Monday January 19, 2009 - 17:41:05 GMT
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The Continental Model
New York and London financial industry jobs have vanished and government
solvency along with them. The New York City and State Governments face extended
years of multi-billion dollar deficits. Britain has the lowest interest rates
ever set by the Bank of England in its 315 year history.
and America bet heavily on the financial services economy. The bet has not
turned out well. The failed investment house Shearson Lehman might as well
represent an entire banking sector that has disappeared overnight. Has
the economic bet on services left the British and American economies less able
to weather the recession? Are economies which retained a much larger
portion of their manufacturing industries more resilient?
the past 30 years the American and British economies have traded their
manufacturing jobs for work in all types of services. The banks,
investment houses and hedge funds of London and New York were only the best
known of an entire services sector that came to dominate both economies.
Services tend to be a knowledge intensive businesses, better able to take advantage
of the information revolution and its efficiencies than manufacturing.
The older labor intensive manufacturing industries were moved to low wage
countries, often by the original American or British firms. Countless
manufacturing jobs from England and the United States were moved to China,
India, Malaysia and other emerging market countries as their firms sought
greater efficiency and profits from lower costs.
economic model practiced in the United States and Britain is often criticized
on the continent and in the European Monetary Union (EMU) for its willingness
to tolerate economic dislocation and unemployment in pursuit of efficiency,
flexibility and productivity. It is called the Anglo-Saxon model for its
supposed rapacious tendencies, with little protection or concern for workers or
those displaced by its creative ferment. The term Anglo-Saxon recalls the
tribes who conquered England and the â€˜civilizedâ€™ Romanized Britons in the fifth
century. The centralized French and German economic systems are the spiritual
descendants of that Roman Imperial model.
France and Italy have been more solicitous of their homegrown manufacturing
firms. Fewer jobs have been moved overseas by their industrial
companies. But has this autarkic tendency helped preserve jobs and
consumer demand within the EMU market and its individual countries? Will
it help them weather the recession?
worldwide recession struck employment first and hardest in the financial
sector. But this crisis is no respecter of economic model or good
intentions. It has hit the euro areaâ€™s three largest economies
forcefully, despite their more extensive manufacturing base.
output in the EMU was negative in eight of the ten months to November last
year. In Germany output fell at an annualized rate of 15.1% in the three months
to November; in France the drop was 14.5%; in Italy 19.5%.
Unemployment is rising, from 7.2% at the beginning of 2008 to 7.8% in November
the last month for which EMU statistics are available. It will go higher in
is falling worldwide. Britain and the United States, the main export
markets for European manufacturers are in a consumer recession. Emerging
markets too are buying less and investing less in their own productive
capacity. The demand for capital goods is down around the globe.
the Eurozone the recession is also being felt in restrained consumption. The
saving rate in the EMU is higher than in the Anglo-Saxon countries but rising
unemployment and the air of pervasive gloom is keeping the consumer out of
stores. European consumer confidence is at record lows. And the
negative outlook is affecting services as well; the December Services
Purchasing Managers Index registered a record low. Services are not
going to rescue the Eurozone economy.
slowdown is driving government deficits higher around the globe and Europe is
again no exception. The budgets of the smaller EMU countries are already under
stress. Standard and Poorâ€™s, the rating agency, has already downgraded the
sovereign credit rating of Spain and Greece and put Portugal and Ireland under
review. Germany officials have said they expect their deficit to be
over the Maastricht 3% limit before recovery takes hold.
European manufacturing sector, larger and to some degree more protected than
the US and British versions has proven to be no refuge from the destructive
forces of the recession and the financial crisis.
ECB has been guilty of similar miscalculation. Until President Trichetâ€™s
admission last July that economic growth was far slower than expected the bank
had maintained a standoffish attitude to the credit crisis. The governors
had preferred to believe that the crisis was the product of lax US regulation
and an overheated housing market. Surprisingly enough ECB comments before the
January 15th 50 basis point cuts had been hinting at a rate pause. The decline
in the euro prior to the cut was clear evidence of market skepticism.
again events have overtaken EMU and ECB official expectations. The
protected EMU industrial model has not saved European jobs. It has not
sustained consumption or consumer spending. It has not prevented a recession.
Trichet has all but promised a rate cut in March. This time the markets
will take him at his word; the euro is still falling.
FX Solutions, LLC
Chief Market Analyst
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