As in the early 1930s, the shockwaves of the crash, at first confined to those directly involved in financial markets, are painfully touching the lives of increasing numbers of people. The search for scapegoats is becoming more bitter. Today’s hunted bankers cut wretched figures compared with the top-hatted, cigar-wielding plutocrats in Georg Grosz’s caricatures of the Weimar Republic. It is better to forfeit a knighthood or even a bonus than be hanged from a lamppost, but they face the same raw public anger.
Unfortunately, this fury chimes with the widespread but false belief that the rich can pay for all the damage, an idea that politicians – most shortsightedly – are doing little to discourage. The narrowing of the tax base in many countries needs urgently to be corrected; it is barely being addressed.
Immigrant and refugee populations, tolerated during prosperous times, are now seen as both the cause of unemployment and a potential source of sedition. Tolerance, always fragile, is giving way to disapproval. Fashion is becoming more staid; they’re wearing ties again at Davos. Demagogues are gaining ground in a number of countries in Europe – so far, oddly enough, more in the still relatively thriving north than in the suffering south. So far.
The economic debate, in which the proponents of austerity face off against those who see the promotion of employment as the primary duty in such times, would be all too familiar to a revenant from 80 years ago. It is considered bad manners to accuse the inventors of the fiscal pact for the eurozone of not having learnt the lesson of German reparations after the first world war. But the pact enshrines a similar intellectual error, and this needs saying. That it may be necessary to secure German support is beside the point: reparations were essential (with rather more justification) for French support at Versailles in 1919. That did not make them a good idea. Besides, Germany, with its own demographic problems increasingly evident, can no more pay for all Europe’s problems than the rich can pay for the world’s.
The US, winded by the financial crash and its aftermath, and retreating from one of its periodic sallies overseas, is feeling sour and turning inward. The benefits of international projection of American power are never easier to appreciate than when it is absent.
While rising nations rearm, the international order as a whole is weakening, just as it did in the 1930s as the League of Nations became ineffective. The world’s difficulty in dealing with the violent repression of protests in Syria, or with the blatant defiance of Iran, is a painful reminder of this. Modest examples of protectionism are proliferating. They do not yet threaten the world trade order, but the failure of the Doha round of trade talks and the rise of mercantilism in the emerging world suggest not only that the tide has turned but that the west is losing the will, as much as the ability, to impose its ideas. The European Union is visibly losing authority over its member states. Brussels still hosts summits; but it no longer makes policy.
Investment bankers may be in retreat, but ideas – as so often – outlive their progenitors. Financial engineering is still with us, purporting to work its meretricious miracles for governments. Thus there remains considerable faith – even, or perhaps especially, among people who hate bankers – that a financial solution, involving firewalls, bazookas, leverage and improbable amounts of money, can “solve” the euro crisis. It can do no such thing. It can buy time, as the European Central Banks’s deftly enormous interventions are doing by flooding the banking system with cash – but the purchase of time is not costless.
Working to a large extent together, the major central banks are applying palliative care on an unprecedented scale to the world economy. De-leveraging is still in its early stages, and the evil day, or decade, is being put off. This warm bath of liquidity not only helps the financial markets strengthen; it disguises from many of the victims of the crash the extent of the loss of wealth that the crash has engendered. And yet – as we have seen in Japan since 1990 – it is hard for economies to recover strongly until such hits are acknowledged.
Facing up to losses on sovereign exposures may be necessary, but it is deeply subversive; every bank, and every central bank, reposes on the myth of sovereign credit. Since in many societies there will be no alternative but to socialise much of the fallout, we can expect to see state indebtedness in many still solvent countries rising to proportions of gross domestic product much higher even than they are today, and many banks coming under state ownership. Pressure will rise for them to behave unashamedly like state banks.
Right now, for the European political class, the objective of saving the euro overwhelms all else. It should not be the only priority. The most important thing is to ensure that more tested aspects of the EU survive an all-too-possible euro break-up. It was a mistake for powerful people in Brussels and Frankfurt to say in 2010 that a bank defaulting on its bonds would necessarily bring about a sovereign default; that a sovereign default would mean the end of the euro; that the end of the euro would mean the end of the EU. Apocalyptic rhetoric can become self-fulfilling.
At such times the first job of leaders is to do no harm: to ensure that a bad outcome, if it turns out to be inevitable, does not necessarily lead to consequences that are worse still. European politicians are finding their primary aim – re-election – extraordinary elusive. They should take comfort: reputations are not secured by pursuing lousy policies that keep you undeservedly in power in the short term. We do not elect people in order to re-elect them; we elect them to make difficult choices on our behalf. Historical reputations – good or bad – can be more durable, even, than knighthoods.
The writer is chairman of Syngenta and a former chief executive of Barclays
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