EUCOM Economic Analysis - Part I

[Fuchs]

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.

[Firn]

@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 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 and it's links show.

Tim Taylor 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.

[Fuchs]

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.

[Firn]

Groundhog Day in 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:

[Firn]

Die Akte Griechenland 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.

[Firn]

So they are (officially) discussing a Grexit. 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:

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:

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.

[Firn]

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, 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.