Deutsche’s ‘Wall Street Crash’ prediction goes über alles the airwaves
This summer Germany passed its first ever minimum wage law. As of July, German workers can’t earn less than 8.50 euros an hour.
The policy was brought in by the conservative government renowned across the world for its economic success. But one bank warned of doom.
If the minimum wage was passed, it said, the whole German labour market would unravel. Up to a million jobs would be lost. The “low wage segment” of the German labour market would be destroyed.
The bank was Deutsche Bank. Its warning was ignored.
Today Deutsche has warned that Scottish independence could trigger a Wall Street Crash-style depression.
I’ll look at their reasoning over Scotland in a moment, but it is worth explaining, in general, the difference between interventions like this, and those by CEOs of companies like Next and John Lewis.
When companies warn of changed trading conditions, higher prices, moving HQs, they are making real decisions. Investment bank economics departments are paid to do a different job: to think and speak “outside the box”.
So the Deutsche report, is an attempt to inject new thinking into the debate about the risk of separation. It argues:
1. Scotland’s reputation as a historic pioneer of capitalist innovation, both in machinery and finance, only took off after the Act of Union in 1707.
2. Scotland can’t become Norway because its oil will run out sooner, and because its exports are more concentrated in oil and finance than Norway.
3. Scotland spends more than it earns – both in public spending and in its balance of trade with the world. This will get worse if the financial sector moves south. So Scotland would have to do more austerity than if it remained in the UK.
4. Neither a currency union, nor sterlingisation would be better, from an economic point of view, than staying in the union.
5. Scotland is one of the most export-oriented countries in the world, with most of its “exports” going to the rest of the UK. Any border controls or currency worries would limit its ability to go on growing this way.
Each of these arguments is plausible. Above all #2 and #3, I have warned before, are a strategic issue: can Scotland attract new kinds of industry and promote new kinds of growth to offset the long-term fiscal crisis of all developed countries, against which oil is only a delay mechanism?
I would class argument #1 as philosophical. There is no counter-factual evidence to show what might have happened if Scotland had remained a separate kingdom in the British Isles as capitalism developed. Maybe somebody should write a Doctor Who episode exploring it.
Argument #4 is a re-run of the currency debate, which is familiar to people on both sides.
Point #5 is interesting, but if you look at the Irish Republic, then its import-export patterns with the UK are quite similar to Scotland’s. So Scotland’s trade is dependent on an amicable political settlement, post independence, should people vote Yes.
But here’s the thing. The report is by Deutsche’s head of strategy David Folkerts-Landau .
He is an eminent economist whose work on the long-term impact of the new global currency system that emerged out of the Asian crisis of 1997 enabled him to spot the possibility that subprime lending could crash the US economy.
But the point about a new Wall Street Crash is contained in a foreword, not the main report. Here Mr Folkerts-Landau says:
“A yes vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US. These decisions – well-intentioned as they were – contributed to years of depression and suffering and could have been avoided had alternative decisions been taken.”
For me, the link between that conclusion and the five points argued in the main document is open to debate.
The foreword’s logic is that, by splitting away from the UK, Scotland will draw down on itself all the negative forces, and wishes, of the global marketplace, and at a time when there is massive downside risk in the global economy.
It is, in short, an opinion.
This week, when I was trying to explain the economic risks of Scottish independence, I also warned that people could be missing the global danger of stagnation and fragmentation, by focusing on the Scottish issues alone.
If major banks thought offering Scotland independence was in danger of triggering a 1930s-style depression, they would have warned David Cameron about this when he did it.
The Deutsche report is a quick, and quite readable, take on economic problems understood by many on both sides.
Mr Folkerts-Landau’s opinion is interesting – but he was ignored by Angela Merkel over wages. As I write this I hear the words “Deutsche… Scotland….Wall Street Crash” being read out by newsreaders on our venerable state broadcaster.
Other opinions are available.
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