Economic frailty not just a Greek concern

In: Uncategorized

15 Feb 2010

This is my comment from this week’s Fund Strategy.

The most amusing event of last week had to be Gordon Brown’s brief appearance on the BBC Newsnight programme. In the space of 30 seconds he found seven different ways of saying that helping to tackle the Greek crisis was not Britain’s responsibility.

Given that Brown constantly evades responsibility for his actions at home it is hardly surprising he wants to distance himself from the Greek crisis. As it happens the financial turmoil in Greece has considerable consequences for Britain whether Brown likes it or not.

It is true that in the most narrow technical sense Britain is not responsible. Since it is not a member of the eurozone it was not party to last week’s negotiations on supporting Greece.

But that is far from the end of the story. For a start there is the so-called contagion effect of Greece on the debt markets. If the markets are really spooked by events in Greece then it is likely to become more expensive for Britain to raise credit too.

This contagion effect itself reflects the fact that Britain’s debt position is not that different from Greece. Although its key debt ratios are not as bad, and its debt has a longer maturity, Britain’s fiscal position is deteriorating fast.

Fundamentally what this reflects is that the economic crisis that hit the world in 2008 was never really resolved. Although the global economy was stabilised its structural problems were not addressed.

Essentially what happened was that the troubled debt of financial institutions was in effect nationalised. Its ownership was simply transferred to the state.

Although this transfer quelled the immediate financial panic it did not resolve the underlying problem of a weak economy. It simply moved the infection somewhere else–to the state sector–and stored up further trouble for the future.

Indeed the financial history of the past two decades can be seen as bubbles inflating as a result of western governments failing to grapple with economic weakness. In the run-up to the Asian crisis of 1997-8 there was a surge to emerging markets. This was followed by the tech bubble which burst in 2000. Then there was the housing bubble for much of this decade followed by the financial crisis of 2008. In each case speculative capital flowed from one area to another rather than being invested in the sluggish real economy.

It is time western governments stopped evading responsibility and started tackling their economic weaknesses at home.

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