When France climbed the fiscal cliff, in 1926

Paul Krugman presents a chart of UK and France growth and public debt (as share of GDP) relative performance in the 1920s. The charts show that using 1913 as a common base, France appears to have overtaken the UK in real GDP by the early 1920s, and its debt ratio went lower than the UK in 1926. Keep a note of that year. For Prof. Krugman, the message is clear –

So virtue was not rewarded, and French political weakness [devaluation and inflation] actually led to a better economic performance.

This conclusion is certainly consistent with the most recent IMF World Economic Outlook, which noted the inability of the UK to lower public debt in the 1920s. But at least for those of a certain age, references to French economic policies of the 1920s should ring a bell, back to a time when the so-called freshwater economists were paying a lot of attention to economic history and specifically the apparent monetarist stabilizations following World War I.  Continue reading

After The Fat Lady Sings

Financial journalists across the globe were both surprised and puzzled recently when they heard Christine Lagarde using a strange expression. “You know, it’s not over until the fat lady sings, as the saying goes,” she told bemused reporters at a press conference in Manilla. Which fat lady, and what does she sing must have been questions going through the heads of many of those present. Continue reading

Idle weekend speculation

Two seemingly unrelated news stories … or are they?

1. New York TimesEach country [Iran & Argentina] has domestic reasons to reach out to the other. As Argentina’s economic growth slows, it is finding in Iran a robust client for its agricultural commodities, with trade volumes between the two nations surging more than 200 percent over the last five years to more than $1.2 billion. Iran, meanwhile, is seeking to blunt its diplomatic isolation, expanding on the warm ties it has forged with other nations in Latin America, notably Venezuela, Bolivia and Ecuador.

2. Wall Street JournalTurkey on Friday acknowledged that a surge in its gold exports this year is related to payments for imports of Iranian natural gas, shedding light on Ankara’s role in breaching U.S.-led sanctions against Tehran. The continuing trade deal offers the most striking example of how Iran is using creative ways to sidestep Western sanctions over its disputed nuclear program, which have largely frozen it out of the global banking system … In Turkey, state-run lender Turkiye Halk Bankasi has been responsible for processing the payments, since the U.S. adopted a measure in January to stop dealing with financial institutions working with Iran’s central bank, freezing out private Turkish banks from facilitating payments.

Iran and Argentina have at least one thing in common. As a result of its mishaps in US Circuit Court in New York in the long-running bond default litigation with Elliot Management and Aurelius Capital, Argentina could find itself needing ways to make payments to people (its bondholders who took the restructuring) while bypassing the global payments system. Iran knows how to do that and the Turkey deal shows it can made to work even for multi-billion dollar payments. Could there be some technical information sharing going on between Tehran and Buenos Aires?

RBS’s problem child

Statement from Central Bank of Ireland

In 2009, the Central Bank imposed an obligation on the Firm [RBS Irish subsidiary, Ulster Bank] to hold €339 million in additional Pillar II capital as a buffer against the risks (over and above credit, market and operational risk) to which the Firm was exposed. In the Firm’s regulatory return submitted to the Central Bank on 31 March 2011, the Firm reported a capital shortfall in relation to its Pillar II requirement of €313 million. The Firm immediately received a capital injection from its parent company Royal Bank of Scotland Group plc (“RBS”) to rectify the issue. The Firm made significant amendments to its Capital Management Programme following a review of the issues which highlighted that the primary cause of the failures was due to inaccurate capital forecasting and other capital management control issues.

The Regulations seek to ensure that credit institutions have sufficient capital to support all material risks they are exposed to. Credit institutions are obliged to hold capital for credit, market and operational risk (Pillar I Requirements). The Regulations set out a framework for the assessment of additional risks relevant to a particular credit institution over and above credit, market and operational risks (Pillar II Requirements). The contraventions identified in this case relate to the Firm’s Pillar II Capital Requirements.

This is part of an announcement that Ulster Bank has settled claims relating to contraventions of capital and liquidity requirements via correction of the lapses, beefing up procedures, and a fine of, er,  €2 million. Now, the first read-through of the statement has something of the flavour of those moments in Inception when you think they’ve exited from a nightmare only to find that they’re still in one: Irish banks, mismanaged liquidity and capital requirements, lax controls, inadequate information submitted to the supervisor … and it happened in 2011!

One reason CBI went relatively easily on Ulster Bank was “the Firm had access at all times to sufficient liquidity and capital during the period as part of RBS.” Which sounds a lot like an implicit cross-border subsidy at a time when banks are supposed to local in life and not just in death. RBS management hasn’t made much secret at their frustration about the way Ulster Bank caused large losses for the overall group. Is there a point at which they decide to get out entirely?

El Rosario De La Aurora

The exact origins of the expression are unknown. They are lost back then, somewhere in the mists of time. But the meaning of the phrase is perfectly intelligible. In Spanish “to end up like the Rosario De L’Aurora” (acabar como el rosario de la aurora), means to end up badly. Very badly. The Rosario in question is a procession (of the kind to be seen in this YouTube video) and aurora here is not a woman’s name, but the Spanish word for dawn. According to legend, the procession which gave birth to the phrase was characterised by a dispute which developed into an outright brawl during which all those precious sacred artifacts being carried by the devout got unceremoniously destroyed. Continue reading

Some economic links

What is “reform”? Peter Dorman blogs.

Wynne Godley on the Euro. He was agin it, for sensible reasons, even if the dream-remark “Unless he justifies himself I must save him” in his memoir of psychoanalysis seems oddly appropriate.

John Major remembers. I can’t imagine any other Tory caring about the music-hall tradition, and he is after all the last British prime minister who wasn’t a university graduate. But this is outrageous:


“I thought I could do something different from any Conservative prime minister before me. But I couldn’t. I was trapped with a socking great recession. Shops were closing, people were losing their homes – all the things I went into politics to avoid – and I was almost powerless to do anything about it. And then, after handing over the best economy in generations, I watched other people spend the money. So, was that frustrating? You bet it was.”

The recession, of course, was the ERM recession, the consequence of the policy he decided on, wanted, and as chancellor of the exchequer, successfully sold to Margaret Thatcher. The “best economy” was the outcome of being forced to abandon this policy and do the exact opposite. Still dodging.

Mervyn King, dictator:

“The process within the Bank was one of second-guessing what your superiors and specifically Mervyn King would like you to think about a certain subject before offering your opinion on it. Agreeing with the Governor was the route to advancement. Some people did not like it and left. It’s all a bit pointless if you are just going to reflect back what somebody already thinks. There were a lot of people at the Bank being paid vast amounts of money to hold a mirror up to Mervyn.”

(I’ve heard this from ex-Bank of England people too.)

The sad fate of the Halifax Building Society:

I went into my local HBOS branch in Keighley, Yorkshire [i.e. my home town and my former account-holding branch - AFOE] a few years ago to get some advice about investments and ISAs. The sales person went through various options, including what sort of level of risk I would like. I then asked him if he invested in any of the products provided by his bank. He confided in me that he made a lot of money doing online poker, and was going large on buy-to-let, and did not use any of the bank’s products.

Sad, but you shouldn’t romanticise the Halifax too much. During my teens, a farmer whose overdraft they called in showed up at that branch with a muck-spreader full of liquid shit and hooked up the tractor’s power take-off. Splat.

British suicide and the economy.

Even I didn’t know this.

When opposites agree

A surprising moment of consensus: Der Spiegel and the Taz both rip into Peer Steinbruck, former German finance minister and leading the race for the SPD’s candidacy as chancellor. Not only that, they do so for substantially the same reasons.

First, they agree that Steinbruck denied in the autumn of 2008 that the financial crisis was a problem, claiming that it was the Americans’ fault and nothing to do with Germany, and even said that there was no need to bail out the banks. Secondly, they agree that he argued vehemently that a response to the crisis would be national-but-coordinated, rather than European, thus leaving Ireland and Spain to cope on their own, and he refused to lead an IMF working group on the issue. These days, he supports euro-bonds. Thirdly, despite all his bluster, he then reversed course and bailed out the banks, setting a precedent.

It’s fascinating that the green-left Taz and Der Spiegel, which might as well be the Bundesbank’s house journal, manage to agree on so much. Taz is predictably more radical, pointing out that WestLB swelled up with dodgy asset-backed securities and eventually burst while Steinbruck was its regulator and that he even got a light-touch regulatory policy for derivatives written into the 2005 coalition agreement, and that he also denied that there was any need for stimulus in the autumn of 2008 before changing his mind. (Who now remembers crass Keynesianism?)

Meanwhile, Guy Verhofstadt and Danny Cohn-Bendit have a manifesto. What can those two possibly agree on? Inevitably, it’s more federalism. As with everyone who uses the phrase “more Europe”, what they want to do with it isn’t clear.

Making the eurozone fit for the challenges of the 1990s

British economist Jonathan Portes remembers the UK’s exit from the Exchange Rate Mechanism:

We argued that the fundamental problem was that we’d joined the ERM at the wrong rate; sterling was overvalued, meaning that we were stuck with a structural current account deficit. The only way to maintain the peg would be through what is now, in the eurozone context, referred to as “internal devaluation”; that is, real interest rates at a higher rate than dictated by internal conditions, and a long and grinding squeeze on wages and prices.

Our solution? We didn’t dare suggest complete abandonment of the ERM. One possibility was for sterling to “realign”, that is devalue, to a considerably lower rate, boosting exports and allowing interest rates to fall. Even better, politically and perhaps economically, would have been if the Germans could have been persuaded to realign upwards, so avoiding the perception that sterling was being singled out; but the French were resolutely opposed to any devaluation of the franc.

The fascinating thing here is, of course, that nothing has changed. In many ways, this is because the issues haven’t changed. Keynes said that the whole complex problem of European currencies and trade in the 1920s could be reduced to one question: how much of France’s war debts would be paid by workers and how much by savers, whether through taxation or through inflation. The answer would set the price level and hence the exchange rate, and how much of a trade surplus Germany could run, and therefore how much of Germany’s war debts could possibly be paid.

Similarly, in 1992 the questions was how the costs of German reunification would be split. Taxation was chosen over inflation, capital was privileged over income. Now, arguably, the question is how the cost of the Great Bubble will be split, and you guessed it. Portes is damning on the reasoning behind this:


The UK had long suffered from periodic cycles of boom and bust, most recently exemplified by the deep recession of the early 1980s and the unsustainable boom of the late 1980s. Monetarism – targeting various measures of the money supply – had failed miserably. The alternative was to “import” credibility from a country with a demonstrated record of maintaining low inflation while avoiding boom and bust – Germany, and we could do exactly that by tying our exchange rate and monetary policy to theirs…

But for me, the most important lesson was a more general one about “credibility”- a concept often used and abused by both politicians and economists. As with the ERM, the argument made by the current government and its supporters for sticking to its fiscal consolidation plan, despite its evident failure, is that the strategy has established “credibility”, especially with financial markets, which can only be preserved by sticking with it.

But of course this is not a justification, economic or otherwise, for the policy. Instead it is an argument for never changing policy at all…

The real hit to credibility comes from sticking to unsustainable policies; and economic success comes from abandoning them and doing something sensible instead. That is one lesson from Black Wednesday we could usefully remember.

Meanwhile, Migeru from the collectif antilibérale has an excellent column taking a sector-balance approach.

Political Europe, with rockets.

Something that has been interesting me recently is the surprising resilience of political Europe. It’s not supposed to work this way – economic integration was meant to pull the continent together into ever-closer union, and the imperatives of economic integration would somehow cause the political sphere to follow along. For years, the criticism was always that the EU was either a boring technocratic project with no zang or zap or anything else with a Z, and that we needed to find a way of getting the public engaged, or else that it was an anti-democratic project imposed on the public.

These days, in many ways, the economic integration has gone into reverse. The simplest index is the gapping-out of every kind of interest rates within the EU. A more sophisticated one is the shift from financial flows between peers to ones mediated via the European Central Bank. This is counter-intuitive, but the point was to facilitate trade and finance among European businesses, not to force everything through a central counter-party.

But the political level endures. People reliably poll strongly in favour of “Europe”, especially in the countries that are suffering the most. And even if the elite consensus seems battered, people are still willing to consider merging the entire European aviation industry.

The failed EADS-BAE merger, however, reflects the limits of the political consensus, and also the changes in it over the last 10 years. People often say that European states are unwilling to touch defence as an issue, because the ultimate attribute of sovereignty is the ability to wage war. But this isn’t quite true. The scale of international integration within NATO is at least as impressive as it is in the EU, especially as it deals with precisely this issue. And it’s not obvious that the obsession with gaining or losing sovereignty is a useful analytical construct, as it tends to obscure the content of policy in favour of meta-arguments.

Why did EADS-BAE not happen? Why did it get as far as it did? It didn’t happen, for one thing, because it was enormously complicated. Both the French and German governments hold shares in EADS, and although the UK government doesn’t own a stake in BAE, it does have reserved powers over it. Further, the French aviation industry outside EADS exists and is a substantial shareholder in it. Sorting all this out implied, among other things, settling the question of whether the French state is more committed to the purely national industry that produced the Rafale or to the European (but heavily French) one that produces the Airbus, something which touches on complex interest politics in France. It implied that the UK government rights in BAE be recognised, which in turn suggested that the British would have to have a stake again.

And it implied settling the question of where Germany fits into European defence and into the European aerospace world. This would actually prove to be the breaking point. Germany, as a nation of export-oriented engineering manufacturers, is always keen to expand its technological base. The second world war shut it out of aerospace for many years, first because the Allies simply banned it and many of the people ended up in the US or the Soviet Union, and then because of the lasting impact. German politicians, officials, and industrialists have been trying to make up the lost ground ever since, and European joint projects have played an important role. West Germany was a charter member of Airbus, of the MRCA program, of Eurofighter, of Eurocopter.

Some of the joint projects were Franco-German, others (like Airbus, Tornado, and Eurofighter) were broader. Interestingly, there was never an Anglo-German project, but there were plenty of tripartite ones, especially after the UK joined Airbus in 1977. One thing that marked many of these projects, though, was the tension between the UK and France on one hand, and the Germans on the other. The key issue was workshare, how much of the production would happen in each country, and more interestingly and significantly, what would come from each country. The French, and the British, considered themselves to have a leading role. The Germans were keen to create a base of know-how on subjects their industry hadn’t had the opportunity to master.

This was dramatised by the history of the Eurofighter project. It began with a great deal of optimism, following the successful Anglo-German-Italian Tornado, which it was meant to replace. The French had decided to join. There were the usual problems in defining the requirements, although they were nowhere near as complex as they had been on Tornado (it had to be a fighter for the Brits and then evolve into a bomber, a maritime bomber for the Germans, and a reconnaissance and electronic warfare aircraft for the Italians, and then a different recon variant for the Brits). By 1985, BAE Warton had a technology demonstrator flying.

Then, things went wrong. The German side wanted to take responsibility for much more of the fuel system and the flight control system. Not only did the British and French consider these to be the crown jewels of their aviation technology, but they also suspected that the Germans were overconfident about how long it would take to create such a capability in Germany. The British were ideologically suspicious of government industrial policy in general, while the French and Italians understood it all too well and accused the Germans of trying to build a competitor industry at their expense. Eventually the French quit and started a unilateral project at Dassault, which to the enormous embarrassment of everyone else would arrive in operational service years before the Eurofighter. The Germans did get the flight controls, and as predicted the project ran enormously late and over budget, before the control system was eventually given back to the UK.

The delays and the cost overruns brought their own problems. By the time the prototype was flying, the cold war was over, and everyone wanted to reduce the production run, especially as the planes were so much more expensive than projected. The cuts to the run meant that the unit price went up. That induced more wrangling. And by the time the planes were finally being delivered, the customers’ requirements had changed.

With the EADS-BAE merger, many of the same patterns emerged. The price of accepting the deal included moving the HQ to Germany, something the French saw as positively offensive. This wasn’t quite as fair as it might have been 20 years ago. In the meantime, the Airbus narrow-body line at Hamburg-Finkenwerder has produced vast numbers of Airbus A320s with success, and developed a speciality in reworking A300s and 310s. (The British could have had it back in the 80s if they had been willing to pay, but they really didn’t believe in industrial policy.) In that sense, Germany is a much bigger contributor to Airbus than it used to be.

The British and French were able to settle their own differences surprisingly easily, reflecting ten years’ effort to mend relations after Iraq, and cooperation on big aerospace projects as far back as the 1950s (for deep historians, the first world war, when the British made the airframes and the French the engines). That was one of the reasons the deal got as far as it did.

Another was that BAE’s decade-long acquisition spree in the US is running down. Careful arrangements were planned to avoid annoying the Americans, but the background fact is that most of BAE’s assets in the US are very much about building the requirements of the War on Terror. If you associate the company with aircraft, it looks deeply odd that it owns quite so many factories making the armoured patrol vehicles the US army bought in vast numbers for Iraq, making explosives detectors, making all the icons of the Bush era.

Further, neither the US or the UK procurement bureaucracies are at all keen on the “prime contractor” business model that helped Lockheed Martin, Northrop-Grumman, Boeing, and indeed BAE waste so much taxpayers’ money in the 2000s.

What does this all tell us? Political Europe is still kicking. The limits of it, though, are still what they were, even if they are very often drawn between different office blocks in Paris as well as along the Channel or the Alps. The EU is troubled, but the Special Relationship isn’t what it was either, although the entente cordiale is surprisingly strong. German corporate ambition is a powerful force, and one that tends to blind the people involved to the fact that there are engineers in Italy.