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Davos and the end of the euro

It’s been a week and a half again, but without many bank scare headlines thank goodness. Instead, we have lots of headlines of politicians and business leaders attacking the banking industry. 

It all starts in Davos, with Chinese premier Wen Jiabao blaming America’s “unsustainable model of development characterised by prolonged low savings and high consumption”, and "an excessive expansion of financial institutions in blind pursuit of profit.”

Difficult to argue with that one, and Gong Xi Fa Cai to you Mr. Wen.

His cure?

“A balance between savings and consumption, between financial innovation and regulation and between (the) financial sector and the real economy."

Sounds good in theory but, if it was that easy, then we would never have been in this position would we?

Mind you, at least his speech had some good digestible content, unlike Vladimir Putin’s.

Putin also blamed America for this mess, but said a few things that jarred with the audience and investors. For example, a sentence such as:

“The entire economic growth system, where one regional centre prints money without respite and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback.”

This is a thinly veiled attack on America and China which has some element of truth.  However, he then went on to say things like:

“Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake”; and

“We all know that provoking military and political instability, regional and other conflicts is a helpful means of distracting the public from growing social and economic problems. Such attempts cannot be ruled out, unfortunately.”

Not the best way to make friends and influence people, but then making friends is not on Putin’s agenda as demonstrated by the Q&A after his session where Michael Dell asked how Dell could help develop Russia’s technological capabilities.

“You know, the trick is that we don’t need help,” Putin said. “We’re not handicapped.”

Nothing like brushing off Dell's sales pitch is there?

Even with these foibles though, it is clear that the world’s leadership wants to tackle the economic crisis we all face during the week at Davos … except that half of the world’s leadership aren’t there.

President Lula of Brazil didn’t go, nor did much of South America’s leadership and, as we know, America’s new President didn’t show.  He’s far too busy Barack-ing the bankers over their bonuses.

Apparently, Wall Street has shelled out over $20 billion in bonuses to top traders for 2008, roughly the same levels as 2004. All this at a time when “these institutions were teetering on collapse. That is the height of irresponsibility. It is shameful,” Mr. Obama stated.

Difficult to argue with that point either. There’s a time for profits and bonuses, and a time for losses and cutbacks.

“Part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, and show some discipline, and show some sense of responsibility," President Obama said.

"We’re going to be having conversations as this process moves forward directly with these folks on Wall Street.”

I bet you are, Mr. Obama.

So it’s all very serious and sombre at Davos and around the rest of the world.

Back in Davos however, there was one big explosion I noted.  This one was over the euro, and whether it has a future.  For some observers, there are real fears that the Eurozone is falling apart as the Greek, Italian, Irish, Spanish and Austrian bond markets all suffer stresses.

For example, Dominique Strauss-Kahn, the head of the International Monetary Fund (IMF), told the German weekly Die Zeit that: "The euro zone needs more coordination on economic policy. Otherwise, differences between states will become too big and the stability of the currency zone is in danger."

I think he has a point, but this seriously irritated many in the Eurozone with Jean-Claude Trichet, President of the European Central Bank, stepping up to the mark stating that: "There is no risk that the euro will break apart.”

Yep.

Mind you, the idea of a Eurozone breakup has been on the cards for over a year and it is a good debating point.  Truth be told, it is likely that the odd country might leave the Eurozone at some point, but it won't be everyone nor the whole region breaking apart.

And the bankers position in all of this?

Well, many of them just avoided going to Davos at all, for obvious reasons.

John Thain, ousted head of global banking at Bank of America, Citigroup’s CEO Vikram Pandit and Barclays’ CEO John Varley are all giving it a miss this year. As are Goldman Sachs’ leaders, Morgan Stanley and more. Mind you, HSBC and JPMorgan are still giving it a good go and, even with their leadership missing, Barclays still threw a party … just a bit smaller than usual.

Mind you, most bankers probably wanted to avoid the beating they were going to get from not just the politico’s but also their customers with many industry leaders, such as Indra Nooyi Chief Executive of Pepsico, attacking Wall Street for infecting Main Street.

All in all, it looks like Davos has been the usual talkshop without any clear results as yet.

The three key messages appear to be let's all work together to solve this, avoid protectionism and we need to talk a lot more.

On the first point Klaus Schwab, the founder and executive chairman of the World Economic Forum, used his opening speech to call for unity saying that bankers are “not only part of the problem. They are part of the solution.” 

Too darned right.  The guys who created this mess can get us out of it. That’s a critical point.

Theref
ore, as Mr. Schwab put it, "we need a well-functioning financial community, we should not forget. Otherwise, we don’t have a well-functioning economy.”

The second point relates to major concerns that banks and countries are going to raise barriers to trade and focus upon domestic priorities and concerns at the expense of others.  In other words, the return of "protectionism", where trade barriers critically undermine global wealth and commerce.  That's a real concern.

Finally, there is the question that some are asking: what does Davos actually achieve?

Apart from being a great, high profile, politics meets business networking event, does it actually deliver any solutions?

After all, no-one predicted subprime or liquidity crises at Davos, even though some of us were talking about systemic risks a few years ago.

If Davos does not deliver real insights and solutions then what is it good for … apart from being a big networking conference for world leaders with no clear, tangible output?

And if its just a politics meets business annual jamboree, it's a shame there weren't so many free parties laid on by the banking guys then.

Maybe next year?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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