A Panglossian Perspective on the EU summit

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In our turbulent times, it it reassuring to know that certain things remain unwaveringly true. One of those things is that regardless of any grand statements, national interests override supranational ones. Nowhere was this more in evidence than at the European Summit overnight. Interestingly enough, despite that, most of the major countries got their way and will not walk away unhappy.

Purists Germany stopped the ECB from actually solving the Eurozone debt crisis by letting it act as a proper central bank and prevented the ESM/EFSF from getting banking licenses of their own. The UK protected itself from a heavy extra burden of financial regulation in the City, a key driver of our economy, while not preventing the Eurozone from beginning the process of integrating into a more meaningful fiscal union with the real and necessary restrictions of national sovereignty required for a currency union to work. And the French got to maintain the pretence that they are the key diplomatic player in the EU, the power behind Germany’s economic throne, by loading the proposed treaty with so much of that financial regulation as to force the UK to veto an EU-wide treaty. And on an EU level, at least the Eurozone debt crisis has a bigger temporary sticking plaster to kick the can down the road a bit longer.

Let us be clear: Germany holds the Eurozone’s pursestrings and if any nation can be said to have got its way more fully than the rest, it is Germany. They have imposed their economic model on the rest of the Eurozone. It may not quite be an iron hand yet, but the velvet glove is certainly off. In the meantime, the EFSF will run concurrently with the ESM for about a year, which together with other resources pledged, brings the total amount of money in the EU bailout pot for profligate PIIGS to a bit over a trillion euros. That’s still not enough, really. Two would be nicer. But it’s not a bad sticking plaster – certainly better than the ones we’ve had so far – and might just be enough to calm the situation. Time will tell; it’s a little too early to judge that today.

The UK was forced to wield its veto. The usual suspects have begun hand-wringing about “isolation”, but as Terry Smith of brokers Tullet Prebon amusingly suggested this morning: “the UK as isolated as somebody who refused to join the Titanic just before it sailed”. To have signed the treaty would have subjected the City to a huge potential increase in regulation. Like it or not, the City contributes about 10% to our national wealth, a far greater percentage than any other EU country’s financial intermediation services. Add in financial services more generally, and the figure rises to about 1/3 of GDP. Even just considering the taxes it pays (yes, it does actually pay a lot of tax, despite what some would have you believe), that’s an important cash-cow for the UK government to preserve. Subjecting it to a new swathe of regulation is hardly conducive to profit, especially in such fragile times.

The French are very aware of this of course, which is why they insisted on including so much financial regulation in the proposed treaty. Unable to persuade the Germans to give the ECB proper banking powers, they were at risk of appearing impotent in the EU. And if there’s one thing that a French President with a looming re-election campaign can’t afford to appear, it’s impotent. As no other EU nation has as large a financial sector as Britain, it was easy for them to ensure that the other countries would not object; the impact of the regulations would be negligible to them. This ensured that either Britain would capitulate (handicapping one of its traditional strengths, benefiting France) or it would have to veto the treaty (allowing Sarkozy to frame the outcome as British isolation, boosting his domestic prospects).

The UK’s relationship with the EU will certainly now be very different to before. A veto, once wielded, is no longer a frightening spectre to either British PMs or our EU colleagues, but merely a tool. It will likely be used more frequently. I suspect the likely outcome will be a multi-speed EU, with the eurozone (and its likely future members) moving towards a more integrated political and economic union, and the UK and any other permanent non-eurozone members remaining in a looser alliance with the eurozone. The key thing the UK has to negotiate is the maintenance of a single market when it comes to no cross-border tariffs, minimising internal national subsidies, and the other key free trade tenets currently enshrined at an EU-level. Everything else can gradually be allowed to drift apart, which in the medium term will make it easier to begin cutting back on some of the more intrusive bits of current EU social and regulatory legislation.

It is undoubtedly in the UK’s long-term economic interests to remain part of the free-market aspects of the EU (although Channel 4′s relatively impartial FactCheck suggests its benefits may often be overstated). The challenge will be maintaining the UK’s free market relationship with the EU while the Eurozone members integrate further politically. Given the free market aspects are already in place, this should not be an impossible challenge. A delicated balancing act, certainly. But not impossible.

In the longer term, the UK can develop into a low-tax offshore gateway to the rest of the EU, with less regulation than the mainland, attracting global investment precisely because of that lower regulatory burden. A jumbo-sized Hong Kong, if you like. This would not be possible if the UK were part of a more integrated political, fiscal and monetary union with it. In the very long term, the balance may shift again. We cannot predict what the EU or the World will look like in 50 or 100 years. But for today, and for the short and medium terms, David Cameron did the right thing for Britain.

And funnily enough, leaving aside the relative sideshow of financial services regulation, the Eurozone may just have done enough to stave off imminent disaster too. Well, as the title suggests, I am an optimist.

The Fetishisation of Perfection

Head of a Nymph, Sophie Anderson

I must confess a penchant for complex systems.

There is little more pleasant than the intricacy of checks & balances, although I only enjoy them if my understanding of them arrives through noting the overall patterns that result, rather than through crude mechanistic analysis. Appreciating the underlying ebb & flow of emergent phenomena speaks to what Jung would have termed my intuitive rational nature.

My fondness and aptitude for noticing these mechanisms is at least part of what attracted me to psychiatry. The mind is doubly complex, consisting as it does of both physical and psychic constructs. The physical is the complexity of our neuroanatomical wiring and the neurochemical connections within that network. While some argue that theoretically the psychic world can be entirely understood through the physical, even such reductionist evangelists would admit that our current understanding is a long way from complete.

The psychic world is the more intriguing. It consists of our modes of thought: how we view ourselves, others, and the interplay between these entities. We create an internal construct of both ourselves & others, often built upon rather dubious foundations, and our entire understanding of the world in predicated upon these constructs. Some of the constructs emerge through experience, some are models formally taught to us, and some are probably rooted in a genetic hard-wiring. Even more amusingly, we are only generally aware of a small minority of the conceptual filters through which we view the world, which gives rise to what Freud would term the unconscious mind and perhaps also to what the spiritual would call the soul.

Regular readers know I enjoy a variety of complex systems; not just psychiatry & psychology but also clothes, economics, philosophy and some kinds of art. The common thread linking these interests are the delightful emergent patterns that are created through expression & exploration these systems. Different schools of art & philosophy, different conceptual models of the mind & human behaviour, different fashions & economic systems… they are all best considered not as absolutes with pros & cons relative to some theoretical gold standard, but as different sensory modalities. No-one would ever claim that smell is better than sound, or sight is better than touch.

Of course, this very relativist and individualist intellectual position of mine is itself derived from a set of preconceptions. In the end, everything anyone can attempt to say really is nonsense, if Wittgenstein will pardon the liberty of my paraphrasing. But this is to miss the point entirely: it’s rather delightful to play the game anyway.

The title of this post is a lament at how much of the world either cannot play, or refuses to play. Instead, they focus on improving things in an endless search for perfection. While superficially a laudable goal, the problem is that in order to improve a situation, you must understand the system well enough to know what improvement means. Simply having one specific goal in mind frequently – possibly, inevitably – leads to problems in other important areas. Imagine a fat woman being squeezed into a too-small corset: the narrow waist comes at the high price of either fat spilling over as visible unsightliness elsewhere, or internal distress. Similarly, targets and outcome measures can lead to many more negative issues in unexpected areas even if the target is achieved. Better to appreciate the system for what it is, and harmonise your existence within it, which can mean insulating yourself from its excesses by detaching yourself from its impact through rising above it.

Naturally, I am extremely grateful that most people prefer to seek perfection. It has led to tremendous improvements in material comforts, and grants me the luxury of not having to live a purely subsistence lifestyle myself. Nonetheless, those capable of broader perspective will be happier for indulging that aloofness rather than chasing the flitting faerie nymph of perfection. The nymph, you will recall, generally doomed her lover.

The Wisdom of Walter Bagehot

Readers of The Economist will already be familar with the name Bagehot, it being the title for their UK-focused regular column. I suspect fewer will have read anything by the man after whom it is named.

I recently had cause to browse Lombard Street: A Description of the Money Market (a free online copy can be found at Project Gutenberg). Written in 1873, in the aftermath of a banking crisis (Lombard Street is in the City of London, and used in this context to refer to the global banking system), it’s a remarkably prescient view of our current situation, and one worth citing from directly. I will not provide much further commentary as his quoted words are self-explanatory both in their description of the problem and the least-worst solution. I’ve also kept any modifications to the absolute minimum required to retain comprehension on stitching the quotes together.

The briefest and truest way of describing Lombard Street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has even seen. Of the greatness of the power there will be no doubt. Money is economical power. But very few persons are aware how much greater than the ready balance is the floating loan-fund which can be lent to anyone or for any purpose.

A million in the hands of a single banker is a great power; he can at once lend it where he will, and borrowers can come to him, because they know or believe that he has it. But the same sum scattered in tens and fifties through a whole nation is no power at all: no one knows where to find it or whom to ask for it. Concentration of money in banks, though not the sole cause, is the principal cause which has made the Money Market so exceedingly rich.

It is a luxury which has never been enjoyed with even comparable equality before.

But in exact proportion to the power of this system is its delicacy. Only our familiarity blinds us to the marvellous nature of the system. There never was so much borrowed money collected in the world. If any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger. The amount of cash-in-hand is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it.

We do not always manage it with discretion. There is the astounding instance of Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of England in the City of London; it was better known abroad than any similar firm known, perhaps, better than any purely English firm. The partners had great estates, which had mostly been made in the business. They still derived an immense income from it. Yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company’s capital. And these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better. After this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.

Ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. These banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. At first, incipient panic amounts to a kind of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost money? and a thousand such questions. And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. All men of experience, therefore, try to strengthen themselves in the early stage of a panic [by limiting credit].

A panic, in a word, is a species of neuralgia; you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.

There should be a clear understanding between the Central Bank and the public that, since the Bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.

We should also look at the rest of our banking system and try to reduce the demands on the Bank as much as we can. The central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it.

It may be said that the reserve in the central bank will not be enough for all such loans. If that be so, it must fail. But lending is, nevertheless, its best expedient. This is the method of making its money go the farthest, and of enabling it to get through the panic if anything will so enable it. Making no loans as we have seen will ruin the country; making large loans and stopping, as we have also seen, will ruin it. The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank [and the country]; but if it do not, nothing will save it.

Bagehot went on to describe the importance of central bank lending at a premium to the pre-crisis rate & to lend against collateral, both to ensure moral hazard remained. The US Federal Reserve, The Bank of England, the Bank of Japan and even China’s central bank have all read & understood Bagehot and turned on the money tap to keep the global system from seizing up entirely and so utterly destroying the quality of life of billions of people. The European Central Bank likely also understands it, given its participation in the 30th November 2011 central bank agreement to increase dollar liquidity. Unfortunately, it is currently prevented from acting further due the legal limitations placed on it by, primarily, the Germans in terms of using one of a central bank’s greatest assets: printing money to permit that liquidity flow and devalue currency, even at the cost of inflation.

As we begin to see the cautious outlines of a potential “grand bargain” on lending involving the IMF, the world’s major central banks, the BRICS, and Eurozone fiscal policy union, let’s hope they haven’t left it too late…

Italy. Or, How Markets Got Their Groove Back.

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Two Eurozone governments toppled in almost as many days. First Prime Minister Papandreou of Greece was forced to resign, and at time of typing we hear that Prime Minister Berlusconi of Italy is finally throwing in the towel. The common factor? Despite bluster, both eventually kow-towed to capital markets.

Markets are much misunderstood & maligned. They are either perceived as Machiavellian, plotting complex geopolitical outcomes from the shadows, or as irrational, disregarding long-term economic fundamentals in favour of short-term risk-taking. Markets are a reflection of the sum of a large number of disparate actions. As such, they are subject to the emotional temperature of those making deals. Fearful traders make for volatile markets.

Since the global financial crisis first hit in late 2007, those traders realised en-masse that something had gone dreadfully wrong. The complexity of some of the financial vehicles, especially in securities markets, led to an inability to accurately price risks. Accurate pricing of risk is an essential of any market, from the man on the street choosing how much a used car is worth, to an investment bank deciding what a trillion-dollar collateralised debt is worth.

That inability to price risk shook confidence in the entire financial system, with results we’re all familiar with. Far from being Machiavellian geniuses, traders are all too human. They became extremely fearful to trade with, well, anyone. They lost the ability to gauge what was worth investing in and what was not, and in their fear desperately turned to politicians and governments to solve the problem.

There is something subtly different in the air this week. The repeated failure of those politicians to restore confidence, most especially in the eurozone but also in the USA, has caused something to snap. Market have gone from childlike fear to doing their basic job: pricing in risk. The cost of Italian government debt rose to near-unsustainable levels on the back of prolonged shilly-shallying by the Berlusconi government, prompting his slow-motion fall.

This is a restoration of moral hazard in markets for which we should all be very grateful, as it is the first sign in over four years of a return to some degree of normality in how markets are supposed to work, as abnormal and dramatic as the events themselves are. Unpopular as they currently are, markets are our least-worst way of judging monetary value. There is something potentially cathartic and empowering about their net actions this past week, which may encourage sustainability and further progress in the months to come.

Governments, beware.

Honey, I couldn’t be happier than if they were based on real grades

Hand-drawn (by one of the negotiators) diagram of the eurozone deal, via Reuters. Note the many question marks...

We have an eurozone deal. The huge sense of relief felt by worldwide markets was almost palpable in its intensity, with global indices soaring in unison.

Of course, it’s a massive temporary fudge with large blank spaces that need filling in over the next few weeks. And in itself it does nothing to address the underlying structural problems of the eurozone (more on that later).

But it’s a lot more than I expected last week, so I’m pleased that enough heads could be banged together to at least come up with something. More importantly, it really felt like some tough decisions had been made.

Which brings me onto the difference between substance and appearance, and the vital importance of psychology in bridging the gap.

The title of this post is taken from the grossly underrated mid-90s movie Clueless. For the uninitiated, Clueless follows Cher (Alicia Silverstone), a Californian high school girl with a talent for manipulation and a fondness for matchmaking. The plot is loosely based on Jane Austen’s Emma but is shrewd enough in its updating to stand strongly as a work on its own.

The title quote is spoken by her father, proclaiming his delight at her ability to deftly manipulate her way into getting higher grades than her academic ability deserved, by pairing up two of her hard-grading but lonely teachers, improving their mood, thus making them more lenient graders. Reality becomes be a malleable function of applied psychology.

The movie has a lot more of these satirical, bitingly-accurate little asides. For instance, when Cher is asked her opinion of violence on TV, she replies, “Until mankind is peaceful enough not to have violence on the news, there’s no point in taking it out of shows that need it for entertainment value”. If you’ve never seen the movie, perhaps dismissing it as fluffy/superficial rom-com, you should definitely watch it. It neatly dissects the 90s as Heathers did the 80s, except it does so with affection rather than disdain.

The eurozone deal is currently based on ephemera. It has little real substance to it, as the details of the bank recapitalisations, haircuts and EFSF expansions are yet to be fleshed out. But what it achieves is psychological; it draws a line in the sand around the problem. To paraphrase Churchill, it feels like the end of the beginning. And that may be enough of a psychological sleight-of-hand to persuade markets to react accordingly, which will then translate perception and appearance into reality.

The American investor Benjamin Graham is famous for saying, “In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. What he meant was that day-to-day fluctuations are based on volatile emotion & appearances but over the years, profitable businesses with a future will outperform unprofitable businesses.

For the eurozone to profit from the breathing space granted by the psychological drama of today’s deal, they must turn around their core business: they need to remedy the structural problems of monetary union without fiscal union. There are signs this will happen. EU President Barroso is pushing for deeper fiscal integration within the eurozone. Essentially, the richer countries will gain some control over the poorer countries’ budgets in return for helping them fund their economic deficits. This would certainly help mitigate the structural problems, though of course no-one really wants to talk about the potential democratic deficit created by such a move.

On a more parochial level, the UK may potentially be able to get the best of both worlds, benefiting from a more stable eurozone while remaining outside it, and retaining relative economic independence while still being part of the EU single market. It’s an exciting, if unpredictable, situation. There is a saying, popularly though inaccurately attributed to an ancient Chinese curse, “May you live in interesting times”.

We are certainly doing that. Better try to enjoy it.

Rebuilding Greece

As global markets rise on the hope that the Eurozone may finally be mustering the courage to grasp the political nettle of the problems generated by a single monetary policy but multiple fiscal polices, it seems appropriate to post this photograph of the Parthenon being rebuilt. Taken during a recent break I enjoyed in Athens & the Ionian island of Kefalonia, the imagery of the Parthenon gradually being reconstructed, reversing the damage caused by years of neglect, resonates neatly with the wider challenge faced by the Greeks.

This was my first visit to Greece in many decades, and much has changed. Despite its current woes, it is undoubtedly a richer and more sophisticated country than I remembered. It has benefited from the influx of funds brought about by EU membership and the cheap borrowing costs it initially experienced as a Eurozone member. The debt has caught up with it and my personal opinion is that all the current austerity measures & bailouts are simply buying time to manage a more definitive restructing of the debt in due course. Call it a default if you prefer, for that is what it will be in effect, but it will be done in a contained way once the rest of the Eurozone has finally erected sufficient economic defences to calm any subsequent financial concern.

Greece itself faces a long period of reconstruction. It is a proud country, with a glorious past (some aspects of which I intend to blog about soon) but it must realise that many of its current problems are of its own making. Poor tax collection, profligate spending and overgenerous public sector conditions are an unsustainable and toxic mix.

I witnessed first-hand the anger and sorrow that the population are feeling. From large protest marches watched over by riot police, to individual stories of woe such as the young museum worker who hadn’t been paid in four months, Greece is struggling to transition. The risk is of an increasingly angry population causing severe unrest requiring military intervention, and a subsequent coup. This may seem outlandish speculation but it is only a few decades since Greece was under military rule. With the current political class widely reviled, it may not take much more pressure for the public to permit a coup.

The following images of the Parthenon show more of the restoration work taking place. I hope the Greeks can manage to rebuild their country with equal care.

Euro Farce

The Eurozone remains en route to implosion. But it’s a slow-motion train wreck.

I first blogged about this almost exactly one year ago, and again last November; I doubt today’s post will be my last. I won’t rehash the detail from those posts, but reading them in light of ongoing events proves their points.

Eurozone central bankers and politicians have consistently failed to definitively address the fundamental structural economic flaw generated by a unified monetary policy and nationally disparate fiscal policies.

That’s because there is no way to address this mismatch, short of unifying fiscal policy to a much greater degree than stronger countries’ economies (and voters) are prepared to accept. Or breaking up the monetary union, which Euro politicians and central bankers refuse to accept.

Paul Mason, BBC Newsnight’s economics editor, is just one of many journalists now publicly discussing scenarios previously considered verboten. His idea of Euro bonds would be one way of addressing the structural problem, but fails the litmus test, as I doubt it would be palatable to German voters. His final point, quoted below, paraphrases one I made in my earlier articles:

Whether we hit the barriers of political unacceptability or a market attempt to take down the ECB first is a question everybody hopes we never have to answer, but markets have staged attacks on central banks before.

Where I differ from his perspective, is that I hope the question is answered, and soon.

What is needed is clarity and finality, not ongoing slow-motion crisis and farce. Euro currency fragmentation will be intensely painful, but as with a sticking plaster, it’s best to act decisively to limit the overall agony. It’s been over a year since this crisis started, and the hope then was that temporising measures would buy enough time for economies to recover, and that growth would be enough to disguise the underlying problem. If it had happened, it would have worked.

It hasn’t happened, because what Greece, Ireland, Portugal (and Spain and Italy) desperately need in order to grow is rapid and major currency devaluation relative to other world currencies, to make their economies competitive again. They cannot get sufficient devaluation within the Euro, as the relative economic strength of the northern Eurozone countries keeps the currency as a whole moderately attractive internationally. It is falling in value somewhat, despite that, but not nearly enough to save the periphery. The ECB’s recent interest rate hike simply underlines how monumentally destructive the Euro is proving to the peripheral economies, not to mention their citizens.

Solving the problem demands decisive political action to either break up the Euro, or drive the Eurozone significantly towards  fiscal union. Forgive my scepticism but I doubt we’ll get either. Just more muddling through with temporary bailouts and other weak measures. In short, keeping fingers crossed, hoping it buys enough time for natural growth to kick in, and praying the market is too stupid to see what’s going on in the meantime.

Hmm, good luck with that…!

Japan Earthquake: Consequences

Map of tsunami wave height; click for source

The twists and turns wrought by the Japan earthquake have gripped and troubled me. I am by nature, and to some extent profession, a contingency planner. When faced with a difficult situation, I tend to switch into a pattern-recognition and problem-solving mode, anticipating consequences in order to take advantage of them. The Japan earthquake is troubling because its medium and long term ramifications are very unsettling.

The facts are straightforward: the 9.0 magnitude earthquake that occured off the Sendai coast on 11th March was one of the most powerful ever recorded. It generated a massive and rapidly-arriving tsunami, leading to major loss of life and catastrophic damage. Several nuclear reactors at Fukushima are in danger of core containment breach, and at time of typing, there are reports of a minor containment breach at reactor 2. The Bank of Japan has pumped trillions of yen into the economy to prop it up during the crisis, and the emergency services and military appear to be doing the best they can under trying circumstances.

The consequences are much harder to define.

The loss of life is of course immensely tragic on personal, national and global levels. However, the calculating side of me is bound to point out that on that global scale (comparing it to previous natural disasters such as Haiti’s earthquake) it is not disproportionate.

Many tens of thousands (probably hundreds of thousands) of lives were undoubtedly saved by Japan’s affluence. Its wealth enabled adherence to strict building codes, making deaths from the earthquake itself relatively limited. This is a triumphant testament to technology and its careful widespread implementation.

The tsunami killed many more. It is much harder to prevent tsunami deaths. One would assume that Japan will respond by implementing more safety restrictions into its building code for coastal properties, such as mandating the orientation of buildings to permit the force of tsunami waves to pass through rather than destroy. These would be relatively straightforward regulations and I have little doubt Japan will respond well in this regard.

The economic consequences are more painful. Natural disasters are generally associated with an immediate GDP hit, followed by a rebound 6-18 months later as reconstruction kicks in. Under normal circumstances, Japan would follow this overall neutral pattern (as it did following Kobe’s earthquake). But Japan’s national debt is enormous at about 200% of GDP, and interest rates are already in the basement following decades of stagnation and the 2008 financial crisis. This limits economic room for manoeuvre and magnifies the impact of that short-term GDP hit, making it more likely to be prolonged. If Japan’s GDP is negatively affected for more than 6 months, it may trigger a global slowdown. Although it has been stagnating for 20 years, Japan is still the world’s 3rd biggest economy and a major recession would impact global demand chains.

This is particularly concerning for the UK, given that the success of the austerity programme being implemented by the coalition government is dependent on moderately strong private sector growth. Direct UK-Japan trade is in the order of about £10-20bn only, so although knock-on effects via the USA are harder to quantify, it’s possible that the fallout to the UK economy will be relatively contained. It’s simply too early to be sure about the impact on the UK beyond noting that several large insurers will bear major, but largely absorbable, losses.

Fallout of another nature is perhaps more troublesome in the long term. It’s highly unlikely that radiation from Japan will cause the UK any problems whatsoever. Even within Japan, the impact should hopefully be fairly limited, especially if the cores at Fukushima do not lose further containment. But the effect on our energy policy may be significant.

Elements of the Green movement have been swift to use the incident to buttress their more generalised anti-nuclear policies. While some environmentalists now support nuclear power as being cleaner than coal or oil, and therefore helpful in mitigating climate change, the majority still push very strongly against an expansion of fission plants. Public opinion has gradually been shifting back towards nuclear power in the decades since Chernobyl, but this progress is likely to be reversed in the emotional knee-jerk response to what we are seeing unfold in Japan. The longer it takes to control the cores, the worse that response is likely to be.

No method of power generation is risk and impact free, but nuclear is in many ways safer, cleaner and more cost-effective than other methods. It has some major drawbacks of course, not least that if all the lines of defense do collapse, then the consequence of a fully exposed core are very significant. Nuclear power stations are designed with significant depth of defense and I hope and pray that the depth is sufficient to allow the Fukushima cores to be brought under control. Newer designs of plant are more defended still (Fukushima is about 40 years old), with passive as well as active lines of retreat in case of emergency.

While it is absolutely right that nuclear plants should be designed with the precautionary principle uppermost in mind, I believe it is fundamentally wrong to construct an entire energy policy around such worst-case scenarios. Any energy policy has to be balanced not solely against the risk of incredibly unlikely catastrophe, but against the far more likely effects on the economy, and the need to securely keep the lights on.

Britain is a much more geologically stable country, and with newer reactor designs, I firmly believe that nuclear power is easily a safe enough option. It is also going to be necessary in order to maintain power grid stability in the face of our international obligations to mitigate climate change. Renewables alone simply cannot fill the gap in the short time we have. I hope there isn’t a knee-jerk response against nuclear fission’s planned expansion in this country.

Of course, a more lasting solution would be cost-effective large-scale nuclear fusion, and there is a very strong international effort to develop the technology required, which I touched upon in an earlier entry. That would be both cleaner and safer than fission.

National disasters can paradoxically bring out the best in people. All the reporting from Japan conveys images of an understandably shocked and frightened populace, but one attempting to work with authorities to rebuild their country. Having visited and worked there, I believe they will succeed.

Equality is not Fairness

 

The impact of women on male insurance premiums

The European Court of Justice ruled today that it is illegal for the insurance industry to use of gender to determine risk.

It contravenes the European Convention on Human Rights (ECHR) which requires that wherever possible, each gender should be treated equally in order to prevent discrimination. The result of this attempt to mandate equal rights has led to the bizarre situation of the Court being forced to rule that an industry which distributes the cost of insuring risk according to the eminently fair principle of riskier individuals bearing more of the cost, can no longer do so.

And I doubt that anyone really expects the outcome of this to be that men’s car insurance premiums will fall by more than a token amount. Instead, the more likely outcome is that women’s rates will increase instead, making the population as a whole a lot worse off. The impact on the wider insurance industry will affect pension annuities too: men generally get higher rates because statistically they are likely to die before women. Now both sexes will get something closer to the lower female rate.

This ruling is a beautifully accessible example of the difference between equality and fairness.

Treating everyone equally – assuming that just because they are all human beings, they all deserve the same treatment – is fundamentally unfair. People are not equal. Fairness and justice should be about equitable outcomes, not equal ones. Confusing these concepts leadings to well-meaning but ultimately self-defeating creations like the ECHR that do a disservice to the population they are meant to protect.

Individual variation resulting in inequality and differential outcomes is not something to be feared. Fairness demands that our society is freely able to distribute its bounty equitably – albeit unequally – between individuals.

Now, preventing discrimination is vitally important. But stopping discrimination is about preventing inequitable outcomes to individuals because of their group membership, not to prioritise the group membership over the individual, which is what the ECHR does.

The Court had no alternative but to rule the way it did, because the ECHR is deliberately phrased to emphasise the gender identity sub-group rather than considering humanity as comprising a mass of individuals who just happen to fall into various sub-groups.

Membership of a sub-group should never lead to inequitable outcomes; gender (or religion, race, sexuality, and so on) should never be used as a reason to inhibit rewards to a particular individual. But membership of a sub-group should never be used a reason to mandate equal outcomes with other sub-groups.

The way to avoid this is to bypass the importance of sub-group membership altogether: value the individual instead.

Related Articles

• This insurance ruling trivialises human rights | Stephen Booth (guardian.co.uk)
• EU court bans insurance sex discrimination (foxnews.com)
• Gender case hits insurance costs (bbc.co.uk)
• “UK insurers face “large-scale adjustments” over ECJ gender ruling” and related posts (insurancedaily.co.uk)

An eye on the main chance: Britain in a future global economy

Summarising recent efforts by Citigroup and HSBC to peer into the crystal ball of global economic development, Ambrose Evans-Pritchard ‘s Telegraph article makes fascinating reading.

The two reports agree with the conventional wisdom of BRIC (Brazil, Russia, India, China) countries continuing their inexorable rise up the GDP league table, as traditional Western powers gradually slip down, but vary hugely in the degree of the change by 2050.

Citigroup projects a world heavily dominated by the East, with China and India together adding up to four times the GDP of the USA and Indonesia alone surpassing the UK, Germany, France and Italy combined. HSBC favours a more modest scenario of China taking the leader’s jersey from the USA, but then slipping back somewhat. The differing outcomes are largely due to variation in methodology between the two reports in how they account for demographic changes.

Living in the UK, I was impressed to see that even in Citigroup’s vision of Asian economic supremacy, we would be the sole EU country to retain a top 10 GDP ranking. This is mainly due to the UK’s population growth creating more workers to minimise the financial impact of an ageing population in a way that other EU countries cannot. Or as Evans-Pritchard cheekily puts it: “the UK faces a less disastrous ageing crisis than much of Europe… thanks to our unrivalled leadership in unwed teenage pregnancies.”

Of course, all modelling exercises are to some extent intellectual navel-gazing, especially when projecting so many decades into the future. Forecasting models get worse the more distant the outcome being scrutinised. Small errors in initial assumptions used are magnified, and microfissures in methodology become gaping crevasses.

But despite these caveats, it’s still fun to play in the sandbox.

The overall trend is one where the division between rich and poor will be less about which country you live in than about your access to capital and your skill-set. The middle-classes in currently advanced countries will face an inevitable squeeze in living standards, relative to the growing middle-classes of currently developing countries. World GDP will boom, but more so in the youthful large countries than the mature ageing economies. This will be politically difficult for the leaders of these older nations to manage. It may be good for the world as a whole, but individual countries will face a very different future with a different range of incomes than they’ve become accustomed to.

And the UK’s role in such a world?

For decades, the UK has worked hard to (often successfully) punch above its economic weight in world affairs. It’s done this through historic global diplomatic ties and through military expenditure. In the future, even if it slips to 10th in the economic league table, it will still gain position – in relative terms – compared its European neighbours.

By that time, the EU will have either sunk or swum its way through the current Euro debt crisis. It will be a looser alliance of free trading states with a more tightly integrated core; or it will be a closely-linked federated structure. And given events of the past month or so, it may well include elements of North Africa. The UK’s relatively thriving economy would give it a louder say than at present and that opens up intriguing possibilities. Would it be able to tilt the economic axis of the EU rightwards? Would it encourage transatlanticism? Or would it return to its historical roots and advocate a global approach to trade?

The relatively-thriving island of the UK could end up being surprisingly influential as a central broker in a world with disparate economic centres of gravity. A multipolar economic world (albeit with the relative heavyweights of the USA and China) represents an opportunity for vibrant middle-ranked countries to wield disproportionate influence that a world with just one economic axis does not. If the UK keeps an eye on the main chance, the future isn’t so depressing after all.

Related Articles

• Will ‘Chindia’ rule the world in 2050, or America after all? (telegraph.co.uk)
• Growth Forecasts Should Open Europe’s Eyes (online.wsj.com)
• London set for biggest boost in GDP growth says Citigroup (telegraph.co.uk)