A Word Of Thanks To The IMF

That was the week that was, it’s over, let it go…….

Well I don’t suppose it’s that often that people get the opportunity to enthuse about the International Monetary Fund. Normally you find people like Joseph Stiglitz, or Naomi Klein, who are bitterly critical (often for many of the wrong reasons, here, and here). But I would like to express my gratitude to the Media Relations department of the Fund (and in particular to Mr Murphy – I think I have the name right), for enabling Landon Thomas to have access to the members of the Spanish team to talk about my role, which hasn’t been, let’s be clear, that earth shattering – don’t believe everything you read in the press: it is certainly ridiculous to suggest, for example, that I actually wrote the last report. All I have done is provide some analysis, for consideration, on the evolution of the current account deficit, some opinions over the actual levels of bad debt in the banking system, and some data on off-balance sheet public sector debt.

Anyway, it can’t be that easy for a major multilateral organisation to handle a sensationalized “IMF turns to blogger for advice on Spain” type story sweeping the globe. So I am grateful for the mature and intelligent way they handled a tricky situation which landed in their intray.

Of course, let’s be clear, offering advice does not mean 100% agreement. Evidently the Fund do not (at this point anyway) share the opinions of people like myself and Paul Krugman that growth will only be restored on Europe’s periphery by a series of substantial internal devaluations. They have confidence that a combination of fiscal restraint and long term structural reforms should be sufficient to do the trick. And they surely would in no way contemplate my “plan B” option, which is that if wage and price competitiveness is only returned slowly, then the only realistic way to “unblock” the situation may be to encourage Germany to temporarily return the Deutsche-mark.

In fact, my differences with the Fund over this sort of issue have been on record for some time now, as in the case of the amicable but clear debate I had with IMF Regional Representative for Central Europe and the Baltics Christoph Rosenberg about the desirability, or otherwise, of Latvian devaluation at the time when the IMF programme was initiated there (see my original argument here, Christoph’s reply here, and my response to Christoph here). Or again, take the Hungarian situation, where I have been arguing there will be no solution to the problems that country faces without biting the bullet of converting the Swiss Franc loans to forint. Back in January I warned that the way the programme was being applied was leading to a build up in fiscal liabilities which the incoming government would need to face up to (Hungary Isn’t Another Greece…. Now Is It?), and on this occasion the ongoing IMF Programme was defended by the then Finance Minister, Peter Oszko.

And, coming right up to date, it is hard to be in agreement with the assessment of the stresses the Spanish banking system is under which is made by former Bank of Spain deputy governor Jos̩ Vi̱als and his team in their recent Global Financial Stability Report. My view Рwhich I communicated to the Spanish team Рis that their evaluation substantially underestimates the likely extent and duration of the Non Performing Loan problem in the Spanish financial system.

Yet despite these ongoing differences, I still favour IMF interventions here in Europe, as in the Greek case, where I was arguing in favour of what eventually became the adopted solution from the begining of January. I think IMF involvement in resolving the problems facing many peripheral Eurozone economies is desireable given the Fund’s accumulated expertise, and relative political distance. On the other hand, it is unrealistic to expect the Fund to take a radically different policy stance from the one determined in Brussels, whose attitudes and opinions must always condition IMF involvement in Europe. So if policy changes are needed, then it is in Brussels and not Washington that these must be initiated.

And nowhere are the insights the Fund can offer going to be more important and useful than here in Spain, where, if the recent leaks to the Financial Times Deutschland are accurate, a call for intervention may not be that far off. Certainly everyone who I have talked to recently is very nervous about the severity of the financing problems currently facing the public and private sector. This week’s decision by the ECB to extend the short term financing operations for another three months, and to continue the programme of buying government bonds will buy time, but that is all. Strategic decisions have now to be taken, the Spanish economy may well be on the point of slipping back into recession in the second half of the year, and the two steps forward, one step back pace of the reforms being implemented by the current administration is painfully slow. So let’s here it for them then, what about a round of applause for all those boys and gals over in Washington who tirelessly labour, day in and day out, in their constant effort to keep Europe’s troubled economies from going “belly up”.

And now, as far as I am concerned, it’s high time life got back to normal.

The Price Of Power

Hell, it seems, knows no fury like the financial markets being told you are about to become the next Greece. The poor Vice President of the election-winning Fidesz party, Lajos Kosa, had no idea what was in store for him when he calmly announced to a group of astonished journalists that Hungary was in the throes of a sovereign debt crisis not disimilar from the one Greece has been passing through. The value of the forint immediately fell sharply, and a whole army of government spokesmen – lead by incumbent Prime Minister Viktor Orban – had to rush for the microphone to try to clarify that the man didn’t mean what he had just said. Continue reading

South Africa 2010: Let the football craze begin!

Being too lazy and uninspired to write a decent World Cup post myself, I shall point our readers to a truly funny column by Dave Barry, in the Miami Herald, on football-related activities. One quote:

I truly believe that, even though many Americans say they hate soccer, if they gave it a fair chance — if they took the time to actually watch a World Cup match or two — they would still hate soccer. I don’t know why this is, but apparently it’s not going to change. I’ve given up arguing with guys who tell me how boring soccer is, but will happily spend four hours watching a baseball game in which 97 percent of the action consists of batters calling timeout.

Feel free to use this post as an excuse to share your own football-related witty comments, predictions, pet peeves, vuvuzela imitations, etcetera.

Demographics and the Macroeconomic Environment

Actually, our tussle hasn’t only been with the research institutes, and the bank analysts, from time to time we have also engaged with some of the better known cases of mainstream journalism, as, for example in the case of The Economist, and in particular their Central and Eastern Europe correspondent. This exchange of views (which went up on the Economists own Certain Ideas of Europe blog in October 2007), is a good example of the range of issues involved (which go from Germany, to Japan, to India). And now for the second of our Bologna abstracts. Continue reading

Breaking Cover

Well after a pretty hectic 48 hours being pursued all over the virtual globe by the economic and financial press, I am finally coming up for air. Those who don’t know what I am talking about might try this, or this, or this (etc). Actually I am grateful to Catherine Rampell of the New York Times’s Economix for rescuing a comment I made on Landon Thomas’s original article, which summarises some of the argument I am advancing about housing bubbles and median population ages. Irrespective of whether the argument is right or wrong, I think the comment makes things clearer.

What I want to make clear in this post, is that none of the argument Claus and I are advancing at the present time is exactly new. Back in June 2007 (that is just before the crisis broke out) some of Europe’s leading economic research Institutes (CPB, DIW, ESRI, ETLA, IfW, NIESR, OFCE, PROMETEIA, WIFO) organised their 4TH Euroframe Conference on Economic Policy Issues in the European Union in Bologna. The conference was entitled appropriately enough “Towards an Ageing and Globalising Europe: Challenges for the European Social Model(s)”. They issued a call for paper abstracts (the call file is still online here), so Claus Vistesen and I, together with two other young European economists who were working with us at the time (Aapo Markkenen and Paula Silli) sent in four abstracts on related topics. Unsurprisingly, none of the proposals presented was considered sufficiently interesting to be accepted by the committee of experts appointed to take the decisions. (The Scientific Committee was made up as follows: Karl Aiginger (WIFO), Ray Barrell (NIESR), Alan Barrett (ESRI), Paolo Bosi (PROMETEIA), Klaus- Juergen Gern (IfW), Markku Kotilainen (ETLA), Alfred Steinherr and Christian Dreger (DIW), Henri Sterdyniak (OFCE), Wim Suyker (CPB), Catherine Mathieu (OFCE, Scientific Secretary)). So the problem isn’t that the demographic argument has been studied, analysed and found to be wanting, the sorry situation is, it hasn’t even been considered worth listening to.

Here is the first abstract. Continue reading

Dutch Parliamentary Elections Updates

First impressions.

PVV (Geert Wilders‘ Party) is the big winner. JP Balkenende is now definitely out. His CDA took a fair beating. As did the Socialist Party. D66 (from 3 to 10) makes a nice comeback, GreenLeft could be a factor of some importance when it’s time to form a government coalition (possibly purple). Turn-out is estimated at 74%.

Rita Verdonk’s Party Trots op Nederland (Proud of Holland) did not make the cut. Populism doesn’t seem to work for everybody. Do check out the linked vid with English subs for some Dutch right-wing Zeitgeist.

Nice fait divers for expats like myself (hat tip Sargasso). Half a million Dutchies living abroad have the right to vote (representing about eight seats in Parliament). This year 46,396 of them registered to vote. One of their main worries? Finding a red pencil…

The face of the new Prime Minister? Or is this the one?

Thursday 03.00 am, Rutte on tv: “It’s the economy. And immigration too.” He congratulates Femke Halsema (GL) and Alexander Pechtold (D66) with their scores…

Wilders on tv (earlier this evening): “As the country’s third party we cannot be excluded, we want to govern.” Is willing to compromise in order to be able to govern.

03.26 am Mark Rutte (VVD) on tv calling it, tentatively, for the VVD. Lauds JP Balkenende. Keywords: Economic recovery, security, immigration. Believes he is the obvious candidate for Prime Minister.

Live commentary (in Dutch) and footage can be found here.

Here is a link with election updates. Just choose the number 443 and press “gaan” (go).

Situation as of Thursday 03.38 am with 96.5% of the votes counted:

VVD 31 (conservative-liberal, up from 22 in 2006)
PvdA 30 (labour/social-democrats)
PVV 24 (Geert Wilders’ Party, up from 9)
CDA 21 (Christian-democrats, down from 41 and now behind PVV!)
SP 15 (Socialist Party, down from 25)
D66 10 (social-liberal up from 3)
GL 10 (green left)
CU 5 (christian union)
SGP 2 (christian party striving for theocracy)
PvdD 2 (party for the animals)

Calling it a night. PVV, VVD and D66 win big, CDA en SP lose big. Mark Rutte will probably become the first liberal Dutch PM in modern history.

The Nixon option

(I will spell things out a bit more in this post than I might have if we didn’t have an infusion of NYT readers, but probably I should anyway. Some of our readers don’t know a lot about economics.)

We’ve been debating the wisdom of savage wage cuts in Spain and other countries, which Ed thinks is necessary. The idea is that wages have risen far more than is reasonable because of bubbles, which means they’ve become uncompetitive. Normally, that could be solved by currency devaluation, but Spain is in the euro. So Ed wants “internal devaluation”: wages cuts, which will also lead to cuts in prices.

The thing is, what we’re calling internal devaluation isn’t actually analogous to actual devaluation. It’s not even close. It’s not a question of your perspective; it’s not “only” a psychological difference. So how would you get an “internal devaluation” that lived up to its name? Richard Nixon might have an idea…

Currency devaluation can be relatively painless, but wage cuts will be a very painful process. People will be poorer, which will also lead to a collapse in demand, which will lead to a general economic collapse. Price cuts – deflation, sound nice, but are very destructive. It leads to people expecting lower prices, and delaying purchases, which lead to lower production, which leads to lower wages and lower demand, which in turn leads to even lower prices, which leads to people delaying purchases even more. A downward spiral of misery.

Also unlike an actual devaluation, lpeople will have less money to pay back loans, which isn’t a small thing. You already have a lot of people underwater or close in Spain.

History shows that wage cuts and deflation will normally be a very slow and painful process. A government can induce a faster “internal devaluation” by slashing wages for public sector workers. That would still not be very similar to actual devaluation. It would give the economy a body blow, a veritable death blow. Deflation would still be gradual and destructive. It would also hit some people far harder than others, without necessarily targeting less productive sectors of the economy. The more well-off segments of private sector workers probably wouldn’t see any wage cuts at all.

This won’t do. So if – if – savage wage cuts are the least bad option, why not just have a government directive to cut wages for every resident and all prices in one fell swoop, and then retain controls for a couple of months? This way you won’t get a deflationary spiral, you won’t get the same utter collapse in demand. There would be a collapse in corporate profitability, which would happen anyway. It would also be less manifestly unfair.

This still leaves you with loans that haven’t gone down. One immediate thing you could do would be to institute (temporarily) very lenient bankruptcy laws. Currently, they don’t allow any kind of personal bankruptcy, you just (fail to) pay off your debts until you die, and live like a pauper. Probably something more radical is needed.

Most of the arguments against a conventional use of wage and price controls don’t apply here. In any case, Spain doesn’t actually have any good options. What we need to figure out is the least bad option.

Does anyone know if there are any EU rules against something like this?

Welcome New York Times readers

We hope that you’ll look around the entire blog, but here are all the AFOE posts of Edward Hugh.  One suggestion to the NYT editors — an extra comma is needed to ensure that people don’t think there’s a blog called A Fistful of Euros Global Economy Matters.

UPDATE: The NYT article now includes the necessary comma and a link (which may have taken the site down for a brief period).