Friday, January 10, 2014

10/1/2014: Ambrose Evans-Pritchard on Euro area's miracle of recovery


A very good article by Ambrose Evans-Pritchard on the fallacy of European 'leaders' view of the peripheral countries economic stabilisation: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100026365/barroso-triumphant-as-jobless-europe-wastes-five-precious-years-of-global-recovery/

Some caveats:

  1. AEP argues that Ireland had the capacity to withstand domestic blowout caused (as he correctly states) by the monetary policy mismatch. His argument for this is that "Ireland is highly competitive (second best in EMU after Finland on the World Bank gauge)." The problem, of course, is that WB competitiveness indicator is superficial - it hardly reflects the reality on the ground when it comes to credit supply (non-existent in the economy, yet highly ranked in WB study), openness of domestic markets (not measured), access to public procurement (not measured), extent of domestic indirect taxes (not measured), security of domestic property rights (pensions or insurance contracts, anyone?), etc etc etc. 
  2. AEP argues correctly that Ireland has high levels of exposure to international trade. And this is sustaining the macro-level recovery in the economic aggregates (GDP etc), but this has virtually no effect on the ground - the domestic economy is stagnant and most of the improvements that do take place are down to Malthusian contraction: emigration, jobs destruction, tax and charges hikes, rip-off via state-controlled prices and other measures that continue to shift private sector resources to fund the Exchequer. Ireland has had virtually no real reforms in the way domestic (public and private) business is conducted.
  3. AEP acknowledges some of the above problems, saying that "But even if Ireland can make it without debt restructuring (and that is not certain), the underlying erosion of the workforce through hysteresis from mass unemployment – and from mass migration to the UK, US, and Australia – has greatly damaged the long-term growth potential of the economy." This is spot on. One qualifier, however - Ireland already had three rounds of debt restructuring: two rounds of restructuring Troika debts (terms extensions and rate reductions) and one round of restructuring banks-linked debt (Promissory Notes). These provided, in some cases real and in some temporary, relief to the fiscal funding side of the equation. It is, however, in no way certain that we will not need more restructuring.


Key is that AEP 100% correct in saying that:
"At the end of the day, Ireland was forced by the EU authorities to take on the vast liabilities of Anglo-Irish to save the European banking system in the white heat of the Lehman crisis, and the EU has since walked away from its pledge to help make this good. The Irish people have been stoic, disciplined, even heroic. They have survived this mistreatment. To cite it as a vindication of EU strategy sticks in the craw."

And per future, I couldn't have said it better myself:
"Europe is one external shock away from a full-blown deflation trap, and one recession away from an underlying public and private debt crisis. Nothing has been resolved. Aggregate debt ratios are higher than they were before the austerity experiment. In the end there will still have to be a "Brady Plan" like the Latin American debt write-offs at the end of the 1980s, but on a far larger scale and with far more traumatic effects on the European body politic. So celebrate today while the sun is still out, and dream on."

Let me add that Europe is one internal shock away from the above too. All that is needed is a massive wave of financial repression to derail the common currency's faltering monetary structure and push the banking sector back into contraction. The debt levels - private and public - are dramatic enough for the economy to succumb to either external or internal shocks. And one certainty we have is that shocks do happen.
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