Thursday, July 26, 2012

Seeing the erred ways of my thinking... (3)

I was completely brainwashed in the last 10 years of my 40-year career in banking. During the first 30 years, I was involved with more of the "high finance": balance sheets, balance sheet structures, balance sheet optimizations, maximizations of REO, reallocations of assets, EBITDAs, EBITDA multiples, etc. etc. A company was a balance sheet. When the banker visited the company, he discussed with management how new financial gimmicks might improve his bottom line. The CFO would not walk the banker proudly through the production lines (which he might not even know) and the banker would not be interested in that.

During the last 10 years of my career, the time of brainwashing, I was involved with middle-market entrepreneurs (as opposed to large, publicly-traded anonymous corporations) in Austria and Southern Germany. The companies were not small. Some of them had sales of several billion Euros. But they were privately held; typically family-owned.

Such entrepreneurs do not think of their companies in terms of balance sheets or return on equity. They do not think of cash flows in terms of how much they can take out of the company. They do not feel responsible to shareholders, tax payers or whatever. They feel responsible to their companies, to their employees and to themselves and their families. They are interested in what makes their business grow. They are not proud of reducing staff when business is slow. They are proud of finding new areas of business to employ the staff which would otherwise not be necessary.

One such entrepreneur once told me: “My job is not to reduce staff levels if business is slow. My bookkeeper could do that. My job is to find ways how to profitably employ the staff we have and, hopefully, hire additional staff”. Interestingly, such companies typically showed greater ROEs over time than many publicly-traded anonymous corporations. However, the ROE was not their objective; instead, it was the result of doing the right things.

Take a hundred or so of such entrepreneurs from all EZ-countries. Lock them up in a beautiful resort for a long weekend and mandate them to come up with solutions how the economies in EZ-countries could be brought back into balance in a way that the sum of combined efforts is greater than the sum of individual efforts. You would get practical solutions; solutions which could be implemented and which would work. They would not include items like debt mutualization funds, Eurobonds and so forth. There would be no discussion about abstract financial structures and instruments.

There would be a lot of discussion about market opportunities; about suppliers’ capabilities; about potential new areas for growth; about new technological trends; about competitive advantages; in short: about ways how to create real value. There would also be a lot of discussion about how people, the primary resource of all economic effort, could be employed to the fullest extent and how their talents could be optimally developed.

Specifically as regards Greece, they would not have spent their time listing all of the things which are deficient in the Greek economy. Instead, they would have spent their time listing all the things for which the Greek economy would have potential, how that could be optimally taken advantage of and what structural changes could be required on the part of the government to make this possible. Their focus would have been: "How can we increase economic activity which will be for the benefit of all of us?". It would not have been: "How can you balance your budget?"

Moral of the story
I would have thought that EU-elites would be capable of thinking the same way as such entrepreneurs would think. And, unfortunately, I was wrong!

The final question
Is there still a chance to move into the right direction? Quite unlikely but, as they say, hope dies last.

PS: previous posts in this series: P1, P2.


  1. "Their focus would have been: "How can we increase economic activity which will be for the benefit of all of us?". It would not have been: "How can you balance your budget?"

    This is also one of the troika's problems. The troika always perceives as "certain income" to raise the taxes. Even if they decrease revenue, they like them high. For example, if you tell them "let me lower the VAT on restaurants-fast foods from 23% back to 13%, because i will get the same or more tax revenue", they will say "no", because "it is a supposition".

    It's not a matter of supposition. When all economic activity has crumbled and you penalize the last thing standing, tourism, while every other competitor around has VAT 5-9%,and you have 23% AND the euro, you 're not helping... You are demolishing what's left. Even more, you will push the greek owner to VAT-evade more than what he already does.

    I agree on what you say about businessmen, provided that they could be happy enough with making money on common project, rather than making money by beating their opponent :))))

    The problem of the EU, is that, still, it has a conflict of interest between states. In theory, the "common" enemy should be outside the eurozone, but reality is different. It is like "one for all and all for themselves".

    My money are on the BRICS. They have cohesion, national dream and thirst. If you speak with an Indian, he has a sort of national pride for his country's products. And he really wants to challenge the current bigs and become big. In EU, one is looking how to stab the other in order to make his profit. There is no "european idenity", populations take for granted their current status and there is little thirst for making a national achievement, exactly because when you have your belly full for long, you forget how it is to be hungry.

    The BRICS are hungry and they now have the technology. They are always more catching up. If they play smart, they will surpass the west.


    1. You are making a mistake. The entrepreneurs I refer to don't think "national". They think globally to the extent that it helps them to grow their business and that economic structures allow them to do that. They will invest wherever they think they can grow their business. If Greece were a country which they would find attractive to grow their business, they would invest there. If they had to invest in Greece because someone told them that this is the time where they should stand up and support Greece, they would tell Greece what they would need in order to invest there so that they and Greece would mutually benefit.

    2. Yes, of course, business nowdays has no "fatherland". I meant, that if a businessman sees an opportunity to take out a long time opponent of his, he may fall in that temptation. It depends on how profitable is the prospect of cooperation as opposed to the possibility of wiping out a weaker opponent from a regional market.

      My reference to national was in state interests. For example, in Greece, since we were one of the best clients, the weapon industry uses even the local ambassadors as means of pressure. And for example, you see when Greece wanted to buy aircrafts, we were bombarded in newspapers for months with articles, pubblicity etc. And there was something that attracted my attention. The European fighting between each other, were 3 (french, a european consorcium with Germany-Italy-Britain and Sweden). And on the other hand, you had the american Lockheed Martin. My question was "instead of fighting each other saying my airplane is better than the french in that, but mine is better than the swedish in that", why can't the 3 europeans come together, build an aircraft better than the american or cheaper if you like and present as 1 force? Because apparently each one wants to keep his own business for maybe national strategic interests?


    3. I bet you anything in the world: if those EZ-entrepreneurs got together in a resort and they heard that some German/French arms manufacturers wanted to push more arms down the throats of Greeks, they would tell them to back off. They would tell their fellow entrepreneurs "why should we as tax paying companies pay for you getting paid for arms which Greece doesn't need and which do not add any real value to the present Greek situation?

      You don't believe me? Well, don't underestimate the common sense of entrepreneurs!

    4. No, i believe you :) But in the arms case, they would be simply be ignored (too many factors beyond simple business,from geopolitics, to national defence priorities and pride,etc).

      On normal businessmen i agree, provided they would get a fair deal for all. An old greek saying was "the best way to beat competition is to kill it". If you can't kill it, you may as well make money with it.


  2. Your 100 EZ entrepreneurs may come up with many worthwhile ideas. But since they are inherently uninterested in power for its own sake, they wont be interested or capable of implementing them across one nation state; let alone across a region of 17 nation states, where 10 other nation states have a veto vote on any serious structural reforms.

    Europe needs to find some Lee Kwan Yu's & Deng Xiaoping's if its to transform itself in the long term.

    Also outside of Germany & Austria and maybe the Nederlands there's no cultural equivalent of the Mittelstand which is where I think Klaus is coming from - if there was then the EU would already be Greater Germany.