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The Art of the Possible
The Art of the Possible

On 30 September 2022, the FTE Investor Summit will commence on Mykonos: Follow The Entrepreneur – Investor Summit in Mykonos 2022 (globalftenetwork.com). During the days of the Summit, a wide range of speakers will present their ideas, their businesses, and their expectations. In so doing, we believe that the event will demonstrate, once again, the basis for Ecosystem Economics®.

Centrally, this holds that individual economic units, be they entrepreneurs, companies, or governments, can achieve a system-level win through understanding their economic connections with others and, in understanding, acting in a manner which allows all to develop and grow. It is the antithesis of the beggar thy neighbour approach of historic economic systems where success was measured relatively.

It relies on the Multiplier Effect where investment input can multiply the resulting output through the dynamics of the economic system into which the expenditure has been made.

We may be about to witness a real-time use of this concept in the United Kingdom. If true, then it could herald a significant change in economic policy across the G7 and EU through the coming few years. A move from Monetarism to Keynesianism has not been seen this century.

However, this apparent shift must be seen in the context of the relative success of the Greek economy which moved out of the special surveillance imposed by the IMF following the Financial Crisis in June 2022. This recovery could be seen as a validation of Monetarism in the face of economic problems.

One week before the FTE Summit, the British Chancellor of the Exchequer, Kwasi Kwarteng, will make a statement to the House of Commons. Dubbed a “fiscal event”, the contents have been widely trailed in the media. The rumoured lifting of the cap on bankers’ bonuses has attracted the most criticism.

We believe that the case for this lifting is based on the concepts behind Ecosystem Economics®. This belief is founded on the provenance of the bonus cap in the first place.

It was introduced following the Financial Crisis (2008/9) by the EU’s Capital Requirements Directive which came into effect fully in 2014. It limited any bonuses paid by qualifying financial services firms to two times the annual salary of the recipient.

To be clear, the ability of UK domiciled financial services firms to pay bonuses commensurate with performance, rather than an imposed ratio, is freedom which should be conferred on the UK authorities or the banks themselves by the decision to exit the EU. Theoretically, it is part of the “Brexit Dividend”.

Yet the British remain conflicted on Brexit. Debate centred on “taking back control” or “leaving without a deal”. The ability to pay bankers bonuses beyond a Brussels-inspired limit sits uneasily within this dichotomy. Instead, the British have turned on an old foe, the bankers themselves.

The City of London has never promoted itself to the wider British public. Yet it generated £200 billion in output in 2019, just over 10% of the total for the UK. In 2020, it was the largest net exporter of financial services in the World, some £121 billion. Critically, in the last reported year, it paid 13% of all taxes levied in the UK, or £100 billion.

This economic base remains and, if managed carefully, can play a critical role in the financial recovery of the United Kingdom.

We are certain that the new UK Chancellor has in mind The Multiplier Effect if, as expected, he overturns the Capital Requirements Directive next week. This Effect was first observed, in print, by John Maynard Keynes and is often expressed alongside the Marginal Propensity to Consume or MPC.

Essentially, the MPC is determined by an individual’s or an economy’s intention towards saving. Thus, if an economic actor saves 20% of its income, its MPC is 0.8 indicating that, in any given time for any given income, it will spend 80%.

Using this ratio, the MPC Multiplier Effect is

MPC Multiplier = 1 / (1 – MPC) or 1 / (1 – 0.8) which equals 5.

In this example, for every one unit of currency invested, the economic ecosystem would generate five units of currency.

It is relatively easy to understand how a new Government, apparently more Keynesian than Monetarist, would see the attractions of such a relationship and, indeed, seek to base economic policy on it. Moreover, this new Government will be more than painfully aware that the most efficient segment of the economy through which to generate this effect is financial services. The UK dominates this industry in Europe, its financial returns are significant, and its ability to pay its people has been constrained by EU rules which, post-Brexit, are sitting on bonfire lit and sustained by a referendum.

If successful, the implications for the EU-wide restriction on bonuses in financial services may come under scrutiny. Since 2014, centres such as Paris, Frankfurt, and Amsterdam have all sought to increase their share of domestic trading in capital markets. These centres’ ability to do so rests on recruiting and retaining talent. Anecdotally, since the Directive, there has been a flow of talented bankers to the US, attracted by the ability to earn bonuses set against performance rather than constrained by regulation.

The economic future of the EU, as much as the US and the UK, is dependent on managing inflation while limiting declines in economic activity. Historically, this has been attempted through government intervention, viz the recent US and EU programs to stimulate economies while both the Federal Reserve and the ECB have appeared chary of raising rates. Historically, this combination has always raised the spectre of further inflation as the demand push achieved does not pull supply sufficiently to mitigate price rises.

Perhaps Governments should look to Greece as an example of how to manage this push/pull dynamic. It stands out as an economy which appears to have married government intervention with private endeavour successfully. As recently as June 2022, the IMF Executive Board released a report to conclude the Article IV Consultation with the Greek government. It stated:

“The Greek economy recovered strongly from the severe COVID-19-induced recession, with output returning to the pre-pandemic level in 2021. The strong fiscal response, accommodative monetary policy and prudential policies, and sizable EU support have been key to fostering the recovery. Despite the challenging environment, reforms progressed in several areas, including digitization, privatization, improving the fiscal policy mix, and bank balance sheet repair. Greece completed the early payment of all outstanding IMF credit in April, which terminates the Post Financing Assessment.”
IMF Executive Board, 21 June 2022.

The IMF concluded that the Greek economy was set to grow by 3.5% in 2022 with inflation expected to average 6.1%. While GDP growth is expected to moderate to 2.6% in 2023, this is seen in the context of inflation falling to 1.2% over the same period. The IMF stressed “the need to continue pursuing prudent policies and implementing growth-enhancing structural reforms to ensure debt sustainability and promote inclusive and greener growth.”

As the UK may look to a version of “trickle-down economics” in allowing its financial services industry to encourage a multiplier effect, Greece has demonstrated that a measured, co-ordinated approach to recovery can have similar system-wide benefits. What is clear, perhaps more so in Greece than in the UK, is the need to ensure that all actors understand the need to achieve this system-level win. The catharsis of Greece’s economic crisis is likely a factor in this understanding although the UK is undergoing a period of similar national reflection which may yet achieve a similar result.

In both cases, we believe that Ecosystem Economics® are in practice, reinforcing the trend towards realistic co-operation within healthy competition.​

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