer of chaos to the financial system. Not only have Western governments been unable to address the regulatory problems that led to the collapse of the financial system some five years ago, but they have also failed to curtail the habit of borrowing to pay for political largess and ever-growing bureaucracies that interfere with every aspect of life in our so- called free society. While the leaders in China have a vision and a plan to rebalance the economy and battle with the corruption that goes with a directed economy and one-party state, Western politicians in the main have ceased to provide vision and leadership and focus instead on giving hand-outs to the most vociferous pressure groups, along with passing populist legislation to win votes.
The “too big to fail” issues for the West’s financial system pale into insignificance compared with the idea that the US could default on its debt. If the US did default, it would paralyse the global financial system; not for a week or two, but for years. The whole basis of credit and the money transfer systems that keep the Western world moving would be frozen. The legal complications and the paralysis that this would bring would halt large sectors of the financial system and glue it up for years. The ability of Western governments to borrow would be put into jeopardy and it would destabilise the whole basis of our democratic system.
Of course, the financial Armageddon that this entails is similar to the period in the fifties and sixties when global nuclear war was discussed. In spite of this possibility things proceeded normally and the event didn’t take place. Today, the idea of a US default is interesting to discuss but if anyone thought it was really going to happen then the financial system would collapse.
While the situation is extraordinarily dangerous, it will be resolved. However, lasting damage is likely to have been done to the credibility of the US, and indeed Europe, in the eyes of the rest of the world. There are, however, some very interesting likely repercussions. We see in America the Tea Party holding the government to ransom. The Germans have their Pirate Party, the Dutch their Freedom Party and in Italy there is the Five Star Movement; and, not to be outdone, the UK has its Independence Party. All these movements have pretty much one thing in common – they indicate frustration and indeed a distrust of the main stream political parties in their respective countries. It is difficult to categorise their primary supporters but they are by-and-large the blue collar workers who feel disenfranchised by the lack of financial progress, going back even to the period before the financial crisis.
These are people who see their cost of living rising but wages flat-lining and job security decreasing. By-and-large the left leaning parties have let them down and the right-leaning parties are associated with the upper echelons of the countries’ establishments. At this level, government expenditure and bureaucracy is seen as detrimental to their interests and their natural feeling that saving is good and debt is bad. In Europe, most see Brussels as an unelected elite who have little interest in their plight, which is hardly surprising in Southern Europe with its massive unemployment problems, but the lack of wage growth for the average German worker is also galling. In the USA middle and lower incomes have remained flat for the last five years. The Tea Party in particular is focussed solely on getting the government to balance its budget and there is little sympathy for those in the financial sector who they feel are crying wolf.
Of course, the holding down of wages has brought prosperity to Germany and is a contributor to the potential re-industrialisation of the USA. This and all the complex economic arguments about how you reinvigorate an economy are of no great interest to the majority of the population.
The light at the end of this particular tunnel is the hope that our political classes will get the message that less legislation, less pandering to vested interests and more concentration on balanced budgets might be politically popular. Always looking for this elusive light, one can only hope that this is the way things will turn out. Clearly, a train wreck in our economic systems would be a disaster but, equally well, the complacency in all our politicians, both on the left and on the right, about ever increasing government debt is itself likely to lead to a train crash, albeit in slow motion.
Damon de Laszlo 14th October 2013