A Fistful of Umlauts

In which the Frankfurter Allgemeine, the German newspaper whose website has meanwhile gotten much better, interviews Edward. He says things such as

“Um das zu erreichen müssen Preise und Löhne für Jahre um 6,5 Prozent fallen.”


“Denn die Unverantwortlichkeit der spanischen Regierung gefährdet andere Europäer. Gefragt ist Führungsverhalten in Europa, vor allem von Frankreich und Deutschland.”

The bits with fewer umlauts are also very good.

Revisiting pension wisdom

As Edward’s post below indicates, the ECB seems to be in a pre-Christmas rush of visibility to set out its opinions on various issues.  Jean-Claude Trichet delivered a speech on the topic of systemic risk at Clare College, Cambridge, today and it’s a nice roundup of the analytical progress so far and remaining challenges in understanding what the hell happened over the last year.   One of his incidental points worth noting —

What have we learned from this experience in terms of identifying those structural trends in financial systems that are important for systemic risk?  … Fifth and finally, as financial sectors develop, households may take greater risks, for example in mortgage markets and, more broadly, in their pension investments. While this also raises issues of consumer protection, from a systemic perspective, it becomes increasingly important to know how resilient the household sector and consumption can be in such a situation.

It would be hard to find a major report on pensions in any country in recent years that did not recommend a move towards a greater financial sector role in pensions (yesterday’s Irish budget made clear that this will be the future for new entrants to the Irish public sector as well as the established defined benefit system becomes a legacy program).   But as Trichet points out, no one has yet gone back and reconsidered what exactly this model of household investors does to financial market stability, and indeed to macroeconomic stability given the effects on household wealth.   In retrospect (and perhaps even at the time), such a lacuna in such a confidently expressed piece of conventional wisdom is amazing.

That Which The ECB Hath Separated, Let No Man Join Together Again!

In a recent post on the FT Money Supply Blog the ever perceptive Ralph Atkins made the following, very interesting, observation which, I think, goes a long way towards helping us all understand what exactly the thinking is which lies behind the ECB’s current strategy for its handling of the Eurozone economy.

One of the subtleties of yesterday’s complex package from the European Central Bank was that it attempted to re-assert the principle of “separation”. When the financial storm broke in August 2007, the ECB insisted, doggedly, that emergency financial market liquidity injections were not related to its monetary policy. That remained firmly aimed at controlling inflation and still very much determined the level at which it set the main policy interest rate. Indeed, in July last year the ECB famously raised the interest rate to 4.25 per cent because inflation appeared to be getting out of control.

Continue reading

Crowd delirium

Urbain Grandier, as Aldous Huxley recounts (The Devils of Loudon, 1952), was a French clergyman of the seventeenth century. In 1634 he was executed. He’d been tried and found guilty of witchcraft. This charge had a sexual dimension; the nuns who first accused Grandier (in 1632) said that he had sent devils to seduce them. Of course, no modern person would admit to believing in witchcraft, so it’d surely be hard to find anyone today who thought that Grandier’s burning at the stake in front of a large crowd was warranted. To modern eyes, Grandier’s story comes across as picturesque and barbaric; and, ultimately, remote.

There are some other things relevant to Grandier’s case. (Bear in mind that Grandier was real person.) Despite torture, he never confessed to anything. But he had been critical of authority (specifically, Cardinal Richelieu). He was good looking, and he had a reputation as sexually adventurous.

But anyway, that was a long time ago.

Take Colin Stagg, then. In 1992 he was prosecuted for the murder of Rachel Nickell. Stagg never confessed to anything (despite attempts at entrapment by an undercover police woman, posing as a love interest). No evidence connected him with the crime he was accused of. The Metropolitan Police still went ahead and put him on trial for the murder, literally on the grounds that they believed he was the kind of man who would have done it. The case against him failed – as you’d hope. But the Daily Mail continued to insinuate, for almost a decade, that Stagg was a sexual deviant who had ‘gotten away with murder’. In 2008 a man already committed for murder was convicted of the crime Stagg had been accused of.

Hysteria is a word that’s been used. Huxley suggests ‘crowd-delirium’:

… the crowd-delirium can be indulged in, not merely without a bad conscience, but actually, in many cases, with a positive glow of conscious virtue.

I don’t think it’s reaching too far to suggest that where crowd-delirium exists today, it’s at least partly embodied in newspaper reporting. The 2007 murder of Meredith Kercher in Perugia, Italy, seems to have set off something very nasty. Here’s Sue Carroll in the Mirror:

Articulate and flirtatious with moist Bambi eyes, her status, carefully manipulated by her garrulous publicity-driven parents, morphed from suspected murderer to victim long before the trial. A flight home had been arranged and grandiose plans were afoot for the prodigal daughter’s return with lucrative book deals in the pipeline, movie rights under discussion and TV interviews planned.

The brutal murder of a beautiful young girl in a vile sex game was turned into a side issue. The fact Knox had wantonly and without a single vestige of shame named an innocent man, Patrick Lumumba, as Meredith’s killer was also conveniently forgotten by fans and family.

And here’s Libby Purves in the Times:

The American campaign for Amanda Knox (nobody seems to bother about Guede or Sollecito) is almost libellously critical of the Italian court; but for what it’s worth, both evidence and reconstruction look pretty convincing to me. Not least because of the perpetrators’ heavy use of drugs and drink — the defence put their changing stories down to memory loss — and because of the febrile sexual obsession that seems to have driven the young attackers.

It seems unlikely that it was deliberate murder: more like an extreme episode of disinhibited, brain-fogged sexual bullying that ran out of control. Three against one, fuelled by a toxic mixture of male excitement and female resentment of a “prig”.

You need more than imagination for a just conviction, and there isn’t evidence for a “vile sex game” or “brain-fogged sexual bullying”. It’s overwhelmingly likely that the ‘sex game’ theory is nothing more than a construct of the prosecution. And I’d suggest, incidentally, that a plausible explanation of why the investigation turned to Lumumba (a black man) is that the police attempted to fit him up by extracting a suitable confession from Amanda Knox; and that they did this on the basis that Knox had sent a text message to Lumumba (her employer) which said ‘ci vediamo’ (‘see you later’).

The more you look at the story of Sollecito and Knox, the more innocent they seem. And if they are innocent, all you have in their conviction is further injustice to add to the original crime. By contrast, there is much stronger evidence against Guede, who was convicted earlier this year. I suspect that this is the very obvious direction of travel for those not ‘transcending downwards’. But there’s a species of opinion writer that’s not interested in the rights or wrongs of one individual case. Purves again:

What is really sad though — see, even I jib at saying “wrong” — is the idea of “adventurousness”: sex made “zipless”, gourmet, divorced from affection, understanding, wonder or hope. You clock a hot piece, pull, mate and discard with hardly a name-check. It rounds off the evening but blunts your humanity. Many grow out of it and find faithful partnerships. Some find later life haunted by it. Some misunderstand the other party’s intentions and are devastated, or become stalkers.

At worst, a few confuse the general tolerance with permission to bully and coerce.

But as adventures go, frankly, the fling-culture is rubbish. And the saddest thing of all is how very miffed many people will be with me, for saying so.

A shorter Purves: someone must be doing something wrong; someone should burn.

It’s All Greek To Me

In the long run we are all dead. But as someone else famously put it: we ain’t dead yet, and in the space between these two undeniable truths move forex traders, financial markets and a host of other would be economic participants. The financial press is full right now of headline catching stories about how Greece is at imminent risk of sovereign default. The German newspaper Die Welt even had a lengthy piece this weekend with the catchy title After Dubai, Who Will Be Next (the answer is obvious isn’t, otherwise what is the point of the question). One has the impression of a Europe filled to the brim with financial journalists busily rumaging the entrails, in search of the least glimmer of light which will confirm that something decisive and earthshattering might actually happen (soon), what with the German Der Spiegel announcing at the weekend that Greece’s growing public deficit problem is to be an item on the agenda at the next Governing Council meeting of the European Central Bank on December 17 (surely the big news would be if it wasn’t going to be there), and Bloomberg’s Maria Petrakis telling us that Greek Prime Minister George Papandreou is toiling away in what many might consider was a vain attempt to “convince investors he can tackle the worst fiscal crisis in 15 years”.

To add even more theatricality to the “drama” groups of protestors predictably battled it out with police on Athen’s streets, in marches that were ostensibly to commenorate the death of a young teenager in last years riots. Even the normally staid and prudent Economist throws its weight in behind the charge with a piece whose title tells it all: “Default Lines” (perhaps the words “in the sand” could have been thrown in to add a bit more tension), which goes so far as to suggest that a partial Greek default might even be welcomed by some Eurozone member states, since it might take some of the heat off a hard pressed euro.

As if to add a little more spice to the story, Standard and Poor’s decided to pick this Monday to announce it was putting Greece’s A- long-term sovereign credit rating on Credit Watch with negative implications, with the unusual little “extra” that it gave the Greek government only 60 days, as opposed to the customary 90, to respond with adequate information to avoid the decision of downgrading to BBB+ (a level which if it was generalised across the rating agencies would imply that Greek Bonds would no longer be eligible as collateral at the ECB once the temporary relaxation of normal criteria which accompanies the extraordinary liqidity measures is withdrawn – although who really knows when this is likely to be). Naturally bondholders were not slow in reacting to the news and the spread on the 10-year Greek/German bond yield widened again, to 201 basis points from the 174 basis points level of late last Friday.

Actually, this is far from the first time that investors and journalists have been getting excited about the default risk on Greek public debt. In fact that very same Spiegel had an article headlined Greece Teeters on the Brink of Bankruptcy as far back as last April (that’s a hell of a lot of “teetering” that has been going on), while the ever interesting Willem Buiter had a lengthy and influential blog post back in January on the worthy topic of whether or not it was structurally possible for a member state to default on its sovereign debt and remain in the eurozone (his conclusion was that it was, and in fact I don’t disagree with him).

But gentlemen are we not getting rather ahead of ourselves. As I said at the start, in the long run Greek Sovereign debt may be dead than the deadest of ducks, but it ain’t dead yet, nor is it likely to be in the most immediate future, there is far too much at stake for all of us for this to simply be allowed to happen, “sin mas”. In fact it was the much more cautious Moody’s who made the relevant points here in a press release issued last Wednesday where it argued forcefully that investors’ fears that the Greek government may be exposed to a liquidity crisis in the short term are totally misplaced.

Now words here do matter, Moody’s are completely right, the Greek government will not be exposed to a liquidity crisis in the short term (as opposed to a sabre rattling threat of one from the ECB among others), but this does not mean that they do not face a solvency issue in the longer term. That is, in the longer term I am absolutely sure that Greek public finances are deader than that proverbial dodo, the thing is, the long run simply hasn’t arrived yet.

Let Moody’s talk, since they do talk sense in this case:

“the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states”.

So here’s the first point, the Greek situation is a bad one, but it is not “materially different” from that of a number of other eurozone member states (I will return to this) even if the risk of its losing sovereign bond collateral eligibility is greater than that of any other member state, at this point. In the second place what Greece is inevitably facing is not a liquidity crisis (I’m sorry Maria, no financial crisis at this point), but a long term solvency one if it can’t raise its trend growth rate in the context of the looming cost of maintaining an ever larger dependent population with a declining and ageing workforce. That is to say, the strategic problem for Greek public finance is not the quantity of debt accumulated to date, but rather the impending dead weight of future liabilities, and how these can be met. In this case, short term technical default to wipe the slate partially clean and start-up again would resolve nothing, since without a much higher underlying growth rate (without the aid of government deficit funding) the impending liabilites are not supportable, and decision takers at Ecofin and the ECB know this perfectly well, which is why they may well rattle the sabres, but in the short term at least we will see little in the way of exemplary action. For a sovereign default in Greece (a mature developed economy) would be a complete first, and would take us all into very new, and uncertain territory, since it could quite literally become a default from which there was no viable route for return.

So What Is The ECB Up To?

The FT’s Frank Atkins has confessed to having been struck by the comments on Greece made by Jean-Claude Trichet, European Central Bank president, at the press conference which followed last weeks ECB rate setting meeting. I am sure he was not the only one who was listening, and given food for thought.

When asked about the country’s acute fiscal difficulties and the risk of a possible default, M Trichet simply stated he had every “confidence that the government of Greece will take the appropriate decisions”. This remark, as Frank Atkins says, was notable for its lack of forecfulness and could suggest he does not entirely rule out Greece facing sufficient problems servicing its debt that it might be forced into the hands of an external agency like the International Monetary Fund.

Indeed M Trichet’s statement could be interpreted as meaning that an exasperated ECB would almost welcome such an eventuality, and might by withdrawing easy short term funding from Greek Banks even give things a hefty shove in the direction of just such an outcome. But an ECB which does not frown on the possibility of their most recalcitrant pupil being steered briskly towards the welcoming arms of the IMF is not the same thing as an ECB which envisaging, contemplating, or even in its wildest dreams vaguely imagining a Greek sovereign default. Any suchbdefault would surely follow, and not precede a (flawed and failed) IMF intervention, or would be the inevitable by prooduct of Greece being unceremoniously ejected from the Eurozone by sheer market forces, with the ECB relegated to meer spectator, unable despite its best efforts to contain the situation.

So my reading of the situation as it stands now, is that policymakers will do all that is in the power (which is a lot) to avoid the markets having so much say in the matter, but that what they do want to do is keep up the pressure on the new Socialist administration in Athens. Their aim is surely to try to turn back the “moral hazard” screw whereby European Union authorities, in giving the impression that they will always and ever ride to the rescue, no matter what the provocation (and Greek statistical authorities sure have been doing some provoking), simply encourage member state governments to continue to act recklessly. And this becomes all the more important given the fact, as I mentioned earlier, that Greece is only one among several problem pupils, and that more than the credibility of the Greek government (of which surely there is little left), what is being tested is the credibility of the European Union’s institutional structure.

We might be forgiven for getting the impression that to date rather than acting as a stimulus to deep economic reform, Euro membership has rather acted to reward those countries who would get into more and more debt, with ever less sustainable economic models, by supplying them with funding at far cheaper rates of interest than the markets would otherwise make available. It is this particular clockhand that Europe’s leaders would now dearly like to turn backwards, and this is why I have little doubt that it is in Greece that a stand will now be taken. If not, then that longest of long runs may arrive rather sooner than some of us, at least, are comfortable with.

Double Dip Alert In Japan

Despite recent optimism about the apparent renaisance of growth in the Japanese economy, and the heightened sense of enthusiasm which surrounds the surge in economic activity right across the Asian continent there are considerable grounds for caution about the sustainability of the Japanese recovery itself.

The first of these is to be found in the fact that, as has becomeplain from the latest batch of data releases, Japanese manufacturers are continuing to curb both capital spending, salaries and workforces, making any recovery in domestic demand driven by “second round” effects extremely unlikely. A second reason for having second thoughts is the long term decline in the level of Japan’s trend growth, which has fallen substantially over the last two decades under the impact of its shrinking and ageing workforce. Thus whatever the initial rebound, without the aid of strong demand elsewhere it is completely unrealistic to anticipate strong sustained growth in the Japanese case. And lastly it is evident that whatever the recent optimism Japan’s economy still faces major challenges, and in particular the risk of getting caught in yet another deflationary spiral, a danger which was recently highlighted by the announcement that prices fell at the fastet rate in half a century in October. Continue reading

Are the Germans taking over Romania?

Not quite those Germans.

What’s happening in Romania, then? Handelsblatt reports. It’s time to pick a president, and the Social Democratic candidate looks in a strong position – although he finished second by a few points in the first round of the French-style presidential election, he’s got promises of support from several other parties, notably the Liberals and the Hungarian minority.

Fascinatingly, though, as part of the agreement with these groups, he’s promised to appoint the independent mayor of Sibiu – Hermannstadt in German – as prime minister. That’ll be one Klaus Johannis. Yes; he’s a Transylvanian German, the first time that a member of this minority will head the government. Of course, Romania has a hell of a lot of problems; the economy’s going to shrink between 7.5 and 8 per cent this year, there’s an IMF requirement to cut the public sector deficit to 7.3 per cent of GDP at the same time (ah, the IMF – never an institution to risk popularity by changing its ideas), and the country’s elite is full of old spooks from the Ceaucescu years.

But I can’t help but be amazed at the idea of a Romanian government that includes the Hungarians and is headed by a German, within 20 years of the revolution and 5 years of the CIA operating a secret jail in the suburbs of Bucharest. Well – non- or quasi-revolution might be more like it, which just adds force to the point. There are other reasons to be cheerful; HaBa also points out that there is some €32bn in EU funding heading that way in the next few years, which ought to help. If you want an inspiring European story, it’s right there.

However, they also note that the Renault Logan car factory accounts for 2 per cent of GDP and 15 per cent of net exports. I guess they can’t really be criticised for pinning their hopes on export-led growth when the UK and Germany are doing exactly that.

Europe in the World Cup Draw: Zzzzzz

All the major European sides are in groups where they are likely to advance. England has an interesting match against the US, but does anyone really think the English are going to fall to Algeria or Slovenia? The Netherlands, to Denmark or Japan? Italy, to Slovakia or New Zealand?

The closest thing to interesting is down in Group D, where Germany faces three teams that, while not as good as Germany, are all good enough to perhaps pull off an upset. But Germany is still very likely to advance.

Since “which major European side advances” is not interesting, and the obvious stuff about the draw has already been discussed a million times elsewhere (Italy lucks out! France is not punished! Portugal, too bad!) let’s briefly consider the structure of the groups. Continue reading

Russia’s Economy Slows In November

As doubts grow that in the post Dubai world Russia’s central bank will be able to sustain a great deal of momentum in its ongoing programme of interest rate reductions, we learn this week that the pace of expansion in Russia’s economy slowed back in November, following two months of steady advance in September and October. This time services activity also weakened its advance while manufacturing activity registered its second month of contraction. Yet the central bank may well show increasing restraint in lowering interest rates, even as the economy slows, the ruble rises, and bank retail lending continues to fall, having declined for nine consecutive months up to and including October, while corporate lending dropped for a second month in a row and hasn’t risen for six months (for more on the particular topic see my recent post – Are Russia’s Consumers Getting “Carried Away” With Themselves?). Continue reading

Global Manufacturing Loses Momentum In November

Operating conditions in global manufacturing industry improved for the fifth successive month in November, although there was an evident slowdown in the overall rate of expansion, with differences between countries accentuating and not diminishing. The JPMorgan Global Manufacturing PMI aggregate reading came in at 53.6, down from October’s 39-month high of 54.4, and signalling that the first wave of post crisis momentum may be losing force as governments slowly start to remove stimulus measures.

Continue reading