Eurozone crisis could unleash an epidemic of protectionism
WHEN Lehman Brothers went bankrupt in 2008, precipitating a global recession and the unwinding of a massive credit bubble, many feared a terrified world would succumb to the siren songs of protectionism. History usually repeats itself because younger generations forget the past or believe that they are better than their forebears; and one of the key factors that turned the post-1929 bust into a prolonged depression were the Smoot-Hawley Tariffs, signed into law by Herbert Hoover in 1930, when America slapped massive taxes on 20,000 imported goods. This triggered a trade war, a drastic reduction in commerce and ended a great, 19th century-inspired era of wealth creating globalisation. It took until the late 1990s-early 2000s before globalisation finally surpassed its previous peak of 1914.
The pessimists were right to worry – finance has already become far less integrated following the crisis, with large banks becoming more focused on their domestic markets and pulling out of foreign countries. This is partly because of the regulatory reaction to the crisis, and the fact that cross border resolution and bankruptcy mechanisms for complex, global banks have yet to be introduced. But so far we have fortunately not seen a significant return to protectionism in other areas. There has been no wholesale rejection of the liberal international economic order. Financial markets are more integrated than ever. Businesses continue to globalise; the technology revolution is ensuring the word is becoming smaller.
The big worry now is that the Eurozone crisis could provide a fresh impetus for the forces of protectionism. The signs aren’t good. Perhaps most worryingly of all, Switzerland is warning that it may introduce capital controls for the first time since the 1970s if the euro breaks up. This would be to prevent an extremely sharp appreciation of the Swiss franc caused by massive inflows of capital from terrified investors seeking a safe haven for their assets. The Swiss authorities are already intervening in the markets to try and enforce a cap on the franc-euro exchange rate.
The good news for Switzerland is that it has better economists than the Eurozone: the Swiss National Bank’s president Thomas Jordan predicted the Eurozone crisis in his 1994 Ph.D thesis. In doing so he was hardly unique, of course; anybody with a real understanding of monetary economics and the history of currency unions predicted that the euro would either eventually collapse or mutate into a comprehensive super-state.
But for all Jordan’s prescience in that area, capital controls would be a disaster. They would amount to a huge leap towards the true deglobalisation of finance, rather than the ersatz variety we have seen so far. If Switzerland – supposedly a paragon of capitalist virtue and an economy reliant on global finance – takes the lead then others would be bound to follow. A renewed epidemic of capital controls would be catastrophic. It would be the modern equivalent of Smoot-Hawley: without the freedom to move funds about, global businesses cannot operate. One of the greatest days in UK economic history was when Margaret Thatcher and her first chancellor Lord Howe abolished exchange controls in 1979. Until then, it was forbidden to take out pounds from the UK without permission, with only tiny amounts ever tolerated. It would be horribly ironic if we were ever to return to such sorry times – courtesy of a single currency that was supposedly meant to facilitate freer trade, but which ended up dealing it a mortal blow.
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