Monday, 20 December 2010

Are Two Days Meetings, Once a Quarter, Enough to Run Europe?

The December Summit of the EU agreed to introduce an amendment to the EU Treaties to create a permanent bail out fund for Eurozone member states, that will be activated “if indispensable to the stability of the euro area as a whole”.
This is quite a high bar to cross. Suppose there is a financial crisis affecting the majority of countries in the euro zone, but one large country has insulated itself against this economic shock by building up large savings and preventing its banks from lending more than a very conservative amount. Would the existence of that one such country in the euro zone be legally sufficient to prevent the bail out fund being used then, because the crisis was not affecting the euro area ”as a whole”?
This wording in a Treaty will be very severe and may mean that countries in difficulty will not use this fund at all but will prefer to seek help from the IMF, because the IMF will look at the situation of individual countries, not at the euro area as a whole.
It would appear that this announcement has not calmed the markets. If so, this is because it is a one sided solution. It deals with helping countries avoid collapse, but it does so by enabling them to add further to their debts by borrowing on the strength of the credit of other member states who have a better credit rating.
What it does not do is provide a vision of how economic growth will be restored , so that a flow of funds will be created to repay the debts. The EU heads of Government have produced tons of paper on this topic in the past, notably under the so called Lisbon strategy. These papers have been full of pieties about “reform” and “flexibility”, but have lacked specifics and rigorous follow up. I always had reservations about the Lisbon Process because it lent the good name of the EU to systematic evasion of responsibility in areas where the EU actually had no power to act under the Treaties, and thus no responsibility for failures.
My own view is that the European Council, which is a body consisting of 27 part timers, is not a body that is capable of the sort of rigorous, sustained, and self critical thought that is needed to restore economic growth at this critical moment in history.
27 heads of Government, all of whom are already fully employed managing their own countries , can only turn to EU affairs in their spare time, which may be on the plane on the way to the meeting in Brussels. The European Council does have a small secretariat and a fulltime Chairman, but that is not enough to make up for the fact that the people who make the actual decisions are all part time Europeans. Arguably the European Commission is available to help but its role is sidelined by its institutional rivalry with the Council.
We are facing more than a financial crisis. We are facing a crisis of the welfare state in ageing societies. We are facing a crisis of globalisation, and potentially even a crisis of the efficacy of European democracy. These subjects need to be tackled together in a sustained way, with a real sense of urgency. Decisions need to be taken now, that point the way forward for Europe for the next ten years. Leaders need to sit together until they have reached a full mutual understanding on all that needs to be done, the whole job, not just bits of it.
I believe that the members of the European Council from the 16 euro area countries should be  recalled, in the days after Christmas before the markets get going again in the New Year, and work together for a week or more with all the relevant members of the European Commission, to put together a ten year strategy for political and economic reform to facilitate the economic revival of the entire euro zone.
On the narrower issue of bank debts, the conclusions of the summit are also one sided. For example, the Irish banks owe 113 billion euros to German banks , 107 billion euros to British banks, and a large amount to Belgian banks. If mistakes were made in borrowing this money by the Irish banks, mistakes were made in lending it too. The lending banks were regulated in their home countries, not in Ireland.
While the Irish banks were regulated by Irish authorities who did not do their job properly, Irish taxpayers were not parties to either the lending decisions, nor to the borrowing decisions. Yet they are taking on the full responsibility of ensuring that the loans are repaid. They are getting new loans to help them do this, but they will have to repay those loans in full. There is a lack of symmetry here, to use a mild term.
Of course something along these lines was needed to prevent the problems of the Irish banks infecting the German , Belgian and British banks too. In protecting those banks one is protecting German, Belgian and British taxpayers. So surely this is a European responsibility, as well as an exclusively Irish one?
This is the sort of issue that it would take a lot of time to work out fairly and proportionately, time that the busy part time Europeans on the European Council do not allow themselves to take

Tuesday, 14 December 2010

Time for Unity of Purpose and Clarity of Vision

In August 2003 the International Monetary Fund said the following about Ireland   

“The spectacular increase in house prices and credit raises the risk that prices may unwind, possibly abruptly”

It went on to say that the increases in house prices were outstripping rents.

One question we must ask ourselves is why this warning, back in 2003, was ignored.  For example, why did the Central Bank not insist at that time that lending for property development by Irish Banks not exceed (say) 20% of the deposit base? What account did the ECB take of this IMF warning in monetary policy?

But questions also need to be asked of the Irish Banks themselves, and of the other Banks elsewhere in Europe who lent so much money to the Irish Banks to fuel this “spectacular increase in house prices and credit”. 

The IMF Report was a public document.  The Banks and the Rating Agencies had thousands of researchers available to them to read all the IMF publications, including this one on Ireland.

Yes, of course, it is true the Irish Authorities who ignored this Report by the IMF have a lot to answer for.   But so also do those who lent so much money to the Irish Banks, or who gave favourable credit ratings to them, notwithstanding their exposure to prices that might “unwind abruptly”, in the elegant phrase of the IMF.  Were they not asleep at the wheel too?  Were they not culpable in making the comfortable assumption that there would be “a soft landing”?

In terms of house prices and property loans, Ireland is undoubtedly the worst case in Europe.   But the same people who ignored that risk also ignored other major credit risks like the unsustainable large foreign indebtedness of European States, like Greece.

Put simply, the markets did not do their job until it was too late, and then they panicked.

And it is not as if they were not warned. 
 The European Commission has published a number of alarming reports about the long term sustainability of public debt in European Countries in light of the ageing of our populations and the consequential increase in the pension and health care costs relative to what could be earned by the diminishing population of working age.
 It predicted that, by 2O50, the debt to GDP ratio of many European countries, including this one, would reach between 400% and 500% of GDP, if existing policies were not changed.   Again, these Reports were publicly available, but the researchers in the Rating Agencies and the Banks seemed to take little notice of them, and probably still do. The US also faces the same problem, and is doing even less about it than Europe is. That is why we will have sovereign debt problems for many years to come.

These problems are simply too big to be ignored, and too big to be tackled by one country on its own.

I listened to former British Prime Minister Gordon Brown on the radio this week.  He said that the European Union needs to tackle all its three problems at once.   The deficit in the Banks, the deficit in the Public Finances, and the deficit in competitive growth are all part of the one problem.  Gordon Brown suggested that they should be tackled together, rather than separately.  He is right.

He also reflected on the fact that what is happening today in the banking sector is simply a reflection of a huge change in the distribution of economic power in the world.  Since 2000, we in the West have been sustaining and increasing our living standards through expanding credit, while the Emerging Economies have been gaining an ever increasing share of the production of goods and services.

 All that the expansion of credit did was postpone, and thereby make more painful, an inevitable reduction in relative living standards in the West. The financial crisis is just a symptom of a deeper change.
 Ironically, it would have been better for us if it had happened earlier.  It is better for us that it is happening now, than it would have been in five years time, because if we had continued on our previous path , the  cuts would then be even greater.

The 27 Heads of Government of the European Union will meet this week to work out a new mechanism to support members of the Euro Zone that get into difficulty.  I hope they will not confine themselves to trying to solve part of the problem.  They need, as Gordon Brown has suggested, to look at the problem in its entirety. I suggest that they sit together until they have  mapped out a strategy to deal  in an integrated way with  the  problems of sovereign debts,  banking  contagion, and insufficient competition and growth

Daniel Gros, the Director of the Centre for European Policy Studies, has suggested that there be what he calls “a big bang solution to Euro Zone problems” .  He says that  the fact that loans of the future European Stability Mechanism (ESM) are to be senior to private credit,  will make it difficult for any country, that gets funds from the ESM, to raise money privately as well. This is something that should be re-examined.

Another respected economist, Wolfgang Munchau has argued for what he calls a limited fiscal Union. He says that, to sustain the euro, the Euro Zone needs a system to redistribute money in a way that will ensure that the imbalances,  that our now causing such difficulty ,do not build up again.  We do not need a Transfer Union, as some  in Germany  fear, but we  do need a eurozone   system of mutual insurance, for which we each pay a fair  fee.
He argues against increasing the existing EU Budget, which does little to solve Europe’s imbalances.  Instead he suggests that responsibility for resolving the problems of systemically important banks should rest at EU, rather than at national, level.  Arguably Europe’s banks have lent so much to one another, that  this makes sense.   He also proposes a system of EU wide short term unemployment insurance, and a European Tax on countries that consistently run overlarge deficit budgets. I believe the EU needs a tax base to recapitalize the ECB.

One can argue against the specifics of some of these proposals.  But there is no doubt but that we urgently need comprehensive decisions on the shape of the European Union, a Union that will be capable of sustaining and managing a single currency. Now is the time to take the whole issue on, and make the big decisions, once and for all. Ireland needs to take part in these debates, and not just obsess about our own problems.  It is in our vital interest that the project of building a better structure for the euro is a success.

   There are some who would give up the effort, and some who would like the euro to fail. I believe they are wrong.
The euro is the centre piece of the EU. It is the guarantor of the single market.  It harnesses economics to build a structure ot peace and interdependence in Europe.  The breakup of the euro is not a good option, as Gordon Brown has recognised.   It would open us to the threat of competitive devaluations within Europe. That is what happened in the 1930s. Europe’s stateswomen and statesmen will not allow that to happen again. We have built a structure of peace in Europe, and we are going to keep it.
Of course one will hear arguments from economists, particularly in the south East of England , that single currencies are unviable because it is impossible to agree an exchange rate that suits everybody in different parts of a large Union.  But this ignores the fact that the same argument could also be made within United Kingdom itself.
 The exchange rate of sterling that suited the South East of England in the 1980’s did not suit the rest of the UK.  A strong pound was good for London and bad for Newcastle. I am sure Scotland might  even need a different monetary policy to Wales from time to time.   But nobody   has suggested that therefore the UK should have had two currencies, one for the South East of England  and another for the rest of the UK.  The same argument applies within the European Union.
 In the euro we have to find other ways, apart from devaluations, to deal with imbalances.  After all, if devaluation was such  a panacea, why has Italy lost ground to Germany over the last twenty years?
  The big decisions,  that can only be taken at European level,  should be made this week, so that uncertainties are removed, and we can build on our strengths.
 Here in Ireland we have a remarkably strong export sector, which includes our financial services industry.  We have a legal and professional infrastructure to support our financial services that is second to none. We have unrivalled international links, as I have found in my travels on behalf of IFSC Ireland.  We have regulators who have learned lessons, and who know that success comes from dealing with future risks, not from   re fighting the last war.  We continue to improve our competitiveness, faster than almost any other euro area country. Our corporate tax policy has been vindicated.   Now is the time for unity of purpose and clarity of vision. Let us get on with it.

Speech by John Bruton, President of IFSC Ireland and former Taoiseach - At the FSI Annual Dinner at the Shelbourne Hotel on Tuesday the 14th December 2010 at 8pm.

Thursday, 9 December 2010

IRELAND and the ARAB world.

I have just returned from a week’s visit to Saudi Arabia, Bahrain, Abu Dhabi, Dubai and Qatar .
Apart from Dubai, these are countries with substantial surplus cash, derived from oil and gas revenues. One of my goals on the trip was to encourage investors from these countries to use the highly sophisticated financial services industry in Ireland to maximise the return on, and to minimise the risks to, their global investments.
I was accompanied on the mission by Irish experts on international banking, funds management, and aircraft leasing. Also on the party were representatives from the IDA, Enterprise Ireland, the Department of Finance, the Central Bank, and the Irish Stock Exchange. The Irish Ambassadors to Saudi Arabia and to the United Arab Emirates played a big part in making the visit effective. Irish business people are very influential in all these countries and are using their networks to help their home country .
In Saudi Arabia, I met HRH Prince Alwaleed bin Talal of Kingdom Holdings, and the Governor of the Central Bank of Saudi Arabia, Dr Mohammad al Jasser.
I met the Governor of the Central Bank of Bahrain, Rasheed Mohammad Al Maraj, and the Governor of the Central Bank of Qatar, Sheikh Abdullah Saoud Al Thani.
I also gave television interviews to CNBC and Al Jazeera.
We were very well received. Our visit enabled us to draw a clear distinction between
Ireland’s internationally oriented financial services industry, which is in excellent health and is expanding,
and the Irish domestic banking sector , which has not been managed properly and is only beginning to resolve its problems.
This is a good time to invest in Ireland, as asset prices and costs are now much more competitive than they were in 2006. Only by visiting these countries in person and putting this message across on a face to face basis, can one counter the negative impression created by the resort to an IMF/EU aid package.
The striking impression in all the countries we visited was of very rapid economic development. New and adventurously designed office blocks, and magnificent mosques and museums are being built in all the major cities. The grand mosque in Abu Dhabi is a magnificent modern example of faith inspired architecture. The Museum of Islamic Art in Doha, the capital city of Qatar, will attract visitors from all over the world, especially in the period leading up to Qatar’s hosting of the World Cup in 2022.
There is, of course, fragility in this prosperity. The breakdown in the peace process between Israel and the Palestinian Authority, the continued Israeli settlement in occupied East Jerusalem, and the Iranian nuclear programme create significant political risks.
Taking account of its own record in promoting civil rights, I believe the United States should, if it is serious about a two state solution in Palestine, spell out a detailed US position on the exact boundary there should be between the two states, including in Jerusalem, and on the rights of minorities on either sides of any border between them. The response to such an initiative would clarify whether both sides are actually serious about creating two states. It is both unfair and dangerous to pretend that a basis for agreement on two states exists, if it does not.

Friday, 3 December 2010

Michael Fogarty Memorial Lecture

I am very much honoured to have been invited to deliver this lecture. Let me start by saying what I will try to deal with.

First, I will talk about the relationship that should exist between the Christian churches and politics.

Then, I hope to show how the insights of Christian Democracy provide answers to the problems people, and economic policymakers, face in these recessionary times.

I believe Christian Democracy is just as relevant today, as it was when Michael Fogarty studied Catholic Social Thinking in the 1930s, when he worked in the Economic and Social Research Institute in Dublin from 1967 to 1973, and later on when he served as Chairman of Oxfordshire County Council

Politics should be open to be influenced by people of faith. Getting involved in politics is one of the best ways to promote Christian values. Opting out of political life, in an effort to recreate a romanticised past, leads nowhere.

Why should politics be influenced by people of faith?

Secularists say that there should be no such influence. They say politics must represent all the people and that, therefore, it should operate in a separate sphere from churches, who should neither influence, nor be influenced by, politics.

I believe this secularist view is naive in its understanding of human nature.

Voters do not divide their minds up into watertight compartments ,marked “religious”, “political,” ”personal,” family” and so forth. What goes on in one part of their mind influences what goes on in the other.

Whatever about religion, secularists will agree that ethical beliefs should influence politics.

But the truth is that it is impossible to separate ethical beliefs from the religious source from which many people’s ethical beliefs spring. Of course, that is not to say that people with no religious belief have no ethical beliefs. Of course they do, often very considered ones. But those who do have religious beliefs draw heavily on those beliefs in formulating their ethics. Furthermore, their religion helps them to hold themselves to account for how they follow them in practice.

Humans are social beings. They do not live atomised lives as solitary individuals. They live and form their ethos in society with other people. Society is made up of multiple overlapping communities of families, of neighbourhoods, of workplaces, of political parties, of nations, of sports clubs, and for the community of a church to which they belong. The overall shared ethos of society or nation is formed, and built up, in all of these communities, interacting with one another.

Indeed society can only function properly if a shared ethos has been formed. Laws are obeyed, not only out of fear of retribution, but just as importantly out of a sense of a shared ethos, an ethos that forms a basis for trust, a shared ethos that alone makes government and governance possible.

His Holiness Pope Benedict summed it all up very well, when he said here in Westminster during his visit

“I would suggest that the world of reason and the world of faith – the world of secular rationality and the world of religious belief – need one another and should not be afraid to enter into a profound and ongoing dialogue, for the good of our civilization.

Religion, in other words, is not a problem for legislators to solve, but a vital contributor to the national conversation”

As long as religious belief exists, and there is every reason to believe it will always exist, the secularist notion that religion and politics should be kept entirely separate is simply unrealistic. It is unrealistic because politics can only work properly if a society has a shared ethos. As long as religious belief exists, it will contribute to the shared ethos of society . Thus it will influence politics. To attempt to organise society as if that was not true, is simply naive.

And naive beliefs, pursued relentlessly as they often are, lead either to tyranny or to the breakdown of the tolerance needed for democracy to function.

Of course, secularism did not appear out of thin air. It was a reaction to an excessive and immoderate dominance of politics by particular religious viewpoints in the past. Secularists should beware of committing the same errors of immoderation, in pursuit of their own cause now.

For example, to seek to use the power of the state to remove every symbol of religious belief from the public space would be just as immoderate as past efforts to use the powers of the state to push one religion on people.

The European Convention on Human Rights, agreed to in 1949, guarantees to every European the right , in its words, to

“manifest his religion, with others in public or private , in teaching, practice , worship and observance”.

The Convention extends its protection to all religions and not just to Christianity.

In that context, it appears to me that the Swiss vote to ban minarets on mosques in Switzerland is a denial of the right to “manifest” religious belief “in public” as guaranteed by the Convention.

In the same vein, Christians should not confuse Christianity with some form of Euro centric cultural nationalism. Christ came on earth to save all mankind, not just people who can prove European ancestry.

One of the major challenges we have to work on today, as Christian Democrats, is the relationship in mixed societies between Christianity and Islam. As Archbishop Rowan Williams said recently, in a speech on Christian/Muslim relations

” both our faiths are missionary faiths...precisely because we have that in common, it is not easy to find a space we can inhabit together”.

Yet, as he also pointed out, we share a passion for universal truth and that helps us to recognise in one another the same fundamental seriousness about the things that are really important.

I believe that Christian Democracy, which is founded, not on individualism, but on respect for the fundamental value of each person, is well placed to help society to respect the fundamental value of each Muslim person in every respect, including in his or her religious beliefs.

And I would also argue that Christian Churches, precisely because they are religious institutions, are better placed to reach out to believing Muslims in a respectful way, through common activities at local level. Christian Democrat inspired political parties should also be open to membership by non Christians who accept the social principles which we seek to put into action in politics.

You cannot separate the religion practised by a significant body of its members or citizens from politics. But there are clear distinctions of function to be respected. Working out these boundaries will be an ongoing task, and they will shift from time to time. That is not a threat to anyone. In the past, in my country, the church took in roles that the state was unable to take on. Some of these roles can now more easily performed by the state, with its increased resources and the reduced fulltime manpower available to the churches.

There are, of course, areas the state should not enter, just as there are areas that the church should leave to secular authorities.

Having, I hope, made the case that Christian believers have a right to bring their religious insights to bear on political questions, I would now like to say how these insights can help find answers to some of the political questions of our day.

Coming as I do from Ireland, I am sure you will understand if I start with economic problems of the Western World, economic problems that have been brought to the surface by the financial crisis, but which existed already anyway.

The credit boom in some western countries since 2000, that was fuelled by Chinese , Japanese and German savings, was an anaesthetic that prevented the symptoms of underlying problems from emerging.

In that sense, we would have been better off if the crisis had occurred sooner, because we would then have been forced to deal with the underlying problems sooner......and less painfully.

The underlying problems are

the ageing of our societies,

the way our education systems fail some of our children,

the unsustainability of western patterns of energy and food consumption,

the distorted allocation of resources in capital markets,

and our inadequate means of supervising flows of capital across borders.

The fact that people are living longer has meant that the pension systems of most western countries are unviable. People are now retired for too long a period to be supported by the contributions they made in taxation or to pension schemes during their working lives. This was made worse by mistaken “early retirement “schemes introduced to create jobs for younger people, or solve short term public finance difficulties.

The emphasis that Christians place on the family will become more important as the welfare state, to which many family responsibilities were transferred in the past sixty years, becomes financially less capable of bearing them.

The ageing of societies has also contributed, along with law cases and incentives to over use of drugs and tests, to an explosion in health costs. The United States is the worst case here but other countries are heading in the same direction.

These problems were known during the credit boom, but little was done about them because money was artificially plentiful. Anyone who proposed unpopular changes would have been accused of being a heartless book keeper.

Education systems have also been failing to respond to challenges. A significant proportion of young people continue to drop out of school with few or no qualifications .The only jobs some of them are qualified to do can be done more cheaply in Vietnam or China.

The educational system has been designed for those with academic aptitudes, but not to nurture other forms of intelligence. This is a failure of imagination and intellect by educationalists, rather than just a failure to provide money.

An education system which caters well for those who can compete academically, but has no relevant answers for those whose talents lie in other directions, is not living up the Christian Democrat motto that “every person counts”.

Young unqualified males are particularly vulnerable. 75% of the recently unemployed in the US are male. Young females may find jobs locally in the service sector, but the jobs that unskilled males used to do, either migrated to the Far East, or were in volatile sectors like construction.

Income inequality has risen, especially in English speaking countries. Globalisation gave great rewards to those who had the skill to position themselves at the various busy cross roads of the information society, like in finance, entertainment, law, or professional sport, where they could either levy what economists call an “economic rent” (ie. an artificial scarcity premium) on the rest of society, or could hold their employer to ransom by threatening to move to another firm, or to another jurisdiction with a lower tax rate.

But Globalisation left other people behind. It brought lower prices and consumer choice, but the benefits were not always distributed fairly. Fairness can be a nebulous concept. It can also be a cover for self serving arguments.

As I see it, fairness is not a matter of looking for equalization of incomes. It is a matter looking for proportionate returns to the effort people put in, to the risks they have taken, to talent they have,and to the social contribution they are making. This is all a matter of judgement based on values.

Fairness cannot be achieved by a state imposed incomes policy, as was attempted in Britain and many other countries in the 1970s. But it can be brought about if long term values get a better hearing in the board rooms of companies, and by the enforcement of competition policies that make it harder to charge “economic rent”.

Economic activity is a means to an end. The end we seek is a society at ease with itself because every member of society feels that his or her contribution is respected.

The financial crisis has also laid bare the fundamental unsustainability of our patterns of energy and food consumption in the western world.

There is not enough oil, nor enough fertile land, nor enough unpolluted atmosphere, in the world to cater for a situation in which Indians, Chinese and Brazilians would consume oil, coal, and livestock products at the rate we do in Europe and America. It takes far more acres to produce protein and calories off the back of an animal, than straight from the ground.

The legacy of colonial intervention in China and India held those countries back for two centuries. Western patterns of consumption of food and energy only became possible because there was less competition for these resources from those countries and because we controlled the rules of the economic game. That era is now over.

The growing middle classes in emerging economies will look for the same energy usage, and meat and dairy intensive diets, that we take for granted. Energy and food prices will inevitably rise because of that. On present trends, China’s oil imports will double in the next twenty years.

The capital markets have not covered themselves in glory in recent years either. Thanks to financial innovations, shares in companies could be bought and sold with much greater frequency than ever before. Hostile takeovers became easier to mount. This meant that companies were judged, and executives rewarded, on the basis of short term movements of share prices.

This had its most devastating effect in banking, where credit broke down completely in 2008

And what is credit after all?

Credit is trust. That is what the word means.

As the Pope puts it in the Encyclical, Caritas in Veritate, prepared before the financial crisis had fully unfolded

“Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. And today it is this trust that has ceased to exist, and the loss of trust is a great loss”

This is a very important insight. All markets depend on trust. Without trust, we would find ourselves spending so much on lawyers to check one another out, that trading with one another would become incredibly expensive.

But where does trust come from?

It comes from a shared ethos or belief system.

And where, for many people, does their ethos come from? To a significant degree, it comes from their religious beliefs.

A number of economists are coming around to the view expressed by the Pope. They see that Regulations cannot alone create the degree of trust and confidence necessary for markets to function properly. There has to be trust too. Markets need ethics, and, for many, ethics derive from religious belief.

Ask business people about doing business in China today and they will tell you about great opportunities there, but that these are reduced by forms of lack of trust, like corruption and intellectual property theft. This underlines what the Pope says about solidarity and trust being necessary to the proper functioning of markets. Even in the narrowest “economistic” meaning, his words make sense. They illustrate, in a very real and modern way, what a shared religious heritage, and its consequential shared ethos, can contribute to our economic success or failure.

In 2008 we had to save the banking system. Over the last four centuries banking allowed us to use our resources in ways that would have been impossible without it. But, in the medium term, we also need to decide the proper role, function, and scale of banking in our society.

We need a banking policy, not just a bank rescue policy. Banks that are “too big to be allowed to fail” or “too interconnected to be allowed to fail” must never again drag taxpayers unwittingly into underwriting huge private risks.

The short-termism that brought banking down infected other businesses too. Productivity gains were preferred to innovations. The human capital of a company was valued less than it should be.

We are only beginning to consider how to change this.

One suggestion is to enhance the voting rights of shareholders who hold their shares in a company for a longer period.

The freeing up of global capital markets has outdistanced the supervisory capacity, and even the understanding, of national financial regulators.

This allowed the build up of unhealthy imbalances in the world. Half of the debt of the United States is now held by foreigners, particularly the Chinese central bank. The Chinese have bought these dollar denominated assets in order to keep the value of their own currency artificially low. Meanwhile the US is printing more dollars through Quantitative Easing. The net effect of these political decisions may be that both the Chinese and American currencies are artificially devalued against other currencies like the euro or sterling.
This would introduce more uncertainty and tension into a world that is already uncertain and tense. It is reminiscent of the behaviour of nations during the 1930s.

Politically created problems need political solutions. The venue in which these political solutions should be found is the G20. But the G20 has not yet fully found its feet, and is governed by a rotating Presidency, something the EU has found to be unsatisfactory.

In fact, if free movement of capital across borders is to be allowed to continue, the world probably needs to institute what the EU itself is trying to grope its way towards in the euro area, namely a system of cross border economic governance that highlights imbalances and distortions long before they become bubbles about to burst.

Fines and penalties may not be necessary. So long as information is shared and published in a timely way, intelligently guided markets should discipline delinquent behaviour. The job of supervisors and rating agencies is to ensure that the information is obtained and published in good time and is interpreted intelligently and courageously. That did not happen in recent times, and rating agencies were entangled in unethical conflicts of interest which compromised their truth telling role. The IMF should be given the full range of supervisory functions over all its members, including the United States and China.

Markets need rules, and the rules must be enforced. The market is a social and legislative construct. If the absence of rules, and untrammelled freedom, was the best way to a good market economy, Somalia would be the richest country in the world!

But even if we do all these things right, as I have said earlier, I believe we are entering a period when material conditions for Western countries will not be as good as they were until recently.

Our share of the world’s wealth will be less.

Our ability to control the rules of the game will be less too. We will no longer be able to keep tariffs high for things like textiles and cotton to protect our own producers, while insisting that tariffs are low for what we want to export.

We will also have pensions to pay and debts to repay, and a diminishing workforce to earn the surplus needed to do so.

Compared to our grandparents, we will remain very wealthy, but compared to people in other parts of the world, we will be comparatively less well off than we are today.

I believe that religious belief will help us to put these superficially uncomfortable changes into proper proportion. It will help us realise that material progress is not, and never was, the elixir of happiness.

A survey a few years ago, found that the Japanese were ten times better off financially than the Poles, but no happier.

The Poles were happier than the Hungarians, despite similar levels of wealth.
The United States today is much richer than it was in 1960, but the divorce rate has doubled, the prison population has increased fivefold, and clinical depression has tripled. People are richer, but no happier than they were in 1960.

This is not to say that material wealth does not bring happiness to nations. Up to a certain average per capita wealth, it does. But above that level, and we here are far above it, it seems to make little difference, on average.

Beyond a certain point, all more wealth does is give us is more choice, and more choice on top of more choice. 27 choices of printer for our computer, 500 choices of television channel, endless choices of foods flown from the far side of the globe, holidays destinations in countries we had never heard of ten years ago. Is that a recipe for happiness?

In fact, it seems it sometimes even makes us less happy. Choice adds to anxiety. It absorbs time, time we might use better otherwise. We are never fully satisfied by it. How many really happy faces do you see in a busy shopping centre?

Unfortunately, studies suggest that what makes people relatively happier is not so much being better off as such, as being relatively better off than whoever it is they normally compare themselves with, their brother in law, their work colleague or whoever. And conversely what makes them unhappy, is falling behind those people.

What people really want and need is a sense of control of their own lives, and a sense of belonging.

Sometimes, accepting that we have enough, is a key to a good life. That may not please the economists who are constantly looking around for “consumer confidence”, a barren and soulless concept, if ever there was one!

So, in the end, the problem is one of values.

The values we need to survive the recession are ones that bring us out of ourselves, that help us to transcend our own problems, by interesting ourselves in other people, and by giving service to something greater than ourselves.

It is noteworthy how the recession is altering people’s values already. The chief executive of the Society of St Vincent de Paul in Ireland told me this week that his organisation have been able to set up more new conferences(branches), with new volunteers, in the past two years than it had been able to do in the previous twenty years.

As Pope Benedict put it when he spoke in Prague last year

“human aspirations soar beyond the self, beyond what any political or economic authority can provide, towards a radiant hope that has its origin beyond ourselves yet is encountered within, as truth and beauty and goodness.“

Note for editors; The Fogarty lecture is sponsored by the Centre for Christian Democracy, which is affiliated to the European Peoples Party. John Bruton was a vice President of the European People Party from 1992 to 2005.