EUCOM Economic Analysis - Part I

[Surferbeetle]

The buffet that comprises the EU’s most recent fiscal and monetary deliverables is in some ways reminiscent of the mind-boggling spread found at a Vegas Buffet. Prime Minister David Cameron of the UK has recently cast a historic veto, as the only EU member to do so, against a proposed tax and budget agreement to address the current European political and economic crisis. (1) This has exposed significant ideological differences internal to the UK, led to open speculation regarding a perception that, in so doing, the UK has undercut it’s ability to circumscribe German leadership of ‘the continent’ and led to further speculation that the UK veto has perhaps further weakened the UK’s ability to negotiate for pro City of London EU financial policy. (2) (3) (4) (5) (6) (7) Historically, Mr. David Cameron’s actions may be seen as faintly echoing Prime Minister Harold Macmillan’s (UK PM, 1957-1963) unsuccessful strategy to circumscribe the European Common Market, which later led to an unsuccessful attempt at a u-turn and the UK’s subsequent attempt to join the EU core nations. (8) The high stakes clash of ideas may also be seen as the UK’s embrace of high risk/high payoff financial tactics, techniques, and procedures such as ‘rehypothetication’ versus that of a German vision of austerity and prudence. (9) (10) (11) (12) This struggle, and the advocates of the differing visions, is partially visible at the global level by considering which nations are contributing funding to IMF and other efforts to resolve the crisis. (13) (14) This does not mean that the world is simple, black and white, since resolution is desired by all, but it does mean that as always methodology, and political appearances, matters. (15) (16) Nonetheless,winners are already being anointed. (17)

(1) UK alone as EU agrees fiscal deal, 9 December 2011 Last updated at 11:37 ET, BBC News, http://www.bbc.co.uk/news/world-europe-16115373

(2) Nick Clegg warns European veto 'bad for Britain' , 11 December 2011 Last updated at 12:41 ET, http://www.bbc.co.uk/news/uk-16129004

(3) Triumph und Zweifel in Grossbritannien, 11. Dezember 2011, Neue Zürcher Zeitung, http://www.nzz.ch/nachrichten/politi....13600699.html

(4) Europa lässt Großbritannien zurück, 09.12.2011, 10:48 Uhr, Handelsblatt, http://www.handelsblatt.com/politik/...k/5940698.html

(5) Toward a Gentler, Kinder German Reich?, by Dr. Tony Corn, November 29, 2011 - 8:32am, Small Wars Journal, http://smallwarsjournal.com/jrnl/art...an-reich#_edn7

(6) Franco-British Alarm of 1989 Comes True as Merkel Calls EU Shots, By Leon Mangasarian, December 07, 2011 6:01 PM EST, Bloomberg News, http://mobile.bloomberg.com/news/201...s?category=%2F

(7) Cameron Negotiates U.K.’s Isolation in EU, By Gonzalo Vina and Rebecca Christie, December 09, 2011 8:05 AM EST, http://mobile.bloomberg.com/news/201...2Fworldwide%2F

(8) Marsh, David, The Euro, 2009, Yale University Press, New Haven and London

(9) Shadow Rehypothecation, Infinite Leverage, And Why Breaking The Tyranny Of Ignorance Is The Only Solution, by Tyler Durden, 12/10/2011 13:10 -0500, Zero Hedge Blog, http://www.zerohedge.com/news/shadow...-only-solution

(10) The (sizable) Role of Rehypothecation in the Shadow Banking System, by Manmohan Singh and James Aitken, IMF Working Paper WP/10/172, http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf

(11) German Vision Prevails as Leaders Agree on Fiscal Pact By STEVEN ERLANGER and STEPHEN CASTLE, Published: December 9, 2011, NY Times, http://www.nytimes.com/2011/12/10/bu...mc=rss&src=igw

(12) Does Math Support Euro Survival?, Lawrence Goodman
December 5, 2011, Center for Financial Stability, Inc., http://www.centerforfinancialstabili...uro_120511.pdf

(13) IMF Resources to Stem European Crisis Will Get Boost Without U.S. Backing, by Sandrine Rastello and Ian Katz, Dec. 10, Bloomberg Business Week, http://www.businessweek.com/news/201...ands-back.html

(14) China Can’t Use Reserves to ‘Rescue’ Countries, Fu Says, by Michael Forsythe, December 04, 2011, 7:16 PM EST, Bloomberg News, http://www.businessweek.com/news/201...s-fu-says.html

(15) Euro Crisis Pits Germany and U.S. in Tactical Fight, By NICHOLAS KULISH, Published: December 10, 2011, NY Times, http://www.nytimes.com/2011/12/11/wo...emc=rss&src=ig

(16) Euro in der Krise, Handelsblatt, http://www.handelsblatt.com/politik/...e/3732552.html

(17) Ein Zeichen inmitten der Euro-Krise, Deutschlands Finanzminister Wolfgang Schäuble erhält den Karlspreis, 10. Dezember 2011, 14:53, NZZ Online, http://www.nzz.ch/nachrichten/politi....13588386.html

[Surferbeetle]

CONTINENTAL SHIFT: Safeguarding the UK’s financial trade in a changing Europe, By Stephen Booth, Christopher Howarth, Mats Persson, Vincenzo Scarpetta, December 2011, Open Europe, http://www.openeurope.org.uk/researc...entalshift.pdf

Firstly, the UK's level of influence on new European financial rules has decreased; regulation is now less geared to financial services growth but more towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals potentially affecting the City of London either in the pipeline or being discussed at the EU-level – while some are justified, very few of these are aimed at promoting financial services trade.

Luck May Be Key Ingredient for EU Leaders’ Latest Blueprint to Save Euro, By Simon Kennedy, December 12, 2011 3:59 AM EST, Bloomberg News, http://mobile.bloomberg.com/news/201...s%2Feconomy%2F

“Luck is likely to be required,” said Joachim Fels, chief global economist at Morgan Stanley in London.

To have a chance of success, a deal reached after all-night talks on Dec. 9 to restore faith in the single currency requires investors to avoid dumping European debt, Standard & Poor’s to hold off on threatened downgrades, foreign countries to chip in rescue cash and the European Central Bank to soothe bond markets.

Politicians also have to avert the unforced errors that sank previous initiatives and turned a Greek deficit problem in 2009 into a threat to the international financial system.

Russia added to oil traders’ risk lists, By Javier Blas, Last updated: December 13, 2011 10:13 am, Financial Times, www.ft.com

After a year in which many unusual events hit oil prices – including the collapse of the 42-year long regime of Muammar Gaddafi in Libya – traders are not ruling out anything and have added Russia to their risk lists.

Russia is the world’s second largest oil producer and recent demonstrations in Moscow have spooked oil investors and traders. On Saturday, tens of thousands took to the streets in the capital to demand a rerun of elections, Russia’s largest opposition demonstration since Boris Yeltsin took on the Supreme Soviet in 1993.

The International Energy Agency estimates that Russia oil output hit a post-Soviet high of 10.7m barrels a day in October. But at the same time [...Russian...] oil demand is also rising strongly, hitting nearly 3.5m b/d this year, up 5 per cent from 2010.

[Firn]

I think you are offering a good overview. In my humble opinion the British veto was in some ways unique. We have already had a couple of states using this card but never in such a situation and never against such political pressure, with one country so completely isolated. Remaing alone in among 27 member states is quite a feat of diplomancy.

Europe alone would have the (private) money to handle to crises on the bond market, the big problem is the lack of trust of potential private investors and the persons handling that money in certain economies and states. The fligth of Greek capital is just the worst instance of it.

During the Euro years a massive amount of captial, sometimes luring also considerable amounts of people, from the core of Europe, especially Germany flew into the countries with a better economic future and bigger captial gains at a just moderatly higher risk. This caused a lack of investment in, once again especially in Germany and meant painful reforms and a (relative) loss of income for the workers.

So the current adjustment after a phase of very cheap and plentiful credit is especially for former boom countries. Sadly the political freedom to follow Mr. Keynes is perceived to be almost non-existent although it was used considerably to lessen the impact of the 2008 crisis. Personally I would like the see an aggressive policy by the central bank. Even if monetary policy alone will not solve the crisis, it can not miss.

[Fuchs]

During the Euro years a massive amount of captial, sometimes luring also considerable amounts of people, from the core of Europe, especially Germany flew into the countries with a better economic future and bigger captial gains at a just moderatly higher risk. This caused a lack of investment in, once again especially in Germany and meant painful reforms and a (relative) loss of income for the workers.

Germany had a lack of investment?
What's your expectation for investments?
We're capital investment central.

Capital export is in macroeconomic bookkeeping the other side of the coin for trade balance surplus - unavoidable (save for exceptions such as transfers).

[Surferbeetle]

I'd drop the quite unimportant Marshall Plan from the list and add the InterWar years efforts of left German and French foreign politicians at cooperation instead. They were the prototypes for Adenauer's integration policy.

Fuchs, reading recommendations are always welcome and appreciated.

The key names of the financial teams backing Herr Adenauer and Gen de Gaulle ~ 1949 - 1957 that I am chasing history on include:

-Germany: Ludwig Erhard (Economics Minister), Karl Blessing (Bundesbank President), Wilhem Vocke (Bank Deutscher Lander – Directorate President)

-France: Jacques Rueff ? Maurice Couve de Murville?

The feature of the reunification that we did not want to duplicate at all were the transfers from West to East.

Has not Germany already paved this particular route with myriad bank loans to the periphery? Commerzbank appears about to pay the price for mispricing the risk of recovering principal from debtors. Am I correct in understanding that the current cost/benefit transfer union calculation being run includes loss of goodwill (intangible assets), the nationalization of select German banks, myriad contractual reconfiguration costs, appreciation of the Deutsche Mark (ranging from 30% to perhaps 70% relative to specific/discrete currencies?), the reapplication of border transaction costs, currency exchange costs, usw., usw, usw?

I think you are offering a good overview.

Firn, appreciate it as well as everybody’s insights.

Remaining alone in among 27 member states is quite a feat of diplomacy.

There are a number of issues that we have insight into as well as a number of questions that arise as a result of this diplomatic action; how & why Germany, the UK, and France actually produced this result, will this kill Germany’s preference for full treaty (all 27) change, is an outside the treaty agreement (27 minus) discredited, can existing treaties still be used to accomplish the objective (full 27), does this lock in a two speed solution (17 core vs. 10 periphery) is the French financial establishment (not to mention France) adequately represented by the emotional responses of multiple senior representatives during the last week, why could not the UK find allies such as Ireland, will this action embolden & facilitate Scotland’s (Alex Salmond) interest in succession, etc., etc.

During the Euro years a massive amount of capital, sometimes luring also considerable amounts of people, from the core of Europe, especially Germany flew into the countries with a better economic future and bigger capital gains at a just moderately higher risk.

Do you mind expounding and do you have some references to share on this topic? I see a number of economic models that were developed during this period, and I wonder about what worked, what went wrong, and if these models are salvageable and applicable to other locations. Dublin’s growth from 1997 to 2001 appeared to average ~9% per year and low corporate taxes were part of that model. Irish (Bank of Ireland, Allied Irish Bank, etc) financial leverage of ~8 times GDP during this period was not sustainable however. Iceland’s (Kaupthing,) amazing boom and bust during this period appeared to include financial leverage of ~12 times GDP. Scotland’s (RBS) financial leverage of ~15 times GDP was not sustainable either. Yet, Switzerland (Credit Suisse, UBS, etc) while acknowledging the recent insights into internal controls system of UBS, continues to thrive with financial leverage of ~ 6 times GDP. Poland is interesting as well.

Sadly the political freedom to follow Mr. Keynes is perceived to be almost non-existent although it was used considerably to lessen the impact of the 2008 crisis.

Maybe I am cheating, but, I wonder if both Keynes and Hayek have something to say…I am mostly in agreement with Gavyn Davies recent statement in the FT:

“…the global economy needs a mixture of policies which write off debt in some cases, pay off debt in others, and extend debt in still others. A one-size-fits-all approach which encourages the simultaneous deleveraging of all sectors at maximum speed could cause a genuine economic calamity.”

[davidbfpo]

An intriguing Kings of War blog post by David Betz, albeit with a strange opening part, OK it is the season of goodwill, but Yoko Ono. Anyway I digress.

This part struck me, although citing Anglo-French military co-operation we would be foolish to think that is the only instance:

Case in point: today’s intervention by the head of France’s Central Bank to downgrade UK first. Can someone remind me why it is a good idea to share major defence assets with people whose first instinct when crisis hits is to cry ‘shoot him first!’?

There are other strategic points raised, notably the decline of (Western) Europe, the rise of China (big assumption author notes) and whether the BRIC are competitors or partners.

Link:http://kingsofwar.org.uk/2011/12/hap...s-war-is-over/

[Fuchs]

There's a difference between shareholders of a stupid corporation being on the hook while hoping that they get their returns and taxpayers paying and seeing how towns in another region rebuild themselves while theirs decay.

[Surferbeetle]

Draghi warns on eurozone break-up, By Ralph Atkins and Lionel Barber in Frankfurt, December 18, 2011 10:44 pm, Financial Times, www.ft.com

Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis.

Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.

EU demands £25bn lifeline from the UK, By Tim Ross and Bruno Waterfield9:51PM GMT 18 Dec 2011, The Daily Telegraph

European finance ministers will aim to agree a new €200 billion (£167.7 billion) loan to the International Monetary Fund as part of a deal to save the single currency.

Three quarters of the money is expected to come from eurozone members, but Britain will also be asked to provide funds.

Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal.

Financial tricks to get out of debt, By James Mackintosh, Last updated: December 18, 2011 3:39 am, Financial Times, www.ft.com

Something funny has been going on in Greek debt markets. Even as the yields available on bonds maturing in just a few months have soared to silly levels, the government has been able to raise money at perfectly reasonable rates.

Last Tuesday, for example, Greece issued a bill – a short-dated debt instrument – that matures in June. It raised €3.7bn ($4.8bn), paying 4.95 per cent, annualised. By the standards of ordinary times this would be a disaster; Germany is paying zero interest on similar bills.

What is going on in Greece is a reworked version of the old principle of printing money to pay government debt (“monetising” it), this time via the banks. Such tricks are likely to become increasingly common as governments grapple with horrific debts.

Crisis fears fuel debate on capital controls, By Gillian Tett, December 15, 2011 7:53 pm, Financial Times, www.ft.com

Is the world stealthily sliding towards capital controls? That is the question which is starting to hover, half-stated, on the edge of policy debates, as financial anxiety spreads across Europe.

But now, a new salvo has been fired into this debate from an unexpected source: the Bank of England. Earlier this week, the Bank released a paper on global capital flows written by three of its economists, William Speller, Gregory Thwaites and Michelle Wright, which draws heavily on earlier research by Andy Haldane, the Bank’s head of financial stability.

Financial Stability Paper No. 12 – December 2011, The future of international capital flows, William Speller, Gregory Thwaites and Michelle Wright, Bank of England

The experience of the past decade has demonstrated the challenges that international capital flows can pose for financial stability. The build-up of global imbalances (large net capital flows) was one of the preconditions for the recent financial crisis. Increased interconnectedness between countries’ financial sectors (large gross capital flows) created channels through which the initial shock could spread around the world. In these respects, the scale and volatility of international capital flows were crucial determinants of the depth and breadth of the crisis which followed Lehman Brothers’ demise.

These dramatic events demonstrate that it is incumbent upon policymakers to develop strategies to deal with these risks in the future. But however great the challenges policymakers may have faced in the most recent episode, these are set to become even greater in the future as large emerging market economies (EMEs) increasingly integrate into the global financial system.

The key challenge for policymakers is to mitigate the potential financial stability risks associated with much larger future international capital flows while simultaneously preserving the key benefits that financial globalisation has to offer. The increase in capital flows will have implications for many policy issues, including, but not limited to: the elimination of data gaps; policies which limit the build-up of balance sheet mismatches; the Basel III international capital and liquidity standards; macroprudential policies; the use of capital controls; and reforms to the international monetary and financial system.

[Surferbeetle]

Hal S. Scott

Hal S. Scott is the Nomura Professor and Director of the Program on International Financial Systems (PIFS) at Harvard Law School, where he has taught since 1975. He teaches courses on Capital Markets Regulation, International Finance, and Securities Regulation. He has a B.A. from Princeton University (Woodrow Wilson School, 1965), an M.A. from Stanford University in Political Science (1967), and a J.D. from the University of Chicago Law School (1972). In 1974-1975, before joining Harvard, he clerked for Justice Byron White.

When the Euro Falls Apart, Hal S. Scott, Harvard Law School, International Finance 1:2; 1988 pp. 207-228, http://www.law.harvard.edu/programs/...ch/15scott.pdf

The paper then focuses primarily on two significant problems related to a break-up. First, a country seeking to leave EMU, particularly after the transition period, may have difficulty re-establishing its national currency unilaterally, as its economy is likely to have become thoroughly 'euroized'. Second, any break-up accompanied by re-denomination of existing euro obligations, including government bonds, will create great legal uncertainty and costly litigation. There are no continuity of contract rules for exiting EMU equivalent to those for entering. Both problems require cooperative and deliberative solutions and will be difficult and costly to solve.

[Firn]

Germany had a lack of investment?
What's your expectation for investments?
We're capital investment central.

Capital export is in macroeconomic bookkeeping the other side of the coin for trade balance surplus - unavoidable (save for exceptions such as transfers).

Regarding capital movement I thought mostly along the lines of this this blog entry.

Germany suffered from a severe lack of investment, according to that paper, even if you take into account the lack of bubble "investment" into construction, like in Spain (or the US)

[Fuchs]

http://www.destatis.de/jetspeed/port...perty=file.pdf



Look at the graphic on page 14 and keep in mind our working age population is shrinking and the statistic is in real, not nominal, terms.

Capital investments equalled 17-21% BIP (BIP ~ GDP) over the last decade,
About 2-7% BIP net capital investments in that decade.

Meanwhile, Germany still had a net capital export / trade balance surplus on the order of several per cent GDP.

Better don't look at the UK or US for comparison, for you'd get a shock.

[Firn]

http://www.destatis.de/jetspeed/port...perty=file.pdf



Look at the graphic on page 14 and keep in mind our working age population is shrinking and the statistic is in real, not nominal, terms.

Capital investments equalled 17-21% BIP (BIP ~ GDP) over the last decade,
About 2-7% BIP net capital investments in that decade.

Meanwhile, Germany still had a net capital export / trade balance surplus on the order of several per cent GDP.

Better don't look at the UK or US for comparison, for you'd get a shock.

Thanks for the link. It is of course always interesting to look at both sides of the coin when it comes to trade balance - capital "balance". As with all macro and economy things are relatively easy when look upon in isolation, but become much more difficult and controversive when combined.

One could argue that the UK or the US are in comparison in an overall better situation then Germany because the world is willing to invest into them, but that would be as narrow minded as to state that Germany is in a better shape because it is so much more competitive.

As you have written demographics play a central role in the net capital investments, however one should not lessen the influence of culture and politics and the often irrational aspects of markets. For example while the increasing population of the US was key for the heavy investement in the durable consumer good housing the cultural norms (want own suburb home) and politics (Fannie and Freddie) were also important. But the bubble was only possible due to the common illusion based on experience that housing prices "always" went up and that boundless greed was fueled by extremely easy credit in a time of very low interest rates. Massive investement/spending in construction drove many other sectors of the economy be in the US or in Spain.

In Germany and in Italy the government did not support private investment into the private building sector as heavily and combined with a different consumer climate/confidence and tighter credit and the aging population an important driving force for the economy was missed in the last ten years. Increased public and private investment might have helped the overall economy, but the current crisis has shown the danger of an excessive spending fuel by too loose credit outstripping demand by a great margin especially if followed up by crippling austerity.

Overall I have to confess that such discussion are very hard to do in such a from.

@Suferbeetle, I will also try to respond to your post, it might take a bit. Still I agree when you say:

Maybe I am cheating, but, I wonder if both Keynes and Hayek have something to say…

Hayek and Keynes did invest a lot of their work and theory driven by experiences outside the realm of the "normal" economic environment. A cynic might say that a good deal of the economic research based upon a close look at recent stable times has hobbled the ability to tackle a big crisis. Most European and even more the dominant US-American economists suffered in short from a very focus on a restricted geographical area and a restricted timeframe.

[Firn]

Do you mind expounding and do you have some references to share on this topic? I see a number of economic models that were developed during this period, and I wonder about what worked, what went wrong, and if these models are salvageable and applicable to other locations. Dublin’s growth from 1997 to 2001 appeared to average ~9% per year and low corporate taxes were part of that model. Irish (Bank of Ireland, Allied Irish Bank, etc) financial leverage of ~8 times GDP during this period was not sustainable however. Iceland’s (Kaupthing,) amazing boom and bust during this period appeared to include financial leverage of ~12 times GDP. Scotland’s (RBS) financial leverage of ~15 times GDP was not sustainable either. Yet, Switzerland (Credit Suisse, UBS, etc) while acknowledging the recent insights into internal controls system of UBS, continues to thrive with financial leverage of ~ 6 times GDP. Poland is interesting as well.

While both Hayek and Keynes did a good job explaining who one could come into such a dire situation like a deep depression Keynes did a far better job at giving the economic science (finally) the framework and the politicians the tools to get out of such a crisis. The effects of monetary policy in the last years has been remarkably close to what Keynes described as the liquidity trap, and textbook models (IS-LM, in a Mankiw) stemming from that era fit very close indeed.

Lessons learned from this prolonged crisis have been many, perhaps too many to discuss here in detail. Anyway Ireland with a young population and deep reforms, depreciation agains the European benchmark the DM, access to ever more open markets and a beggar-thy-neighbour approach to taxes roared mightily in the 90s. While the Euro prevented further deprecations, the high productivity partly due internal boom, fueled to a good degree to ready consuming and hefty construction aided by loose credit by highly leveraged banks, facilitated by much capital and workforce influx from the rest of Europe and led to a great success story. Sadly the Irish had a similar shock as many Americans, with big elephant in the room, the lacking ability to print money and to depreciate heavily to boost an small, integrated economy compared to the rest of Europe. Additionally they shouldered, perhaps out of a mixture of pride, the call of duty and a lot of pressure the banking debts and went for austerity. Not surprisingly the wages have been very sticky, internal devaluation was hardly there and unemployment is very very high compared to better times.

In short high leverages tell just part of the story, but if the story includes lax regulation, low rates, a lot of (in hindsight) risky debt, a booming economy and housing prices seemingly going only up and maybe a good headline like "Celtic tiger" helping to sell it to foreigners with money and willing hands then a bad bust is almost certain.

The deep irony is, as usual, that when prices have fallen massively be it in construction or in equity all is suddendly perceived as much much riskier as when those prices had been sky high. It is quite natural that way, as without that psychology the economy and the markets would not fluctuate that widly.

BTW Switzerland has it's own currency, a reputation of solidity and as a haven of security. Traditionally in such a crisis the money is not leaving the swiss depots, but it is coming in. Additionally the Swiss federation as very low debt and a lot of firepower and there is hardly doubt that it could support the big Swiss banks. In fact it has been fighting (successfully) very hard to keep the Franken from rising by all that demand further into the sky. The printing press must have been very busy indeed.

P.S: I will try to link some of the papers in question. Macroenconomics have been surprisingly helpful, if you (as usual the difficult part) looked at the right things.

[Dayuhan]

Interesting article in Foreign Affairs. Full text available with free registration.

The Failure of the Euro

The little currency that couldn't

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries...

http://www.foreignaffairs.com/articl..._euro_3-010512

[Surferbeetle]

Hildebrand Steps Down at SNB, By Jennifer M. Freedman and Klaus Wille - Jan 9, 2012 6:37 AM MT, Bloomberg News

Philipp Hildebrand resigned as head of the Swiss central bank after a currency transaction by his wife last year dented the credibility of the franc’s chief guardian.

As head of the SNB, he helped toughen financial regulation, forcing UBS AG and Credit Suisse Group AG to boost capital buffers. He also lowered borrowing costs to zero and in September introduced the first currency ceiling since the 1970s to help protect the economy.

Hildebrand’s first round of currency purchases forced the SNB to declare a record loss in 2010 and prompted calls from Christoph Blocher, vice president of the Swiss People’s Party, for him to resign. Bank Sarasin, a Basel-based private bank, said on Jan. 3 it had fired an employee who helped pass data on the trades by the Hildebrands to Blocher.

Philipp Hildebrand from wikipedia

Hildebrand is currently under attack due to the losses arising from SNB’s exchange rate interventions between March 2009 and June 2010. In this period, the SNB accumulated foreign currency reserves worth over 200 billion Swiss francs. Since the Swiss franc has since appreciated substantially, the interventions caused losses on SNB foreign currency positions equivalent to 26.5 billion Swiss francs in 2010 and a further 11.7 billion Swiss francs in the six months thereafter.[4] Although the SNB has repeatedly defended these interventions as they made “sense at the zero lower bound when the traditional monetary policy instrument is exhausted”,[5] the international press and financial market analysts by and large deem the interventions a “costly failure”.[6]

Given the size of the loss (equivalent to around 5,000 francs per capita), Hildebrand is under fierce political attack for being the driving factor behind these interventions. Critics point out that the interventions were undertaken when there was no underlying need to intervene and that they were continued even when the European debt crisis in spring 2010 already had intensified so that the exchange rate the SNB was trying to support was unrealistic.

The right-wing People’s Party (Schweizerische Volkspartei (SVP) / Union Démocratique du Centre (UDC)) and the politically colored magazine Weltwoche are among the loudest critics of Hildebrand, repeatedly demanding his resignation. These attacks however led to prominent figures of other parties voicing their support for Hildebrand and moreover emphasized the political independence of the SNB. However, in an article titled “With Unsteady Hand”, Switzerland’s center-leaning major business magazine Bilanz criticized Mr. Hildebrand’s leadership of SNB, citing in particular his limited experience and that Mr. Hildebrand’s actions in large parts seem to be the result of his eagerness to appeal to the public.[7]

Christoph Blocher bio from Wikipedia

Blocher built his political career through campaigning for smaller government, for a free-market economy, against Switzerland's membership in the European Union and for more tightly controlled immigration. He represented the canton of Zürich in the Swiss National Council from 1980 until his election to the federal council in 2003 as a deputy of the Swiss People's Party (Schweizerische Volkspartei/Union démocratique du centre; SVP/UDC). In addition to the Zürich chapter of the Swiss People's Party, he led a mass organisation, the Action for an Independent and Neutral Switzerland (Aktion für eine unabhängige und neutrale Schweiz). He has frequently been compared by the media and his political opponents to figures such as Jean-Marie Le Pen and Jörg Haider.

Blocher is leader of the party's nationalist wing, which dominates the party's delegation to the National Council.

Germany issues debt with negative yield, By Richard Milne, Capital Markets Editor, January 9, 2012 12:04 pm, Financial Times, www.ft.com

Germany issued debt on Monday for the first time with a negative yield, meaning that investors were in effect paying Berlin for the privilege of lending it money.

A €4bn auction of 6-month bills drew a negative yield of 0.0122 per cent in a sign of Germany’s haven status amid the eurozone debt crisis.

But demand for the debt was down with the so-called bid-to-cover ratio dropping to 1.8 times from 3.8 times at the previous auction a month ago.

German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas.

[Firn]

The policy of the Swiss NB to draw a line into the sand at a very deep point was so far successful, and the Euro is still hovering above it, despite it came closer in the turmoil of the last days. Traditional monetary policy has indeed run out of room, which forces me to once again make a nod to Keynes, so other tools were needed to achieve the desired effect. This policy has a couple of effects, even if it won't be able to stem the tide of liquidity into the "safe heaven" Switzerland.

1) The Swiss economy, especially the export, the retail in border areas (Switzerland is small and well connected) and tourism sector suffered already heavily due to a Franken, widely seen as overvalued. This will at least mitigate that damage

2) It helps those in Europe which took a credit in the Franken, a strategy rather popular a couple of years ago in Austria and some regions of Italy and especially in countries like Hungary where the rates on the own currency were relatively very high. (A 'very' controversial law was passed in Hungary to mitigate the effect of the big slide of the Florint against the Euro at the cost of the banks)

Anyway around 1950 you got 1 CH for roughly 1 DM, perhaps the unofficial reseve currency of Europe, around 1970 even more then that and around 1995 quite a bit less then that. Before the SNB acted like it did you got at the lowest point roughly 1 CH for 1 Euro. In fact the CH gained roughly 90% in the last 20 years...

[Fuchs]

...which accounts for little unless we compare the inflation rates.

The really interesting thing about exchange rates is in the long term not the official exchange rate, but its movement in comparison to purchasing power parity (PPP).


One example about PPP; Krugman recently published some stats about Japan which made Japanese workers look rather unproductive in comparison to U.S. workers. This can be wholly explained with the undervaluation of the Yen; the same statistic expressed with PPP would have looked very differently.
This PPP thing contributes to an outdated and false sense of superiority of Americans in regard to their economic standing.

-------------------------------------

Somewhat related to the topic in general:
A short story and defence-related concern about the Euro crisis.

[davidbfpo]

A short KoW comment by David Betz that takes imagination - in my case - to follow. Citing a German source:

1. If Greece gets the next big (80 billion Euro) tranche of IMF-EU bailout moulah in March; then,

2. it will be able to conclude a whole bunch of new defence contracts including, inter alia, new Eurofighter jets, frigates from France, submarines from Germany, and Apache helicopters from the USA.

Link:http://kingsofwar.org.uk/2012/01/guns-not-butter/

He's also written a wider comment on the world economy, with many valid points beyond money. This is only a taster:

If you’ve read a newspaper lately you’ll have seen ample evidence that no one has the faintest idea how to deal with simultaneously:

a credit bubble
a bond bubble
a real estate bubble and a farmland bubble
a commodities bubble, and
several currency bubbles.
(Plus a higher education bubble?)

Link:http://kingsofwar.org.uk/2012/01/ple...ut-the-bubbly/

[Fuchs]

There's a way how to deal with it; understand that you an allow all this to blow up and have a comeback in less than ten years IF you get rid of the burden.
Germany reached 1936 levels of industrial production in 1952, only seven years after the war and only three to four years since actual recovery began.
Less than eight years later it had defeated unemployment (temporarily) and was transitioning to real wealth for everyone (refrigerator, TV set, kitchen electrical equipment, car - the stuff that was used to measure wealth well into the 80's).


The worst you can do is to lack confidence and courage and muddle through.

[Firn]

...which accounts for little unless we compare the inflation rates.

The really interesting thing about exchange rates is in the long term not the official exchange rate, but its movement in comparison to purchasing power parity (PPP).


One example about PPP; Krugman recently published some stats about Japan which made Japanese workers look rather unproductive in comparison to U.S. workers. This can be wholly explained with the undervaluation of the Yen; the same statistic expressed with PPP would have looked very differently.
This PPP thing contributes to an outdated and false sense of superiority of Americans in regard to their economic standing.

-------------------------------------

Somewhat related to the topic in general:
A short story and defence-related concern about the Euro crisis.

Leaving the PPP issue aside, which has it's merits even despite the difficulty to calculate it, as it is usually better to be roughly right then exactly wrong, I can not imagine that the slight difference in inflation in the last, say 20 or 30 years can explain the rise of the Franken. Swiss and German inflation differ only slightly even if compounded.

The radical gain of the Franken in such a short time is IMHO only explainable by the same, almost desperate rush for perceived safety which drives up the parked money at the ECB to ever greater heights and which has driven the interest rates on Danish and German bonds into the negative.

----

The story in the liberal ZEIT states to some extent the obvious and well-known. Greece has a very large military compared to it's size, seemingly mostly due the perceived Turkish threat, composed of many products bought abroad with big German share. The German politicians have pressed (like others) the Greece to buy German (or European, for example the Eurofighter) and the German defense industry has long established Greek subsidiaries to better play the political game which created some odd purchasing decision. And last but not least Greece doesn't seem to be ready to cut the defense budget nearly as much as other ones, for example that of social security even if it is running a massive current budget deficit...