Southern discomfort

15 May 12
Michael Ware

The profligacy of southern Europe has been astonishing and explains why Greece is about to be unceremoniously kicked out of the euro. It won’t be too long before Spain is shown the same door


My teenage daughter wants desperately to go to university. She doesn’t care about where it is or what to study, she just wants three years of living in halls of residence, eating pot noodles and hopefully meeting sensitive intelligent boys who also happen to play a lot of sport.

I am, of course, trying to make her be a bit more focused and talk about the dreary details of careers, student loans and the overall cost of going, but Louisa is having none of this. Both her parents spent three years having fun, all paid for by the state whilst not having to worry about getting jobs at the end of it so why shouldn’t she?

The reason, of course, is that the world has changed and those carefree days of 100% grants and free courses are a distant memory along with flared trousers, Findus crispy pancakes and nationalised industries. Louisa and her friends want it all to come back. If a politician stood up tomorrow promising to abolish tuition fees and student loans and to bring back good old British Rail, I suspect he would be swept into to office on a wave of happy teenagers, grateful middle-class parents and nostalgic train spotters.

This may sound simplistic but arguably both the Greek and French electorates have just done something similar. They have voted in politicians who are promising a pain-free return to a more carefree era where the state provided lots of good stuff for free, the banking crisis never really happened and austerity was just a clever word to use in scrabble.

For these electorates, their new politicians have found the hidden door to another world, a place where public spending can carry on unchecked and the big bad bankers can be made to pay for everything through taxes on bonuses and mansions. This is the new homeopathic version of politics, if you are sick you don’t have to take any real medicine, just a chalky tasting placebo and everything will get better, trust us.

I, for one, have my doubts as to whether this is a sustainable strategy. Southern Europe has to live in the same global financial market as everybody else, and the international bond markets are already giving their opinion by increasing rates to unheard of levels. The cost of 10-year Greek bonds is now 25% per annum, which is the sort of rate you associate with countries that use the word 'Democratic Peoples Republic of’ in their titles.

However this is also understandable. The profligacy of our southern European cousins has been astonishing and two recent stories give a real flavour of what has gone on. Firstly did you know that the average pay of a state employed Spanish air traffic controller in 2010 was £800,000 per year? Yes you read that correctly, £800,000 to stare at a computer screen all day and say ‘Alpha Bravo Zero’ instead of using proper letters.

Secondly, the last wave of strikes in Greece was over a proposal to raise the public sector retirement age to 60. This included state employed hairdressers and television presenters who currently retire at 50 because they work in allegedly hazardous occupations.  Again you have read that correctly, they were protesting against reforms to stop government-employed hairdressers retiring at 50 from the rigours of blow drying and asking about your holiday to spend the next 30 years playing cards and drinking black coffee in sunny market squares.

This is why the Greek economy is about to be unceremoniously kicked out of the euro and I am pretty sure that it won’t be too long before Spain is shown the same door.

My worry is that, despite the messages coming loud and clear from the bond markets, the UK electorate will be tempted to follow its French and Greeks cousins down the same path of simplistic voter friendly solutions mired in a yearning for the carefree pre-globalisation past.

Austerity is hard, spending cuts are hard and I fear that at the next election the UK will echo the Europeans and fall back on the touchstones of blaming all our ills on immigration, the European Union and the new bogeymen of big business.

British politics has always been characterised by heroes, villains and simple narratives with the promise of happy endings. You will get a lot of votes if you promise to tax the rich to pay for nurses.  You won’t get as many if you try to explain that the roots of the banking crisis are based in Bill Clinton’s well intentioned but ultimately horribly misguided reform of the US mortgage market in the 1990s. Trust me, I have tried this at dinner parties and the former is lot more popular line of argument than the latter.

So I am therefore resigned to Louisa incurring £50k of debt in exchange for a BA in something vague from a former polytechnic. It won’t her get a job but she will have a lot of fun albeit at a cost of £1,500 per month for three years. And unlike the Germans, I won’t kick her out of the family home just because she is in horrendous debt with no way of paying it back.

However I do hope that the British electorate is prepared to be brave enough to take a somewhat sterner line. The party is over at least for a few years and we need to start clearing up the mess.

The Greek and the French are trying to prolong the fun for just a bit longer but I suspect they and their children will end up with very nasty hangovers as a result.

Michael Ware is corporate finance partner at 

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