Eurozone governments are now too big to succeed
By
Tim Price Nov 25, 2011
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I try not to write about politics. I’m an asset manager, after all, and not a policy-maker. But there comes a point when so many of the financial market’s difficulties have their origins in the political sphere that discussing anything else seems irrelevant. Now is such a time.
Ronald Reagan, or at least his speech-writer, made two fine observations about government. Government, he said, is like a baby. An alimentary canal with a big appetite at one end and no responsibility at the other. And he identified the ten most dangerous words in the English language: “Hi, I’m from the government, and I’m here to help.”
The markets reminded us this week that the global government debt crisis isn’t going away. But in a eurozone context, we should perhaps be adopting the phrase ‘government crisis’ instead. Ambrose Evans-Pritchard referred in The Daily Telegraph to Spain’s outgoing Socialist government as “the fifth victim to fall in Europe’s arc of depression”, in the wake of change in political leadership across Ireland, Portugal, Greece and Italy.
The problem is easy to identify, but hard to fix. A combination of Western governments and those same countries’ banking sectors is effectively insolvent. The problem is one of democracy itself. The system sows the seeds of its own destruction when a critical mass of voters appreciates that it can vote itself privileges. Politicians who can rarely see further than the next election are happy to provide them. A state of entitlement then sets in, with the wealth-creating private sector crowded out and milked for taxes. In one sense government policy is predestined to fail because, as Mrs Thatcher observed, sooner or later the government runs out of your money.
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Now the piper must be paid. The debt load must be reduced. It increasingly looks as if governments could default explicitly (as in Greece, even if that fact has not been formally recognised yet); or implicitly, through a policy of inflationism and money-printing. Either way, the West faces perhaps the gravest threat to its wealth in living memory.
All the eurozone political class can do is run back to the tax-and-spend rulebook. Their latest proposed wheeze is to introduce a ‘Robin Hood’ tax on the financial sector that would indirectly threaten the entirety of financial services in Britain, and not just its banks. I’m no apologist for the bankers, but a Tobin tax on financial transactions would affect everyone working in finance, not just “greedy” bankers. Given that most financial businesses are intermediaries, those costs will inevitably get transferred to the end investors.
Unless instituted everywhere, such a tax wouldn’t work and would drive investors and issuers of securities elsewhere. I’m sure of my ground here. There is a huge historical precedent. President John F Kennedy introduced the Interest Equalisation Tax in July 1963, which was designed to make it less profitable for US investors to invest overseas by taxing foreign securities. Economic historians continue to debate whether the tax was successful (it was abolished in 1974). What it did achieve was the creation of the offshore eurobond market, a multi-trillion dollar market where I spent the first ten years of my career, and a market that also happens to be dominated by London. Tax-and-spend eurocrats should be careful what they wish for.
Perhaps the fundamental problem with the eurozone is its size. Bigger in trans-national politics is rarely better. The finest advocate for small government in Europe was probably Leopold Kohr, an Austrian Jew born in the tiny village of Oberndorf in 1909. In 1941 he wrote the first part of what would become his masterwork, The Breakdown of Nations. He argued that Europe should be divided back into the sort of small political regions that persist to this day in places like Switzerland. “We have ridiculed the many little states,” he wrote sadly, “now we are terrorised by their few successors.”
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Another advocate of smallness in the economic and political sphere is Dr Albert Bartlett, emeritus professor of physics at the University of Colorado at Boulder. Bartlett’s lecture on ‘Arithmetic, Population and Energy’ (available on YouTube) is stunning.
Bartlett argues that our biggest failure is our inability to understand the power of exponential growth. And he asks, “Can you think of any problem in any area of human endeavour on any scale… whose long-term solution is in any demonstrable way aided, assisted or advanced by further increases in population, locally, nationally or globally?” As he puts it, beyond a certain point, growth is either obesity, or cancer.
Ronald Reagan also spoke about government indebtedness. He once told the participants at the Gridiron Club annual dinner: “I am not worried about the deficit. It is big enough to take care of itself.” Well, government indebtedness is now a huge problem globally. Are our politicians big enough to take care of it? I very much doubt it.
• Tim Price is director of investment at PFP Wealth Management. Tim also writes The Price Report newsletter. For more information, contact: 020-7633 3637.
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