What’s this on my doorstep? A bomb!
Okay – so it wasn’t quite the real thing – in fact it was this week’s copy of the Economist. The front page showed half a dozen trussed up baguettes and a flickering fuse-wire…
Could it be that France is the real danger at the heart of the European project?
Indeed yesterday, France’s bonds were stripped of their AAA status by yet another ratings agency – Moody’s. What’s more, Moody’s says it may cut again, citing inflexible labour markets and low levels of innovation as key problems for French competiveness. Oh, and then there is, of course, the matter of what looks like a shocking double dip recession spreading across the eurozone.
Yes folks, eurozone troubles keep piling up – and the infection is spreading deeper into the core.
Today, I want to show you a fascinating chart from CitiGroup that tells you all you need to know about Europe’s ills – and why we need to continue to tread carefully here.
What’s at stake is democracy itself.
The chart that says it all
At first sight, the chart I’m about to show you may look a bit confusing. But bear with me – it’s worth investing a few moments to understand what’s going on.
The chart shows the poll ratings for the leaders of the PIIGS nations (I’m sure you don’t need me to spell them out) through the financial crisis period. Actually, it’s not just the PIIGs, it also includes France. Oh, the French will be happy that CitiGroup saw fit to lump them in with the so-called peripherals!
You’ll notice that new leaders come in on a high. And from there, there’s only one way to go – down!
Let’s take the green line for example. It shows Berlusconi’s gradual fall from grace. But then there’s a break in the line – that’s when Mario Monti took the reins, his rating went sky-high. But only for a while. Most politicians have some sort of a honeymoon period upon taking office.
But it’s looking like they’re very short-lived these days. It’s all very well making promises on the campaign trail – but they’re much harder to keep once you’re in the job.
Take François Hollande. He may have come into the Élysée Palace all guns blazing, but just look at how quickly his popularity plummeted.
Looking at each country’s progression of leaders in turn is fascinating. And it highlights a serious problem at the heart of Western democracy…
Enough rope to hang us all
As Bill Clinton once famously said, “It’s the economy, stupid” and never has that been more true.
Everyone wants a slice of the economic pie. And it’s not just the welfare dependents – business is increasingly dependent on government handouts. In fact, François Hollande recently launched his “competitiveness pact”. He aims to lift output by half a percent over five years by granting €20bn a year in corporate tax relief and pruning public spending by 1%.
This is not what many voters had been expecting of their socialist leader!
The point is, in the West both industry and vast swathes of the public are hooked on government. But the only way to give to one group without having to take it from the other, is to borrow the extra cash.
And for the likes of France and the UK – they’ve been able to do that. You see, as capital has fled southern Europe, the cash has migrated north.
As money floods into French bank accounts, the banks use much of the cash to buy French government bonds (for safety, you know!). And so the yields on government debt are down to just over 2%.
It’s just the same as here in the UK – perceived safety allows government borrowing to continue to rise. None of the hard-core austerity for us lot… and precious little rioting in the street too.
Let’s enjoy the endgame
The thing is, neither stimulus (more borrowing), nor austerity have shown any meaningful and sustainable impact on our listless economies. Despite the best efforts of the politicians to spend and borrow, or indeed make cuts, the opinion polls still point downhill.
The truth is wholesale reform is required. And Western democracies are simply not geared up to delivering that. Or is it simply that the politicians aren’t made of the right stuff?
Who knows? But one thing’s for sure, things aren’t getting any better.
I think it was Hemingway that answered the question, “How does somebody go bankrupt?” Answer: “Slowly at first… then, all of a sudden.”
Western nations have been gradually bankrupting themselves for decades. And though a few years of crisis may not seem like “all of a sudden” – if you take the long-view, things are coming to a head pretty quick.
There’s no easy way out of the funk we find ourselves in. It’s now pretty obvious that austerity doesn’t work. So that just leaves one option on the table. Print and spend. Yes, I know I said wholesale reform was another option – but so long as there are opinion polls, that seems highly unlikely. Doing things right will cause too much pain.
On the bright side, print and spend policies don’t need to be bad for investing.
I expect that today’s short-term economic policies will be ruinous over the long run. Not least because they’re not helping to get the economy back on track anyway. But over the short term, I welcome the money printers with open arms. There’s no doubt it’s good news for many asset classes – not least our gold.
So let’s not get too pessimistic – keep calm and carry on. To find out more about how to help protect yourself during the endgame, click here.
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