Wednesday, 19 August 2009

Putting Money In The Right Places Not Where Your Mouth Is

A study by IAB labour market has concluded that Germany will not suffer the same scale of job losses as the UK. The main reason is that Germany pumped money into wage subsidies which supported employment.

It's more than that. I sit here having spent this and the last few weeks in Germany and it is clear there is a profound difference to the way in which Germany has spent money to stimulate its economy and how the UK has. There are obvious things - Germany and France are pulling out of recession and there are signs that it is sustainable. Germany put money into wage subsidies for firms to help stop widescale, automatic redundancies which has been the first port of call in the UK in response to the recession. Germany and France put around €5bn into the car scrappage scheme to stimulate sales rather than dither over helping mothball factories and then go to scrappage in the UK at a paltry £300m. Angela Merkel pledged €6bn into the wage subsidy scheme but she fought, along with France, the wholesale and unlimited bail out of banks much to Gordon Brown's annoyance in the G20 meetings. The results have been impressive with no huge increase in unemployment and an early exit to the recession while Britain reels at 2.4m unemployed (some say the real figure is 6m) and this will peak at over 3m before the year ends - as yet there is no sign of the end of the recession for the UK.

Germany got it right - we didn't.

Don't React, Think

Another of my New Scientist articles caught my eye. Notice how Government's over react to situations rather than think them through - the soundbite is better than the diligence in most cases as it sustains or wins votes. But you only have to look at Britain's reaction to swine flu to understand we have committed huge resource to try to cover something which could have been contained far more easily and with less cost, and we have simply saved no more lives by doing so. That is one example - another would be how, in the face of a rail disaster we pour millions into rail safety. The result is that we have no more rail disasters in 2008 over 2007 saving a few lives. Meanwhile around 279 deaths happened as a result of trespass and suicides on the rail network in 2008, around the same amount as 60 years ago.

In other words, we tackle the headline, not the real problem costing far more.

We could get onto road saftey but that is its own nightmare deserving far more airtime while all the heightened security, a war with Iraq and spend after 9/11 did not stop 7/7 occurring under our noses. There is now clear evidence that George W. Bush actually got briefed on a threat to hijack US planes just a month before 9/11 and his recation was, 'You have covered your asses, now go.' The subsequent spend on two major wars has got us no further in making us safe - if anything, we are far worse off.

So back to the point. While Germany put specific money like €10bn into education which has to be spent by the end of 2010 on refitting schools or new interactive learning techniques to lay a foundation for the future, Britain chose to put huge sums into bank bail outs without any idea how much was required or when it would stop. In fact, we knee-jerked into taking Northern Rock into public ownership before we had even time to think and then plunged incredible sums into banks and a further £175bn into Quantitative Easing without any idea what the real results would be. Germany and France were right on their game - specific sums for specific effects and no wanton bail outs with incalculable effects.

Guess who is in the better position.

But there is far more. Eminent economists like Kenneth Rogoff argue that we have thrown money at the problem of the banking system with little thought, especially when it comes to regulation. You do not have to be a genius to realise that banks worldwide are now using easy and cheap loans from Governments to fund incredibly high risk debt swap and the likes as they did before but now under the umbrella of taxpayer guarantees should they fail again.

What does it do? Obviously, it will bring vast, short term profits which banks will want to pay high bonuses on - and guess what we have got? Rogoff goes into far more detail but basically he highlights the knee jerk reactionism by the US and UK over Northern Rock and Lehmans as examples of reacting without thinking which has caused a cascade of similar, more profoundly expensive mistakes.

Time and again, we see that Governments react with short term thoughts that have major effects in the long term. Germany and France campaigned against some of the stupidity Britain went for and they have been the quiet, unassuming winners because they put their money into the exactly the right places to get the desired effects.

At the time, Merkel was seen as the ditherer while Brown was seen as the superhero flying from country to country to save the world even if he did inexplicably go through Brazil. Merkel has proved to be right, choosing the thoughtful and precise approach. Brown has a dog's dinner on his hands thanks to his knee-jerk responses to crises. The difference being is that Merkel knows pretty much how much it has cost to get out of the recession - Brown has zero clue and we will pay yet more as banks behave in the same way as before the crisis.

Regulation and reformation of the financial system was the key if £billions were to be thrown at it. We have none and we are faced with the sight of banks paying a thin layer of superstars bonuses that make it look as though we are rich again. Instead we are paying off debts that will last until 2032.

This is not an issue between employer and employee as Darling would have us think, this is about what banks are really earning, what they can sustain and what we have paid them to survive. We are the 'Masters of the Universe' but we need politicians to enforce it. It's our money, after all.

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