Necessary Measures
“I know that the measures that I have announced are not pleasant, but they are necessary.” These were the words of Spain’s Prime Minister Mariano Rajoy as he announced public spending cuts and tax increases of Euro65bn.

Whilst I can understand this action from a purely economic standpoint, I found it hard to believe from a behavioural perspective. This was on top of last night’s news that Spain was to inflict bond losses onto private savers (see the article by Miles Johnson, Peter Spiegel and Joshua Chaffin in the FT).

I wonder if the social ramifications of these actions and the broad scale of the task ahead are really appreciated.

The Depth of the Crisis
I have been thinking for some time about how long it would take Spain, Portugal, Greece, Italy and potentially the rest of Europe to recover from all this turmoil. Wolfgang Münchau has been thinking about this too. His conclusion is 20 years. My conclusion is similar, but I would go as far as saying that it is not just Europe, but all the  ’advanced’ economies of West, that face a new 20 years’ crisis.

Why?

Several recent articles and books have appeared that catalogue the West’s problems. For example, I attended an excellent presentation by Prof Joseph Stiglitz at Chatham House last month, when he laid bare the scale of inequality that we have created (I say ‘we’ as I am sitting here in ‘the West’ writing this blog entry). Zbigniew Brzezinski’s new book Strategic Vision: America and the crisis of global power also sets out an inventory of primarily America’s, but also the West’s problems. Raghuram Rajan’s essay in the May/June issue of Foreign Affairs - The True Lessons of the Recession sets out an excellent summary of the tasks that lie ahead of us, which are not limited to the issue of sovereign debt reduction. The big tasks for the West include:

  • How to replace jobs lost to technology, automation, outsourcing and global competition.
  • How to re-engineer the structure of ‘advanced’ economies so that (a) there is a reduced reliance upon a volatile banking sector and even more importantly, (b) broad skill-based work opportunities are provided. Since the appearance of the Great Recession there has been an emerging argument that services-based economies only offer ‘elitist’ employment opportunities. Rajan refers to this as employment ‘bifurcation’, noting that in the US employment opportunities have divided into low-paying jobs that demand few skills and high paying positions that demand very specialised skills – with nothing in the middle – Rajan noting that 35% of those in the US aged 25 – 54 with no high school qualification have no job. This ‘re-engineering of the economy’ is easier said that done. It’s easy to cut and to outsource. And it’s also easy, through this process, to lose skills developed and honed over the decades. A great example would be the UK. In 1918 the UK launched the world’s first aircraft carrier. Now, as a result of defence cuts, the UK doesn’t have an aircraft carrier. When its new carriers, currently under construction, are launched it will have to rely upon France to train pilots to land on carriers! But there is a serious point. Has the West lost the skills it needs to re-build its economies?
  • How to re-engineer education to provide a new skill mix.
  • How to re-train those past college leaving age.
  • How to manage a major cultural shift away from ‘borrow and spend’ to ‘save and protect’ as the social safety nets that were the hallmark of the West (and particularly Europe) are removed.
  • How to manage the implicit cultural shift as workers transfer from public to private sector employment.

All this takes time. It has to be completed in an environment of reducing global growth and increasing competition as new economies enter and, quite understandably, ask for their share of the employment cake.

My best guess in 20 years. But it will be a difficult road. The extremists will want to take advantage of the social trauma and it is all too easy to see a protectionist war erupting.

The Skills Doom Loop
All this requires careful management. I am reminded of the golden rules of change management – how to successfully lead major change in business organisations. One of the first steps is to build a burning platform for change –  messaging of why change is needed, the vision that we’re aiming for and a broad plan of how we’re going to get there.

My problem is that beyond austerity, many find it difficult to see a vision or a broad long-term plan of action.

And then we have the ‘Skills Doom Loop’. There is a lot of talk of a European ‘Doom Loop’. This is a financial doom loop where banks drag down governments and then weakened governments in turn drag down banks. For more on this see Peter Coy’s article in Bloomberg Business Week. But Europe and the West face a skills doom loop where austerity cuts impact education and the capability to re-skill the workforce and as time goes on more skills are forgotten and the economy becomes less competitive and shrinks and more austerity further weakens education and …

Closing Points
And a couple of closing points.

If from a business strategy perspective, you think it’s best to rush off and relocate to Asia, think again. In my mind, Asia is the next crisis point. More of that in another post.

And my final point. This is not Europe’s or the West’s first 20 years’ crisis. E. H. Carr wrote a famous text under the same title dealing with the hope, disappointment and confusion that marked the years running from 1919 to 1939.

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