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Wednesday, 18 October 2017

Reality cannot compete with expectations

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Those amongst us who were watching the post ECB Central Council Meeting press briefing yesterday will surely remember the experience for a long time to come. Not that St. Mario knocked the cover off the ball by confirming or denying anything in particular but it will remain in the memory for the elegant leap by a young feminist protester, Josephine Witt, onto his desk, disrupting proceedings while spraying him with confetti and calling for an end to the dictatorship by the ECB. Well, it certainly helps to keep the faces of politicians safe from raw eggs and custard pies.

On one hand bankers of the investment and commercial variety have been pilloried over the past eight years as the most evil men since Judas Iscariot while their counterparts of the central variety have generally been awarded wings and haloes. One of them, in my book, has even been sainted. And yet, yesterday, Sr. Draghi found himself subjected to both physical and mental abuse. How Miss Witt got into the press conference is a different matter entirely but why would any Northern European – she is neither Greek, Spanish, Portuguese or Italian – feel the need to attack the man widely credited for making sure that most Europeans have jobs and that those many who don’t still have bread on their tables?

The answer to this one, though easy to find across the West, is on the front pages of British papers for all to see. The governing Conservatives have long tried to make a virtue of living within ones means. Let’s briefly forget whether they have succeeded as we all know that the bark was fiercer than the bite. The simple fact is that with a message of fiscal responsibility the Tories have lost market share. On Tuesday, David “call me Dave” Cameron launched his party’s election manifesto with a totally changed rhetoric. Suddenly it was all about more spending on this, more spending on that and whatever they can spend, we can spend more.

The Conservatives have had to bow to the simple reality that past records count for nothing at election time and that it is headlines trumpeting promises of endless streams of cash for healthcare, education and the environment that win votes.

Election campaigns and fiscal reality are not happy bedfellows.

The Office for Budget Responsibility is supposed to be the independent body that puts the government’s projections through the abacus in order to declare whether the figures – which are the starting point for all parties’ projections – offer anything close to the ring of truth. Last night, it was the figures of the OBR itself which were brought into question as the IMF stated that it thought the boys at the OBR were being wildly optimistic in terms of their forecast for UK growth and hence fiscal revenues and that therefore the main parties’ forecasts for their arrival at a balanced budget were pie in the sky.

What has this got to do with Miss Witt and Sr Draghi you might ask? It might sound as though I’m having one of my hours as a grumpy old man – some suggest that I have fortunately limited myself to 24 of those a day – but the problem the eurozone and the ECB have to deal with is not as much the reality but the expectations which have been created amongst the population and hence the disappointment and frustration that they are not met.

The introduction of the single currency was supposed to usher in a brave new world of eternal economic growth, higher standards of living, better education, better healthcare, cleaner energy, permanent snow in ski resorts and a rain-free seaside.

The political DNA of the EU seems to contain an axiom which insists that everything is for the best, and suggesting otherwise is tantamount to high treason. Admitting that there might be a blemish on the body will surely destroy the whole edifice and force it down a black hole which will call the end of time.

Thus, citizens have come to treat their standard of living and levels of care as a birthright. They might be happy to make their contribution but should there be a shortfall, expect somebody else to make up the difference. That someone, currently, is the ECB.

For a long time, maybe too long, the ECB resisted the call for it to do the politicians’ bidding, but in January it succumbed to the need for urgent intervention – and was roundly criticised for doing too little, too late. Well, maybe not too little, but certainly too late.

In Shakespeare’s Julius Caesar, Brutus and Casca declaim: “The crown was offered to him three times?” “Yes, indeed, it was, and he pushed it away three times, each time more gently than the last; and at each refusal my countrymen shouted.” And yet Caesar was slain.

The ECB must have refused the crown more often than thrice. Funnily enough, Marc Antony’s famous speech “Friends, Romans, countrymen, lend me your ears” actually reads remarkably well if one substitutes “Caesar” with “ECB” and “Brutus” with “European Council”.

We have known all along that the European political class handed the ECB a hospital pass and, in my humble opinion, it deserves the Nobel Peace Prize and the Nobel Prize for Economics for the way it has handled the situation so far. Actually while thinking along those lines, for defying gravity, it might deserve the prize for physics too.

Europe and its people are not suffering from a lack of performance but from an excess in expectations. The late Margaret Thatcher, reviled and adored in equal measure, made her mark above all by bringing down expectations of what the state could and would provide. Thus, in some respects, the UK came through the GFC and its aftermath more in line with the US than with the EU.

Cameron vowed to stay the course but he has, once again, panicked and promised the moon and the stars as he did in the run-up to the Scottish referendum. I wonder who performed the surgery which implanted in him the backbone of an earthworm?

If, as and when Greece finally admits defeat, the ECB will be asked to shoulder the blame (along with Wolfgang Schaeuble) perhaps it will be time to read some of the backcopies of the papers in order to remind oneself of how Greece got into its current mess.

Other than those who advised the Athens Treasury on how to use swaps in order to defer bad fiscal news – I recall the name of Goldman being mentioned – all the protagonists were home grown. Can one blame the Germans, the Finns and the Dutch for actually believing what they were being told by people they trusted? Can you imagine the uproar if Greece’s inclusion in the single currency had been accompanied by the insistence that German auditors were to be placed in the Ministry of Finance in Athens? Do me a favour.

Miss Witt might be misguided but I’m not sure that she alone is to be blamed.

Apart from that, the US yesterday delivered yet another set of weak numbers, not least of the Empire State Manufacturing Survey which had been slated to report at 7.17 but flopped in at –1.19. On the back of that, markets went up and down though not entirely in that order. Equities continue to trade as though they are about to run out, just like Bunds.

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