Last week, European commission president José Manuel Barroso commented: "Socially and politically, one policy that is only seen as austerity is, of course, not sustainable. The policy has reached its limits because it has to have a minimum of political and social support." The furious reaction of Germany’s finance minister, Wolfgang Schauble, who said "the eurozone's woes have nothing to do with strict budget rules – somebody should tell Barroso that", provided a small insight into the intense political differences and tensions that the eurozone sovereign debt issue has spawned, and hint at the extreme difficulties that lie ahead.
The topic resurfaced this week when Italy’s new prime minister, Enrico Letta, revoked planned tax increases that had been intended to raise up to €6bn.
"We will die of fiscal consolidation alone," he said. "Growth policies cannot wait any longer."
Prime minister Letta is not the only politician or trade union leader talking about "growth" – restoring growth, encouraging growth, borrowing to fund growth and so on, which is needed to drive (re)employment.
The unanswered question, of course, is: growth of what? Where is the employment going to come from?
There are two huge macro themes at work here: the transformation of global economies, and the limitations imposed on governments’ abilities to handle that transition by colossal levels of sovereign debt.
As the structures of the world’s economies change, many traditional jobs are disappearing forever, just as they did when Britain and other western nations transitioned from agricultural to industrial economies in the 19th century. How many cadgers, cafenders, cafflers and cainers do you know?
Eventually, just as then, new industries will emerge that will generate new jobs – although, just as then, we don’t yet know what they will be.
In the meantime, the challenge confronting the eurozone is, and will be, how society is to cope with an era of prolonged high levels of unemployment, and how those more fortunate can be persuaded, indeed encouraged, to care for their less fortunate fellow citizens. Particularly since the wealthiest tend to be the most mobile.
It seems unlikely that today’s society would tolerate the extremes of social suffering that characterised the 19th century, when millions were stripped of the ability to provide for their families as agricultural economies were dismantled and industrial economies constructed in their place.
But today’s angry and disillusioned, dispossessed and excluded have political power that was unavailable to their forebears – the power of the internet to harness votes of the young and angry is already giving rise to new and extreme factions that are winning votes and seats and influence.
That could have profound implications for government policies in the years ahead.
Meanwhile, there are clear parallels with events in the years following the First World War, when Germany was saddled with sovereign debt in the form of war reparations that were economically impossible for it to repay, but politically impossible for its erstwhile foes to forgive.
With a desperate need to create and fund employment, but unable to borrow and with no significant revenues, the German government resorted to printing money – sound familiar?
Germany’s economy collapsed in to hyperinflation, mass impoverishment and political anarchy, alarming Germany’s creditors and prompting a series of increasingly desperate attempts to restructure her war debts – the Dawes Plan of 1924, the Young Plan of 1929 and, finally, the Lausanne Conference of 1932 – involving forgiveness, moratoriums, extensions and new loans. Doesn’t this sound familiar as well?
Ultimately, in 1933, Germany’s National Socialist government repudiated the country’s debts. We are not there, yet, but the politics of envy and revenge have been unleashed, and already stalk the land. They are rarely travelling companions of economic recovery.
Jan Luthman runs the Liontrust UK Macro Growth and Liontrust Macro Equity Income funds, which have both significantly outperformed their FTSE All Share benchmark since they were launched in 2002 and 2003, respectively.
The manager has returned 143.68 per cent over the last decade, beating his peer group composite by around 20 percentage points.
Performance of manager vs peers over 10yrs
Source: FE Analytics
Both of his funds require a minimum investment of £1,000 and have an ongoing charges figure (OCF) of 1.6 per cent.
He outlined the potential impact of social media on investors’ portfolios in an interview with FE Trustnet last year.
The views expressed in this article are those of Jan Luthman and do not necessarily represent those of Liontrust.