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14
Nov 11

Germany thanks the southerners

Saudi investment opportunities

Angela Merkel today gratefully acknowledged the southern European contribution to the euro. “Without the incorporation of those sunny southerners, the euro would be the deutschmark. It would have reached Swiss franc levels, ruining our exports,” she stated, while munching on sardinas at the opening of the Museum of Greek Siestas & Tax Evasion. “Instead, we have this delightfully devalued deutschmark, which has allowed our trade surplus to reach a three year high.”

As she flicked the tail of her flamenco-inspired suit, she thanked Germany’s fellow members in the EU and the Eurozone for being responsible for nearly two thirds of the country’s foreign trade. “Vielen Dank for being less competitive than us and buying our goods,” said Merkel, as she headed off for a week’s holiday in the newly opened Deutsche Acropolis Hotel in Athens.

In truth, most Germans bristle with resentment at having to bail out a bunch of “lazy” southern Europeans who lack a Teutonic work ethic. Similarly, many English smirk at the continental chaos and cheerily anticipate the collapse of the euro. Both would benefit from a bit of perspective.

UK growth this year is now forecast at 0.7%, down from an earlier 1.7%, on the back of the Eurozone crisis. Britain is already seeing a fall in exports to the Eurozone. At 40% of total exports, the impact of a continental recession will be brutal, let alone the unknown effect of a euro collapse. Additionally, British banks are being forced to increase their provisions for the debt of peripheral countries, adding even more impetus to the existing credit crunch.

The flowering of, respectively, nationalist stereotypes and schadenfreude does a disservice to both nations.


Mario Monti, the technocrat who is due to announce a cabinet which he will lead as prime minister, has had an effect on Italy’s borrowing profile. The spread between German and Italian bonds fell on earlier speculation about his appointment, while on Monday Italy sold €3bn of new five-year bonds at 6.29%, a high rate but one that is below what it would have had to pay if Silvio Berlusconi had still been ensconced.

Spain’s Monti is Jaime Caruana, a former governor of the Bank of Spain and now head of the Bank for International Settlements. The Popular Party, set to win a majority in the election on Sunday (20 November), should appoint him Minister of Economy asap. Spain’s spread would fall 100bp. Appoint him Vice President as well, like Rodrigo Rato was in Aznar’s government, giving him more influence, and it would fall another 50bp.

Admittedly, giving up Swiss franc earnings for euros and a role that will see him turn into a St Sebastian figure, pierced by the arrows of countless critics, does not sound attractive. But money has never been Caruana’s motivator. And the saint was cured by Saint Irene of Rome. (It is true that Sebastian then preached Christianity to Emperor Diocletian and was subsequently clubbed to death, but surely martyrdom is a small price to pay in these apocalyptic times?)


These times are also ones where investors are stumped as to where to invest. Dr Florence Eid, founder of Arabia Monitor, believes Saudi Arabia is one possible answer. The IMF forecasts its economy will grow at 6.5% in 2011.

“The King’s financial support package represented a 23% increase in the budget for 2011. This was on top of an existing and fairly ambitious industrialisation, infrastructure and human resources strategy,” she says. “This implies that over the next five years there will be a gold mine in all sectors. The country will be a construction site.”

The IMF forecasts 6.5% growth in Arabia this year, with high unemployment, housing shortages and inflation as the three main tests facing the economy.

The $136 billion in government funds, announced in February and March, was aimed at preventing the unrest from other Arab countries spreading to Saudi Arabia. Bar a few Shia rallies in the Qatif area, which the Saudis blamed on Iran, the Arab spring did not lead to serious disturbances. Eid and her team at Arabia Monitor believe the stability will continue.

“Saudi Arabia is run by a family that has shown over the years it can deal with challenges, from the Iraqi invasion of Kuwait, to the rising Islamic tide, to the demographic challenge of needing to create opportunities for the 50% of the population that is under 25 years old,” says Eid, whose firm specialises in Middle East and North Africa (MENA) research and advisory services.

A recent Chatham House roundtable, however, concluded that the Arab Spring poses a great threat to Saudi Arabia because it endangers the core patronage network that underpins the state. The foreign affairs institute also forecast major upheavals in the House of Saud when the next generation of princes are considered for succession.

Eid notes that despite foreign criticism of its governance, the royal family has developed a “fairly pronounced and healthy respect for technocratic expertise.” The ministries of finance and health, plus the central bank, are run by technocrats who have been in the same jobs for a number of years. The same criterion does not apply for ministries that are seen as crucial to sovereignty, such as that of foreign affairs.

The IMF points to high unemployment, housing shortages and inflation as the three main tests facing the economy.

Eid argues that the Saudi invasion of Bahrain to support the ruling family and squash demonstrators calling for more rights for the majority Shias and more democracy should be seen within the context of the GCC. “It was reassuring for the international investor community. It showed they had teeth and were open to putting to one side their non-intervention policy when events happen in their backyard,” says Eid.

The Lebanese-born, MIT PhD says analysts are mistaken in assuming that the new Crown Prince Nayef Al-Saud will roll back reform when he becomes king. She believes he will continue on the path of gradualism and “evolution rather than revolution.”


Robinson Hambro, the Board Search firm I co-founded with Rupert Hambro almost a year ago, is evolving too.

Last week we were quoted in the Financial Times on the subject of recruiting women to UK boards: “You don’t need five goalkeepers on a football team, you need a mixture of abilities and positions. There has been a tendency to appoint directors who have run divisions of FTSE companies when most women haven’t done this. Instead, the cleverest women we know, who would add value to boards, tend to have risen in professional services firms and asset management and media.”

Much the same can be said about the Eurozone. Not everyone can run a current account surplus. Or a current account deficit, for that matter. There has to be a balance, just like a team.

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