New Europe

16th January, 2011

World public opinion, to the extent that such a thing exists, and an increasing number of players in developing markets seem to have now turned against globalization. Governments are forcefully bowing to the strong negative attitude of the public in their countries, vis-à-vis the “laissez passer” legislation concerning the movements of capital in and out of their economies.

New York and London commentators, for a number of years, have been  taking for granted that the financial agents staged in those two mega cities should have a free hand and uninterrupted access to all and every capital, money or commodity market all over the world. This is obviously the ideological outcome of thirty years of deregulation and policies favoring globalization followed by all the major countries of the world, a process that started in the 1980s, took momentum in the 1990s and became standard, just around the turn of the Millennium.

What followed however were two major financial crises and a number of regional capital market melt downs, like the ones in South East Asia and Argentina. The most ferocious of the two crisis was the real estate one of 2007-2008, that destroyed all the major banks in the US and Britain, and threatened to demolish the real economy of the entire world along with the banking sector in the rest of the major economies. The taxpayers’ money and the central bank zero cost loans that were used to save the western financial system from a total collapse have now led to severe public spending cuts, which affect greatly the average man in the street all over the western world. It was a lesson that all these people learned about banks.

Our political leaders refuse, however, to acknowledge this reality about the big financial firms which, after losing all their bets in the real estate market, have turned their newly acquired capital from taxpayers and central banks into the oil and basic food stuff markets, trying to create new values for themselves and make the rest of world pay for this. All that would have not being possible without a thirty year deregulation all around the world and the arrival of the globalization era.

Good things do not last forever though and this perfect set up for the big banking and investment firms, including the various forms of capital formations like the private equity or the state owned funds, is to come to an end. Major developing economies like Brazil and South Korea are now protecting themselves from the uncontrollable inflows and outflows of capital, by starting to impose increased taxes on those movements. The 6% levy imposed on inflow of foreign capital into Brazil may be the beginning of more restrictive policies. The aim will be to protect their internal financial markets from the abrupt in and out flows of New York capital, being it to a large degree just newly printed paper by the Fed. It is also a warning to the traditional western financial centers, that their ability to conquer the rest of the world just with printed paper is over. In the medium future, if the west wants to expand to those economies it would be obliged to finance real economy investments with long term capital, as some decades ago. The terms however will not be the same as in the 1950s and the 60s.

The real message is that the west will no longer have a free access to economies like Brazil and South East Asia. China and India have already set their own terms in financial relations with the west. It seems certain that the world financial markets are soon to be much more regulated. The European Union will end up in the middle, between the unregulated US and increasingly regulated emergent states..