A tale of two economies: From Australia to Europe – Part 2

In my previous article, I described my experiences travelling through Italy on the 2015 International Study Program in Banking and Finance, which is managed by Monash University. Following this experience, I moved further north and crossed the Swiss Alps.
Switzerland, I have come to learn, also has much stricter immigration laws than the EU, which would explain why there are no ‘selfie-stick’ salesmen and why much of the population seemed ethnically Swiss. Switzerland operates at a higher level of efficiency and has a smaller population to cater for in terms of social welfare. We visited the Bank of International Settlements in Basel. In particular, I was intrigued by BIS’s Basel Committee on Banking Supervision and how they work off a system of mutual consensus rather than legal enforcement, as it seems logical that nations agree on prudential requirements such as the counter cyclical capital buffers, as there is a need to amass capital during the good times in order to stave off recessions during cyclical downturns. It was encouraging for me to learn that BIS has built upon lessons learnt from the last crisis and reviewed the standardised and modelled approaches. They also provide analytical support, such as defining whether a bank is a ‘Systematically Important Financial Institution’ (i.e. if it goes under, will the entire economy freeze).

When we arrived in Paris it immediately became clear how expensive everything was compared to Italy, the other EU country we visited thus far. It is unclear whether we were simply paying inflated tourist prices (the Champs-Elysees was extremely expensive), however even the supermarket seemed expensive. A kilo of local cheese was €20.  The high cost of living reduces Paris’s competitiveness in terms of tourism and demand to live and work in the city. This may hurt the Parisian economy and over time, the French economy. This is also a problem in Australia, especially in the housing market where affordability has been affected by rampant Chinese demand and the presence of negative gearing laws. Any unsustainable growth in the cost of living in either Australia or Europe would risk a deflationary crash, which would have devastating economic effects.

In Paris, we visited the The Organisation for Economic Co-operation and Development (OECD) OECD and discussed their efforts to curb bribery in international business. It was interesting to discover that bribery is present even in developed countries like Australia, as the speaker Graeme Gunn, pointed out. It was also intriguing to learn that fighting bribery goes beyond mere morality and that there are sound economic reasons for such litigation. Bribery increases the cost of business and volatility, whilst simultaneously decreasing competition, trust in the system and overall development. The consequences of this negative externality are far-reaching, as was demonstrated by the fake bomb detectors sold in the Middle East.

In the evening, we decided to go to a night club. Unlike Melbourne, where it doesn’t matter who you are you can get in to venues as long as you dress appropriately; Paris had more of a class system in place. Many venues were having private functions only. The only publicly open night clubs had large entry fees, and once inside, most tables were reserved for wealthy businessmen and their escorts. There was also a lot of tension in the air and suspicion, given that the Charlie Hebdo attacks had occurred two weeks earlier.

This experience was disappointing, as it seems Paris is foregoing a lot of potential revenue from out-of-town patrons. The arrogant approach to tourists in Paris may adversely affect Paris’ tourism (a major revenue source) in the long term.

The next stop was Amsterdam. Whilst wondering through the streets there, I noticed that petrol was €1.50 per litre. It was surprising that there was any demand for petrol in Netherlands seeing as it appears that everyone here rides push bikes! Still, this does seem low by normal European standards. The lower price of oil, it seems, will create wealth redistribution from oil producers (e.g. the Middle East) to oil consumer (i.e. Europe). Falling energy prices might then flip low growth and low inflation Europe into a deflationary mindset. As the price of oil drops, relative prices will also drop. This would be detrimental to many European businesses, which rely on credit to finance their activities. The real value of their repayments would increase and their ability to service the debt would decrease, which may mean more lay-offs and even slower growth in Europe, which is undergoing a very modest recovery as it is.

We finally moved on to London, where I felt the business climate was quite different to the continent….

To be concluded.