Posts Tagged ‘European Union’

file000108949998

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

file4701263253048

The last couple of days has seen news on the UK to delight all but the most cynical. Alas it has also seen news to make the cynical look smug, and say ‘I told you so’.

The good news relates to trade. Exports of goods in the second quarter of 2013 reached £78.4 billion, the highest on record. Okay, imports were up too, rising to £103.3 billion, the highest level since the three months to November 2011. But when it comes to records, ‘best ever’ would normally be seen to score the ‘best in 18 months’.

The UK’s deficit in goods and services in June was £1.5 billion, the lowest deficit since January.

But the real encouragement relates to exports outside the EU. In June exports of goods outside the EU rose, while imports fell. In fact exports to non-EU countries increased by £1.3 billion (10 per cent) to £14.2 billion and imports from non EU countries decreased by less than £0.1 billion (0.2 per cent) to £16.8 billion.

Within the EU, exports of goods also rose, but not by as much (£0.9 billion or2.3 per cent), while imports increased by £0.3 billion or 0.6 per cent to £52.9 billion.

In Q2, UK exports to the US rose by £348 billion while imports were £96 billion, and exports to China were up £153 billion while imports shrunk by £17 billion. The rise in UK exports to China seems to be part of a trend. They have risen sevenfold since 2002.

Don’t over-egg the trade data; it is good, but not brilliant. It is encouraging, however.

Less pleasing was data compiled by the House of Commons Library at the request of the Labour Party. It found that since 2010, of the 27 countries in the EU only three have seen real wages (that’s wages after inflation) fall so steeply. It turns out that UK wages, after inflation, have fallen by 5.5 per cent since 2010. Only in Portugal, Greece and Holland have wages relative to inflation fallen more than that.

Those two sets of data show the two sides of the UK economy at the moment. There are signs, albeit not overwhelming signs, of exports leading recovery. But as long as wage rises continue to lag behind inflation, the UK’s economy looks fragile. Much of the growth we are seeing is coming on the back of consumers spending more, which itself occurs because they are once again running up debts.

The fix lies with getting productivity up, and that surely depends on more investment. That is why George Osborne’s approach to creating growth via rising house prices is dangerous, but we don’t seem to have learnt from past lessons.

Not enough investment and rising house prices were characteristics of the UK economy before 2008. They are becoming characteristics again.

© Investment & Business News 2013

315

It is kind of assumed that savings are good, debt is bad. If that is so, then there has been good news from the EU and bad news from the UK. In the EU savings ratios are rising, according to recent data, while in the UK they are falling. So that is EU good, UK bad. It is just that the real story is quite different, because there is something missing, and that missing ingredient is called investment.

Across the global economy savings equal investment. They have to; it is a matter of definition. GDP equals consumption plus exports, minus imports, government spending and investment. But across the global economy exports must equal imports. Drill down and look at government spending and actually it is one of two things: consumption or investment. So GDP really equals consumption plus investment.

But what are savings? By definition they are income that is earned but not spent on consumption. So by definition, savings equal investment.

But supposing we all decide we want to save more, and we all park more of our earnings in our savings account. Supposing there is no corresponding rise in investment. If this were to happen, given the equation that GDP equals consumption and investment, then either as we save more, other people borrow more, or the money we save is lost forever.

To put it another way, across the economy there is no point in saving unless this is matched by investment.

Now take the EU. According to data yesterday (30 July) in the EU27, the household saving rate was 11.0 per cent, compared with 10.7 per cent in the previous quarter. In contrast the household investment rate was 7.9 per cent in the first quarter of 2013, compared with 8.1 per cent in the fourth quarter of 2012.

Now take the euro area. In the first quarter of 2013, the household saving rate was 13.1 per cent, compared with 12.4 per cent in the fourth quarter of 2012. The household investment rate was 8.4 per cent, compared with 8.7 per cent in the previous quarter.

In short, savings ratios are rising, but investment ratios are not. This is not merely a negative development, it borders on being disastrous.

In contrast, the household savings ratio in the UK was 4.2 per cent in Q1 2013, the weakest since Q1 2009 when it was 3.4 per cent. The UK savings ratio is too low, but what really matters is not savings, it is investment.

In the UK investment remains way too low, but here is some rare good news. 2013 looks to be on course for seeing the highest levels of investment in the UK since before the crisis of 2008.

© Investment & Business News 2013

Those who like to tint their spectacles with roses saw reason to cheer. The Eurozone economy appeared to be on the slow march to recovery. Oh boy it was slow, and the signs of recovery were subtle, but they were there. Then yesterday it began to look as if was all going to blow up.

There is a consensus across much of the euro area that pain just can’t be avoided; that recovery can only occur if first we have pain, then more pain, and then – just to be on the safe side – a bit more pain. But, or so goes the consensus, the people realise this; they are willing to make the sacrifices, and recovery will follow – just be patient and let hard work and fortitude carry the euro through.

Last year Stein Ringen, a sociology professor at Green Templeton College Oxford, penned a piece for the ‘FT’. He said: “Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.” But, in his bullish article, he added: “Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right.” He then talked about how the solution turned out to be “steady work and steely brinkmanship.”

The article was written on March 27 last year. At that time there was a consensus across the euro area that predictions of doom had been disproved. There was one snag with the optimism of that time: subsequent events showed it to be ill-informed. In fact, the euro area has been in recession/depression ever since.

Then earlier this year, in another one of those ‘told you it would be all right’ type statements, José Manuel Barroso, president of the EU Commission, said: “[The] existential threat against the euro has essentially been overcome.” He concluded: “In 2013 the question won’t be if the euro will or will not implode.” Or take this piece in ‘Bloomberg’, written in January this year, Why Austerity Works and Stimulus Doesn’t http://www.bloomberg.com/news/2013-01-07/why-austerity-works-and-fiscal-stimulus-doesnt.html

The author Anders Aslund said: “After five years of financial crisis, the European record in Northern Europe is sound, thanks to austerity, while Southern Europe is hurting because of half-hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.”

So, was there evidence to back-up these claims? Was austerity working?

Of late there have been signs – small signs, but signs nonetheless – of improvement. Take Markit’s latest Purchasing Managers’ Indices (PMIs) for both manufacturing and services. The word high features prominently. For Ireland the composite PMI for June rose to a five month high; it hit a three month high for Germany; a 24 month high for Spain; a ten month high for France, and a 21 month high for Italy.

So that was encouraging.

Spanish manufacturing now appears to be out of recession, with the latest manufacturing PMI for Spain hitting 50 – a 26 month high – a score which is meant to be consistent with zero growth. Furthermore, recent trade data showed the first trade surplus for Spain in 40 years.

On the debt front, central government debt in Greece is well below target so far this year, and much better than during the corresponding period last year. Ireland appears to be on course to meet its targets for this year.

This is where the good news finishes, however.

Sure, Spain posted its first trade surplus in 40 years, but this was largely down to plummeting imports. In other words, the surplus was a symptom of economic depression. Sure the PMIs are looking better, but they still suggest the euro area is in recession – a very deep recession in some cases, including – by the way – France and Italy.

As for debt, total external debt (that’s public and private owed to creditors abroad) is 168 per cent of GDP in Spain, 200 per cent of GDP in Greece, 227 per cent in Portugal, and 410 per cent in Ireland.

Debt maturing in 2013 or 2014 in Greece equates to 21 per cent of GDP in Greece and Portugal, 23 per cent in Spain, and 32 per cent in Italy.

Unemployment, especially in Greece and Spain, remains at levels that can only really be called horrendous.

How can hard work save these countries when there isn’t the work for people to do?

But we now appear to be entering a new era; one in which monetary policy will slowly tighten. If the Fed raises interest rates in 2015, as it suggests, what will this mean for the euro area?

Bond yields soared in Portugal yesterday on the latest political uncertainty following the resignation of two government ministers. They also rose sharply in Greece, which is also facing a political challenge at the moment, after the Democratic Left pulled out of the Greek coalition following the closure of State TV, in another government attempt to reduce spending. Yields were up in Spain too.

The good news, albeit small comfort for many, is that Angela Merkel seems to have woken up to the plight of the euro area’s unemployed youth. Post German elections – assuming she wins that is – there is even a chance she will rein back on pressure for more austerity.

The truth is that austerity is not working. Sure parts of the economies across much of Europe need a radical overhaul, and indeed could do with some austerity measures. But other parts of the economy need stimulus, and they need big stimulus. Nothing short of a latter day Marshall Plan will do.

But the ECB has been a disaster – fretting over inflation when deflation was a bigger danger.

Maybe, the ECB will mend its ways, but the signs are not good. If the Fed tightens, the euro may come under pressure relative to the dollar, and in such an environment it is hard to imagine the ECB announcing quantitative easing, even if this is what the region needs.

Alas, thanks to policy errors, and an ill-founded sense of confidence – even a head in the sand mentality amongst many decision makers in the euro area – it is no longer the euro that faces a so-called existential threat, it is the EU itself, and that is tragic.

It is not too late to save the project, but only massive investment, perhaps funded by the ECB printing money, will do it.

© Investment & Business News 2013

New car registrations across the EU dipped by 5.9 per cent in May, falling to their lowest level recorded in the month of May since 1993. Intriguingly, the UK was one of the few countries in the region to see a rise in new car registrations. Meanwhile, the UK car export sector is one of the new sectors to see genuinely rapid growth. When you consider how awful the state of our main export market is, that is quite impressive.

According to the ONS: “In 2002, there was a deficit in trade in cars of around £7.5 billion. However, the value of exports of cars from the UK more than doubled over the 10 years to 2012, while the value of imports grew much more modestly so in 2012 this trade was close to break-even (that is, the levels of exports and imports were virtually the same).”

Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

Yet, look at car sales. According to the European Automobile Manufacturers Association, in May demand for new passenger cars declined by 5.9 per cent in the EU, reaching 1,042,742 units. In absolute figures, this is the lowest level recorded for a month of May since 1993 when new registrations stood below one million. Five months into the year, a total of 5,070,840 new cars were registered in the region, or 6.8 per cent less than in the first five months of 2012.

Sales were down 2.6 per cent in Spain and by 8.0 per cent in Italy. They fell 9.9 per cent in Germany and 10.4 per cent in France. The UK saw growth of 11.0 per cent.

So what can we read into this? Firstly, the fact that UK car registrations rose may be a sign of the UK economy picking up.

But it is genuinely impressive that the UK trade deficit in the car industry has shrunk and is possibly on the verge of going positive, at a time when our main market is stuck in depression, and at a time when UK domestic car sales are rising.

The UK car industry may actually do very well indeed once conditions return to normal. Indeed, even if they don’t return to normal, the UK only really needs to see the growth trajectory of its car exports to stay where it is, and by 2018 the UK car industry will once again be an important net contributor to UK GDP.

© Investment & Business News 2013

The EU’s financiers responsible for the Greek rescue scheme in 2008 have reacted strongly to accusations from the IMF that serious errors were made in the initial bail-out of Greece. Maybe it is time that these deniers started being a little more honest with themselves and us.

Haircuts can be good things. Sampson may not have agreed with such a sentiment, but, on the other hand, we tend to feel better afterwards. It can be like that with sovereign debt too, but in 2010, the so-called TROIKA – that’s the organisation made up of the IMF, EU commission and ECB – thought the very idea of a haircut of Greek debt was about as sensible as turning the Acropolis into a new apartment block.

Plenty of people warned that it was dangerous, and over and over again we were told that the harsh terms imposed on Greece were not necessary. Now the IMF is saying it was all a terrible mistake.

In a report published yesterday the IMF said: “Not tackling the public debt problem decisively at the outset or early in the programme created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output.”

Of course this is the IMF. It is not going to wear a hair shirt, or be too vocal in slating its partners for that matter.

It said that after the initial bail-out Greek public debt “remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.”

And, it continued: “There are…political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs. To read the report, go to Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement 

A spokesman for the EU commission said: “We fundamentally disagree… With hindsight we can go back and say in an ideal world what should have been done differently. The circumstances were what they were. I think the commission did its best in an unprecedented situation.”

ECB President Mario Draghi has entered the debate too, saying: “We tend to judge things that happened yesterday with today’s eyes. We tend to forget that when the discussions were taking place the situation was much, much worse.”

Hindsight bias is indeed a real phenomenon, and maybe we are all too keen to claim wisdom after an event. Psychologists can even cite studies to show that we have a distorted view of our own history, claiming, or even believing we predicted certain events when in fact we did no such thing.

But on this occasion citing hindsight bias as an excuse is not good enough.

Plenty of media, including, but not only, this publication warned at the time that the TROIKA was failing to see reality, that it was punishing Greece unnecessarily and that debt has to be cut via write-downs.

The TROIKA ignored what was obvious to outsiders. To now claim it had no way of knowing; that we are applying hindsight bias shows it has not learned anything. It is, frankly, arrogantly ignoring what is happening around it, stuck as it is in an ivory tower, or wherever it is that these financiers live.

There is a lesson today. Still the TROIKA, EU Commission and grandees of the Eurozone claim that the worst is over; that the troubled economies of indebted Europe are on the road to recovery, and by doing so they continue to make fatal mistakes.

What will happen in two years’ time, when the IMF says that too much austerity in 2013 led to unnecessary human hardship? Will the TROIKA accuse the IMF of hindsight bias, and say it had no way of knowing this at the time?

Rather than denying errors, perhaps the TROIKA et al, should tuck into some humble pie, and then, just maybe they will notice they are repeating this mistake.

© Investment & Business News 2013

China is not happy with the EU, the EU is not happy with China, and the British Solar Trade Association seems to side with China.

The EU has imposed anti-dumping duties on China’s solar panel exports. China has responded with tariffs on Europe’s wine exports.
Actually, this is the EU compromising. It is phasing in the tariffs much more slowly than originally intended, and they will, in any case, be at a much lower rate.

The EU says China is using subsidies to sell its panels on the cheap, and reckons they should be some 88 per cent more expensive.
On the other hand, the solar industry has received large subsidies in Europe, too.

Ray Noble, PV Specialist at Solar Trade Association (STA), reckons that the real problem for the EU is that the European industry has not invested as much as it should have. It has taken the money from subsidies, and, as it were, run. China has invested far more and consequently enjoys greater scale. That is why it can sell panels for less money than European companies.

STA CEO Paul Barwell recently said, “If duties are imposed, panel prices will rise across the board, and consumers and installers alike will lose out. It makes no sense to safeguard 8,000 manufacturing jobs by sacrificing up to 200,000 jobs in the wider industry.”

Mr Noble said, “I suggest David Cameron and Angela Merkel work together to sort out these absurd rules and remove this lingering market uncertainty, so that industry can get on with installing low cost, clean and affordable solar energy.”

© Investment & Business News 2013