For three days last week, Dr Rowan Williams, the 104th Archbishop of Canterbury, among other distinguished speakers, told economists, theologians and others gathered at a Wall Street conference that wealth and money were not the same thing. Wealth, said the Archbishop was much more about human relationships, than noughts at the end of a balance sheet.
The idea of money as a metaphor in faith, and indeed, the affinity between capitalism and social justice is not new. This has not stopped policy planners from being, on occasion, spectacularly unsuccessful in accounting for the latent risks of new global interdependencies. Relatively minor inputs in one part of the system frequently have unexpected and major impacts in other parts.
Fortunately, the connection between income generation and income distribution is no longer a major source of ideological difference. Nearly everyone agrees that productivity has to be incentivised and that free enterprise thrives where income inequality is greatest.
The problem from a societal point of view occurs when the values that drive profit making do not correspond with the real world. The invention and increased use of “unreal forms of wealth” such as derivatives and futures assume continuity that exists on paper, more than anywhere else.
While Warren Buffett once called derivatives “financial weapons of mass destruction” there has been in recent months a renewed increased interest in diversified “social finance” products. This is the product of several trends. Firstly, the financial industry is running out of options and doing good is one way of raising an investment profile cost effectively. Also, many of these investments are in emerging economies, and are expected to grow faster than developed ones. Being uncorrelated with other assets they represent a good diversification strategy at reduced risk. Secondly, there is a growing demand for ethical investment, particularly in the UK, and several social investment banks have been founded there. Social-enterprise clubs are now among the most popular student organisations at leading British universities. Thirdly, there is a return of “back to the roots” and “small is beautiful” mentality. Fourth, governments such as those in the US and the UK are supporting efforts by providing tax breaks and a more streamlined regulatory environment.
Social adhesion
If there is a quintessential value that defines the European project, it is social cohesion. Social cohesion means less inequality and less social conflict. Germany is probably the most successful example, having really managed over a protracted period, to marry social harmony and economic reform. In the past decade, notwithstanding the economic challenges of reunification, successive German governments have kept public debt in check, partly freed its labour markets, and kept unemployment down to a minimum while maintaining competitiveness. Elsewhere however, the need to preserve social cohesion has become a self-defeating excuse to avoid the political risk of social reform.
According to the Economist magazine most countries have opted to maintain social cohesion, even if for the wrong reasons - social cohesion usually protects those in more permanent positions, in particular public servants to the exclusion of the young and immigrants. Some countries such as Spain and Italy face a difficult scenario where both reform and non-reform have attendant risks. Since most of the newly created jobs in both these countries are temporary, it is primarily those at risk of social exclusion that are least likely to benefit from a policy of social cohesion.
Inaction seems to be the rule in the European Union, from the left of centre government of Greece which has cited social cohesion as the primary reason of avoiding public-sector pay cuts in its urgently required fiscal retrenchment, to the right of centre government of Italy which is loath to bring in destabilising legislation that might weaken the fragile coalition, unless absolutely necessary. The Spanish Socialists have also justified the retention of labour-market laws that make it prohibitively expensive to fire permanent employees. Likewise, the conservative government of Nicholas Sarkozy, who are unwilling to risk trouble in the streets by pushing for much needed labour-market, pension and welfare reforms.
The exception to the rule has been Ireland, the only country thus far to grab the proverbial bull by the horns and rein in ballooning public deficit in a relatively short time-frame. Facing a large deficit and a recession, the Irish government revoked its 30-year social contract with employers and unions and slashed public spending. This measure has led to dramatic reductions in public sector salaries - salaries in the wider economy followed suit. Public sector response so far has been limited to work-to-rule and the strategy seems to be working. Ireland is pulling out of recession faster than everybody else ensuring that its economy will regain competitiveness within the euro zone.
The strategy employed by the Irish government is in stark contrast to the drawn out affair of their Greek counterparts. Notwithstanding the success of their recent bond issue where the government raised half of the EUR51bn needed to cover its budget deficit in 2010 according to Fitch, further radical measures may be required if market sentiment spins out of control. This is generally understood to mean deeper cost cuts and possibly a euro zone bail-out.
Source: The Economist,
International Herald Tribune
