Germany has new Queen, needs new President.

Earlier today, German President Horst Köhler resigned, effective immediately (BBC coverage). His constitutional successor, and now German acting head of state is Social Democrat Jens Boehrnsen, who is the mayor of the state of Bremen and in this function speaker of the parliament’s upper chamber (Bundesrat). A new President will have to be elected by a special constitutional assembly, the Bundesversammlung, within 30 days. Despite Germany’s Presidency being largely ceremonial, and even though Mr Köhler was a generally popular President during his first term and reelected for a second five-year term in 2009, he recently came under attack for lacking a certain inspirational aura, and, worse for someone who was director of the IMF, lacking intellectual leadership in financially troubled times.

Mr Köhler’s resignation may not be sufficiently bad news to kill the national celebration following Lena Meyer-Landruth’s victory in the 2010 Eurovision Song Contest – and the World Cup is around the corner. But his claim that his resignation over an interview that he should not have given – he stated that an export-orientated country like Germany may need to deploy troops to protect its economic interests which unsurprisingly caused a lot of confusion given German history and the obvious unpopularity of military deployments – was “inevitable” because of the dignity of the office seems a bit hyperbolic and thus more as yet another display of what many people have begun to worry about: nine months after taking office, the German government is increasingly in disarray, both conceptually and electorally. In a recent poll, only three per cent of the Germans said they would vote for the junior coalition partner, the Free Democrats, which means they lost about 10% of the vote since last September.

Sure, this is only a snap shot, but it’s also a bit more – it’s fundamental disappointment about this government’s performance from day one on. The parties’ as well as the government’s competence in a number of important areas, notably economics, is challenged on a daily basis. Even members of Parliament are complaining publicly that they are supposed to simply sign off on economic legislation they don’t understand and that the government apparently isn’t able to explain. Imagine how the average voter must feel.

So maybe Mr Köhler’s resignation was a last act of leadership. The debate about who will succeed him will likely be a little different from the usual backroom coalition decisions about who will become President. It will likely become a rather public debate about leadership in difficult times. And that’s both good, and a problem, since the amount of people who may be up to the job and fit the political requirements is rather limited.

Off the top of my mind, I really can’t think of anyone but current finance minister Wolfgang Schäuble. So let’s help Angela Merkel and make the contest a bit more exciting with a little short list of our own – who’s your best bet for “Germany’s next President”?

The Economic Consequences of Mr. Hugh

Edward Hugh and Paul Krugman and even Dani Rodrik are in agreement, as Ed meets the elite; although we don’t know how much Spain’s external account needs to swing towards surplus in order to get the economy growing, we know it needs to be going that way, and therefore it’s a choice between “internal devaluation” – i.e. wage cuts for everybody – of the order of 20% or else, departure from the eurozone.

I cannot support this contention.

Let’s have some axioms – things that have to be true, and which are generally accounting identities.

Number one: Exports to Mars remain a losing business. Therefore, the world economy cannot but have a balanced trade account. One man’s current account deficit is another’s surplus. This is true by definition. It is also true, but less so, of the eurozone – of course, the eurozone has a net imbalance with the world, but it is true that if a eurozone country has a current account surplus with the rest of the eurozone, a sufficient current account deficit must exist elsewhere in the eurozone to match it.

Number two: The money has to go somewhere. One man’s trade deficit is also his capital account surplus. If Spaniards want to buy more German goods than they sell Spanish goods to Germany, absent a massive extra-eurozone trade surplus, somebody must lend them the money. Similarly, if Germans want to sell more goods to the eurozone than they buy, they must do something with the surplus of euros that results.

Number three: The money still has to go somewhere. Stashing your export sector earnings in ultra-safe eurozone government bonds, like a stereotype German, is an economically identical activity to borrowing German money to spend on stereotypical Mediterranean corruption – for example having real-estate banks managed by the Church, although how DEPFA or IKB Deutsche Industriebank were any better is not obvious. Every Sparbuch is the flipside of a tax break for a mobbed-up developer setting fire to a Greek hillside. Obviously, it would be silly to hold individual German savers responsible – but the Great Banks of Frankfurt, the institutions through which the German trade surplus is recycled?

And it is no sillier than holding individual Greeks or Spaniards responsible, which is what Ed Hugh, Paul Krugman, the European Commission, the International Monetary Fund, the CEO of Banc Sabadell, etc, etc, actually propose to do.

As Ed rightly says, the real issue is “where will the growth come from?” With recovery, everything else will be surprisingly easy; his example of Finland is a case in point. Another would be the UK budget consolidation of the mid-90s, or for that matter, of the post-war era. Without it, there is arguably no point in worrying – in that case, in the fairly short term we are all dead, and default, euro failure, and an unquantifiable degree of misery are inevitable.

Unfortunately, although his analysis is correct, Ed’s prescription is very unlikely to lead to growth. What export market for Spanish goods is there that will outweigh a 20% hit to aggregate demand? Who will buy? What will they buy, that is currently overpriced by 20% divided by the percentage of marginal cost accounted for by labour? Labour is asked to fork out, but where are the guarantees that this patriotic sacrifice will achieve anything? One might well conclude that the actual content of this proposal is in the bit that is clear and well specified – the 20%.

To be more rigorous about this intellectually, think of it as follows; Spaniards suffer the 20% wage cut, and all else remains equal. We have no reason to think all else does not remain equal. No doubt this reduces the Spanish trade deficit by some number. This implies that the eurozone exporters – Exportland – see their trade diminish by the same value. The Spanish trade account is balanced, but we are all, on balance, poorer. And it is possible that the eurozone exporters will redouble their efforts to cut prices and hold onto market share – they have no reason not to, and in fact it is their core national economic strategy to export at all costs.

The only way this approach might not actually be deflationary at the eurozone level would be if it caused prices to fall sufficiently that they undercut Chinese prices; this is unlikely, and anyway would represent the export of European deflation to the poor.

So, to sum up so far, it’s just as possible to have a beggar-your-neighbour “internal devaluation” as it is to have a beggar-your-neighbour devaluation. The difference is that the “internal devaluation” option is also a beggar-yourself-and-indeed-everyone-else policy, and one that will create more actual beggars. And, in fact, beggar-your-neighbour internal devaluation accurately characterises the policy of Exportland’s economic leaders.

There is, of course, an alternative – it is the sunshine policy. Pay Germans more money – perhaps 20% more – and they can spend it, among other things, on one of Spain or Greece’s biggest exports, which happens to be sunshine. The dangerous imbalances would be reduced; demand would be created for the products of whatever new industries Ed’s new circle can think of. After all:

Put another way, thanks to the foreign funds which flowed in to finance the housing boom Spain became a major imports powerhouse, with the consequence that both the trade and the current account deficits deteriorated sharply, while a significant part of Spanish industry simply died. One of the major tasks of any recovery programme is to bring this industry back to life. In this sense what Spain’s economy needs is not rejuvenation but resurrection.

Better yet, there is a simple policy lever available to make this happen. German wages are essentially set by the annual bargaining round between IG-Metall and the Industriellenvereinigung, which acts as a price leader for the rest of the economy.

Surely, though, we need to cut, cut, and cut again to stay competitive with China? Well, this statement would be interesting if it wasn’t wildly counterfactual. At the current relative wage rates, it’s blindingly obvious that eurozone exporters are not succeeding in beating Chinese producers on price. They are doing so on their products. And, soon enough, the question will be absurd because the Chinese will themselves be looking over their shoulders – apparently, GDP per capita in Shanghai is comparable to that in Lisbon. The only future strategy is to have good products; after the bubble world of the 90s and 2000s, we’re back to the late 80s view that the future belonged to whoever had the best products and supply chains.

Some other ideas: perhaps the ECB should make it a policy objective to run over the shorts? There are surely some hints here.

Fitch, meanwhile, thinks that Spain’s creditworthiness is adversely affected by its plans for internal devaluation, but I am on record as saying that anyone whose investment decisions were guided by credit rating agencies would have lost their shirts three times over in the 2000s – once with Enron, once with the alt-telco bonds, and again with mortgage-backed securities. (I’m also the proud owner of the domain name standardispoor.com, if anyone has ideas about what to do with it.) However, our hypothetical investor would have avoided these catastrophes, because they would have had no money to lose in them, having already lost it all in Russian GKOs in 1998, Thai or South Korean corporates the year before, or Mexican government bonds in 1994.

I commend the proposal of just sitting back and being rich, as Harold MacMillan once said, to my readers, and indeed to the CEO of Banc Sabadell, who no doubt has greater expertise in this matter than myself.

Whither Spain – Towards Finland or Argentina?

Well, here I am spending my last day in Sitges, attending the annual meeting of the Circulo de Economía (which is why I have been so silent of late). This annual meet-up tends to attract many of the leading participants in Spanish economic and political life. To give you some idea, in the session before mine the Industry Minister Miguel Sebastian gave his version of where we are (which was in fact the toughest statement I have heard from any PSOE representative in recent years), while I shared the platform with Cristobal Montoro (who is PP candidate for Economy Minister). I have been here since Thursday, and in my presentation stressed the need for some sort of internal devaluation. This in fact got me a lot of headlines in the Spanish press the next day (or here, or here, or here). These have been interesting days for me, meeting and talking to a lot of people. I even got to meet the legendary Catalan President Jordi Pujol for the first time in my life. In the lift on my way to bed last night I found myself in the company of Banc Sabadell CEO Josep Oliu. I was tempted to share with him my views on the problems facing Spain’s banking system (which I am sure he is only all too well aware of), but decided discretion was the better part of valour, and limited myself to a simple “bona nit” as he got out of the lift.

As a sign of the times, Alfredo Pastor (who introduced me) pointed out, “what Edward was arguing six months ago seemed to be “catastrophist”, now it has become the consensus”. And indeed if you look at the arguments presented by Fitch for their latest downgrade – including the demographic ones – they are not that far from arguing what I am arguing: the fiscal measures may work, but where the hell is the growth going to come from! Continue reading

Burden-sharing in Lithuania

Here’s the concluding statement of the most recent IMF visit to Lithuania.  As with the Spain statement of a few days ago, it is noteworthy for its bluntness — these things read much less like bland compromise statements than they used to.  A basic indication of how troubled things are –

with real GDP only recovering its pre-crisis levels in 2014/15

And even that doesn’t take account of population growth.  So in terms of levels, this is going be at least a 6 year slump.

Continue reading

Supplying the rules

The Irish parliament is during today and tomorrow rushing through the legislation that allows the highly indebted country to make an apparently profitable loan to Greece as part of the Eurozone rescue package.  Here is the actual Irish legislation which is just one page; the main action is in the attached schedule which is the Intercreditor Agreement signed between the Eurozone countries excluding Greece that governs the overall loan.  Here’s a little irony –

This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by and shall be construed in accordance with English law.

Thus, as with the day-to-day operating language of the Eurozone, when it came time to need a legal architecture for an agreement among the countries, it is supplied by its most prominent non-member.  

Much Ado About (Some Of) The Wrong Things

German Finance Minister Wolfgang Schaeuble told reporters in Brussels today (Monday) that getting their deficits down was “the only task that everyone has to fulfill for himself and for the common good.” Meanwhile, over in New York, Paul Krugman was busy writing on his blog that “the most startling and frustrating thing about the debate over the fate of the euro is the way almost everyone avoids confronting the core issue” – which is, according to Krugman, that “wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall something like 20-30 percent relative to wages in Germany”. So at one extreme the Eurozone’s problems are seen as being almost exclusively fiscal ones, while at the other the principal problem is thought to be one of restoring lost competitiveness.

The difference in perceptions couldn’t be clearer at this point, now could it? Continue reading

it’s all about…

The Guardian has a screenshot of Cleggy boy’s negotiating positions re the Tories: 

But it is the detail at the end of the note which is most revealing. Under the heading "Roles" Clegg lists the two main issues as "ratios" and "me".

and also:

Funding for opposition parties: so called "short money."

Trebles all round, then.

life on earth

What has happened since the election is supposedly a taste of what will happen if we ever get proportional representation. Count me as a convert. What we have here is information we don’t get when the winner just ends up outside Downing Street looking smug and standing on a big pile of votes. We get a plain view of how the senior political classes behave while under pressure; how they behave towards their frenemies in the other parties, how they react to the various gurglings and moanings from within their own ranks. We see the media throwing up all commitment to the pretence of objectivity in their reporting – we get to see the narrative being constructed rather than having to guess at that through how it being plays out. 

We get to judge the capabilities of politicians conducting their everyday tradecraft – and my, doesn’t Cameron look the weak willie? There’s still a remote possibility that he’ll have his coalition snatched from under him by the party sixty seats behind: a week ago his party was talking about storming into No 10 even if they didn’t get a majority. In fact, this may be working to his temporary advantage if it really has led people in the Labour Party to rediscover the virtues of principled opposition. More generally, we get to see all of them squirming about in the petri dish. We become a more educated electorate. Hell, Sky should have sent Adam Boulton home with some powerful tranquillisers days ago and hired David Attenborough to cover for him.

royal hunt of the Clegg

This is from the wiki about human sacrifice among the Aztecs: 

 What we can glean from all this is that the sacrificial role entailed a great deal of social expectation and a certain degree of acquiescence. Sahagun's informants told him that key roles were reserved for persons who were considered 'charming…quick..dances with feeling.. without [moral] defects … of good understanding … good mannered'(Sahagun Bk 2: 24: 68-69). 

For many rites, the victim had such a quantity of prescribed duties that it is difficult to imagine how the accompanying festival would have progressed without some degree of compliance on the part of the victim. For instance, victims were expected to bless children, greet and cheer passers-by, hear people's petitions to the gods, visit people in their homes, give discourses and lead sacred songs, processions and dances …  [and] these [pre-sacrificial] rites were performed in the case of all the prisoners, each in turn. 

It should also be remembered that these sacrifices were ritualistic and symbolic acts accompanying huge feasts and festivals. Victims usually died in the "center stage" amidst the splendor of dancing troupes, percussion orchestras, elaborate costumes and decorations, carpets of flowers, crowds of thousands of commoners, and all the assembled elite. 

This is basically what Cleggy and the Lib Dems were subjected to this weekend, an intensive process designed to socialise – hypnotise, almost – them into propping up a Tory government under circumstances that would lead to their annihilation, with Cameron playing the role of Mexica high priest and “the markets” playing the role of Huitzlipochtli and kindred other Gods whose anger needs to be appeased. See also the solar king myths of prehistoric Europe. 

As it happens, the LDs are showing some signs of resilience to this process. But we shall see.

UPDATE: Scratch all that. David Cameron is Edward Woodward.

reverse ferret scenario

So Cleggy boy meets Brown, while carefully not having a face to face with Cameron. Not bad. Obviously, he’s not so lost in the creamy embrace of the Cameron-media complex to exclude a bidding war. 

Here’s a scenario, based on 

i) final abandonment of the idea that anyone is “acting on principle” 

ii) not getting electoral reform is suicidal for the Lib Dems 

Absolutely desperate for some kind of deal to reverse Clegg’s apparently irresistible drift towards the Tories, Brown offers proportional representation without a referendum, to take place at the next election, whenever that is. 

Clegg takes the deal, and immediately precipitates an election. Labour duly get hammered. So do the LD’s. But they still come out ahead in seats because their votes are now proportionate. 

Clegg goes into coalition with the Tories. 

Woe, beating of breasts, laments for the progressive coalition, etc, etc. 

As I say, just a thought. It’s probably more likely that he’s stringing Brown along to get more out of the Tories.