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738  23 June 2003   

Don’t waste your
money, Gerhard!

All reports suggest that the German salariat, of the Left and the Right, is panicking at the continuing weakness of the German economy.  Politicians of the Christian Democrat Right are preparing to support the Socialists in approving swingeing tax cuts, in a desperate attempt to stimulate national economic growth.

That will not work  My theory (see Multiple Differential Uncertainty) is that the German consumer is genuinely anxious.  And the Germans have plenty to be anxious about.  Tax cuts would be seen as a confirmation of Governmental anxiety, and would only aggravate the situation.  “If the situation is so bad that Germany needs these tax-cuts, my worries must be justified, so I’ll keep the hatches battened down even more firmly” – that would be the popular reaction.

Consider the German consumer’s grounds for anxiety.

  1. The weakness of the former “East German” economy continues to be a drag upon the totality of the German economy.  Kohl’s integration terms, while admirably idealistic, were also unrealistic, and the Wessies are still anxious about the Ossie Effect;

  2. Germany is now being frozen out of closer relations with Bush’s America: they supported Schroder’s principled stand against the Iraq War, but they are now faced with a rampant, bullying USA, and they are anxious about the consequences of that ostracism;

  3. EU Expansion: as Europe’s “front-line” state, and the contiguous neighbour of many of the new-access Eastern European states, ordinary Germans are apprehensive about the effect of expansion upon their society, its stability and character;

  4. Welfare State: Germans fear the erosion of the generous state benefits which have characterised the last fifty years.  Without significant military commitments, Germany has been free to apply its wealth to civilian purposes, high pensions, generous unemployment benefit, top-class health services; all the indications are that these high-quality services will in future be eroded;

  5. Employment: Comparative evidence increasingly suggests that the heavy protectionism of German labour and trade union laws will have to be substantially watered-down, if economic flexibility is to be increased and if Germany is to become a competitive location for future private investment.

Now – these are all well-founded fears.  None of them is fanciful.  They constitute a uniquely German cocktail of anxieties: I doubt if any of them would figure, for example, in any UK clutch of worry-beads.  Psychologically, the German consumer is therefore vulnerable – and will not be reassured by panicky tax-cuts from the German Government, particularly as they would have to be accompanied by welfare reductions, thus accentuating consumer anxiety still further.  This is a good example of a situation illuminated by my theory of Multiple Differential Uncertainty. 

I do not underestimate the political difficulties facing the German Government.  But to cut taxes would be to pour petrol on the flames of fear. Schroder should be working on those Five Fears direct, chipping away at their resolution,and re-building consumer confidence.  It will be a long, slow haul – and it may already be too late to save the Socialists, at the next Election.   

But nothing else will work.

Do you have any experience of the German consumer psyche?  Drop me a line

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739   23 June 2003  

Watch for Basel II

This is the working-title of global inter-governmental negotiations, all about the regulation of banks.  A rudimentary “Basel I” has proved defective in several respects, incapable of predicting or countering Bank failures.   Banks are vital international institutions, key institutions of the global economy. 

Yet how should their reliability be monitored, regulated?  Who should do the job?  The key control device is the required liquidity ratio.  In relation to its total lending capacity, how much of a Bank’s resources should be held in immediately accessible “liquid” form?  That’s the “liquidity ratio”.  These conventions vary, however, from one country to another, and so international negotiation is fraught with difficulty.  Banking is as much an art as a science, closer to sociology than accountancy.  Further, the ratios differ according to the particular type of banking transaction, and its attendants risks. 

Finally, there is the difficult question of who the regulating authority should be.  Should the Banking Regulator of the Cayman Islands regulate a major bank, just because it moves its Head Office to the Islands?   The collapse of BCCI, so many years ago, revealed deep fault-lines in the present system of regulation. 

Basel II has reached its “Final Proposal” stage, and the Governments are now aiming at implementation by December 2006 – not far to go now, in banker’s time.  Given the fragility of the global economy, the new system cannot come soon enough for me.

What do you think?  Drop me a line

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