The au­dac­ity of hope

But be­ware the new spec­tre stalk­ing Europe

Finweek English Edition - - Economic Trends & Analysis - HOWARD PREECE

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.