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Government intervention: from crisis to co-operation?


In the next in the series of top 10 risks facing CFOs we take a look at government intervention

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Government actions and policy responses remain a top 10 fear for boards, according to the latest research. In the wake of François Hollande’s election in France – and the inevitability of radical change across the euro zone in the event of more government defaults, business leaders must be deeply concerned.

“This issue touches on the very biggest questions – right back to the argument in the early 1990s that liberal capitalism had won an incontrovertible victory over other forms of civilisation – Francis Fukuyama’s famous ‘end of history’,” Philip Middleton, an Ernst & Young partner, says.

“In light of recent events - and the way that governments intervene in other parts of the world - perhaps that's not so clear cut,” Middleton, also head of EY’s financial services government group, adds.

The latest Ernst & Young survey of the risks facing global business leaders confirms last year’s assessment that government policy remains a big risk for management.

It’s certainly true that since the financial crisis, government has played an increasingly active role in business. Regulation has become more intrusive, and some governments have become more active in setting and determining industrial policy. Among the EY survey respondents, 61 percent say the risk of a continuing expansion of government’s role has increased as a result of recent economic turbulence.

Of course, many governments may feel they have no choice and would rather not bail out private institutions. Public finances remain under severe strain – many countries are taking a much tougher line on tax enforcement, undertaking more frequent and aggressive audits, particularly of cross-border transactions, and are sharing information with other countries. Around two-thirds of companies worldwide reported that they are experiencing heightened risk or uncertainty around tax legislation.

At the same time, pressure from protest movements and the electorate’s discomfort with both the effects of austerity and with its effectiveness at solving fiscal problems is empowering politicians like Hollande to take a more aggressive stance on business.

But to paint all government intervention as bad would be to ignore some very recent history on the subject. “In the case of financial services, intervention was justified by sheer size and interconnectedness - the systemic impact of a collapse given the global networks for financial services would have been cataclysmic,” Middleton says.

“Some might argue that intervention is justified in less extreme cases - that the UK government might have stepped in to save one or two retailers, for example. But those cases are much less clear cut.”

Bailing out financial heavyweights such as Lloyds, Royal Bank of Scotland, AIG, Bank of America and Goldman Sachs simply wasn’t avoidable, however. “Without it, the whole system would have collapsed,” Middleton says.

“We saw how allowing one major institution [Lehman Bros] to go under created unparalleled disruptions. There were those, even at the time, who argued that the market was the best means of handling the crisis. But it's the old Keynes point: even if the market might always play out correctly in the long term, have we got that much time to play with?”

The list of US government bail-outs also includes Chrysler and General Motors. These were more strategic interventions – and arguably, more political ones, too. “That intervention ultimately proved successful – but there is still a debate among politicians about whether that was the right thing to do,” Middleton says.

“If those companies had failed, some argue, it would have allowed for the natural and efficient reallocation of capital. There are always questions about whether it's right for the state to seek out champions in particular sectors.”

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Government intervention: from crisis to co-operation?
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