As the crisis in the Eurozone lumbers on, politicians across the continent are under pressure to implement painful austerity measures.
Having surrendered the ability to devalue their own currency, they are forced to find other ways to right their teetering economies within the confines of a single currency.
It does make sense to continue down this path
Morgan Stanley Investment Management
Outside of wartime this simultaneous co-operative process is unprecedented, says Navtej S. Nandra, head of international at Morgan Stanley Investment Management.
“For the first time in human history you have 15 to 20 sets of politicians, central bankers, policy-makers, regulators working together,” he told a recent forum organised by NUS Business School’s Centre for Corporate Governance and Institutions.
“Everyone is in the same kitchen trying to come up with the right solution, and the awareness and agreement that this has to be solved jointly gives us hope.”
While there may be hope, there are also many hurdles. Complicating matters are the politics of cutting pensions and other social entitlements in order to meet budgetary targets. With emotions running high, opposition politicians have the opportunity to use proposed reforms as political leverage.
Meanwhile leaders worried about their own political careers have competing priorities – doing what is right versus doing what is politically expedient. Each country is responsible for its own austerity plan and must show progression and change in behaviour before the money starts to flow.
“Even though you may agree that you’ll get up at 5 am and go for a run every morning, therefore I will give you ten dollars…. the problem is, if you’re like me, after a month you’ll start sleeping until 8 am and stop going for a run in the morning,” says Nandra.
Put simply there is no way of actually enforcing action when you’re midway through the money stream, he says. It’s up to the governments to stick to their promises.
While the cost of bailing out countries is very high, Nandra says the alternative – the expense of watching banks collapse – would be twice as high and incalculably more paintful.
“It does make sense to continue down this path,” he argues, adding that the crisis has shown current financial theories to be quickly outdated or backward looking, designed around the last 50 years of enormous growth – fueled by the US and Western economies – that currently does not exist.
For instance, Nandra says, the International Monetary Fund (IMF), whose purpose is to ensure financial stability has a difficult role to play in this current environment in Europe.
“The IMF worked at a time when the rest of the world was strong and one to two countries were in trouble – because you were depending on the rest of the net to pull two countries up. The traditional approach has to be remodeled to work at a time when everyone else is weak.”
Calling on countries to simply tighten their belts won’t work either, he says. There needs to be a balance between austerity and growth. Leaders are under pressure to rein in national debt levels and obligations, but at the same time need to create growth – without which there will be no excess earnings.
The problem, Nandra says, is how to create growth in consumption or exports? Where do you take that growth to?
The major markets of the world are all inward looking at this time: Europe’s in deep stress, the United States wants its own growth and China wants to develop its own industry.
“The tricky balance today is that you cannot just cut spending and starve yourself in order not to spend money… You also need to invest in growth, but growth requires confidence in the future,” he says.
That’s why everyone is “kicking the can down the road.” The complexity of balancing the competing forces of austerity and growth is at the heart of the puzzle right now. It is a problem he predicts will play out over the next three years.
For the lucky ones that have money to invest, there is still value to be found, but at the micro, not macro level. But for most we are in uncharted territory.
“I actually think many of the people who wrote great books on how to invest would find it hard in these markets,” Nandra says. Most of the literature was written at a time when markets were trending upwards, GDP was growing, company profitability was going up and competitive intensity was lower.
“Today there is slow growth, not a lot of opportunity, there are forces of indebtedness that need to be addressed and there is a cost that cannot be supported,” he says.
“The solution is complex and requires a blend of considered austerity and forgiveness of the duration in terms of when you expect your money back and dampening of spirits and an acknowledgement that that’s okay…because whether we like it or not we’re dependent on each other.”
He predicts the Eurozone will remain intact and says, despite all the doom and gloom, things should be kept in perspective.
“Life is still not bad, that is what I would like to say to these countries: You still have a much better standard of living versus emerging markets.”