A depressing shade of grey

The German and Greek views of each other have become increasingly polarised over the last few months. The Greeks are “lazy spendthrifts who retire at 50 (women) or 55 (men) and make a national sport of not paying their taxes”, according to many Germans; the Germans are “not following the solidarity spirit of the EU and are putting their national and domestic interests first” if you ask the Greeks.

Stephen King, Group Chief Economist of HSBC Bank Plc, has a different take on the problems in Europe and the western world. Namely, that irrespective of the financial crisis, we would have a problem, due to the inversion of the population pyramid. And that the future is neither bright nor orange but, instead, a depressing shade of grey. The financial crisis may have thrown the problem into focus, but it would have been exposed at some point anyway:

While it’s convenient to blame the financial crisis, we need to dig a little deeper. As Western populations age, we end up with an inverted population pyramid: the boomers head off into retirement while the population of those who are working age shrinks.

But if the boomers’ savings are made up of pieces of paper – claims on future economic activity – and the working-age population is shrinking as a share of the total population, it’s hardly surprising that, collectively, these pieces of paper may turn out to be worth less than they originally appeared to be. If future output is lower than the claims made upon it, those claims will have to be reduced.

And that, sadly, is what we’re seeing today. In the eurozone, we’re witnessing a struggle between those who own pieces of paper – most obviously German creditors – and those who issued pieces of paper – Greek debtors. The Germans legally have a claim on future Greek tax revenues. The Greeks, meanwhile, are discovering their economy isn’t quite as strong as it once was and they’d rather use their – limited – tax revenues for domestic purposes rather than repaying the Germans.

Additionally, he argues that the western nations are collectively suffering from too much debt and that the current low interest rates won’t be enough to help their economies to recover the rates of growth that we have historically seen in the West. He could be right; Japan’s economy has not yet recovered from the property boom and subsequent bust in 1990 despite having had negative interest rates for periods since the bust, and it looks increasingly as if the path the western world is following is similar to that of Japan.

King foresees that the the emerging nations – Brazil, India and China – will increasingly be trading with each other in the future, leaving the sclerotic West more and more isolated.

My guess is that the economic pressures on the western nations will force their governments to pursue national interests more vigorously as they weigh up where to invest the limited resources at their disposal, which could lead to a lot more friction between those nations. Not an encouraging thought if you live in the West.

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