May 28, 2012
In football, there is the following expression: he reads the game well. All good players read the game well. The same goes for rugby. Today, you will hear commentators say about Brian O’Driscoll that he reads the game.
This means that Drico can see where the game is going, where the next play is and how to either deal with it or seize the opportunity. In soccer, the player who reads the game knows where the ball is going next. They used to say this of Roy Keane. It is the same for all major sports.
Many years ago, I spent a summer working in Canada, where the national hero at the time was Wayne Gretzky, the brilliant ice hockey player. Gretzky was so good that, when he retired, his number – 99 – was retired from all North American professional hockey teams. His most famous quote followed a simple question from a commentator about why he was so successful.
Gretzky didn’t even think, he just responded as if it were the most simple thing in the world: “I skate to where the puck is going, not where it’s been.”
Our politicians and those who negotiate for us, whoever they are, would do well to listen to the sportsmen. Head to where the ball is going, not where it’s been.
The European financial and economic ball is moving and the fiscal treaty is all about where the ball has been. By focusing on this treaty, we are like footballers worried about where the ball is now, rather than where is it going next.
Where is the eurozone going next? Well, either it’s going to break up or it will head towards further fiscal integration.
Of the two, fiscal integration is a bigger threat to Ireland. Why? Because our low tax rate goes with it. Make no mistake. The price of fiscal integration has to be tax harmonisation. That’s the way it works.
We can kiss goodbye to the one part of this economy that is truly globally competitive.
Forget the workforce and all that stuff. The reason companies are here and not in Belgium or the Netherlands is because we give them a reason to be here – tax. The new French administration is already targeting it. Wait until we sign up now and see where this is leading us.
If I were a foreign investor, I would be much more worried about Ireland being subsumed into a great European tax bracket than anything else. Maybe the investors who have signed up this year are betting that when push comes to shove, the Irish will opt out the day the Europeans insist on tax harmonisation. I agree with them.
But if this is our position, then we should be preparing for it because this is where the ball is going.
However, the ball will not travel smoothly from A to B.
In contrast, the past week has heightened the sense that the euro will break apart. The focus of attention right now is Spain and Bankia, Spain’s Anglo, which is following the same pattern as our banks, but in a much shorter time frame. Every time the bank ‘fesses up, its losses are greater than it had admitted before. We have seen this pattern.
The core of the problem, which is sometimes overlooked, was highlighted in the Financial Times last week by the brilliant writer Gillian Tett. She looked at the huge interbank loans that were the result of the first ten years of the euro. Banks all over Europe loaned to other parts of Europe and other countries.
When the currency was not in doubt, the people who manage risk at banks (I know, don’t take these guys too seriously) were happy to have a liability in Germany and an asset in Italy.
So, if a German bank lent to an Italian bank, the asset was in Italy and the liability in Germany. But now, in what is called asset liability matching, or ALM, banks want to match their asset and liabilities in the same country. So if a bank has loans in Italy , it will want to also have its liabilities in Italy because it is worried about the euro falling apart.
Now no one wants to lend cross-border – the only way that banks can square these positions is by deleveraging in the periphery. This means squeezing the economies more. This leads to less and less credit and more and more unemployment. The IMF estimates that, over the next 18 months, this will happen to the tune of $2.6 trillion. They will take $2.6 trillion out of the European economy.
This is a huge amount of money. Let’s just get a handle on how big it is for us, the citizens, trying to get finance. It is 26 followed by eleven zeros. If you were to spend $1,000,000 a day it would take you 7,123 years to spend $2.6 trillion. That is what this means. At today’s exchange rate of the euro to the dollar of $1.25, it would take 5,698 years. So it’s a lot of bread.
As a good proportion of this money will flow out of the periphery, the rate of unemployment will rise again and again. This is when, eventually, the lender of last resort will be Germany and the periphery of Europe will be one large economic zone that is sinking.
This is when the Germans have to properly consider the notion of “peripheraid”. Peripheraid is where the eurozone is going.
Peripheraid is the ongoing infusion of German cash to the south and the west. It will have to work the same way as the Italian state has operated in the past 50 years where the north subsidises the south of Italy. The German people, at some stage, will say enough.
Last weekend, I was in Munich. I spoke to lots of Germans. Bavaria is the richest part of Germany. Unemployment is below 3 per cent. The people have no idea what is going on in the rest of Europe because their circumstances are so different. However, when asked about the euro and the ongoing crises, they responded that they wouldn’t pay indefinitely for the rest. They understood that they were huge beneficiaries from the euro, but they also understood that they are now Europe’s ATM machine.
This is where the ball is going. Break-up is the most likely solution and some sort of two-speed Europe will emerge. The fiscal treaty is already redundant. No peripheral country will make these targets in the face of the huge deleveraging and, in the end, we will break our own laws.
We are in a game of poker where everyone has their price. The thing about poker is you have two minutes to figure out who the fool at the table is. If you haven’t figured it out in two minutes, the fool is you. Why fold now, when the game is only beginning?