ECONOMICS FROM CENTRAL PLANNERS TO BANKERS

The European Central Bank HQ in Frankfurt, Germany

As Coursera's thought-provoking mooc on "The Economics of Transition and Emerging Markets" (see my previous post) draws to a close, I feel it's time to reflect on the state of British and European political economy.

The high-point of Moscow's Higher School of Economics online course was for me an essay for peer assessment which asked participants to compare the transitions of the former Soviet Union and China from centrally planned economies to market-orientated ones. As I researched this fascinating subject, it also became clear that there has been a parallel transition towards central planning in some market-orientated economies - I'm going to take the UK as an example - in recent years. Moreover, Bank of England Governor Mark Carney told the Eurozone yesterday to follow Britain's example, notwithstanding "...central bank governors do not usually comment on the fiscal policies of their own jurisdictions, let alone foreign ones", http://www.independent.co.uk/news/business/news/bank-of-england-governor-mark-carney-urges-eurozone-to-spend-its-way-out-of-stagnation-10009743.html Good evidence for the re-construction of the central banker's role as central planner.

It should also be remembered that not so very long ago the Royal Bank of Scotland (currently 82% owned by the UK government) "had a £2.4tn balance sheet that was as big as the German economy in 2008" making it the world's largest bank. However, following the global financial crisis, the rescue of this institution, along with other major parts of the banking sector, effectively committed the UK economy to the state capitalist model http://en.wikipedia.org/wiki/State_capitalism  A feature of this model which Britain has not yet embraced is the Sovereign Wealth Fund http://en.wikipedia.org/wiki/Sovereign_wealth_fund so Chancellor George Osborne proposes to set one up based on the proceeds of fracking for shale gas http://www.theguardian.com/environment/2014/nov/10/uk-proposes-shale-gas-sovereign-wealth-fund Although the financial viability of fracking, aside from environmental objections, is currently questionable http://www.bbc.co.uk/news/business-31022280

In Germany fracking is currently banned, and I should imaging that Chancellor Merkel is presently minded to tell Governor Carney to "frack off", after the fashion of Vivienne Westwood who once sought to style the world's most powerful woman http://www.dw.de/refining-merkels-makeover/a-1887784 As a child of communist East German Mrs Merkel knows all about the centrally planned economy. The need for the Eurozone to follow Britain down the path of moral hazard in the form of quantitative easing is therefore one reason why the Eurosceptic Telegraph can claim today that "Germany's worst nightmare has come true" http://www.telegraph.co.uk/news/worldnews/europe/germany/11377010/Germanys-worst-nightmare-has-come-true.html For what is QE but a soft budget constraint http://blogs.ft.com/maverecon/2009/10/kornai-on-soft-budget-constraints-bail-outs-and-the-financial-crisis/#axzz3QJmVZbRE of the kind linked to the collapse of Soviet communism?

Reports of the Euro's death have been greately exaggerated before, of course, but the entry of China's Renminbi into the world top five currencies this week means that we do indeed live in interesting times http://en.wikipedia.org/wiki/May_you_live_in_interesting_times