Bad Parallels

John Quiggin writes about the banking crisis:

Suppose Bank A owes a trillion dollars to bank B which in turn owes a trillion to C which in turn owes a trillion to D which owes a trillion to A. Now suppose that A gets into liquidity trouble and can’t pay. Then B is similarly in trouble and so in turn are C and D. If D could cancel the debt to A and forgive C who would in turn forgive B and so on to A, all would be well. But in the normal course of business you can’t do that. The fact that it’s zero sum doesn’t help. You need either wholesale resort to bankruptcy, or outside intervention.

It has strong parallels with John Maynard Keynes’ description of the financial consequences of the first world war. Basically, he said, everyone had ended up by owing everyone else a lot of money. Rather than the UK running a trade deficit with the rest of the world (and a services surplus), and a trade surplus with the empire, it had been running a surplus with its allies and a deficit with the empire’s civilian economy and the rest of the world.

The financially weaker allies had all turned to the next one up the chain for funds; Greece and Romania turned to Russia and Italy and they turned to France, which turned to the UK, which eventually turned to the US. As Europe was running a massive trade deficit with the rest of the world, the dollar claims everyone else accumulated could only be spent with the US; the adjustment path was meant to be that the British empire would spend the accumulated sterling claims buying things from the UK, and that the other allies would pay up. Netting out the numbers, Keynes concluded that the remaining dollar debt was manageable.

But the Russian revolution kiboshed this; if the Russians didn’t pay (and neither did some others), the French couldn’t pay, which meant the British couldn’t pay either. The solution the government offered was to make the Germans pay; Keynes pointed out that as nobody had any forex, there was no-one in a position to buy German exports, so they couldn’t pay either. Further, holding US dollars meant that Australia, say, could go and buy capital goods from the US instead. In a sense, the eventual solution was that Germany didn’t pay, but borrowed a ton of money from the US to finance its imports, paying with exports to the US; a Marshall Plan in one country, at least until the credit crunch meant it couldn’t roll over short-term paper.

Short-term commercial paper? Where have we heard that recently? Oh yes, at companies like IKB, Northern Rock, Citigroup, Morgan Stanley…substitute subprime mortgages for Russian bonds, SIVs and CDOs for France and Italy, and the UK for the major investment banks, and it’s quite eerie. But who are the Americans in this scenario?

French Candidates: What is this EU thing anyway?

Why do the leading candidates in the French presidential election seem to have utterly strange European policies?

Take Nicolas Sarkozy. He supposedly believes in “rupture” with old ways and a dash for a new free-market, hard-nosed, toughness cult future. And Euroscepticism is at the heart of this. But at the same time, he has promised to restore le productivisme – that is to say, the maximisation of volume – as the guiding principle of the Common Agricultural Policy.

That’s not free-market, tough, eurosceptic, hard-nosed, liberal, or anything else, except for pure clientele politics. Better yet, it’s the kind of clientele politics that uses other people’s money. Yawn. Not that the peasants’ representatives believes in it – one of them recently said that “there are no cloned Chiracs available”.

Fascinatingly, he’s also now blaming the European Central Bank for its exchange rate policy – as is Ségoléne Royal. Sarko thinks the trouble at Airbus is all down to the bank’s “policy of over-valuation against the dollar.” Sego apparently asked for Angela Merkel to help change the ECB’s charter so that “its sole objective would not be the exchange rate.”

One problem – the exchange rate is not the objective of the ECB. The ECB does not target the exchange rate. This is, of course, all part of the game with the straining “Bretton Woods II” arrangement between the US and China pushing the adjustment burden our way. But – the ECB does not stock and does not sell exchange rate targets.

The Plot!

I’m not sure what Jerome is driving at here. It seems quite clear that, by promising a further referendum on whatever arises from Angela Merkel’s efforts to revive the Constitution, Ségoléne Royal is taking quite a risk, not least by betting on her ability to get the Laurent Fabius fanclub on side. I wouldn’t bet on a remixed Euroconstitution passing a referendum in France, but perhaps the argument is that the “non de gauche” was really a generalised protest vote and once the Left is back in power, the poison will have been drained from the issue.

Instead, the collectif antilibérale over there seem to think the whole thing is a British plot to get the Germans to stop the French from reviving the constitution, which is now a key document of multipolarity, solidarity, republicanism, laicité and other agreeable qualities. It used, of course, to be an Anglo-Saxon liberal conspiracy to subvert the French welfare state, but presumably that portion of the statement is no longer operative. Anyway, it’s not the French government that is reviving it, it’s the Germans. And it’s not the Left that is reviving it, but the Right, which begs the question why he is so annoyed by the possibility of its non-revival.
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A Fistful of Evro?

I see from EurActiv that the Bulgarians are runing into some linguistic trouble over the single currency:

The country has expressed concern over the differences between Bulgaria’s Cyrillic and the EU’s Latin alphabets, in response to renewed European Central Bank (ECB) demands that ‘euro’ be spelled and pronounced with a ‘u’ and not a ‘v’ as Bulgarians wish (‘evro’).

(Strictly speaking of course the argument is whether or not the Bulgarians should be allowed to continue calling it the “евро”, not the “evro”, as nobody plans to use the Latin alphabet for the word.)

Nobody seems to have noticed that in Greek the word ευρώ is also pronounced “evro”. Those who are more familiar with ancient rather than modern Greek (which is probably the majority of those outside Greece who have bothered to think about this issue) will have assumed that the word is pronounced with only one consonant rather than two.

Anyway, it’s not as if other languages are uniform. If that Latvians can say “eiro” and the Maltese “ewro”, the Bulgarians should be allowed their spelling, and not be made to go down the road of the Slovenes, who are forced to use “euro” officially but continue to use “evro” unofficially.

Wikipedia has a page about this. (Of course.)

Hungary: Well That Didn’t Take Long!

It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:

For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.

The warning lights are flashing again – this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.

Well, well, well, scarcely three weeks later, and here it is, all on the table. Sometimes, in the field of interest of what is sometimes erroneously termed the dismal science, things do indeed move quickly.
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Visit Hungary Now!

Because they devalued the forint this summer, so everything is now about 7% cheaper.

Well, they didn’t actually devalue it. No. I mean, that would imply there had been a… devaluation. Ha ha, how silly. No, what happened was that the Bank of Hungary moved the band in which the forint was allowed to float freely. Whereupon the forint freely floated down from around 250/euro to more like 275/euro. So, it was a sudden fast downward change in the value of the currency caused by central bank action. Which is not a “devaluation” at all.

(The forint lost about 10% of its value in a month; you can see the graphic here. It has since clawed back about a third of that loss. Still, a Euro will go about 7% further than it would in May, and about 10% further than in March.)

Nobody seems to have paid much attention, but I think there are some points of interest here.
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The “Teuro” Dissected

Did prices really go up when the Euro arrived? The public mind, or at least the dominant media discourse, says they did. The inflation indices say they didn’t, or at least the prices that did go up were outweighed by the ones that went down. This paradox may have been solved. Erich Kirchler, of Vienna University’s Institute for Economic Psychology, tells Der Standard how.

Kirchler formed three representative groups of volunteers, and showed them prices in Schillings, then in euros. One group’s price was exaggerated by 15%, one reduced by 15%, and a control group saw correctly converted prices. All three groups were convinced the prices had risen…yes, including the second group. When he repeated the experiment with wages, rather than prices, the guinea pigs were convinced the opposite was the case.

He theorises that two well-known cognitive biases are at work – irrational perception of risk (the difference between accepting €10 now, or a 90% chance of €90 later) and the salience heuristic (unrepresentative but extreme events are over-perceived).

I was in Austria for the introduction of cash Euros, and I recall not so much that prices went up, as that the standard sums of money one withdraws from ATMs (20, 50, 100 etc) were suddenly considerably more and hence it was easy to spend more. Everyone was convinced that prices went up, though. And the German-speaking press had been hammering the word “Teuro” (roughly: “dearo”) into the meme-pool for months before the switch. (Especially, of course, Bild Zeitung and the execrable Krone..)

Why France MUST Reform – MUST, I Tell You!

Since the withdrawal of the CPE and the resulting collateral damage to Dominique de Villepin, not to mention Nicolas Sarkozy’s unexpected appearance as a unity figure at the height of the crisis, it’s rapidly being promulgated as conventional wisdom that France “is ungovernable”/refuses to “reform”/cannot be “reformed”. There is only one problem with this discourse, very popular in anglophone leader columns and the like, which is that it’s nonsense.

It’s quite often been raised here on AFOE that the French economy isn’t actually in trouble. Growth, although not great, is ticking along, inflation is controlled, unemployment is higher than the UK but lower than Italy or Germany, and the demographics (as Edward Hugh will no doubt point out) look a lot better than many other countries. Certainly, there’s more youth unemployment than one might like, but almost all the figures for this are wildly misleading. The percentage rate of unemployment in the 15-24 years age group looks scary high, but is actually a very small percentage of that group–because most of them are in education or vocational training of some form and hence not part of the labour force. Unemployment as a percentage of the age group is rather lower than the national rate and not much different from that elsewhere in Europe. (Le Monde ran a useful little chart of this in a supplement yesterday that doesn’t seem to be on the web.) Much – indeed most – of the difference in employment growth between France and the UK in recent years has been accounted for by the UK government going on a hiring binge.

So why the crisis atmosphere? More, as ever, below the fold..
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Es Lebe Das Exportventil!

Chris “Stumbling and Mumbling” Dillow has a very interesting post on signs of German economic recovery. Interestingly, the bellwether Ifo confidence index has shown a dramatic uptick, reaching its highest level since 1991. Dillow proceeds to examine its correlation with the DAX stock market index.

Now, as Chris points out, DAX-constituents are likely to be the most globalised German businesses. The DAX tracks the Ifo with about a three month lag. This all suggests that a) the most globalised German businesses are feeling chirpy, as you’d expect in an economy struggling to raise domestic demand that trades with several raging boomers, and b) that some things never change.

Back before the Second World War, before the Nazi seizure of power, there was something known as the Exportventil in German. This means something like “export safety valve” in translation. What it meant in practice was that German industrialists believed that exporting was a hedge against the economic and political instability at home, and duly specialised in exporting as much stuff as possible. That is pretty much exactly opposite to what you’d expect – after all, you normally assume that German businesses know more about Germany than Country X and therefore face lower risks at home, not to mention the foreign exchange risk involved.

There were good reasons for this, though – economic conditions inside Germany were dire, the devaluation of the mark was helpful – and alternatively you could price your products in hard currency and thus protect yourself against the hyperinflation. It also helped that you had a stream of foreign-denominated revenue, which meant you could borrow in the US. The downside of the Exportventil, though, was that German businesses were highly operationally geared with respect to world trade, and German banks tended to have long-term German assets and short-term US and sterling liabilities.

The onset of the great depression, of course, slashed demand for German exports – and the beggar-your-neighbour policies drained world trade of liquidity, which hit the Germans twice as hard because of export dependence. So the safety valve turned out to be more of a seacock that let more water into the ship. Germany, however, still seems to love exporting – which perhaps explains the strong “home bias” that Chris claims to have identified.

In a tangential theme regarding historical legacies and the way things don’t change, check out this post at Veronica Khokhlova’s. Seems the Ukrainian electoral map divides along the ancient border of Kievan Rus..