G7 Summit shows leaders are forgetting the lesson of the 1930s

G7 May17G7 Summits began in the crisis years of the mid-1970s, bringing Western leaders together to tackle the big issues of the day – oil price crises, the Cold War with the Soviet Union and many others.  Then, as stability returned in the 1980s with the BabyBoomer-led economic SuperCycle, they became forward-looking.  The agenda moved to boosting trade and globalisation, supporting the rise of China and India, and the IT revolution.

This weekend’s 43rd Summit in Italy suggested we may be going back to earlier days.  As the picture confirms, the leaders did all meet in the Italian city of Taormina in Sicily.  But they clearly found it difficult to meet the challenge set by their hosts of “Building the Foundations of Renewed Trust”.  One very worrying sign was that both the USA and the UK seem to have become semi-detached from the process. :

□  UK premier Theresa May left early, to “hold urgent talks with her election campaign chiefs” after new polls showed her lead dropping to single figure levels
□  President Trump refused to endorse the Paris Agreement, causing German Chancellor, Angela Merkel, to comment:
“The entire discussion about climate was very difficult, if not to say very dissatisfying. There are no indications whether the United States will stay in the Paris Agreement or not.”

There was some good news, with a compromise seemingly being agreed with US President Trump over his desire to dismantle the world’s open trading system, as the final statement noted:

“We reiterate our commitment to keep our markets open and to fight protectionism, while standing firm against all unfair trade practices. At the same time, we acknowledge trade has not always worked to the benefit of everyone.”

But it was a relatively weak statement, and nothing was said about the President’s withdrawal from the Trans-Pacific Partnership, or his decision to demand a formal review of the North American Free Trade Agreement. The change is even clearer by contrast with last year’s Summit in Japan, when the leaders committed:

To fight all forms of protectionism ….(and) encourage trade liberalization efforts through regional trade agreements including the Trans-Pacific Partnership, the Japan-EU Economic Partnership Agreement, the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.”

Sadly, the same lack of unity had been seen just before the Summit, when President Trump failed to endorse Article 5 (the fundamental principle of the NATO Alliance), which declares that an attack on one member state is an attack on all, and requires a mutual response.  As the Financial Times noted:

This was particularly galling given that he was attending a memorial for the September 11 terror attacks — the only time Article 5 has been triggered. It remains unclear why he equivocated.”

Even the Summit dinner saw a lack of unity, with US National Economic Council director Gary Cohn suggesting:

There was a lot of what I would call pushing and prodding.”

This lack of a common purpose amongst Western leaders is deeply worrying.  Of course, they were able to agree on strong words about terrorism and the role of social media.  But their key role is to be pro-active, not reactive.

Collectively, their countries are responsible for nearly two-thirds of the global economy.  Individually, none of them – not even the USA – can hope to successfully tackle today’s challenges.  This was the rationale for the formation of the G7 in 1975, and it has since played a critical role in helping to spread peace and prosperity around the world.

Today’s G7 leaders seem to be in danger of forgetting their core purpose.  They need to re-open their history books and focus on the lesson of the 1930′s, when “beggar-my neighbour” trade policies led directly to World War II.


Europe heads into the Great Unknown as UK prepares for Brexit; Dutch and French voters go to the polls

Brexit Feb17Next month sees the start of a process that could change all our lives.  Whether we live in Europe, or outside it, the political decisions about to be made have the potential to impact every country in the world – for better or worse.

And yet, nobody has yet begun to put together the various pieces of the jigsaw, and identify the wide range of different outcomes that could emerge.  By the end of the year, the EU and the eurozone might have collapsed – with massive impact around the world.  Or ‘business as usual’ might continue.  Or we might have a revived French-German partnership again, reigniting the energy that first began to rebuild Europe after World War 2.  None of us know, and it is very dangerous to keep pretending that ‘business as usual’ is the only option.

The changes are so vast, and so different in their potential outcomes, that I will explore them in two separate posts this week.  Today, I will look at Brexit and the current outlook for the Dutch and French elections.  On Thursday, I will look at the outlook in Italy and Germany, and draw some conclusions about what may happen.

   Brexit is the first unknown.  The UK expects to start the process of leaving the European Union (EU) next month.  Premier Theresa May has now published the government’s position on the talks.  But what will happen when she presents her terms in Brussels?  She wants to retain access to the Single Market for critical UK industries such as financial services, autos, aerospace and chemicals – but she doesn’t want to allow immigration to continue on the current basis, and she probably doesn’t want to pay the €60bn bill that Brussels believes she will owe on leaving.

So what will happen?  Will it be sweetness and light, with everyone singing “For she’s a jolly good fellow” as she walks out the door?  Or will there be furious arguments, and no agreements for UK trade in the post-Brexit world?  And what will happen back in the UK while all this takes place?  Will businesses simply sit back?  Or will some decide it would be prudent to move to France, Germany, Ireland or elsewhere?  And what might happen in Parliament, where May only has a majority of 12, if things go badly?  Could her term as premier end up being one of the shortest on record?

   The Dutch elections are the next unknown on 15 March.  Geert Wilders, the anti-immigration, anti-EU candidate for premier, is currently leading in the polls.  But will he do better, or worse, when the time comes to actually vote?  As we know from the Brexit and US Presidential elections, the polls are not always accurate – if people who have not voted in the past, now decide it is time they went to the polling station.  And if Wilders does win, will he be able to form a government?  Current premier, Mark Rutte, has said he will refuse to work with him.  So it could be a very lengthy process before The Netherlands has a new and stable government.

And what would happen if Wilders did become premier?  His main policy is leaving the EU.  On what terms would he seek to do this – would he adopt the same positions as Theresa May, or would he have different priorities?  And would the EU itself survive the departure of one of its original 6 members?  Many people think it wouldn’t.

   France’s presidential elections are next, on 23 April. French polls were completely wrong in the primaries – Alain Juppé was defeated by Francois Fillon for the Republican nomination, Manuel Valls was defeated by Benoît Hamon for the Socialist nomination.  At the moment, Emmanuel Macron with his new En Marche! movement, and Marine Le Pen of the National Front, seem likely to go through to the final round.  Their outsider status is critical to their appeal, but their policies couldn’t be more different. Macron wants to revive the EU, le Pen wants to leave it.

What would happen if Le Pen wins?  Almost certainly, the EU would collapse – whether or not Wilders had already begun the process.  And what would that mean for the European and global economies?  What would happen to the value of the euro?  What would happen to the euro itself?  Would all the break-up decisions be taken rationally, or would they happen late at night, after bitter argument?

What about the alternative, a win for Macron – who only declared his candidacy in November, and is still forming his new party?  He has recognised that the curo cannot survive in its current structure, and has argued the EU should develop “a roadmap for Europe” in critical areas including defence, security and the economy.  If fellow social democrat, Martin Schulz, were to be elected Chancellor in Germany in October, the stage could be set for a dramatic reshaping of EU policy – and probably also its membership.  The contrast with Ms le Pen’s plans couldn’t be stronger.

These uncertainties would be difficult enough to manage on their own.  Brexit itself is a complete unknown, effectively tearing up the last 43 years of UK law and economic policy.  But it could easily be over-shadowed by developments in The Netherlands and France.  If either or both decide to leave the EU, who really knows what would happen to the European and global economy, the value of European currencies, or Europe’s relationships with the rest of the world?

But these uncertainties are only part of the Great Unknowns now ahead of us.

On Thursday, I will look at the highly uncertain political outlook in Italy and Germany.  I will also highlight the very different possible outcomes from Europe’s plunge into the Great Unknown – which has the potential to impact all of us, whether we live in Europe or elsewhere.

France’s pension age stays low, whilst New Old 55+ generation increases

France1 Dec13France, with GDP of $2.6tn, is the 5th and final profile in the blog’s series on the impact of ageing populations on economic growth.  Its importance lies not just in the size of its economy, but also in the fact that its relationship with Germany has been the driving force behind the European Union and the Eurozone.

France is also interesting as it is one of the few Western countries which actively encourages women to have more children. It provides major incentives including monthly allowances, 3 years paid parental leave and subsidised day-care.  The cost of these is large and rising, having reached 15% of the nation’s budget back in 2005.

The UN Population Division’s forecasts for future fertility rates thus show major variation as the chart above demonstrates, as it is impossible to know if the policies will prove successful:

  • Life expectancy (red column) has risen 26% since 1950 to around 80 years today
  • Fertility rates fell 30% from their 1960 peak of 2.8 to just 2.0 babies per woman by 2005
  • In the Low Case (green area) they fall further to 1.5 babies by 2030
  • In the Medium Case (triangle) they stabilise at 2.0; and rise to 2.5 in the High Case (square)

One success for the policy has been that France saw its birthrate pass Germany’s in 2000 for the first time in modern history, and it is now 18% higher at 790k births/year.  But this is mainly due to the decline in Germany’s birth rate.  And  in terms of economic growth, these new babies will only begin to have an impact once they reach the Wealth Creator 25 – 54 age group.

Thus the key issue for the next 10-20 years is the legacy of the declining number of births after 1972′s peak of 880k/year.  France’s recent policy shifts will not change the fact that its current BabyBoomer population is ageing fast.

As the new OECD Pension  Book highlights, 30% of the working age population are already over 65 years.  Yet remarkably, France has been reducing its pension age to 60 years – even whilst its life expectancy was rising.  Reforms passed in 2010 are slowly reversing this policy, but pension age will still be only 62 in 2017.

  • Average earnings are $48k per worker
  • The public pension currently provides a 50% pension after 40 years work in 2010, rising to 41.5 years by 2017
  • The earnings measure is the average of the best 25 years’ earnings, with a ceiling of €36k
  • Private pensions are also important, but are too complex to be summarised in a blog post

Thus the OECD calculate that gross pensions are nearly as generous as in Germany at 48% of median earnings.  The problem is simply that they are unlikely to be affordable for much longer:

  • 1 in 3 of the adult population were already in the New Old 55+ generation in 2000
  • The New Old total 40% today, and will be almost 1 in 2 of the adult population by 2030

France is thus a useful example of how governments have chosen to ignore the reality of ageing populations, due to their focus on the short-term electoral cycle.  There has been no debate about whether it is medically and mentally better, or worse, for people to retire at an early age.  Nor has there been a debate about the wider economic costs.

The result is that we face an economic and social crisis, for which there are now no ‘easy solutions’ available.  20 years ago, it would have been relatively easy to index pension age to life expectancy.  Most people would have complained a little, but then shrugged their shoulders and got on with their lives, on the principle that ‘what you never had, you never missed’

But that is not the position today.  As investment magazine Barron’s observed about the US’s failure to properly address its pension issues:

It is difficult enough to put 50-year-olds on notice that entitlements they expect at 70 will probably not be available. To give them this bad news when they’re 60 or 65 is inhumane.”

Eurozone politicians have built a Tower of Babel

Tower of Babel.pngLast week saw the 20th EU ‘Crisis Summit’. Like the previous 19, it achieved little. Yet everyone at the meeting knew what had to be agreed:

• A banking union which operates across national borders
• The issuing of joint Eurozone bonds, guaranteed by all euro members
• Adoption of a Federal budget and economic policy

These measures would create the essential fiscal union required to support the euro as a common currency.

Equally, this is not a new debate. It was spelt out in 1990 by German Chancellor Kohl and French President Mitterand, when the concept of the euro was first discussed. As the US example shows, monetary and fiscal union also requires political union.

But today, the two countries at the heart of the euro project are as far away as ever from agreement:

• Germany wants to have central controls over spending
• But France will not agree to give up national sovereignty.

Equally, as Reuters notes, the leaders continue to talk different economic and political languages. The ‘crisis summits’ thus resemble the efforts to build the biblical Tower of Babel, pictured above by Breughel.

Thus in German, the word for ‘debt’ is Schuld, which also means ‘guilt’.

So in Germany, the Eurozone debate is a morality play, where those in debt are ‘sinners’:

• It wants the debtor countries to introduce a stability culture of low inflation and low debt, via a savings policy based on austerity
• But new French President Hollande won election on the basis of a ‘growth policy’ based on spending, not savings.

Pensions policy highlights the difference. Germany is raising pension ages to 67 years. Whilst France has just reduced them from 62 to 60 years.

The European Central Bank is caught in the middle. It provided €1tn ($1.4tn) of emergency funding in December to avoid the collapse of the banking system. But it cannot force the politicians to accept the need for fiscal and political union to support monetary union.

Thus as the blog warned a year ago:

“The alternative (to agreement) is not the status quo, as too many politicians still hope. It is that the Eurozone could eventually break up, and in the process severely damage both the European Union and the wider global economy.”

Boom/Gloom Index stalls as austerity worries rise

Index May12.pngEU policymakers like to pretend that the Eurozone debt crisis was resolved by the adoption of last March’s new Treaty. An even more disturbing thought is that they might even believe their own propaganda. Who knows?

But on the ground, it is crystal clear that the problems continue to multiply. Latest data from the Bank for International Settlements (the central bankers’ bank) shows lending within Europe continues to slow, as the blog will discuss on Saturday. This is not good news for the global growth agenda.

Meanwhile, the blog’s own Boom/Gloom Index remains stalled for a 3rd month at the 4.0 level (blue column) that has historically divided boom from gloom. And the austerity reading (red line) continues to rise.

The Index’s paralysis seems to mirror rising political uncertainty:

• Next Sunday sees the final round of the French presidential election
• Greece votes the same day for a new government
• Ireland votes later this month in its Eurozone treaty referendum
• The USA is entering presidential elections

Equally, jostling for power continues in Russia (after its recent election) and in China (ahead of the politburo changes in October).