Tuesday, September 24, 2013

Israel and the global economic crisis

A lecture was given by Pinchas Landau at AACI Netanya with the above title, which focused mostly on Europe. Pinchas Landau is a graduate of LSE and was for several years the financial editor of the Jerusalem Post, he still writes a column in the Post, but has his own consulting company and publishes the Landau Report, that provides intelligence on investments mainly for companies. His lecture was excellent, informative and coherent. This is my summary of his lecture.

He had bad news and good news, the bad news is that Europe is doomed, financially, economically, politically and demographically. The good news is that Israel among the many countries of the world that have been negatively affected by the global economic crisis is one of the least affected and has relatively good prospects. What does he mean that Europe is doomed; if you look at the published debt/GDP of all countries of Europe, including the USA and UK, the figures are too high, somewhere between 90-120%, when the official limit required for the Eurozone is supposed to be a maximum of 60%. But, these are only the official figures, if one takes into account the unofficial financial commitments of all these countries, the figures come out above 400% and in the case of Greece up to 850%. In other words, Govt. spending and social entitlements have essentially bankrupted all European countries, to an extent from which they can never recover. The idea that people can depend on their pensions and entitlements is no longer valid, mainly since the population of Europe is aging and those young people that are left cannot support the entitlements of the older people. Further, the younger people cannot find employment, for example whereas the overall unemployment rate of the EU is ca. 12%, that among young people (16-25) is around 20-25%. So the young cannot find jobs and careers and since there are fewer of them they cannot support the mounting debt that the governments have accumulated.

There is a well-known cycle that has been documented thoughout history, that a financial crisis leads to an economic crisis, ie. reduced public spending leads to reduced government income and less social entitlements. This in turn leads to political instability and the turning of a significant portion of the public to extreme political parties that offer drastic solutions, that often include scapegoating and oppression of minorities. Such a process is already happening within the EU, where countries that have recently become democratic are turning to fringe right-wing parties, such as in Hungary and Slovakia. Even in France, where social entitlements are among the highest in the world, recently the French Cabinet expelled most Roma from France back to Romania, because they were considered to be a drain on the French economy. In the UK there is the UKIP and the EDL, in France there is Le Pen, in Greece there is the New Dawn. In effect, every country of the EU will follow the PIIGS (Portugal, Ireland, Italy, Greece and Spain) down the same road, of drastic cuts in Government spending, drastic cuts in social entitlements, social unrest and then reversion to political extremism.

One corollary of this situation is that the middle class is being squeezed, a phenomenon that has been noted throughout the western world. Another factor is the north-south divide, between Germany and its allied states of Holland, Belgium, Scandinavia, and the Baltics, where citizens pay their taxes and fiscal responsibility is taken seriously, and the Mediterranean countries, Portugal, Spain, France, Italy, Greece, Cyprus, where people don't pay taxes and there is a relaxed attitude about fiscal responsibility. Many think that technology will come to the rescue. But, this is a myth, technology can to some extent help, but usually only a few gain significantly from the financial windfall of new technology. The rest of us have to pay for it, thus we buy the computers, software and smartphones that puts money into the coffers of the already rich.

This analysis has not touched on India and China, but both of these rapidly expanding economies are shackled to their endemic cultures of corruption and nepotism. Russia is not much better off, the oligarchs (who are mostly Jewish) are rapidly exporting the wealth of Russia to the west. France is one of the most worrying countries, because although its debt is as high as the PIIGS, it seems to be going along as if there is no real problem, and if its economy fails then the Eurozone will definitely collapse, even Germany cannot bail out France. An alternative to the breaking up of the EU/Eurozone is greater central control, for example with a central European Bank, along the lines of the US Federal system. But, the countries of Europe are loath to give up their cherished independence, and who would be in charge of a unified EU, why of course, the Germans.

A major collapse of Europe would affect Israel significantly. Yet, Israel is poised to continue its careful economic path, in which it has had hardly any sovereign debt or banking collapses. Also, the upheavals foreseen in Europe would result in a mass emigration of Jews from France, with the second largest Jewish population in the diaspora (ca. 500,000) and from the UK (260,000). Although these influxes would put further strain on the Israeli economy, nevertheless, these immigrants would be both relatively well-off and quite productive. So while the future looks gloomy for Europe, it looks relatively positive for Israel.


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