It is clear that the Eurozone can no longer do anything right

Allister Heath
COULD Brussels have been taken over by saboteurs, a secret army of eurosceptic infiltrators and spies masquerading as officials?

I only ask because it now almost seems as if Spain’s bailout was deliberately designed not merely to fail but to inflict maximum damage on the Spanish economy and the entire Eurozone. Rarely have I seen such incompetence. Last night’s decision by Moody’s to downgrade Spain another three notches – it is now just higher than junk – was made for several reasons – but the first, ironically, was the bailout itself, which in reality was merely a soft €100bn loan to the already increasingly indebted Madrid government. “This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis”, as Moody’s put it. So there you go: the “bailout” was so damaging that it might actually precipitate the need for another bailout. Rarely has public policy been so counter-productive; in the old days, the law of unintended consequences used to take many years before it manifested itself. Now it just takes a few days before it becomes clear to all and sundry that bailouts have achieved the opposite of what they intended. As to Spain, Moody’s is warning that it could be cut to junk within three months’ time. Such a move would trigger more chaos, including haircuts.

Meanwhile, France, Germany and other conflicting sources of power and influence within the EU keep making contradictory statements – it is almost impossible to decipher Germany’s comments in particular at the moment. So what next? More bailouts, presumably, until the cash runs out. Cyprus could come soon. It was also downgraded last night; its economy is inextricably linked to Greece’s, which faces a major turning point at the weekend when it decides whether to back pro or anti austerity parties. An election of the latter would trigger almost certain default and Grexit. We shall soon find out.

I’m thoroughly enjoying the shareholder spring. It is good to see the owners of companies finally exercising their proprietorial rights and duties. This is not about equality, class war or fighting high pay, as some observers would have us believe – this is a profoundly capitalist revolution, with those who put up capital attempting to regain control and ensuring that high pay only goes hand in hand with high levels of performance. Bosses of publically traded companies are employees – not owners – regardless of whether they actually founded the firm they run. But while it is right for shareholders to crack down on rewards for failure, and to make sure that even successful bosses aren’t engaging in gratuitous pay hikes, some arguments being used by the discontents are flawed. It makes no sense to take a company’s share price for a year and to use that to determine whether a CEO deserves a pay rise. For a start, one needs to look at a share’s total return, which includes the dividend, but that is only truly relevant over longer periods of time, thanks to compounding.

The main issue is that the same people who rant against excessive short-termism in markets are often guilty of falling into the same trap when looking at a CEO’s performance, especially in times of falling share prices, which bolsters their case. As long as a firm’s financial performance, properly measured, has been good, it shouldn’t matter too much whether a share price has dipped for a few quarters. The converse is also true: a higher share price should not in of itself suffice to trigger a pay hike. Life is more complicated than that.