Economics 14/10/10: Innovation Union from European Union

Just in case you thought our own Government's naive and overly optimistic 'knowledge economy' papers were original in their lack of understanding of business, take a look at the latest EU-wide policy idea.

According to the European Commission boffins, by 2020 we will be living not in a Fiscal Union (won't happen, cause Germans wouldn't want a de jure responsibility for PIIGS) or the Monetary Union (can't last much longer in its current shape due to contradictory forces of sovereign economic policies) or even a Bailout Union (the current reincarnation of the big idea)... instead we will be the happy citizens of an Innovation Union.

The details (if one call them such) of this well-meaning stuff are provided here.

Not to waste anybody's time with navigating the lofty dream space of European 'thinkers' on development policy, let's cut straight to the chase. Two things come to mind reading the document.

1. It is aspirational (good thing) of benefits of the Innovation-driven economy and is strong on traditional bits of bureaucratic competency, promising good targets on legal environment and strategic partnerships, but
2. The big iceberg awaiting the Euro dreamliner (err... Titanic) is also right here - on the Welcome page: "Innovation as described in the Innovation Union plan broadly means change that speeds up and improves the way we conceive, develop, produce and access new products and services. Changes that create more jobs, improve people's lives and build greener and better societies."
   

Spot what's missing in the grand vision? Here:

• Sales
• Marketing
• Logistics
• Commercialization
• Consumer
• Finance (especially the issue of relationship between current fiscal imbalances and promised subsidies)
  

You see, folks in Brussels think that once a nerdy type draws a squiggly thingy on an i-pad and another nerdy types says 'Cool, man!', you instantaneously get more jobs, improve lives and green-up the bettered society. Not much else is required:

• Lower taxes to promote greater consumption, especially given we are facing rapidly aging and more risk averse European demographic, which is not exactly representative of early adopter consumer types needed for Innovation Union? Nope, not needed.
  
• Lower state charges to promote more investment, again especially in economies where savings will be increasingly consumed by pensioners instead of invested by the younger income earners? Why bother!
  
• Fewer Nanny State regulations to improve 'access', especially in the regulatory environment that has by now even managed to ban insurance companies from pricing the basic risks? Will have Innovation without that, thank you.
  
• More entrepreneurship to support deployment of products into the marketplace, again a major bottleneck in the aging and largely socially immobile society of EU? Uh, oh, what's 'entrepreneurship'?
• Improved early stage finance environments with fewer state subsidies inducing distortions in the market, especially crucial given the state of public finances in the non-Innovation EU? We can't have anything that involves 'fewer subsidies'!
  

So this is why, in my view, the latest idea, despite being aspirational and well-intentioned risks becoming yet another Titanic of economic policy, to join such hits of the past as:

• The Lisbon Agenda (which aimed for EU to overtake US in terms of economic growth, jobs creation etc by 2010);
• The Social Economy (which aimed for the EU to become a singular welfare state where the young labour away assets-less and savings-less to preserve the status quo of landed gentry and pensioned state employees);
• The Knowledge Economy (which aimed for the EU to become a heaven for all sorts of knowledge), and
• The Green Economy (which aimed to turn EU into one big nature preserve at a wave of a magic wand of subsidies).

What can possibly go wrong this time around with Innovation Union, then?

Economics 17/03/2010: Stuck in the Euroland

The silver lining to the ongoing PIIGS crisis in the Euroland is that finally, courtesy of the severe pain inflicted by the bonds markets, Brussels (and more importantly the core nation states) is forced to face the music of its own making.

I wrote for years about the sick nature of the European economy - at the aggregate levels and individual countries cases. Today's FT Alphaville article by Lombard Street Research’s Charles Dumas (here) offers another great x-ray of the issue:

Dumas' chart clearly shows just how sick the core Euro area economies are and how structural this sickness is. With exception of the bubble-driven catch-up kids, like Spain, the Euro area has manged to miss the growth boat since the beginning of the last expansion cycle.

"The chart above shows real GDP growth from the end of the last recession… Germany is placed evenly between the Sick Man of Europe, Italy (with no growth at all – the very fact of EMU membership has been enough to crush Italy), and the Sick man of the World, Japan (which at least managed nearly 1% annual growth). Germany’s pathetic advance over eight years was 3½%, less than ½% a year, and one third of the growth of Britain and France…" But France, and the UK, have managed roughly 0.975% annualized growth over the same time. Comparing this to the US at 1.27% puts the picture in clearer perspective.

The problem, of course, is much greater. I wrote before that the real global divergence - over the last 10 years - has been happening not via the emerging economies decoupling from the US, but via Europe's decoupling from the rest of the world. The chart above clearly shows that this significant in economic terms (as the gap between European 'social' economies wealth and income and the US/UK is still growing). But the chart also shows that Europe is also having a much more pronounced recession than the US.

Europe's failure to keep up with the US during the last cycle is made even more spectacular by the political realities of the block. Unlike any other developed country or block, EU has manged to produce numerous centralized plans for growth. Since the late 1990s, aping Nikita Khruschev's 'We will bury you!' address to the US, Brussels has managed to publish a number of lofty programmes - all explicitly aimed at overtaking the US in economic performance. All promised some new 'alternative' way to growth nirvana: Lisbon Agenda was followed by Social Economy, which was displaced by the Knowledge Economy. The latest installment - this year's Agenda 2020 is a mash of all three - the strategies that failed individually are now being mixed up in a noxious cocktail of economic policy confusion, apathy and sloganeering.

But numbers do not lie. The real source of Euro area's crisis is a deeply rooted structural collapse of growth. No amount of waterboarding of the real economy with cheap ECB cash, state bailouts and public deficits financing will get us out of this corner. Tax cuts paid for through fiscal spending reductions could have helped in the long run by deleveraging Europe's economy out of the state control bubble. But this opportunity is now firmly wasted through unprecedented amounts of deficit financing deployed in 2009-2010.

Never mind Greece and the rest of PIIGS, EU has no growth engine to get ourselves out of the Japan-styled (or shall we call it Italy-styled) long term stagnation.

Economics 29/01/2010: US Economy Blistering Growth

US GDP grew at annualized rate of 5.7% in real terms in Q4 2009 (q-o-q growth), according to the "advance" estimate released by the Bureau of Economic Analysis. This is a massive jump on 2.2% real rise in Q3 2009.

Q4 increase reflected gains in private inventory investment (two consecutive quarters rise), exports, and personal consumption expenditures (PCE). Imports, which reduce GDP, also increased in Q3, signaling improved consumer and producer (intermediates) demand, but the rate of growth fell in Q4. An upturn in nonresidential fixed investment was partially offset by slowdown in federal government spending.

Real personal consumption expenditures increased 2.0% in Q4, down from an increase of 2.8% in the third quarter. Durable goods decreased 0.9%, in contrast to an increase of 20.4% in Q3 2009. Nondurable goods increased 4.3%, compared with an increase of 1.5% in Q 3. Services increased 1.7%, compared with an increase of 0.8% in Q3. This suggests rather anemic holidays season and potential reversal in consumer confidence (see below). It certainly does not add up to a robust change in the crisis-driven increases in marginal propensity to save (up 4%+ in Q4) and enhanced risk-aversion (keeping durables sales down).

Real nonresidential fixed investment increased 2.9% in Q4, in contrast to a decrease of 5.9% in Q3. Nonresidential structures decreased 15.4%, compared with a decrease of 18.4%. Equipment and software increased 13.3 percent, compared with an increase of 1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9%. All indicating the beginnings of a new business investment cycle - a very good sign.

A note to European policy makers: weaker currency works magic: real exports of goods and services increased 18.1% in Q4, compared with an increase of 17.8% a quarter earlier. Real imports of goods and services increased 10.5%, compared with an increase of 21.3%. This again points to depressed consumer rebound, but it also signals that inventories rebuilding might have been completed by now - a sign that we might expect much weaker contribution to GDP growth from that side of the NA in the next 2-4 months.

Stimulus is thinning out and rapidly, but on the military spending side, not in civilian consumption. Real federal government consumption expenditures and gross investment increased 0.1% in the fourth quarter, compared with an increase of 8.0% in the third. But non-defense spending increased 8.1%, compared with an increase of 7.0% in Q3.

Another lesson to European leaders: cut taxes and see things grow faster. Current-dollar personal income increased $119.2 billion (+4.0%) in Q4, compared with an increase of $35.1 billion (1.2%) in Q3. Personal current taxes decreased $11.7 billion, in contrast to an increase of $3.5 billion in Q3. Thus, disposable personal income increased $130.8 billion (+4.8%) in the fourth quarter, compared with an increase of $31.6 billion (+1.2%) in the third.

The miracle that is the resilient US economy is about to swing into action, assuming no adverse news on the Federal Reserve side.

Charts on Consumer Confidence finding upward support, again... over the downward cycle
but not over a deviation from historic trend...
not yet. Which means that we are now in the optimistic (exuberantly) territory relative to historic trends:
and

Economics 12/11/2009: ECB's latest view

I will be blogging on the latest monthly bulletin from ECB published today, but here are few early previews:

One interesting snapshot showing just how silly is all the talk about decoupling in growth between emerging economies and the West:
Since mid 2008 there is absolutely no difference in leading indicators for two series. So anyone still thinks that emerging markets up 90% in a year is a good thing?

And here is a latent illustration of the trend I described some weeks ago using raw ECB data:
Of course anyone knows by now that money supply is not growing, despite the ECB vastly expanded liquidity pumping operations as banks hoard cash in capital reserves, while Government mop up all and any liquidity they can get into their vast deficit financing exercises. Clearly, M3 is showing that things are going swimmingly in the euro area economy.

Don't believe me? Well, here is another illustration:
So things are not getting much better on the credit markets side. The mountain of debt on private sector side is still intact, the mountain of debt on Governments' side is rapidly rising. Hardly a sound exit from the crisis.