Bruno Colmant - Economic Insights

The real challenge in 2015 will be to avoid the economic shipwreck of the Eurozone in what is often presented as a Japanese-style deflationary scenario. Unfortunately, that scenario seems more and more plausible – prices have been going down over the past two years and the inflation rate will become negative at the beginning of 2015. Technically, of course, this could be described as disinflation rather than deflation, or as a trend towards low inflation, in order to avoid stigmatising a general fall in prices. A distinction could also quite justifiably be drawn between good and bad deflation –...

The real danger lying in wait for the commercial banks is the low level of interest rates which, combined with risk limitation requirements, curbs their potential profitability. Moreover, the banks are facing major operational challenges, as they have to bear the operating costs of two retail channels (physical and digital) at a time of recession. The intermediation margin, i.e. the difference between interest received and interest paid, may well become too narrow to ensure a satisfactory return for the shareholders. This is a real problem, as an economy needs profitable banks in order to absorb the risks they take. An insufficiently profitable bank no longer takes risks and so no longer fulfils its social purpose.  ...

Various labels - subprime, bank lending, sovereign debt and monetary - have been used since 2008 to describe the economic crisis. Yet its scope doubtlessly extends far beyond these spheres. The crisis poses a fundamental question for society about the role of government, squeezed between unpredictable global corporations and public debt that requires refinancing to guarantee social order.Gorged on debt, governments are hostages to banking sectors, themselves prisoners of central banks that need to support private enterprise by constantly providing liquidity. In 2008, governments saved the market economy but society saved free enterprise. The financial rescue was justified, as banks by definition exist to "manufacture" money. To abandon the banks would have been tantamount to demonetising debt and to a public debt repudiation. Governments also set in motion so-called economic stabilisers, in other words counter-cyclical mechanisms to increase government expenditure during economic downturns as revenue shrinks.Compared with the options available in their economic bailout of 2008, governments are now dominated by the growing power of corporations. The latter have established and mapped out their own rules and standards in the name of self-regulation.The role of governments could therefore change because legal jurisdictions suffer when national economic borders are eliminated. Activities traditionally in the state sector (health, education, security) could gradually switch to free market principles, with outsourcing to the private sector. This would mean the demise of the concept of a public good Moreover, it is no longer just a question of less government at any price. We need to know how government, ie the embodiment of our community, will integrate seamlessly in collective and individual relationships. Clear-sightedness is needed on this point. Government's weighting in the economy may be excessive but it is not about to diminish drastically. But a lack of economic growth combined with disinflation is holding back growth so much that government will need to intervene in order to return the economy to a sound footing.The extent of the damage to the social fabric becomes clear from this assessment. An economy in crisis combined with deflation should give rise to increased demands for assistance from the public authorities at a time when governments, bloated after years of growth, are being cut back. Left or right-wing perspectives do not alter the fact that, after the failure to reduce the role of the state during periods of growth, this situation has formed during a recession. Our past rulers were not particularly visionary, doubtless yielding to the partisan pressures of the moment. Our future rulers will have to handle social issues very wisely. Furthermore, the current crisis marks the end of a model. We are witnessing the end of one based on complacency, a lack of vision and few prospects. Have we properly evaluated the importance of a younger generation facing patently contradictory demands? We ask it to pay off the outstanding debts of its elders at the same time as we hand it an economy beset by unemployment. Our economies are not ageing gracefully. They are brim-full of certainties about territoriality and eurocentric. There is no awareness that the world has spread upwards along vertical paths. We are imbued with a sense of our civilisation’...

The euro promised a brighter future. That hasn't happened.For the Nobel Prize winning economist, Paul Krugman, the euro is one of the greatest catastrophes of economic history (New York Times, August 2014). In 1997, Nobel economics prize-winner Milton Friedman had  predicted that the absence of political unity would be exacerbated by a single currency. Sadly, he was probably near the truth. At the risk of shocking a number of readers, I believe that Krugman is partly correct despite the fact that we will stay in the Eurozone because our currency simply cannot remove itself. The euro will survive, unless major political shocks occur. But there are undeniable flaws in the currency's design and they will make things worse. There may be bad times ahead. The euro does not qualify as a so-called “...

70 years ago, the Allied nations recast the world monetary system at the Mount Washington Hotel in the small New Hampshire town of Bretton Woods. The Bretton Woods agreements were probably the greatest monetary accomplishment of the 20th century. Brought to fruition before the Allied victory over Japan and Germany, they laid the basis for post war reconstruction and ushered in 30 years of unprecedented growth between 1944 and 1974.   The Bretton Woods agreements proposed fixed exchange rates between the currencies of developed countries. Called the Gold Exchange Standard, the system determined currency rates against the dollar which in turn was tied to gold at a level of 35 dollars per ounce (31 grammes).  ...