Archive for the ‘Eurozone Economy’ Category

file0001300785481Question, what does the Swedish economy and George Osborne’s dream have in common?

Answer: Setting aside that Sweden is still somewhat concerned about such issues as equality, welfare and workers’ rights, the Swedish economy is, quite probably, Mr Osborne’s dream.

Like the UK, Sweden once suffered a banking crisis. Unlike the UK, the Swedish crisis occurred a quarter of a century ago. Lots of dust has settled since, but today, Sweden is a country with a firm check on public finances. Today, Swedish public debt to Sweden’s GDP is just 44 per cent, roughly half of the UK equivalent. Since 1997, the Swedish government has targeted a one per cent budget surplus over the course of an economic cycle.

You could say that its prudence writ large. Sweden has become one of the most competitive economies in the world, a major technology hub and a centre for entrepreneurism, all this with a growth rate since 2008 that the UK can only envy.

So that’s austerity for you. Cut the size of the state, and the private sector can grow into the void that is left – at least that’s the theory. But maybe Sweden bears the theory out.

There is just one snag. Since 1997, household debt to disposable income in Sweden has risen from 90 per cent to a staggering, and very worrisome, 190 per cent.

It does rather seem as if the price Sweden has paid for reducing government debt is for household debt to rise. When you think about it, across the global economy, if savings are at a certain level, and governments are trying to cut debt, that must mean that private debt must rise, otherwise, all that money that is saved leaks out of the economy.  It’s a point that gets forgotten.

But George, or so it appears, has abandoned his dream.  It is no longer his target to create a budget surplus by 2020. Brexit has made this impossible.

The truth, of course, is that for all the talk of prudence, of how you can’t fight a crisis caused by too much debt by borrowing more, of how the Keynesian idea of demand stimulus in times of trouble is dead, Mr Osborne has done the opposite of what he said he was doing. Year in year out, targets for government finances have been missed. Borrowing each year was higher than was predicted the year before.  On the other hand, while household debt to disposable income has been rising of late, it is way below the pre-2008 level and nowhere near the level in Sweden.

And now, thanks to the Brexit vote, it appears even more targets will be missed.

Before the referendum, Mr Osborne threatened an austerity budget if Leave won. Instead, it appears we are getting more Keynesian stimulus.

If the Brexit supporters, such as Michael Gove and Andrea Leadsom, have a dream, it is for the UK to be like Singapore, a dynamic independent hub off a mainland. Can that happen? It is hard to imagine the whole of the UK being like Singapore, but London . . . well, if you squint your eyes, and apply a large dollop of thinking outside of one of those box things, then maybe London can become Europe’s Singapore.

And now George Osborne is talking about cutting corporation tax from 20 to 15 per cent, the lowest such tax rate amongst the world’s major developed economies. So is that good thinking, or has he boxed himself into creating a low tax haven even though social discontent was the main driver of the referendum result?

The Keynesians argue that in times of economic trouble you should forget about government finances and spend instead.

But the government tells us that this philosophy is irresponsible, that we must live within our means.

In reality, we are being told to forget about government finances and cut corporate taxes instead.

This article was originally posted on Fresh Business Thinking http://www.freshbusinessthinking.com/keynesian-osborne-opts-for-tax-cuts/

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London may top the Hollywood list for cities that it most likes to destroy.  The latest Independence Day movie is one example, but these days, it is quite common for a crumbling London to form the backdrop to a Marvel blockbuster, as super heroes take to the tube on their way to wage war with Norse gods.  Even in that movie franchise that seems to most exemplify US culture, Star Trek, where the American dream spreads across the galaxy, it was London and not New York that formed the centre piece in the most recent movie. Images of King Kong on the side of the Empire State have been replaced by images of the London Eye, or the Palace of Westminster, fallen at the hands of an alien space ship.

If there was a Hollywood destruction index, London would no doubt come top.  Why is that? Is it because of Pinewood studies? Or is it because Hollywood implicitly sees London and not New York as the de facto capital of the world?

Yet, based on the recent EU referendum one could be forgiven for concluding that the rest of the UK doesn’t like London.  Sure, there are good reasons to think that the UK capital will lose out big time to Brexit, but in many parts of the UK it is seen as arrogant. They have longed for it to get its comeuppance, maybe not quite in the way that Hollywood has it happening, in reality, Gerard Butler does not form a part of the narrative, but ‘London has Fallen’ http://gb.imdb.com/title/tt3300542/, does all the same seem to sum up the hopes of some.

As Yanis Varoufakis put it in that indefectible way of his, https://www.theguardian.com/commentisfree/2016/jun/24/brexit-britain-disintegrating-eu-yanis-varoufakis  “the City (whose insufferable self-absorbed arrogance put millions of voters off the EU)” was one of the causes of the Brexit vote.

Some respond with a call for an independent London, a petition on change.org asking the London Mayor to declare London independent, so that it can apply to join the EU, has 175,000 signatures. It seems unlikely many of the people who signed the petition really believe in the idea of an independent London, they signed in protest, just as many people voted in protest in the referendum.

An independent London is about as likely as the football authorities declaring England’s recent euro match against Iceland null and void. Although oddly enough, there may be some sense in a watered down version of an independent London. Certainly the rest of the UK may benefit from London having its own currency, but with taxes paid into the UK exchequer.

The FT recently warned that London’s buoyant Fintech sector may take a major knock from the Brexit vote. After-all, immigrants have had a lot to do with the success of this sector.

Yet maybe in parts of the UK, where economic depression has been the norm for decades, the sorrows of London are seen to be roughly as important as the criteria by which Hollywood chooses cities for the location of blockbuster movies.

But there is something bigger going on.

The clash we are seeing between London and some of the poorer areas of UK is being played out in similar fashion across much of the world.

People in many parts of the UK voted for Brexit because when they heard that the economy would deteriorate, they thought “but, the economy is already awful where I live.” The claim that all those years of hard work, of rebuilding the UK economy, may go into reverse, means little to people who are worse off today than ten years’ ago. Instead, they voted for change.

Yesterday’s FT also ran a story about how the Berlin mayor is grappling with populism.

Wikipedia defines populism https://en.wikipedia.org/wiki/Populism as a “political position which holds that the virtuous citizens are being mistreated by a small circle of elites, who can be overthrown if the people recognise the danger and work together.” Of course in many cases, rebellions against the elite are led by people who are even more elitist.

Even so, it seems that a resentment towards an elite was one of the main drivers of the Brexit vote.

But this same resentfulness percolates across the world, how else do we explain Marine Le Pen, Donald Trump, Philippine president-elect Rodrigo Duterte, Austria’s near miss with an extreme right wing president, governments in Poland and Hungary?

The Brexit vote shows that when economic success is seen to bypass great swathes of the population, problems follow.

Varoufakis predicts years of deflation, as the EU descends into ever greater instability.

But then he has his own agenda. He hates the way the EU elite treated Greece, and believes their determination to create an ever more united Europe is fuelling resentment.

But the pressures of immigration are not going to go away. The population in Africa is set to explode. In Nigeria alone, the population is expected to rise from 159 million in 2010 to over 400 million by 2050.

If the Brexit vote was mainly about fears over immigration, then what will happen as immigration pressures soar, as it surely will?

One economic consequence may be so called helicopter money.  If deflation becomes a permanent threat, then why can’t central banks print money and governments use it to fund stimulus programmes?

Maybe we have forgotten one of the lessons of the post-World War 2 era. During the quarter of century after the war, equality was greater, unions were stronger, but in the west growth was the highest ever.  By the mid-1970s, the system that created all that growth seemed to have backfired, instead we got inflation and the reforms of Thatcher and Reagan followed. The pendulum swings, and then it swings back again. Sometimes the swings are punctuated by wars, other times we just get discontent.  It seems that that right now, the pendulum is swinging again.

Article originally posted on Fresh Business Thinking: http://www.freshbusinessthinking.com/brexit-vote-points-to-two-speed-uk-and-maybe-two-speed-world/

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It was November 2012 when Jens Weidmann, President of the Bundesbank, likened quantitative easing, or QE, to a Faustian pact with the devil.  But it was even earlier, back in 2010, when Brazil’s finance minister talked about currency wars.

It was during that era that QE was seen as leading a kind of race to the bottom, as countries fell over themselves to try and achieve a cheaper currency.  It didn’t work out like that, of course. It is no more possible for every country to have a cheaper currency then it is for every Premiership football team to win on the same day.

The critics of QE were legion. They said QE was behind currency wars, and that the inevitable result would be hyperinflation. And they saw the words of Jens Weidmann as a kind of official endorsement of that view.

It was in this environment that the buy gold bandwagon got moving. BUY GOLD, they said. It was the only safe refuge in a world gone mad under QE.

They overlooked that across the world there was a chronic shortage of demand, a savings glut and that the west was suffering from a balance sheet recession.

There are lots of things wrong with QE, the main critique might be that it is a blunt weapon. But it was never likely to lead to hyperinflation, not in a world starved of demand.

But what it did do was lead to a cheaper dollar. And when the dollar fell, so gold rose.

Back in 1999, when UK chancellor Gordon Brown sold the UK government’s gold supply, the yellow metal was trading at less than $300 an ounce. In the summer of 2009 it was trading at just shy of $900. Those two years stood either end of the great gold market, when it rose in value by around 300 per cent.

Gold continued to rise in the aftermath of the crisis of 2008. In September 2009 it was trading at $1,000 and in August 2011 it finally passed $1,900. That was when the gold hype was at its peak.

But in 2015, currency wars has turned to currency normality and inflation stands at close to zero across the developed world. QE didn’t create hyperinflation, it was not even enough to fight the threat of deflation.

In 2015 the US economy began to improve, the Fed made noises about increasing interest rates, the dollar rose, the euro fell, and gold went out of fashion.

As of this moment (21 July 2015) it is trading at $1,108 an ounce.

Why didn’t gold rise above $2,000, or even $3,000 as was once predicted? The reason is simple. QE was the not the devil’s tool it was made out to be, the global economy suffered from lack of demand.  The risk of hyperinflation was built upon a myth.

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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It’s an odd thing, isn’t it? Not so long ago, people were talking about Belgium as being the country in northern Europe that was most in danger of going the way of Spain, Portugal and co. And for a long time, Holland – along with Germany and Finland – had been lecturing the rest of Europe about the need to live within one’s means. All of a sudden it looks a lot different. Holland is fast becoming the sick man of northern Europe, and the reason? Well, let’s hope George Osborne is paying attention, because it is a lesson he could do with learning.

According to data out recently, the Eurozone is out of recession. The German economy grew by 0.7 per cent, France by 0.5 per cent, and at face value it was encouraging stuff, but among all that good news there was one piece of worrisome news. The Dutch economy contracted by 0.2 per cent. It was not really a surprise. It contracted in the last quarter too, and the one before that and before that. In fact the country has been in recession for 18 months now. That makes this one nasty recession, but just remember, it was also in recession in 2008/09, so for Holland it has been a double dip of truly unpleasant proportions.

The reason is not rocket science.

During the boom years Dutch house prices rose too high – way too high. Seduced by the idea that owning a house in Holland was a sure-fire investment winner, sucked into the narrative that a shortage of land meant that house prices across the Netherlands were guaranteed to rise, urged on by a government that subsidised mortgages, the Dutch borrowed against their home, and borrowed against the belief their home would rise in value and they ran-up huge debts.

It really is a puzzle. Among those who lecture us the most about the need to live within our means – so that is Dutch and British finance ministers for example – there seems to be a kind of casual disregard for household debt. We must live within our means, unless that is to say you are a voter, in which case, borrow, put it on the plastic – it matters not, your home will rise in value.

According to OECD data, household gross debt to gross disposable income in the Netherlands is 285 per cent. This is the highest ratio across the OECD. To put those numbers in context, the equivalent ratio in the US for 2008 was just 108 per cent. In the UK the ratio is 146 per cent – which most would agree is worryingly high – and yet the UK household debt levels seem like prudence personified compared to those of the Dutch. Dutch house prices fell sharply in the first quarter of 2013, in 2012 and 2011. Yet despite the falls, Dutch house prices to incomes are still above the average for the country – although admittedly not by much.

Government debt is not so bad. Gross government debt is 71 per cent of GDP, net debt just 33 per cent, which is the lowest among the Eurozone’s bigger economies. Holland’s government appears to be in love with the idea of austerity; of prudence keeping government debt under control.

Yet consider what might happen if households find they just can’t afford their debt. Imagine what might happen if global interest rates rise, which they are likely to do over the next few years. If households find they cannot pay their way; if there is a surge in the number of properties repossessed by the banks, the chances that Holland will experience its own Northern Rock type moment seems real. The possibility of a Dutch banking crisis is very real. Yet the consensus among economists towards Holland seems to be one of relaxation. The country still boasts a top notch credit rating, for example.

The thing about austerity is that it matters not how prudent a government is, how clearly it balances its books (not that the Dutch government is balancing its books), when households run-up debts, and house prices crash, household debt can become government debt. This is what happened in Spain two years ago. It may happen in Holland, and may well happen in any country where the government tries to stimulate house prices, creating consumer confidence, in turn creating growth. Are you listening Mr Osborne?

© Investment & Business News 2013