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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Oh We Are The Champions

Yes we are really, aren’t we. Especially if we are called Arcelor, or Danone, or Endesa, or Eni, or Enel, or Banca Antonveneta or Pekao. And what these champions have in common, and it is this which sets them so much apart from their footballing equivalents, is not the ability to win anything, but rather their capacity to lose, especially in a take-over battle from a foreign pretender. And just for this very reason it is, it seems, ok for you to include the referee in your line-up. Indeed such is the sporting prowess of these ‘champions’ that it is deemed that what they are most in need of is not the cold harsh wind of competition, but rather protection, and indeed protectionism, anything rather than face outright competition from would-be global rivals. A rare breed of champions these.

I think before I go further, I would like to draw attention to one idea which holds us all together here at Afoe:

Purity of race does not exist. Europe is a continent of energetic mongrels. – H.A.L. Fisher
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The French Unrest and the Labour Market

Morgan Stanley’s Eric Chaney has what I consider to be a very sensitive and perceptive analysis of the economic backdrop to the French urban unrest:

Turning to economic causes, many analysts have pointed to mass youth unemployment as the main cause of the political unrest in low-income suburbs. The numbers are striking: the French unemployment rate reached 21.3% in the 15-24 age bracket in 2004, vs. 13.4% for the OECD as a whole. However, the headline unemployment rate is misleading because, at the same time, the participation rate of the 15-24 age group is particularly low in France: 37.5%, vs. 49.9% in the OECD. Practically, this means that 7.8% of the population aged between 15 and 24 is unemployed in France, vs. 6.5% in the OECD. The difference is not that large. What makes France different from other countries is the very low participation rate of young people, not particularly massive unemployment. In other words, the young in France take fewer jobs than their counterparts in other developed countries……”

“That brings us to a more fundamental point: why is it so difficult to create jobs in France? I have discussed this point in a previous note (“Making France Work”, June 21, 2005). In my view, the causes of the job disease fit reasonably well with the “insider-outsider” model developed by labor economists, provided that it is extended to products and services markets. I will elaborate only on labor market issues, starting with the minimum wage, which I believe is the major hurdle to job creation for young and less skilled workers. However, highly regulated product and services markets, which allow various interest groups to keep markets closed to competition and thus reduce employment opportunities, are another important cause of the job disease……….”

“Originally, the minimum wage was introduced as a protection against excessive employers’ bargaining power (“monopsomy” cases). Over the years, it became a protection against competition from cheap labour. Many studies on French data have shown that a rise in the minimum wage is very negative for employment. Although estimates may differ, they converge qualitatively. For instance, Bernard Salanié (Columbia University) and Guy Laroque (CREST) estimated that a 1% rise in the minimum wage could cost 29,000 jobs (“Une décomposition du non-emploi en France”, Economie et Statistique N331, 2000-1). As a consequence, each minimum wage rise, often seen as a “social measure” in French media, would increase the proportion of people living only on social benefits. This point is particularly important for young and low qualified workers, whose parents are often also unqualified: they suffered twice from the generous increases in the minimum wage in terms of fewer job opportunities for them and their parents and, thus, a lower income for their household.

Rational Markets?

The general impact of the French riots is, I feel, being ably covered by others here, what I am curious about is how financial markets reach their opinions. According to headlines in many newspapers, the euro is falling aginst the dollar as a result of what is happening in France (or see here). This may or may not be a good reading of why the euro is dropping, but if it was the explanation, I would say it was a far from rational response.
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Too Hot to Change?

The Cunning Realist takes a look at limits:

Since the bursting of the technology bubble in 2000, there have been four distinct periods in which the Fed has flooded the system with an extraordinary amount of liquidity in an effort to boost the stock market:

1. Immediately after 9/11.
2. During the second half of 2002 in response to widespread accounting scandals and the meltdown in the corporate bond market.
3. During the summer and fall of last year, just before the presidential election (draw your own conclusions).
4. The past two months.

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Scary Stuff

In a post which appeared earlier this week Tobias asks us whether, given some of the possible consequences of a French “non”, it might not be reasonable to ‘scare’ voters a little by spelling out some of the potential fallout which might follow a French rejection of the Constitution Treaty.

Perhaps the phrasing is unfortunate, but undoubtedly voters in Eurozone countries need to think long and hard about one especially sensitive area of impact: the future of the euro itself.
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Of We Go Again, Ready, Set……….

After a weekend of semantic analysis the currency markets didn’t take long getting back to work – the euro was only a cent off its all time high by late morning. According to the relevant meaning of volatility is: tending to vary often or widely, as in price – the ups and downs of volatile stocks. Not much danger of volatility here, not if the only way the dollar is going to go is down. Wouldn’t the more appropriate term have been secular decline? But maybe they aren’t against that, and the markets in turning the pressure back on the dollar, have read the signal exactly right.
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Book Review: “European Integration 1950-2003: Superstate or New Market Economy?”

Once upon a time, there was a large, intellectually hegemonic, somewhat totalising ideology rooted in a heterodox school of economics. Its advocates proposed to make massive changes to the structure of society and claimed that only such a revolutionary realignment could alleviate the contradictions and failures of the existing order and save the world from stagnation and misery. They claimed that their programme would produce immediate results, and that the only reason it wasn’t immediately implemented was because entrenched interests were manipulating the public against them.

Ultimately, advocates of these principles did gain power in many places and were able to implement elements of their programme. Some came to power through revolutions of various kinds that granted them the near-dictatorial powers they needed to make the changes they believed necessary. Others were able to convince electorates and even elites that theirs was the way of the future. They turned public dissatisfaction to their advantage, especially during economic downturns when people were willing to turn to new solutions and elites feared that the masses would turn against them.

And, they had some arguable successes, but no unambiguous ones. In some places, particularly those where effectively unlimited power had shifted to them, they often maintained highly inequitable regimes which grew harder and harder to justify, faced ever growing public disaffection, and turned to more oppressive and manipulative means to sustain control. This undermined their movement, but despite the best efforts of their enemies was not quite able to kill it off.

In states where more democratic methods had been used, the need to compromise with established interests and to sustain public consent forced them to accept measures often contrary to their initial programme. Their ideological identity tended to shift over time as winning elections grew more important than ideological purity and as the drawbacks of real power became apparent. Actually being held responsible for results forced many members of this tradition to accept their enemies’ interests as at least partially legitimate, and compelled them to less radical legislative programmes.

In some of those nations, these radical parties became increasingly manipulative and difficult to distinguish from their former enemies. But, in a few places, the necessary dilution of their programme brought about an ideological synthesis that appeared successful, and this success in turn showed that the radical programmes they had once advocated were perhaps unnecessary. In the end, ideology had no real hold on them, and the models and methods that seemed to work became the political and economic programme that they were identified with. Their former allies who operated more dictatorial regimes were easily repudiated.

But others were unable to accept that option. They included dissidents who had been burned by the growing authoritarianism of their own failed revolutions, or who were simply unable to accept that their early ideological purity had become superfluous. They were isolated and powerless, only able to function in the states where their former allies had become moderates, leaving them without meaningful public support. They fumed at the world’s unwillingness to go the way they wanted, and increasingly recast the history of the world in terms of their own ideological predispositions. The past became, in their minds, an unending conflict between an ideologically pure vanguard and scheming established interests, a story of their courageous champions betrayed by back-sliding traitors. Ultimately, the world moved on and these radicals virtually disappeared outside of intellectually protected milieux like privately-funded think tanks and universities.

Of course, by the now the astute reader will have recognised that I am talking about the history of neoliberalism.
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