Last November Forbes listed European Central Bank President Jean-Claude Trichet as the 15th most powerful person in the world. Right now, with the enemy at the gate, I would rate him higher. Incidentally Silvio Berlusconi “and family” came in ahead at 14th, perhaps a fair reflection of the tragi-comical state of the eurozone. It is not clear how many members of Silvio’s “extended” family were included or whether they were all allowed to vote for him).
How long does it take to change the basis of an economy and the mindsets of its participants?- Martin Webster
Mr Trichet has a thankless task. The ECB has been constantly criticised by European politicians for not doing more to boost economic growth.
On the one hand, that’s about as hypocritical a stance the European sophists could assume. If they had not adopted reckless economic policies, with no consciousness or care of the inevitable end game, we would now have growth potential aplenty.
Instead, we have a debt mountain to fight through and a prolonged period of belt tightening which will inevitably kill off any hopes of a quick recovery.
On the other hand, Mr Trichet’s defence that the ECB has been successful in controlling inflation seems almost inappropriately smug given the context. A surgeon cannot claim the operation was a success if the patient died in the process.
Mr Trichet is in many ways an admirable character, much more so than some of the unstatesmanlike (albeit infinitely devious) political counterparts he has to deal with.
The fact that Mr Sarkozy does not seem to like him much only serves to raise him in my humble estimation.
However, the “accusation” that he is more German than the Germans has a grain of underlying truth.
In retrospect, raising rates was (possibly very) premature. It was all the more surprising given the ECB’s default stance of doing nothing.
Mr Trichet has often argued against “policy activism” and acting too strongly in response to economic indicators, “only to be forced to reverse gear soon thereafter as new estimates become available.” As it happens, it appears that the intervening data will prompt Mr Trichet to do just that.
Over at the Bank of England, Mervyn King has continued to keep rates firmly grounded. At first glance it appears odd that the ECB raised rates when inflation was low, yet the Bank of England kept rates low when inflation is much higher in the UK. However, there are some critical differences between the eurozone and the UK.
Despite all the talk of austerity measures in the eurozone, the UK has got on with it and is well ahead on this score. As mentioned above this will have an impact on growth, which argues in favour of lower interest rates.
The UK has also faced an increase in VAT, which is a material item that will drop out in due course.
In other words UK inflation is currently ‘artificially’ high to the extent that it is impacted by the one off effect of the VAT increase, and is projected to drop. That is not to say that the Friday night curry will get any cheaper in future, only that it will not get more expensive as it has done in the past!
Finally, the UK consumer has consumed far more than your average eurozoned person, as evidenced by the household debt to income ratios. The savings rate will have to go up and debt down. Again, in that context it makes sense to keep interest rates low.
In every crisis you will get differing views as to the best way out of it. However, many of the proposed solutions merely address the symptoms, not the underlying cause. It appears lost on many that the issues run much deeper, and at least to some extent we are going to have to rip up the very foundations of Western economies.
This is the crisis to end all crises. Governments, and individuals, are going to have to learn to live within their means as the supercycle of seemingly never ending debt accumulation to fuel expenditure and consumption (and bailouts) actually draws to an end.
It is a sad spectacle to see a grand old continent, the birthplace of so many great artists, architects, musicians, scientists, philosophers and so much that is good about the world, go cap in hand to the emerging East to help pay its debt obligations, brought to its knees by morally bankrupt Ponzi scheme politicians with no leadership skills. The question is how long does it take to change the basis of an economy, and the mindset of its participants? Perhaps William Inge gave us a clue: “The proper time to influence the character of a child is about a hundred years before he is born”. We are in for the long haul.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
www.curmiandpartners.com
Mr Webster is head of equity research at Curmi and Partners Ltd.