Archive for the ‘Europe’ Category

Twenty seven per cent! For those under 25, the unemployment rate is 57 per cent. These are staggering numbers. Spain’s government debt is out of control, not because it is wasting money, but because so few of its workforce have jobs.

Yesterday saw data on Spanish and French labour markets. The data on France was awful when measured by any normal yard stick, but in comparison to Spain it was positively brimming with optimism.

French unemployment is, in fact, now 3.2 million, compared with 6.2 million in Spain. In the UK unemployment is 7.9 per cent, or 2.56 million.

We keep hearing about how the Eurozone is slowly recovering, not that this is showing up in the data on GDP; that we just need to give the region time; that green shoots are everywhere. But look at the job stats.

Don’t compare the adjustment occurring in Spain with the UK experience under Mrs Thatcher. The Spanish experience is worse by a substantial order of magnitude.

There are structural problems with the Spanish economy – that is for sure. But what Spain, along with Greece, Portugal and the rest of the motley crew needs is massive investment.

By all means impose austerity on sectors of the respective economies. But other sectors must be recipients of a latter day Marshall Plan, or the consequences for democracy and peace in Europe will be dire.

The data was revealed a week or so ago. It is pretty clear cut. According to the ECB, the median wealth of the Spanish is 183,000 euros, 172,000 euros for Italians, 75,000 for the Portuguese, and a stunning 267,000 euros in Cyprus. In contrast, median wealth in Germany is just 51,000 euros.

So that’s it then. The problem is not that the poor old Spanish and Cypriots are being pulverised by the vicious EU, which is being prompted by Germany into punishing them for mythical misdeeds. Instead, the real problem is that poverty stricken German households barely have two cents to rub together.

The solution is simple enough: tax ‘em. Have a wealth tax. And where will it end? Will the meat in your freezer – beef, horse or otherwise – be seen as wealth and subjected to tax?

There is an alternative take. Writing in the ‘FT’, Wolfgang Munchau argued that the ECB survey was in fact being taken out of context. For one thing, he said median wealth is a meaningless guide. He said: “If you want to compare across countries, it is better to take the mean.” Mr Munchau suggested that if we use mean wealth as the guide, then Germany’s does not lag behind troubled Europe as much as the quoted data suggests. It is not clear that Mr Munchau is right here, however. After all, median data is the better measure for telling us the position of most people, and is not distorted by a small number of people with massive wealth.

But Mr Munchau made a more substantive point. Actually the differences in wealth are a symptom of the euro – that is to say, a Cypriot euro has less value than a German euro, hence Cypriot assets appear to be worth more.

Others question the limitation of the ECB data, and say it does not take into account savings in pension schemes.

But there are other more important points. For one thing, the ECB survey relates to asset values from a couple of years ago. Asset prices across much of troubled Europe have crashed since.

Besides we all know that in Germany the housing market is seen as less important. The Germans do not celebrate house prices going up – they mourn.

The data does suggest an interesting idea though. Is the reason the savings ratio in Germany is relatively high, and thus consumption to income relatively low, because Germans have less wealth tied in the home, and after a period of rising house prices, appear to have less wealth?

©2013 Investment and Business News.

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As a species there is one thing we are lousy at. We think we are unique. We come up with an idea to solve a particular problem, and rarely does it occur to us that across the economy others are behaving in much the same way, and have come up with a similar idea.

Collective behaviour can have the effect of nullifying our actions; it can even have the opposite effect to what we had originally intended.

So that’s us. You and me. We are victims of this. It’s like a virus, and it has a name too – it is called the fallacy of composition. It has infected humanity since we came down from the trees. But you would expect more from regulators, wouldn’t you? Alas the regulator of the European pension industry – which goes by the snappy title of the European Insurance and Occupational Pensions Authority – has contracted a nasty dose of the fallacy of composition. It is one of the reasons why the economy can’t get out of the rut it has got itself into.

Back in 1997 it happened with Long Term Capital Management (LTCM). They came up with an algorithm that was a sure fire way to make money. It couldn’t fail, or at least the chances of failure were so minuscule that they were effectively ignored. What LTCM did not factor into account was what would happen if other investors applied a similar approach. The crisis that ensued was like an early preview of 2008, and nearly brought the global economy down to its knees. The IMF made a similar mistake. It congratulated the banking industry on the innovation called mortgage securitisation, and said that as a result of this the chances of banking crisis had reduced. It was a victim of the fallacy of composition. When the majority of mortgages were subjected to securitisation, the result was that –because banks took on more mortgages as a result – risk increased. You know what happened next.

We have an economic cycle for much the same reason. When market research shows demand is greater than supply in an industry, the company which commissioned the research increases output, but they rarely factor in competitors having access to similar research. Output rises, the industry sees boom, but then production exceeds demand and recession follows: companies cut production, demand exceeds supply, until research emerges showing demand is greater than supply.

So that’s the composition of fallacy. Across the economy it applies to savings. In a recession, companies and households reduce risk, save more, and the recession gets deeper as a result.

When banks reduce risk en masse, the result is less lending, the economy stumbles and the very thing banks were supposed to reduce, then rises. The fact is that all banks are insolvent. No bank can survive calls from all of its depositors to withdraw their money. If all banks collectively agreed to increase risk by lending more to wealth creators, the result would be a stronger economy and the chances of a banking crisis would fall.

If all pension funds put less money into ultra-safe, low yielding assets, and invested in infrastructure, and funded company investments by buying equities, the result would be an improving economic outlook, and pension funds would rise in value.

But under solvency II regulations, pension funds are required to reduce risk. So they have no choice but to pump more money into government bonds, and because government bonds pay out such incredibly low yields, they have to buy an awful lot of bonds in order to meet their commitments. That means they have to raise more money, and companies have to pump more profits into pension schemes and less into investment. The economy deteriorates as a result. And pension fund find they have an even bigger deficit.

The EU Commission wants to see European pension funds put money into infrastructure. The European Insurance and Occupational Pensions Authority has considered its request, and given the following statement: “Any preferential treatment of a certain asset class might result in a build-up of risk concentrations in the sector with the associated higher level of systemic risk.” In other words, they’ve said no. The irony in this statement is the use of the two words systemic risk. Actually, the fallacy of composition is the cause of systemic risk.

The National Association of Pension Funds (NAPF) has looked at the implications of forcing UK pension funds to follow solvency II rules and fears a £450 billion pension deficit will follow as a result.

Joanne Segars, chief executive of NAPF, said: “The EU plans for UK pensions come with a clear and unpalatable price tag. Businesses trying to run final salary pensions could be faced with bigger pension bills to plug an astonishing £450 billion funding gap. This would have a highly damaging effect for the retirement prospects of millions of UK workers.” She added: “This project has been conducted at breakneck speed due to the EC’s ludicrously tight timetable. This cannot be the basis for formulating a policy that could undermine the retirement plans of millions of people both in the UK and across Europe.”

She is right, but wrong about the problem. The problem is not that the European regulator is enforcing a “ludicrously tight timetable”, it is that it has fallen victim to the fallacy of composition.

©2013 Investment and Business News.

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In 2008 UK average labour costs per hour, measured in euros were 20.9. In 2012 they were 21.6 euros. That’s a rise of just 3.3 per cent.

Or let’s use sterling rather than euros as the measure. In 2008 unit labour costs per hour were £16.70.In 2012 they were £17.50, which is a growth rate of 5.2 per cent. Contrast that with Germany where unit labour costs are up 9.1 per cent. They are much higher too: 30.4 euros in 2012.

In France, unit labour costs have risen 9.5 per cent to 34.2 euros. Of course, Germany has roughly half the unemployment rate of France.

The highest unit labour costs are in Sweden: 39 euros, while Denmark, Luxemburg, Finland, Belgium, the Netherlands, and Austria all have unit labour costs over 30 euros an hour.

Of the 27 counties in the EU, 15 have lower unit labour costs than the UK. They are slightly lower in Cyprus, a lot lower in Greece (14.9 euros), much higher in Ireland (29 euros), lower by the tiniest of margins in Spain, and significantly higher in Italy (27.4 euros).

In terms of growth between 2008 and 2012, only Ireland, Greece, Latvia, Lithuania, Hungary, Poland and Portugal saw a lower growth rate.

Unit labour costs contracted in Lithuania, Hungary, Poland and –most notably – in Greece, where they have fallen 11.2 per cent.

From an economic point of view, falling unit costs are good in the sense that they provide a country with improved competitiveness. But they are bad in the sense that they are a function of productivity, and wages. That Greek wages are falling so fast may be an indication that the country is gradually becoming more competitive but the resulting depression is really rather nasty.

As for the UK, falling unit labour costs is a sign of poor productivity. But why is UK productivity so low? When you factor in networked readiness it is harder to explain. See: IT readiness: does Finland lead the world for economic potential, is the UK in seventh spot?

What the UK needs is investment. Maybe Vince Cable’s plan for a business bank is the right one. More likely it does not go anyway near far enough.

©2013 Investment and Business News.

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All of a sudden the criticism is coming from everywhere. From George Soros to the Australian Treasurer; from the US Treasury Secretary to a former German Finance Minister, Germany’s leader Angel Merkel is being put under enormous policy to change tack. Is the great European experiment with austerity about to be ditched?

Perhaps one of the more surprising elements of the recent media coverage of the death of Lady Thatcher has been the focus on her views on the unification of Germany. Opinion seems divided on what, precisely, she believed, (whether unification should not happen at all, or should be merely delayed).

It is clear, however, that she had grave reservations. The unification of Germany probably led to acceleration in the European project; the idea being that a more closely integrated Europe, especially closer ties between France and Germany would act, as a counter weight to Germany’s new found might. Lady Thatcher, it appears, felt that not even that approach would work; that a united Germany would become virtually all powerful within such a union.

But the discussion on Lady’s Thatcher’s views on German unification is really about something else. Germany’s position within Europe is becoming increasingly unpopular and seemingly unrelated developments in the news have been sucked into the debate.

The criticisms of Germany have reached a new crescendo for two reasons. The first factor is the contrast with Japan. Its new programme of QE is not so much making the Eurozone look as if it is behind the curve, as making it look as if it is not on the curve at all. The second factor is the Cypriot debacle. The way this crisis was dealt with in Europe has left a nasty scar on the entire European project.

The US Treasury Secretary Jack Lew has been in Europe, and while he made some attempt to couch his words diplomatically, it is very hard not to interpret his comments as being hugely critical of Germany. He said at a press conference: “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.” Err so what plans are those, exactly? Europe does not go for demand management. The ethos in Europe seems to be austerity and let demand take care of itself.

George Soros has been in Frankfurt, and while there he made a speech slating Germany for the way it dealt with the Cypriot crisis and said Europe’s biggest economy should do one of two things. Either it should support euro bonds, whereby bonds issued by one government are guaranteed by all members, or Germany should leave the euro.

He said: “Germany has no right to prevent the heavily indebted countries from escaping their misery by banding together and using Eurobonds.” He added: “The financial problem is that Germany is imposing the wrong policies on the Eurozone. Austerity does not work. You cannot shrink the debt burden by shrinking the deficit.”

Meanwhile former Australian Deputy Prime Minister and the country’s Treasurer Wayne Swan has praised the monetary policies of the US and Japan. “Thank God for the Fed,” he said. He could just as easily have said “Curse the Eurozone.” It would have meant much the same thing.

In Germany, the former Finance Minister and now political rival to Mrs Merkel Peer Steinbrück used an interview in ‘Spiegel’ to slam Mrs Merkel’s focus on austerity. Nobel Laureate Paul Krugman used his ‘New York Times’ column to congratulate Japan on its new bold approach to QE: “Seriously,” he said, “this is very good news.”

Austerity can work if applied in isolation, but when it is applied across a continent as important to the global economy as Europe it can become self-defeating.

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The European commission is not happy. It turned out that the latest cuts it enforced on Portugal were not legal – according to the Portuguese Constitutional Court. Really Portugal, you must try harder than that.

Back in May 2011 Portugal asked for help. The European Commission, ECB and IMF, collectively known as the TROIKA, agreed a 78 billion euros bail-out, but only if in turn Portugal implemented some pretty severe cuts.

Of five billion euros worth of cuts agreed by Portugal’s government, the Constitutional Court has rejected around a fifth. The court didn’t much like the idea of cutting the pay and pensions of public sector workers, and rejected plans to tax unemployment subsidies.

Portugal’s Prime Minister Pedro Passos Coelho has said it’s a national emergency.

Portugal’s harsh Dickensian masters, The European Commission, said: “Any departure from the programme’s objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens.”

So what is Mr Coelho to do? He said that the money must he be found from elsewhere, probably meaning public sector cuts, less money spent on education, health and social security.
But how can Portugal cutting spending on education be good for the country in the long run?
It just goes to show that the belief held by the markets that the Eurozone crisis was near its end was based on some pretty some pretty optimistic readings of the data.

Actually forget about the data; there is more to it than that. There are people at the other end of Eurozone austerity, and right now the seeds for all kinds of social unrest are being sown.

Austerity can work when applied in isolation. But when it is applies across more than one continent, it looks like economic suicide.

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And so it came to pass that the Cyprus parliament was not happy and rejected what was possibly the maddest idea ever put forward to bail-out a country. The vote was a close run thing, with 36 members of the Cyprus parliament voting against the bank levy and 19 abstaining. The number of MPs voting for the proposal reached a grand total of zero.

Good for Cyprus. Now it has to decide what to do next.

It could do a lot worse than consider the lesson of Iceland. In 2007 Iceland’s GDP was 1.293 trillion kronor. In 2008, its external debt was 9.533 trillion.

You may remember that when the scale of Iceland’s problem emerged, and when the UK press found out that UK citizens and local authorities had exposure to Icelandic banks, the country was made to do the walk of shame. Its representatives were hauled up by the British media: “Are you ashamed?” they were asked, and: “What are you going to do about our money?”

The UK used anti-terrorism legislation to freeze Landbanki assets. This was not a move that endeared Britain to the Icelandic people, but maybe the UK felt it had an opportunity to exert revenge over the cod wars, and the Viking invasions before that.

Back in January of this year, the court of the European Free Trade Association – one of those cursed EU courts that should be banned because it tries to consider all points of view and not just the UK’s position, or indeed the position of the UK tabloids – ruled in favour of Iceland over the UK and Holland. Its decision means that the little island to the north west corner of Europe will repay the money it owes to the UK and the Netherlands gradually, and under its terms.

Today, Iceland and its people are still suffering. But then again, it has enjoyed seven successive quarters of growth. It is not easy repaying debts when the money you owe is valued in a foreign currency and the currency in which you receive your salary crashes. Iceland was pretty much left high and dry by the international community (you are on your own mate, was the general feeling attitude in the UK). The IMF did loan out money, but as usual under terms that were very painful. Iceland eventually responded by having bank loans to its citizens valued in foreign currencies declared illegal. Other legalization enabled many homeowners with negative equity to write-off much of their debt.

Ironically, Iceland may yet see a pretty sensational turnaround, and become one of the wealthiest countries in the world on a per capita basis thanks to its one of the island’s most famous natural resources, but one we don’t usually think of as resource at all. Plans are afoot to pipe heat from Iceland’s volcanoes and lava flows, and – via the magic of thermal energy – heat northern Europe. Iceland may yet have the answer, or at least a partial answer, to the energy crisis, and one that does not risk exacerbating global warming.

Iceland also has rather a lot of something else. What is it now? Oh yes, that’s right, ice. Maybe it could use that to cool down the Sahara – all we have to do to achieve that is to solve the minor problem of working out how to transport ice a few thousand miles without it melting.

Cyprus has neither ice nor lava, but it does have a lot of natural beauty.

Its future will be best served outside a Eurozone that has completely failed to come to its rescue in its hour of need. It may be better off with a cheaper currency, and laws designed to protect its citizens over the interests of foreign investors, whilst at the same time welcoming foreigners who can boost its economy. Best of luck to you, Cyprus. Anyone fancy moving there?

©2013 Investment and Business News.

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