Market Analysis

Born to Underachieve

Socialist sentiment in Europe doesn't bode well for long-term Continental prosperity.

Story Highlights:

  • Former and present European leadership is touting a "super-regulator" to govern financial markets.
  • Current European sentiment is against financial "speculation," ignoring the increased wealth it brings to all layers of society.
  • Clamping down on financial innovation and stifling incentives only brings stagnation in the long term.


What do you get when you put a bunch of socialist ex-leaders in a room with a pen and paper?

One messy financial regulation proposal:

EU-Wide "Super-Regulator" Poses Threat to City of London
By Ambrose Evans-Pritchard, The Telegraph

Just when it appears Europe is ready to up the ante, increasing its competitive practices and really letting loose those economic animal spirits (see pro-free market platforms from Germany's Angela Merkel and France's Nicolas Sarkozy), leaders from Europe's "socialist bloc" are up to their old tricks. Deciding the "credit crunch" is evidence of the "social risk" of modern capitalism, they propose the EU appoint a "super-regulator" of European financial markets.

The idea of such a large-scale Big Brother government entity is disturbing enough. Even more frightening is this incredible (and ridiculous) statement in the group's proposal: "The financial world has accumulated a massive amount of fictitious capital, with very little improvement for humanity."

Even worse: "Free markets cannot ignore social morals. Decent capitalism needs effective public policy. But when everything is for sale, social cohesion melts and the system breaks down." In other words, they only like capitalism if it brings even distribution of wealth and prosperity. Eh? Sounds like socialism to us.

Here's the real kicker: "Financial markets have become increasingly opaque. The size of the lightly or not-at-all regulated ‘shadow banking sector' has constantly increased in the last twenty years. Inadequate incentive schemes, short-termism, and blatant conflicts of interest have enhanced speculative trading."

There is indeed a fantasy world in our midst. But it's not in the financial markets; it's in the heads of EU leadership. There is simply no firm ground for these statements to rest upon. What part of the last 30 years of evolving, dynamic capital markets, rising stock prices, constant global economic growth and higher standards of living don't they see? Never mind that global stocks were UP in 2007, or that already they're about breakeven for 2008…or even that we've yet to see a quarter of negative growth in any major region of the global economy. None of that matters in the fantasy life of EU regulators.

True, the notion of a "super-regulator" probably has little chance of materializing (the EU can scarcely get its own constitution passed for goodness' sake), but the sentiment isn't limited to a few ex-leaders. Sarkozy and Merkel also joined the dark side, decrying financial "speculation" despite their mostly pro-free market platforms—leaving Britain's Gordon Brown among the last voices of reason in the EU. The UK has long been a bastion of economic liberalization, with the "City of London" the world's financial capital (sorry, New York). Despite the "credit crunch," Brown still espouses capitalism and backs the City. Unfortunately, Continental powers believe innovative City trading is the root of all evil.

This episode is a shameful demonstration of capital markets ignorance. Without "speculative" business activity trading (read: folks wishing to take risk in order to make a profit), there is little incentive to gain or engage in capital markets activity generally. It's as if there's no comprehension whatsoever that free flow of investment capital is the lifeblood of a growing economy.

But perhaps they're not to blame. This perspective seems to be in their blood:

Europe's Philosophy of Failure
By Stefan Theil, Foreign Policy

Maybe their philosophy is to blame for Continental growth lagging UK and US prosperity for so long. British and American schoolchildren pore over supply and demand charts, while French and German kids read socialist propaganda disguised as textbooks. But this shouldn't surprise. Europeans remember and fear fascism, and they're conditioned to believe an egalitarian, socialized society will keep a modern Franco or Mussolini at bay. Stifled prosperity is a small price for social freedom in the mind of many.

Unfortunately, this ideology won't improve anything. If Europe truly believes capitalism is the problem, suffocating financial markets will bring only new forms of unhappiness, unrest and economic dislocation. In a world where many countries are adopting policies to entice business and new capital, Europe would be heading backwards. Multinational companies aren't shy about relocating to sunnier climes, and if Europe continues to be hostile to free markets, companies and the wealth they bring will exit en masse, leaving poverty, unemployment and unrest in their wake. Countries forsaking the inherent social freedoms of capitalism will always underachieve.



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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.