29/11/2011 - 09:00

Analysis: The European tsunami heading your way

29/11/2011 - 09:00


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Analysis: The European tsunami heading your way

To understand the frightening dimension of the financial crisis unfolding in Europe you need to do two things. Firstly, think of Indonesia’s 2004 tsunami and how it devoured everything in its path. Secondly, get up close with a personal visit to sense the power of what’s coming.

The tsunami, which flooded and then carried away everything that lay in its path is a powerful image, but it is an accurate one with Greece, Portugal, Italy and Spain on the beach as the first waves hit. France and Germany, are sitting on higher ground, imagining that they’re safe – but not for long.

What’s this got to do with Australia is a question many people far from the action are inclined to ask, but they too will discover that the waves of an economic tsunami reach as far as anything mother nature can concoct.

That’s why I reckoned it was a good time to get a close look at what’s unfolding in Europe and the best place to start with an exercise in economic pulse taking is London, something that some of the world’s most powerful financial managers are also doing.

On the same day that I arrived the man who runs the $400 billion sovereign wealth fund of China, Lou Jiwei, made his presence felt with a remarkable lecture delivered to Europe via a letter to London’s Financial Times newspaper.

What was so extraordinary about Mr Lou’s letter is that it came from a career communist, but could have been written by a professor from the Chicago school of free-market economics. The father of that school, the late Milton Friedman, would probably have given Mr Lou an A, if not for accuracy, then at least for audacity.

The core of Mr Lou’s contribution to the Europe debate was that China stands ready to help, an astonishing acknowledgment that Europe really matters in the fast-fraying global economy, but the secondary message was even more important, because he argues that free-market solutions are the key.

Digest these thoughts from Chairman Lou on how to fix Europe, starting with: “reducing taxes and offering bank loans at discounted rates. These measures will generate demand for equipment manufacturing, put more people on the payroll and cut back on unemployment benefit spending”.

Doubtless he is right, but it is remarkable to see those suggestions coming from a senior Chinese investment official in the same week that much of London looks likely to be shut down by widespread industrial action.

No-one can accuse Mr Lou of entering the debate about Europe’s future because China is panicking. It is probably more a case of seeing how to deploy some of that $400 billion in a way that will generate future earnings by helping Europe and Britain return to growth.

But, before growth returns it will be essential to blow away the air of impending doom which is engulfing Europe and Britain – including, for the first time, a timetable on when the European debt bomb might explode.

According to Wolfgang Munchau, a former co-editor of the German edition of the FT and now an associate editor of the parent newspaper, the D-day for Europe and its common currency, the euro, is December 9, the date of the next summit meeting of European heads of government.

Without a solution to the tsunami-like devastation of country-after-country in the eurozone on that day there is the risk of a “violent collapse”, a theme picked up by other close observers, including Ambrose Evans-Pritchard, who argues that the European: “Dam is breaking. Interbank lending has seized up. Much of the financial system is paralysed”.

Meanwhile, in the land of Oz, a magical place where water flows uphill and the clocks run backward, the Australian Government steams ahead with policies designed to attack business in precisely the opposite way recommended by China’s sovereign wealth boss, Mr Lou.

It is possible that Australia will muddle through the global crisis being caused by most European countries spending vastly more than they earn.

In fact, the view of Australia from London looks so attractive that the investment banking world has added Australia to its latest acronym – a word made up of the first letter of a group of words.

In Australia’s case we are a member of the CARBS, the world’s major commodity producing countries, and good places to invest in a commodity-constrained world. The full membership list is Canada, Australia, Russia, Brazil and South Africa.

Whoever at Citibank conceived the notion of investing in CARBS which, the bank said “make you strong” missed a chance to call his novelty economic grouping the CRABS – which would have made for much more interesting headline writing.

Whatever the name, the Citibank view is that investing in the CARBS makes a lot more sense than investing in Europe, especially as the eurozone debt-bomb is ticking down to its potential December 9 explosion deadline.


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