FINANCE GETS ITS MOJO BACK

 byLorraine Bolger.
 Published: 26/01/2017

The people formerly known as the Masters of the Universe - now just plain financiers - rolled into town this week for the annual European Financial Forum, a gathering of everyone who’s anyone in the global financial sector convivially hosted in Dublin Castle by our impressive Minister for Financial Services, Eoghan Murphy and the Financial Times.

For the sector, it has been a traumatic decade. After all, 2017 is the 10th anniversary of the collapse of Northern Rock, prompting the first bank run in Britain in a century. We are all familiar with what unfolded next, as the global financial crisis morphed into the Great Recession and the bail outs, restructurings, austerity, asset market booms and inequality triggered by ultra-loose monetary policy that many now blame for the political populism of 2016 that delivered Brexit and Trump.

The pivotal events of last year were elegantly encapsulated by Eoghan Murphy, channelling Lenin, to wit “there are decades when nothing happens; and there are weeks in which decades happen.”

However political uncertainty aside, the dominant mood and theme in the room was that the financial sector and the broader economy have at last put the challenges of the past behind them and may be about to enter a new phase of investment, growth and employment.

This bullish tone was best articulated by former governor of the Swiss Central Bank, Philipp Hildebrand - now Vice Chair of BlackRock, the world’s largest asset manager and new employer of former British Chancellor, George Osborne.

Hildebrand sees the most realistic prospects for reflation in the global economy in a decade - meaning the huge fiscal stimulus and tax cuts expected in the US and the gradual move away from austerity and deflation in Europe create the best conditions for broad and sustained economic growth in a decade.

The known unknown is how companies will respond to these conditions? The cheap money of the past decade has failed to stimulate corporate investment - mainly because of a lack of sustained demand. Instead, companies have used the opportunity to reduce debt and reward shareholders with buybacks.

For reflation to lead to a period of sustained economic expansion according to Hildebrand, the missing piece of the jigsaw will be the re-emergence of Keynes’ long-dormant ‘animal spirits’ - the confidence factor that drives investment, growth and employment. These spirits have been absent for many years - to listen to Hildebrand and watch the Dow reach 20,000 for the first time this week you might conclude that they are on the way back. Time will tell whether what we are seeing is just a short-term ‘sugar high’ due to changes in US policy or whether this time the recovery really is real.

What does all this mean for Ireland and jobs in the financial services sector here? Clearly Brexit looms into view. The majority view among people I spoke to was that the government is playing a smart game in leveraging the opportunities Brexit might present for financial services by avoiding the love-bombing that Paris and Frankfurt have engaged in.

Instead, Ireland’s strategy rests on the assumption that the City will remain Europe’s financial centre and seeks to position Dublin as a natural partner that will both compete with and complement London for investment and jobs. It is a subtle approach that hopefully puts Dublin in a position to steadily grow employment in the financial sector over the next decade.

However success is by no means assured, and amidst the positivity the biggest concern people in the sector have is that the government has missed a trick in its IFS2020 strategy by not focussing sufficiently on attracting higher-value and more sustainable jobs here. If the limit of our ambitions is to continue to be Europe’s back office for financial services, then one of the biggest open goals in our recent economic history will have been missed!