Last week we explored a few instances in which the pursuit of safety may distort attitudes towards risk-taking, enterprise and the optimal deployment of capital. For the sake of simplicity we can define the optimal deployment as the one which maximises aggregate wealth. Wealth distribution is another matter altogether, and a socio-political one, but it is self evident that for wealth to be distributed it must have been created in the first instance.

The architects of this disaster remain at large – unelected, unaccountable and unswervingly unrepentant- Martin Webster

The general suggestion of the article was that if you incentivise a safety first attitude, you disincentivise risk-taking. The former has an (often unseen, but nevertheless present) influence on the latter. If you disincentivise risk-taking, you limit the growth engine needed for future wealth and job creation.

Let us now postulate that European economies, and especially those under EU control, are characterised by big government (highly centralised), big regulation and big welfare (and big slogans). All of this is in the context of an aging population and falling competitiveness.

One would expect such entities to have a fundamental struggle to service the needs of the present, to have governments which are tempted to take short term measures which appeal to the electorate, to have the public sector provide significant employment, to be slow in introducing reforms. With that potent mix, one might expect low growth, persistent deficits and accumulation of debt. The accumulation cannot go on forever, however, since it would eventually go beyond the point that the debt can be serviced.

This is all starting to sound disconcertingly familiar. However in theory the accumulation of debt does not constitute a problem in itself as long as the future wealth generation potential is safeguarded (this is where safety procedures should be kicking in). That requires a benign environment for investment.

My understanding of the word “investment” seems to differ from that of the EU – which seems to think that expenditure is synonymous with investment. Those who watch PMQs (Prime Minister’s Questions) in the House of Commons will have seen the government boast that they “invested” X on hospitals, schools and so on. Politicians should not be allowed to use this phrasing. The correct phrasing would be: “We have spent X, and funded it by taxation and borrowing”. In terms of proper private sector investment, the kind which aims to generate a direct return on capital (European vanity projects therefore excluded), it is worrying to note numerous signs that Europe is lagging its favourite benchmark, the US. Take for example private equity and venture capital – the sharp end of capitalism. In 2011 US private equity fund-raised $122 billion (up 22 per cent) Europe $53 billion (down eight per cent). US venture capital fund-raised $16 billion (up five per cent), Europe $3 billion (down 11 per cent). These figures are much worse if we strip out the UK, which is easily the leader in Europe.

This can only be seen as an absolute policy failure to attract sufficient capital into business ventures. Have these figures ever been discussed during a European banquet? Does Brussels understand what contributes to its high youth unemployment?

Of course, Europe now also has the straightjacket of a single currency to contend with. Students of the single currency will be able to trace its origins to a perceived need to control Germany. What was intended as a symbol of unity has become the ultimate North/South divisive device.

Backed against a wall, Machiavellian manoeuvres by the politicians cannot be ruled out. The sales pitch will be that the worst is over, that the crisis is manageable – but so far we have been given a false sense of security.

Take Dexia for example, which passed the stress test with flying colours (12th out of 91 banks) – but needed to be bailed out three months later. We have a Stability and Growth Pact which has provided neither, with major economies having previously decided the rules do not apply to them. We have the authorities deliberately blocking credit default swap payouts. We have the ECB buying EFSF bonds – surely a breach of the Lisbon treaty, at least in spirit.

We have an EU which makes up the rules as we go along – and then proceeds to break them. I am reminded of a T S Eliot poem, Mr Mistoffelees, which I have amended slightly in honour of European politicians: “They can creep through the tiniest crack, They can walk on the narrowest rail, They can pick any card from a pack, They are equally cunning with dice.”

The European crisis is often portrayed as a failure of capitalism, but it is just as appropriate to call it a failure of the extreme socialist ideology embedded in the EU. The architects of this disaster remain at large – unelected, unaccountable and unswervingly unrepentant. Until they are ousted, there can be no long term solution.

(This is part two of a two part article.)

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.

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