Where is the Economy going?

"This sucker's going down."

George Bush's pithy description of the US economy during the 2008 financial crisis has been lampooned by comedians the world over but the joke may be about to end. Not renowned as being a deep thinker, George Bush was more prescient than he could have realised; it was only the timing he got wrong.

The fundamental economic facts in 2012 have changed little since 2008. The debt overhang and imbalances in the global economy remain huge; such that a major correction is required, somehow, some way. There is a belief that a smooth correction will be possible but for many countries the debt is beyond their ability to pay. The Eurozone in particular has huge internal imbalances which require either the pooling of debt (which the Germans and Finns won’t allow) or break up. There is not a third way ‒ despite the smoke and mirrors that European policy makers are using to uphold the belief that the euro will survive intact.

World leaders and central bankers have worked hard to hold the world economy up over the last four years through pumping in new money and buying up distressed assets. This is like a doctor loading up their patient with increasing doses of anti-depressants despite knowing that withdrawal will be much harder beyond the immediate crisis. Policy is focussed on bolstering confidence and encouraging the belief that all is well.

The point will come when confidence evaporates and a rush into real assets begins. The clever money has already moved, when the rush begins there will be few exits available and the world’s markets will move in unison.

I could be wrong; I hope I am wrong; but reality has to return eventually.  The world economy is more connected, more interdependent, more indebted and more imbalanced than at any previous time in history. Whichever way it goes, we will all go together. Perhaps we are like a cartoon character that has just run off a cliff and is hanging in mid-air, legs still running, defying gravity for as long as possible. The trouble is we don’t live in the fantasy world of international finance; we live in the real world where facts cannot be ignored indefinitely.

Greek Euro Exit

It is certain that Greece has plans to leave the euro but these will be marked ‘Top Secret’ and only shared with those who need to know. If the market knew that Greece was leaving, and the date of its departure, there would be a run on Greek banks and huge opportunities for the speculators. I have looked into my crystal ball and the logic points to the weekend 27-29 October.

 On the 28^th October 1940, the Italian ambassador in Greece, Emanuele Grazzi, demanded that Greece allow Axis forces to enter Greek territory and occupy certain unspecified strategic locations or otherwise face war. The Greek reply is said to have been a simple ‘Ohi’ meaning ‘No’ although the precise wording in the diplomatic language of the time was ‘Alors, c'est la guerre’ (Then it is war).

The Italians expected a quick war lasting no more than a few days but the Greeks fought back and it was not until the next year that the German forces entered the fight and finally succeeded in invading. The Greek’s bravery was recorded by Winston Churchill who declared that "Hence we will not say that Greeks fight like heroes, but that heroes fight like Greeks".

The 28^th October (Ohi Day) is now a public holiday in Greece and a day for the Greeks to be proud. This could also be the day of the Greek exit from the euro, not harping back to fighting against the Germans, although there are some interesting resonances with modern day Greece which the Greek popular press are likely to highlight. This day will be chosen because the Greek exit is long overdue and this next bank holiday weekend will allow time to make the changes whilst the Greek banking system is closed for business over the long weekend.

The report on Greek finances by the ‘troika' representing Greece's international lenders – the European Commission, European Central Bank and International Monetary Fund – was expected to be finished by the end of September, giving Eurozone finance ministers time to study it, and debate it at their meeting in Luxembourg today, but it has been delayed. It is my suspicion that reading between the lines of this report it will become clear that Greece will have to leave the euro. Rather than publish the report and allow the markets to reach this conclusion, it has been decided to leave the euro before the report comes out catching the markets by surprise and giving Greece a chance of pulling off this difficult and complex move.

At today’s meeting of finance ministers in Luxembourg there will be some around the table who know of the Top Secret plan but it will not be discussed and not shared with those outside the tight group of people who need to know.

A Super Tanker without a Captain

The Arctic sea ice is an important indicator of change taking place in the climate systems of our planet. If this was on the control panel of a super tanker there would be a flashing red light and the Captain would be woken to come to the bridge. Evasive action would be needed to prevent the tanker foundering.  Of course if the crew get it wrong they can abandon ship; but we cannot abandon planet Earth. When the climate changes, we will have to fight for space to live in places above the rising sea level and regions where it is still possible to grow crops.

Credit: NASA/Goddard Scientific Visualization Studio

The advanced technology of our satellites gathering images 24/7 and transmission over the internet allow us to monitor the Earth’s indicators in real time.  These pictures show that sea ice reached its smallest extent on 16 September; it is now starting to rebuild as the season changes and the Arctic moves towards winter. This annual expansion and contraction is part of the normal cycle but the minimum ice extent this year is the smallest ever recorded. Scientists at the National Snow and Ice Data Center (NSIDC) report that sea ice extent fell to 3.41 million square kilometers (1.32 million square miles), now the lowest summer minimum extent in the satellite record. “We are now in uncharted territory,” said NSIDC Director Mark Serreze. “While we’ve long known that as the planet warms up, changes would be seen first and be most pronounced in the Arctic, few of us were prepared for how rapidly the changes would actually occur.”

This is flashing a warning from the systems of planet Earth but the Earth’s system respond very slowly. Like a super tanker that turns ever so slowly after the rudder position is shifted, excess carbon dioxide emissions need controlling now or there will be no stopping the consequences. It may already be too late to prevent climate change but a good Captain would take evasive action to limit the damage. It would be incompetent to leave the ship to continue on the same course.

NSIDC scientist Julienne Stroeve said, “Recent climate models suggest that ice-free conditions may happen before 2050, though the observed rate of decline remains faster than many of the models are able to capture.” Serreze said, “While lots of people talk about opening of the Northwest Passage through the Canadian Arctic islands and the Northern Sea Route along the Russian coast, twenty years from now from now in August you might be able to take a ship right across the Arctic Ocean.”

There seems to be no intention to respond to this warning but to keep the fossil-fuel economy going at full tilt. It is as if the world leaders are on the Bridge of a super tanker, the warning light has come on, and rather than respond they have placed a coat over the control panel, leaving them free to discuss the opportunities of an ice-free Arctic Ocean. “What warning? I see no warning.”

It is a shame that planet Earth doesn’t have one Captain; we will not know who to prosecute for wilful incompetence.

Disingenuous Skies

Airbus has recently launched its ‘Smarter Skies’ vision of how aviation will look in 2050. There are some good ideas but the overall package is looking more disingenuous than smart.

Aviation is fighting hard to protect the status quo against the demands of environmentalists. In Europe, Airbus describes the situation on its website under the heading ‘The Environment and Air travel’:

‘Air travel is an invaluable global asset which is at the heart of today’s global economy. Therefore, safeguarding aviation’s economic & societal benefits is crucial. More than 56 million jobs and USD $2.2 trillion of global gross domestic product are supported by the air travel industry. The aviation industry’s global economic impact is 3.5 per cent of global GDP. If aviation were a country, it would rank 19th in size by GDP – approximately the size as Switzerland or Poland. Globally the aviation sector is expanding. Passenger demand doubles every 15 years and by 2050 it could be handling 16 billion passengers and 400 million tonnes of cargo annually. In the meantime, passengers have become increasingly mindful of the ecological impact of their travel choices.’

Four sentences before any mention of the environment, in a section specifically about the environment, is a peculiar way to present their case.

On the other side of the Atlantic, Boeing’s environmental report 2012 is more upbeat:

‘At Boeing, we are focused on creating cleaner, more efficient flight. Each new generation of products we bring to the marketplace is quieter, consumes less fuel and is better for the environment.’

This claim is referenced to the dawn of the jet age when we discovered how to pump fuel out the back and ignite it to produce thrust. Boeing omits to mention that only their newest planes match the fuel efficiency of the propeller driven airliners of the 1950s.

Policy makers should look outside the aviation industry, for advice and the policy choices available, as the industry is hell bent on defending an antiquated vision of aviation which has no place in the 21st century.

Increase VAT on Energy

“To help the transition to a low-carbon economy, VAT on gas and electricity should rise to 20%.”

This is what needs to be said and I will salute the politician who has the courage to say it.

The world shares the challenge of curing a dangerous addiction. Fossil fuel is something we feel that we cannot do without, despite the negative consequences and despite there being other ways to live our lives. Breaking the habit will be hard whilst we live in societies where addiction is regarded as normal. Realization is growing that burning fossil fuel is dangerous with potentially severe consequences over the long-term but that does not make it any easier to overcome the short-term craving for the next fix.

Across the world, governments subsidise fossil fuel out of political expediency, bowing to the demands of the fossil-fuel junkies. This is not quite as bad as subsidising pushers to keep the street price of heroin affordable, but the analogy is not entirely misplaced.  Higher prices for fossil fuel are a necessary precondition to force the transition way from its use. This underpins the business case for low-carbon energy generation and investment in efficiency measures as well as providing the means to cajole people into appropriate lifestyle change.

In the UK, VAT on gas and electricity is set at 5% compared with a general rate of 20%. This is in effect a subsidy, which becomes particularly invidious when you consider that, if the European Commission gets its way, VAT at the full rate will be charged on energy-saving materials used to insulate homes. It is high time that politicians removed this anachronism and raised VAT and gas and electricity to 20%. The logic is inescapable but the political fallout could be huge.

The way to sell this change of policy to a general public, concerned at how to pay for their next ‘fix’, is to focus on how the extra tax will be deployed. A cynic might argue it should be spent on whatever bribe will stifle dissent, but a more principled approach would be to focus on increasing investment in low-carbon public infrastructure and support for efficiency measure such as the insulation of homes of the less well off. The other way is just to do it, and face-down the political consequences, but such direct and decisive action does not fit with modern emasculated politics.

Government Stalls

UK plc needs a sound strategy for aviation but the government has stalled the process of locating one. Instead of taking a decision, it has set up a commission to examine the options and report after the next election. This is the oldest political trick in the book, putting short-term political expediency before the long-term planning needs of the country. It also makes David Cameron’s pledge to be ‘the greenest government ever’ look increasingly threadbare.

 

‘Green’ was never going to be an easy objective — when policy has to be economically literate and commercially viable — but green means giving equal weight to the needs of society and effective stewardship of the environment.

Aviation policy is not about this electoral term, or the next, it has to be about the nature and shape of aviation through the course of the 21^st century. It is much more than a decision about extra runways serving the South East of England; aviation policy requires a complete reappraisal of aviation and its role in society and the economy. We have all the facts and data needed to make a decision about coherent policy that deals with people’s aspirations, the needs of the economy and the pressing need to control emissions.

It can be done; let’s do it.

 

Prowl and Pounce

Last week, the UK Prime Minister was taunted by Tim Yeo MP as to whether he is a man or a mouse in relation to making a decision over a third runway for Heathrow. This week I would like to challenge the UK government on the same issue with another animal metaphor. Is the UK government a flock of sheep or a pride of lions? When I observe the government dealing with aviation policy – shifting this way then that, one moment influenced by environmental policy and the next responding to demands from the business lobby – it looks like a flock of sheep without a sense of direction. I would like to see government acting like a pride of lions, eyeing up the possibilities and then going in for the kill.

Aviation is affected by a range of issues; at the core are two sets of predictions. First, aviation is predicted to grow substantially and this is presented as vital to the economy to ensure that the UK remains well connected to the global market. Second, the emissions from aviation are predicted to grow exponentially increasing their contribution to climate change. The government is torn between supporting growth to help the economy and controlling emissions to counter climate change. It wants to do both, of course, but in the blinkered world of conventional narrow economic analysis it is seen as one or the other. The flock of sheep rushes from one side of the field to the other depending on which lobby group, or focus group, is shouting loudest at the time. The result is procrastination and a policy vacuum which serves no one.

 A pride of lions would prowl around the issues and decide where to attack before pouncing. The argument from economists – that we need more conventional aviation – is a distraction. The prey to hunt down is the blockage that prevents the development of green aviation (within a sustainable economy). In hunting down the problem, it is worth scanning the bigger picture. Conventional aircraft will continue to have a role for many decades but conventional flying will become much more expensive, leading to much reduced capacity (and much reduced emissions).  This part of the new landscape for aviation is clear; the other side of the argument – as to what will evolve to satisfy the demand for low-cost air travel – is much more interesting. New designs of air vehicles that are slower and more efficient will come off the drawing board into development and deployed into the fleets. These will need different ground handling facilities, so planning airport capacity is not simply about numbers of terminals and runways but requires a fundamental rewrite of the design codes for airports.

 

None of this will happen whilst the old economic model of growth based on tax-free fuel dominates aviation. The lions should single out the weakest link in the herd of issues and circle around the blockage in international politics, and pounce, taking down the tax exemption for aviation fuel. The problem moves from an impossible dilemma into a difficult but workable transition to sustainable aviation.

 

I hope the Prime Minister proves to be a man and not a mouse, and his government lions not sheep.