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Edmund Conway

I am Economics Editor of The Telegraph newspapers and website. Come join in as I try to get my head, and hopefully yours, round what on earth is happening in the financial crisis. I also blog occasionally on music, literature and anything else that takes my fancy.

Germany's protectionist bombshell

 

By Edmund Conway Economics Last updated: September 28th, 2009

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The trouble with protectionism is that both the efforts to prevent it and the disastrous effects it can have have been painted as boring. So often do politicians around the world drone on about confronting the threat that it has become increasingly difficult to convince people of its importance. I can tell you that protectionism is, as I see it, the biggest worry I have about the next couple of years, both economically and diplomatically. I just worry that we’ve become anaesthetised to such comments.

I wrote about protectionism in my column last week, so no need to repeat myself, except to give an update. I mentioned that although there are growing examples of the rise in “traditional” protectionism - stuff like trade barriers, subsidies for domestic companies and so on - the real threat remains the more invisible, insidious element of financial protectionism. This works in two ways: first, that governments around the world, by dint of supporting their banks, are (by helping them survive) giving them anti-competitive support to the detriment of foreign competitors (particularly those with less generous governments ). Second, that governments are invariably ordering their banks to withdraw cash and operations from overseas in order to fund more lending for domestic businesses and consumers.

The first is perhaps unavoidable; the second is inexcusable in a globalised world.

And yet it is happening at alarming pace. There is anecdotal evidence: there were explicit clauses when Royal Bank of Scotland that stipulated that it should ensure more cash was lent to domestic customers. There is statistical evidence. The latest Bank for International Settlements quarterly report showed that the flows of cash around the world have continued to slide.

But I fear that far worse is yet to come. Take Germany as an example. Following the election result, it looks rather likely that the new government will order an overhaul of the way the country’s Landesbank system works. These banks expanded rather too far and too fast into Eastern Europe and Britain (remember West LB and how it became a major player in the world of property finance not so long ago?). According to Hans Redeker of BNP Paribas, one of the likely stipulations the new government will impose is for the banks to withdraw their capital from UK assets and spend the proceeds on financing domestic companies. The amount could be very substantial, if this chart below is anything to go by. It shows that although lending activity throughout the eurozone has dropped like a stone, this hasn’t coincinded (yet) with any cutting of foreign assets.

EMU: Imploding credit growth suggest net external assets to decline

Redeker’s insight (as a currency buff) is that this will cause the pound to fall even further against the euro (until, that is, people realise next year how much of a mess the continent’s own economy is in) but my concern is more deep-seated.
If Redeker’s prediction about Germany is the case for other countries around the world, the likelihood is that we are only halfway through this collective purge of overseas assets. And as country after country follows suit, it will result in broader protectionism. As the BIS said in its annual report a few months ago, “after seeing foreign-owned banks pare back activity during the crisis, host country governments may become less sanguine about allowing outsiders to operate on their soil… And, by reducing the ease with which capital moves across borders, financial protectionism would shrink trade in goods and services and thus moderate growth and development.”

What I still find staggering is that governments around the world are being allowed to get away with this kind of protectionism without any apparent resistence from either companies or economic institutions like the IMF or OECD.

As it happens I am off to the IMF’s annual meeting this week so will be sending through plenty of updates around the events this week. It promises to be a very interesting meeting indeed. The US used last week’s G20 to pledge to ensure the international monetary system is no longer allowed to generate the imbalances that caused this crisis. But precisely how do they do this? Hopefully we might get some answers this week.

Tags: finance, financial crisis, Germany, imf, protectionism