Why crises are good news for the EU
THERE are two kinds of organisations: those that are rewarded for failure with more power and greater budgets, including most regulators, and those that are punished for their mistakes, including private firms operating in a real free-market with no bailouts. The European Union is very much in the first camp. The proposal yesterday by the European Central Bank President Jean-Claude Trichet that governments should create a finance ministry for the 17-nation bloc is as brazen as it is predictable. Each time EU centralisation is shown to fail, with the creation of an unmanageable new currency zone just one of many such instances, the bureaucrats’ answer is always to centralise even further. The European Exchange Rate Mechanism failed – the answer to that was to create the single currency. The Eurozone is now in crisis – so the answer is to give much greater powers to Brussels over national budgets. That won’t work either – so at this rate in a few decades’ time we will have sleepwalked into a governance model that is even more centralised than anything the US would ever countenance, with Brussels exercising more power than Washington. We are not there yet, of course, but the EU is driven by the logic of the ratchet. Crises are useful because they allow a fresh power grab.
All of this is wrong. What is needed is more experimentation, with successful projects rewarded and bad ones penalised. The euro doesn’t work – so it should be wound down or at least those countries that are too weak to be members should be made to leave. If politics were imbued with the same discipline as that of a functioning market, with the equivalent of profit and loss, this is what would happen. The fact that it never will is why we should never rely too much on politics and big government.
DOT.COM BUBBLE
The latest, most demented phase yet of the new dot.com bubble is upon us. Groupon, the US-based digital coupon site, announced plans to raise at least $750m on the stock market last night. The company was founded in 2008; many now believe it to be worth $25bn. Even though it made a loss of over $450m last year, its valuation has surged from zero three years ago to $1.4bn after a 2010 fundraising to $6bn a few months later when it rejected a takeover approach from Google. Clearly, many investors have lost their marbles – while it is true the firm is growing extraordinarily fast, the kinds of valuations now being talked about are several times too high. The biggest issue is that other competitors could enter the market and thus erode its future growth potential. But investors are drunk once again. Why do they never learn?
SATURDAY EDITION SPECIAL
For those of you going to the races at Epsom tomorrow, we have a treat in store for you: City A.M.’s first ever Saturday edition, chock-a-block with news, analysis and insight on the Investec Derby, as a well as a good dose of business news. We will have hand-distributors at Waterloo and London Bridge for people taking the train from London – and lots of copies at arrival in Epsom Downs and Tattenham Corner. Bill Esdaile and Ben Cleminson, our racing editors, will be providing readers with the best, punchiest racing content anywhere. We are proud to be the official newspaper of the 2011 Investec Derby, and hope to see you there.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath