A nasty, irritating little possibility of a full-scale disaster
13 December 2011
I am beginning to think that I may have hidden talents as an economist. It is true that I don’t have much by way of training for the role but have found that my own self taught methods have produced consistently excellent forecasts, and certainly better forecasts than those of Osborne and of the Office of Budget Responsibility.
I hesitate to divulge the secrets of my success, but it is really quite simple. I take Osborne’s own forecasts and knock off somewhere between 25 per cent and 100 per cent. It seems to work every time.
But why this interest in economics? Because law firms do well when the economy is thriving and do less well when the economy is weak. When you are running a law firm, this simple truism matters. So, I am always on the look-out for signs of a slowdown when the economy is booming, and for signs of a recovery when in the midst of a slump. Or at least that is what I used to do. In the midst of this slump I am not bothering to look for signs of a recovery which would be a waste of time.
I am instead looking for signs of a catastrophe – a financial Armageddon that could follow the collapse of the Euro. Is such a catastrophe very probable? No. Is it probable? No. Does it remain an irritating, niggling little possibility? Yes. An irritating, niggling little possibility that the world could still go to hell in a hand cart is one that I would like to see stamped out once and for all, and very soon.
The current Osborne projections for the economy are about three quarters of a per cent of GDP growth this year and next, with something north of 2 per cent thereafter. Using my tried and trusted methods, this equates to GDP growth over the next four or five years of around an average of 1 per cent or less. Not ideal. But we can live with it. There will be a lot of tacking into the wind for the next few years, but we can adjust and get through it.
A financial meltdown, on the other hand, would be a rather different proposition. Mervyn King talks of “unimaginable consequences”. Willem Buiter, Citi’s chief economist talks of “only” a five per cent chance of a collapse of the European banking system and the Atlantic financial system and of a global depression, and of GDP falling by 10 per cent and of unemployment rising to 20 per cent. A 5 per cent chance of all that happening is to me about 4.999 per cent too much.
And so it was that amidst all the furore of Cameron’s veto and Britain’s isolation after Friday morning’s Summit, I was looking for tangible signs that the political leadership of Europe had come up with the long hoped for big bazooka designed to save the Euro and eradicate the risk of financial meltdown once and for all.
I looked in vain. Take the case of Italy and Spain. These two need to find €1trillion over the next two years. It is easy to sometimes forget that although 1 billion and 1 trillion both have a similar ring to them and both sound rather a lot, that one is in fact a thousand times greater than the other. It takes sixteen years to repay €1billion at €1 a second and sixteen thousand years to repay €1trillon. Italy and Spain have two years, not sixteen thousand years.
Merkozy’s medicine is more and more austerity for these economies which will choke off the chance of any growth which will in turn put off the bond markets coming to their rescue, which will in turn mean that the €1trillion needs to come from somewhere else. On this particular subject, we are asked to hope that an alphabet soup of institutions, the EFSF, the ESM (where did that one come from?) and the IMF, some of which exist and some of which are still work in progress, will somehow come to the rescue.
We are encouraged to believe that with fair wind and a bit of luck this lot together will possibly be able to rustle up something close to €1trillion between them to help ease the problems of Italy, Spain and other countries. Hmmm…Not quite the shiny big black bazooka we had all been hoping for to put those nasty bond market blokes in their place once and for all.
So that nasty, irritating little possibility of a full-scale disaster remains.
And what will we do if it does all go pear-shaped? That is the problem. Unless and until it happens, we just can’t tell and my new found skills of economic forecasting don’t really work in such an eventuality. And it may just perhaps be a little bit more of a possibility than one might have hoped, given the continued inability of the politicians to come up with anything convincing. Perhaps they are simply incapable of summoning up the fire power to stamp out the last embers of the possibility of it happening.
I think I will go back to the law, bury my head in the sand and hope and pray that the ECB prints some money. If the worst comes to the worst, I suppose we could live for a while on advising on the legal meaning and validity of all the Euro denominated contracts and insurance in circulation but…
Chris Carroll, senior partner, Travers Smith