Category Archives: Economics and demography

How Many Times Can One Driver Fall Asleep At The Same Wheel (And Live)?

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“Break the thermometer, then you won’t have a fever.” – Former Polish President Lech Walesa

Watching the TV news here is Spain at the moment is often a rather discomforting and sad affair. The normal menu seems to consist of a constant stream of ministers who have to appear before the cameras and the public to explain something that they, in all fairness, don’t really understand themselves. And so it was on Saturday, as I tucked into my early morning breakast of sausage and beans (Catalan style) in the village near my mountain retreat, there in the background I could see the face of Spain’s Labour Minister Celestino Corbacho (photo above), giving details to the assembled press corps of the latest government decision to make another six month extension for the 426 euro monthly “exceptional” payment for those whose unemployment benefits have run out. Why there are so many unemployed in Spain, and why renewing this subsidy is now an almost permanent necessity (this is now the third time that this “temporary” means of support has been extended), or what the real prospects of creating enough jobs to start reducing the unemployment mountain any time in the foreseeable future, was not explained. Well, the future is not ours to see, so “que sera, sera”.

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The Shape of Bulgarian Things to Come

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As the IMF say in their most recent staff report on the country, the aftermath of the recent severe economic crisis leaves us with the question as to whether potential output growth in Bulgaria in the years to come is going to be markedly lower than it was during the boom years. As the IMF point out, the current recession was preceded by an investment boom in construction, real estate and the associated financial sectors. Now that the boom (which was always unsustainable, Bulgaria’s current account deficit in 2007 hit almost 27% of GDP) is well and truly over in these sectors, the strong associated decline in investment could have large negative effects on output. Moreover, it will take considerable time before the excess labor and resources that are no longer needed in these sectors can be absorbed by other sectors, which suggests that the rate of unemployment may rise yet further and remain higher for some considerable time. Not a uniquely Bulgarian story, but none the less important for that.

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Merkel’s Little Ray of Sunshine

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Remember the sunshine option? You might think it was getting some traction. Berthold Huber, the leader of IG Metall, has set some goals ahead of this year’s payround, which opens on the 27th and covers the steel industry. IG Metall is the German metalworkers’ union, which in practice represents most of the industrial economy – the wider importance of the steelworkers’ pay round is that it acts as a price-leader for the rest of the German collective bargaining year. Huber clearly reckons that Germany is recovering well enough that he can insist that the workers get a share of the benefit. Further, he wants to reintegrate some of the short-time or temporary workers, a sector that grew during the Lohnzurückhaltung years and then during the crisis.

Interestingly, someone has gone further and nailed a target to the wall. Peter Bofinger, a member of the German council of economic advisers, has named a figure of 3% earnings growth as necessary to achieve a broad-based recovery. Bofinger has appeared on this blog before; looking back, these remarks are highly telling

If the SGP is regarded as a framework that contributes to price stability, it suffers from the weak link between government deficits and inflation. This is due to the fact that a negative budgetary position can be caused by excessive government spending but also by a dismal growth performance….However, already in the 1990s it should have been obvious that the link between public debt or deficits and inflation is very weak, at least in OECD countries with relatively moderate inflation rates….Together with the depreciation of the dollar this insufficient macroeconomic stabilisation can be regarded as the main reason for the underperformance of the euro area in the last few years.

Bofinger’s words are here, in an interview with the Rheinische Post. Bofinger argues that German employees have seen no growth in their buying power in the last 10 years (the unions’ research group reckons no growth in real wages in 6 years), while exports grew by 70% at constant prices – to put it another way, there’s been a “massive redistribution at the expense of workers”. Of course, the flip side of holding down wages in a major export economy is that somebody has to buy the stuff. He further argues that the Lohnzurückhaltung has contributed to European economies drifting apart: in Der Spiegel, for example.

Anyone who sees this as a virtue must ask themselves whether Germany’s export successes would have been possible if other countries had behaved as “virtuously” as we have. It says a lot about the level of the debate that such simple and fundamental insights are apparently difficult to get across in Berlin.

(Die Zeit has an article about Bofinger and his predecessor on the council, Jürgen Kromphardt, which describes them as the last Keynesians. To read, as a period piece from the distant age of 2004.)

So what’s happening in the other superexporter? Even The Economist has not only noticed Chinese labour activism, but thinks it’s a good thing. Doug Saunders reckons that this is the only lasting gain from the boom.

That’s the theory; the practice is here.

The week-long strike at Honda supplier Atsumitec ended Thursday after workers and management agreed to a 45 percent increase in the basic wage from 980 yuan a month to 1,420 yuan.

The roughly 200 employees at the Foshan plant were, in addition, offered a 250 yuan monthly living allowance and a performance related bonus; a significant victory after management had earlier in the week threatened to fire striking workers and hire replacements if they did not return to work…. The fact that workers are asking for increases of around 50 percent, even higher in some cases, is a clear indication that wages in the Pearl River Delta have been kept far too low for far too long.

As the strikes continue, a high-level delegation from the Guangzhou Federation of Trade Unions arrived in San Francisco, the first leg of a four-city tour of the United States designed to improve relations with American trade unions and labour groups.

Delegation head Chen Weiguang was quoted by the Chinese media as saying American labour groups had already secured a commitment from Apple to improve payments to Foxconn so that wages at that company’s factories in China could be increased.

Even the People’s Daily thinks so, although I’m not sure what to make of this:

Nonetheless, even as these doubts remain over the ACFTU [the official unions, under pressure to demonstrate real representative power - not-ed], it’s not stopping in its “union-building” efforts. The Financial Times reports that it’s unionizing many large foreign investment banks, including Goldman Sachs, JPMorgan, Morgan Stanley and UBS. According to a foreign banker in Suzhou, “(t)hey are actually telling us [to establish union chapters], not asking us…the feeling from everyone was – we just got a 2 per cent tax.”

Too Soon To Cry Victory?

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Confidence Has Returned To Europe’s Financial Markets, But Lasting Economic Growth May Not Be So Easy To Achieve

ECB president Jean-Claude Trichet was in rather optimistic, one might even say jovial, mood at the press conference which followed this week’s central bank rate-setting meeting. Second-quarter GDP growth in the 16-nation euro zone would prove “really exceptional,” he stated, while the July bank stress tests marked “an important step forward in restoring market confidence.”

And it wasn’t only that pre-holiday bonhomie – as Ralph Atkins also reports M. Trichet was about to head off for some well earned rest in the Brittany seaport of Saint-Malo – which was lifting M. Trichet’s spirits, recent data – especially from France and Germany – has been reasonably encouraging. Indeed, M. Trichet’s comments came just hours after Germany reported a stronger-than-expected 3.2 per cent rise in industrial orders in June, which came hot on the heels of some pretty strong PMI readings and a further rise in confidence among those living in the Euro Area about the immediate economic outlook, which hit its highest level in more than two years in July according to the EU economic sentiment indicator. Nevertheless, as the EU Commission itself points out, a substantial part of the most recent improvement is due to the improved mood in Germany.

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Do The Latest European Bank Lending Numbers Reveal A Major Headache Looming For The ECB?

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According to Ralph Atkins, writing in the Financial Times:

“Eurozone mortgage borrowing grew last month at the fastest pace in almost two years in a sign that bank lending across the 16-country region may be flickering back to life. Lending for house purchases rose at an annual rate of 3.4 per cent in June – the fastest since September 2008, according to European Central Bank data published on Tuesday. The acceleration pointed to a revival in consumer confidence and an increased willingness by banks to fuel the economic recovery with loans to the private sector.”

So is this really the good news it seems to be? Well the answer is (as usual) yes and no. The problem is that behind the positive aggregate data lie the individual national details (you know, the place where the devil is usually to be found), and when we dig down to this level, then we find the position is much more complicated than it seems. Nor should this surprise us, since if a one size fits all interest rate policy didn’t work in the pre 2008 world (just look what happened to Spain and Ireland for heavens sake), is there any good reason to assume that it will in a post 2010 one? Continue reading →

Latvia: The Demographic Price Of Procrastination

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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 →

Macroeconomics, Representative Agents and Demographics (wonkish)

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Upon first reading what I am, more or less, pasting below, my thesis councillor opinioned that this particular piece of text was a malignant tumor that had to be surgically removed if the patient (in this case, my master’s thesis) were to make it alive. I agreed with him back then and I still do, but I thought that the section was too interesting to be devoted entirely to the dustbin. Moreover, the debate on the state of macroeconomics has gotten new life on the back of the financial and economic crisis with a lot of interesting contributions in the past 2 years [1] and I wanted to add my own spin on, at least, part of the issues involved. Continue reading →

Interpreting The Stress Tests

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Evidently there is now a considerable debate out there about the famous (or should that be infamous) CEBS stress tests. Methodologically all sorts of weaknesses have been identified, but in many cases these are decidedly beside the point. It is important to be aware what the tests were (and weren’t) designed to show. They were, it seems to me, essentially designed to free up lending in the short term European interbank market, nothing more, nothing less. This would be useful since it would enable the ECB to step out of playing this particular role. And it may well happen, since if everyone can agree that no European bank is going to fail tomorrow, or be allowed to fail tomorrow, then there should be no difficulty for one bank to lend to another for 24 hours, and so on.

But this issue is a quite separate one from the longer term funding needs of the Spanish banking system, for example, or from the longer term solvency of Greek sovereign debt, where a large quantity of asset backed securities of one kind or another need to be re-financed in the months and years to come. This is a much more complicated issue, since no one has a really very clear idea of the longer term value of the securities which back the pieces of paper, either in the Spanish or the Greek cases, and the stress tests have done nothing to resolve this issue. And that is not surprising, since they were never intended to serve that purpose.

What the tests have I think made reasonably clear is that no EU bank or sovereign will be allowed to fail between now and the end of 2011. They will not be allowed to fail, quite simply because the ECB and the European Financial Stability Facility are there to guarantee that they don’t. So something is something. The Eurozone was created without due care and attention being paid to the kind of institutional backdrop which would be required to support it if things went wrong. Now things certainly have gone wrong – in ways which I think were perfectly forseeable, but let’s not push that one too hard right now – and we are in the process of putting some of the institutional support in place. Like Gaudi’s famous Sagrada Familia, what we have is a work in progress, with no evident end-date in sight, and no detailed blueprint of what the thing will finally look like. Debate about the future is, as they say, “ongoing”, and the situation is “fluid”.

At the same time issues about the per se usefulness of the kinds of tests the CEBS have just carried out remain, and continue to be legitimate areas of discussion. Some people have spoken about the likelihood of tail risk events (not forseen in the stress tests). But to some extent even this argument misses the point, since I am not sure that what we are talking about are “tail risks” in a situation like the Spanish or Greek one. The kind of cascading scenario (debt snowball, for example) we could see actually forms part of what anyone with a solid grasp of the underlying macro should actually expect to happen if no one does something to ensure it doesn’t, for the simple reason that all the various economic agents are effectively “inter-linked”, so when one part of the system goes down, then the rest can come crashing down behind it. And this is what will almost inevitably happen if someone, somewhere doesn’t find a way to revert the Spanish and Greek economies to a sustainable growth path.

With this in mind, and with due regard to the fact that most of the models conventional economists and financial analysts work with make all kinds of “linearity” assumptions when in fact many of the processes involved are decidedly non-linear, and subject to various kinds of interconnectedness issues and feedback loops, I though it might be useful to reproduce here an argument to this effect recently made by my friend, the Catalan economist Jordi Molins. So without more fuss or flourish, here its is. Continue reading →

Is There Global Economic Slowdown In The Works?

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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 →