Stephen King: We await the day Western nations opt to default by stealth
To continue living beyond their means, Western nations can simply sell their prized assets to those nations with deep pockets
Monday 21 June 2010
I was asked the other day how the Spanish should respond to their crisis. "Easy," I said, "so long as they beat Honduras and Chile, they'll be fine." The World Cup is a tricky old thing. Only a few nations have triumphed. Some have managed to win only when playing on home soil (England in 1966 and France in 1998). Others have won both at home and away (Germany, Argentina and, if we go back to before the Second World War, Uruguay and Italy). Only one team has failed to win at home yet has, nevertheless, consistently won everywhere else. That team, of course, is Brazil.
Over the years, the World Cup has become more difficult to win. In 1982, the number of teams competing in the finals rose from sixteen to twenty four. In 1998, the number went up again, this time to thirty two, where it remains today.
That's hardly surprising. The second half of the 20th century saw the fall of empires and the rise of nation states and, other than the creation of a national airline, soccer offers the best way to advertise your nation state to the rest of the world.
In its early days, the World Cup was almost entirely a European and Latin American affair. Admittedly, there were occasional interlopers. India was supposed to take part in the 1950 tournament although later withdrew, allegedly because of the excessive cost of transporting its team to Brazil, where the competition was being held. South Korea, rather badly bruised after the Korean War, took part in the 1954 competition.
Morocco was the first North African side to compete, in 1970, while Zaire was the first sub-Saharan African nation to enjoy some World Cup action, back in 1974. Only more recently, however, have seeded teams had to face pesky challenges from the likes of the Algerians and Slovenians.
The multitude of footballing nations taking part in recent World Cups is a joy to behold. Of course, if soccer isn't quite your thing, it can get a little tiresome (I can think of better ways of spending a Saturday evening than watching Cameroon versus Denmark, even though I have nothing against either country). But the competition provides entertainment in the most unexpected ways.
We learn from assorted pundits that (i) England will have no difficulty beating the inexperienced Algerians, who hail from a country with sand and no grass; (ii) that Fabio Capello, previously assumed to be a managerial genius, is now a clueless Italian who announces his team selections far too late; (iii) that not a single foreign goalkeeper knows how to cope with high balls into the area, a tactic which England therefore employ with monotonous regularity, game after game and decade after decade; and (iv) that, following their victory against Australia, the German team is clearly made up of footballing geniuses (just before they slump to a defeat at the hands of Serbia).
In other words, the World Cup provides a wonderful opportunity to engage in the stereotypical nonsense that blights our understanding of the world. If England can't manage to beat Algeria, it must be because England are rubbish.
No one seems to proffer the obvious alternative explanation, namely that, on their day, the Algerian team isn't too bad. Indeed, if the finals have demonstrated anything, it's surely that the gap between the favoured teams and the rest isn't so great: competition is hotting up. How else should we explain the defeats suffered by Spain, France and Germany over the last few days?
These stereotypical beliefs are not unique to football pundits. They can also be found in the financial world. Europe's fiscal crisis can be blamed fairly and squarely on those lazy chaps living in Greece and Spain who, through the excessive consumption of ouzo and sangria, have failed to deliver the necessary austerity. Or maybe the crisis can be blamed on the Germans, whose desire for financial discipline is so great that it sounds almost deviant. Or, instead, perhaps the crisis is the fault of the euro itself, a currency arrangement that never made sense and was only created to prevent the French franc from suffering a humiliating devaluation against the German mark.
Yes, it's the same sort of nonsense that you can hear every night on BBC and ITV. And it is best encapsulated in the idea that the Anglo-Saxon world has discovered the secret of everlasting and ever-expanding wealth while other nations will, for all time, be condemned to struggle. For the West, it's a comforting thought but, just like the possible failure of fancied European nations in the World Cup, the thought may not survive the test of reality.
Even if the World Cup itself has yet to be turned completely upside down, the economic world already has been. Western nations are awash with the kinds of debt problems which are more commonly associated with the emerging world. Emerging nations, however, have learnt some harsh lessons over the years. Having borrowed too much in the 1980s and 1990s, they mostly adopted a much more cautious approach over the last ten years, opting for budget and balance of payments surpluses where possible. The Western world, convinced of its innate superiority, simply didn't bother, believing that market forces would solve all problems.
The financial crisis has shifted the goalposts, if you'll excuse the pun. Markets failed and governments ended up picking up the pieces. Huge budget deficits are now creating a new sense of unease. Who will bail out the governments? Will it be taxpayers and public sector workers, who will doubtless protest their innocence? Or, instead, will it be a government's creditors, who could be hit via inflation, currency depreciation or outright default?
If you're an out-and-out Keynesian, you might be inclined to argue that no one will have to bail out governments. If an economy has settled down at a high unemployment equilibrium, all that's required is a fiscal jolt to move activity back to a bigger and better level consistent with full employment (and, in time, much higher tax revenues and, hence, lower government borrowing).
It's a bit like saying that England will succeed against Slovenia on Wednesday so long as they score more goals than the Slovenians: true but rather pointless. The "fiscal jolt" argument assumes that Western economies are entitled to follow a particular economic path, associated with rising prosperity year-in, year-out, just as England are entitled to win against supposedly "lesser" opposition.
If, however, an economy has been persistently living beyond its means for a decade or more, it's difficult to see how Keynesian policies, on their own, will take us back to the Promised Land. George Osborne, the Chancellor of the Exchequer, seems to recognise this: others don't.
Beyond austerity and default, there is another option for Western nations. To continue living beyond their means, they can simply sell their prized assets to those nations with deep pockets. There will surely come a point where investors feel uneasy not just about Greek government paper but also US government paper. After all, the American public finances are also in a complete mess. The West cannot survive on IOUs forever. But which other assets should it sell? Funnily enough, it's already made a start: football clubs are increasingly being auctioned off to the highest bidders in the emerging world. Perhaps it's a sign of things to come.
Stephen King is managing director of economics at HSBC
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