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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OECD on Portugal with a touch of Eurozone criticism

In case you were wondering about the Portuguese economy a recent OECD survey tries to steer you in the direction and although the OECD are undobtedly right in many of their observations the case of Portugal also mirrors how being a member of the Euro does not necessarily help you to achieve those honourful demands of convergence.

Let us see what OECD has to say about Portugal’s economy.
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Euro in trouble?

English weblog England Expects has an intriguing post on the vitality of the euro. More precisely, about its lack of vitality:

For the first time, an official French report has criticised the Euro. Indeed, the latest report of the Council for Economic Analysis (CAE) given to the French government on 23 March, “Economic policy and Growth in Europe” and written by Philippe Aghion, Élie Cohen and Jean Pisani-Ferry, draws up for the first time a really tough assessment on the single currency and the actions of the Euro zone.

I have no time to comment, as usual, but the report is definitely worth a read (308 pages). Teaser:

“Economic integration has stagnated and no longer promotes growth. The euro’s creation has not produced the knock-on benefits expected. The increase in trade has been relatively modest and financial and credit markets remain segmented. The single currency even seems to have had a “numbing” effect on the EU members, which no longer need to protect against a foreign-exchange crisis and have become complacent in their efforts to control spending and make structural reforms. Moreover, the euro area’s macroeconomic framework has become obsolete. Furthermore, the Lisbon strategy has become bogged down in procedures and has degenerated into rhetoric. This is because it doesn’t have the means to achieve its objectives, since EU-members remain responsible for supply-side policies and the political economy of reform is still mostly national.”

You can find the report here (pdf).

Saving The Euro

Do you want to save the Euro? Well one idea for how to do it has been proposed by University of Missouri-St Louis history professor John Gillingham: reissuing the 12 national currencies that were replaced with just one, while at the same time retaining the euro as a parallel currency that finds its market value in competition to reissued national currencies (podcast here).
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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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Les Jeux Sont Faits

Yes gentle readers, les jeux sont faits. Italy has entered the election season, and this time the game is for real. The outcome of this election, and the decisions which are subsequently taken will be important not just for Italy, but for the whole EU, and the stakes are not small ones: the whole European process is in play. (This post needs to be read in conjunction with the last one from Alex, and contsitutes the start of our campaign: Italian elections 2006. Incidentally, since none of us are in Italy, and since I for one tend to see everything Italian through a Spanish filter, if there is anyone out there in Italy reading this, and who fancies their hand at some guest blogging during the Italian campaign, then please consider yourself invited to contact us directly to talk about this.)

The starting point for getting a handle on Italian Elections 2006 is undoubtedly a blog post from the US economist Nouriel Roubini following an amazing outburst at the recent Davos forum by Italian economy minister Guilio Tremont (also see here).

Wolfgang Munchau takes up the issue in an FT article today.

There was a revealing incident at the World Economic Forum in Davos this year. Nouriel Roubini, the New York-based international economist, took part in a panel discussion during which he raised questions about Italy’s future in the eurozone. A fellow panellist was Giulio Tremonti, the Italian finance minister. Professor Roubini wrote in his web log* that his presentation “caused a stir with Minister Tremonti who interrupted me in the middle of my remarks, went into a temper tantrum and shouted: ‘Go back to Turkey!’ I happen to have been born in Istanbul.”

Perhaps one should not conclude too much from this incident, but it does show one thing: European officials are getting nervous about the future of the euro. A few years ago, no one would have raised an eyebrow.

Now Munchau’s focus is Spain, but Spain and Italy here are but two sides of the same coin, the existence of low, and thoroughly inappropriate, interest rates. In the one case it is the private individual who is hopelessly in debt, in the other it is the state. Now as Munchau states:

Italy is often mentioned as the country most likely to leave the euro. I disagree. Leaving the euro would not solve any of Italy’s problems. Since Italy’s debt is mostly euro-denominated, Italy would be facing an Argentinian-style debt crisis.”

This is undoubtedly true. Leaving the euro would clearly leave Italy facing a horrible mess, of gigantic proportions, but it ducks one key question: will Italy be able to stay inside? It may well be that Italy would never ‘choose’ to leave, but can Italy find a sustainable path to maintain its membership? That is the real question, and I, for one, have serious doubts on this, doubts which I have never really tried to hide. In the face of Italy’s inability or unwillingness to correct its course, the issue is, as Roubini himself asked in an earlier post, in the game of chicken which is now being played between the Italian state and the EU institutions who will be the first to blink? Certainly no-one here has a very viable exit strategy to hand. The latest news on the current attempts to reign in the debt is certainly far from reassuring.

So, to start the ball rolling, here are a number of the key issues as I see them:

1/. The existence of a huge and unsustainable public debt, no clear evidence that anything is going to be done about this, and the accompanying serious policy headache both for the EU Commission and the ECB.

2/. The presence of a high level of private saving, coupled with a far from dynamic internal economy.

3/. The fact that Italy has one of the lowest fertility rates in Europe which make the population pyramid unsustainable in the long term together with a lack of the real resources needed to introduce a programme of public policy to address this problem.

4/ The presence of strong xenophobic attitudes among leading members of the Berlusconi government (and here) which makes recourse to serious immigration as a paliative to the demographic problems extraordinarily complicated while at the same time making the conduct of EU foreign policy even more of a headache.

5/ A long and complicated history of corruption at many levels of private (and here) and public life (and here), and a complete lack of infomational transparency in dealings with the EU.

6/. The presence of a heavily ‘familiaristic’ approach to public policy which prevents realism and objective debate in looking for solutions to Italy’s long term structural difficulties.

7/. The existence of a strong sense of denial inside Italy itself about the scale of the problems and a real and present willingness to blame the euro itself for all the problems.

This list of headaches is undoubtedly long enough already, and undoubtedly more topics could quickly be added, they do howvere form a starting point for a full and frank dicussion of the problem. Let the games commence!

The Perrenial Euro Story (or lack of it)

Brad Setser has a post, the perrenial dollar story, which IMHO, has one large and significant ommission: it doesn’t really mention the euro. Personally I don’t really see how you can consider the future evolution of the dollar without taking the euro into account. This realisation provoked a rather long comment from me on Brad’s blog, and it is this comment, in a slightly modifed form, that I am now posting here. (Update: incidentally, I notice that Claus Vistessen has two highly relevant summaries of the great greenback debate (here, and here) which. among other things, serve as an excellent introdiction to the issues involved).
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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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Feldstein: A Eurosceptic at the Fed?

Bloomberg this morning has a review of the pros and cons of Marty Feldstein as Alan Greenspan’s successor. One thing they don’t touch on is what the implications might be of having someone at the head of the US Federal Reserve who is pretty much convinced the Euro can’t work.

“Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman’s job,” says William Niskanen, who followed Feldstein as head of the President’s Council of Economic Advisers in 1984 and is now chairman of the Cato Institute, a free-market research group in Washington.

Feldstein finished second only to Ben Bernanke, chairman of the White House Council of Economic Advisers, when 104 financial professionals were asked last month to name Greenspan’s most likely successor. Bernanke got 38 percent of the vote and Feldstein 31 percent in the survey, which was conducted by Stone & McCarthy Research Associates, a Princeton, New Jersey, consulting company. No other candidate received more than 10 percent.
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