View Full Version : EUCOM Economic Analysis - Part I

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02-20-2014, 01:28 PM
Capital import's desirability is overrated anyway.

Well that kind of line is not that helpful. Overrated to what? For which type of country in which type of economic circumstances? In which sector?

In any case a (much) better governace, labour&tax reform, a more efficient credit market and higher (total factor) productivity growth are more important issues then 'just' more (public) investment. Still it is just so amusing to read the generic PPP (http://governo.it/backoffice/allegati/72849-8936.pdf) of the Italian gov with that clever goal to attract foreign direct investment and to have a couple of months later such a bad and stupid law. :D: :rolleyes:

Voxeu (http://www.voxeu.org/) has a couple of interesting articles looking at the Italian economy from different angles. It is important to keep in mind that countries like Germany and Austria profited by having easier access to cheap labour across the borders. That more Europeanized value chain made TFP growth considerably easier.

02-20-2014, 02:02 PM

I am not an economist, however, the impression I get from the last events is that most capital imports are not long term investments, i.e. they lack in my opinion strategic value. :-)

And I do not get your second argument, cheap labour. IIRC the same guys from Romania and Bulgaria, who now (since 2011) have come to Germany in larger numbers had come to Italy and Spain in the years before. What is the difference?

02-20-2014, 05:24 PM
Capital imports are one side of a coin - the other is the real economy side; imports of goods and services.
An import of capital without accompanying goods and services import would merely mimic an increase in circulated money; a mere monetary effect.

Italy has a positive trade balance now, but it hadn't for years and it has really now more use for the surplus than for additional (capital) imports. The economic problem is rather demand side than supply side after all.

Italy is not in a position of a poor country which cannot afford to import modern production machinery; that's merely a question of allocation to Italy. It's thus going to get the necessary investment goods with or without much capital imports.
Finally, capital imports from individuals typically won't go into the direct investments account.

Summary: Capital imports are overrated as help against domestic problems because people tend to neglect the drawbacks and to highlight the advantages.

About the cheap foreign labourers; there were restrictions for Poles and IIRC also Czechs for a long time, despite the EU. They play almost no role in the sectors which compete with Italy. Polish labourers tend to be employed in construction or agriculture, for example. Almost none work in automotive, chemical or machine building industries.

02-20-2014, 08:13 PM
@Ulenspiegel and Fuchs: The 'quality' of the foreign (direct) investment and it's value for the Italian economy depends of course a lot on the specific cases. The FT (http://www.ft.com/cms/s/0fa9d3ea-67f5-11e3-8ada-00144feabdc0,Authorised=false.html?_i_location=htt p%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F0fa9d3ea-67f5-11e3-8ada-00144feabdc0.html%3Fsiteedition%3Duk&siteedition=uk&_i_referer=) has a short article about fire sale business prices in Italy.

German companies are seizing opportunities to expand as the recession drives down the cost of deals in struggling southern Europe, with
only US-based businesses closing more deals to acquire Italian companies in 2013, according to Dealogic.


In one recent case, Mr Mack says, a company in the dental sector was relocated entirely – including its production facilities which were dismantled in Tuscany and rebuilt in Bavaria.

German businesses, Mr Mack adds, are not interested in Italy primarily because of the Italian market. “They are interested in the products, interested in marketing the products somewhere else.”

That is of course not the outcome you want to see from an Italian point of view and it is different in other cases. I guess that in this case a competitor was able to get those assets at a good price compared to it's value. A big aspect of the lack of financial strenght in Italian companies is the credit crunch, partly deepened by the incentives to buy the states debt.

The key difference between Italy and Germany in terms of cheap labour is not so much the immigration but the outsourcing of elements of the value chain across the borders. While Italy has lately increasingly done so in countries like Romenia (language!) it has been much easier up north to integrate labour-intensive steps on foreign soil within the EU at low labour costs. This obviously raises productivity and profits at home, as this article (http://www.voxeu.org/article/germany-s-super-competitiveness) and it's links show.

Tim Taylor (http://conversableeconomist.blogspot.co.at/2014/02/a-german-employment-miracle-narrative.html) has picked up that argument and the one about flexible wages in his post. I would throw in the luck which Germany had that with it's industrial makeup with the key 'automotive, chemical or machine building industries', mentioned by Fuchs, it got a huge demand boost from abroad. Not close to the Australian level, but still a big boost indeed, just look at annual reports from German companies in question.

I will leave it there for now.

02-21-2014, 02:35 AM
Headlines abut corporations being bought by foreigners are distractions. It isn't even an equity capital addition, but a sale. So former owners have sold and use the liquidity for something else.
Whenever you see that, look at the trade balance; there's little reason to think that foreigners buy domestic businesses more than domestic capitalists buy foreign businesses if the trade balance is positive.
One could look more closely (at the direct investment statistics instead), but the gain in information isn't worth it imo.

One example: Arab monarchs like to buy shares of the German automotive industry and produce some occasional headline this way. So what? It means nothing on the macro scale, it gets dwarfed by all the other activity.

02-05-2015, 10:52 AM
Groundhog Day in Greece (http://www.voxeu.org/article/groundhog-day-greece) is mostly in line with my personal opinion. The importance of the ECB in the current situation, especially for a country like Greece is reflected in the wild swings in the market. We had now this from the ECB:

ECB’s Governing Council lifts current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic

Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review

A short press release can have a huge effect indeed, especially in the context of the Greek economic situation and the election...


Perhaps even more drastic:


03-17-2015, 07:37 PM
Die Akte Griechenland (http://www.faz.net/aktuell/politik/ausland/historische-schulden-die-akte-griechenland-13483054.html) is a highly interesting article about the bond debt Germany owes according to the Alexis Tsipras, among others, Greece. Some aspects discussed in it are tragicomic others of course most grim.

According to the 'Haager Landkriegsordnung von 1907' Greece had to finance it's occuption, which rapidly posed big problems. Per capita the specific cost in Reichsmark was the highest of all Europe but the exchange rate got fixed and the Greeks (had to) massively devalued their currency with the printing press which meant that the German soldiers could afford less and less. Italy and Germany tried to get the Greek state to do more but there were understandably a couple of problems:

1) The war hit (rather obviously) all the three sources of hard currency like shipping, tourism and remittances very hard.

2) Greece was already heavily in foreign debt before the war

3) The Greek public sector was large, overstaffed and not very competent.

To raise the income the tax evasion was to be curbed by following the 'German model'.

The reading becomes very grim when one discovers how the Greek currency was eventually supported - by buying it up with the looted wealth of the murdered Greek jews, especially gold. The German report comes up with 476 million RM of liabilities which however have to be balanced with Greek ones towards Germany for food from German-controlled areas, German goods and (sic) gold from the restricted German reserves. For those the documentation was not fully available, and the 'final' report was wrapped up four days before the Soviets launched their great offensive against Berlin. Interestingly the exact number has been widely accepted while the rest has not been considered.

Personally the article has reinforced my opinion that laying to rest those claims and conflicts has been incredibly important for the common European good and enabled in part the economic miracle which followed the war.

06-12-2015, 02:02 PM
So they are (officially) discussing a Grexit (http://www.theguardian.com/business/blog/live/2015/jun/12/greek-minister-sees-deal-soon-despite-imf-pullout-business-live). Seems more then groundhog day, with dwindling support within Europe's insitutions and it's people but as it is politics it is almost impossible to figure out what will come out of it. The current Greek government seems brilliant at getting political allies (http://en.enikos.gr/economy/30428,The-dramatic-meeting-that-led-IMF-to-withdraw-from-Greece-bailout-talks.html):

A member of the political negotiation team from Athens, according to IMF sources, criticized the attitude of the Fund noting its "unproductive attitude" that keeps the negotiations deadlocked. He added: "We do not need the IMF, you can leave, your contribution is not constructive. "

The IMF delegation asked for a break to brief their superiors in Washington.

When the meeting with the Greeks continued, the Greek team read the following statement: "Wherever in the world the IMF is engaged, its participation was by invitation and the tacit or active support of the country concerned. Syriza is the only government in the history of the IMF which calls on the Fund to leave, despite the fact that it has been invited by the country. "

On hearing this statement the IMF delegation left the room...

The basic problem is still not solved, especially after the post-Syriza crash during this terrible depression. Greek does infact need something called money, be it from the EU, the Russians or the IMF. All in all it is a tragic, suicidial farce (http://www.project-syndicate.org/commentary/greek-default-political-suicide-by-anatole-kaletsky-2015-06):

This outcome is all the more tragic, given that the economic analysis underlying Syriza’s demand for an easing of austerity was broadly right. Instead of seeking a face-saving compromise on softening the troika program, Tsipras wasted six months on symbolic battles over economically irrelevant issues such as labor laws, privatizations, even the name of the troika.

This provocative behavior lost Greece all potential allies in France and Italy. Worse still, the time wasted on political grandstanding destroyed the primary budget surplus, which was Tsipras’s trump card in the early negotiations.

P.S: It is worth repeating the praise about the current crop of central bankers.

06-24-2015, 04:06 PM
So a deal is in doubt, as so often, and there might be long hours and days ahead, as so often before.

Alexis Tzipras is locked in talks with Greece’s creditors that could help determine whether Athens receives the bailout funds it needs to avoid bankruptcy.

Insiders say that that outcome of today’s negotiations with Christine Lagarde, Mario Draghi and Jean-Claude Juncker are highly uncertain, with no guarantee of a breakthrough.

Hopes of a deal tonight were badly dented this morning, after it emerged that Greece’s latest proposals have not been accepted by its creditors, putting the whole deal in doubt

The creditor's take on the Greek proposals seems to have been leaked (http://blogs.ft.com/brusselsblog/files/2015/06/Greek-crediors.pdf), likely if you follow cui bono by somebody in the Greek team. Lots of red ink, especially about the pensions and VAT, but also a demand for bigger cuts in military spending which is very high by not so high European standards.

I have no idea how this will end or when but it is difficult to see a soft landing for Greece in the mid run. The Greek are right that such most cuts will deepen the recession but so many years of mostly pseudo-reforms and recent snubs has likely hardened the creditors stance which understandably has also been shaped by internal politics...

As I said before it is a great tragedy that it has come so far.

06-24-2015, 06:54 PM
https://ci3.googleusercontent.com/proxy/1kjIhjJf8f2y7CACbsM6Y7MnsKRdnP2rLbgPHUtzZ7stJkDVed Dpn1g9ty0XHAlGUyC9RSqB1pIO4Msrc0VZC10L-eYXah2IfyEYFp_5Ildnr29672tULSz78zpe9QNtJFb5JQ=s0-d-e1-ft#http://i.telegraph.co.uk/multimedia/archive/03351/240615MATTEmail_3351590a.png

06-25-2015, 03:32 PM
I'm certain quite a few creditors are feeling that way. On the other hand many Greeks see it like that:


I have to repeat myself that it is really a farce and a tragedy that it has almost come down to this.

06-27-2015, 07:20 PM
So we are stumbling (http://www.theguardian.com/business/live/2015/jun/27/greek-crisis-mps-referendum-tsipras-eurogroup-ministers-live) towards a Grexit unless somehow an agreements gets someway found and maybe for some Draghi ex machina. Great tweet by Peter Spiegel (https://twitter.com/SpiegelPeter/status/614830763926777856/photo/1):


Pretty much everything you need to know about Greece today in one footnote

Withdraw who can at many Greek ATMs, a sight we saw in Cyprus earlier and not a pretty one...

06-27-2015, 09:01 PM
Whilst a Greek exit from the Euro is a possibility, nay a certainity for many, coming up fast - for mainly political reasons - is a British exit from the EU. The UK is not in the Euro.

So this article's three charts put a different angle to the usual reporting that the EU is the UK biggest market:http://www.telegraph.co.uk/finance/economics/11700443/The-EUs-dwindling-importance-to-UK-trade-in-three-charts.html?

This is the third chart:http://i.telegraph.co.uk/multimedia/archive/03336/Capture_3336133b.jpg

06-28-2015, 08:19 PM
The Uk is an interesting case, but I didn't have any time to take a closer look so I that one will have to wait.

Without just some Draghi to the rescue and no shortest term political soultion the predictable bank holidays and seemingly capital controls (http://www.theguardian.com/business/2015/jun/28/greek-crisis-ecb-decide-emergency-funding). As so often the details are not yet know and rumours are spreading. According to some the banks might close until the 07/07.


It’s official, capital controls are being imposed in Greece, as the financial crisis takes an even more alarming turn tonight.

Speaking on live TV, Alexis Tsipras is saying that the Greek central bank has been forced to recommend a bank holiday and the introduction of capital controls.

Truth be told most smartish money should be gone for some time while the optimistic or 'patriotic' will access now restricted.

As I said before we seem to stumble ever closer to Grexit. History sometimes gets made in that fashion.

06-29-2015, 08:41 PM
It has been a black Monday for Greece after many dark years as the country nears an exit. Maybe this is exactly strategic goal the leadership Syriza was working on and their abrasive style, lack of professionalism and wild attacks were their means to make pretty much any compromise with the creditors impossible. If this was their plan and they pull it off while most Greeks wants to stay in then I will be impressed. But it could well be that it was a play to secure an 'acceptable' agreement gone wrong and a Plan B was quickly needed. Who knows.

Personally it seems to me that a Greek exit from the Eurozone has become the best options for Greece itself. Many months ago I hoped that deep Greek reforms, and many are still desperately needed*, combined with another haircut with little to no austerity would have enable Greek to grow faster. However the lack of deep reforms, harsh creditor demands and the new Greek leftist government have tanked the economy again in an surprisingly short time and shaped a fait now almost accompli. Congratulations.

Now I think it is best to try the other bad option, which will be harsh and brutal but live will go on, hopefully with more hope.

06-30-2015, 07:59 PM
It is not yet certain that there will be a referendum nor the exact question it asks is known, but the supporters of a Greek membership in the Euro turned out in large numbers (http://www.theguardian.com/business/live/2015/jun/30/greek-debt-crisis-day-of-decision-for-tsipras#block-5592d4ebe4b07edb74969a48), just like those opposed did yesterday. Not surprisingly there were more not-so-bad-offs today then before.

Anyway it looks like there will be all sorts of talks and actions in the next days but everybody knows that every day with this sort of economic deadlock will inflict deeper damage. The stories are quite shocking and are excellent examples what happens if a cash economy suddendly lacks it. Personally I think that we will have a referendum written by Syriza and it might be a very close thing.

BTW for the first time a developed country will miss an IMF payment, bar a miracle solution.

P.S: The markets reacted not too badly for the large change in odds of a Grexit

07-01-2015, 06:01 PM
The Greek Manufacturing PMI has fallen considerably (http://www.markiteconomics.com/Survey/PressRelease.mvc/003c7359aa0748999b0b0db5b6a7f680) since Syriza was poised to win the elections, reversing a strong upward trend. Correlation is no causation but there has been lots of reports in fall that many of the haves feared their victory and investments and business slowed.


The Guardian, with it's excellent live coverage brought my attention to a handy list of Mr. Varoufakis, which is obviously fully imerged in the referendum campaign.

Greece’s finance minister, Yanis Varoufakis, has published a short’n’snappy bullet point list of reasons to vote no on Sunday.

It includes the fact that Greece’s debt is unsustainable and should be restructured, and a promise that a No vote won’t lead to Greece leaving the euro.

So what does he state?

Greeks should say “a big NO, he concludes. Here’s why:

Negotiations have stalled because Greece’s creditors (a) refused to reduce our un-payable public debt and (b) insisted that it should be repaid ‘parametrically’ by the weakest members of our society, their children and their grandchildren

The IMF, the United States’ government, many other governments around the globe, and most independent economists believe — along with us — that the debt must be restructured.

The Eurogroup had previously (November 2012) conceded that the debt ought to be restructured but is refusing to commit to a debt restructure

Since the announcement of the referendum, official Europe has sent signals that they are ready to discuss debt restructuring. These signals show that official Europe too would vote NO on its own ‘final’ offer.

Greece will stay in the euro. Deposits in Greece’s banks are safe. Creditors have chosen the strategy of blackmail based on bank closures. The current impasse is due to this choice by the creditors and not by the Greek government discontinuing the negotiations or any Greek thoughts of Grexit and devaluation. Greece’s place in the Eurozone and in the European Union is non-negotiable.

The future demands a proud Greece within the Eurozone and at the heart of Europe. This future demands that Greeks say a big NO on Sunday, that we stay in the Euro Area, and that, with the power vested upon us by that NO, we renegotiate Greece’s public debt as well as the distribution of burdens between the haves and the have nots.

My take:

1. I agree pretty much, although he does of course just focus on the pensions while ignoring other stuff like much needed reforms.

2. Fully agreed.

3. Have to check it.

4. Misleading at best, only a few players out of many have.

5. At least in part it is due to Syriza and his unique negotiating and neither are deposits safe, nor is Greece certain to remain in the Eurozone or EU even if there a lots of legal questions about the latter.

6. We don't know what a No or a Yes will mean and it is of course politically expedient to tell the Greeks that a No just means better terms with the creditors.

All in all I'm still not sure if the duo just wants to get the Greek people to vote to have a pretext to exit the Euro while telling them a No will also mean that they will remain in. The creditors will then be blamed by them because their offers were humilating and stupid (partly true) and twice didn't respect the democratic voice of the Greek people.

As I said a Grexit will be mean much suffering but is at this point in time highly likely the best outcome for Greece. It's more difficult to gauge the impact on the Euro zone.

07-04-2015, 05:31 PM
So tomorrow is decision-day, at least sort of. While the Greeks won't and can't know what oxi or nai will exactly mean the tensions are obviously running high with both sides pretty much tied. Attacks abound and rumours run while some statements like the one by the radical right-wing defense minister sitting by his radical left-wing pm about the army and internal security. Obviously this quickly used by the oppositions among which are also men and women who fight against the military regime.

The campaigns have been very short and the oxi mobilized quicker then the nai but we will see how gets more votes. Some stunning graphs to remind oneself about the fertile ground Syriza grew in:




All from the RBS Economics twitter feed (https://twitter.com/RBS_Economics). Great and important stuff but it doesn't quite show the misery like that photo and it's story (http://www.businessinsider.com/afp-crying-greek-pensioner-the-story-behind-the-poignant-photo-2015-7?IR=T):


When he was told at the fourth that he could not withdraw his 120 euros ($133), it was all too much and he collapsed in tears.

The 77-year-old told AFP that he had broken down because he "cannot stand to see my country in this distress".

"That's why I feel so beaten, more than for my own personal problems," Chatzifotiadis said.

07-13-2015, 05:18 PM
So I was wrong and Syriza had not Grexit as Plan B and didn't prepare accordingly. With their bluff called and no more fresh money for the Greek banks with all the obvious consequences national politics in badly constructed groups dominated the European idea and economic logic. And it was far from a pretty sight.

Indeed, the strong do what they can and the weak suffer what they must. It's not war but it certainly wasn't my idea of Europe.

P.S: I'm surprised that hardly anybody compared the recent events with those in Cyprus in which the MPs (http://www.theguardian.com/business/2013/mar/19/eurozone-crisis-cyprus-bailout-government-vote) rejected, among 'a sense of pride', the bailout terms only to cave in to even harder ones later.

As a side note capital controls were expected to last only four days (http://www.theguardian.com/world/2013/mar/27/cyprus-what-capital-controls-mean) - only to last two years (https://euobserver.com/economic/128244). Iceland with it's five years at that time might have indicated a somewhat longer timeframe...

08-03-2015, 06:36 PM
So I was wrong about being wrong, there was at least some planning (http://www.telegraph.co.uk/finance/economics/11764018/Varoufakis-reveals-cloak-and-dagger-Plan-B-for-Greece-awaits-treason-charges.html) towards a Grexit. Perfectly understandable, treason at worst it would have been not to prepare in such fashion. Sadly it was still a path the Greek government didn't want to walk, perhaps fearing the vast pro-euro majority after they managed to isolate themselves completely.

The stand-off which induced the ECB pouring more liquidity into the Greek banks starved of cash by a bank run followed by the painful capitulation did obviously great harm to a very weak economy:


With the market opening and it's 20+% crash those are just numbers which I don't recall seeing in an European country. Shocking stuff and I anticipated worse then most.