Europe's Broken Bismarckian Promise?
During the six decades of generally positive macroeconomic conditions that followed the post WW2 Marshal Plan and Treaty of Paris, the European Union created an integrated legal-commercial bloc that eventually rivaled the United States in terms of economic dynamism while seemingly simultaneously preserving the progressive social model inherited from Germany’s Bismarckian tradition and Britain’s Liberal “welfare reforms”.I've already covered whether quantitative easing is bringing pensions to the brink. With rates stuck at historic lows, pensions are struggling to meet their actuarial target rate of return, taking on more illiquidity risk in real estate, private equity, and investing with large hedge funds that are suppose to deliver absolute returns.
And Germany and the UK were very much the twin engines of European economic growth throughout that period, with the highly innovative and lightly regulated City of London becoming progressively more important than Wall Street for the origination and trading of key asset classes, including fixed income instruments, currencies, derivatives and asset-backed securities.
But things changed abruptly after 2008: European and British policymakers must now confront a series of crises unfolding inauspiciously at the same time.
The unending Euro ‘debt crisis’, the social unrest resulting from the harsh austerity measures imposed by the EU Commission and/or national governments, the newfound (and sometimes not thought out) regulatory zeal of EU lawmakers, with their sudden passion for “financial regulation” and “banking supervision” which comes after years of complacent laissez-faire.
But the most serious crisis is the least visible: Europe’s growing pension predicament means that millions of European retirees now live in poverty, and, more dramatically, tens of millions of European workers are likely to retire in the next ten years with inadequate pension benefits that will leave them far below the poverty line, even in relatively rich member states such as the UK and Germany.
We have to remember that the European Union was established precisely to put an end to an ‘age of austerity’ that lasted for more than five years after the Second World War.
The renewed social contract underwriting that European experiment was founded precisely on the dual promise of generous pension plans and modern infrastructures for all citizens. Tellingly, these basic promises are being broken across most of the European Union today.
Two weeks ago, HSBC Holdings plc, Europe’s leading financial services company and the UK’s largest private sector employer, announced abruptly its unilateral decision to terminate the bank’s generous defined benefit (DB) pension fund from next year for all existing members, an unprecedented move for a firm of that size and likely to inspire other plan sponsors across the EU.
By a cruel irony, a team of HSBC economists and actuarial experts published a special report the same week, showing that most UK workers are not preparing adequately for retirement, with 19% saving nothing at all!
The first age of austerity (1945-1949), often cited by David Cameron and George Osborne as a metaphor for Europe’s current economic circumstances, was a short hiatus: the Marshall Plan and the Treaty of Paris (from which the EU was derived) rapidly restarted the European growth engine.
This is unlikely to happen this time around as the United States is unable (“Fiscal Cliff”, “Debt Ceiling”) and unwilling to ‘bankroll’ the rest of the world, the European Union is divided against itself and exposed to severe demographic, macroeconomic and fiscal pressures and, more importantly, the energy and commodity producing nations of Latin America and the Arab world are no longer ruled by pliable “comprador” technocrats eager to please the West by adjusting supply to the economic cycle of Europe and America.
All this is happening at a time when the European Central Bank and the Bank of England are pursuing a particularly hazardous monetary policy (the “quantitative easing” series), in essence keeping interest rates at artificially low levels for an extended period of time.
This has a doubly negative impact for pension funds and pension beneficiaries: several consecutive years of lower returns for the fixed income asset class as a whole will further widen the pension funding gap in the medium-term, and, in parallel, rampant inflation will erode salaries in real terms (a fact recently recognized by the Office for National Statistics in the UK), forcing workers and pensioners alike to dip into their savings to pay for food and fuel.
Indeed, QE has been a boon for the world's wealthiest individuals, including elite private equity and hedge fund managers, many of whom now count themselves among the world's richest billionaires. But QE has decimated the retirement accounts of millions in Europe and the United States who now face looming pension poverty.
However, as the titanic battle over deflation rages on, the world's major central banks have been engaging in quantitative easing (QE) to fight rising fiscal austerity which threatens to augur in a new depression. This juxtaposition of easy monetary policy and tight fiscal policy has been a controversial topic between those who believe we have a "debt crisis" and those who believe we have a "jobs crisis."
I'm firmly in the latter camp. The zealous focus on cutting debt threatens to kill the hopes, dreams and aspirations of another lost generation struggling to find a decent job with good benefits. It's a sad statement of our society when young adults in the US are flocking back to their parents' homes amid a sluggish economy. The situation in Canada is worse and in Europe it's a total disaster as youth unemployment keeps on swelling well past depression levels.
Worse still, dysfunctional politics everywhere means there is no coordinated response to tackling the global jobs crisis. Sadly, financial markets are now discounting ongoing dysfunctional politics. It's as if we've come to accept mediocrity from our political leaders as the standard norm.
And yet despite all the political rancor, I'm still bullish on America and believe Europe will slowly work through the structural headwinds that have plagued its fragile union in the last few years.
But as developed economies work through their growth challenges, some worry of a much bigger bubble that threatens global growth. Below, CBS 60 Minutes' Lesley Stahl reports on China's real estate bubble. China's move to pop the housing bubble is driving down shares, by a lot. Definitely something to keep a close eye on but I'm more concerned about London's property bubble and Canada's perfect storm.