East Europe Forecasts Also Getting Revised Down

According to a study out today by Capital Economics, East Europe’s gross domestic product will shrink by 6 percent on average this year, with every single economy in the region posting a contraction.

The biggest declines (15 percent) will be in Latvia and Lithuania. Poland is forecast to contract by 3 percent. The Polish decline will be lead by a drop in industrial output that will help push the unemployment rate to close to 15 percent. Falling tax receipts will widen the fiscal gap to 5 percent of GDP, making the goal of euro adoption in 2012 unlikely.

Hungary and Romania, which is negotiating external aid, will both shrink by 7.5 percent. Turkey will also shrink 7.5 percent, while Ukraine’s and Estonia’s output will decline by 10 percent. Bulgaria, expected to shrink 5 percent this year, is likely to follow its neighbor Romania in applying for an IMF loan as a collapse of exports and inward investment will shrink the money supply, forcing the government to drain its fiscal reserves to restore liquidity. Capital Economics argue Bulgaria’s reserves will only cover their needs for a further six to twelve months. Continue reading

German 2009 GDP Forecasts Getting Revised Down

Well, following the OECD forecast last week (German GDP to drop 5.1 percent 2009, compared to a decline of 4.1 percent in the euro region), German bank analysts and research institutes are now cutting their forecasts. Perhaps the most radical at this point is Joerg Kraemer, chief economist at Commerzbank in Frankfurt, who is predicting German gross domestic product will drop as much as 7 percent in 2009. He was previously forecasting a drop of between 3 percent and 4 percent. The institutes are also coming into line, and RWI institute have now said they expect the economy to shrink 4.3 percent instead of the 2 percent projected in December, while the IMK institute has cut its forecast to a contraction of 5 percent from an earlier1.8 percent one.

You can find my last substantial review of the German economy here. Personally, I now think a 5% contraction is a done deal, and while I am not at this point prepared to go as far as Joerg Kraemer, there is plenty of downside risk, and we should now at least be prepared to contemplate the possibility that the second half of this year will be worse than the first half, as the impact of the stimulus plan fades, inventories are cut back, and deep job cuts start to hit the manufacturing sector. It is also rather worrying that, with elections looming, Germany’s leaders seem to be in serious denial on all of this.

Japanese Land Prices Hit 1984 Level

This from Bloomberg this morning:

Japanese residential land prices fell to a 24-year low as job losses and wage cuts discouraged homebuyers, while tighter credit markets choked off funding for property developers.

Residential land prices fell 3.2 percent in 2008 to the lowest since 1984 and average commercial land prices dropped 4.7 percent to a three-year low, the Ministry of Land, Infrastructure, Transport and Tourism said today in a report. Overall property prices declined 3.5 percent, erasing two years of gains that followed a 15-year slump.

The decline in residential land values, which are about half of what they were at the height of Japan’s bubble economy in 1991, may continue as the recession deepens. The central bank forecasts the sharpest economic contraction in more than 60 years as an unprecedented decline in exports forces companies to cut production and fire workers.

Land prices have, of course, lain at the heart of the ongoing Japanese deflation problem. Do people still think they know what all those toxic assets lying about out there are actually worth? I mean, Japanese land values are just about to go below prices established more or less 25 years ago. So in property market terms at least, it isn’t the lost decade anymore, we’re moving in to the “lost quarter century”.

gaseous Goodhart

China’s top climate change negotiator wants the Chinese export sector to be excluded from their targets, and “consumers to pay” instead. This is not good news.

For a start, the tactics. It means accepting the principle of letting some special interests off. We know, after all, that there will be the mother of all lobbying wars about this, all wanting their pet interest group to be left out. Therefore it’s best to hold a firm line as long as possible, minimising the damage. Also, even if this isn’t just special pleading, the output (no CO2 target for much of Chinese industry) is identical to the effects of special pleading. So it’s worth treating it as such until proven otherwise.

After all, if it proved to be honest, you can always make a gracious concession later; but you can’t take back concessions you made earlier so easily.

Secondly, there is no end to this argument. If they claim a right to export all they like and bill the customer for the CO2, then for this right to be effective, they must also have a right to import capital goods – machine tools, Siemens power stations, that kind of stuff. Wham, half the German engineering sector wants a note from mum too. What about the primary exporters? And come to think of it, if it’s the consumer’s fault, some of that responsibility must rest with the people who lent them the money…which for the dollar zone was the People’s Bank of China, State Administration of Foreign Exchange.

More seriously, it’s a really bad idea on the substance. The mechanism of action is something like this – imports containing a lot of embodied CO2 would be taxed and would cost more, so people would buy less carbony ones, and Chinese exporters would stop producing so much CO2. But it’s a very long set of tongs; too many moving parts. Unless the energy used in the product is a hell of a lot, the tax component won’t be that great compared to the range of prices for that kind of product. The exporter might not notice, or might attribute the drop in sales to something else.

Just taxing fossil fuel at the point of sale, already, has the huge advantage that it falls directly on the user, who has the most control over how much gets used, and it’s explicitly and unmistakably down to the fuel.

Further, how many SKUs (Stock-Keeping Units – individual products) does the Chinese export sector produce? It’s got to be in the tens of thousands at the least. Under this proposal, each one would have to be carbon-audited accurately and regularly and assessed for taxation on that basis. It is far from clear whether the importing state or the exporting state would do this. Just taxing fossil fuel, already, involves less than a dozen SKUs, which happen to be bulky, smelly, heavy, or black and dusty, and therefore difficult to hide on a big scale.

And every manufacturer would have a fine incentive to lie about the CO2 emissions associated with their product; if you can bring yourself to put melamine in the milk, you can surely lie about your electricity bill. It’s the worst Goodhart’s Law violation I’ve seen for a long time.

But here’s the really weird bit. Whether the CO2 tax is applied at source as a fuel tax or a cap-and-trade system, on crossing the border like a tariff, or at the point of final sale like VAT, the economic upshot is essentially the same; goods subject to it would cost more than goods not subject to it, and goods subject to it that contained more CO2 would cost more than ones with less.

Either yer man is hoping that the importing states wouldn’t bother to impose the tax, or else his argument is actually indistinguishable from the one he’s trying to shoot down – that there should be a tariff on goods from states that don’t implement a CO2 tax.

Alternatively, he’s just talking his book, setting a negotiating marker in a cost-free fashion. In which case, time to pick it up and run it back.

If this leaves you in need of an optimism fix, have a look at this GSFC feature. The “shorter”: ozone depletion would have made it unsafe to go out in the sun for as long as five minutes essentially everywhere by 2065, but we, ah, fixed it. (Via German ScienceBlogs; if you speak German there’s also a fascinating interview with Paul Crutzen here.)

giant centrifuge arm for whole ships considered cool

The French government is moving its ministry of defence, pulling a whole gaggle of institutions together into a “French Pentagon” to be built on an old Navy site in the suburbs of Paris. Obviously there are the usual complaints, but this is interesting. Jean-Dominique Merchet’s Sécret Défense reports that they are going to knock down a giant circular water tank with a huge rotating arm. Eh?

Well, the site was the R&D centre for French naval shipbuilding, and the installation was used to test the hull design of new ships. A scale model (“scale model” here means something that weighs about as much as an articulated truck) would be built and spun through the water at high speed on the end of the arm, driven by huge electric motors, so the engineers could observe the turbulence it created in the water. The thing is 60 metres in radius, 5.5 metres deep, and the arm moves at 17 degrees a second

These days, we can solve fluid dynamics problems with a Really Big Computer instead, so the thing is losing some of its relevance. But it seems a shame to flatten it and build offices; someone really ought to get some photos taken before the bulldozers move in. A few are here and they are suitably science-fictional.

Anything that thinks logically can be fooled by anything that thinks at least as logically

On Monday, I saw Paolo Sorrentino’s film about Giulio Andreotti, Il Divo at the ICA. It’s a scorching brilliant sensation, full value for its Prix du Jury, and I strongly recommend you see it at once.

The first thing you need to know is that this is a movie; a lot of directors, faced with a heavy political biography and a crisis that needs explaining, would have ended up with a hell of a lot of people talking a lot in moodily lit offices or speechifying in parliament. But the historic genius of Italian cinema is that it’s always been able to deal in serious subjects by looking good, and Sorrentino’s direction makes the whole thing look fantastic and practically thrum with energy.
There is one of the best depictions of the sport of politics anywhere, as Andreotti attempts to be elected President of the Republic and the camera tracks with his finance minister, (Paolo Cirino Pomicino, played by Carlo Buccirosso) for an unfeasible period of time as he schmoozes, threatens, and argues his way around MP after MP.

A string of mafia assassinations are shocking and hyper-real; there is a lot of really bad violence in films, the sort of ketchup-CGI-unfeasible car wreck fluff where it is not clear whether it is more boring or more desensitising, and only a few manage to get the shock and horror of it. My reference point for this is the fist-fighting in Once Were Warriors, which is far more shocking than any amount of car-off-viaduct; this is similarly classy. Note that Sorrentino has to deal with the most hackneyed piece of “action” available, an actual car blowing up, in the Mafia murder of Giovanni Falcone, and handles it well.

The look-and-feel gives us some important clues; Andreotti, played superbly by Toni Servillo, is sinisterly out of place in parliament or in the streets, surrounded by his escort of hochglanzed Fiats and whipsmart security agents in sharp suits and sharper machine pistols, but perfectly at home in the sick, stuffed baroque corridors of power, where his colleagues never quite fit in either. They would rather be in public, in the 20th century; when one of them appears for a meeting with both a Motorola NMT brick of a mobile phone and a VHF radio, he might as well have brought a sharpened flint to a genetics lab. But you could overdo this – by the time Andreotti is facing trial, he can be spotted briefly speaking on one of the new GSM phones, just as the reporters type in unison on a gaggle of laptops.

Servillo’s performance is a wonder; he plays Andreotti as an entirely physical being, an odd idea for an old politico who is barely seen outside the corridors of power, and who answers his doctor’s suggestion that he exercise by saying that everyone he knew who did was dead. But the only signs he gives of inner life or emotion are physical – rather than feelings, he has migraines. He’s a classic hysteric, so deeply repressed that his emotions are only expressed as psychosomatic, not to say diplomatic illnesses.

In fact, his whole family are like that; there is a scene of the whole clan taking pills together before eating, as if to relieve a common headache brought on by ignoring common secrets. Interestingly, Carlo Buccirosso’s character nods to this unphysical physicality early on – in a party scene, he motionlessly listens to Andreotti holding court, until Livia Andreotti announces that it’s her husband’s bedtime. Demonstrating a proper submission to his wife, Andreotti departs. No longer on his best behaviour, the Minister of the Budget dances wildly and very unlike any finance minister is meant to as the camera frantically tracks him.

Time, and secrets; the depths of history are as important to the film as the depths of space and time to, say, Lovecraft. There are unimaginable, mind-wrecking horrors lurking in there, in the files in Andreotti’s private archives (he significantly remarks that an imagination is one thing, but an archive is much better), and he’s one of them. Charlie Stross used the toolkit of horror to write about the Cold War, and of course Andreotti is a product of the same conflict, having spent his life keeping the Communists out of government and Italy in NATO, whatever it took.

There is a theory that the sudden wave of honesty that ripped through several great European political parties in the 90s – the Christian Democrats in Italy, the network around Mitterand in France, the British Conservatives, Kohl’s CDU – was a reaction to the end of the Cold War. Suddenly, it was no longer true that any deceit, any crime would be better than the worst-case scenario to end all worst-case scenarios, and up it all came. The eruption was most powerful and most sensational in Italy, and one of its consequences was that Andreotti’s calculations were no longer valid, perhaps precisely because it was fundamentally psychological; he couldn’t feel it.

The closest character in the rest of the cinema to Servillo’s Andreotti is undoubtedly HAL, the computer in 2001: A Space Odyssey. And come to think of it, HAL is another Cold War product, eventually brought down by the duplicity inherent in its need-to-know protocols. This science-fictional reading is explicitly hinted at during the trial towards the end of the film, when a journalist describes Andreotti as an extra-terrestrial. That is precisely what he isn’t, of course – in fact, he’s a formidable artificial intelligence, hyper-rational, inscrutable, amoral, realistic, terrifying.

Intelligent he is, but artificial? Certainly. There is a sense in which self-control, self-discipline, and pathological repression aren’t that far apart. Andreotti’s constant psychosomatic disorders are the manifestations of a man whose life’s work has been to convert himself into a computer, an expert system, a walking simulation of Italian politics that can resolve the answer to any question about it in faster-than-real time. He is, indeed, an artificial intelligence, and just as imperfect and dangerous as you’d expect from an experiment in human-equivalent AI left to survive in politics.

Krugman Says Nationalise The (Bad) Banks, And I Say Nationalise The (Bad) Countries

There is one hell of a rumpus going on at the moment, in particular about the recent statements made by the German politician Otto Bernhardt, a leading member of Angela Merkel’s Christian Democrat party, in a Reuters interview last Thursday. There is also a hell of a rumpus going on in the United States about the Geithner Bailout. My point here is simple, one and the same issues are involved in both cases, although in the latter we are talking about banks, while in the former we are talking about entire countries.

Part of the issue is moral hazard. What both the US Treasury and the EU Commission/ECB seem to be doing at the moment is bailing people out without recourse, and this is dangerous at the best of times, but when it simply won’t work (which I’m sure of in Europe, and Krugman estimates in the US) then it almost amounts to recklessness. The core of the present policy seems to have been enunciated by the hapless Otto Bernhardt in his unfortunate Reuters interview:

“There is a plan.” He added: “The finance ministers have agreed the procedures. The core point is: ‘We won’t let anyone go bust’.”

Continue reading

Say What

“Only takes one tree, to make 1000 matches Only takes one match, to burn A thousand trees, A thousand trees” – Stereophonics

I have on occasion been turning to the lyrics of the English rock group Stereophonics when events in the economy and the market have eluded and essentially confused me. This time is no different and for the life of me I am unable to the see the rationale in the recent messages emanating from key European policy makers in the context of the ongoing crisis on the European continent and specifically the impending collapse of the East European economy. Continue reading

Slovakia’s 2009 presidential election

Well actually this post isn’t from me, but from my Global Economy Matters co blogger, and Election Resources On The Internet elections wonk, Manuel Alvarez-Rivera. Anyway, here we go:

Voters in Slovakia went to the polls today for a presidential election, but the outcome will almost certainly be decided in a runoff vote next April 4. Normally, a second round between the candidates arriving in first and second place would be held if no candidate won an absolute majority of valid votes in the first round of voting, but last February the Slovak Central Election Commission (UVK) ruled that an absolute majority of all eligible voters was required in order to secure a first round victory. Continue reading

The Almunia Syllogism

European Monetary Affairs Commissioner Joaquín Almunia recently, and possibly totally inadvertently, stumbled on a very interesting argument. Here it is:

“Who is crazy enough to leave the euro area? Nobody,” Almunia said. “The number of candidates to join the euro area increases. The number of candidates to leave the euro area is zero.”

Reductio Ad Absurdum

Now you don’t need a PhD in economics to understand what follows, although a little bit of basic logic would help. What we have here could be construed as a kind of syllogism (and from now on let’s christen this one “The Almunia Syllogism”). The Almunia Syllogism has the following form:

a) Anyone leaving (or aiding and abetting the departure of someone from) the Eurozone is crazy
b) The EU Commission, The ECB and The National Leaders are not crazy
c) Therefore no one will leave, or be allowed to leave, the eurozone (at least under current conditions)

Q.E.D. We Will Have A United States Of Europe.

Well, ok, I do need to add a lettle lemma here to the effect that the only way to enforce (c) is to build the necessary architecture, and there is room for debate about this, since this lemma is neither proven, nor is it self evident. You also need to accept that there is an excluded middle here, and we do not have a “now either the EU leaders are crazy ot they aren’t” fork which we can get diverted down.

As I say, the lemma is not self evident, although my own opinion is that in the weeks and months to come its validity will become extraordinarily clear even to the most reticent among us, but this still needs to be established. The thing about the lemma is that it focuses the debate. Those who do not agree with it need to be able to show how we can have (c) within the present architecture (since here there is a middle to exclude, either we can or we can’t). The results coming out from the “we can” camp are not entirely encouraging. For example, ECB Executive Board member Lorenzo Bini Smaghi’s recent attempt to argue that Krugman has it wrong, and that (we can manage with what we have) fails stupendously to convince, in my opinion, and especially the extract I reproduce below (which exemplifies precisely the point those who want new achitecture are making).

For instance, for the period 2009-10, discretionary measures adopted in Germany total 3.5% of GDP, compared with 3.8%in the United States. In some European countries, such as Italy, the size of such stimulus measures is relatively limited owing to the high levels of debt, but in other countries the total fiscal stimulus is larger than in the United States.

The whole issue is that we need a mechanism to average out the stimulus, is that so hard to understand? Is this obscurantism, or simply stupidity?

A Literary Trope Not A Syllogism

On the other hand, the formal validity of the following “utterance” from Almunia is rather more questionable.

“Don’t fear for this moment,” he said. “We are equipped intellectually, politically and economically to face this crisis scenario. But by definition these kinds of things should not be explained in public.”

The first phrase is an exhortation, one which I would agree with (but not for the same reasons), the second is an assertion whose truth content is, at least,questionable, while the third is an admission, one which would perhaps better not have been made, or a piece of advice, which the unfortunate Otto Bernhardt seems never to have received.

A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed. Otto Bernhardt, a leading lawmaker in Angela Merkel’s Christian Democrats (CDU), told Reuters in an interview late on Thursday: “There is a plan.”

and then Bloomberg let us know a bit more about the details of the plan.

The German Finance Ministry has no knowledge of a rescue fund organized by the European Central Bank for troubled euro-region members such as Ireland and Greece, spokeswoman Jeanette Schwamberger said.

Otto Bernhardt, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview with Reuters today that the ECB has a fund at its disposal to help troubled countries and can make money available at 24 hours’ notice.