13 Sep 2014

Deutsche’s ‘Wall Street Crash’ prediction goes über alles the airwaves

TO GO WITH AFP STORY : " The Great Crash

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 .

Head of Research and member of the Group Executive Committee of Deutsche Bank AG Folkerts-Landau arrives for the Frankfurt Finance Summit in Frankfurt

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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7 reader comments

  1. anon says:

    sadly Bankers are a devalued currency.

  2. anon says:

    Just a question probably already asked, but if a financial institution makes comments like this while some part of their organisation or client may be seeking to gain financially such as by shorting the market, is that the term? does this impinge on any legislation governing their activities?

  3. Andrew Dundas says:

    Isn’t it a well-worn fact of economic geography that the ratio of external trade to GDP is highest amongst small nations than the larger nations such as the UK? And isn’t the standard explanation that small nations have less ranges of tradeable specialities and need to buy-in more of their needs? So, for example, that the trade to GDP ratio of the U.S.A. is a much smaller proportion of its GDP than, say, French GDP.
    Which is why small nations are so much more vulnerable to market shocks than large nations.
    Scotland has a population well below the average for the 200 sovereign states in the world today, and its economy moves in lock-step with our largest trading partner. Scotland’s reliance on exports to the rUK is ten times greater than rUK’s exports to Scotland. Because rUK is nearly 12 times larger than Scotland. Both need a common currency, but Scotland’s need is far greater.
    We should remind ourselves that basic tax rate in Norway is 28%, its NICs 16% and its VAT 24%. That’s how they’ve managed to accumulate their Oil Fund.
    Adopting ALL current EU policies is mandatory for all new Members and includes adopting the Euro just as soon as GDP per capita is sufficient. Scotland would be obliged to adopt the Euro on entry. Which could be just a little awkward.

  4. Steve Allan says:

    No-one has ever offered independence to the Scots. Is your economic analysis more reliable?

  5. Veronica Ferguson says:

    Thank you. You have no idea how refreshing it is to read a measured, insightful piece. The people of Scotland are about to make a momentous decision, many of us are tortured over it and it really saddens me to see that largely, the UK media are jumping on dramatic headlines without appropriate scrutiny.

  6. anon says:

    if it all goes pear shaped and the sums do not add up, they can always reach for a whiskey..mmm come to think of it

  7. Anti matter David Cameron says:

    Joking aside Dr Who level context is useful. The broader global dynamic at the moment outside of China and Russia is towards fragmentation. The broader context here is vision, or lack of it.

    Where there is no vision the people perish so says the Bible, the western style democracies have had no vision since 2008, vision was sold out during those fateful days along with moral hazard.

    The Scotland situation is one expression of that dynamic continuing to play out, there is no future vision to buy into the union, so, like elsewhere, the trend is towards fragmentation.

    The no campaign is focussed on stimulating past nostalgia for the success of the union and fear of the consequences of a split, there is no grander strategic ‘Jerusalem’ style narrative anywhere to be seen to inspire people to pro-actively vote no, the no vote is a fearful passive vote.

    So our German banker rather misses the grander point, being that the broader trend will continue towards fragmentation (no matter what happens in Scotland) until such time as the grand injustice of 2008 is addressed or otherwise a different vision appears which inspires people to work together once more.

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