Since our last post was about Greece, balance demands that we ought to say something about her neighbour, and long-time competitor, Turkey.

This huge country has one foot in Europe and one in the Middle East. Despite the fact that 97% of her land is in Asia, the eyes of Turkey’s political and business classes have been looking more and more to the West in recent years. The West has paid her little attention in response. This is a big mistake.

Turkey is a gigantic business opportunity. Her economy has been modernising at a furious rate. The in-flight magazine on Turkish Airlines – which is itself now a very impressive modern operation – is as full of IT gadgets, fashionable leisure items, and new media as its American equivalents. One is met at Istanbul by that ubiquitous symbol of Western “progress”, the Starbucks. Turkish television shows Hollywood films. Young urban Turks are indistinguishable from their counterparts in Western Europe.

Yet Turkey remains a land of dramatic contrasts. Within a few miles of up-market coastal resorts that resemble the South of France there are villages that look unchanged since the zenith of the Ottoman Empire in the 16^th Century. The tourist can feel that he has entered a time warp. SUVs whizz past old ladies who are literally bent double under huge bundles of sticks. Turkey is changing fast, but still has a long way to go – hence the opportunity.

The country’s cosmopolitan leaders have long sought to add membership of the EU to membership of NATO and the G-20 as a symbol of Turkey’s commitment to the modern world. The appetite for this has been diminished a little, but by no means completely, by the eurozone crisis and also by a recent falling out with France. The French passed a law making denial of Turkish massacres of Armenian Christians a criminal offence. That these massacres took place, about a hundred years ago, is a matter of undoubted historical fact, and the Turks really do need to come to terms with this aspect of their history, among others. However, the French law is unlikely to help this process: how can one encourage people to debate a difficult subject by making it illegal to discuss it freely?

The strident reaction of Turks of all shades of opinion to the French law is a useful reminder that, for all its modernising, Turkey retains a political culture very different from that of the Western countries it seeks to emulate. However, this may be to Turkey’s advantage in the medium term. A country semi-detached from the EU – with all the benefits of physical proximity and economic integration, but without the burden associated with eurozone membership – might be the best place to do business for the next few years.

John Richards’s Predictions for 2012

Since our previous predictions have proved fairly accurate, I am going to stick my neck out and give some fairly specific best-guesses for the next year. I must give the health warning that these are only extrapolations of present trends, and do not take account of currently unforeseeable events – which, of course, always occur.

First, the good news: the world as a whole should avoid a full recession in 2012 – emphasise the word should. All the bad news should not be allowed to obscure the fact that global business is growing, albeit slowly. Recovery from 2008 should not be expected to be spectacular, but it ought to continue, so long as everyone keeps their heads.

Alas, the bad news is that they are unlikely to keep them in Europe. The latest scheme to save the euro, FU (Fiscal Union), does not address its underlying problems. I predict the euro will survive, but not in its current form. Sooner or later, its weaker members must leave the single currency, for their own good as much as the euro’s. Yet there will be more time and money wasted before the EU’s leaders are forced to accept this obvious truth.

I can also see no end to the economic stagnation of the United States. Political gridlock will continue until the November elections. President Obama will then be re-elected fairly comfortably – not because he offers any solutions, but because he has more money, because he retains the uncritical support of most of the mainstream media, and because his Republican opponents look more and more like a suicide cult.

The second terms of re-elected Presidents are usually disappointing: it seems unlikely that Obama II will come up with a real vision for America’s economic recovery given that there has been no sign of such a vision so far in Obama I. Mr Obama was elected on a platform of Change; his probable re-election will mean No Change.

However, there is now more to the global economy than the old Western Powers. A sign of the times is that Brazil has just overtaken the UK to become the sixth biggest economy on Earth. This is not a negative reflection on the UK – where the outlook is not too bad so long as the British can keep their distance from the euro debacle – but one more indicator of the massive power shift that is taking place in the world. That may be bad news for the moribund economies of the West, but good news for the rest of the planet, and for those American, British, and European businesses who see what is happening and look for new opportunities where the growth is.

We were told that business was relying on increased consumer spending over Christmas to boost the economy.

So we were told – by commentators with little or no first hand experience of commerce. Those of us who have been in business for more than a year or two know that an extravagant Christmas means an austere New Year – or, sometimes, vice versa. There is never something for nothing in economics. Simply waiting for consumers to spend more ignores the fact that their resources are finite. If they go beyond their limits, there is a price to be paid later – and if business profits from their self-indulgence, it must also pay its share of that price. That is basically why our economy is now so weak: we partied for more than a decade and now the bill has arrived.

More importantly, just hoping that consumers acting stupidly will solve their problems for them distracts businesses from trying to solve those problems.

There are two sides to economics, supply and demand. Most media commentary focuses on the demand side, consumer spending. Politicians are also obsessed with it because everyone is a consumer but only a minority are suppliers – and, in our materialistic democracy, high consumption is equated with happy voters.

Yet many of the problems in the West in particular – especially Europe, Britain, and the United States – are due to a failure to address the supply side. During the party years of high demand, the money kept on flowing – much of it borrowed but no one cared so long as it kept coming. Structural inefficiencies were increasing, but they were tolerated because no one wanted to be the party-pooper.

Now the cheap money is gone and we find ourselves in a far more competitive world, and the West is at a disadvantage. Much of our leadership is short-sighted. Executives are largely untrained and come out of university with unrealistic attitudes. Directors often pay themselves too much relative to their results. Workers in Britain and America in particular are poorly educated. Unions still impose restrictive practices. Government adds to costs, increasing risks and decreasing rewards, through excessive taxation and regulation.

Western businesses need to stop waiting for the next one-off spending spree and knuckle down to the hard, unpleasant, unpopular work of restoring their competitiveness.

It is a commonplace to say that the world would be better off without politicians. Of course no one really means it – but it may be true in the economic crisis that is now brewing. Our political leaders, far from averting this crisis, are themselves the cause of it.

The same was not true of the 2008 crisis. The politicians were a contributory factor then, but by no means the only one or the most important. The global economy survived that crisis and has been recovering, albeit very slowly, since then. The 2011-12 crisis is a new one and is entirely of the politicians’ own making.

A little local difficulty in Greece has been blown out of all proportion by European politicians’ obsession with maintaining the euro in its current form at all costs. The actual needs of the different national economies of the EU have been put second to keeping countries in the eurozone who should never have joined in the first place.

Leaving aside the question of the desirability of a single currency in theory – there is case for and a case against – the deal cobbled together in a panic by European leaders last week is not a sound basis for such a currency. Although EU leaders are right that tighter enforcement of the rules is essential to any single currency, the new proposals, called “fiscal union” (FU), leave the same holes in the deal that led to the wholly foreseeable collapse of the previous arrangements. The markets are now endorsing the position of the UK, which wanted nothing to do with it.

Meanwhile, the stupidity and egotism of Europe’s leaders seem to have provoked the competitive streak in their American counterparts, who appear determined to prove that they can be just as stupid and egotistical. Everyone is at last agreed that a cut in payroll taxes is a highly desirable stimulus to employment – something this blog has been saying for some time – so one would imagine it would pass without difficulty. Not in Washington...

For purely political reasons, President Obama and his Democratic allies tied the payroll tax cut to an increase in taxes on higher earners, knowing his Republican opponents are pledged to oppose tax increases. Rather than stick to the moral high ground, the Republicans, in their turn, tied their support for the tax cut to funding a controversial pipeline in the worst tradition of American “pork barrel” politics. Given that the Republicans were elected on a platform of cutting both taxes and “pork barrel” expenditure, their making the cut conditional on more expenditure is doubly inexcusable – at least the Democrats are being true to their principles, even if what they are doing in bad for the economy. Both sides have proved themselves selfish, foolish, and dishonest, but in different ways.

Looking at our “leaders” in general, even a law-abiding businessman must wonder if the anarchists may have a point.

So don't think you can fool me with your political tricks
Political right, political left, you can keep your politics
Government is government and all government is force
Left or right, right or left, it takes the same old course
Oppression and restriction, regulation, rule and law
The seizure of that power is all your revolution's for
You romanticise your heroes, quote from Marx and Mao
Well their ideas of freedom are just oppression now

Nothing changed for all the death, that their ideas created
It's just the same fascistic games, but the rules aren't clearly stated
Nothing's really different cos all government's the same
They can call it freedom, but slavery is the game

Extract from 'Bloody Revolutions' by Crass

The euro crisis has now claimed a centre-left Prime Minister in Greece and a centre-right one in Italy. Leftist Spain is keeping a low profile, trying very hard not to be noticed – almost certainly in vain.

Yet it would be a mistake to write off the Mediterranean economies as “all the same”. Greece is a true basket case, a welfare state in the literal sense – a state dependant on welfare – underwritten mainly by the Germans. Italy, however, is in many ways a strong economy, at least in parts, with lots of viable businesses and an understanding of the need for international marketing. The present crisis is all about past deficits rather than future prospects.

Italy’s underlying problems go back a long way: weak governments since the beginning of the Republic encouraged structural inefficiencies. As a result, public sector debt has grown out of control under governments of both left and right. This could be ignored in the years of growth, but not since 2008.

Silvio Berlusconi attempted some reforms, but half-heartedly and largely without success.  So the markets rose a little on the news of his resignation – only to fall dramatically when realisation set in: If Berlusconi cannot deliver reform, who can?

There is no one in Italian politics with anything like Berlusconi’s power and personal dynamism. Although he has lost the high approval ratings he once enjoyed, the fact that he ever had such large majorities makes him almost unique among the Republic’s Prime Ministers, and he still has a larger block of parliamentarians and voters loyal to him than any other Italian politician. He might object to the comparison, but he was the most powerful Italian leader since Mussolini. He delivered an unparalleled period of relative stability in Italian politics. If he must share some of the blame for some of Italy’s failure to reform, he also deserves at least part of the credit for her recent prosperity.

Largely portrayed in the English speaking media as a buffoon, he is nevertheless a self-made multi-millionaire and understood business – unlike the career politicians and bureaucrats of the European Establishment, who never embraced him. His clowning led many to underestimate him: his road to power was over their political graves. He was a product of the openly corrupt Italy of the 70s, but he did not create the system that made him and which he exploited so skilfully. An unelected technocrat is unlikely to succeed where he failed.

Many Italians say openly that only a Mussolini can sort their country out. The EU seems keen to take on that role. For all his many, many faults, Silvio Berlusconi may yet go down as having been the last, best hope of Italian democracy.

At the very least, the eurozone will weaker without him – and a lot duller.

Friday is 11/11/11 – for once a date that works in the American date format as well as that used by the wider world, for whom 9/11 technically means the 9^th of November). Childish it might be, but many of us will not be able to resist the temptation of purposefully using the date somewhere, even if just for posterity, perhaps by writing out that increasingly archaic financial instrument, a cheque (or check in the American spelling).

Friday is also the day when veterans are honoured in the United States, and those who died in war are remembered in a number of other countries of “the developed world” – an expression that seems almost as increasingly dated as a cheque – including Britain, France, Canada, Australia, and New Zealand.

So it seems a fitting moment to pause and reflect. Could those who have died for those countries over the last hundred years have predicted the world we have today? Would they have approved of it? Would they be disappointed?

Perhaps if a Canadian or an Australian or a New Zealander from 1911 could have looked forward in time he would have been pleased to see his country today prosperous, dynamic, and fully independent. However, a patriotic American, Briton, or Frenchman of 1911 – or 1941, or 1961, or 1991, or even 2001 – might be quite shocked to see how much his country has declined in power and prestige.

Globalisation is a fact. The world is no longer the exclusive preserve of a handful of major powers run by white men. This is a right and necessary change.

What is neither right nor necessary is the crisis of confidence into which the old major powers have plunged as a result of this desirable development. For some years now, the United States, the United Kingdom, and the European Union have been living on borrowed money and the memories of past glories. Now both are drying up, and the West is drifting, lost and leaderless, in an unfamiliar world.

It is not too late to turn things around. The 1960s and 70s saw a similar loss of confidence and direction. Yet new leaders were found and old values revived, the Cold War was won with remarkably little violence, and the West went on to enjoy a prolonged period of peace and prosperity.

It could happen again, but only if we find leaders who are prepared to admit there are problems and face up to the challenge of making American, British, and European businesses competitive in the truly global economy we now enjoy. The world offers greater opportunities than ever – but only to those who understand that it has changed.

We have been reluctant to post over the last week or two out of a very real fear that anything we said would be out-of-date a few hours later.

However, this does not mean that anything that has happened is at all surprising or incredible, as some in the media have claimed. On the contrary, we were not the only ones to predict that there must be severe consequences if European politicians did not face facts about the euro and Americans did not get real about their debts.      

Being proved right, again, gives us little pride and no pleasure – little pride because it was all so obvious that we do not deserve much credit for spotting it, and no pleasure because it is frustrating that such an avoidable disaster was not avoided.

It is doubly depressing that the politicians still have not learnt their lesson. The response of the European Central Bank, buying debt from badly run countries, is treating the symptom not the disease. Greece must be kicked out of the eurozone. Such a display of resolution might be enough to keep other failing members in. If not, the euro cannot continue as it is. Everyone knows this.

Everyone also knows that the American “debt deal” is nothing of the sort. It is full of holes. Referring the real decisions to a committee is a politician’s way of avoiding his duty. At best, it simply postpones the problem – like kicking the ball to touch in a rugby match so that both sides can catch their breath. At worst, it means that the big crisis is yet to come: the real fighting will start when the committee reports – if it ever does.

Given this prospect, Standard and Poor’s decision to strip the United States of its AAA credit rating is fair, albeit perhaps a little premature. The politicians who are complaining about it are in a state of denial. It was rude of Mr Putin to call America a parasite on the global economy for sucking up so much of the world’s available credit – but he was factually correct. It is shameful that the USA has now surrendered the moral high ground to a past KGB Colonel.

All that said, too much should not be read into the current market turbulence. For one thing, the big players agree that most businesses are slightly over-valued by the markets, so some readjustment is necessary. It should also be noted that it is summertime, when the players themselves are away, and nervous juniors are running the office.

Things will calm down soon – but only until the players get back to their desks and find that the politicians have not done anything in the meantime to solve the problems that are now all too obvious.

The markets are very nervous – and rightly so – about the debt crises in Europe and the United States.

Yet the frustrating thing about both crises is that they should be relatively easy to avert. They are not mega-tsunamis or planet-killing asteroid strikes that are beyond all human control. Nor are they mysterious: there is no need for a new Keynes to tell us what is happening, because anyone who can read a newspaper and do basic arithmetic knows exactly what the problems are. They are foreseeable and were foreseen, and indeed have both been rather unmissable for some years now.

Above all, they should be very easy to solve, given the political will. The solutions are not rocket-science. Everyone knows what needs to be done, and what will eventually have to be done.

In the United States, the government must stop spending as much as it does. The federal deficit is unsustainable. Sooner or later, there must be cuts, and there will be. Delaying the evil hour only makes it worse. Even the flawed Class of 2008 understood that there comes a time when unpleasant decisions cannot be put off.

In Europe, there is a limit to how much the more prudent nations can prop up the more feckless in order to maintain the pretence of a single currency. Does anyone, even the most sincere European federalist, really believe that Greece can and will remain a member of the eurozone indefinitely?

Everyone in the business world knows what has to happen. So – at least privately – do most politicians. So why delay? Everyone is agreed on the decisions that need to be made, so the sooner they are made the better.

Yet the political class seems paralysed with indecision. President Obama, obsessed with his re-election next year, has failed to take control of negotiations with Congressional leaders by advocating bold measures: once again, he has shown himself to be a reactive President, rather than one who seizes the initiative. Meanwhile, across the Pond, the European Establishment is terrified that suspension from the euro of Greece – and then probably Portugal and Spain, and maybe Italy and Ireland – will undermine the credibility of their whole cherished project of European integration.

It is tragic that in the whole pack, there is not one real leader with the guts to say, “We all know what we are going to have to do. Let’s just do it.”

For the real tragedy is that nothing magical is required here, only the courage and honesty to do what clearly needs to be done – in other words, leadership.

The media are not sure how to react to the turmoil in Tunisia and Egypt, but their default position is to be broadly supportive of crowds on the streets because they look vaguely “democratic”.

The markets, on the other hand, are nervous, and, as ever, it is the markets which represent brutal realism and practical experience, while the media represent wishful thinking.

Parallel with, and sometimes overlapping, the economic integration of the European Union, the nations around the Mediterranean have, in recent years, become more and more integrated with each other and with the global economy. Some of these nations, those which are culturally Christian, are EU members; others, those which are culturally Muslim or Jewish, are currently not full members, but some of them would like to be. Yet, irrespective of whether they are EU members or not, the business links between them are growing in importance.

So whatever happens in the Mediterranean Basin matters a lot to the EU, and would matter to EU nations even if the EU did not exist. You only have to glance at the map to see why. Italy, for example, is only a few miles across the water from Tunisia, and the two are close trading partners. In purely business terms they have more in common with each other than Italy does with some fellow EU members further north.

As both cause and effect of increasing prosperity, the Mediterranean Basin has enjoyed a longer period of relative peace and stability than at any time since the zenith of the Roman Empire. Compare the region with how it looked in the 1970s and the change is wondrous. Even problem countries like Libya and Lebanon are making real efforts to become part of the commercial mainstream. Free trade is indeed a powerful force for peace, but it cannot be taken for granted.

It is possible only because Muslim states around the Mediterranean have become increasingly pro-business and, if not exactly pro-Western, at least subtly open to Western influence. This is not always popular. Although all observe the constitutional niceties of democracy, the price of strong government sometimes involves turning a blind eye to democracy in the broader sense.

If – and it is a big “if” – greater democracy comes to Tunisia and Egypt as a result of the current unrest, there is no guarantee that those elected will continue the policies that have delivered such peace, stability, and prosperity as they currently enjoy. If this is the beginning of a return to the uncertainty of the 1970s, the impact on the global economy – and especially on the economic integration of Europe – could be catastrophic.

Eire, the Republic of Ireland, is a classic example of how low business taxes can generate prosperity even in the most unpromising of places. Although Irish people around the world are very entrepreneurial, the Republic itself was an economic backwater for most of its history. That changed when tax cuts attracted massive inward investment and turned Ireland into the “Celtic Tiger”.

The fact that Ireland is now in financial trouble does not alter that fact that it proves the effectiveness of a low tax regime. The current crisis arose in spite of Ireland’s success as a venue for inward investment, not because of it.

The low business taxes remain Ireland’s greatest competitive advantage – so it is sad that the Republic is almost certainly going to have to give them up.

The Republic’s mistake was not its low taxes but its failure to exploit their success in attracting inward investment. Instead of using the opportunity to develop its own indigenous enterprise culture, the Republic enlarged its already bloated public sector. Instead of investing in the capacity to generate even greater prosperity, Ireland’s politicians became addicted to higher spending.

So the global banking crisis only exposed that the Tiger was more of a kitten than it appeared. Bailing out Ireland’s banks increased state spending even more, and the government made the problem worse by adopting a strategy of hoping it would go away if they ignored it.

The European Union has now stepped in to bail out the Republic itself – but at a price. It is hardly surprising that the national governments who are providing the actual cash – Ireland’s competitors in Europe as well as “partners” – demand that taxes go up in return. They have long been jealous of the competitive advantage Ireland has enjoyed as a result of low taxes, and so they can hardly be expected to underwrite it.

That is why the Irish have been reluctant to accept the bail out. Without those low taxes, the economic future of Ireland looks grim. A virtuous circle may be replaced by a vicious circle – higher tax rates reduce the tax base and so increase demand for even higher tax rates. Ironically, this may mean that the very people who are insisting that the Republic raise taxes may end up paying even more than they intended to underpin the Irish economy.