The developed world is struggling to break out of a vicious circle. Living beyond their means has become the main problem of European governments. When the euro was created, the Continent did away with the borrower of last resort, i.e. with the central banks of sovereign states with a sovereign currency. Of course those currencies tanked when the governments concerned ran up large deficits, but the sovereign debt was paid back—admittedly in a depreciated currency but without defaulting (we are referring here to developed Europe). Requiring the euro zone members to comply with the Maastricht rules, it was believed, would provide enough convergence to ensure stability. The mistake was in accepting the lies, cheating and skewed national accounting.
Companies, including banks, have to comply with strict accounting standards. Governments tried to put themselves above all that, and everybody knows what happened. Plenty of blame can be laid at the doorstep of politicians. By pledging benefits that they know full well they won’t be able to deliver once in office, they buy people’s votes (and thus engage in a form of clientelism). They spend their entire term worrying about getting re-elected and don’t do a lick of work for the common good. They are like parents who promise their children extravagances while knowing that they already cannot make ends meet. Living in a world far removed from everyday cares and having no notion of how to budget since all their expenses are paid, they behave like mythomaniacs. Yet a government is like a household: it may have more possibilities but it also has its limits, which though much greater still exist. And once they have been reached, either there is a collision or drastic steps have to be taken to avoid one. The inevitable result is a poorer country.
We will stick to the situation of Europe here, since that is our focus. It is saddening to hear what the EU politicians say. They would have their good citizens believe that the billions they need to balance their budgets are stashed away in banks. But banks are part of the system like everything else. The junk bonds of tottering states were issued by those same states, weren’t they? Don’t conclude from that that I defend the banking sector indiscriminately. In some ways it is a disaster, with mathematicians modelling risk that they have no practical knowledge of and with chains of command that lack a full understanding of the positions taken by traders or even of the products the bank sells. My views on politicians and banks run parallel when I think of Dexia, a hopeless case encapsulated in one of its business lines—selling fixed-income products denominated in Swiss francs to French municipalities that raise taxes in euros. Naturally it all backfired, since instead of maximising potential profit such formulas ended up maximising the so-called experts’ incompetence. Dexia now has to be recapitalised by the Belgian government, though where the money will come from is anyone’s guess.
One could argue that Dexia exemplifies yet again how banks are the source of all evil. Well it does not, because in life we all have our bit to play. It is the authorities’ duty to provide a framework, to limit, prohibit or permit while bearing in mind the common good. It is the job of bankers, as businesspeople, to exploit the framework that they are given with a view to surviving in the face of competition. In exchange they pay high corporate and income taxes that ought to ensure a properly functioning state, which isn’t the case in most countries nowadays.
It is high time Europe found new leaders like the visionary ones of the post-war era. A pan-European borrowing facility could only be set up by simultaneously integrating politically. In other words the EU would have to create a supranational body to oversee its members’ public finances and budgets, i.e. their income and expenditure. Whether such a body starts with a small or a large number of countries is a procedural issue. At present Europe is buying time to avert an implosion of its financial system, which through payment transactions includes not only banks but also manufacturers and service providers of all kinds.
People often think that banks should be allowed to fail because, otherwise, taxpayers’ money would have to be used to bail them out. The truth is quite the opposite. The authorities rush to the rescue of banks by printing money because, if they didn’t, the whole population with its checking accounts, savings, pension funds and tax revenues (deposited in banks) would be swept away as if by a tsunami. Some would have us turn the clock back to avoid having to make such a choice. Do they really want to go back to barter or to the stone age, with all its trappings including high infant mortality?
There is an urgent need for citizens to search their souls and conscience before casting a ballot. We should think about our future, about what past generations have endured to bring us where we are now and about what sort of devastated landscape we will leave to the coming generations.
What we can do is make an effort so that there will indeed be a future. It is not by finding scapegoats that our problems will be solved. The past has shown us what extremes that can lead to and still not provide any solution. Politicians should do their job as responsible men and women. And when they err, let the people democratically mete out retribution. Unrealistic policies, such as spending money that one does not have, should be debunked.
So how does Switzerland figure in all this? As an independent country in the heart of Europe, we are as real territorially as we are economically. Our franc is strong, ay ay too strong at present, but wouldn’t a weak currency be a bigger shortcoming? Given our multilingual heritage, we have adopted English almost as a fifth national language. We have sound finances and a propensity for saving and moderation on a par with our neighbours’ propensity to spend. Finally our political system, with its separation of powers at the municipal, cantonal and federal levels, means things can never get very far out of hand. Problems remain a manageable size. Politicians normally have to keep their ear to the ground. Only in Switzerland’s two largest cities is the political class a bit disconnected from everyday realities. Struggling to make ends meet is unfamiliar to them, but as long as they are counterbalanced by countryside opinion we can stay on an even keel.
Is that an overly optimistic view? At all events it is how outsiders see us. We on the inside have the impression that our politicians and regulators at times ride roughshod over us and overstep their powers. Being out of touch, they take decisions that could cause considerable damage in terms of lost jobs and competitiveness in entire sectors. As guardians of the general interest our government should naturally defend Swiss manufacturers. But it should be standing up for the financial industry as well. We need a regulatory environment that is not only realistic but also provides scope for a constructive view on the future. It isn’t a crime to inspire international confidence or to attract savings from around the world. Nor should it be wrong to develop expertise in wealth management or to overcome the fiscal and regulatory obstacles that prevent our investment funds from being global players. With so many jobs at stake, it is important that Switzerland’s government and market regulator be aware that we are counting on them. It would be unfitting to fall, in this area too, into the trendy trap of looking for scapegoats.
Frédéric Binggeli, a member of Banque Privée Edmond de Rothschild Executive Committee,