Contributed by David Furlonger [ Register Now For January 19th webinar: Euro Crisis Webinar ]
An interesting article appeared on Reuters yesterday: Financial repression is here and may be helpful.
It discusses and supports the potential for greater control over the financial markets by governments, including a continuation of the current schemes that print more money for central banks to lend to banks who then buy more “risk free” government debt. Throw in a little inflation and the long-term debt load depreciates. Merkel is calling for more money for Greece and I note that the US debt ceiling has been nearly reached – again. (Where did that last U$1tn get spent anyway..?) The suggested alternative to financial repression via regulation is considered far worse. But is it?
Admittedly austerity packages don’t help either and are creating popular unrest at levels considered worrying enough for several commentators to point to previous historical conditions that led to bloodshed. Nevertheless, structural reform doesn’t even seem to be on the agenda, and certainly lacks political will.
In fact, the most recent Economist leader hinted rather as political posturing and included the repressive/protectionist impact of:
- The imposition of the Tobin tax on financial transactions (suppressing proprietary trading),
- Forcing houses that do clearing & settlement of derivatives that are denominated in euros to be located in eurozone,
- Forcing OTC derivatives to move to exchange-traded instruments
While maintaining market order, curbing greed and improving terrible risk management is important, protectionism and unnecessry regulation will only introduce artificial subsidies. Financial institutions will surely be wise to this as the costs of managing red tape increase eating further into profit margins. The euro crisis and political/regulatory meddling will therefore likely encourage Asian markets to be more aggressive with strategies to evolve their own platforms and tempt firms to move east.
Regardless of Europe 2020, a 2010 European Commission report highlighted more than 330 trade restrictions that included cross border challenges such as tariff increases, licensing requirements etc, as well as internal restrictions such as certification schemes, buy-national policies etc. A worsening euro situation leading to a meltdown or default scenario will only make matters worse: The Euro Crisis: Four Scenarios and How CIOs Can Prepare for Them, and likely bring about yet more “repression.”
Perhaps the most immediate form of any financial repression will involve protectionist initiatives designed to “protect” local jobs. This has two implications for CIOs:
- General enterprise HR sourcing and labour/talent mobility
- Ability to outsource
This will require CIOs to perform a risk analysis/containment and draw up contingency plans for all outsourcing contracts. Such planning will enable CIOs to adapt outsourcing strategies as needed. In the current crisis, these plans need regular review. The key question here is to ask: what contractual contingency has been taken in the event of a significant change to the business model of the firm due to meltdown or euro break-up?
CIOs should carefully consider their longer-term HR plans in terms of location of critical talent, training mechanisms, long-lining business support and the specific contractual requirements for IT staff and their jobs. Flexibility is key, as is increasing the institutional knowledge of non-eu locations, working practices and culture.
In terms of the ability to outsource, corporations and government departments have been under pressure in the press and from unions to reconsider outsourcing while simultaneously looking to make local redundancies in an effort to cut costs: Backlash leads Birmingham City Council to reconsider offshoring IT-jobs and Department for Work and Pensions staff begin industrial action. CIOs need to have in place communication and media management plans to address any public backlash from operational changes.
CIOs should also note that repression may not be overt. They need to prepare for additional administrative requirements, the impact of subsidies on ROI and potentially more foreign exchange rate manipulation that will impact the costs of products and services. Note the last quarter’s Swiss moves in this regard: Swiss Franc Protectionism. Such protectionism will likely not occur as “one-off’s” at the moment annual budgets are set. This means CIOs will require financial flexibility from CFOs as part of ongoing project commitments.
Loading companies with more red tape will in the end just be counterproductive for all of Europe, especially at this moment of econommic malaise. However, CIOs must prepare for more protectionism, whether overt or hidden under the banner of market stabilization.
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