Wednesday, 26 September 2018

Time for Europe to accept relegation

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SwissInvest strategist Anthony Peters recalls simpler times – and suspects we’ll be going back to them

Anthony Peters, SwissInvest Strategist

I MIGHT BE about to attract the wrath of my editor, a keen football fan, but I belong to the community who prefer to watch men in short shorts play rugby to footballing men in shorts which, if they were any longer and baggier, would be skirts.

Nevertheless, Euro 2012 is nearly finished – or will be by Sunday – and many out there think that despite the weekend’s eurozone summit (the 19th since the crisis began) the euro will also be finished before the end of 2012, irrespective of what they appear to agree on.

I can’t remember how many analogies have been drawn since the eurozone crisis began but football lends itself to the comparison.

If I think of clubs whose outgoings exceed their incomes, are populated by people who believe that they are entitled to more than there is available and who don’t care what happens to the future while dismissing traditions which made them great, I don’t think I’m that far away.

More to the point, finding sugar daddies is what makes clubs great and those who live wholly within their means get penalised and left for dead. Take the likes of Manchester City or Chelsea or AC Milan off the financial drip-feed of their owners and they look just like eurozone peripherals – over-committed and underfunded. European football’s equivalent of the Growth and Stability pact is the Financial Fair Play rule – live within your means – but it remains equally disregarded and unenforced.

Does Angela Merkel have the desire to be the Roman Abramovich of the Eurozone League?

An interesting case is provided by Glasgow Rangers, a team with a huge history which has gone into administration. Can a buyer be found? Of course not, because the economics simply don’t stack up and the players want to leave because they are being asked to accept pay commensurate to their talents. If they were as good as the pay packet they take home, they’d not be in administration.

THAT ASIDE, I had a call from a portfolio manager friend of mine who had been invited to sit on a panel discussing the outlook for markets for the next 10 years. He had a set of notes but wanted to float them past me. We appeared to be in consensus that the current socio-economic model is broken and that it needs to be replaced. The time and money which is being spent on trying to keep it going is probably wasted and will most likely be lost.

The underlying economics are simple – with the help of near-endless leverage which was cheaply available to both the private and public sector, demand grew during the boom at a rate which consistently outstripped the natural rate of growth, or trend growth.

Rather than questioning how or why growth was on such a trajectory, the powers that be decided to simply recalibrate what constituted trend growth and all was fine in the garden.

So, my friend concluded, if the economy outgrew itself, then we must now either expect a sharp drop in output and consumption in order to return to the long-term sustainable growth curve or we must flat-line until the curve catches us up. One way or the other, we have a miserable few years ahead of us.

The logical conclusion of this is that if growth is not an option, then austerity is a necessity. That is unless you can, just like a football team, find a sugar daddy who covers your eternal deficit.

But does Angela Merkel have the desire to be the Roman Abramovich of the Eurozone League? While the latter can now show that his Chelsea has won the European Cup, all the former will be able to put in the trophy cabinet is a few million disgruntled taxpayers for whom charity begins at home.

THERE WAS A happy time when football clubs were clubs and not publicly-listed companies, when the players lived in rented rooms and took the bus home after the match – sitting on the top deck with their boots strung around their neck, smoking cigarettes. It cost two shillings and six pence to go and see a match and nothing to ride home on the bus with the centre forward. This was the Greece I knew and loved in the 1960s. Was it less happy?

My friend and I agreed that the key to progressing out of the crisis is in managing expectations. Until citizens can be brought to understand that, the new, more humble paradigm is going to be different – not better, not worse, just different – until then the political class will be faced with an insoluble equation. What continues to evade the leaders is the understanding that they are flogging a dead horse.

If the Premiership didn’t exist and nor did the Championship (that’s what we now call the first and second division in this country), would people go and watch the first and second division (third and fourth to you and me)? Of course they would, because that would be the best on offer – the prevailing benchmark.

When we discover that we must – and can – do the same in socio-economic terms, then the healing process for Europe will begin. But not a minute before.

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