Thursday, 20 September 2018

Successes big and small

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As Germany turns its attention to domestic issues as it rebuilds  a grand coalition, Ireland readies itself to go alone in the cruel world of global finance

Anthony Peters Orig - Aug 2011

Anthony Peters, SwissInvest Strategist

Ever so quietly and over the best part of two months, Mutti Merkel has been chipping away at building a viable grand coalition with her centre-left SPD rivals and, behold, she has succeeded.

Whether she has done more chipping at the SPD or whether they have done more at her and her CDU/CSU majority is a matter of opinion, but we do now have a coalition agreement, signed off by the SPD board on behalf of the membership and ready to tackle the issues ahead.

I suppose the two key “take-aways” for the casual observer are that the coalition agreement is mainly focused on domestic issues close to the SPD’s heart, not least of all the introduction of a minimum wage, a feature quite surprisingly lacking in this otherwise fairly egalitarian and highly vociferously socially conscious society and then the reappointment of Wolfgang Schaeuble as finance minister.

The rest of the news is fairly standard with the SPD boss, Sigmar Gabriel, becoming minister of economics and energy, Frank-Walter Steinmeier re-occupying the foreign ministry which was his in the last grand coalition and some of the more socially sensitive ministries going to SPD members.

The smart news is that Ursula von der Leyen, Christian Democrat, will become Germany’s first female defence minister after previous stints as family and labour minister and that Andrea Nahles (SPD) the new minister of labour and social affairs has caused Joerg Asmussen to resign from the board of the ECB in order to take up a post as a junior minister in her department.

Asmussen’s decision to step down is supposedly for “family reasons” as, according to the official banter, the strain of his commuting between Berlin and Frankfurt was becoming too much. And your uncle! Asmussen is not a central banker but a politician and at the age of 47 has done more than his fair share of career building. His move back into the political arena looks to be carefully planned which will set him up perfectly for his next strategic move towards the front bench. Schaeuble turned 71 at his last birthday. As the Yanks would say, do the math.

Ireland’s exit

Meanwhile, in a small country far, far away….. Yes, little Ireland exited from the strait-jacket of the bailout and is ready to go it alone again in the cruel world of global finance.

However, enthusiasm should be kept under control as none other than the Taoiseach, Enda Kenny, reminded us all yesterday. National debt is sapping at 125%, unemployment remains high and the brain drain is still in full swing. More to the point, as this is the warning for those who believe that Ireland is the first of many, the country suffered a banking crisis but never a structural one in the way that the Club Med did and still is. It has always been a special case and in skipping out of the grasp of the troika it is not setting a precedent for Greece, Spain, Portugal and, truth be told, Italy and France either.

Ireland is the business school case of what happens in a one-size-fits-all interest rate regime where there is no political union and where the fate of small islands half way to the US doesn’t figure in the thinking of the great and the good. However, its predicament also demonstrates the pit-falls of governments believing that rampant fiscal revenues from real estate and consumption taxes and plunging unemployment are all of their own good making. One thing that should also not be forgotten is that what has done more to bring the country to where it now is its generous corporate tax regime, the single feature which its currency union partners would love to dismantle more than anything else.

At 3.44%, Ireland’s 10-year bonds yield around 160bp over German Bunds but only 100bp more than France and around 60bp less that Italy and Spain which are currently pretty much flat to one another at 4.08% yield.

That is good and reflects both the hard work put in by the Dublin authorities and patience and indulgence of the people of Ireland. It also not only speaks volumes about the perceived credit standing of Ireland but of those around it too. Yet, the core of the Irish economy was always sound and the massive dose of salts which has been pumped through the moribund banking system and real estate market has done nothing to alter that.

The Irish broadly speak English as a mother tongue and hence have access to the British, the US and the Australian labour markets like no other. In other words, Ireland is a special case within the crisis-hit parts of the eurozone and to complacently celebrate it as a pars pro toto would be a critical mistake. If its own government and people aren’t whooping it up, nor should anyone else.

So there we are, entering the last full week of the business year. I can’t see anything particular that will light it up and am also prepared to concede to consensus that the FOMC will sit on its hands even if it does repeatedly point to the big stick standing in the corner. Equity markets are struggling a bit of late but as I said last week, we’ve had a good year and it would be nice to enter the New Year with a bit to spare in the tank.        

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