The audacity of hope
But beware the new spectre stalking Europe
THE SOUTH AFRICAN ECONOMY still faces some further large and potentially distressing shocks. Many observers think the outcome of the presidential election in the United States ensures the start of the promised new era of global hope. More realistically, however, another immediate crucial development will be increasing public realisation of the severity of economic problems in Europe. Those will inevitably add to the already increasing concerns about SA, which is so heavily dependent on foreign capital flows.
The European Commission (3 November) said: “The economic horizon has now significantly darkened as the European Union is hit by the financial crisis that’s taking a toll on business and consumer confidence. Emerging economies are holding up better than the European Union and the US so far, but even they are unlikely to escape unscathed.”
Also remember that some Asian nations are suffering – and even China is well off the boil.
Professor CW de Kiewiet famously observed in the Thirties that SA had largely advanced economically by windfall. SA has continued to rely primarily on good fortune – above all, in commodity prices – for economic boom phases. So a big setback in international economic growth, which must be the outlook for the next year or two, will impose clear limitations on SA’s particular growth hopes.
However, the broad global media focus (very much including that within the US) has until now been overwhelmingly on all the financial difficulties facing the US.
The colossal difficulties confronting Europe attracted much less attention – so far as they were admitted at all until very recently. There were hard political reasons for that. Most European leaders urged, with convenient self-righteousness, that their national weaknesses were essentially a byproduct of US policy failings.
And British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel (more especially, the socialist financial minister Peer Steinbrueck in its coalition government) have put the main blame for the world financial crisis on “dogmatic American free market ideology”.
They have sought to contrast that with supposed “sound regulatory controls” in their own countries. Steinbrueck went so far only six weeks ago to contrast “feckless” US banking practice with apparent secure banking regulations in Germany.
Well, Steinbrueck also now knows all about hubris and nemesis. Hardly had he effectively sang the praises so loudly of German (and his) financial regulation than it became only too horribly clear that Germany – and Europe generally – had gone its own way to financial crisis every bit as much as the US.
Indeed, the European situation might ultimately prove even tougher to handle than the position in the US. Writing in the New Statesman, Britain’s left-wing intellectual weekly magazine, Iain Macwhirter noted on 30 October: “It was Europe’s dark secret. While US banks were lending irresponsibly to homeowners who couldn’t pay, European banks were lending to emerging countries that couldn’t pay.”
He continued: “Europe’s sub-prime crisis has now come home as heavily indebted nations of the Eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, the Baltic states – are collapsing one-by-one into the arms of the International Monetary Fund. ‘Icelandisation’ is the new spectre stalking Europe.”
Ambrose Evans-Pritchard takes that story further in the London Daily Telegraph. He writes: “The latest statistics from the Bank for International Settlements show that Western European banks hold almost all the exposure to the emerging market bubble, now bursting with spectacular effect. They account for three-quarters of the total US$4,7 trillion in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeded the scale of both US mortgage calamities, sub-prime and Alt-A.”
Evans-Pritchard adds: “Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them likely losses of $74bn. The Germans have lost $22bn. Austria’s bank exposure to emerging markets is equal to 85% of its total gross domestic product. Exposure is 50% for Switzerland, 25% for Sweden, 24% for Britain and 23% for Spain.”
Evans-Pritchard then throws the killer punch at European complacency.
“The United States’ figure is just 4%. America is the staid old lady in this drama. Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using US dollar balance sheets, adding another ugly twist as global ‘deleveraging’ causes the US dollar to rocket on foreign exchanges.”
None of that matters now – except maybe in later revisionist history – to President George W Bush as he sits out his farewell powerless days in the White House. But the new US administration – unlinked to Bush, anyway – won’t need to take any finger-pointing lessons from Europe.
Brown, Merkel, Sarkozy and the rest must note that the US is still very much the dominant economic Western power. China will certainly know.