The Systematic Destruction of Confidence
Published in Le Figaro
(France) on 19 March 2013
by Pierre-Yves Dugua (link to original)
The whole business of the botched rescue of Cyprus is the latest episode of irresponsible political amateurism in Europe. But there are other examples: the French government clinging to its untenable promises to reduce the budget deficit and then giving them up, without convincing us that it knows how to solve the basic problem; or the absence of credible reforms to give companies the necessary leeway so that they can invest and recruit; or indeed the deliberate policy of discouraging the "rich," who have been transformed into the scapegoats for a crisis resulting from 40 years of bad policies.
And what about the U.S., another dismal example of sabotaging confidence? The succession of budgetary psychodramas, threats of the suspension of the U.S. Treasury's right to issue bonds, the absence of a federal budget since 2009, which results in a sort of DIY government tax policy; the refusal of both parties to discuss both social spending cuts AND tax increases, even though everyone knows that they are both necessary; the purchase by the central bank of part of the public debt, maintaining a zero rate which eliminates the interest rate on savings: There are so many handicaps that America is imposing on itself and whose side effects undermine confidence.
The most important ingredient for economic growth is confidence. Even if credit is plentiful, even if household incomes are solid, even if companies have plenty of money, without confidence, nothing happens.
Confidence is difficult to define. It results from a coming together of subjective factors like historical precedents, the proper application of the law, regulatory visibility, the solidity of a currency, the credibility of the regulators, and especially the competence of the political authorities.
Who ever thought of creating the system that has caused a banking crisis in Cyprus? Which minister will be the next to come up with a similar idea? What planet are the people who govern Europe living on? Didn't they see that the Italian and Spanish would immediately ask questions about full access to their bank deposits?
In 2012 the European Central Bank put in place extraordinary liquidity measures for banks and states in difficulties, on condition that they reform their practices. But these reforms are not going to happen. And then we're surprised when the crisis reappears!
For months now the IMF has been telling anyone who will listen that it is extremely urgent that they reform banking regulations in Europe, in particular to remove the national control of governments over their countries' banks. But in practice, nothing really happens. And then we're amazed that U.S. capital won't refinance a European bank anymore!
Confidence is much more difficult to generate than it is easy to destroy. The best way of destroying it is for a government to promise to do A, B and C and to then only do half of A so that B and C can be more easily forgotten.
For ten years now the U.S. has been promising its G7 colleagues that they will tackle the budget deficit problem. But nothing has been done.
The Treaty of Maastricht dates back to 1992. Last year, promises were made to modernize it, to reinforce it and to make it more credible. But in practice the objectives of discipline are never met by the doubtful countries of the Eurozone. And a good excuse to delay the application of these fine resolutions is always found.
We are then astonished that the confidence of investors and companies is simply not there.
There is another other aspect of confidence too — that of the citizens in their elected officials. And this deficit is still increasing. In Greece, Spain, Italy and France, among others, responsible policy-makers are being regarded as bad ones. People are believing less and less in the traditional parties. They want to give the extremists, the jokers, the new faces a chance. They let off steam with populist slogans. Despair makes people do anything.
In the U.S., political debate is also impeded by the irresponsible propaganda of the two parties. One affirms that public expenditure should be reduced, not now, not tomorrow, not ever. As soon as anyone looks at a possible saving in more detail, it causes a general outcry among the Democrats. This was clearly seen when it came to finding a mere $85 billion worth of savings in a budget of $3.6 trillion. The Democrats obstructed everything without proposing anything else, except for new tax increases!
On the Republican side, the same silliness is apparent: They refuse to accept any tax increases in the medium and long term, but also any reduction in military expenditures and any elimination of tax benefits that introduce secure incomes and unbalance the healthy allocation of resources. It is true that the Republicans accepted the tax increases on Jan. 1, under duress. But this sacrifice has now strengthened their refusal to negotiate a tax reform that they actually wanted last year.
This is why the large American companies don't invest very much, despite their large assets. It is true that in the U.S. the situation is less dramatic than in Europe. There are several reasons for this: First, thanks to an unprecedented lax monetary policy, coupled with an equally lax budget policy (a deficit of 5 percent of GDP again this year), growth is unhealthy, but it's there.
Secondly, households are in the process of relativizing the impact of the political stalemate in Washington. They are feeling more confident thanks to the re-inflation of the housing bubble: The value of their property rises, and they feel richer.
Finally, the State has less influence on the U.S. than in Europe. Its blocking is thus less debilitating here than on the old continent. Wall Street's big rise since the beginning of the year illustrates the reconstitution of a certain type of confidence in America, the first step toward a return to normality.
In Europe, the problem is much more delicate unfortunately. It is necessary to reform the national policies of employment, education, taxation and training, and at the same time to strip governments of their sovereignty, which is not understood, badly tolerated and which national governments do not really want to accept for fear of losing their privileges. This double requirement was difficult to pass in a period of weak growth. It is even more difficult in a period of recession.
The recessions, instead of acting as a force that would break down resistance to reforms, seem, on the contrary, to paralyze them. And to make matters worse, the countries that, like Spain, enter into truly painful reforms are not well rewarded by the markets. Why? Because they have no confidence in the local political situation and especially doubt the credulity of policies that have not been used until now. There is no large-scale precedent for the success of an "internal devaluation."
This expression describes what the Eurozone wants to do, with the blessing of the IMF, to the countries whose productivity is not strong enough. As they cannot devalue their currency, since they remain in the Euro, they must lower their costs differently: by reducing their purchasing power!
Yes, it needs to be said: The relative impoverishment of the Spanish is the implied condition of keeping Spain in the same currency zone as Germany. It's crazy, but that's “internal devaluation.” How can we believe that this gigantic experiment on a continental level inspires confidence?
And what about the U.S., another dismal example of sabotaging confidence? The succession of budgetary psychodramas, threats of the suspension of the U.S. Treasury's right to issue bonds, the absence of a federal budget since 2009, which results in a sort of DIY government tax policy; the refusal of both parties to discuss both social spending cuts AND tax increases, even though everyone knows that they are both necessary; the purchase by the central bank of part of the public debt, maintaining a zero rate which eliminates the interest rate on savings: There are so many handicaps that America is imposing on itself and whose side effects undermine confidence.
The most important ingredient for economic growth is confidence. Even if credit is plentiful, even if household incomes are solid, even if companies have plenty of money, without confidence, nothing happens.
Confidence is difficult to define. It results from a coming together of subjective factors like historical precedents, the proper application of the law, regulatory visibility, the solidity of a currency, the credibility of the regulators, and especially the competence of the political authorities.
Who ever thought of creating the system that has caused a banking crisis in Cyprus? Which minister will be the next to come up with a similar idea? What planet are the people who govern Europe living on? Didn't they see that the Italian and Spanish would immediately ask questions about full access to their bank deposits?
In 2012 the European Central Bank put in place extraordinary liquidity measures for banks and states in difficulties, on condition that they reform their practices. But these reforms are not going to happen. And then we're surprised when the crisis reappears!
For months now the IMF has been telling anyone who will listen that it is extremely urgent that they reform banking regulations in Europe, in particular to remove the national control of governments over their countries' banks. But in practice, nothing really happens. And then we're amazed that U.S. capital won't refinance a European bank anymore!
Confidence is much more difficult to generate than it is easy to destroy. The best way of destroying it is for a government to promise to do A, B and C and to then only do half of A so that B and C can be more easily forgotten.
For ten years now the U.S. has been promising its G7 colleagues that they will tackle the budget deficit problem. But nothing has been done.
The Treaty of Maastricht dates back to 1992. Last year, promises were made to modernize it, to reinforce it and to make it more credible. But in practice the objectives of discipline are never met by the doubtful countries of the Eurozone. And a good excuse to delay the application of these fine resolutions is always found.
We are then astonished that the confidence of investors and companies is simply not there.
There is another other aspect of confidence too — that of the citizens in their elected officials. And this deficit is still increasing. In Greece, Spain, Italy and France, among others, responsible policy-makers are being regarded as bad ones. People are believing less and less in the traditional parties. They want to give the extremists, the jokers, the new faces a chance. They let off steam with populist slogans. Despair makes people do anything.
In the U.S., political debate is also impeded by the irresponsible propaganda of the two parties. One affirms that public expenditure should be reduced, not now, not tomorrow, not ever. As soon as anyone looks at a possible saving in more detail, it causes a general outcry among the Democrats. This was clearly seen when it came to finding a mere $85 billion worth of savings in a budget of $3.6 trillion. The Democrats obstructed everything without proposing anything else, except for new tax increases!
On the Republican side, the same silliness is apparent: They refuse to accept any tax increases in the medium and long term, but also any reduction in military expenditures and any elimination of tax benefits that introduce secure incomes and unbalance the healthy allocation of resources. It is true that the Republicans accepted the tax increases on Jan. 1, under duress. But this sacrifice has now strengthened their refusal to negotiate a tax reform that they actually wanted last year.
This is why the large American companies don't invest very much, despite their large assets. It is true that in the U.S. the situation is less dramatic than in Europe. There are several reasons for this: First, thanks to an unprecedented lax monetary policy, coupled with an equally lax budget policy (a deficit of 5 percent of GDP again this year), growth is unhealthy, but it's there.
Secondly, households are in the process of relativizing the impact of the political stalemate in Washington. They are feeling more confident thanks to the re-inflation of the housing bubble: The value of their property rises, and they feel richer.
Finally, the State has less influence on the U.S. than in Europe. Its blocking is thus less debilitating here than on the old continent. Wall Street's big rise since the beginning of the year illustrates the reconstitution of a certain type of confidence in America, the first step toward a return to normality.
In Europe, the problem is much more delicate unfortunately. It is necessary to reform the national policies of employment, education, taxation and training, and at the same time to strip governments of their sovereignty, which is not understood, badly tolerated and which national governments do not really want to accept for fear of losing their privileges. This double requirement was difficult to pass in a period of weak growth. It is even more difficult in a period of recession.
The recessions, instead of acting as a force that would break down resistance to reforms, seem, on the contrary, to paralyze them. And to make matters worse, the countries that, like Spain, enter into truly painful reforms are not well rewarded by the markets. Why? Because they have no confidence in the local political situation and especially doubt the credulity of policies that have not been used until now. There is no large-scale precedent for the success of an "internal devaluation."
This expression describes what the Eurozone wants to do, with the blessing of the IMF, to the countries whose productivity is not strong enough. As they cannot devalue their currency, since they remain in the Euro, they must lower their costs differently: by reducing their purchasing power!
Yes, it needs to be said: The relative impoverishment of the Spanish is the implied condition of keeping Spain in the same currency zone as Germany. It's crazy, but that's “internal devaluation.” How can we believe that this gigantic experiment on a continental level inspires confidence?