Summer Reading

I'm off to Cornwall at the weekend with the kids, so I need to choose a few books for what I hope will be a relaxing week. I've already got a copy of Hunted by fellow Curzon-ite Emlyn Rees, The Big Short by Michael Lewis, who I know a bit from our work on Bloomberg, and American Pastoral by Philip Roth, who I have got back into since attending the Man Booker Prize dinner a few weeks ago in his honour. That seems like a pretty good range - some light fun, some art, and some serious stuff.

Hopefully a fair number of people will be taking 'Shadow Force' with them on holiday. I think of my own books as summer reading. But what makes a great story for the beach?

I think it needs a number of qualities. It needs a rattling good story that grips you from start to finish. It needs some jokes - no one wants to be too downbeat on holiday. It needs some escapism - a holiday is all about getting away from things, and we want a book that does that as well. But it also needs to tell you something serious, and educate you in some way, because a holiday is one of the few chances we have to fill gaps in our knowledge.

I try and touch all those bases in my own work. And I always keep in mind that that is the recipe for a great holiday read.

The History of the Greek Crisis

I've done a piece of History Today about the Greek debt crisis. You can read it here.

Invest in Stable Democracies....

In my MarketWatch column this week, I've been arguing you should invest in stable democracies - there are more of them all the time. You can read it here.

The IMF Isn't Worth Any More Money

On RealClearMarkets this week I've argued that the IMF shouldn't be given any more money. You can read the piece here.

Sterling Will Fall Again....

I've made my debut as a Huffington Post blogger this week with a post on sterling. You can read it here....

France Will Be the Next Eurozone Victim

In my Money Week column this week, I argue that France may be the next country to fall to the euro crisis. Here is a taster.


The euro debt crisis increasingly resembles a teen horror movie. As soon as you think it is all over, the monster springs back to life. There is an unlimited number of sequels. And it usually ends up with a bloodbath.
This week it was the turn of Italy to be in the spotlight. The country’s bond yields started to spike upwards, a serious issue for a nation that has vast debts to pay the interest on. After flying under the radar for much of the crisis, the Italian debt market looks close to unravelling. Spain is coming under increasing scrutiny as well. It might well be next.
But in fact the markets are looking in the wrong place. True, there is plenty to worry about in both Italy and Spain. But the real testing ground for the euro is going to be their northern neighbour, France. It too is struggling to stay in the euro – and it, far more than Italy or Spain, has the potential to trigger a financial meltdown. France matters to the global financial markets far more than any of the other euro countries in trouble.
Monetary union was, of course, largely a French idea. The country’s industrial and financial establishment had long been unhappy with floating exchange rates. As one of the major exporters within the European Union, they could see that constantly shifting currencies made life very difficult for their companies. While Germany primarily exports to the rest of the world, France is a euro-zone manufacturing hub. A fixed currency system was very much in its interests. Indeed, one interpretation of the creation of the euro was that it was a deal between the French and the Germans: the Germans accepted merging their currency with France’s in exchange for French support for the re-unification of Germany after the fall of the Berlin Wall. It is ironic, therefore, that it isn’t working out the way France planned.
Could France seriously have a problem staying in the euro? After all, it is a big, successful economy. It is not a peripheral nation like Greece or Portugal, neither of which ever really industrialised, or a chronically financially chaotic country like Italy. Then again, Ireland was a successful, wealthy economy, and that didn’t stop the country going bust as a result of monetary union.
In reality, France is steadily losing competitiveness within the euro. That was confirmed last week with the latest trade data, which showed a widening deficit. The April trade gap rose to 7.42 billion euros. The UK, by contrast ran a deficit of £2.8 billion or 3.1 billion euros in April. The French deficit now amounts to 3% of GDP, and has been hitting fresh records month-by-month. France’s trade deficit with Germany, its main trading partner, is now one billion euros a month. “Within euroland, France is losing competitiveness to Germany, and it has no option for devaluation to help itself out,” noted Hi-Frequency Economics in an analysis of the figures. “A potential rift between France and Germany on trade would be a far more serious challenge to EMU’s political fabric than a disagreement over how to restructure loans to euroland’s second-smallest economy [Greece].”
Indeed so. There is no great mystery about what is happening. French wages have been rising at a faster rate than German wages, and their productivity is not as good. The country is steadily becoming a less attractive place to make things.
The important point is that persistent and rising trade deficits are clear evidence that France is struggling within the single currency in precisely the same way as the Greeks – it’s the same explosion, just with a much longer fuse. As it runs bigger and bigger deficits, the money will have to be re-cycled through the banking system. Eventually that will lead to a financial crisis.
It may happen sooner than anyone thinks. While a country such as Italy has a greater stock of out-standing debt, France is racking up new debts at a far faster rate. Last year it ran a deficit of 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012 according to estimates by Capital Economics. That isn’t exactly running out of control – but it is getting very close.
There are other problems on the horizon. A Presidential election is due next year. That may turn into a competition for who can make the most extravagant promises. And the far-right National Front leader Marine Le Pen is pledged to bring back the franc. If she continues to do well in the polls, then pulling out of the euro will be on the agenda. That is not true of any other euro area country, not even Greece.
At any point, the bond markets may well take fright. They will start pricing in the possibility of France pulling out of the euro, or defaulting on some of its debt. Yields on French debt will start to spike upwards. And that will be the point at which the crisis turns scary.
While Greece, Portugal and Ireland don’t matter very much to the global capital markets, France does. In fact, it matters much more than Italy and Spain. It has $1.7 trillion of outstanding public debt, making it the fourth largest debtor in the world, according to data from the Bank for International Settlements. (The US, Japan and Italy are ahead of it). That debt is widely traded – 37% of French debt is held internationally, which is a lot more than Italy (24%), the US (19%) or Japan (1%), again on BIS figures. In truth, French bonds are held by institutions right around the world and have always been regarded as rock solid.
On current trends, that will have to change. France can no more survive in the euro-zone than Italy or Spain can. At some point, the bond markets are going to wake up to the problems in France. They are going to get very nervous about French debt, the same way they did about Greek and Portuguese and Spanish debt. They will start marking down the bonds, and factoring in potential default. But if that happens the losses to the financial system will be very nasty indeed. The euro was created in France. It may well be in France that it starts to finally unravel as well.

Launching Onto Kindle....

The Kindle is a fantastic device for readers, but it potentially is even more interesting for writers. It isn’t so much the ability to reach readers directly, as the opportunity it offers to try out new forms. The publishers and the bookshops are all focused on the 100,000 word book. But there are lots of other ways of writing things.

I’ve just launched by first short story on Kindle. It’s called ‘Lethal Force’. It would be free, but Amazon won’t let me give it away, so instead it is 71p. It will be free in iTunes just as soon as I can get Smashwords to give it an ISBN number and get it up. Take a look, you might enjoy it.

But it isn’t just short stories that can find a home on Kindle. There are other forms of writing as well.

I already have one idea, which I’m working on right now. Watch this space…..

The British Monetary Union Isn't Working Either....

In my Money Week column this week, I've been looking at the the UK as a monetary union, like the euro....and concluding that doesn't work either. Here's a taster.


What does the euro need to make it work better? The most common answer is that it needs to be turned into a fiscal union, with large-scale transfers from the richer regions to the poorer. It is the conventional wisdom of every editorial, and City pundit. Until it becomes a ‘transfer union’ it doesn’t stand a chance of succeeding.
A caveat or two is usually thrown in. The political obstacles are formidable. The Germans might never agree to their taxes being sent to bail-out Greece or Portugal. The treaties might need to be re-written, and that would require the agreement of all the European Union’s members. Still, if only those obstacles could be overcome, a fiscal union would smooth out most of the problems.
The trouble is, no one seems to have stepped back and questioned the fundamental assumption. The evidence suggests it may well be wrong. Europe has another monetary union between countries at very different stages of economic development. It is called the UK, and the currency is sterling. Reverse the polarities – the UK has a rich south, and a poor north, rather than a rich north and a struggling south – and the sterling area has many similarities to the euro area. It is made up of group of countries with very different levels of prosperity. And it has huge transfers between the richer regions and the poorer.
And the result? It doesn’t do any good at all. True, it holds the currency area together. But it only does so at the cost of creating regions that are ever more dependent on state aid. The truth is, a transfer union won’t save the euro even if it was politically feasible. Nothing will. The project is doomed.
That doesn’t stop people from trying, The most common critique of the single currency is that is an economic union without a political union. George Soros has argued for a year that without a single government the currency won’t survive. The President of the European Central Bank Jean-Claude Trichet has called for a European finance ministry.
The UK’s experience, however, suggests that even if it happened, it wouldn’t work. Britain used to be a fairly homogenous economy, with wealth relatively evenly spread out across its major industrial centres, much as it is in modern Germany. Not any more. Post-industrial Britain has a very, very prosperous capital, surrounded by equally wealthy suburbs. The Midlands and East are doing fine. The rest of the country has been falling behind at an increasingly rapid rate. The result is that there are huge disparities between output per head in the South and Wales, Scotland and Northern Ireland. It isn’t quite as dramatic as the gulf between Germany and Greece – but it isn’t that far off.
That gets fixed by fiscal transfers. The UK, which has of course a single government, and single finance ministry, shuttles large sums of money from the richer regions to the poorer. Oxford Economics, the consultancy firm, has calculated the amount the British government spends per person employed – per taxpayer, in other words - for the different parts of the country. In the prosperous South-East, the government spent £14,100 per working person. In Northern Ireland, it spent £21,200. Wales, Scotland and the North-East were all way above average. The East, East Midlands, and London were all below average – although London, which has pockets of real poverty amidst its wealth, not by as much as you might think. It also looked at expenditure relative to gross value added, that is the actual output of the region. Taking the average for the UK as 100, Northern Ireland scored 155 and the South-East just 84. In other words, a lot of the wealth from the South-East gets sent to the ‘periphery’.
The UK is, therefore, a monetary union with very significant transfers between its richer and poorer regions. The trouble for the euro’s would-be fiscal unifiers is that there is very little evidence that it fixes the problem. Northern Ireland for example has had a consistently lower growth rate than the UK as a whole – this year, it will grow by 1.1% compared with 1.7% for the UK according to estimates by Northern Bank. Much the same is true of Wales and the North-East. The regions with the biggest fiscal transfers have grown consistently more slowly than the rest of the UK, with the result that the ratio of state spending relative to their local economies has grown steadily over time. Between 1999 and 2010 state spending rose from 50% of the Welsh economy to 69%, according to calculations by the Centre for Economics and Business Research.
Fiscal transfers can hold a monetary union together. There is no sign of the sterling area breaking up, although the Scots might eventually decide to go their own way. But they won’t close the gap between the richer regions and their poorer neighbours. They are a permanent subsidy – and one that will probably grow over time.
If anything, the fiscal transfers probably make the problem worse. They crowd out private investment – after all, why would anyone in Northern Ireland set up a business when they are relatively few industries where it has much strength, and when they could just get on a plane to London, or else get a secure job in the public sector? It creates whole regions where the fiscal transfers are the only thing that keeps the economy afloat.
That just about works in the UK. It has been a unified state for several hundred years, and has close ties of language, culture and family between its regions – although it remains to be seen whether the Tory voters of the south-east will accept the deal forever. But it is very hard to see it working for the euro zone. Voters in Munich and Eindhoven already seem outraged by paying for the Greeks and Portuguese. When they get told that the transfers are permanent, and will rise steadily over time, they will surely refuse to pay. The scary truth is that even the one plausibly fix for the euro crisis doesn’t work.

How The Euro Will End....

How will the euro actually come apart. I've been exploring that in my Market Watch column this week. You can read it here.

Greece Isn't Lehman Brothers. It is Worse Than That...

In my Money Week column this week, I've been writing about why Greece is even worse for the markets than Lehman Brothers. Here's a taster....


If the Greeks had a euro for every City analyst and financial reporter who has solemnly warned that the country’s debt crisis risks being ‘another Lehman moment’ for the financial markets, their economy would probably be in far better shape than it is. It has become the most over-used cliché of the last few weeks – and like every tired cliché, simply shows that the people using it have stopped thinking clearly for themselves.
In truth, the Greek crisis is nothing like the Lehman collapse. It is far worse than that. Lehman was a short, sharp shock for the global markets, and although it caused massive damage to the global economy, it was over relatively quickly.
The sovereign debt crisis, by contrast, is going to be a long, drawn-out and messy affair, with no clean resolution. It will depress investment, economic output and equity market for years to come.
Over the course of the last week, the Greek crisis has prompted a global sell- off in every kind of asset – and rightly so. The government of the beleaguered Greek premier George Papandreou looks on its last legs. The Germans have been wrangling with the European Central Bank over the terms of a fresh bail-out. Protestors have been marching across Greece, fighting yet more austerity. There were certainly reasons to fear that Greece might be forced into a sudden default – and that would pose huge risks for the European banking system. Greek debt is hidden on balance sheets right across the financial system. No one really knows where the losses will come out.
Even so, it is nothing like Lehman Brothers. When the Wall Street investment bank collapsed in 2008, the US Treasury and the Federal Reserve had no real idea it would pose a systemic risk to the financial system. If they had, they wouldn’t have let it go down. They would have stepped in to rescue it instead. The crisis it provoked was largely unexpected.
That isn’t true of Greece. Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy are well aware of the threat a Greek collapse poses to the financial system. They aren’t going to let it happen until their experts have reassured them their banks can survive. After all, they aren’t stupid. They are not going to let their financial system blow up. If they have to find a few more tens of billions of euros to prop up their wayward southern neighbour for another year they will. It’s better than the alternative.
There isn’t going to be a sudden collapse. The risks are all flagged up, and everyone will work hard to avoid them.
The trouble is, Greece is just the tip of a much larger iceberg. The sovereign debt crisis is going to depress economies, deter investment, and keep a lid on assets prices for a long time yet.
Greece has been running massive budget deficits for years. So have most of the other peripheral countries, such as Portugal, Ireland, Spain and Ireland. France shows very little sign of getting its deficit under control. Neither does the US. The UK is making some progress, but lower than expected growth means we are unlikely to meet our targets. The sovereign debt crisis is not just a Greek issue. It is hitting most of the developed world.
That is going to impact the markets in three ways.
First, it is going to depress economic growth. There is only one real way to bring deficits under control, and that is to make deep and painful cuts in government spending. Nothing else works. But as governments everywhere scale back on their expenditure, growth is going to be hit. Over the medium-term, a smaller state allows the private sector to grow faster. It is a mistake to fall for the simplistic Keynesian mistake of thinking state borrowing and spending promotes growth. It doesn’t. Cuts allow the economy to grow faster – eventually. But it takes time for that to happen. And in the medium-term, the economy will be more sluggish than it otherwise would be.
Next, the debt crisis is going to deter investment. Who would want to build a new factory or sales office in any of the peripheral euro-zone countries right now? You have no idea what the economies will look like, or even what currencies they might be using in three or four years time. You are likely to face years of grinding austerity programmes as governments struggle to stay in the euro. And yet investment is the lifeblood of economic growth. If companies don’t invest, then economies are not going to be able to grow.
Finally, it is going to depress asset prices. For all the reasons outlined above, the debt crisis is going to slow global growth. That is bad for just about every class of asset, from equities, to bonds, to commodities (although probably not for gold, which is usually the one clear beneficiary of a monetary crisis). Clearly enough, that is going to depress the markets as well. But it is also means investors are going to be very cautious. The constant threat of defaults, the worries that it will lead to a fresh banking crisis, and the nervousness over which country is likely to be targeted next, will all make any kind of bull market very hard to sustain. And the lower asset prices are, the lower growth will be as well.
In many ways, we’d be better off with a Lehman moment. A quick, sharp crisis that ended with Greece defaulting on its debt, re-establishing its own currency, and one or two over-exposed banks being bailed out, would be better than a saga that drags on for years with no clear resolution. But it isn’t going to happen. The global economy suffered from the Lehman collapse – but was able to start recovering the following year. Unfortunately, this crisis will take far longer to resolve.