Sinking, fast and slow

fyi

‘Exploiting the flexibility in all the new fiscal regulations introduced in the euro crisis, officials in Paris, Berlin and Brussels are moving toward a resolution of the French budget problem based on three factors: politics, economics and bureaucratic procedure.

Starting with politics, the key point is that while the EU budget rules were agreed to by national governments, led by Germany, enforcement is up to the European Commission. Governments, and specifically the German government, have no direct input into the assessment of national budgets. This is overseen by the commissioner for economics and monetary affairs, now Finland’s Jyrki Katainen, but due to be replaced on Nov. 1 by the former French finance minister, Pierre Moscovici. Responding to German misgivings that Moscovici might show “favouritism” to the French budget (which he largely wrote), Juncker created a new procedure whereby Moscovici’s judgments will be co-signed by another commissioner, Latvia’s Valdis Dombrovskis, reputedly a fiscal hawk.

But Dombrovskis has conveniently turned more dovish since his appointment, telling the European Parliament that “we are now gradually moving from the stage of fiscal adjustment which … has by and large been done.”

http://blogs.reuters.com/anatole-kaletsky/2014/10/10/an-atomic-bomb-is-hovering-over-frances-economy/

As for Sarkozy – a good few of the decent people in Libya and across N. Africa wish they had never heard of him: as do I. Methinks the French centre left would vote for Le Pen over Sarkozy … must check if Blind Biddy can resurrect that case for Den Hague vs Nikki on behalf of the Libya people …

A useful summary of the various positions from Reuters.

http://www.reuters.com/article/2014/10/11/us-imf-economy-highlights-saturday-idUSKCN0I00QL20141011

And another useful link (H/t Seafóid).

http://blogs.ft.com/andrew-smithers/2014/10/the-eurozone-and-quantitative-easing/

This extract is a neat summary of the overall situation as it is generally perceived.

“There are three possible ways forward. The first is that my prognosis is too pessimistic and domestic demand in the eurozone economy will pick up, either of its own accord or because QE is effective. The second is that Germany’s view changes under the pressure of reasoned argument and that its government introduces a sharp rise in its fiscal deficit. The third is that events, rather than reason, cause a policy change. This last is the usual pattern and therefore seems the most likely.”

The error in this analysis is that the German position is somehow the key and that it is this that must be influenced by future events. The view is erroneous. It is but an element in an overall compromise on the future direction of economic policy on which all countries, and especially those members of the Euro Area, have to agree.

“Of course, you may think that if he wins the UMP nomination, the Left will rally round and vote for him [Sarkozy] when it comes to the second round.”

The left will do the ‘right’ thing, in the end?
That would be a very naive left indeed.

France’s economic malaise long predates the Euro. Ditto Italy and a few others. These countries have been growing at snail pace since the early 1980s. Blaming the Euro and Germany is a cop-out. These countries need to reform themselves like the UK, Ireland and a few other European countries did. Quite simply, they need to get their finger out. I was never a lover of Mrs Thatcher because of her attitude to N. Ireland, but France sure could have done with someone like her. France today is the pre-Thatcher UK under Sunny Jim Callaghan.

France’s problems have less to do with Germany than with their own restrictive anti-business practices and generally workshy attitude. Short working week, a ludicrous number of bank holidays, virtual immunity from being sacked in many areas no matter how bad you are at your job, hanging around university studying useless subjects until you are nearing middle-age and balding, then retiring at 55, going on strike at the drop of a hat, high taxes on business, and so on. I’m 65 and I worked 60 hours last week. No intention of retiring until I drop dead. My father retired at 83. I hope to beat him. If I was in France, I’d probably be in jail for breaking some absurd labour law. I went skiing in France last April. In the town where I was skiing all the shops closed for lunch from 1pm to 2pm. They used to do that in my home village in Tyrone, but they abandoned the practice around 40 years ago. They are still doing it in France. And their education is lousy. They ranked miles behind Ireland in the last PISA tests in 2012. Having largely got rid of Church education (as Dubln 4 liberals would like to do here), their state schools are full of bearded Trotskyite buffoons masquerading as teachers. And, while Ireland has Ryanair, last week Air France announced that they had lost 500million euros because of a strike. A few years ago I was in Vesuvious restaurant at the top of the Champs Elysees and the waiter wouldn’t bring me the bill because he said it wasn’t his job to, and that I’d have to wait until the one whose job it was to do that was in a position to do so.

If the Euro and Germany are so bad, why is Ireland growing at 6 per cent? If the Euro is so uncompetitive, why are Ireland’s exports growing at 13 per cent? If cutting government borrowing is such a deterrent to growth, why has Ireland managed to cut its deficit to to 2.7 per cent next year and still grow fast, while France refuses to cut its deficit below 4.5 per cent next year because it would slow its growth too much.

I can understand the embarrassment that left-wing economists like Kevin O’Rourke feel at the condition of France today. But, rather than admit that France’s condition might have something to do with the left-wing policies Mitterand and Hollande inflicted on France (with Chirac and Sarkozy being little better), they simply say its all Germany’s fault. A complete cop-out.

@DOCM

So, do I take it from your approving citation of Andrew Smithers that you were opposed to the Fiscal Compact? After all, “It is a common error to assume that economies are so alike that one medicine is always the answer for all those suffering from weakness or excessive strength.”

@paulr

You are quite correct. I agree totally. If a number of important European countries are suffering economic stagnation because of their foolish policies, this holds back growth in other European countries, even those that are pursuing sensible policies.

For example, the number of overseas tourists to Ireland is up 10 per cent so far in 2014. But, the number from U. States is up 14 per cent and from continental Europe only 6 per cent. If continental Europe was growing as fast as the U. States, the number from there might be up 14 per cent as well. Apart from possible (but still unlikely) disasters due to ebola, mid-east war, all-out Russia/Ukraine war and cut to gas supplies etc, the relative stagnation in continental Europe is the main risk to Ireland’s current high growth. So, I agree with you that the Irish government should be concerned about it and taking steps to address it. If continental Europe could only get its average growth rate up to a modest 2-3 per cent over the next decade, Ireland could easily average 5-6 per cent. But, if continental Europe manages only 0-1 per cent average over the next decade, this might drag Ireland back to the 2-3 per cent range.

However, my point is that for France and others to be putting all the blame on Germany and the ECB for their slow growth is a cop-out. It does not address the real problem, which is their own lack of internal reform. For example, last year they were blaming Germany and the ECB for the euro being too high. But, as anyone living close to Ireland’s artificial border will be very aware, the euro is 12 per cent lower now against £sterling than it was last year, and lower against the $dollar too. Ireland is having an export boom on the back of it. What’s stopping France and Italy and others doing the same?

One other important factor I forgot to mention in my first post on why some continental European countries are doing so badly is their disastrous demographics. Ireland is the only country in Europe with half-decent demographics. To be fair, France is not the worst in this respect. Italy, Spain, Germany and others are worse. In many of these countries there are now far more people aged 65 plus than aged 0-20. In Ireland its the opposite. Ireland still has an abundant supply of young people coming on stream, although Dublin 4 liberals are working flat out to abort this flow. That’s one of the many reasons America multi-nationals prefer Ireland. No one wants to invest in countries where there are more 65+ geriatrics (like myself) than there are 20 somethings. And their ridiculously low retirement ages compound the problem.

@ Ernie

The Fiscal Compact is not the horse medicine you assume it to be.

FYI a 2012 link to a contribution by Seamus Coffey that explained for me how the system actually works (and which I assume is till up to date).

http://economic-incentives.blogspot.ie/2012/05/hitting-structural-deficit-target.html

@ JTO

Given the state that you consider France to be in, is it not remarkable that it continues to be the most visited country in the world in terms of overseas visitors (your good self included)?

@DOCM

Was that a “yes” or a “no”? It remains the case that the fiscal compact is aptly characterised as “one medicine for all,” injected by our German overlords.

Were you for or against?

Yeah, I find that the electorate is very responsive to economic blackmail. Usually, it doesn’t even have to be made explicit.

Would anyone care to offer a reasonably accurate translation of this. It appears to provide some colour for the Bundesbank/ECB nexus:

http://www.focus.de/magazin/kurzfassungen/focus-42-2014-konflikt-zwischen-ezb-chef-draghi-und-bundesbank-praesident-weidmann-schaerfer-als-angenommen_id_4197041.html

It is also worth noting that S & P have made a parallel downgrade for the European Financial Stability Facility (EFSF) as France is its second most important guarantor after Germany.

@ DOCM

Pettis has been right about Germany, and the global situation.

http://www.amazon.com/dp/B00AWTZ3I8/ref=as_sl_pc_tf_lc?tag=chinfinamark-20&camp=213381&creative=390973&linkCode=as4&creativeASIN=B00AWTZ3I8&adid=0GFDVX5KF1W9EE116NM7&&ref-refURL=http%3A%2F%2Fblog.mpettis.com%2F

Marine Le Pen may well not seem a huge risk for France to take in 2017.

With a country like Denmark putting restrictions on immigrants, immigration is unlikely to be a huge issue.

However, leaving the euro as an “an unbelievable opportunity” would need to be credibly fleshed out and if the euro crisis had been deferred for a decade, Alex Salmond would now be preparing to be PM of Scotland.

So scaring older voters about the risk to their savings would be a potent weapon in the hands of opponents.

Manuel Valls, the French PM, has said that his boss committed a “strategic error” in not explaining during his election campaign “what a bad situation France was in.”

In 2017 Valls with 3 years in office as a reformer, could have enough appeal to get into the second round against Le Pen.

…or the situation may not still be bad enough for voters to support clarity over fudge.

France and Italy account for 37.5% of euro area GDP and Germany 28%.

In 2013 France’s GDP per person was ahead of the UK’s.

The three countries have about €2 trillion in public debt each and in 2012 Japan spent less than 1% of GDP on servicing costs while Italy spent 5.6% – 60% of the debt was held in Italy.

In the early 1990s Italy was paying about 12% of GDP in servicing costs – almost 20% of current public spending.

So the recent dips in bond yields and about one quarter of the debt maturing in the short-term, is a help to the economy.

There is no consensus for a union wide stimulus nor has there been in the US.
The global model that was dependent on credit and commodity price booms coupled with surging emerging market growth, cannot be easily replaced.

Reza Moghadam, head of the European Department at the IMF until recently, has become the vice-chairman in Global Capital Markets at Morgan Stanley, and in an FT op-ed on Saturday said:

German manufacturing pay outranks every significant manufacturing country in the world and in 2012 was 28% above France’s (that is pay and does not include employer’s social security).

It is highly likely that Le Pen would stand up for what she perceived to be the interests of France. Her presidency would certainly be a game changer. What Europe needs now is a figure with the status of De Gaulle. Instead it has the “Rice Pudding”. Going back to Sarko is not going to change matters.

Now it might not end well but it would certainly break the current impasse.

Le pen would stand up for France, Tull? And les Shinners would do the same for Ireland, surely? Democracy is about giving people what they want and giving it to them good and hard. None of those charlatans incl UKIP have anything coherent to say as policy. I want a change is not good enough. Look at Obama. French Hopey changey even with docs is not going to fly.

@ JTO

Far be it for me to stop you visiting France (although how any such intention could be read into my rather rhetorical question escapes me). The point that I was making is that you are grossly exaggerating the situation of the country and your contribution is, in itself, inherently contradictory i.e. how could a country so badly led end up being so attractive to you and to visitors from all over the world. I would not mind if we had its health service either.

On the impact of the euro, it was France’s own decision to join (with a admittedly a tiny majority) and the country must now live with the consequences, the most difficult being that it can no longer devalue a French franc to restore competitiveness. To that extent, the euro, and how it is managed, is a vital element in the overall mix.

S & P deal with this, and other points, in its rating decision. (I cannot find a link to the original English version).

“Wages and other labour costs are simply too high, even by the standards of rich countries.” [Reza Moghadam]

What sort of silly rubbish is this? ” … stagnation becomes the new normal.”

“Hello, Reza” – stagnation (in developed economies) IS the ‘normal’.

And this crapola – ” There is scope for a stimulus across the Eurozone, not just in Germany. It should amount to between 1 and 2 per cent of the bloc’s gross domestic product – more where demand shortage is keeping output below potential …”

Completely contradictory – and fails to ‘see it’. Attempt to stimulate demand with fiat credit and simultaneously real money reduce wages ???? So now, the new normal is to drive your car with one foot firmly slammed on the accelerator, whilst the other is equally firmly slammed on the foot-brake – and both hands jerking the hand-brake as hard as you can.

@ MH: “Cutting wages while arguing for a stimulus is an issue that cannot be dealt with in a soundbite.”

Agreed, but that well superannuated, demented soul is sure trying their damnedest! Do sentient economic folk believe still believe this dreadful, contradictory nonsense? Seems so.

@ Seafóid: ” … real non debt driven growth is the key issue.” Yeah! And our ‘great leaders’ do not know how else (with copious amounts of fiat credit) to power Permagrowth. It would be Marxian (as in Groucho) if it what is actually being implemented, were not so destructive.

Its one thing to close-up a business and board up the windows. Its another thing entirely to demolish the actual building. Its the latter that is in progress – and progress is pretty good! And a bunch of bureaucratic creeptoids in the US of Amnesia keep telling us – “Its all KO!”. “Just – CARRY ON!”.

@Thats Legal

“By preventing credit being used to bid up property prices enough to make it more profitable to build, the central bank has kicked the problem of pricey builds to government to solve. If they solve it, the country as a whole will be better off, as we’ll have more reasonably priced property, .”

I could not agree more.
The fact is that at current Dublin house prices, the majority of aspirant home buyers cannot afford a house, and are in effect social housing candidates.
This is neither the fault of the central bank or the people themselves.
It is the direct consequence of land profiteering and govt levies taking economic priority over the basic housing needs of citizens.
The central bank should not row back one iota from its targets. In fact they are too soft.
It is a matter for politicians, and a Minister for Housing if we had one, to ensure that reasonably prices houses are available to people living on reasonable wages.
Land profiteering and people making ‘property plays’ should be routed out of the system [and out of the country if needs be].

@BWS

Bank credit is only part of the problem in Dublin. Almost 33% of new house cost in Dublin is made up of land profit and State or State agency taxes. If ‘developers’ had been denied credit it might have helped considerably. Not only did they get credit, but it seems that Ronan and Quinlan (from recent reports) are back again for more money]

Equally if this gent was selling the land his company is sitting on at agricultural prices, it would knock about €40,000 at least off the prices of the houses being build on it. [In the event that building is more profitable than hoarding, that is]. But Ireland in its wisdom has decided that it is better for property players to make a killing that it is for aspirant home owners to own a home at reasonable cost.

But in the short term the restriction of bank credit will certainly force up rents and will bleed the tenants as assuredly as any bank mortgage ever did.

I tend to agree with you re a one salary being the benchmark to measure a mortgage against, if as a society we intend to procreate sufficiently to remain a society.

@ That’s Legal

I agree with your analysis, especially on the point you make with regard to the euro preventing politicians from taking what might be described as the palliative route of a devaluation; which does nothing to resolve the underlying problems of the loss of economic competitiveness.

Therein lies the great political danger.

http://graphics.wsj.com/which-country-has-the-most-nobel-prizes/

This talking point about no one getting rich by devaluing their currency is daft. The point about floating currencies is not about getting rich or not getting rich. It is about having an effective mechanism to correct economic imbalances – turning national economic success into greater spending power on imported goods and services rather than boomy bubbliness, and loss of competiiveness into inflation rather than large scale unemployment. We left the gold standard because, on the whole, once things start going very right or very wrong economically you are better off with a floating exchange rate.

Wall Street Journal

ERLIN—Germany and France have tapped a prominent economist from each country for policy advice to counter “the risk of a lost decade in Europe” in an attempt to bridge the growing divide between the two countries over how to revive flagging economic growth in Europe.

German Economics Minister Sigmar Gabriel and French Economy and Industry Minister Emmanuel Macron recently solicited help from French economist Jean Pisani-Ferry and Henrik Enderlein, lecturers at the Berlin-based Hertie School of Governance, in separate letters seen by The Wall Street Journal.

http://online.wsj.com/articles/germany-france-asks-economists-for-advice-to-avoid-lost-decade-1413221631

@ BCT

Does the euro not have a floating exchange rate?

Wanting a national currency with a floating exchange rate is not compatible with joining a currency union. If one does join, one must confront the resulting consequences/challenges. Basing policy on the illusion that one has actually not done so cannot be recommended.

The euro floats,but the euro zone has demonstrated that it is far from an optimal currency area. It is evident that it was a blunder on the part of the EU to establish it. The economics were nonsensical, and events have shown that that the politics were misguided and naive.

For the moment, at least, it seems that dismantling it is both economically and politically impractical, although I think Kevin is right to hint that this may not last. In the meantime, the trope that no one ever got rich by devaluing simply diverts attention from the fact that almost every developed country in the world has for long periods benefited greatly from the shock-absorbing capacity of floating exchange rates on national currencies.

@ Ernie

“DOCM will give you several links. Read them or the beatings will recommence”.

do you bother reading them? My understanding is that DOCM works for some euro outfit and then she/she comes along and says France is entirely responsible for the situation it finds itself in. Nothing about the wider dysfunction. What happened to the notion of the union ?

@ BCT

No argument with you there! But you seized on a point being made – the general ineffectiveness of devaluations in a historical perspective – which only came up in passing and in the context of the inability of the euro countries to devalue. From my limited knowledge, it can only work – or, rather, help – in the context of (i) a general budgetary retrenchment and programme of reform and (ii) when nobody else is doing it (the example of Sweden in the 90s comes to mind). If it did work independently, the massive devaluation in Sterling vis-a-vis the euro – now reversing – would surely have given UK exports a boost?

@ GK

I believe Ambrose carries the nickname “Armageddon” and one can see why. Maybe he could do a piece on the UK economy cf. Robert Skidelsky.

http://www.theguardian.com/commentisfree/2014/oct/09/labour-george-osborne-recovery-coalition-cuts

“There is one possible exception: if wealth-holders believe that the government needs to cut its deficit – because otherwise, say, Britain would “go the way of Greece” – then the announcement of a credible deficit-reduction plan might increase their confidence in the future and cause them to increase their spending.”

Maybe this is what is happening in Ireland! But the warnings of the Fiscal Advisory Council regarding external economic weakness seem to be based on solid ground. To this extent, AEP is right.

In a nutshell, Ireland has been borrowing money to ease the impact of austerity but has failed to target it correctly i.e. on maintaining the standard of living of those lucky enough to remain employed rather than following the advice of Skidelsky.

Le Figaro on the three-cornered stand-off between Paris, Berlin and the Commission (departing and arriving!).

http://www.lefigaro.fr/conjoncture/2014/10/13/20002-20141013ARTFIG00335-deficits-paris-et-berlin-negocient-en-coulisses.php

Seconds out! might be most appropriate comment.

@seafóid

do you bother reading them? My understanding is that DOCM works for some euro outfit and then she/she comes along and says France is entirely responsible for the situation it finds itself in. Nothing about the wider dysfunction. What happened to the notion of the union ?

As with all propaganda the content is irrelevant, it is why it is being said (normally to muddy the waters or derail a thread here).

It is hard to know what nexus of the financial sector, Eurocracy and the European right DOCM
represents but if he (or she) is being being paid to ruin the blog and distract from the underlying issues that face Ireland and the EU it is money well spent – he shows real commitment.

For instance in this thread 29% of posts, and possibly more of the content, comes from DOCM.

What continues to puzzle me is why the blog’s moderators allow it.

It seems that the WSJ report linked to by Frank Galton above has real substance.

http://www.reuters.com/article/2014/10/13/us-germany-france-reforms-idUSKCN0I21QO20141013

The situation highlights the long-standing and rather curious relationship between the Chancellor and her finance minister. What the real German policy position is remains as undecided as ever.

The possibility of agreement on some form of EU-wide stimulus programme seems, however, to be increasing. This cannot but be helpful and must push Ireland further along the road to recovery (especially against the background of a budget without any evident immediate banana skins).

It’s not unmoderated.

No thread on the budget, the end of austerity, and of the double Irish……….?

From JTO:

“I’m 65 and I worked 60 hours last week. No intention of retiring until I drop dead.”

Wow. As somebody only about 8 years along in my career, that sounds exactly how I’ve always dreamed my life would go: Working 12 hour weekdays (or perhaps “just” 9 hours every day?) so that I’m too tired to enjoy the pay I receive, have sex with my spouse or get to know my kids before they grow up… and continuing like that forever until one day when I collapse at my desk.

Unfortunately, I’ve also seen Dead Poets Society… and I value working AS THE MEANS to have both wealth and free time to enjoy other pursuits in life. But good luck to you… perhaps all the hard work you’re putting in will earn you a ticket to first class in Protestant Heaven.

@ JR: Thanks. Just confirms what I believe – there are ‘triple -Oirish’ tax breaks for some Irish non-taxpayers – that is, they not only do not pay income or similar taxes, they get rebates on their water charges and their debt payments! Bloody lovely! I’m jealous – of course!

And, whither oil? If there is all this wonderful green shootery going on all over the shop- why is oil price down 25% ??? It should be increasing!!! Lets see if the prices of other raw commodities and finished goods with a high oil content, also ‘deflate’. Hmmmm.

Is there any substance to the news reports that Noonan ate Google’s sandwich and existing arrangements have a stale by date of 2020. Google’s stock rose slightly on the news which means the news was priced in.