Italians ignore the experts

28/02/2013 § Leave a comment

By now, it is old news that Italians expressed their collective displeasure with economic experts telling them how to run their country. Monti, you will recall, was appointed Prime Minister in a true ‘call in the experts’ move. Now, his party has made a poor showing in the election, and no wonder:

Battered by 13 months of the technocrat government’s austerity measures, many voters had grown to loathe Monti for – as they saw it – turning the screw on them with tax hikes when they were already struggling in a recession.

The adjective commonly applied to Mario Monti was ‘technocratic’. It’s such a bloodless word. For it to have any meaning, one must make massive assumptions about the objectivity of knowledge and the possibilities for even-handedness. It’s an entire worldview hiding in a single word.

Economies are, of course, for the benefit of people. If people decide that things aren’t working out for them, they have options. Sometimes, it means changing jobs, or cutting back on spending, or moving cities. Those are all individual actions made within the bounds of existing conditions. Sometimes, though, people decide that the conditions need to change. That’s what the Italian election signals, as Krugman explains:

The fundamental fact is that a policy of austerity for all — incredibly harsh austerity in debtor nations, but some austerity in the European core too, and not a hint of expansionary policy anywhere — is a complete failure. None of the nations under Brussels/Berlin-imposed austerity has shown even a hint of economic recovery; unemployment is at society-destroying levels.

In a crass way, this is clearly a consultancy failure: the expert didn’t understand the client. He pushed the client too hard on challenging issues and didn’t understand the complexities of the environment in which he was operating. It’s no wonder his contract was terminated.

I’m sure he will be appointed to some other job, though. Unlike many of his compatriots.

Shuffling sideways

24/08/2012 § Leave a comment

I’ve been working through the economic news from around the world this morning. Bloomberg says that Europe is still contracting, although perhaps a bit less than before. Indicators for both services and manufacturing are in the negative zone, just moving around a bit. The same article tells us that China is slowing down and the United States is moving sideways. The Washington Post reports much the same information, adding that the eurozone numbers mean Europe is ‘firmly in recession’, and that China’s economic policy will be on autopilot until the Party Congress in October. I’d add that US policy is also likely to be on autopilot until November: Congress will try to stymie the President and the Federal Reserve will want to avoid appearing political.

The policy news out of the eurozone was better, as TVHE explained a couple of days ago, and then the news this morning is contradictory and strange. Matt Nolan focuses on the ‘we won’t tell anyone’ aspect of the story. I keyed into comments in this Reuters article, in which a European bank economist explained the folly. I guess I assumed that, if someone can clearly explain the problem in a news article, the ECB can understand that it might not be good policy.

With all this, I was trying to think of what the country-by-country analysis meant for the world economy. I went back to the World Bank statistics just to refresh my memory of the relative sizes of these countries’ economies. As a service to readers, I’ve put them in pie charts:

These are just reminders that the big countries are big — a few countries comprise most of the world’s GDP. They all seem to be shuffling sideways at the moment. Given that the US and China are at points in their political cycles when economic policy is flat, that shuffling looks set to continue through the end of the year. The contradictory yet strangely hopeful signals out of Europe suggest a muddling through there. The Eurozone chart also suggests that Greece isn’t as important as it is made out to be, but Italy and Spain could be worries.

For New Zealand, well, the latest NZIER column (pdf) probably has it about right (and not just because they sign my paychecks): ‘stagnant’, ‘sideways’, ‘anaemic’, ‘flat’, ‘weak’, etc.

Happy, happy, joy, joy.

Last rites for Grecian euro?

24/07/2012 § Leave a comment

An observation striking in its simplicity is this: something that cannot continue indefinitely, won’t.

This has been my frame of reference for Greece’s troubles. The size of the debt is unsustainable; payments on the debt cannot continue to be made. Something has to give.

All the activity of the last months (years?) hasn’t affected the underlying conditions or the key ratios. As Bloomberg reports:

“Nothing is really fixed in Europe,” John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York, said in a telephone interview.

Now, we have reports that the IMF is washing its hands of Greece:

In an article published on its website, Spiegel cites unnamed senior European Union sources in Brussels who told the news magazine that the International Monetary Fund (IMF) had signaled it would not contribute to any further aid for Greece.

Months ago, when it looked like Greece might fall over and leave the euro, the problem was that no plans for exit were in place. The experts said it would take months to organise. Well, we’ve had  months, now. We also have plans.

Who decides when to pull the plug?

The eurocrisis is dead. Long live the eurocrisis!

20/06/2012 § 1 Comment

So, Greece.

They had the election, and the scary party didn’t win. Yay! Now we can all go back to…to what?

Just to recap:

Greece’s conservatives and socialists are edging towards a deal on a new government….

Who are these conservatives and socialists who saved Greece, Europe, and the world from Syriza, the radicals who would have torn up the existing bailout agreements and pushed for a better deal? Why, they are

arch rival parties which alternated in office from the fall of military rule in 1974 until last year, when Greece’s economic crisis forced them to share power in a short-lived national unity government.

Let’s say you’re the kind of person who thinks that the Greeks brought this all on themselves, that this is a sort of Greek tragedy in which moral laxity in Act I sets off a chain of events leading to punishment in Act III. They overspent, they didn’t pay their taxes, and now they can’t pay their debts. Who, exactly, was in charge in Act I? Actually, it seems that the same people who were in charge then just won the election. If the actors are still on stage, the play isn’t over. There’s still plenty of time for the gods to punish the mortals’ hubris.

Let’s say, alternatively, that you’re the kind of person who thinks this is structural. The euro is a monetary union without a fiscal union, so it has insufficient automatic stabilisers to contend with the regional economic heterogeneity in Europe. Money flowed into Greece when investors thought it was a safe as Germany. In fact, it wasn’t, and now those debts cannot be paid. Who, exactly, is going to negotiate the lower debt payments and/or higher inflation that might allow Greece to trade through? The same political parties who have been playing catch-up for the last couple of years?

There are now reports that the election may have shaken things loose a little. Creditors are signalling that they may be willing to renegotiate. Maybe the threat of competition — the success of Syriza — was enough to push the political duopoly towards a better equilibrium.

With that exception, the Greek election has merely moved us back to the status quo ante. As I recall, it wasn’t all that flash.

Standing in Harvard Square with leaflets and a big sign

15/06/2012 § 6 Comments

There was, floating around the Web recently, an analysis of the current economic risks. It had probabilities of each major economic area pulling through without collapse, 80% for the US, 70% for the EU, etc. The two points seemed to be that each area still had a good chance of being fine, but the probability that nothing would happen was fairly low.

What struck me was that the analysis treated the risks as independent. Of course, they aren’t. If the eurozone were to collapse, to whom would the US and China (and NZ) sell their exports? Those economies would suffer, too. The joint probabilities are key.

Dani Rodrik tells a story about what could happen, the joint probabilities presented in prose. Entitled ‘The End of the World as We Know It’, it is a tale of worry and woe that ends thus:

A remote scenario? Perhaps, but not remote enough.

I’ll leave you to follow the link.

Journalism-lite from the G8

21/05/2012 § Leave a comment

The G8 summit running over the weekend issued a communique on the global economy, and this was picked up by the international press. Unfortunately, the press wasn’t particularly helpful in understanding the economics. They repeated the statements in the communique, but without analysis or explanation. These statements are fundamentally political, so they aren’t much help understanding the economics.

For starters, the leaders of the G8 said this:

Our imperative is to promote growth and jobs…. [W]e commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us.

Of course their imperative is growth and jobs. The G8 isn’t going to announce its support of stagnation and unemployment. The current debate is how to promote growth and jobs. Some pretty clear lines have been drawn in economic theory and economic policy. One side supports the view that Aggregate Demand is cyclically low, and should be supported by the consumer of last resort, the government. The other side supports the view that short-term boosts will only create long-term problems; creative destruction is reallocating resources to more productive uses, and governments must strengthen their balance sheets. Both theories share the same goal: economic growth.

The G8 statement doesn’t take sides in this debate, so it is fundamentally meaningless as economics. Politically, it leaves the door open to be all things to everyone: ‘the right measures are not the same for each of us’.

Further down the communique, one statement that got people talking was this:

We agree on the importance of a strong and cohesive Eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the Eurozone while respecting its commitments.

At first glance, this looks like support for Greece, and that’s how Reuters reported it (‘World leaders back Greece’). Except the G8 might just as well have come out for unicorns and rainbows. And free wi-fi. All they have done is confirm their support for two principles. These two principles currently happen to be at odds. One way or another, the conflict is going to be resolved, and then we are going to find out their preference ordering.

Here is what they said. They want:

  1. Greece in the Eurozone
  2. Greece ‘respecting its commitments’, which means paying back all the money it owes everyone.

The OECD statistics paint a grim picture. Government debt in 2010 was about 150% of GDP and continues to grow. Government expenditure accounts for 50% of the official economy, although the informal economy is large. The difference between government revenue and expenditure in 2010 was 10% of GDP. Recall that the Stability and Growth Pact calls for a public debt of 60% or less. Put these numbers together, and the net result is this: if the government can reduce its spending by 40% (or 20% of GDP), then the country can meet its eurozone obligations in about 10 years. At least half that decrease is a real reduction, because the government is no longer spending borrowed money. The other half — the part that is paying off past borrowing — may or may not come back to Greece in the form of increased exports. Because they are euro loans, the creditors can take the repayments and spend them elsewhere.

The G8 communique is saying that they support Greece in the eurozone on terms that make it impossible for Greece to remain in the eurozone. That is why the document is fundamentally political. The business and economics journalists should say so.

Accepting a euro break-up

16/05/2012 § Leave a comment

Tyler Cowen points to his own 2005 post and this statement:

It would be ironic if the strongest argument against the Euro was simply the eventual need to dissolve it.

I immediately thought of Slavoj Zizek’s commentary about Jean-Pierre Dupuy on climate change: the only way to deal with climate change is to accept that it is our future. As long as it is but a potential, one future amongst many, it is a mere potentiality that we can conveniently ignore. If, however, we begin to think of it as our destiny, then we can push against it.

Zizek:

the way we act is determined by our anticipation of the future and our reaction to this anticipation.

He then quotes Dupuy:

The catastrophic event is inscribed into the future as destiny, for sure, but also as a contingent accident: it could not have taken place, even if, in futur anterieur, it appears as necessary.

From that perspective, it is only by accepting the certainty of a euro break-up that Eurocrats can paradoxically begin to create plans to avoid it. Thus, the ‘need’ to dissolve the euro might become the strongest argument against it, but might also motivate efforts to save it. As long as break-up was unthinkable (just a few months ago), then the parties involved were not willing to take the necessary steps to ensure its survival. Now, perhaps, they may try.

Is Krugman a betting man?

14/05/2012 § Leave a comment

First, my apologies for bouncing off Paul Krugman two days in a row. But this is a chance to see who is a better forecaster, Krugman or the hive-mind of New Zealand.

As reported over the weekend, Greek politicians have failed to form a government. They are now in ‘emergency talks’ to form a government palatable to enough people to stand. Things don’t look good; new elections may have to take place. The core problem is austerity and the bail-out package the the EU.

Krugman blogs that ‘[s]ome of us have been talking it over’, and that Greece might leave the euro. More precisely, he predicts:

Greek euro exit, very possibly next month.

Wow. That’s a pretty concrete prediction.

What does iPredict say? There’s a contract for this: ‘Greece to announce before 1 January 2013 departure from the Eurozone’ (Ticker: EURODEP.GREECE.2012). It’s currently trading at $0.3452. The people trading on iPredict give Greece a 35% probability of leaving the euro by the end of the year (we’re only in May now). Krugman says ‘very possibly next month’.

Who will be right?

Wanna bet on it?

French revolution?

08/05/2012 § Leave a comment

Hollande defeated Sarkozy in this weekend’s presidential election in France. Reporting and commentary is amusingly mixed. The NZ Herald on-line published an article today with the headline ‘Markets brace for French Revolution’. A commentary in The Independent (UK) starts:

France will be waking up today to its first Socialist President for 17 years – and bracing for radical change. There are all kinds of reasons why one might fear a François Hollande presidency, especially if you are a prosperous French person.

But read a bit further, and these articles and many others suggest that little will change. They mention some of the promises: 60,000 more teachers, a higher minimum wage, and higher taxes on a small fraction of high-income earners. Then comes the summary:

But given the constraints of international finance and economic structures, observers said Hollande will not really have room to maneuver to shift France radically to the left.

If there is any doubt of this assessment, let’s ask some actual socialists. From the World Socialist Web Site:

Conservative President Nicolas Sarkozy and Socialist Party (PS) challenger François Hollande faced off last night in the lone TV debate before the May 6 run-off election. Some 20 million people reportedly watched the event. In a confused and argumentative debate, Hollande and Sarkozy both sought to win support from the financial elite on a program of social cuts, anti-immigrant racism, and continuing imperialist wars.

It is important to remember who the Socialist Party (PS) is in France, and the structure of the French elite. The PS is one of the two main political parties and has been near the centre of power for decades. It doesn’t remain close to power by being revolutionary — it must maintain some versus of the status quo. The French elite — and Hollande is one of them — is a cadre educated in the French grandes ecoles who work together, play together, and live together. Sarkozy was a bit of an anomaly in this regard — a mediocre student from second-tier schools.

Looking at Hollande’s promises, this centrism is obvious. As much as he has promised increased spending, he has also promised to move France to fiscal balance over the next few years. If the problem is truly one of aggregate demand — the Keynesian assessment of Europe’s troubles — then fiscal balance puts a severe constraint on government action. Hollande appears to be a socialist in the little things — lower retirement age, more teachers — and a conservative on balance.

The real action is unlikely to be in France. Instead, it is how France and Germany work together that will count. Krugman had some thoughts on this:

The Germans … will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.

This will be interesting to watch.

Austerity is not incompatible with social unrest

26/04/2012 § 1 Comment

French President Sarkozy pulled back the curtain, briefly, then let it fall back. His statement, ‘Le Pen isn’t incompatible with the French Republic’, revealed his core consideration: power. Le Pen and her father before her marked the outer edge of French politics on the Right. The National Front wins small percentages of the popular vote, but its real function is to be the bit outside the ‘reputable’ Right. With this heavily-contested election and Sarkozy’s weakness, he is flailing around for any weapon with which to beat Hollande.

Sarkozy just moved the outer edge of what is acceptable. He has since retreated, but his statement can’t be unsaid.

It is a stark reminder that economics has ramifications for the real world. Keynes noted the same issue in ‘The Economic Consequences of the Peace’ after the Treaty of Versailles. That’s the potential failure of the technocratic, expert position: it fails to account for the impacts on and reactions of citizens. And then, it is blind to the reactions of politicians keen to hold onto power.

The success of Le Pen and Sarkozy’s subsequent reaction are symptoms of how people are reacting to the European economy. They are symptoms of people’s dashed expectations about well-being and fairness.

They are also analogous to the protests in Greece. They indicate a breakdown in larger social agreements. The economy rests on these larger social agreements. The economics literature likes to talk about ‘trust’, but it really is something more than that. It is expectations for the wider fair-play in society and the impacts on each person’s individual well-being now and in the future.

The difference between a normal recession and the present situation is this: people expect and live with normal recessions, even when they are personally harmed. There is a sense that, yes, things are bad, but either ‘that’s the way things go’ or ‘it’ll get better’. In the present situation — the Great Recession, the Lesser Depression, whatever you call it — Greeks, Spanish, French, and others are starting to say, ‘This isn’t right. This isn’t what I agreed to. I want — I demand — something different.’

The danger is that something different could be something worse.

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