Madrid, January 21th at Fundación Rafael del Pino, and Story starts by saying that the current crisis is opened to many interpretations on causes and remedies. Since venues of interpretation are so far apart, getting close to a solution is difficult.
In the most pessimistic scenario of several analyzed by Jonathan Story, he envisions a problem of trust on institutions: Agents may become conservative and decide to invest on real state, withdrawing liquidity from the financial system. Why so? The poacher has also been the gate keeper (i.e. people ask themselves how has Madoff been able to get money as well
as being at the regulator, the FDIC?)
Story believes there is room for optimism. Historically he recalls cases in the 1970s, when governments at either side of the spectrum in Spain, UK and USA opted for acting. They did so with a recycling policy (such as subsidizing housing), transferring funds to less favoured. He also states that people are keeping their money in deposits.
The US is still the key state in the global system, although with much less room of manoeuvre. This has implications for the new scenario under a severe economic crisis. However, locally, the US has a very fragmented financial and regulatory system, which Story sees as a problem.
In Europe he sees the problem of leadership, and somehow lack of ambition. Story belives that the United States may afford to have an insulae approach to global problems. It is a country big enough, and key in the global system. Europe, however is not developing an European pride (education is a main cause). European countries have a real problem acting as insulae.
Story pinpoints some long term shifts:
1. In Italy, current labor cost are 30 per cent above those in Germany. Spain is in the middle. Germany has excelled (at managing in detail all the outsourcing (to eastern Europe), three times per capita than EU number two, becoming a manufacturing champion). In no way Latin countries are catching up with this. Manufacturing is (terrible) in Spain.
What to do for Spain? Very little. Easing the labour law will panic workers. If anything, massive investment program at the EU level, but through direct involvement of the heads of government, not through European institutions. Serious leadership and not provincial mass is needed. For Spain there is a tough test lying ahead for the monetary union. He see the
way out in Spain is promoting big programs at the EU level.
2. Europe needs leadership: it is heavily underperforming playing prestige. Europe is more than it believes of itself (just count on the Olympic medals for Europe, close to two thousand, but not sold as European).
3. Russia has become European. Russia prefers Germany to China. Russia is scared of China for two main reasons: Siberia is the key asset of Russia -close to China- and the demographic implosion of the frontiers with China. China is the American friend, and beside, China´s economic implosion in the last 20 years.
4. The United States will not be able to pull apart from global problems, as it did from the 70s, but Story stresses that Obama´s plan is to get back to the USA as an exporting nation, and less focus on the global financial system as a source of growth. The message is: nations should rely more on themselves since the American yard will not be the consumer place the world has been used to.
He concludes that fear is what is moving the tectonic plaques right now. And fear is based upon greed, (not a good world to live in, he concludes).