DABERIAM LXVII

February 2012

December seems a long time ago, when I last put some thoughts down on paper, but since then nothing much has really changed.

For those familiar with Alice in Wonderland, it is clear that the Red Queen still reigns. It is now considerably more than two years since the German Chancellor decided it was politically more expedient to bail out Greece in order to protect Deutschebank and other northern European institutions. This political decision, apart from exacerbating an economic crisis, is creating very disturbing currents in European politics. The austerity being imposed on Greece and other Mediterranean states will cause a growing political backlash against Germany and if the EU continues to crush the Mediterranean economies, the political disruption is likely to become very serious and could easily unglue the political structures of Europe.

The repetitive week-end crises do nothing to create the industrial and commercial certainty needed for the European economy to expand; they seem to just turn into massive bureaucratic exercises aimed at doing more of the same.

Conjuring up more billions to plug the gap in the Greek trade and government deficit as well as financing the re-cycling of outstanding debt in order to protect the banks that hold it in what should only be described as their gambling accounts, is an untenable notion. Allowing Greece to default and then using the resources available to help the country re-start within or outside the EU, would be a better option for everyone. At some point, probably in the relatively near future the Greek government needs to act in the interest of its people, not in the interest of the banks. If they don’t, we could easily see the destruction of their democratic system. This is more than interesting times, it is exceedingly dangerous times for European democracy.

That said, I think one can become more and more optimistic that the rest of the world is gradually working out its economic problems. China certainly seems to be managing an economic slow-down from double digit to single digit growth. There could easily be more but localised unrest as the new educated and relatively middle-class are upset by regional problems as some sections of the economy have to shrink while others grow. There is also the possibility of dislocation during the current leadership changes, but barring accidents there is no reason at the moment why China should not continue to be a major world engine of growth.

The Pacific Rim countries are all motoring along nicely with mostly stable governments and mostly enjoying growing prosperity. This also applies to a considerable extent to the South American continent. 

North America is steadily rebuilding its economy. The extraordinary sight of a dysfunctional government in Washington almost totally abrogating its responsibility for any of its proper functions is bizarre. Even more extraordinary is the unintended experiment in economics, which is demonstrating that leaving people to their own devices, given a fair wind and a low level of Government bureaucratic interference, they will resolve their economic problems.

US industrial and corporate growth is steady and unemployment is falling. Corporate profits are rising as are retail sales both in real and nominal terms, now back above the highs of 2007. The US housing market is stabilising and as and when house pricing is seen to be firmer, it is likely that there will be an added boost to the economy as the building industry starts to recover. A further boost to the economy is low cost gas which is enhancing the competitiveness of US primary industries, particularly in the chemical and steel sectors. Added to this, Central Bank easing around the world continues to support economic growth everywhere except in the Club Med countries.

Apart from Europe, the Middle East is a considerable cause for concern. While the regimes that control the majority of countries in the region are neither democratic nor benign dictatorships, the destabilisation of the area is not of itself necessarily good for the populations in the area. The growing instability is a serious threat to oil supplies and is also hindering oil-field development. But the extraordinarily rapid application of new technology which is exploiting new oil and gas reserves on the American continent, both North and South, will in the short to medium term mitigate the dangerous situation in the Middle East, however this nevertheless is clearly a very worrying area.

All in all, the outlook in February does not look much different to December other than one can be optimistic that the world economy is doing fine. It is really only Europe that has created its own peculiar kind of bureaucratic and political chaos.

Damon de Laszlo 
15 February 2012