Two views have appeared in recent days regarding the ramifications of ‘Grexit’ or Greece’s exit from the Euro Zone. The picture painted by Daniel Keleman in Foreign Affairs – Europe’s New Normal – is relatively upbeat. The other, Martin Wolf in today’s Financial Times – [...]]]>

Two views have appeared in recent days regarding the ramifications of ‘Grexit’ or Greece’s exit from the Euro Zone. The picture painted by Daniel Keleman in Foreign Affairs – Europe’s New Normal – is relatively upbeat. The other, Martin Wolf in today’s Financial Times – A Permanent Precedent is far less optimistic.

I side with Wolf.

Most importantly, my position is that the Grexit will be the final straw that will set the pendulum of social contagion in motion. By ‘the pendulum’ I am referring to the way we make decisions and see the world. The pendulum is illustrated below:

For a long time, especially in the business world, we have seen the future through the eyes of Adam Smith (Adam Smith died in 1790 but dead thinkers can tell us a lot about the times that we are now in and we should should listen intently to them). Basically, Adam Smith believed in the ‘invisible hand’ of natural harmony and our ability to resolve differences. We have been living in this thought world for a long time (and certainly since the fall of the Berlin Wall) and it underpins the aspirations of the ‘oneness’ of economic globalisation.  It also underpins the way that we think about business strategy. But there is another way of seeing the world and we must listen to the words of Thomas Hobbes (1588 – 1679) who warns us that the life of man without the rule of authority (and we can say here ‘legitimate authority’) is ‘solitary, poor, nasty, brutish, and short’. What this all means is that the pendulum can swing to a world where it’s every human being for him/herself – the opposite of a globalised world on ‘oneness’.

And this is the problem of the ‘Grexit’, it could be the final straw to start the pendulum swinging.

The task for business leaders is to look closely at markets and think which way the pendulum could swing after ‘Grexit’ in each market.

The news is understandably full of the continuing saga of the ‘Euro Crisis’, focusing on Greece and whether or not we face a ‘Grexit’ (isn’t it amusing how these new words appear in times of crisis) and more economic contagion. This is an important debate, but we must not [...]]]>

The news is understandably full of the continuing saga of the ‘Euro Crisis’, focusing on Greece and whether or not we face a ‘Grexit’ (isn’t it amusing how these new words appear in times of crisis) and more economic contagion. This is an important debate, but we must not see it merely as an economic issue. In many respects, the Euro Crisis should be seen as a microcosm of a future world. We may all have to go through what is now happening inside the European Union.

The Euro Crisis should be seen therefore as more than issues of financial ‘firewalls’ and ‘austerity’. What we are really seeing is a struggle for who holds power. In other words we are witnessing, within the European Union, a preview of the coming reshaping of the world order. When I talk of the ‘world order’ I mean the ‘rules of the global game’. For most of us in at least the West, the rules of the global game were crafted by the US in the closing years of the Second World War. Democracy and open markets were championed and new institutions such as the UN, IMF and World Bank appeared to support these ideals. But the world has changed a lot during the ensuing 60 or so years. We shouldn’t fall into the trap of thinking that:

• ‘Super power’ states are the only plausible architects of a world order
• There will be one world order. We face the  prospect (or in my view certainty) that the world will fragment into multiple orders.

Joseph Nye[1] makes the important point that globalisation has empowered everyone, making even small groups of people as powerful as nation states. Nye uses the example of 9/11 to show how a relatively small group of individuals can kill more Americans in one day than a nation state did in 1941 (Pearl Harbor). This all means that new world or regional orders will be defined and moulded by more architects than just a small collection of powerful nation states. We must say goodbye to a world where the rules of the global game can be decided by just one or two powerful states. We are now in the highly unusually position of having a range of newly empowered architects, all jostling for position and wanting to try to push things their way.

I deal with this new array of architects in my forthcoming book, The Era of Global Transition, to be published in September, but in this post I want to say hello to one important actor that I will call the Splintered State.

‘Splintered states’ can take a pivotal position, being able to punch above their weight. Typically, splintered states historically enjoyed positions of relative influence and wealth. Their influence is now waning. Their empires and sources of power are dying. They are losing the access to resources that they once enjoyed.

History tells us that when empires die they become dangerous, prone to irrational actions and behaviour[2]. They may not be able to craft a world order, but splintered states can throw rocks into the pond that are big enough to make a lot of us wet and influence the formation of regional orders.

The European Union was a growing empire, built on the foundations not of hard-edged military power, but the use of more subtle soft, influential power[3]. The Great Recession has eroded that source of power and the European Union is in retreat. Now we face the prospect of fragmentation with the likelihood that Greece will be the first to exit. An exit will finalise Greece’s transition into a splintered state. And if Greece exits and we face the emergence of more splintered states.

As we have said, splintered states are potentially dangerous. Splintered states can act irrationally and could be those that will finally take the remaining wheels off the globalisation bandwagon. Typical actions will include:

• Protectionist, ‘beggar thy neighbour’ policies that could spark economic warfare.
• Emergence of political extremism.

Political extremism deserves a special note. Firstly, in times of crisis and impending poverty, forget the popular mantra that ‘everyone wants democracy’, people will want a strong leadership figure that they have confidence in. Secondly, political extremism is an issue that is bubbling at an alarming rate in Europe[4], [5].

Splintered states can punch above their weight in this inter-connected world of ours and may be surprisingly influential when we navigate the next turn in the globalisation story.

References

[1]          J. Nye, The Future of Power. New York: Public Affairs, 2011.

[2]          R. Gilpin, War and Change in World Politics. Cambridge: Cambridge University Press, 1981.

[3]          M. Wolf, ‘The pull of a free and prosperous Europe’, FT.com, 01-Feb-2005. [Online]. Available: http://www.ft.com/cms/s/1/3f90b804-7483-11d9-a769-00000e2511c8.html#axzz1QqPth8ub. [Accessed: 01-Jul-2011].

[4]          A. Mammone, ‘The Future of Europe’s Radical Right: Why the Politics of Race Are Here to Stay.’, Foreign Affairs, 20-Sep-2011. [Online]. Available: http://www.foreignaffairs.com/articles/68286/andrea-mammone/the-future-of-europes-radical-right?page=show. [Accessed: 06-Oct-2011].

[5]          M. Goodwin, ‘Right Response: Understanding and Countering Populist Extremism in Europe’, Chatham House, London, 2011.

Nothing like an attention grabbing headline.

But there is a very serious issue here. In today’s FT, Gideon Rachman puts forward a very good argument as to why there is no alternative but austerity for Europe, see No Alternative to Austerity. Rachman paints a picture of the vice [...]]]>

Nothing like an attention grabbing headline.

But there is a very serious issue here. In today’s FT, Gideon Rachman puts forward a very good argument as to why there is no alternative but austerity for Europe, see No Alternative to Austerity. Rachman paints a picture of the vice that now grips Europe, and it is a vice that some would say has been imposed by free market capitalism. One jaw of the vice is of course the need to reduce national debt. The interest rate ‘imposed’ by markets on Spanish bonds breached 6% in April and Italy’s touched 7% earlier this year. The other jaw of the vice that Rachman refers to is the competitiveness of the some European economies. These economies suffer from two problems – the first is cost –  or red tape – that inhibits both new hirings and international competitiveness (think about all the new emerging economies queuing up to compete in the global market place). The second is one of economic structure where there are deep questions regarding the stability of economies with exposure to the services sector (especially, in the case of the UK, financial services).

So time, and a long time, is needed to ‘cure’ these problems and loosen the grip of the vice.

But factor in what we are starting to see across Europe. Matthew Campbell summaries the situation well in last Sunday’s issue of The Sunday Times - see Fears of anarchy as neo-Nazis recruit Greeks with food. I don’t have to detail the content of the article, the title says it all.

The problem is that capitalism needs time in Europe to effect its cure. And that’s what Europe may not have. The time factor may allow the rise of extremism and protectionism on a scale that we have not yet witnessed.

I am left with the closing lines of Slavoj Zizek’s book, First as Tragedy, Then as Farce ringing in my ears:

‘… do not be afraid, join us, come back! You’ve had your anti-communist fun, and you are pardoned for it-time to get serious once again!’ (p. 157)

The real question is ‘has capitalism signed its own death warrant in Europe?’

The latest news that Argentina has nationalised the oil group YPF, whilst a shock, should come as no surprise and is a taste of things to come.

Just put together:

This article makes an interesting read about the West’s lack of a grand strategy. It also struck me that it applied to the UK as well with regard to the apparent absence of a plan to restructure its economy (see my last post). It struck me too that [...]]]>

This article makes an interesting read about the West’s lack of a grand strategy. It also struck me that it applied to the UK as well with regard to the apparent absence of a plan to restructure its economy (see my last post). It struck me too that we are the ‘dopes’ worrying about relatively minor side shows such as bankers’ bonuses and granny taxes.

This article contains some important observations – Luxury goods: style rises in the east – http://www.ft.com/cms/s/0/5fc71b48-7f09-11e1-a26e-00144feab49a.html

Conventional thinking has been that burgeoning consumer demand in Asia would save the West and especially the West’s luxury goods sector.

Maybe this might not be the case.

This article points [...]]]>

This article contains some important observations – Luxury goods: style rises in the east – http://www.ft.com/cms/s/0/5fc71b48-7f09-11e1-a26e-00144feab49a.html

Conventional thinking has been that burgeoning consumer demand in Asia would save the West and especially the West’s luxury goods sector.

Maybe this might not be the case.

This article points to the emergence of a more likely range of outcomes:

(1) Organisations (or in China’s case state owned enterprises) will buy up Western brands at potentially bargain basement prices.
(2) Increasingly innovative economies, with growing intellectual capital, will create their own brands.
(3) The emerging economies may overtake the ‘advanced’ economies in terms of innovation capabilities. The sad fact is that people have to work in close proximity to each other to produce innovative ideas and products – I am one of those who holds that all the ‘virtual’ networks in the world can’t replace good old trust and face to face working. The point that to work, R & D has to be close to the ‘production’ line, is made in this article: America reassembles industrial policy
(4) The next chapter in this story of growing capabilities will be the emerging economies’ emergence (if you excuse the pun) and dominance in the services sector.

None of this is long-term good news for the ‘advanced’ economies.

So what does all this mean?

Focusing on Asia for growth might not be the relatively straightforward decision many may think. The West, the ‘advanced’ economies that I have referred to, will fight back, electorates will make sure of that. The great battle for ‘economic rebalancing’ is about to start as the West seeks both to (a) reduce exposure to a volatile banking sector and (b) stimulate manufacturing in an attempt to encourage a broader employment base than financial services can provide.

So we need to be careful. We are on the edge of a protectionist battle. What seem to be commonsense decisions now, might not look so straightforward in a couple of years’ time. But there’s a second point too. We don’t yet know what role the emerging economies will take on the world stage, especially as the influence (and power) of the US declines.

The future may not be as benign and straightforward as we think.

I have just finished reading a Financial Times  interview with the now legendary management thinker Gary Hamel[1]. Hamel is probably best known for his work on ‘core competences’, a concept that really did change both management thinking and attitudes to strategy and competitive advantage. Hamel has a new book out - What Matters Now. [...]]]>

I have just finished reading a Financial Times  interview with the now legendary management thinker Gary Hamel[1]. Hamel is probably best known for his work on ‘core competences’, a concept that really did change both management thinking and attitudes to strategy and competitive advantage. Hamel has a new book out - What Matters Now. I must get a copy, but it will have to join the reading queue – there are three books in front of it dealing with the changing global order plus Pinker’s The Better Angels of our Nature.

Anyhow, back to the article which introduces Hamel’s latest work. The main message is a continuance of Hamel’s call for a revolution in management. In the interview, Hamel makes the point that he feels that change, for managers, is ‘inevitable’ as companies are up against a series of unprecedented challenges. The challenges aren’t described but other drivers of change are mentioned that include:

(i) ‘Knowledge is now a commodity’

(ii) A new generation, brought up on digital media, believes that ‘every idea should compete on an equal footing’ and

(iii) Social media are ‘subverting traditional management’.

This led me to reflect upon what might be Hamel’s underlying or even subliminal assumptions when he made these propositions.

I guess that the assumptions might have embraced the view that we are all on an unstoppable journey to a world that is freer, more open and more democratic. This spread of democracy will power new levels of global growth that can  deliver a ‘win win’ for everyone.

I’m sure we would all agree with these assumptions. They give a great vision for the future.

So where’s the problem?

Hasn’t anyone noticed that the world is becoming more autocratic?

Reflect for a moment upon the implications of a future world dominated by a new great power that believes in another model. Reflect too upon long-term public reactions to the Euro Crisis and how, as part of the crisis management process, leaders and have fallen and the power of national self-determination has been eroded.

And what about democracy as the prime, unrivalled generator of growth? Surely its track record is unquestionable?

Well, not so I’m afraid. Research on the topic has not produced a definite answer [2]. The best we can assume is that democracy does not impede growth.

The message here is that in a complex and unpredictable world be terribly careful about what you assume is a certainty.

It probably isn’t.

References
[1] A. Hill, “Still on the cusp of a revolution,” Financial Times, 04-Mar-2012.
[2] J. Williamson, “Is the ‘Beijing Consensus’ Now Dominant?,” Asia Policy, no. 13, pp. 1–16, 2012.

The Press and the blogsphere have been full of talk of the financial markets over-ruling democracy. Now we’re talking about over-ruling democracy in Europe of all places – and most would see Europe as the global champion of human rights. Some see that is a negative step, for example, [...]]]>

The Press and the blogsphere have been full of talk of the financial markets over-ruling democracy. Now we’re talking about over-ruling democracy in Europe of all places – and most would see Europe as the global champion of human rights. Some see that is a negative step, for example, Skelton[1].

Others see this as a very much more positive step forward. Altman[2] would be in this camp and his position can be summarised as follows:

(a) Whislt he acknowledges that the short-term effects of markets wielding their sword can be painful, not least in terms of the impact on the individual, the long-term results are ‘often transformative and positive’.

(b) Economic globalisation (particualry the free movement of funds) provided markets with this sword.

(c) The power shift from states to markets is permanent.

Mr Altman is wrong I am afraid. The change is not permanent. The whole system of economic globalisation can be undone.  It may be unthinkable, but it can be undone just as we may see another unthinkable event in the next few weeks, the unbundling of the Euro. The fact is that globalisation has empowered not just financial markets but more importantly the people. Just look to the Arab Spring of 2011 to see examples of that new power in operation.

The real danger is that the financial markets may die by their own sword.

Be under no illusion, capitalism is facing its greatest test and the jury is out considering its verdict. If capitalism fails, there are others waiting to take its place. In the end the people will decide, not the financial markets.

[1] D. Skelton, “Government of the technocrats, by the technocrats, for the technocrats,” New Statesman, 16-Nov-2011. [Online]. Available: http://www.newstatesman.com/blogs/the-staggers/2011/11/european-greece-technocrats. [Accessed: 19-Nov-2011].

[2] R. Altman, “We need not fret over omnipotent markets,” FT.com, 01-Dec-2011. [Online]. Available: http://www.ft.com/cms/s/0/890161ac-1b69-11e1-85f8-00144feabdc0.html#axzz1fHKcTLBn. [Accessed: 02-Dec-2011].

Two things that we took for granted when preparing our business plans. Unwritten assumptions that democracy and capitalism would survive all that the world could throw at them.

Well, many are frightened that this might not be the case. Most are pointing to the current Euro Area crisis as [...]]]>

Two things that we took for granted when preparing our business plans. Unwritten assumptions that democracy and capitalism would survive all that the world could throw at them.

Well, many are frightened that this might not be the case. Most are pointing to the current Euro Area crisis as a potential source of capitalism’s demise.

True, this is one of capitalism’s great tests but the real problem maybe located far away in an area that many think will give capitalism and democracy a long-needed shot in the arm – Asia. John Feffer makes the point that we could see North Korea coming back into the fold, providing a pivotal energy and transportation linkage uniting pan-Eurasian interests – from Russia to China.

But we have to consider what impact North Korea’s inclusion may have in Eurasia. New feet will be under the table at the head of the world’s fastest growing zone of influence – and neither capitalism or democracy got those feet under the table.

And at the time of writing this post the FTSE 100 here in London is down 1.3% after about 5 hours trading.

If we look back over just the last three months we see a real roller coaster:

FTSE 100

Since the end of July the total [...]]]>

And at the time of writing this post the FTSE 100 here in London is down 1.3% after about 5 hours trading.

If we look back over just the last three months we see a real roller coaster:

FTSE 100

Since the end of July the total value of investments (or should I say Joe Public’s savings) has dropped by nearly 15%.

Why? This is the question on everyone’s lips. Well, we had an emerging US debt crisis, similar concerns regarding the credit worthiness of Spain and Italy, banking worries in Europe and worries too about global growth.

All conventional explanations. But these issues have been around for months if not years. None of this is new news. The stock markets should be good, efficient mechanisms for discounting, or projecting, the future. But from Joe Public’s perspective they are not. The ‘markets’ appear to be irrational custodians of Joe’s savings.

And this leads me to the point of this posting. The world is changing. The influence of the US, who nearly single-handedly crafted the post second world war world order is in decline. There are new eyes watching what is happening.

We are witnessing far more than the prospect of a double dip recession. We are facing the second great test of capitalism.

Capitalism’s first great test within this new, emerging, multi-polar landscape occurred on 15th September 2008 with the banking sector crisis that led to the so-called Great Recession. The rather mild problem is that the jury failed to come to a verdict on whether or not capitalism passed this first great test. At that time, capitalism escaped with merely a stern written warning in the form of the comminique issued after the first G20 meeting.

But now capitalism is facing its final warning. If it delivers a depression instead of jobs we can expect radical changes and the US will not be the leading architect of the next world order.

Some say that even communism could be back[1].

References
[1] N. Lezard, “First As Tragedy, Then As Farce by Slavoj Žižek,” guardian.co.uk, 24-Oct-2009. [Online]. Available: http://www.guardian.co.uk/books/2009/oct/24/tragedy-farce-slavoj-zizek-lezard. [Accessed: 23-Mar-2010].