Europe proposes regulation not a fix.

August 17, 2011


I’m in Perth today to speak at a HIA conference. My topic is the future of finance – looking out to 2030. You won’t be surprised to hear I’m going to look at history to see what it tells me about the future.

At a very high my takeaway is of Regulation, De-regulation, Re-regulation. I’ll post the PowerPoint presentation when I get home later this week.

But its the Re-regulation that has its corollary with the European proposal we saw overnight from French President Sarkozy and German Chancellor Merkel. They are proposing a financial transaction tax as a way to raise revenue BUT I’m sure this is also aimed at making the cost of short-term trading higher and thus reducing pressure on the European periphery from traders. It’s very Mahatiresq from the Asian crisis back in the 90’s.

Now transaction taxes are not new – the Tobin tax has been around as s proposal to rein in FX speculators for years.

But what is interesting in the context of my talk today and then what Merkel and Sarkozy are implying is that we, markets, are already looking at more regulation and must likely tighter controls on the free flow of finance.

Coming the week of the 40th anniversary of Nixon closing the gold window for the USD does the moves by Merkel and Sarkozy herald the start of a rollback of free markets?

I think the answer is yes.

It’s a long way to formal reregulation but I get a sense that politicians are getting tired of their lack of control of markets. Sure it might be a bit like playing the man not the ball and I’m not saying we are going back to Button woods – but it seems to me that the longer the GFC persists the more likely we are to get new regulations.

The unfortunate reality is that while policy makers focus not on a solution but trying to tie markets down the more likely markets are to remain volatile.

Last night we saw that Germany, as the healthy man of Europe has almost reached stall speed in its economy and we all know how weak the rest of Europe already is. So we’ll end up with more volatility and market falls.

Greg McKenna – on the road
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