A Blue Sky above Dark Clouds

Long time ago, when I was very young, I learnt to fly in a little airfield in Minorca, an island in the Mediterranean Sea. While in summer the weather was always resplendent and you could enjoy flying from dawn to sunset, the situation was quite different in the short winter afternoons when dark clouds and a local strong wind, called the “Tramontana”, shattered our young illusions about getting behind the controls of our small plane and watching from a few hundred feet above, the daily life of our fellow countrymen. I remember that when student pilots gathered together in the hangar cursing the dark cloud layer, our flying instructor, a man with thousands of hours of flight experience, looked at us and said with a smile:“Cheer up! Above the dark clouds, there is a bright blue sky…”

Later on, during my lifetime, when some unfavorable circumstances or any kind of problems have come my way, I always remembered my instructor’s words and that helped me to find a way out of the problem. Today, several European countries are suffering an economic and financial crisis of monumental proportions; thousands of small businesses are disappearing because the shortage of credit from troubled banks is not allowing them to continue their business; unemployment is reaching unacceptable levels for communities used to a comfortable way of living politicians are overwhelmed by events and can do no more than try to stop the blows of the stock market; everybody looks to the European Central Bank, hoping they will find a solution to stop the long list of countries that need to be urgently bailed out.
Greece was the first to require assistance, followed recently by Ireland. Nevertheless, economic crisis are not new in international markets; they periodically appear after periods of rapid credit expansion which creates bubbles not supported by the real economy or after dramatic situations that shattered the countries’ monetary policies Perhaps the most well known economic crisis is the one which followed the end of the First World War, in 1918. Most European economies had contracted – Germany’s and France’s by 30 percent, Britain by less than 5 percent– as men and capital were wasted, as factories diverted to producing arms, and livestock slaughtered.
To meet the War’s financial needs, the governments of Europe had spent some $ 200 billion, consuming almost half of their nation’s GDP in mutual destruction. The central banks of the belligerent countries both increased the money supply and incurred heavy debts, mainly granted by banks within the United States.
After the Versailles Treaty, Germany was compelled to indemnify the victorious countries, i.e. France, England, Belgium, Italy and the United States of America, with an astonishing figure of 269 billion gold marks- equivalent to 100,000 tons of pure gold – what would be today around USD 778 billion.
As a result of this heavy burden, the defeated Germany fell into a deep economic recession: hyperinflation; riots and strikes; political instability; continuous change of governments, some of them in office just a week; it was “a kind of madness”. On the victor’s side, things were not much better; both French and British governments tried to renegotiate the debts incurred with the US banks, setting out that they have suffered the heaviest burden in both lives and destruction of assets, while the United States only joined the war towards the end of the conflict.
The overall picture was dramatic, with the specter of another war on the horizon. Even in such difficult circumstances, the human factor made its appearance. Four men, each one head of his country’s Central Bank, assumed the task to reorganize the economic situation: Montagu Norman, Bank of England; Benjamin Strong, Federal Reserve Bank; Emile Moreau, Banque de France; and Hjalmar Schacht, of Reichsbank, were able to put in force the “Dawes Plan”, so called after Charles Dawes, a Chicago banker who headed the US delegation to the Reparations Commission, and, with the support of new loans from US banks, stabilised the European economies. Norman and Strong were good friends and they spent holidays together in the French Riviera, where they designed the main lines of the project and submitted, first to Hjalmar Schacht and later to Emile Moreau. Only through the personal approach – not through diplomatic negotiations – they reached agreement. The crisis we are facing today is quite different.

If we ask a panel of experts what are the origins of this crisis, we will get various replies:

  • an economic expansion driven by over optimism and a sharp rise in risk taking;
  • a strong demand for commodities which launched a speculative process which was disconnected from the real economy; systemic financial risks with inappropriate supervision which allowed an unsustainable expansion of credit; etc.

New important players joined the game: China has become the world’s largest exporter and the world’s second largest economy, surpassing Japan; Developing countries now account for 37% of global trade and, besides, they hold approximately two thirds of global foreign currency reserves; Brazil, South-Africa and India have become big players in foreign direct investment activity; etc.

Other policies are playing its role in global trade: the Doha round is in a stalemate situation (perhaps because of the difficulty in adopting reforms related to competition, trade and investment, as well as agricultural matters). It looks like the economic situation is worse than ever. It’s not true! Figures released in recent conferences and global trade studies have shown the start of a turnaround in global trade.

Transaction numbers in trade banks around the world have started growing after a two year fall. In a survey of over 5 million transactions studied by the ICC Default register only 1,100 defaults were recorded reflecting the inherently safer nature of Trade above other bank finance transactions. With a little optimism and a lot of imagination, we will find the way out of this crisis. Keep in mind my old instructor’s thought: …”up there, above all these dark clouds, there is a bright blue sky”.

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