One of the things I think we can safely say about the impact of the current economic crisis is that the face of Macro Economic theory will never be the same again. Quite what the macro economics of the future will look like is too early to say, but what is clear enough is that the existing corpus has been tested and found wanting: it’s predictive capacity is very, very limited, and this is obviously a far from satisfactory situation.

At the same time, new ideas, and new perspectives are emerging. I have already spoken earlier this morning about the key issue of “non linearities” in the context of Jordi Molins’ discussion of the weaknesses of the stress test methodology. Claus has spoken about some of the issues raised by the attempt to put macro theory on micro foundations, and now I would like to present an important, if little known, piece of research coming from Latvia – one of the canaries in the coal-mine on the whole Eurozone sovereign debt issue. Eliana Marino’s work is both extremely interesting and extraordinarily important, since what it illustrates is the negative feedback mechanism that can be activated by having an “L” shaped non-recovery in a rapidly ageing society with extremely low underlying fertility. What Eliana did was something macro economists seldom consider doing, she carried out some qualitative research, rather than running a computer model, to find out just what was happening on the ground.

The resulting survey, which she personally conducted in Riga from September to December 2009 and which involved some of the leading Latvian experts on migration issues, lead her to estimate that around 30,000 people may well have left Latvia in 2009 and the same number are likely to follow them in 2010. These numbers are considerably greater than the official register shows. As she argues these large emigration flows from Latvia will have a significant effect on the future demographic and economic path of the country, creating serious problems of labour shortage, unsustanability of the pension system and accelerating the already significant population decline.

And just why may Latvia be a canary down the coal-mine in this context? Well think about Spain, where the housing boom attracted in the best part of 6 million people – in a country where the rate of natural change in the population was stagnant. Now imagine that with 20% unemployment as the continuing outlook for the country over the best part of the next decade, what might happen there. People could vote with their feet, and the population could contract just as rapidly as it grew, leaving that 1.5 million currently unsellable housing units even more unsellable than ever. The warning signs are there. The number of those contributing to the social security system continues to stagnate, even as unemployment remains unchanged, so where are the people? Some have obviously found their way into the growing informal economy, but others have surely left, and there is plenty of anecdotal evidence to support this idea. In addition, the rate of new household formation turned negative in the first quarter, for the first time in the series history.

At the end of the day, the truth of the matter is that we really don’t know what is happening in Spain, so would the Spanish Eliana Marino please kindly step forward? Continue reading →

According to Ralph Atkins writing in the Financial Times last week, “the pace of Germany’s recovery is helping dispel fears of a “double dip” recession across the continent as a result of the crisis over public finances in southern European countries”. Coincidentally, however, on the very same day, Alan Beattie writing from Washington informed us that the IMF feel “the risk of a slowdown in the global economic recovery has risen sharply”. This left me asking myself which is it: is the global recovery a question of up up and away, or are we at the start of a renewed slowdown (whether or not you wish to term this a “double-dip”)? So I thought I would take a look through some of the most recent data (both hard and soft) to see if I could make any sense of the situation. Continue reading →

Here’s the third in the series of paper abstracts submitted to the Bologna conference in 2007 and which weren’t considered sufficiently interesting to be selected for presentation. This time the topic is migration and the Baltics, and the authors are Aapo Markkenen and Claus Vistesen. (for the two previous abstracts, and more about what this is all about, see here, and here). Evidently the subject is still highly topical. Only last Friday the Wall Street Journal had an article of the growing problem of human capital exodus in Greece. It is very important that people understand that when it comes to economic processes, no decision is ever completely free. There are always on-costs of some kind or another. In this case, a failure to act vigourously enough to restore competitiveness simply means that employment creation becomes far too slow, and people leave. This has the consequence that the population ages more rapidly, and that a return to economic growth is even slower. So more people enter despair and leave, and so on. Well, now for the abstract, and note the last paragraph:

Finally it will be argued that the directional and value component which is implicit in the current migration flows is quite simply unsustainable. Unless the Baltic States address the underlying issues of low fertility in the context of rapid ageing and to some extent reverse the ‘brain flight’ which has been so far associated with this, then absence of a sufficient supply of adequately qualified labour will in the space of a decade or so lead to a significant slowdown in the steady sectoral transition in economic activity and place a break on employment expansion in such a way that the economic growth process will either stagnate or even enter decline.

Continue reading →

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 José Viñals and his team in their recent Global Financial Stability Report. My view – which I communicated to the Spanish team – is 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.