The Hindu Business Line : Europe’s contingency plan

If we look at history, human beings are most creative during times of crisis or adversity. And, the reality is that innovation, most of the time, is the result of creativity. The European continent is developing a unified strategy and contingency plan to protect its economies from the growing finance crisis.

The European Response

As I write this, the French President, Nicolas Sarkozy, the current holder of the rotating EU presidency, has called for an emergency meeting of European leaders to discuss an EU-wide approach. The European Union is to develop an all-encompassing strategy.

German recession

While everything is being done to stem the haemorrhage, I spoke to my close friends and associates around Europe to gather views. Here are the responses:

Dr Klaus Marinus Hoenig, Partner, M&A/Corporate, Linklaters LLP, Düsseldorf, feels that “while availability of acquisition finance will be hit, public takeovers at low stock prices will create opportunities in the private M&A market.”

James Searles, Partner, Steptoe & Johnson, Brussels, said that “financial markets are interlinked and, Europe as well as Asia are clearly not immune from the current crisis in the US. Financial institutions in the UK, Belgium and Germany have already fallen victim. He called for “better regulation” and added that there were no “quick-fix solutions” to the problems ahead.

Real-estate investment advisor, Michael Bünermann, CEO of Haus Finanz Kontor, nervously quotes Nobel laureate and German Professor of Economics, Max Otte’s book Der Crash kommt who, in 2006, had accurately predicted the current situation in America and Europe.

Bunermann feels that in the European continent, Switzerland would be the only country that would escape the financial crisis, mainly due to their prudent money management laws. Interestingly, this was confirmed by a senior banker friend in Switzerland who wishes to remain anonymous. He described “greed, avarice and self-enrichment” as the factor responsible for the current crisis situation. “American bankers are prepared to give away loans only to collect their bonus”, he added.

The CEO of the London-based financial services firm, Silverdale Services, Sanjay Guglani says “It is acid test for the Euro and EU to see if they stand unified in this crisis”. Sanjay predicts “now, that capitalism has been sent for a forced sabbatical, the next disaster could be sovereign funds”.

Stephanie Elingshausen, Managing Director of a leisure and tourism company in Frankfurt laments that her company will probably see a decrease in big spending customers as “a lot of my clients are in the banking and insurance business”.

Dr Johannes Maier, Postbank, Head, Asset Allocation and Fund of Funds Management is very pessimistic in his assessment saying, “Euroland is already in the midst of a recession and, the ECB has completely underestimated the severity of the crisis”. Dr Maier adds a personal note saying “one way out of this dilemma is a clear rate cut from the ECB.”

Ulrich Baeumer, Lawyer and Partner of the Cologne-based Osborne Clarke says: “The European markets will continue to see depressed levels of lending, both between banks and to consumers, resulting in a further deterioration in the housing markets”.

According to him, consumer confidence and retail spending were also declining, thereby curtailing growth and increasing pressure on central banks to cut interest rates. Baeumer feels “the US bailout plan may not be enough to help stabilise sentiment in Europe”.

Jay Sampat, formerly of KPMG and now a senior business consultant in The Netherlands, recalls the anecdote — “If a bank lends €200 thousand to a client, it is the client’s problem to pay back; If the bank lends €500 million to a client, it is the bank’s problem to recover”. Sampat adds that “financial institutions in Europe have not yet fully recognised the extent of the damage and further revelations will follow. The worst is yet to come, he adds.” In Denmark, property consultant Torben Larsen says “the situation is very critical in Denmark and could last for 4-5 years this time”.

My Bonn-based friend, Dr Stephan Kinnemann, former Chairman of German industrial development and investment bank KfW says “it will be some time before stability is regained in the markets and, that the bursting of this bubble is long overdue and a painful pre-condition to regaining a healthy viable economy”.

Simpson Craig, Partner, Steptoe & Johnson, in Brussels expects a sharp slowdown of European economy with a few months delay. “The shock wave will swap over to Europe with impact on the real estate investment market”, he adds. In Berlin, Frank Kunze, CEO of Leasinvest KG Co-consult and financial services expects that “financial markets will not calm down before the end of 2009”.

Sense of Wealth Creation

Many years ago, I had purchased a copy of Kautilya’s Arthasastra. I never ever read it and it was a mere decoration piece in my library. The past weeks prompted me to open the book and do some quick reading. I found it most relevant, even in the current financial crisis. The word artha has two meanings: ‘wealth’ and ‘sense’.

This is a insightful semantic sameness. Artha makes sense only when it is related to the creation of wealth. The American financial wealth creation is playing games with money in the financial casino. This was confirmed by Adam Smith, in his 18th century book of Economics, An Inquiry into the Nature and Causes of the Wealth of Nations. He talks of money as a measure of creating wealth.

An example cited is that a butcher, a baker, and a brewer provide goods and services to each other out of self-interest; these economic activities result — because of an “invisible hand” — the creation of wealth for all three. Simply put, artha is the consequence of peoples’ actions. There is no substitute for work to produce employment and to create wealth. George Bush & Co. had created a chimera of wealth. Naturally, they are doomed to failure since they fail to understand that the butcher, baker and brewer are the real producers of wealth. Not Lehman Brothers of this world.

(The author is former Europe Director, CII, and lives in Cologne, Germany. blfeedback@thehindu.co.in)

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