EUCOM Economic Analysis - Part I

[Firn]

Well I bought now after the big correction, I also had money in hand after securities became liquid. We will see in a couple of years if it was the right solution.

Greece is really the European Achilles’ tendon in the sense that Spain, Italy and Portugal would likely not suffer so much without the pain in the birthland of Hippocrates. It really does test the investors and EU and has already crossed bounderies, for example with the haircut, that were far from the mind of almost anybody a couple of years ago.

The ECB must step in Now, and do it's injections. With credits as tight and money circulating as slowly through many European economies there is no big inflation risk in the short term in most of Europe. The healthier countries like Germany and Austria are more likely to have a higher one, which is of course exactly what neither Frankfurt nor Vienna want. Finland and the Netherlands as well as the relative poor countries like Slovakia, Slovenia and Estonia are also not keen on it. The latter two have still a smaller GDP per capita then Greece which makes the feeling about transfers not better.

[Fuchs]

Actually, the financial markets may be totally overrated, and likewise the problems that Greece can generate.

German banks are pleading companies to take loans - the loan demand is so small. Large corporations can get capital altogether without banks, and the medium-sized companies (SMEs) have spent years preparing for hard times and have enough liquidity.
The truly small businesses get loans through German government-sponsored loans (KfW) and few other loans.

In short: There would probably be more psychological than financial problems for the economy if banks would blow up tomorrow.

[ganulv]

Actually, the financial markets may be totally overrated, and likewise the problems that Greece can generate.

[…]

In short: There would probably be more psychological than financial problems for the economy if banks would blow up tomorrow.

Good God, man, open your eyes to what is going on here!

[Dayuhan]

An opinion, from Foreign Affairs...

http://www.foreignaffairs.com/articl...ormal_3-051712

Europe's New Normal

It's Here, It's Unclear, Get Used to It

The eurozone's troubles no longer qualify as a crisis, an unstable situation that could either quickly improve or take a dramatic turn for the worse. They are, instead, a new normal -- a painful situation, to be sure, but one that will last for years to come. Citizens, investors, and policymakers should let go of the idea that there is some magic bullet that could quickly kill off Europe's ailments. By the same token, despite the real possibility of Greek exit, the eurozone is not on the brink of collapse. The European Union and its common currency will hold together, but the road to recovery will be long...

[Firn]

The direct economic impact of Greece on the EU or the Eurozone is of course rather small. Its GDP is 3% of the Eurozone, and 10% of the German one. Howerver it is somewhat of a horror story keeping investors and the financial markets on the edge, resulting partly in those high spreads for Italian, Spanish and Portuguese T-bonds.

Banks are special and in this delicate situation we won't see any big bank failures, as the governments and the ECB will step in to avoid that more fuel gets thrown into the fire. Already there has been a big wave of nationalizations throughout Europe, even in relative calm places like Austria, even though it was due to heavy lending in the East. As Surferbeetle wrote and I pointed out with an financial index earlier, the banks of Eurozone are now at close to a 25 year low.

I agree with the article and that Greece's exit from the eurozone would be a catastrophe for Greece and a trauma for Europe. Italy and Spain in particular must grow again. The public austerity here is really having strange and frankly idiotic consequences. For example someone just closed the office handling the stamps required for the 10-year prolongation of the drivers license. So basically the state forced many citiziens to break the law by making their license void. Of course in Italian style the government just told the police and the carabinieri to ignore that but try to tell a French or German police officer that while doing a business trip. Quite recently the office has opened again but you can imagine the backlog.

[Dayuhan]

I'd be curious to know if this habit prevails in Europe...

In the US, when budgets are cut or austerity measures imposed, government agencies typically do not try to make themselves more efficient. More often they will deliberately cut services in visible areas that have immediate impact on the populace, hoping to generate public outcry and get "their" money restored. After all, if an agency accepted a budget cut, streamlined their operation, and continued without any reduction in services, they'd have little argument for getting more.

I'm wondering if the case cited above might have a bit of this habit in it...

[Firn]

I'd be curious to know if this habit prevails in Europe...

In the US, when budgets are cut or austerity measures imposed, government agencies typically do not try to make themselves more efficient. More often they will deliberately cut services in visible areas that have immediate impact on the populace, hoping to generate public outcry and get "their" money restored. After all, if an agency accepted a budget cut, streamlined their operation, and continued without any reduction in services, they'd have little argument for getting more.

I'm wondering if the case cited above might have a bit of this habit in it...

Sounds like the blueprint for this case.

To be fair the did ease some other bureaucratic nonsense in that area like requesting persons older the 80 years to come from the whole province to a single comission who with the help of computer programs determined if they could drive on for another 2 years or so instead of doing it at their doctor. (Said that my personal doctor mentioned that he had to void a driver license from a young half-blind women which scored almost perfectly in a vision test in Sicily)

There are so many other terrible laws which are more or less ignored, depending on the region also partly by the institutions. I think this is part of the reason why breaking the sound rules is not considered by many to be a crime. Sometimes the guy not doing it is seen as dumb.

It is all a sad story, we still have a great country with many hard-working people.

About measuring inflation:

The Governing Council defines price stability “as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”. What I would like to discuss in this post is not the inflation target of 2% but rather the HICP. I’d like to argue that by targeting a flawed variable (the HICP), the ECB is generating flawed policy.

The HICP has one enormous deficiency: owner-occupied housing (OOH) is presently excluded from the index, primarily because of the methodological inconsistencies that existed between the statistical methods of the different countries.

Better to be perfectly wrong then roughly right....

[davidbfpo]

Much of the debate on banking and economic policy are simply beyond my comprehension. It is rare to have a straight forward explanation, although I did enjoy Robert Peston's programme last night; which is summarised here:http://www.bbc.co.uk/news/business-18088540

Or just this opening paragraph:

Creating the currency union was not a random act of collective economic suicide, but was in some senses a rational or even noble project that was either premature or too late. The tragedy was that a succession of post-war leaders, whose intentions would be seen by many as honourable, made a series of disastrously ill-timed decisions.

There is a link to the broadcast, but as some know the BBC sometimes declines to let others watch:http://www.bbc.co.uk/programmes/b01hy4xr

Mr Peston is very unpopular with bankers and others here, he is often accused of causing the fall of Northern Rock by his reporting.

[davidbfpo]

This has dropped into my email box and looks interesting and sensible. It is from IPPR a UK centre-left think tank.

The political scientist Larry Bartels argues that there has been no swing to the right – or left – during the Great Recession. Instead, voters have punished incumbents of both stripes if economic growth has been low in the run-up to elections.

Political scientists in the past half-century have increasingly de-emphasised the role of ideological commitments and policy promises in accounting for voting behavior, in favour of an alternative account in which voters simply assess how the nation is faring – particularly in respect of the economy – and vote to retain the incumbent government if things are going well and to replace them if things are going badly. This so-called ‘retrospective voting’ model makes fewer unrealistic demands of voters, it seems to provide a modicum of democratic accountability, and it does a better job of explaining election outcomes than the traditional ideological model.

Link:http://www.ippr.org/junctures/166/91...-in-hard-times

Personally I have a political and so a security concern that it is the failure of traditional state structures that is far more threatening than "extremism". We already have a technocrat government in Italy and for a short time in Greece. There is also a certain impetus for the "strong" state.

[Surferbeetle]

Good God, man, open your eyes to what is going on here!

Hopefully we won't be seeing zombies in the streets snacking on brains!

Zombie banks ala Japan are more likely and keep in mind that the EU houses the largest part of the more or less global banking system. So, incessant Euro snacking by zombie banks?

Watch deposit flight not the Eurocrats, by Paul Mason, 16 May, 2012, BBC News

One way the current crisis could nix Greek euro membership is if the bailout fund - the EFSF - refuses to dole out the relevant billions on a date coinciding with the Greek state having to use said billions to repay its debts.

That is the "political trigger" to euro exit. But market participants are watching something else: the flight of deposits out of Greek banks and into other Euro currencies.

That is because the normal mechanism for making payments across Euro borders, called TARGET2, is seen as the economic trigger for a euro exit.

• Louk's account at Bank A is docked 1000 euros.
• Bank A signals to the Greek central bank, Bank of Greece, that the payment will go ahead using TARGET2.
• Bank A's reserves at the Bank of Greece are docked 1000 euros.
• Bank of Greece's liability to the Eurosystem of central banks rises 1000 euros.
• The Bank of Spain now has a claim of 1000 euros on the Eurosystem of central banks (as a whole, not merely its Greek counterpart).
• The Bank of Spain creates a reserve of 1000 euros for Gomez's bank, Bank B, in Spain
• Bank B creates 1000 euros in Gomez's bank account

[ganulv]

Mr Peston is very unpopular with bankers and others here, he is often accused of causing the fall of Northern Rock by his reporting.

Meh. Pointing out that there is an elephant in the room doesn't mean you put it there. Which is not to deny that distinguishing apprehension of the facts and group delusion is a problematic of modern economic behavior.

[Firn]

Rather long video by Krugman, speaking recently in Bruessel.

It is also interesting to note that he and his wife invest very cautiously, apart from T-bonds which have of course a far higher yield then the current ones they hold mostly cash and cash-like securities. Certainly no gold. It is a wild world out there, he says.

[Fuchs]

Krugman's views are widely published, through his blog, column and books.

He's sternly on the short-term side. Others are more concerned about the long term and I personally are only interested in the long term.

Krugman experienced how little complexity the public understands when he was accused of hypocrisy after calling for higher Obama admin deficits after criticising GWB admin deficits. Totally consistent with Keynesianism, but the public doesn't get that economic policy may need to be tailored to the situation.
Too much ideology, too many laymen who believe they know economics better than economists. I personally had once a boss who believed he knew better about economics because he read a certain newspaper and its econ chapter daily.

So what would happen if the U.S. adopts Krugman's econ policy opinion?
Maybe it would be a success (I doubt it, but then again I don't care about quarter reports), and afterwards the new econ conventional wisdom would be "stimulus solves econ troubles". Stimulus would be used against every tiny ailment.
The long term issues (insufficient capital investment = savings) would not be addressed, the trade balance deficit would persist in a consumption-drives-the-economy society and it all would be blow up in less than ten years (prolly going to happen anyways).


He knows that his recipe demands too sophisticated thinking, he knows he's neglecting the long term and still he insists on his short term views. A true Keynesian.

[Firn]

Well in the face of such a depression I do also like Keynes words about the long-term, in which we are all dead.

The influx of cheap money into various economies did really lead to a bubble consumption and bad investing, however since the the depression began consumption has indeed fallen resulting in a lack of demand. The private sector is indeed saving more and lending less, the states and regions are cutting and the result of this short time adjustment means in almost perfect text-book fashion a lot of pain without much gain. The moral arguments are all fine and I agree with them, sadly they are right now leading us just deeper into the mess.

[Fuchs]

Actually, part of the mess is a desirable market correction while only the other part is a regrettable yet not really uncommon cycle lower end.

The United States are still importing vastly more value than they export it. Even the crisis did not come close to balance this out, despite the global trade crunch a few years ago.

United States savings rate and net capital investment are below or close to negative while the population grows by about a per cent per annum. Guess what? to even catch up with population growth requires about 2 per cent points GDP more capital investment. That's two per cent points GDP less goods consumption (and that's much more than two per cent goods consumption, since most of consumption is about services!).


The most astonishing thing about this long economic crisis is in my opinion that the countries with structural problems didn't even come close to address them properly:

The Greeks were at least trying to do so due to immense pressure.

Iceland, Ireland, Spain, Italy, Portugal - not much done, in part simply unable to cope with their issues in the short or medium term.

U.S., UK - don't even understand their structural problem (=inflated services sector, esp. financial services, middle class purchasing power stagnated in real terms for decades, too much de-industrialised in the past).

Germany - most of 'us' still believe that trade balance surplus is a good thing, that retirement pensions can be boosted with a capital-based approach (=100% nonsense on the macro level), and most tragically, we still misunderstand a shortage of skilled labour of a specific trade as a problem instead of as a symptom of a partial achievement of the desirable full employment. Well, gullible fools deserve to be ripped off by lobbyists. There are more myths , misunderstandings and stupidities in Germany, of course. Our luck is that the undervalued currency and the competence of our SMEs cover much of our failings up.

[Ulenspiegel]

Germany - most of 'us' still believe that trade balance surplus is a good thing, that retirement pensions can be boosted with a capital-based approach (=100% nonsense on the macro level), and most tragically, we still misunderstand a shortage of skilled labour of a specific trade as a problem instead of as a symptom of a partial achievement of the desirable full employment. Well, gullible fools deserve to be ripped off by lobbyists. There are more myths , misunderstandings and stupidities in Germany, of course. Our luck is that the undervalued currency and the competence of our SMEs cover much of our failings up.

Let's simply assume we want to reduce our trade surpluywith France that is around 100 billion per year.:

1) Mass emmigration from France to Germany is a no-go.

2) France is not able to provide enough useful stuff like energy when Germany needs it.

3) Higher taxes in Germany and transfer of money to France is political suicide.

4) Therefore, we need some large-scale investment programms, i.e. German companies get tax dedection/write -offs for investments in France. Which fields would be useful?

[Fuchs]

Let's simply assume we want to reduce our trade surpluywith France that is around 100 billion per year.:

1) Mass emmigration from France to Germany is a no-go.

2) France is not able to provide enough useful stuff like energy when Germany needs it.

3) Higher taxes in Germany and transfer of money to France is political suicide.

4) Therefore, we need some large-scale investment programms, i.e. German companies get tax dedection/write -offs for investments in France. Which fields would be useful?

A flexible currency exchange rate would help a lot, as our exports would be more expensive and theirs cheaper in this trade relation. This would even have a huge effect if the goods and services traded would remain the same.
We don't have flexible exchange rates any more, of course.

Similar (small) effect on competitiveness of German exports would come from an identical VAT. Theirs is 19.6%, ours is 19%. There might be a EU-wide harmonisation at 20% soon.

France could have a greater effort at supporting its exports, similar to German Hermes loan guarantees for exports (and we should really reduce ours except for a couple strategic industries if they have below-average profit margins).

France could at least attempt to attract more German tourists (Cote d'Azur, not only Paris). So far, Americans and Russians appear to consider France more as a tourism country than Germans do.



It wouldn't help if Germans invested more in France. About 90% of our direct foreign investments are related to marketing our products. The construction of a factory abroad is a rare exception to the rule.
Moreover, more capital export to France makes no sense because net capital export is in macroeconomics (VGR) the other side of the coin of net goods & services export. It doesn't solve a trade imbalance, it's the other side of the coin of a trade imbalance!

Germany also needs to push for higher wages. This means less cost competitiveness, reduced social problems, higher consumption (= more import of consumption goods) and a smaller savings rate. Our trade balance surplus could disappear and the French trade deficit would become a French problems instead of a Franco-German problem.


In the end, they need to rebuild their industrial production. They're dropped it too far, just like the UK and US. A country should balance its trade over time, and this can only be achieved with a high standard of living (high goods consumption) if the country has the goods production and export-capable services production to afford this.


The deficit country issues are long-term issues which can be resolved in one or two generations with good policies. Germany's responsibility is at most to balance its own trade, so we're not an exogenous source of pressure that makes our friends' problems worse.

[Ulenspiegel]

In the end, they need to rebuild their industrial production. They're dropped it too far, just like the UK and US. A country should balance its trade over time, and this can only be achieved with a high standard of living (high goods consumption) if the country has the goods production and export-capable services production to afford this.


The deficit country issues are long-term issues which can be resolved in one or two generations with good policies. Germany's responsibility is at most to balance its own trade, so we're not an exogenous source of pressure that makes our friends' problems worse.

For me it would make sense when German companies e.g. car makers(?) would build factories in France, this would lead to a production of internationally competitive products and would reduce the deficit dramatically.

To build industry from scratch that can compete with German companies and first tier Chinese is tough and only works in new fields, which would be?
Maybe cars with electric engine, battery storage systems?

[Fuchs]

Automotive assembly lines have only a small value added. The real automotive industry are the so-called "Tier One" companies; Faurecia (French), Johnson Controls, Continental and so on.


Promising new industries are in my opinion the biotech industries, most importantly the ones which meddle with human and productive livestock's biochemics.
Grow new limbs, grow replacement organs for transplantation, boost muscle growth (not the least to battle cancer), boost growth of certain body parts certain people are much-interested in (cough), tell the central nervous system in the spine to repair itself after a cut, tell the muscles they have been exercised when they weren't, reduce the probability of cancer through various means ...
(Science has already achieved much of the mentioned stuff on laboratory animals or at least has a clue how to do it!)


We have already cars, refrigerators, phones, TV sets, personal computers - what's left are basically bigger and more attractive housing (not export-capable) and a lot of stuff about our bodies.

The optimisation of existing hardware such as more efficient vehicles and sustainable energy supply are small topics by comparison.

[Ulenspiegel]

Automotive assembly lines have only a small value added. The real automotive industry are the so-called "Tier One" companies; Faurecia (French), Johnson Controls, Continental and so on.

Sorry, I do no assume that the current car makers are the ones in future, with electric cars it could be that we buy a Bosch or Continental, BMW or Daimler are "only" suppliers. Here I see clear synenergy with energy technology in houses and see clear advantages in this field for local system providers.

Promising new industries are in my opinion the biotech industries, most importantly the ones which meddle with human and productive livestock's biochemics.
Grow new limbs, grow replacement organs for transplantation, boost muscle growth (not the least to battle cancer), boost growth of certain body parts certain people are much-interested in (cough), tell the central nervous system in the spine to repair itself after a cut, tell the muscles they have been exercised when they weren't, reduce the probability of cancer through various means ...
(Science has already achieved much of the mentioned stuff on laboratory animals or at least has a clue how to do it!)

Here I am much more pessimistic when we discussing the demand side: Even cancer treatment with new biochemical drugs like proteins, the most low-tech field of your suggestions, is so expensive, that only a very small fraction of the population (even in developed countries) can get this. There was much hype, however, the results are sobering, ususally because we do still not understand enough about our own bodies.

We have already cars, refrigerators, phones, TV sets, personal computers - what's left are basically bigger and more attractive housing (not export-capable) and a lot of stuff about our bodies.

The optimisation of existing hardware such as more efficient vehicles and sustainable energy supply are small topics by comparison.

Here I disagree, with PV and wind you have really huge markets and with crude >70 USD it is already a no-brainer in many coutries to install them. In contrast to biotech the existing technology works in these fields :-).