Thursday, 29 January 2009

Macro-Level Trends – (Inter)National Industry Support – Default Position Policy-Making

Unquestionably, the world's once stable, secure and safe economic terrain for investors, enterprises, consumers and governments alike has disappeared. For exactly how long is open to debate. So conjecture and countenance is the diet of financial and mass-media as it reports what seems to be the the ever fracturing inter-relate between capital markets' & intermediary agents' 'disfunctionality' and global governments' (individual and collective) reaction.

Governments are obviously trying to fix the component parts of the broken mechanism, to create much needed conditions of calm. Whilst the depth of banking sector mailais still remains unclear due to a lack of system-opacity within the Derivatives sector, governments seek to limit economic and sociological damage via the application of theory and instruments from econometric history and it various multi-school tool-boxes.

Given their first exposure, and near collapse of their respective banking systems, the US and UK took the lead in endeavouring to stem the economic blood-loss and have effectively set the policy template that Europe and much of Asia have drawn from. Combating the spiralling negative forces of liquidity constraint has been the primary task given its importance in enabling a market-derived and market-confident natural 'price-floor' for all (ultimately inter-related) asset-classes and so end the domino-effect of value-destruction so evident over the last 18 months.

The effective underwriting of the financial-sector to in-turn prop-up ever weakening commercial and consumer sectors has become the uncomfortable new norm, but of course given the unprecedented nature of events, the ultimate long-term economic costs and consequences of forced decision-making are being questioned from Washington to London, from Zurich to Seoul. Although a global phenomena, the quickly emergent dominant trend toward self-defense of national interests during these crisis times comes as little surprise, as it tests the limits of the internationalist idealism that emerged during the golden years.

Interestingly, the country to greatest question the philosophy and true cost of such 'default position economic policy-making' has been Germany - well known for its defensiveness stance. From almost the start of the virally transmitted fiscal breakdown, it has been Angela Merkel & Co who have tried to counter possible over-reaction to the crisis.

Recognising that much of Germany's economic achievement to date has been based on the pragmatic conservative values central to the CDU, and the great cognitive distance gained through a hard fought battle to alter the once 'cosseted' mindsets of most Germans, the Chancellor has great cause for concern in following the lead of Bush/Obama, Brown, Sarkozy, Berlusconi et al. To her, their immediate recourse to liquidity pumping their banking systems through tax-payer expense and 'quantitative easing' without having yet ascertained the depth of the spiralling write-down problem seems an anathema.

Instead, to her mind, the banking sector must be forced to 'come clean' about the level of toxicity residing off-balance sheets intrinsically built into the system before undertaking proportionate redress. Having come so far to date via fiscal prudence; given today's fundamental similarity to the conditions that created the unfortunate German experience of the 1930s; and given the essential dichotomy for her party , it is no wonder she and the CDU stood so firm on the matter for so long.

This pragmatic perspective is echoed by ex-World Bank Chief Economist Joseph Stiglitz from this week's DAVOS Forum, and his critical comments on the innate structural weakness of the US economy before the announcement of the pre-Xmas $700bn TARP(+) and recent $819bn Stimulus Package. Germany clearly doesn't wish to slide down a similar slippery slope of fiscal profligacy.

But of course evolving real-world circumstances ultimately dictate action, even if within the constraints of idealised doctrine. And so recognising how the rapidly shifting sands of (inter)national economic policy-making - under-written by the public's blank cheque and with possible resultant (inter)national industrial-base consequences - could ultimately marginalise Germany's position, Merkel has given ground inch by inch via the notional underwriting of German enterprise and via the use of 3rd party proxies so as to simultaneously retain EU relations and not loose credibility.

Hence the announcements of the possible 1bn Euro underwriting of Opel (which sparked a less than credible M&A suggestion) and ongoing negotiations for requested aid to a debt-laden Schaeffler-Continental by Lower Saxony and Bavaria for another reported 1bn Euros. Both regions are bound to come under increased pressures given the recent doom-mongering by VW Chief Winterkorn, probable mootings from Munich's BMW and the parallel precedent of the 'UK Car Aid' initiative.

From the macro-economic perspective, Merkel's giving-ground should perhaps be regarded as a shame. Since this time of crisis could have brought out Merkel's and the Bundestag's strength of character, acting as a needed counter-force and demonstrating that not all political leaders automatically take on a role approximating Chicken Little's fear that “the sky is about to fall-in”. A much needed role given the fractures that have appeared within the structural walls of the EU, most notable between northern and southern regions experiencing different levels of economic contraction.

That fracture is possibly exacerbated by Sarkozy's effort to create a 'Mediterranean Club' which could feasibly divert inward investment and so constrain domestic prosperity within norther Europe. And so counterpart northern peers and traditionally German-associative countries (from Scandinavia to the Balkans to the accession seeking Turkey) may well feel worrisome that Germany's traditional role as the EU's stable economic-leader and economic engine is being eroded and so needs to be redressed before the political CofG moves to the Paris-Brussels corridor. The fear is that implicit political power is starting to subsume the explicit rationale of pure economics.

However, when one sets Europe's macro-economic ideology against Germany's current micro-economic perspective it appears that Merkel has little choice than to follow the pack in utilising the national accounts. The combined forces of the 'liquidity-evaporation' chain-effect and write-to-market accounting rules (destroying S-T & L-T asset valuations) have drastically undermined the commercial capabilities of what were fundamentally strong enterprises; affecting everything from their MktCaps to credit-ratings to debt-repayment schedules. That exposed Germany's traditionally self-defensive and collaborative domestic industry to the ravages of a poorly functioning capitalist system and so left 'wide-open' to hostile take-overs.

30 years ago observers would not have been surprised to witness the Chancellor of Western Germany espouse of the need to maintain support its automotive and engineering sectors with national funds. Countering US and British political orthodoxy, it would was expected given the cultivation of the country's 'sozialmarktshraft' policy attitude over the prior 25 years.
But the prevailing competitive forces of an ever-globalised, integrated world economy prompted by the powerful dual aspects of political change in planned economies & emergence of low cost economies demanded a radical shift in thinking and perspective for the Bundestag. The result was of course GDR & FDR Reunification and an evident sea-change towards the progressive market-directed economic model. A new model that sought to leverage the best of Western Germany's technical leadership allied to the new benefit of 'elastic labour' largely derived from Eastern German migration, provisioned through new flexible labour laws so as to create the 'German Advantage' on the world stage.

Berlin's recognition that fundamental industrial policy needed to markedly 'shift rightwards' so as to allow retention of its No1 position was a hard-fought battle within German politics and its successful prognosis proved vital to a 15 year growth period between 1992-2007.
Today, Angela Merkel & Co find themselves caught between the CDU's free-marketeering yet conservative stance (that underpinned Germany's growth) and the realities of a rapidly and vastly changed world-wide economic terrain.

However, by standing as firm as possible, and not resorting to 'default-position policy-making' it could set the leadership stance the EU desperately needs when the toxic-assets fear-factor finally wains, as many financial market luminaires believe it will over the next 6 months.