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.()*.*/. \*.* ______.**** * *
.( . . ) ./ ' ' \.*./______/~*. *.* .*
*(...''.. ) *. . * **\'.......... Merry Chri!"#$......
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%&r'(e#) *#)+
,!#--eri)- !' !he re.&e
Europes troubled banks and broke
governments are in a dangerous embrace
IT HAD seemed a simple enough wheeze.
Give banks unlimited access to !"ear
#unding #rom the European $entral %ank
and it wouldnt take much more than a
nudge and a wink #or them to bu" the
bonds o# Europes troubled peripheral
countries instead o# having the E$% do the
&ob itsel#. 'or those too dull to read
between the lines( )icolas *arkoz"( 'rances
president( spelled it out+ ,each state can
turn to its banks( which will have li-uidit" at
their disposal..
The wheeze( however( seems to have been
too clever b" hal#. Hours a#ter /r *arkoz"
was urging banks to bail out governments(
the European %anking Authorit" 0E%A1
released the results o# its updated stress
tests showing that European banks need to
raise 2334 billion 05367 billion1 in e8tra
capital( mainl" to o##set a #all in the value o#
their e8isting holdings o# government bonds
issued b" troubled peripheral European
countries.
The banks with the biggest capital short#alls
are those #rom *pain( Greece and Ital".
*everal ma" have to tap government bail!
out #unds to raise the capital( creating the
circular prospect o# governments bailing out
their banks that are in turn supposed to bail
out the government. Italian banks( #or
instance( will need 234 billion in additional
capital9 among them is :ni$redit( Ital"s
biggest bank b" assets( which holds some
26; billion in Italian government debt and
needs to raise almost 2< billion in capital.
*panish banks need 2=> billion. Europes
core has not been spared either. %anks in
German"( the euro areas biggest creditor
countr"( need additional capital and
$ommerzbank( German"s second!largest
bank( ma" also #ind itsel# asking #or
government help to #ill a 24. billion hole in
its balance!sheet.
A #ew months ago( banks in peripheral
countries were onl" too happ" to #ill their
vaults with bonds issued b" their own
governments. The #eeling at the time was
that the banks would live or die along with
their home countries so there was little
point in tr"ing to mitigate the risks.
/oreover( most peripheral banks have seen
their #unding costs soar. The" had little
choice but to bu" government bonds with
similarl" high "ields. ,?hat else can I do(.
said the boss o# a big Italian bank( in
relation to its large holdings o# Italian
government bonds.
That ardour has cooled since the end o#
@ctober( when the E%A #irst asked banks to
set aside e8tra capital against the possibilit"
o# losses on euro!area government bonds.
*ome bankers now #ret that their
accountants ma" #orce them regularl" to
,mark to market. their holdings and set
aside capital i# bond prices #all. That would
prevent even the most troubled banks #rom
gambling #or redemption b" taking big bets
on bonds.
%anks #rom richer countries will be even
less inclined to help out. ,'oreign banks
have been prepared to take large charges
to sell Ato8ic #oreign sovereign debt( so the
idea that the" would reload seems #anci#ul(.
sa"s Bon Ceace( an anal"st at )omura.
Governments hoping #or a helping hand in
bond markets will have to look #arther a#ield
than their own tottering banks.
/i- #)0 .1e2er
3hy 1#r-e 4ir" #re '4!e) "'re
i)2e)!i2e !h#) "#11 ')e
*@/E people sa" it is neither big nor clever
to drink. Diz( a %ritish comic( settled that
debate with a letter #rom a reader who said+
,I drink 34 pints a da"( Im > #oot inches
tall and a pro#essor o# theoretical ph"sics..
However( another -uestion about size and
cleverness has "et to be resolved. Are big
companies the best catal"sts o# innovation(
or are small ones betterE
Boseph *chumpeter( a#ter whom this
column is named( argued both sides o# the
case. In 37;7 he said that small companies
were more inventive. In 376= he reversed
himsel#. %ig #irms have more incentive to
invest in new products( he decided( because
the" can sell them to more people and reap
greater rewards more -uickl". In a
competitive market( inventions are -uickl"
imitated( so a small inventors investment
o#ten #ails to pa" o##.
These da"s the second *chumpeter is out o#
#ashion+ people assume that little start!ups
are creative and big #irms are slow and
bureaucratic. %ut that is a gross
oversimpli#ication( sa"s /ichael /andel o#
the Crogressive Colic" Institute( a think!
tank. In a new report on ,scale and
innovation.( he concludes that toda"s
econom" #avours big companies over small
ones. %ig is back( as this newspaper has
argued. And big is clever( #or three reasons.
'irst( sa"s /r /andel( economic growth is
increasingl" driven b" big ecos"stems such
as the ones that cluster around Apples
iChone or Googles Android operating
s"stem. These ecos"stems need to be
managed b" a core compan" that has the
scale and skills to provide technological
leadership.
*econd( globalisation puts more o# a
premium on size than ever be#ore. To
capture the #ruits o# innovation it is no
longer enough to be a big compan" b"
American standards. Fou need to be able to
stand up to emerging!world giants( man" o#
which are backed b" something even
bigger+ the state.
Third( man" o# the most important
challenges #or innovators involve vast
s"stems( such as education and health care(
or giant problems( such as global warming.
To make a serious change to a comple8
s"stem( "ou usuall" have to be big.
I# true( this argument has pro#ound
implications #or polic"makers 0though /r
/andel does not spell them out1. ?estern
governments are obsessed with promoting
small businesses and #ostering creative
ecos"stems. %ut i# large companies are the
ke" to innovation( wh" not concentrate
instead on creating national championsE
Anti!trust regulators have strained ever"
muscle to thwart the creation o# monopolies
0#or e8ample( b" preventing ATGT( a
telecoms #irm( #rom taking over the
American arm o# T!/obile1. %ut i# one
behemoth is likel" to be more innovative
than two smaller companies( wh" not allow
the merger to take placeE
?hat should we make o# /r /andels
argumentE He is right that the old ,small is
innovative. argument is looking dated.
*everal o# the champions o# the new
econom" are #irms that were once hailed as
pluck" little start!ups but have long since
grown huge( such as Apple( Google and
'acebook. 0In August Apple was the worlds
largest listed compan" b" market
capitalisation.1 American #irms with 4(;;; or
more people spend more than twice as
much per worker on research and
development as those with 3;;!4;;. The
likes o# Google and 'acebook reap colossal
rewards #rom being market!makers rather
than market!takers.
%ig companies have a big advantage in
recruiting toda"s most valuable resource+
talent. 0Graduates have debts( and man"
pre#er the certaint" o# a salar" to the lotter"
o# stock in a start!up.1 Harge #irms are
getting better at avoiding bureaucratic
stagnation+ the" are #lattening their
hierarchies and opening themselves up to
ideas #rom elsewhere. Crocter G Gamble( a
consumer!goods giant( gets most o# its
ideas #rom outside its walls. *ir George
%uckle"( the boss o# /( a big #irm with a
3;7!"ear histor" o# innovation( argues that
companies like his can combine the virtues
o# creativit" and scale. / likes to conduct
lots o# small e8periments( &ust like a start!
up. %ut it can also mi8 technologies #rom a
wide range o# areas and( i# an idea catches
#ire( summon up vast resources to #eed the
#lames.
However( there are two ob&ections to /r
/andels argument. The #irst is that(
although big companies o#ten e8cel at
incremental innovation 0ie( adding more
bells and whistles to e8isting products1(
the" are less com#ortable with disruptive
innovationIthe kind that changes the rules
o# the game. The big companies that the
original *chumpeter celebrated o#ten buried
new ideas that threatened established
business lines( as ATGT did with automatic
dialling. /r /andel sa"s it will take big
companies to solve Americas most pressing
problems in health care and education. %ut
sometimes the best ideas start small(
spread widel" and then trans#orm entire
s"stems. 'acebook began as a wa" #or
students at a single universit" to keep in
touch. )ow it has <;;m users.
The second is that what matters is not so
much whether companies are big or small(
but whether the" grow. Crogress tends to
come #rom high!growth companies. The
best ones can take a good idea and use it
to trans#orm themselves #rom embr"os into
giants in a #ew "ears( as Amazon and
Google have. *uch high!growth #irms create
a lot o# &obs+ in America &ust 3J o#
companies generate roughl" 6;J o# new
&obs.
Het small #irms grow big
Coliticians should certainl" stop demonising
big #irms and sentimentalising small ones+
an econom" needs both. %ut the" should
not allow their new!#ound appreciation o#
big companies to degenerate into a taste
#or picking national champions. *uch #irms
t"picall" gobble subsidies and crowd out
smaller( more creative #irms. )or should
the" start tolerating monopolies. The ke" to
promoting innovation 0and productivit" in
general1 lies in allowing vigorous new
companies to grow big( and ine##icient old
ones to die. @n that( *chumpeter never
changed his mind.