It’s not all doom and gloom in the City

Allister Heath
IT is important, every so often, to focus on what is going right, rather than on what is going wrong, and on hope, optimism and success rather than failure and misery. That was one of the reasons for City A.M.’s inaugural awards last night, where we celebrated the best and brightest firms and individuals that are leading London’s private sector recovery. I recommend the full coverage of our awards, on page 1 and pages 10 to 14.

It is vital that those of us who believe that London’s financial and business community must prosper and grow again identify and highlight examples of good practice and successful innovation. Many of the individuals and firms that we recognised are truly exciting. I will single out just three that I find particularly interesting: Burberry, winner of our company of the year award; Neptune, our fund manger of the year; and Inflexion, our alternative manager of the year. Congratulations to them and to all our other winners – not least Boris Johnson, our personality of the year.

Contrary to what almost every commentator was expecting, Germany has emerged as one of the great recovery stories of the past year. Its rebound, partly driven by buoyant exports of capital goods, has been truly spectacular. The newsflow has remained exceptionally good, with unemployment falling again yesterday despite the ending of special job markets subsidies. The IFO index rose to 107.6 in October, driven by an increase in the expectation component, suggesting more growth ahead.

The main reason for Germany’s success – which comes after decades of paltry expansion and general morosity – is its renewed competitiveness. Following the launch of the euro, Germany realised that it would not be able to devalue its way to prosperity. It thus became the only significant European economy to actually take an axe to its costs and to tighten its belt. Wages remained subdued for years; its public spending is now far lower as a share of GDP than Britain’s. This, together with other reforms, has allowed the German economy to shrug off the strength of the euro, which many believed would neuter its performance.

Paradoxically, however, Berlin’s success is proving to be a headache for the European Central Bank and further confirmation that the single currency is in terminal crisis. The gap between booming Germany and the near bankrupt peripheral countries, such as Greece, is greater than ever. As Societe Generale’s economists cogently argue, the euro’s strength is having a deeply asymmetric effect, by harming the growth prospects of the less competitive southern Europe while barely impacting Germany’s manufacturing sector. Italy is a prime example of the losing side of the equation: close to two-thirds of its deficit for August was accounted for from outside of the EU, the SocGen research suggests. Persistent euro strength will accentuate divergences and lead to even bigger imbalances in the region. The euro was always an artificial construct, an attempt by Eurocrats to forge a political union by using economic tools. The only country that has truly attempted to make this work is Germany, the Eurozone’s long-suffering paymaster. Yet monetary union is doomed: it has already been holed beneath the waterline by the Club Med nations’ absurd profligacy; another shock, let alone a full-scale sovereign default, would kill it off completely. Mark my word: it will end in tears.