Picking up the tabs for Europe

Read a joke on the internet yesterday; “A Greek, an Irish, a Spaniard and a German go to a pub and have a fun time… at the end of the party, the Greek, Irish and the Spaniard put up their hands for not having money and finally it was up to the German to clear up the mess”. Doesn’t sound funny right? The joke in fact is that this is the scenario that is currently running across most of Europe as it looks down the barrel of the financial crisis that has the potential to threaten every single country.

It is funny in a lot of ways that the most powerful and resilient economy in Europe today is one which has actually experienced some serious political turmoil, change of guard, partition and unification all over the last century. Germany has been subject to paying up for the wars in Europe and has seen inflation that has been just mind boggling during the Depression. In the recent past, Germany has faced the difficult balancing act of offsetting debts of a low industrialized East German economy in the 90’s. Yet again, it is Germany which is having to so a salvage – this time it is most of Europe.

So where did Europe go wrong?

Through the ages, Europe has always been a restless baby. They have fought for power and control within the bounds of the continent or its colonies. It is not uncommon that while Europe made the best out of the Industrial Revolution, the monarchies never really allowed any country to have the relations that kept trading easy to do. It was the post-war Europe where countries finally allied for better relations in trade and removal of tariffs at many levels that got them back on track.

The end of the cold war and the unification of Germany in 1989 gave the idea of a unified free trading and economic zone of Europe as a whole a firm rooting. A common currency, the Euro gave a lot of member nations a tough time marking their own currencies at parity. But this was just a hiccup as in the long run, it ensured that now every member nation had easier access to resources and facilities in better developed nations and also borrow finances to fuel their economic development.

Sadly, this was the space where most countries have got it wrong. When taking a bank loan, we are always asked to issue a collateral or bring in a guarantor to support.  It is a further must for the two to be presented if your own credit rating is weak. The smaller countries like Greece were never in a shape to manage their global debts against their own incomes (usually taxes). But with easy access to global finance and backed by the fact that they are a part of Euro, borrowings increased beyond manageable levels. Public spending on government funded projects, pensions, tax waiver and all kind of populist policies have meant the money borrowed is never coming back.

It wasn’t surprising that when the slow down hit the world in 2008, it was the smaller economies in Europe that had money either invested or borrowed from the US went down. With United Kingdom not a part of Euro and France playing a second fiddle; it was up to Germany to assume the role of big brother and pull up the debt of all these failed economies. But not without conditions towards imposing austerity measures to be implemented by the countries failing to bear its own debt.

But this is easier said than done. When Government implements measures to cut down spends, it means that people are likely to lose jobs, spend less and in turn end up paying lesser taxes. Less tax means the government earns less and cannot repay its debt. What this means is that even with stronger economies in the Euro picking up the tabs and bad debts, this cycle might not end. This is a space where today we have 17 countries linked by a common currency and trade agreements – but the political will, tax structure and the ways to earn an income and spend are vastly different among the member countries.

The Utopian plan would be a uniform currency, tax policy and governance style across the member nations – which is definitely unpopular on a political front. But one thing for sure, the vicious cycle of debt ridden economies has begun. People are going to have a tough time and recoveries are going to be slow and harsh. As for the immediate, someone is going to have to step in and pick up the tab for all of Europe.

The Manipulation Game

I learnt this a part of economics- The Circular Flow of Income.

Industry produces goods: people buy the goods with their wages :: People work for the industry making the goods: Industry pays people wages.

This was simple and pretty basic. Then there was the government which taxed the people and industry to provide for the infrastructure for both. The next layer was financial institutions which gathered surplus from the wages and loaded it to the governments and industry to bridge gaps and grow larger. In return, people earned interest and bought more goods…. And so the cycle grew larger with a global perspective and international trade come in.  

In an ideal world, we have actually set in motion a perpetual growth system that is worldwide and self- sustained. But somehow this never happens. There is always a rouge element which tries to play folly and break the complete cycle. In most cases globally, a government- industry- financial institution nexus has often played havoc and has left communities, countries and even entire financial structure around the world jeopardised. Enron, the crash of 2008 are just a few examples which have left a mark on global economy.

Living in a world where nothing seems to be robust leaves a lot of gaps for me to think in all the places where greed and instant profits are linked to a scenario that seems a calamity but seems like a cover- up for a larger plot. I can’t help but speculate that sometimes it almost seems like a crisis is being created to manage the financial bearings. When companies issue stocks, they are borrowing from people with the idea of mutual ownership and sharing of profits. When the company buys back their shares; dividend is no longer a liability to be paid. A recent article by Jayant Vidhvauns in a Marath daily drew my attention that this is actually a big possibility. (http://epaper.loksatta.com/521248/indian-express/15-06-2015#page/13/2)

Let’s take the recent case of Maggi in India. A legendry brand that’s almost 30 years in existence and stands to take 70% of the instant noodles market. It contributes in the range of 20% of Nestle India’s revenues and is almost a habit for most people who have grown with the brand. We always knew it was not healthy, had MSG and other flavouring agents. So why all of a sudden did one fine morning in June we got alerted? How did this happen to a company that was over exceeding analyst expectations? Why all of a sudden did the share prices fall for a few days and bounce back? Its hard to imagine how many shares might have been bought back by Nestle within the sessions it was running low and how much money was lost by the investors in the process. 

I can’t help but question, is this a planned move to buy back shares in a bid to retain profitability? The company has recovered its shares in the few sessions of panic sale and now the stock is back on track. People have lost money- the company lost nothing. As for its reputation: the entire set of packaged food market with all its competition has gone sluggish; so no loss of market share. The losses in sales are going to be far less as compared to the dividend to be spread amongst shareholders.

Now wait a minute… How did Cadbury’s get worm infested in 2003? Never happened before or after? But that was the time Cadbury got "Delisted" and there was an active buy back. How come Coke had pesticide residues one year and is sharing happiness ever since with no issues? Not to mention the pesticides later got bottles from all the brands and no one lost anything in the market. 

I don’t have enough evidence, study and the understanding to put my finger on things. But one thing is for sure; there are more ways to manipulate and control the business outcomes- especially when big numbers exchange across over a matter of few days. Shares have often been subject to allegations of insider trading, bubbles and scams- but this seems to be a new way that even the regulators might find tough to manage and distinguish as a rouge activity. No matter if you agree or call me a skeptic-  Business today is not just a PnL statement- it is an entire manipulation game.