Why Political Will Matters

Why Political Will Matters

August 10th, 2011 // 5:41 pm @

We live in dangerous economic times; many of the world’s major economies are in recession, and have associated financial problems. The two major world currencies, the Dollar and the Euro are under immense pressure. In these difficult times we need good, and preferably great governments.

What most countries need now are governments who can achieve two things:

  1. Build confidence in the markets, that the government can sort out their countries fiscal issues. When people talk of “The Markets” they are essentially talking about those institutions that lend country’s money. If those institutions are confident in the countries ability to repay loans, they charge low interest. As their level of concern over being repaid goes up, so does the interest rate. Therefore building this confidence is critical, but it is not driven by political speeches, the market requires real action to build confidence. Silvio Berlusconi spoke this week about the fundamental strength of the Italian economy, and Euro leaders are speaking eloquently about their commitment to defend the Euro zone. The problem is these speeches to the obvious frustration of the politicians who make them have little effect on the markets.
  2. Governments actually have to fix the economical issues of their country, get their debt under control, move to balanced sustainable budgets, and help their countries become more competitive. This will not be easy or quick, but it is critical.

Some countries are blessed with political systems capable of tackling these issues. Of concern are those that are for a number of reasons, not able to deal with these two issues. The reasons for this weakness are:

  • Lack of Political Consensus – If there is a broad consensus on the way forward within a country, that allows the government to make the difficult decisions. And the mere fact of a broad political consensus in itself tends to build market confidence.

Countries with a broad political consensus fall into two camps, those where the government and opposition broadly agree on economic strategy, such as Germany and the UK. The second group, are those with one very powerful party of government such as Turkey where the ARP party received 50% of the votes in recent elections. Countries that lack a political consensus are epitomized by the US where there are significantly different strategical economic policies being advocated by the two main parties.

  • Dysfunctional Political System – Sadly some countries have political systems that simply do not function, they tend to be riddled with corruption to the point where the system simply fails to function effectively. Greece is the most vivid present example, but most other southern European countries suffer from at least some level of dysfunction in their political system.

These issues tend to be exacerbated by the political process, where there is a powerful drive to “Compromise” and find “The middle ground”. This can be useful at building a political consensus, but it is of less effective when tackling a major crisis.

Great personal leadership can limit the impact of such issues, particularly in countries with very sophisticated checks and balances built into their political systems. The US is one where a consensus is required between Congress, The Senate and the President to get anything significant done. Some powerful presidents have been able to transcend those political realities through leadership and get things done even when the opposition controlled Congress or Senate. Sadly the last President who springs to mind who could do that was Reagan.

President Obama looks like merely another political player, a very clever one, but sadly not Presidential. In the recent fight over the debt ceiling he came up with a clever answer but possibly to the wrong question.

He came up with a politically acceptable outcome that allowed everyone to save face, but it no way came close to tackling the issues. The fact that US stocks are now falling reflects the realization by the markets that the deal was based on what was politically possible, not what is economically required.

The moment he got down into the battle to find a compromise he implicitly accepted that Congress and the Republicans could use the debt ceiling to hold the country to ransom to get their way. We will never know, but I suspect Reagan faced with such a situation would have been much firmer even to the point of allowing a shutdown rather than giving in to blackmail.

Rating agencies who assess the level of risk in loans, are being castigated for lowering country debt ratings (The level of confidence that countries will repay loans), including that of the US. They are simply reflecting hard facts. The US came within hours of a default and has no agreed plan to get their debt under control. In those circumstances to have not lowered their debt rating would have been indefensible.

For decades our governments have borrowed excessively, the recent recession made that unsustainable. As that fact became clear, lenders got rightly nervous and interest rates climbed, making government issues even more serious.

Too many governments for the reasons outlined above are unable to respond effectively, and therein is the danger.

 

 

 

 


Category : Blog &Leadership &Other Thoughts

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