With treasury at a tipping point the chosen overall theme for this year’s EuroFinance international treasury and cash management conference in Vienna, a keynote session on the first day examined what current development represented key tipping points.
One of the more downbeat presentations came from Daniel Franklin, executive editor of The Economist UK magazine and editor of the upcoming ‘The World in 2017’, the magazine’s annual global outlook. It was titled ‘The end of Europe’ and Franklin noted how political risk – often regarded as largely restricted to emerging markets – had more recently extended to the developed markets, with increasing evidence of disruptive politics on both sides of the Atlantic.
This could well be evidenced by political upsets in the year ahead in several key economies in Europe, where elections are scheduled in Germany, France, the Netherlands and possibly Italy. The shock created by the UK electorate’s decision to exit the European Union (EU) was one of four existential threats – or crises – affecting the continent and which had to be factored into business planning.
The other three identified by Franklin were:
- The euro crisis: Although this has made headlines less often than in 2015, the threat hasn’t gone away, with concerns over the stability of German and Italian banks, the prospect of fresh bouts of austerity and instability in Greece; and the potential for tensions in the eurozone to resurface.
- The migrant crisis: the repercussions continue to feed into politics and demographic pressures alone mean that the problem won’t go away soon.
- The security challenge: a period of stability since the dismantling of the Berlin Wall now appears to be ending, with Russia’s incursion into the Ukraine and the resulting sanctions applied by the EU pressing a more dangerous geopolitical environment.
As for Brexit, there are three potential scenarios, said Franklin. The first is that is damages Europe but not fatally and the Union holds fast. The second is that the UK’s decision proves attractive and Europe is seriously weakened as others follow its example. The third is that, despite assertions that ‘Brexit means Brexit’, attitudes shift and the UK stance softens. Each scenario is plausible, but each also involves a period of continuing uncertainty in the near term.
Three key trends
Three other major trends shaping socioeconomic and geopolitical environments were examined by Alasdair Ross, global product director at the Economist Intelligence Unit. UK. The first was interest rates and while several central banks have recently pushed their benchmark rates into negative territory, they have been on a steadily downward curve over the past 20 years.
While the US appears to be slowly returning to a more conventional business cycle – Ross foresees the Federal Reserve tightening policy more sharply by 2019 to prevent the economy overheating – other regions are unlikely to see much change for the rest of this decade to the low-to-negative rates environment.
What does appear to be changing is a shifting in policy, both in North America’s two main economies, Japan and now the UK, with austerity replaced by investment.
The second trend is stagnating wages in the developed economies – in contrast to China and its regional peers where they have risen sharply and lifted much of the populace out of poverty. “That produces good opportunities for companies confronted by moribund western markets,” Ross suggested.
In the west – with the US again providing an exception – the bargaining power of wage earners has diminished and productivity growth has been weak since the tech boom of the late Nineties. The development of artificial intelligence (AI), robotics and automation suggests, however, that we could be on the cusp of a new era of growth.
The third trend, again a long-term one, is inequality – as the sharp fall that followed the post-World War Two economic boom tailed off in the Seventies. While the number of individuals living in extreme poverty has fallen, the squeeze on incomes has been hardest felt by the middle classes.
Ross noted that a common perception that inequality is increasing, with the very richest taking a disproportionate share of wealth, is fuelling geopolitical instability and is fuelled further by reports of multinational corporations paying minimal rates of tax.
“Are we at a tipping point?,” he asked. “Certainly businesses should expect an extended era of low interest rates and also more populist policies. Donald Trump may not win next month’s US presidential elections, but it’s largely his policies that are going to apply.”
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