Tag Archives: Economics and demography

Theatre of Citizenship

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Everyone’s been terribly worried about France. First of all, last autumn’s carburning outbreak saw a lot of people who really ought to know better gathering to hail the end of days and the Islamofascist conquest of Eurabia, or something. Now, the students are out on the streets to protest the government’s new labour laws, and perhaps the trade unions will be coming too. And then there was the supposedly anti-semitic stabbing of a few weeks ago.

That stabbing, one will remember, brought thousands onto the streets for a heavily earnest, government supported demonstration against antisemitism, terrorism and a few other isms. I’m usually very sceptical about demos like that, and the Spanish tradition of demonstrating against terrorists-they aren’t listening, after all, and it is always worryingly close to demonstrating in favour of the government. There’s a strong case that one shouldn’t take part in a modern version of the demos by (supposedly) torpedoed merchant seamen that Winston Churchill put on in the first world war to shame strikers.

But is there more use to it than I think? (More, and more sense, below the fold..)
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German Demographics

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The Berlin Institute for Population and Development published a study this week detailing falling population in certain parts of Germany, particularly economically depressed parts of eastern Germany, the Ruhr valle and the Saarland. In eastern Germany one of the developments that has been discussed on afoe it becoming clear: Deferred or deterred childbirth in the immediate aftermath of the collapse of communism will have an echo around 2015, as children who were not born around 1990 fail to enter prime reproductive years about age 25. Shortly after German reunification, birth rates in the former East Germany fell as low as 0.77 children per woman. The present rate for all of Germany is 1.36, which the study says is the lowest in the world. (I’m not completely sure of that; I’ve seen very low figures for Spain, Italy, Latvia and Hungary, but don’t have them at hand to check.)

The German newspaper whose website has moderately improved quotes the head of parliament’s Committee on Families as saying the main problem is balancing work and family. No kidding. And about 20 years late.

The accompanying graphic tells another tale: People are leaving poor areas and heading where the money is. Almost all of the big drops–10 percent or more–are in rural parts of East Germany. Can’t keem ‘em down on the farm, even the old collective farm. This is a hundred-and-fifty-year trend and should not be fought. People are also moving to the suburbs; just look at the belt around Berlin.

Sustaining Growth in Turkey

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I don’t suppose it’s much of a secret that Turkey is one of the main ‘growth tigers’ in the ambit of the EU. The big issue is, I suppose, just how sustainable Turkey’s growth is. Well the World Bank is on the story, and now has a Country Economic Memorandum entitled Promoting Sustained Growth and Convergence with the European Union. As the FT notes:

Turkey needs to create more jobs, get more women into the workforce, and send its children to school for longer if it is to improve its chances of joining the European Union, the World Bank said on Monday.

I absolutely agree, and address the significant inequality between Western Turkey and the Kurdish east, may I add. But I do find myself having the thought, if Turkey does all the things which she is being encouraged to do. If Turkey becomes one of the largest and most dynamic economies in the neighbourhood of the EU, will this really increase the membership chances, or will this only make the resistance in some quarters even stronger?

Damage at heart of Europe’s single market?

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Following up on the points made in this post and this one, former EU competition commissioner Mario Monti has a comment article in today’s FT (behind the firewall unfortunately, but his point is clear from the extract):

The single market, a key pillar of the European Union since its foundation, is in danger. Several member states are reluctant to proceed further in building it; they oppose, for example, the services directive. They even try to undermine the working of those components of the single market that are already in place – and oppose foreign takeovers.

Worryingly, the epicentre of this revolt against the single market lies in countries that are at the core of the single currency. The eurozone, in order to deliver the benefits expected from the euro, needs to have more of a single market than the rest of the EU, but already it is getting less. The euro, meant to be the crowning achievement of the single market, looks increasingly like a currency in search of its market.

Italy Had Zero GDP Growth In 2005

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I am sure some people must sometimes feel I am exaggerating when I try to explain the rather dire straits which I feel the Italian economy has fallen into. If you are one of those people I would ask you to take a good look at the latest data release:

Official statistics published on Wednesday showed Italy experienced zero growth in 2005 underlining the dire state of the country’s economy and dealing a blow to Prime Minister Silvio Berlusconi’s election campaign…..Istat, the official statistics institute, said that the weak data contrasted with the US’s 3.5 per cent, the UK’s 1.8 per cent, the 0.9 per cent of Germany and Spain’s 3.4 per cent.

And it’s not as if 2005 was a bad year for the global economy generally, the world economy steamed ahead at a rate of around 4.25% last year, driven by systematic development in India and China and strong growth in the US. Italy has now had an annual growth rate of around 1% per annum over the last decade, and I see no good reason to justify the expectation that this is going to perk upwards sharply anytime soon.

Saving The Euro

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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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Spain Is Now Over The Radar

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It all started with the Catalan Statute, then there was this piece, then Wolfgang Munchau joined in. Today comes the news that:

“The European Union’s top competition regulator will this week issue formal antitrust charges against Telefónica, alleging that the Spanish telecommunications group has abused its dominant position in the fast-growing market for broadband services.”

And there is the situation with the takeover bid from the German group Eon for the Spanish utility company Endesa (full copy here):

ImageEon, Germany’s biggest power group, on Tuesday launched a €29bn cash offer for Spain’s Endesa, raising prospects of renewed consolidation in Europe’s energy sector.

If Eon succeeds it would be the word’s largest utility deal, valuing Endesa at €55bn, including debt and minority interests. It would create the world’s biggest utility with 50m customers across 30 countries in Europe and the Americas.

But the move, which trumps a rival bid from Gas Natural, threatened to disrupt Spanish efforts to create a national champion in the power sector and presented a challenge to Brussels just days after it announced an antitrust crackdown in the energy sector.

The curtain is about to be drawn like never before on Spain’s inner ‘boudoir’. Let’s just hope that everything which is to be found there makes for suitable public viewing.

Who Will Be The First To Blink?

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Methinks the first serious test of the eurosystem is now looming on the horizon. The title of this post refers to an earlier point made by Nouriel Roubini. The FT this morning is reporting that:

“The German cabinet will on Wednesday endorse a 2006 budget that breaks the European Union’s fiscal rules for the fifth year in a row, amid criticism that Angela Merkel’s coalition government is failing to meet its own target to cut spending.”

If this is confirmed the EU Commission and the ECB will then have to respond. One of these fine days all hell is going to break loose in the financial markets. Will that be sooner or later? We await developments.

Les Jeux Sont Faits

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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!

Viva Ricardo!

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Guy of these pages recently spoke to a “source” who has an interesting counter-take on the Italian economy and the Italian government’s debt problem to that frequently discussed here. Apparently, the feller says, there’s no chance of “an Argentinian-style blowout” because of the low levels of private debt.

The source is essentially arguing that Ricardian equivalence holds for Italy. That is to say, private and public savings ratios match each other-when the government borrows, the private sector saves, and vice versa. Hence the recovery path after a debt crisis would be that firms and households load up on debt to invest and consume, kick starting a Keynesian recovery.

Now, it’s an observable fact that the Italian government is up to its neck in debt and households are hoarding cash, but that doesn’t necessarily mean that Ricardian equivalence holds. Correlation does not imply causation, and Ricardian equivalence itself is anything but uncontroversial. In fact, it’s not so much an economic theory as a point for discussion, despite having been around almost as long as economics itself. There are some cases that support it – Israel in the 1980s being the classic – but a lot that don’t.

Arguments that fit the facts are always preferable to ones that don’t, but yer man is a braver man than me if he is basing his business decisions on this theory. Especially, I’m not at all clear on what the intermediate analysis/microfoundations are meant to be-how do we get from here to there? Presumably the Eurocrisis option would be one – out of the €, deep devaluation, export-led recovery and follow through to the domestic economy. But the pain of such a course would be epic. And it’s still worth pointing out that I still haven’t met a European business person who considers it even within the realm of the non-crazed (perhaps I don’t deal with enough Italians). More seriously, the panic and Weltuntergangsstimmung that would accompany such a course would have dramatically depressing effects on those ol’ animal spirits.

What of a forced Ricardian equivalence, about the only other story I can see that would satisfy our man’s argument? Imagine that the Italian government retires large quantities (perhaps massive quantities in the course of a debt crisis) of bonds from private and institutional investors and refinances them with the banks. Government paper is a reserve asset, and an increase in reserve assets should mean a multiple increase in credit creation to the private sector. One may recall that some monetarist-minded governments have been keen on manipulating the balance between T-bill-like assets held by banks and bonds held by funds and individuals in order to influence the creation of credit, usually in a deflationary direction – so why not in an inflationary direction?

It’s a bit like reversing the economic flux capacitor, and it’s certainly what in computing we would call a horrible, kludgy hack, and the inflationary bit could easily go well out of kilter, and the whole thing would be dependent on a lot of good will from a lot of banks, but it bears a passing resemblance to some proposals of Paul Krugman’s regarding Japan in the late 1990s. Edward Hugh will no doubt call attention to the similarities between the problems.

Does the weirdness of the solutions mark the optimism of the “source’s” argument? Or is it a long shot..but it might just work? A key number will clearly be the percentage of Italian government debt held by banks.