I recently went to a debate on the eurozone crisis--one of many I suspect, but this was particularly interesting because it was excellently hosted by a leading political think tank. The speakers made illuminating points and the debate was lively, but in many ways I couldn’t help but feel a (growing?) gulf between the political and investment communities. Of course, they operate in different areas for the benefit of different constituencies, but given the inextricable interdependence between political and economic outcomes, I was again surprised by the lack of common ground between the two.
Now this is far from a new phenomenon. Back in 2010, the majority of investors to whom we have the privilege of speaking were convinced that the election would result in a solid Conservative majority that would be supportive for capital markets. Now it is, of course, easy to be wise in hindsight but the electoral mathematics made this at best an uncertain outcome--a fact far more widely recognised in political circles.
Turning back to the eurozone crisis debate led by influential political thought leaders and economists, we heard total opposition to bank recapitalisations and the view that at least Greece and Cyprus should leave the euro. These are not outrageous arguments, but they are at odds with the perhaps unrealistic expectations of the investment community that are increasingly necessary to avoid a full-scale meltdown in European debt markets. Indeed, perhaps the expectations of the speed of change by the markets is completely unrealistic--they are looking for economic changes that would normally take years to implement.
However, at a time of general agreement that clear political leadership is necessary to address the crisis in a suitably comprehensive manner, it is a concern that there is an apparent gulf between political and economic expectations that appears not to be restricted only to the U.K. We have to hope that any such disconnect does not encourage bond market fears to spread to engulf current “safe” countries such as the U.K. and U.S., whose fiscal issues have hitherto paled against the eurozone crisis. And in the eurozone, hopefully the appointment of technocrat governments in Italy and Greece will help address their problems--although we will have to see if the local populations are willing to tolerate the application of painful austerity measures by new, unelected leaders, or if there will be some form of revolt.
