Something’s got to give
“The crisis is far from over and the level of public debt is unsustainable”. These are the words of Bruno Colmant of Roland Berger Strategy Consultants. The author of more than forty finance books spoke at the ALFI (Association of the Luxembourg Fund Industry) Spring Conference in Luxembourg.
In 2008 and 2009, we compared the beginning of the financial crisis with the year 1979, when there was a big shift from an industrial to a service society. Bruno Colmant admits that we have changed our view on how to compare the two crises: “I must confess that today the situation is more similar to what people experienced in 1929. My family got ruined in 1929; my brother told me that they had lost everything, not only their savings but there was more to it because industrial activity went down dramatically”.
To him, it is worrying that some countries want to implement more rigorous measures even though it is well known that austerity leads to recession due to lack of growth. Bruno Colmant is convinced that something has to change soon, because we cannot have a strong currency and austerity in times of recession.
The public debt in the Europe is around 90% of GPD, which is 30% above the Maastricht Treaty. Normally, this problem would be solved by economic growth. In the current situation of lack of growth, this goal seems out of reach. When Bruno Colmant talks about economic growth, he means 3 per cent over the years to come.
Another way of reducing debt is higher taxes, but that would also mean less consumption and probably less growth. So according to the finance expert this is not a solution to reduce debt either. Mr Colmant warns citizens to be aware of the severity of the crisis and its consequences on their private lives.
“We all make the same mistake: we look at our savings and think we have put some money aside and then we look at public debt and think it is something external to us. This kind of thinking is dead wrong because public debt is our debt. At some point in time there will be a transfer of wealth between private savings and the government. And this will have to happen with social order. Probably the best way to achieve this without any disruption of the financial system will be to put together banks, insurance companies and governments”.
In 1992, there was a political decision to achieve monetary convergence. Thanks to the Euro and a good economy, rates went down and this allowed governments to take on more debt. We have seen public debt rising in almost all major economies in Europe since 1999, since the introduction of the single European currency.
“Was the Euro a big mistake? Is not the question”, Bruno Colmant adds. The mistake, he thinks, is that it was confined to a political decision. “When we admit it was a political decision, everything is basically made clear. We made a decision without sufficient economic focus. We included too many countries with weak economies into the Eurozone. This is because France was afraid of Germany’s political and economic power after the German reunification and it wanted all the southern European countries to join in order to compensate for Germany’s strength”.
He is convinced that the Eurozone will not include the same number of countries ten or fifteen years down the line. Not because countries will take the wise decision to leave but because social shocks or unexpected events will force them to exit.
Whatever the solution to the current crisis looks like, one thing is for sure, he emphasises. “Austerity is suicide, because it will cost us millions of jobs and create a lost generation that will not have achieved financial security.” Bruno Colmant came to Luxembourg with a solution in his suitcase. He recommends a clean-up of public debt through inflation. His final message was that we would not be able to live in a world with no growth, high public debt and zero inflation. CW